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Rust to Diamonds

Among old auto plants, investors can find property gems, but excavating them isn't easy.

Among old auto plants, investors can find property gems, but excavating them isn't easy.

In Norwood Ohio, locals refer to the day the last Camaro rolled off the assembly line of the General Motors plant as Black Wednesday. It was 1987, and 4,000 people in the city of 22,000 lost their jobs, while the 3 million sq. ft. plant that had pumped life into the city since 1923 lapsed into vacancy and neglect.

With the closing, Norwood lost a third of its tax base, $2.6 million in annual revenue, forcing the city to cut 40 municipal workers, close an elementary school and look elsewhere to help fund fire, police and emergency medical services.

“That Chevrolet plant had always been there. It had always been part of my life. Sure, it was a hit. It was a really industrialized city,” says Mayor Tom Williams. The Chevy plant, not far from city hall, was so close to the heart of town that many people walked to work. The closure nearly dealt a death blow to the city. “We said, ‘We're not going to settle for this. We're not going to go under,’” recalls Williams.

On the brink of economic disaster, city leaders were desperate for solutions. It was a crisis that towns across the country faced as buyers deserted U.S. automakers in the late 1980s and 1990s. GM, the country's biggest automaker, closed 22 plants and laid off 70,000 workers. “When you start depending on one industry, you're in trouble,” says Williams.

Pennsylvania was battling similar hardships as Pittsburgh-based U. S. Steel shut down mills, abandoning vast tracts of industrial space. Many were contaminated by toxic byproducts of manufacturing and required expensive cleanup. The Pennsylvanians were finding new uses, from business parks to retail centers, for the abandoned industrial sites known as brownfields. “We went out and talked to those people. We looked at all of Pennsylvania,” the mayor says.

With dwindling resources, Norwood sought a developer to transform its 60-acre brownfield. The easiest solution, converting the empty buildings to warehouses, would not generate enough revenue to replenish city coffers. The town needed to attract new companies and create jobs.

Norwood resolved the quandary by converting the site into high-density office and retail space — and by playing hardball with the property owner. The city sued GM for more than $300 million, complaining that it had failed to deliver promised benefits in return for taxpayer-paid improvements.

“The city had given them quite a bit — vacated land and rights of way,” the mayor says. Although the suit was dismissed, GM tore down the plant at the city's request, absorbing the site costs.

“In the long run — best thing that ever happened,” says Mayor Williams of the plant closure. Cincinnati-based Belvedere Corp. shouldered the mixed-use project. “Belvedere was the first developer to take that risk, to redevelop that GM plant into an office and retail location,” says Harry Blanton, vice president at the Hamilton County Development Co., a private, nonprofit economic development agency.

Belvedere's $100 million Central Parke project launched a metamorphosis of the city, from a blue-collar, factory-driven locale to a town with elegant workspaces. Completed in 1997, Central Parke provides 320,000 sq. ft. of office/flex space and 200,000 sq. ft. of retail space.

The old automotive site attracted 80 businesses and 1,000 jobs, according to the city. Belvedere sold the development to Cincinnati Trophy LLC for an undisclosed sum but continues to manage the buildings. A sample of listings shows available space in three Class-A buildings of at least 80,000 sq. ft. apiece.

Taming the GM brownfield spurred redevelopment at other decaying industrial tracts. Rookwood Commons & Pavilion, a shopping center with trendy restaurants, office space and a medical clinic, rose on the site of the LeBlond Machine Tool Co., keeping the factory's smokestack intact. By 2008, Norwood had a total of 1.7 million sq. ft. more office and retail space than when GM closed.

Altogether, the city has garnered $200 million in new business investment and 4,000 new jobs. Its location near Cincinnati, with leasing costs up to 50% cheaper, and available highways helped lure the new businesses. “It's not what I would call rolling in dough,” says Blanton. “But the community is definitely in a much better situation.”

Closures speed up

Across the country more closures lie ahead as Detroit's Big Three auto manufacturers streamline their operations while investors explore thousands of sites, ranging from assembly plants to warehouses. According to the International Organization of Motor Vehicle Manufacturers, U.S. auto production in 2008 declined 19.3% from 2007, to 8.7 million vehicles.

Plant closures picked up speed with the Chapter 11 bankruptcy filings of Chrysler and General Motors in April and June 2009. In the past five years, 16 major auto plants have closed, and the total is expected to climb to nearly 40 in two years.

Although Rust Belt cities of the Northeast and Midwest are littered with vacant auto properties, brownfields stretch clear to California. Some are contaminated by industrial waste and need remediation. A few are Superfund sites that pose a current or future threat to health or the environment, according to the U.S. Environmental Protection Agency.

The federal government pays some costs for Superfund cleanup. But the Comprehensive Environmental Response, Compensation and Liability Act allows the government to go after companies responsible for the damage in order to recover cleanup costs.

Superfund sites laden with hazardous waste carry high cleanup costs. The Congressional Budget Office says the real cost of cleaning up 1,300 sites on the National Priorities List is more than double the $30 billion Congress anticipated when it passed the environmental legislation in 1980.

The projected cost is $75 billion. Most brownfields are less costly to remedy. Some have contaminated soil or groundwater from leaking oil or industrial chemicals, while others have little or no contamination. The buildings are simply abandoned.

The head of GM's restructuring effort, Albert Koch, vice chairman and managing director of AlixPartners, testified in bankruptcy court that the automaker's collective environmental liabilities amount to more than $500 million for the closed plants.

Any remediation for GM sites such as a former powertrain plant in Massena, N.Y., a Superfund site, now rests with Motors Liquidation Co., formed in GM's bankruptcy to dispose of unwanted properties, says General Motors Co. spokesman Dan Flores. “Motors Liquidation owns and will ultimately determine the disposition of Massena.”

According to one estimate, cleaning up the Massena plant for redevelopment could cost $225 million, and the question of who will bear the costs remains unanswered. In August, Motors Liquidation said in a statement that its objective was to work with developers and communities to resolve environmental obligations to protect public health and creditors' interests.

An investment takes wing

Despite the risk and expense of converting a contaminated property, the effort can be highly rewarding, if the site is well located and the cleanup is thorough. Developer Charles Elliott, senior vice president of Philadelphia-based Dewey Commercial Investors, was drawn to the expansive former Ford-Philco radio and electronics plant in Lansdale, Pa.

It was a dreary, debris-filled landscape. After decades of use by many companies including Ford Motor Co., the land was so polluted it had been designated part of a Superfund site, called the North Penn-Area 7 site by the EPA. But the location, just north of Philadelphia and near a train station, was superb. In 2002, Elliott approached the owner, Ford, about buying the property.

Dewey shelled out $5.25 million for a 35-acre section of the immense Superfund site that stretched over 650 acres. Not until later did environmental consultants learn the extent of the damage, says Elliott.

“There used to be a burn pit on the site. They would take all the rags that they would clean the manufacturing line with and throw them in this pit and burn them. So a cocktail of really bad volatile organic compounds had worked their way down into the water source,” says Elliott.

The toxins created a moving groundwater plume. “I went in a little blind. I didn't know what it really meant to redevelop a brownfield site,” the developer says. Ford paid most of the cleanup costs, but Dewey Commercial forked over $10 million for the remediation, mainly for expert consultants.

The consultants, including attorneys, proved invaluable, Elliott says, because they obtained legal indemnification against lawsuits in protective covenants from both the federal and state governments.

After getting a clean bill of health, Dewey built the Station Square complex of 346 stylish apartments on 30 acres and sold five acres slated for office and retail space for $2 million. Seven years later, the 30-acre property he retains with the multifamily development is valued at $65 million. The retail-office tract he sold for $2 million is worth an estimated $5 million.

Rewarding effort

Persistence by investors, auto companies and communities can pay off handsomely. In 2007, Ford Motor Co. pulled the plug on its largest U.S. assembly plant, a 4.7 million sq. ft. behemoth in Wixom, Mich. It produced 6.6 million vehicles over 50 years, including the prized Thunderbird and Lincoln Town Car.

For two years, the property sat empty. Then, just last month in September, Ford executive chairman William Ford Jr. announced that two energy firms agreed to invest $725 million to convert the site to a renewable energy park. Michigan is issuing a $100 million tax credit at $25 million per year over four years to Xtreme Power of Austin, Texas and Clairvoyant Energy of Santa Barbara, Calif. to produce solar panels and large-scale batteries.

And Pennsylvania developer Elliott can attest to the rewards, after multiplying his company's $5.25 million initial investment. “We've developed a beautiful property, changing this empty, unutilized site into a vibrant residential community,” he says. “It was worth the headaches.”

Denise Kalette is senior editor.

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