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DEFENSE COMMUNITIES 360

Proposed EDC Rule Closely Follows Statutory Changes

  • February 3, 2011
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Local redevelopment authorities can expect to bypass lengthy negotiations with the military services over compensation for BRAC properties, particularly over a property’s fair market value, under the proposed rule the Pentagon issued last month to implement the statutory changes Congress enacted in 2009 to the economic development conveyance (EDC) authority.

Section 2715 of the fiscal 2010 defense authorization bill eliminates the requirement for the military to seek fair market value and, as a result, the proposed rule deletes the requirement for the department to obtain an appraisal of the property as part of an EDC conveyance.

Instead, the proposed rule is intended to allow DOD to attain compensation for a BRAC property by obtaining a share of revenues generated by its redevelopment, primarily through “back-end” deals similar to the ones reached to transfer former Naval Station Treasure Island in December 2009 and Kansas Army Ammunition Plant in February 2010.

“Experience has shown that estimates of fair market value for property at closing installations, especially those requiring substantial future investment in redevelopment, can vary widely due to the uncertainties inherent in significant long-term redevelopment projects and differences in projected costs and revenues over a potential 20-30-year development cycle that may occur on many large closing installations,” the notice states.

The deal agreed to between the Navy and the city of San Francisco over the transfer of Treasure Island — the first EDC to take advantage of the FY 2010 legislation — calls for the city to pay the Navy $55 million initially and an additional $50 million once the project meets a return of 18 percent to investors. And after an additional 4.5 percent return, the Navy will receive 35 percent of all proceeds.

“Elimination of the requirement to determine estimated fair market value and related appraisal requirements should expedite the conveyance process and remove what has been a common source of conflict and delays between the community and the department,” the proposed rules states.

Beyond encouraging revenue-sharing arrangements, the proposed language would allows LRAs to compensate the military for BRAC sites via goods and services, real property and improvements, or “other consideration” deemed appropriate by DOD.

“They really have incorporated the intended flexibility [contained in the legislation],” said David Knisely, partner with law firm Garrity and Knisely. “It really does encourage shared-proceeds deals; that was the heart of the statute. … And it clarified that it could be paid over time,” he said.

The department is accepting comments on the proposal until Feb. 15.

The Nitty Gritty

The proposed rule maintains the existing requirement for LRAs that obtain an EDC to use the sale or lease proceeds to support economic development for seven years, but adds language that could cause a headache for redevelopment authorities. In the case of phased transfers, the notice states, the service may also require the reinvestment commitment to apply during at least the first seven years after the date of every subsequent transfer of property to the LRA.

Such a condition could create a mound of paperwork for redevelopment authorities, at least at large installations where the military conveys the property to the LRA in a protracted series of small transfers due to environmental concerns.

“You don’t want a rolling seven-year period,” Knisely said.

The notice lists 12 categories of allowable uses for which the LRA can spend the proceeds from the sale or lease of an EDC  parcel — including municipal infrastructure, demolition, historic property preservation and marketing the project — but doesn’t mention environmental remediation needed to make the site compatible with the reuse plan.

What happens if a military service transfers the property with land use restrictions that would prevent the LRA from implementing its plan, asked Barry Steinberg, a partner with law firm Kutak Rock LLP. The cost to remove land use restrictions should be covered under the EDC authority.

“It should be clear that that kind of self-help can be used for that,” Steinberg said.

LRAs from the 2005 round of BRAC closures can expect to receive property with pesticides and lead-based paint. In that case, redevelopment authorities should be allowed to use the proceeds from EDC property to eliminate such hazards. “They’re improving the marketability of the property,” he noted.

The prospect of accepting property from the military that hasn’t been cleaned up to the standards required to carry out its reuse plan could cause an LRA to run up against another provision in the proposal as well. The LRA would be required to accept control of EDC property “within a reasonable time” after the property disposal record of decision is reached, according to the notice. If restrictive covenants placed on the parcel are incompatible with the reuse plan, though, the LRA would be forced to choose between accepting the property as is — and taking on the expense of cleaning up the property itself — or forfeiting its rights to obtain the EDC.

ADC will be submitting comments on the proposed rule and is interested in hearing from you. If you have comments, please e-mail them to Todd Herberghs, COO, at therberghs@defensecommunities.org. The proposed rule can be found in the Dec. 17 Federal Register.

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