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Capitalizing on McClellan: Business Park's Developer Looks for Partners or Buyers.

Posted on: Thursday, 22 June 2006, 15:00 CDT

By Dirk Werkman and Jon Ortiz, The Sacramento Bee, Calif.

Jun. 22--After five years of redeveloping McClellan Park, its owners announced Tuesday that they are ready to probe a red-hot commercial real estate market and find out how much they can capitalize off their investment.

This doesn't necessarily mean the property will be sold, said Larry Kelley, president of McClellan Business Park LLC, which owns and operates the former Air Force base. He and his partners would consider a restructured partnership, an investment or a purchase.

When redevelopment of McClellan began, it was perceived by the investment community as an incredibly risky venture, Kelley said, but he now has a record that he believes will appeal to institutional investors.

"We've leased almost 5 million square feet of space," Kelley said. "We've created a lot of value and now the question is, 'How much?' There's a lot of liquidity in the market today, and we just want to explore what the market will say."

McClellan Business Park has engaged Eastdil Secured, the real estate investment banking unit of Wells Fargo & Co., to lead the hunt for partners, investors or buyers.

Kelley and his associates started leasing space at McClellan in 2001 and figured it would take a decade to fill the 8.3 million square feet of offices, shops and warehouses at its disposal. Today the business park is about 53 percent occupied, a pace well ahead of that early estimate.

"I always assumed a 10-year lease-up," Kelley said. "It's been faster than that. It will probably take just three or four more years from where we are now."

McClellan is probably the biggest reuse project in Northern California, said Paul Hahn, the county's economic development director. "Mather has more acreage, but not the building square footage."

With 3,000 acres, McClellan still has plenty of room for growth. How much growth? Kelley estimates there's space for 7 million to 8 million square feet of buildings.

Millions of dollars in improvements have been made to roads and other base structures, and such high profile facilities as the Lionsgate Hotel have been recruited.

A $7 million California Aerospace Museum, expected to become one of the Sacramento area's major museums, is under construction and scheduled to be completed by Dec. 16.

Current tenants -- Northrop Grumman, SureWest, Raytheon, General Dynamics, Sears, JC Penney, the forestry division of the U.S. Department of Agriculture, Flight Options, XO Jet, among others -- now employ more than 10,000 people at the business park, Kelley said. That is double the number of workers at the park five years ago when it opened.

When the federal government announced in the mid-1990s that the Air Force would be vacating McClellan and turning the former base over to Sacramento County, the Sacramento County Board of Supervisors selected McClellan Business Park LLC to acquire and redevelop the facility.

McClellan Business Park is a venture composed of Morgan Stanley Real Estate Fund, Stuart Lichter of Industrial Real Estate Group and Kelley Properties.

Kelley and his associates had already started the transformation of the base into a business park by the time the Air Force vacated the facility on July 13, 2001.

Under terms of the agreement with McClellan Business Park, Sacramento County will get 4 percent of the revenue that the property generates "past a certain threshold," Hahn explained.

The county could start seeing a steady revenue stream from profit-sharing within the next two or three years, Kelley said, if the project continues on its present course.

If part or all of it is sold, and assuming the price is high enough, the county could get a piece of the sale. And a sale would trigger a property value reassessment translating into more tax money. Neither Hahn nor Kelley would disclose how much money the business park would have to generate to trigger the profit-sharing.

Kelley, in a news release, said the combined efforts of the Air Force, Sacramento County and a variety of regulatory agencies have resulted in a lot of progress and a predictable timetable for the completion of the environmental cleanup of toxic materials that had been used by the Air Force during the 60 years McClellan was a base.

Most of the old McClellan air base is still owned by the federal government, which has spent more than $500 million on environmental cleanup from decades of industrial waste that accumulated on the site.

When the Air Force took down the U.S. flag in 2001, the government predicted it would take 35 years and cost the federal government $3 billion to completely scrub the site.

"That estimate was low," said County Supervisor Roger Dickinson, referring to the price tag and the time frame. "It's a shockingly low number of acres -- probably less than 10 percent -- that has been cleared to this point in time."

Despite the cleanup, McClellan Business Park has been able to pull in tenants because the primary source of contamination is in the ground water in open spaces and poses no health threat to building tenants.

Still, the site's environmental contamination could be an issue for some investors, Hahn said, particularly anyone interested in purchasing the entire property.

"We've got a long way to go," Hahn said. "Any investor is going to have to realize that cleanup activity is going to have to go on."

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Copyright (c) 2006, The Sacramento Bee, Calif.

Distributed by Knight Ridder/Tribune Business News.

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Source: The Sacramento Bee

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