ABSTRACT: Corporations with surplus real estate can often obtain substantially higher returns from the property if they maximise their leverage with public jurisdictions surrounding the property.
Goodrich Corporation was able to work successfully with the Port of San Diego and the City of Chula Vista, California, to create a win–win–win public-private partnership. Goodrich ended up with a smaller, more efficient corporate facility, while the public entities realised the opportunity for substantially higher-valued re-use of a large tract of bayfront property. This paper reviews the key points to be aware of in conducting and structuring such a transaction, as well as the potential pitfalls.
CREATING A UNIQUE PUBLIC–PRIVATE PARTNERSHIP
The needs of a growing city, a port and a large aerospace manufacturing firm with surplus property are not necessarily aligned. Nevertheless, in late 1999 a successful win–win–win partnership was forged between the City of Chula Vista, California; the Port of San Diego; and one of the largest divisions of the Goodrich Corporation, Goodrich Aerospace Aerostructures Group. By December 2002, the over all transaction, involving approximately US$90m in value for all its components, was successfully completed.
In its 2002 Annual Report Goodrich stated,
"We are experiencing a down cycle in the commercial aviation market exacerbated by a weak economy and an uncertain global political situation ... we are putting more energy into delivering cost efficiency ... and ... productivity gains through continuous process improvement (CPI). CPI means looking at the way we manufacture things."
The largest manufacturing facility for the Goodrich Aerospace Aerostructures Group (Goodrich Aerostructures) is located adjacent to San Diego Bay in the City of Chula Vista. Before the partnership transaction, the facility comprised 94 owned and 48 leased acres, for a campus total of 142 acres. A total of 2.7 million square feet of buildings used for both manufacturing and office space occupied the site. At the completion of the transaction, the new campus had been 'rightsized' for the company at 87 acres and 1.8 million square feet of reconfigured space. The 'rightsized' facility optimised the production flow and supported the 'lean' manufacturing philosophy.
StoneCreek was retained in 1998 by Goodrich Aerostructures as its Owner's Representative. In this role, StoneCreek first determined the feasibility of reducing the size of this sprawling manufacturing facility by half. After completion of the feasibility analysis, StoneCreek developed a plan to maximise the results of rightsizing for the company. After obtaining management buy-in to this plan, StoneCreek assembled and led a project implementation team and negotiated the public–private partnership deal on Goodrich Aerostructures' behalf. The complexity of dealing with the Goodrich Aerostructures surplus real estate becomes clear when the boundaries of the Goodrich property, the City of Chula Vista Redevelopment Agency, and the Port of San Diego leasehold interests are overlaid.
Figure 1 is an aerial photograph of the Chula Vista Campus overlaid by the patchwork of elements before the transaction, and the more efficient campus afterwards. Over 60 years of operation the facility had expanded tremendously. In the beginning, the growth was largely fuelled by the Second World War; later, by the rapid expansion in commercial aviation. To accommodate this growth, the bay nearby was dredged to create additional land and building space. This land was all deemed 'Port' land and was available on a leased basis only. The main manufacturing building ended up being built half on owned and half on leased land. Later, the Redevelopment Agency of Chula Vista was formed and established its jurisdiction over both Port and Goodrich landholdings. To craft a successful deal, all three parties needed to have a satisfactory outcome from the overall transaction. For example, Goodrich required, as a part of the negotiated deal, a four-year relocation period from 1st January, 1999 to 31st December, 2002 to allow for an orderly transition by Goodrich from its South Campus (the relinquished property) to its North Campus (the existing and new properties for its facilities consolidation).
After: The crosshatched area is the remaning orginal fee owned land. The areas bordered by the dotted lines are the new fee owned parcels. The entire campus is now fee owned.
To understand the complexity of this process more fully, a brief background description of each of the affected parties is useful.
The Goodrich Corporation
The Goodrich Corporation is headquartered in Charlotte, North Carolina, and had sales of US$3.9bn in 2002. The company's business comprises aerostructures and aviation technical services and landing, safety, electronics and aeronautical systems. The Aerostructures Group was responsible for US$1.2bn in sales in 2002. The primary products of the Aerostructures Group are nacelles, pylons, thrust reversers and aircraft engine housings and components. In the company's 2002 Annual Report, the Aerostructures Group is described as the 'leading worldwide supplier of nacelles, which are the aerodynamic structures that surround engines and pylons, which are the engineto-wing structures that support engines. These provide the critical connective conduit for fuel delivery and numerous engine group and aircraft systems.' The Aerostructures Group is an international business, with facilities in Singapore, Scotland, Germany and France as well as in the United States.
City of Chula Vista
Chula Vista, California, is a rapidly growing city of over 200,000 residents in a metropolitan area with a population of approximately two million. Over the past few years, the City has annexed a great deal of additional land to the east, where substantial residential and commercial growth is occurring. This new area is counterbalanced by older areas in the western portion of the City and areas fronting on San Diego Bay. Four other cities also have frontage on San Diego Bay. For several years, the Chula Vista Redevelopment Agency has had the goal of enhancing and upgrading its bayfront property. Seventy years ago the land use in this area was primarily farming and agricultural; development since that time has been primarily industrial and manufacturing. A major portion of Chula Vista's San Diego Bay frontage has been occupied by a power plant, the Goodrich Aerostructures aerospace manufacturing facilities, and a shipyard. The nearby City of San Diego to the north has the longest frontage on San Diego Bay, but Chula Vista is in the unique position of having the greatest potential for redevelopment on contiguous parcels that form the Chula Vista Bayfront.
Beyond its interest in developing a unique, more visitor-serving bayfront, the City of Chula Vista desired to retain Goodrich as a corporate citizen because of its positive economic impact on the City, including the 2,500 high-paying jobs provided by this facility. The Goodrich campus is situated such that the southern half of the campus blocked all development from the Interstate 5 Freeway on its eastern boundary to the waterfront and the marinas on the west side of its facility. leaving aside the industrial facilities in the middle, significant redevelopment potential in the area was possible for the Port of San Diego and the City of Chula Vista.
Port of San Diego
The San Diego Unified Port District was created in 1962 to help ensure the development of recreational and marinerelated business around San Diego Bay on State of California-owned tidelands. Having one agency control all of the tidelands was intended to facilitate equitable development on the land and among the cities bordering the Bay. These tidelands are administered by the San Diego Unified Port District and groundleased to over 360 tenants engaged in various businesses, including shipbuilding, aerospace manufacturing, hotels, restaurants, speciality shopping centres, yacht clubs and the like.
Prior to the transaction, approximately one-third of the original Goodrich campus was on land ground-leased from the Port, and the Port was receiving a significant annual cash flow from these ground-lease payments.
THE ESSENCE OF THE TRANSACTION
Because of reduced Goodrich business volume and new, more efficient methods of manufacturing, Goodrich Aerostructures determined that over one million square feet of industrial and office capacity could be eliminated in the South Campus portion of its facilities, given the proper economic return on such downsizing. While the necessity to make the facility more efficient was clear to the local manufacturing staff, the execution of the task required an economic justification to the Goodrich Board of Directors. The magnitude of the transaction exceeded the local signature authority.
Deal incentives were needed from the Port and the City to reach the Goodrich investment threshold. At the time of the transaction, by internal policy, capital improvement projects at Goodrich had to meet or exceed a specific rate of return. Some of the economics of the 'rightsizing' such as the true impact of productivity improvements, were hard to estimate. To be conservative, hard dollar benefits from the public partners needed to be exhibited.
Initially, both the surplus area in the South Campus and the retained North Campus were a mix of leased and owned land. At the end of the transaction, Goodrich desired to have all North Campus land owned: that is to eliminate all ground-leased property.
The Port was the most logical buyer for Goodrich's South Campus property, as such acquisition created an assemblage of 85 contiguous acres of Port tidelands.
The City of Chula Vista wished to have better access to San Diego Bay. It desired to use whatever powers were needed to facilitate the purchase of the Goodrich property by the Port.
The 'Port' land in this transaction in fact belonged to the State of California Tidelands Trust. This Trust had been established to ensure proper use and management of tidelands property uniformly throughout California. In turn, the San Diego Bay Tidelands were transferred by the Trust to the Port of San Diego to manage. In order for the Port to transfer State Tidelands Trust property to Goodrich for its overall facility reconfiguration, it needed to acquire additional substitute lands to swap for those leased parcels on the North Campus to be transferred to Goodrich. The South Campus land purchased by the Port more than fulfilled this requirement.
The City of Chula Vista wanted increased development on the South Campus land, which would yield much higher levels of property and sales tax for the benefit of the City.
As a result of the aircraft-part manufacturing business that had been conducted at this facility since the early 1940s, there was significant environmental contamination (soil and groundwater) that needed to be addressed by the parties. While most of this contamination dated back to periods before the advent in the 1970s of federal, state and local programmes controlling manufacturing discharges into the environment, the issues nevertheless needed to be solved before redevelopment could proceed on affected areas.
GOODRICH CHALLENGES AND GOALS
From Goodrich's standpoint, the entire campus consolidation had to be economically feasible, or the facility compression and the sale of surplus property would not be a viable economic approach. Since the company was occupying all buildings on the North and South Campus, all the functioning operations on the South Campus had to be relocated to the North Campus, or off site to other Aerostructures facilities around the United States. The corporate goals, described below, were firm:
Maximise future positive cash flow;
Support and enable a $55m plant modernisation on the North Campus;
Increase productivity in the North Campus through new technology and realignment of functions;
Dispose of non-productive assets to increase overall return on investment;
Increase utilisation of the lean manufacturing techniques within the new consolidated facility;
Minimise environmental remediation cost impact through focused assessment and remediation activities and a riskbased brownfield approach on the land being sold; and
Ensure that no production disruption occurred with respect to new construction or relocation that might take place.
THE PORT'S OBJECTIVE IN ACQUIRING SOUTH BAY PROPERTIES
The Port desired to assist the City of Chula Vista in the retention of a major employer and, through the acquisition and exchange of properties, to create a contiguous 85-acre site for future Port development. As previously discussed, significant stimulus for other existing Port tenants would occur with a major waterfront redevelopment.
Because the site had been used as an aerospace manufacturing facility for the previous 60 years, the Port also needed to ensure proper remediation of any environmental contaminants on the Goodrich site. This is an essential consideration in the redevelopment of virtually any manufacturing site in California and the United States, to ensure that subsequent users of the site and the general public, are not at risk of exposure to chemicals or other hazardous materials that might harm them. The challenge involved with the Goodrich facility, as with any other so-called 'brownfield site', was to determine with the regulators, appropriate clean-up and remediation standards for the intended re-use.
CHALLENGES FOR DEALING WITH THE STATE LANDS COMMISSION
The Port of San Diego, although managing the State Tidelands, cannot buy, sell or exchange such land without the permission of the State Lands Commission. Normally lands are only added to the State Tidelands Trust, not removed from it. Even though a larger piece of land purchased from Goodrich would replace the lands transferred to that company on its North Campus, from State Lands' perspective the transaction was a challenge. This scale of transaction — the transfer of approximately 14 acres from public to private ownership — had never before occurred. In order to accomplish it successfully, a number of things had to be in place.
First, a comprehensive benefits analysis, including fair market appraisals for the respective parcels, was required to convince State Lands staff that property further away from the water was at least as valuable as the land closer to the water for which it was to be traded to the Port.
Secondly, a fair price had to be negotiated for each parcel acquired and exchanged.
Thirdly, proper purchase and exchange agreements had to be negotiated.
In order to achieve the transfer, the Board of Port Commissioners for the Port of San Diego had to approve the purchase and exchange and then to present a comprehensive request to the State Lands staff for ultimate submission to the State Lands Commission. Ultimately, the transaction required the approval and signature of the Governor of the State of California.
THE DEAL POINTS
The deal was brought together by building on the needs and wants of each of the three parties, while recognising the process and decision-making constraints of each. Clay Corwin was the lead negotiator and dealmaker for the Goodrich team. He began the process by working closely with the Goodrich team and its management to craft possible deal structures that respected the needs of each party while seeking to advance as many additional provisions as possible that might be achieved for Goodrich. This approach also recognised what each party could and could not bring to the table, as well as their varying missions. For example, stimulating regional economic development, an objective of the Port, allowed it to agree to certain deal terms that a private party would not accept.
After crafting a baseline deal structure, with a few alternatives that made sense for Goodrich, Mr Corwin worked closely with the Port, including Commissioners and Staff, to enroll it in a deal approach that could be embraced. The Port and Goodrich then brought in the City and its considerations, to create a tri-party arrangement — a deal that would respect the absolute needs of each party, but also require them all to stretch beyond their normal comfort zones to achieve an end result all could support. To keep the parties focused on the big picture and not allow the deal to be sidetracked by details in the early stages, Mr Corwin personally drafted a threepage Deal Point Memorandum among the parties. This very short document contained all the major and material business terms of this complex deal and provided the template for the many lengthy and technical legal documents that were ultimately required to implement the project.
Because two of the three parties were public entities, the possibilities in structuring a deal were quite different from what might normally be expected between two private parties. In the case of both the Port of San Diego and the City of Chula Vista, the benefit of engaging in such a transaction with Goodrich extended beyond the physical boundaries of the parcels being exchanged. StoneCreek's advice to Goodrich was to maximise this public-entity leverage to the greatest extent possible.
To accomplish such a project successfully, approval was required from the Board of Directors of Goodrich; the City Council and the Redevelopment Agency of the City of Chula Vista; the Board of Port Commissioners, the State Lands Commission, and the Governor of the State of California.
Incentives from the City of Chula Vista
Property tax refund
As previously mentioned, Chula Vista desired to keep Goodrich as a very large employer and economic engine in its city — and keep it from relocating its operations out of state. Because the Goodrich facility was situated in a redevelopment area of Chula Vista, the city could provide tax incentives for building new infrastructure and facilities on the North Campus. Goodrich's relocation plan required it to close down half of its facilities and replace those facilities with restructured operations in the north, necessitating a very large capital investment in the remaining North Campus. Goodrich successfully argued that this new construction should not be assessed to property tax. The approximately 1 per cent annual tax assessment on $55m worth of new plant and facilities (less a statutorily required diversion of 20 per cent of the tax for low income housing), resulted in the potential for an approximate $450,000 per year tax rebate for Goodrich totalling $13m over the 26-year remaining life of the City's Redevelopment Agency. The total expected from the City was approximately $11,250,000.
Being a public entity, the City of Chula Vista has the power of eminent domain — or the ability to condemn private property in the interests of the health and welfare of the community. In order to make its North Campus viable, Goodrich mandated additional properties to be acquired for it on an owned basis. One of these parcels was already owned by the City of Chula Vista; the other parcel was owned by a private party who refused to sell the property at market price. The City of Chula Vista thus exercised its power of eminent domain and condemned the property for transfer to Goodrich, so that the new Goodrich North Campus would be properly configured. Because of a prior industrial use on the land condemned by the City, as well as on the City-owned parcel, Goodrich received from the City a pledge of an environmentally cleaned property at turnover.
Deal points with the Port of San Diego
Several critical deal points were negotiated with the Port of San Diego.
Income tax benefits
The Port of San Diego also has the power of eminent domain. If the Port deems a taking of land to be in the best interest of the public, it too can condemn land. During the initial deal discussions, the Port threatened to condemn Goodrich's South Campus area. Once it came to the attention of the Port that Goodrich was considering leaving a portion of the site they started to envision the future potential for Port revenue. At the time, Goodrich had not yet made the commitment to consolidate and, as the 'reluctant bride', might not have ultimately decided to do so. Action on this condemnation threat was avoided through the parties' negotiated transaction. In early discussion after the Port raised the threat, the parties met and frankly discussed their respective rights. Thereafter, each independently assessed its own position and the pros and cons to it of a condemnation action versus a negotiated transaction. Upon reconvening and reviewing possible consensual approaches to achieving the Port's objectives, the parties agreed that a voluntary, non-condemnation transaction was possible.
However, the bona fide threat of condemnation by the Port allowed the land to be exchanged in what is known under the US Internal Revenue Code as a § 1033 Tax Deferred Exchange. In a normal tax-free exchange, absent the threat of condemnation by a public entity, called a § 1031 Exchange, like property of similar value can be exchanged at no increase in tax basis to the exchanged properties, thus reducing or deferring the taxable income to be recognised by the exchanging parties. This type of transaction has to occur within a prescribed set of relatively short timeframes. One of the benefits of a § 1033 Tax Deferred Exchange is that the timeframes can be greatly expanded. In the case of Goodrich, the real property sold was more valuable and larger than the real property acquired in the north from the Port. This would have resulted in a taxable gain to Goodrich but, because substantial additional investment for replacement facilities was to be spent in the North Campus, this counted as an offset of about $8m to the net financial gain from the sale.
Property tax benefits
This benefit was in addition to Chula Vista's future property tax rebate. As a part of the negotiated deal, the Port would reimburse Goodrich for $2.4m property taxes paid for the South Campus properties during the four-year relocation period. Thus, this component of occupancy cost was eliminated.
During the relocation period occupancy of the South Campus property, Goodrich negotiated a complete rent abatement from the Port for the lands it was still occupying in the south, totalling $3.9m.
Price of land sold
The value placed on both land to be acquired and divested was approximately $8 a square foot. Goodrich was able to negotiate the $8 per square foot for the land 'as is', avoiding liability or offset for all demolition costs on the property sold to the Port of San Diego (estimated $8m and $10m).
Environmental cost avoidance
The agreement with the Port concerning environmental remediation was to mitigate any contamination in accordance with 'risk-based' factors. The property was to be mitigated only to the extent that it would be safe for the planned future use. In other words, if a parking lot were envisioned to be placed on particular portions of the property for its new use, mitigation for that specific area would require less rigorous clean-up than for other land uses. Also, certain 'sensitive receptor' land uses (eg daycare, hospital, school) were prohibited as part of future development. In addition, Goodrich negotiated a sharing of costs that would be required for future environmental mitigation of the property. The site was characterised by two environmental teams, one retained by Goodrich and the other by the Port of San Diego. To the extent that any environmental contamination had occurred over the 60 years of occupancy, both teams needed to agree on the extent of the clean-up required and jointly obtain regulatory buy-in to the remediation plan. It was estimated that approximately $5m in costs for mitigation could be expected. While this agreement had various cost-sharing steps, overall the Port agreed to pay $2.8m, leaving a residual for Goodrich to pay of $2.2m. If actual costs exceeded $5m, those costs would be Goodrich's sole responsibility.
Favourable loan rates
The Port had borrowing capacity at below market interest rates. During the negotiation, the Port stated that it could loan money to Goodrich at a better rate than could be obtained through Goodrich corporate borrowing to support Goodrich's goal of no negative cash flow during the transition, while providing the capital needed to implement the relocation plan. This lower interest rate differential was, in fact, a portion of the project justification for the Goodrich Board of Directors. Ultimately, the Port was unable to loan this money to Goodrich. The Port originally thought there would be surplus funds available for this purpose but later realised that it would have to issue a bond, which was not feasible at the time. As an alternative, Goodrich was able to negotiate the present value of the interest differential over the life of the previously proposed loan as a one-time cash payment to Goodrich. This amounted to a $2.5m benefit for Goodrich.
THE PROJECT TEAM
Because of the great number of stakeholders affected by the project, including public entities, regulatory agencies and internal Goodrich departments, team building was quite important. The external project team consisted of StoneCreek's project team, Goodrich senior management, Redevelopment Agency and City staff from the City of Chula Vista, and Port staff, as well as each party's technical consultants.
Internal executive team
At the outset, StoneCreek assisted Goodrich in creating an Executive Steering Committee consisting of all of the key executives of the Aerostructures Group. This included the President, Corporate Attorney, VP Manufacturing, Director of Real Estate and Facilities, VP Human Resources and the Chief Financial Officer. In conjunction with StoneCreek, they formulated key guiding principles which governed negotiations with the City of Chula Vista and the Port of San Diego. Within these guidelines, StoneCreek had full leeway in negotiation.
Internal task team
A day-to-day working team called Campus 2002 was assembled for Goodrich. Beyond real estate issues, the daily functioning of a large and complex manufacturing facility had to be coordinated with relocation tasks while production activity continued. A master schedule of all activities was created by StoneCreek's on-site team to control the day-to-day activity. Activity sequences were scheduled to maximise cost savings and to get new efficiencies in place as soon as possible. In those areas of the North Campus where new facilities would be built as replacements for those to be abandoned in the South Campus, the new facilities were first constructed and then relocated from the South Campus in a logical sequence. In the case of movement of facilities and equipment from the South Campus to the North Campus where there would be no new facility built, the timing of the move was carefully coordinated, often at weekends or nights, so that when production started on the next working day all facilities would be operable. This coordination included many different disciplines from internal departments, including manufacturing, facilities, finance and accounting, and senior management at the Goodrich facility itself.
BEST LAID PLANS
During a four-year relocation time span, many events occur, some expected and some not. During the relocation period, several senior personnel changes occurred both at the Port and at Goodrich. The groundwork for the transaction was started in 1998, and it was originally expected that a Memorandum Of Understanding (MOU) for the deal would be signed by all parties by 31st December, 1998. During 1998, the Goodrich Board of Directors and the Chula Vista City Council approved the transaction, but in the same timeframe, a new Port Director was hired, who, upon review of the transaction, was against the deal. With the entrance of the new Port Director, numerous new requirements were established, some of which were implemented and others overridden by several unanimous votes of the Board of Port Commissioners in favour of the project. This new series of events delayed the transaction by several months: it actually closed on 30th December, 1999. Because of internal corporate expectations at Goodrich, it was imperative that the transaction be concluded in 1999.
As an interesting aside, the entire transaction was dependent upon the Governor's signature for the transfer of the State Lands property. On 30th December the Governor's signature was finally obtained in Sacramento, California, approximately 500 miles from San Diego. Once obtained, the document was flown to San Diego and then taken to the County Recorder's office with only one hour to spare for recording. The Recorder's office would normally allow special circumstances and remain open, but because of expected Y2K problems all computer systems were being shut down exactly at 5pm, with no additional recording possible until after the beginning of the year 2000.
New development on the site has not occurred within the timeframes originally hoped for by the City and the Port. After a lengthy process undertaken by the Port in 2000 to select a large-scale developer to come in and redevelop its entire Chula Vista Bayfront property, by late 2001 negotiations between that developer and the Port collapsed and the redevelopment process was stalled. The Port is now beginning a master land-planning process, which will divide the property into several developable components on a smaller scale.
People and organisations have shifted at Goodrich too. During the project's four-year relocation period, there were four different presidents for the Goodrich Aerostructures Group. Also, the Company's Director of Facilities and Real Estate retired.
Despite numerous hurdles, at the end the parties' goals were achieved in the creation of a platform for an exciting rebirth of the Chula Vista Bayfront. Chula Vista and the Port of San Diego now have the opportunity for a new major gateway into the Chula Vista Marina and the San Diego Bayfront. They have created the opportunity for much more desirable land use and development in this area, allowing Port revenues to increase with more profitable land utilisation. Goodrich has right-sized and created an efficient facility, and because additional properties were acquired during the reconfiguration of the North Campus, expansion capability exists if a future need arises.
All in all, the financial inducements and incentives negotiated were substantial. Below is a summary of the key financial aspects.