CCIM Feature

Texas-Size Industrial Deal Changes a City's Future

If everything is supposed to be bigger in Texas, a recent industrial transaction put together by Robert F. Duncan Jr., CCIM, SIOR, certainly fits the bill. Duncan, president of InterAmerica Property Co. in El Paso, Texas, landed the largest industrial build-to-suit deal in North America in 1998.

In doing so, he overcame significant obstacles in site selection, zoning, and access and changed the landscape of the town of Socorro, Texas, forever.

After it was all over he received the William C. Jennings Lone Star Trophy Award, presented to one Texas commercial real estate professional a year by the Texas Association of Realtors, and collected awards from both the city of Socorro and its neighbor El Paso. "It was an outstanding year for me and my company," he says.

What's even more impressive is that his company is no monolithic giant with resources and contacts throughout the world. "We're a four-person niche firm that covers the U.S./Mexican border region of North America, Mexico, and South America with an industrial property focus," he says.

A Big Deal
But the company InterAmerica represented is a giant in the consumer electronics field. Thomson Consumer Electronics, which produces equipment sold under the brand names RCA, GE, and Proscan, is the fourth largest producer of televisions, videocassette recorders, and other electronic gear in the world, with facilities in more than 30 countries.

InterAmerica's association with Thomson began with a "10,000-sf expansion requirement in [Ciudad] Juárez, Mexico, across the border from El Paso," Duncan says. "That was my first assignment [as Thomson's tenant representative]. Our relationship grew over the years. The Socorro assignment was based on a major consolidation of five different facilities in the El Paso region."

The first sign that finding Thomson's new site would be a big deal was the size: The company needed a "minimum of 100 acres," Duncan says. Other restrictions also complicated the search. In addition to reducing its occupancy costs by 25 percent, Thomson wanted to be near its manufacturing operations in Ciudad Juárez. Beyond that, it wanted an industrial site with rail access in a foreign trade zone close to a Mexican port of entry.

Not fazed by the size of the requirement — in the 1980s, Duncan put together a couple of record-shattering lease transactions in suburban Chicago — he located and analyzed 25 sites along the Mexican border in West Texas and southern New Mexico. While all were close to Thomson's Mexican operations, none of them offered the rail or port-of-entry access the electronics giant required.

But a site Duncan located in Socorro, a farming town of 23,000 people about 10 miles south of El Paso, fit the bill. The Union Pacific/Southern Pacific rail line runs through the town and it is only about five miles from the Zaragosa Bridge, the main commercial entry into Ciudad Juárez.

Also in the site's favor was the fact that the flat, rural land offered few development obstacles and little chance of environmental problems since the area was mostly agricultural. However even these positive attributes had negative undersides. The site would require a zoning change and infrastructure improvements. Beyond that, there was still the foreign trade designation to deal with, as well as timing obstacles. "Once the site was approved, Thomson had to occupy the facility within seven months," he says.

Racing Against the Clock
With that time frame looming over him, Duncan strategized on two fronts: lease negotiation and municipal authorities. As Thomson's exclusive tenant representative, he had to deal with all phases of this complex move. Because the firm was consolidating its warehousing, distribution, manufacturing, research and development, and regional headquarters from five locations into one, "We had to negotiate all the leases to be coterminous in order to be in position to consolidate," he says. "Secondly, we formed a partnership with the city of Socorro, the county, and city of El Paso, and many different municipal and governmental entities. This allowed us to tackle issues that arose from a unified front. That strategy worked to a T."

Part of Duncan's strategy rested on recognizing how much this transaction would change the landscape of Socorro. "The largest tax base in the entire city of Socorro was a 20,000-sf Big 8 food store," he says. "The Thomson facility — more than a million sf — would change the cityscape of the entire area." Thomson would bring 500 and eventually 1,000 employees into the town every day, creating a need for restaurants, retail, and other commercial properties nearby. Increased property values, jobs, and economic growth all would follow.

With that in mind, Duncan successfully sought Socorro's cooperation in changing the zoning from agricultural to commercial/industrial. He then negotiated with the rail line to install a new switch for rail service to the site.

Meeting the requirement for foreign trade zone status was a bit more challenging. Many firms that operate manufacturing facilities in Mexico close to the U.S. border use FTZs to reduce U.S. customs fees and speed the handling of imported and domestic merchandise. While it usually takes 18 to 24 months to apply and receive FTZ status, Duncan was able to negotiate a land trade in order to gain temporary FTZ status in about six weeks. A piece of land with FTZ status was "traded" for the Thomson site, creating a temporary boundary modification. The approval process required mountains of paperwork, everything from an El Paso City Council resolution to consent from adjacent landowners and approval by the city of Socorro, El Paso County, and the local school district. But it enabled Duncan to save Thomson more than a year's wait.

With the finish line in sight, Duncan ran into one final roadblock that threatened to stall the whole deal. The city had incorrectly estimated the time it would take to run water and gas lines to the site; speeding up the work would triple the estimated cost. Neither Thomson, the city, nor the developer had the money to cover the extra cost.

Instead of spinning their wheels looking for money where none existed, Duncan and the involved parties analyzed the win-win aspects of the transaction, beyond the bricks and mortar that were going up. Using this "holistic" approach, "It occurred to us that the city of Socorro was going to benefit much more so than any single party," he says. Acknowledging the reality, the city agreed to a 10-year, 50 percent real and personal property tax abatement to offset the higher infrastructure costs.

The site was now in place, but the work was not over. Duncan negotiated a lease between the development company and Thomson. He created three possible scenarios — operating vs. capital lease, synthetic lease, and lease vs. buy — and tested each one to determine the best financial model for Thomson. Although Duncan's analysis recommended owning the facility for 10 years, Thomson chose to preserve its capital and lease for 10 years.

While the complexity of this deal won him the Lone Star Trophy, the economic advantage it brings to Socorro and neighboring El Paso won Duncan the praise of both cities' mayors. At the finish line, Duncan appraises the deal as the "most challenging and the most rewarding project of my career in real estate."

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