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Reclaiming the Waterfront

A hundred builders had already taken a pass on reviving the forsaken RCA Victor building on the Delaware River in Camden, N.J. before Philadelphia developer Carl Dranoff, CEO of Dranoff Properties, traipsed onto the site.

Once the world's largest producer of phonographs, RCA's 20-acre operation hummed with 10,000 workers at its peak in the mid-1900s as RCA expanded into radios and TV. But by the time Dranoff arrived, the iconic Victor, built in 1929, was boarded up with plywood and ransacked.

“I walked along the waterfront and I walked all through the building, which was largely impassable because it had been vandalized,” recalls Dranoff. “There was not one ray of sunshine, and there was no electricity. There was water on every floor, so we had to walk through with rubber boots and flashlights. All the copper wiring and metal duct work had been pulled from the ceiling because vandals were selling it for scrap metal.”

And yet, on that day in 2000, Dranoff knew he would shoulder the project. “It had my name written all over it.”

Across the country, from the New York boroughs to Louisville and west to Spokane and Oakland, cities are reclaiming derelict riverfronts and bayside terrain. Developers and investors brave enough to tackle contaminated sites have at times reaped returns exceeding 25%, after years of hard labor transforming the properties into dynamic living and work spaces.

“Over time, property on the waterfront maintains its value and appreciates,” says Gary Waxman, principal of Liberty Harbor LLC, which is creating a $2 billion, 155-acre mixed-use redevelopment at a former shipbuilding plant on Oglethorpe Bay in Brunswick, Ga.

Not for the faint of heart

Waterfront property is potentially the most valuable square footage in many cities, but redevelopment requires intense commitment — sometimes more than a decade of work — with government oversight, and many millions of dollars in remedial costs. Public-private partnerships, tax incentives and land price breaks have helped a number of developers afford the cleanup process.

But redevelopers need a thick skin. Critics said Dranoff was crazy to take on the costs and hazards of the Camden site. Forty-nine lenders turned down his request for financing, despite an impressive track record of redevelopment. But he recalled how Hoboken and Jersey City had turned their blighted waterfronts with ramshackle piers into showplaces with easy access to the financial center of Manhattan. Dranoff felt he could do the same in Camden, one of the poorest and most crime-ridden cities in the country.

“The strategic importance of the property on a scale of one to 10 was a 10 because it was right in the middle of the waterfront, with fantastic access to Philadelphia,” he says.

Dranoff bought the building for a dollar, gutted it, sank $65 million into it, and created 341 stylish apartments that today are 95% occupied, above ground-floor shops. Construction started this year on the second phase, the Radio Lofts, 86 condos with 14-foot ceilings and spectacular riverfront views. The luxury units, with gourmet kitchens and marble bath floors, are priced from the $300,000s to $500,000s, well below comparable units in Philadelphia.

The next phase of the Camden Waterfront project: Coopers Crossing, a $500 million mixed-use project with 1,200 condos and apartments.

Forest City jumps into the ballgame

When Cleveland-based Forest City Enterprises took on a $1.7 billion project to redevelop 42 acres bordering the Anacostia River in Southeast Washington, the company encountered souvenirs of the site's past — ammunition shells. The property is located on a former annex to the Washington Navy Yard, where the Navy once produced munitions and assembled torpedo tubes.

“None of it is live, it's just shells,” says Ramsey Meiser, senior vice president of development for Forest City. “But we have worked through the [U.S. General Services Administration] and established a protocol for when we find those shells.”

GSA is responsible for the remediation, and Forest City is doing the work on its behalf, Meiser says. “We don't anticipate that there will be a munitions issue. We found some small stuff, but it's not really anything we're concerned about.”

When the 15-year build-out is completed in approximately 2022, The Yards will look like a small city covering 5.5 million sq. ft. Living space will include 2,800 condo and rental units, accompanied by 1.8 million sq. ft. of office space and at least 300,000 sq. ft. of retail.

The street and utility work has been completed, and construction has started on 170 rental lofts. The first apartments are set to open in the fall of 2009, followed by an office building and residential condos in 2011.

Forest City was awarded The Yards site in 2004. A year later, Major League Baseball awarded a team to Washington, D.C., and a new stadium for the Nationals landed across from The Yards, a financial home run for Forest City.

Other developers snapped up nearby land and are furiously building offices and multifamily units. “The area where our site is, the Capital Riverfront, is experiencing a complete renovation and rejuvenation,” says Meiser.

Forest City's deal with GSA was that the company would purchase the land parcel by parcel as it decided which portions to build on, so it wouldn't incur the expense of buying the land in a giant block. Unlike Dranoff's deal in Camden, which allowed him to buy the abandoned Victor building for $1, Forest City had to negotiate the land price with the government.

However, the District of Columbia issued $90 million in bonds to help pay for infrastructure costs. The District eventually will own area streets and utilities. With public funds, Forest City is building a five-acre park on the riverbank.

At buildout, the company will own about two-thirds of The Yards' improved property, including parcels under the residential and retail buildings. But land below the office buildings will be subject to a long-term ground lease with GSA. With up to 30 buildings planned, The Yards is one of the larger projects in Forest City's portfolio, says Meiser.

Spooky sight on Lake Erie

On the banks of Lake Erie in Ohio, Hemisphere Development in Cleveland is toiling on a 1,100-acre assemblage of land where the Diamond Shamrock Painesville Works formerly produced soda ash for use in glass manufacturing.

The site dwarfs the 20-acre RCA terrain in Camden, the 42-acre Navy Yard redevelopment, and even the 155-acre Liberty project in Brunswick, Ga.

Known as Lakeview Bluffs, the Ohio project's targeted completion date is 2025. Sections of the land, located about 30 miles east of Cleveland, contained such severe industrial contamination that in 1980 the Environmental Protection Agency took legal action.

As a result, property owners built a 120-acre clay cap to cover one polluted area. Later, in the 1990s, the state began to require cleanup on the remainder of the site.

“It is undoubtedly the largest redevelopment project on the Great Lakes,” says Hemisphere CEO Todd Davis, who is an attorney and brownfield expert. Like Dranoff, Davis was shocked by conditions at the neglected industrial property. “Even for an environmental lawyer, it was an intimidating sight.”

Chalky white goop blanketed a 300-acre pond, and piles of debris and junked cars littered the lake vista. Nearly 30 buildings were full of asbestos, and some were falling into the lake where the shoreline had eroded. “It was a mine-scarred-looking piece of property,” says Davis.

An old aluminum smelting plant sat in the heart of the site, and right on the waterfront was an abandoned 40-acre coke manufacturing plant that an investor had bought in a tax foreclosure sale. “That probably had the most significant environmental issues,” Davis says.

Hemisphere has already transformed part of the 1.25 miles of shoreline, and is building an IMG sports training resort, along with a marina, vineyard, winery, boutique hotel and golf course on clean acreage. Hemisphere resolved the few lingering legal disputes from about 25 old lawsuits over responsibility for the contamination.

Improvement costs are expected to top $1 billion at buildout. With the help of a waterfront engineering firm, Hemisphere is creating a shoreline breakwater to prevent further erosion. The company imported at least 66,000 tons of limestone. Barges shipped in six-ton limestone boulders and machines set each one in place, like fitting mammoth pieces of a puzzle.

Handling mothballed properties

Hemisphere did not buy the land it is improving, but it has a 99-year ground lease. The deal called for it to clean up and improve the property, and then sell it. Diamond Shamrock still owns the land, but Hemisphere will share proceeds when the property is eventually sold.

The EPA has used Hemisphere's deal structure as a model to show companies with mothballed properties an exit strategy to unload their troubled real estate. Some companies have been reluctant to sell obsolete industrial assets in their portfolios out of fear of enormous financial and legal liability stemming from environmental problems at the sites.

Under the federal Superfund law, or the Comprehensive Environmental Response, Compensation, and Liability Act, the government holds the owner or operator of a site where hazardous substances are disposed of liable for cleaning up contaminants. The only way to get rid of the liability, Davis believes, is to resolve it while working with regulators.

The cost of remediating the coke plant alone approached $20 million, and overall cleanup costs at the 1,100 acres will be far greater, Davis says.

Ohio gave Hemisphere two grants of $3 million apiece to clean two sections of the site. By undergoing the state's voluntary cleanup program, the company received a 10-year state tax abatement on the increased value of the property. Consequently the current value of the distressed real estate is locked in for tax purposes. Additional improvements could garner more tax incentives.

Once the site has been cleaned up, the improved parcels can be sold. “For example, I would release my lease on 20 acres at a time and sell that to a homebuilder who would build homes, and then Diamond Shamrock and our company would share the proceeds,” Davis says.

The arduous cleanup is a winning strategy, he believes. “We think that it will be a phenomenal project, both for us and for the community. [Residents] sat there basically for 25 years looking at this piece of property in the heart of their communities, with no hope of redevelopment.” After cleanup, joggers, golfers and boaters can enjoy lakeside pursuits.

Outsmarting the critics

Like Dranoff, who felt the wind of 49 slamming lender doors, Davis has stayed the course, though critics said the contamination was so bad that the lakeside deal was “upside down.” Naysayers believed that cleanup costs would be greater than any potential profit.

In Dranoff's case, skeptics pointed out that Camden was hardly a likely spot for investment. In 2004 a national research group ranked it the country's most dangerous city. Just two years later, the U.S. Census Bureau said it was the poorest city on a per capita basis.

But Dranoff was convinced that Camden's riverbank was an unbeatable location, and that the city was poised for an upswing. It took a lot of nerve and two years to secure financing. “We got two state agencies to basically play poker with us. One was the Casino Reinvestment Development Agency,” the developer says.

Up to that point, the New Jersey agency had only lent money in Atlantic City, while it raked in 1% of annual casino revenues. The Agency lent $6 million, and the Delaware River Port Authority coughed up another $3 million. “With $9 million in hand, we went back to our lenders, and we finally got Fleet Bank [now part of Bank of America] to lend us $30 million,” Dranoff says. The company sold investment tax credits for its acquired historic buildings, and altogether raised about $65 million. It took $7 million to overhaul the RCA Victor building.

But today The Victor's 341 units are filled with city dwellers, and many of them take a short ferry ride to jobs in Philadelphia. A thousand people have joined a waiting list for upcoming Camden lofts and condos.

“You had to see beyond the blight and the decay,” emphasizes Dranoff. “I saw an entire waterfront in desperate need of entrepreneurship and leadership. It became a passion for me — virtually an obsession, because of all the rejection I had during the first couple of years. I wouldn't give up.”

Denise Kalette is Senior Associate Editor.

City turns from wartime ships to yachts

During the Second World War the small coastal city of Brunswick, Ga. claimed a place in history when it hammered out 99 Liberty ships that carried supplies to troops in the European and Pacific theatres.

Developer Gary Waxman is marking that contribution as he redevelops a neglected stretch of industrial land overlooking Oglethorpe Bay and the Atlantic Ocean in Brunswick, nearly 70 miles south of Savannah. Liberty Harbor, a $2 billion project, spills across 155 acres.

After the war, while the Port of Brunswick prospered, shipbuilding declined, and sections of waterfront where manufacturing once flourished had become vacant. Waxman thought the site was perfect for an upscale mixed-use development. “We wanted to be on the water,” he insists. Waxman also wanted a site with high barriers to entry, one that didn't have a high inventory of competing residential properties.

“Nothing can be built between us and the ocean because it's protected river and marsh lands,” Waxman says. “Once you get about 30 feet above the grade on our site you can see the ocean, and nothing will ever be blocked between us and the ocean.”

The stunning views and a new permit to build 450 marina slips will help Liberty Harbor appreciate in value, he believes. The project is benefiting from tax incentives related to brownfield redevelopment.

The current site plan calls for 1,600 luxury condos, 300 homes, a 400-room hotel, the marina, restaurants and shops, and a town center. The project is scaled down from the 2,200 condos approved for the plan. Roads and infrastructure have been completed, and sales have been brisk.

By mid-May 2008, 130 home sites — the bulk of the first phase — and 100 condos had been sold. Waxman expects a 10-year buildout, with the first phase to be completed by 2010. The first house will cost $2.5 million to $3 million, the developer says. It will include 5,000 sq. ft. of finished interior space and 3,500 sq. ft. of decks.

The coastal homes are built in a vertical style. Living space is above the garage, as regulations require, so that if the property takes on water residents are protected. While hurricanes and flooding are rare, parts of Brunswick were inundated in October 1898 after a hurricane.

With a city population of 16,000 and a metro area exceeding 100,000, Brunswick's per capita income in 2000 was $13,000, well below the U.S. per capita income of $22,199 in 2000, according to the U.S. Census Bureau. The city is near Jekyll Island, where wealthy industrialists including the Carnegie, Vanderbilt and Rockefeller family dynasties once summered, and near Sea Island, where global leaders met for the G-8 Summit in 2004.
— Denise Kalette

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