ARLINGTON, Va. - What do you do with a more than century-old prison that sits on the scenic shore of a New England Navy shipyard?
That's a question that the U.S. Navy is hoping some creative developer will be able to answer under an innovative program called Enhanced Use Lease that allows service branches in the Department of Defense to monetize underused assets without surrendering proceeds to the general treasury.
The site is at the southern end of Seavey Island at Portsmouth Naval Shipyard in Kittery, Maine, 50 miles north of Boston. The Navy is looking for a developer to find the best market value for the prison and to operate under a 50-year lease.
"They have a nearly 300,000-square-foot building that looks like a castle at this beautiful site, and they're looking for someone who can do something with it," Jay Brown, managing director of the real estate advisory firm Alvarez & Marshal told The Bond Buyer's Annual Conference on Financing Military Housing Privatization. "The prison was built in the early 1800s and has [been] mothballed since 1971."
While the idea of converting a remote, antiquated prison into a money-maker might sound daunting, the military has already scored some victories in even more challenging scenarios.
In Leavenworth, Kan., the Army found a developer able to use 38 under-used buildings for transitional housing, a museum, and small-business in exchange for land for the Veterans Administration's cemetery expansion.
At the Aberdeen Proving Ground in Maryland, the site of World War II land-mine training, the Defense Department had to verify that there were no unexploded mines on the grounds before a developer could convert the property to a research park.
"Someone contemplating this should not be faint of heart," said Bob Penn, assistant chief of the real estate division of the U.S. Army Corps of Engineers. "All we have is underused real estate; we don't have cash flow."
The program allows the military branches to retain 100% of the value of the property developed if it is swapped for "in-kind" services or property. For example, in Chicago, the VA used $50 million from the sale and lease of an underused hospital to a community hospital for expansion of the Jesse Brown VA Medical Center. Had the VA simply sold the facility, the proceeds would have gone into the federal treasury, with the VA getting only a small percentage, said Claude Hutchison, director of the Office of Asset Enterprise Management at the Department of Veterans Affairs.
For the developer, financing for the new project often comes in-part from bond issues under tax-increment financing-type arrangements.
For the conversion of a central utility plant at Ft. Detrick, Md., to a Chevron-operated co-generation facility, Bank of America underwrote a 26.5-year bond issue secured by CIFG Assurance NA, Penn said.
Bonds are typically taxable, Brown said, and at least 50% of the debt used to finance a EUL has to be private.
For the military, the conversion of underused assets reduces base operating costs, improves cooperation between the military services, the private sector, and the local community and enhances mission performance, according to the Navy.
However, local politics can also complicate the process, Penn said.
"There is just a gaggle of stakeholders that we have to consider," he said. "When we have an under-utilized property, everyone thinks they have a right to it: Wouldn't that make a wonderful park? Well, we still have to get fair market value. Change is integral, but it's disturbing to some of the stakeholders."
With an estimated 25% of Defense Department facilities ranked as under-utilized, the value of the EUL program could be more than $50 billion, Brown said.
"The size is potentially so big that we think it warrants your attention," Brown told bond industry executives at the conference.