Good deeds? | The good and bad of using real estate as an economic development tool
Flipping real estate is not usually considered a traditional economic development strategy. Still, it’s one that several economic development organizations throughout the state are using in order to create jobs for their communities.
Take the Northern Maine Development Commission, which through the Northern Maine Finance Corp. acquired former MBNA call centers in Fort Kent and Presque Isle from Bank of America in 2006. Or the Greater Franklin Development Corp. in Farmington, which had never purchased a building before it bought the former MBNA call center in Farmington in 2006. “This was a big deal for an organization that doesn’t have a large budget and lots of money in the bank,” says Alison Hagerstrom, executive director of Greater Franklin Development Corp. “But we said, ‘We need to take this chance.’”
Buying and selling real estate is an economic development strategy Robert Clark, executive director of the Northern Maine Development Commission in Caribou, calls “transactional development.” And it’s not just NMDC and Greater Franklin Development that are dipping their toes into the real estate market in hopes of bolstering their local economies. Other economic development groups around the state have had experience with such real estate deals. And while some organizations have scored big, other groups have run into the pitfalls of property ownership, from tenants backing out at the last minute to money pits that are difficult to unload.
Roxane Cole, a broker and principal of Ram Harnden Commercial Real Estate Services in Portland, says most nonprofit economic development organizations probably lack the proper capital to successfully buy and flip vacant buildings. She agrees, however, that these organizations are watching a different bottom line. “If their return on investment is aimed at jobs, then they have a different way of factoring and weighing their return,” Cole says. “So their profile is different than a private investor, but the risk is every bit as real.”
For NMDC and Greater Franklin Development, the gamble paid off. Within 10 months, NMDC had attracted two companies, Arizona-based Connect North America and Fredricton, N.B.-based Synergy Solution, to the Fort Kent and Presque Isle facilities. Today, they employ a combined 260, with plans to employ more than 400. That’s more than the peak of 350 that MBNA once employed at the two call centers. “If we hadn’t [bought the buildings], I don’t think we would have been able to replace those jobs at the facilities,” says Clark.
Within six months of buying the Farmington call center, the Greater Franklin Development Corp. had signed a tenant — Franklin, Tenn.-based NotifyMD, which to date has created 95 jobs and plans to employ 220 within three years. NotifyMD is only leasing the building, but Hagerstrom hopes it will eventually buy the property. “We didn’t purchase it with the idea we’d own the building forever,” Hagerstrom says. “Would we do this again? Probably, but I think the situation has to be right.”
Risk and reward
With the obvious risks involved, so-called transactional development doesn’t always work out as planned. “I guess I would term transactional development like that old western movie ‘The Good, the Bad and the Ugly,’” says Jim Delamater, who was chairman of the now-defunct Growth Council of Oxford Hills and is president of Northeast Bank in Lewiston. “When it works, it’s very good.”
But when it doesn’t work, it can ruin an organization. “The ugly side of that type of model is unless you have an ongoing source of equity capital or debt capital… you’re almost doomed to fail,” Delamater says.
Indeed, what happened to the Growth Council of Oxford Hills serves as a cautionary tale to other economic development organizations around the state. Where NMDC and Greater Franklin Development Corp. bought state-of-the-art commercial properties, in some cases with the cubicles, computers and wiring still intact, the Growth Council of Oxford Hills in the early 2000s began buying properties that needed hundreds of thousands of dollars worth of work.
The plan worked for a while for the Growth Council of Oxford Hills, but Delamater says when the real estate market went south a few years ago, the group was left with vacant buildings that needed expensive renovations. Meanwhile, the organization was stuck paying the buildings’ maintenance costs every month.
When the Growth Council disbanded last year, it still owned a gutted building in Norway and a former mill site in Bridgton. According to its 2005 tax forms, the most recent available, it ended that year $174,500 in the red. The group has reorganized as the Western Maine Economic Development Council, a group under the umbrella of local social services agency Community Concepts. Delamater says the new organization doesn’t have the capital to get into real estate at the moment. “And if it did, most of us would still vote against it,” Delamater says.
Even if a firm plan is in place and the due diligence is there, plans don’t always turn out as hoped. The Shiretown Development Corp., a quasi-public economic development organization in Houlton, in 2004 paid roughly $161,000 for the former Houlton International facility, a large industrial complex built around an old World War II hangar at the Houlton airport.
The organization had a tenant lined up, but the tenant pulled out at the last minute and Shiretown Development Corp. was stuck with a massive industrial property that cost $10,000 annually just to insure, according to the Bangor Daily News. The organization’s funds were whittled down from $51,000 at the start of 2007 to $33,500 in November of that year, the paper said. Only after the group began looking at demolishing the structure did a buyer step forward.
While the situation was at times difficult, Wade Hanson, director of community development in Houlton, says it was worth the risk because it kept the property intact and ready for a tenant. “The larger populated areas are more apt to have more opportunity due to services needed in those areas,” he says. “In smaller rural areas, it takes entities like Shiretown Development Corp. to step up and ensure those opportunities are still going to be there in the future.”
The lack of private real estate investors in rural areas is certainly something these groups can try to make up for, Cole says. “In areas where it’s hard to get somebody to be interested in a building that may have been abandoned, someone that can own it, shepherd it and be aggressive as an owner can be very important,” she says. “And in some remote areas, where that is going hand in hand with job development, it can be crucial.”
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