ELWOOD, Ill. — John S. Gates Jr. harbors no delusions about the railroad industrial parks that his company builds, with their seven-day-a-week operations and streams of heavy truck traffic on neighboring highways, according to the New York Times.
“No nice suburban neighborhood wants them in its backyard,” said Mr. Gates, the co-chairman of CenterPoint Properties Trust, the largest owner of industrial property in the Chicago area.
But in this small farming village of about 1,600 people, 40 miles west of Chicago, Mr. Gates has found a community that agreed to let his company build a 2,032-acre railyard and warehouse complex and keep the tax revenue for itself. The complex, on part of what was once the Joliet Arsenal, will open for use by the Burlington Northern Santa Fe Corporation by September. Though there will be no buildings yet, trains stretching thousands of feet long will roll in to be broken down into smaller trains or transfer their cargo to trucks.
“They’re putting in these giant airportlike hubs for rail, and they’re landing these trains out in the prairie,” said Michael Fonda, a senior director of the real estate services firm Cushman & Wakefield in Rosemont, Ill., referring to this project and a smaller one in Rochelle, Ill., involving the Union Pacific Corporation. “You can’t do these huge rail ports inside the city anymore.”
The Burlington Northern project, to be called the CenterPoint Intermodal Center, will be the largest in the country that combines two or more modes of freight transportation. CenterPoint predicts that it will eventually handle 480,000 transfers of freight a year.
In scope and function, the project compares only with the Burlington Northern Santa Fe Alliance Intermodal Center, part of the Alliance Texas development near Fort Worth. That development began as an airport but quickly integrated another Burlington Northern line. The rail park now covers about 500 acres and handles 450,000 freight transfers a year.
Mr. Gates views his project as part of a still grander trend. “You’re starting to see a movement toward the private financing of what used to be public infrastructure,” he said.
Mr. Gates has also convinced the Army, the State of Illinois and the railroad, among others, that the park will solve problems for them. And better still for CenterPoint, a publicly traded real estate investment trust, he has done a series of deals intended to minimize the financial risks to his company of the $650 million development. The cost is already offset by an estimated $200 million in entitlements from governmental bodies, including money to clean up the site and revenues from increased tax values to build infrastructure improvements, according to company filings with the Securities and Exchange Commission.
CenterPoint intends to build 15 million square feet of manufacturing and warehouse space on the site, which is zoned for heavy industrial use. So far, it has changed the elevation of the site by 30 feet; moved 9 million cubic yards of soil (when the Hoover Dam was built, 5.5 million cubic yards were excavated, according to the Interior Department); laid 38 miles of railroad track; started work on 20 miles of roads and paved the acreage leased to the railroad with concrete and asphalt. It built a water tower and an asphalt plant to serve the construction crews.
The anchor for the project is a ground lease of 620 acres to the Burlington Northern at about 24 cents a square foot, or $6.5 million a year, according to Paul Sisher, the company’s chief financial officer. Counting that, a 51-acre ground lease to Container Care International and two leases totaling 750,000 square feet of distribution space in buildings that CenterPoint will construct, the center is about 50 percent leased, Mr. Gates said.
To finish the project and fulfill the promises he has made to Elwood and Illinois, Mr. Gates must attract tenants who need the railroad.
“For the nonrail users, there is quite a lot of land in the I-80 corridor that has been purchased by developers, so there is a lot of competition,” said Kirk Armour, managing director for industrial property at the Chicago office of the real estate services firm Insignia/ESG.
From the air, the park looks like a big empty slab, but making this much progress has required negotiating with 50 governmental entities, according to Michael M. Mullen, the company’s president.
“There isn’t one Army, there’s 10 armies,” Mr. Mullen said.
The government built the Joliet Arsenal on 23,500 acres here in the 1930’s, supplying munitions for World War II, the Korean War and the Vietnam War. It closed the site in 1976, later declaring it fit for priority status under the Comprehensive Environmental Response, Compensation and Liability Act. In part because the Army is the polluter and in part because of the priority status, the cleanup schedule has not been altered by the Bush administration’s recent decision to scale back the so-called Superfund program.
In 1995, Illinois passed a land conservation act that set aside 19,000 acres of the site for preservation of tall grass and 1,000 acres for the Abraham Lincoln National Cemetery. That left 3,000 acres for industrial development. CenterPoint paid more than $25 million for the land, according to Mr. Gates, but Mr. Mullen quickly found in his negotiations that CenterPoint would not be able to keep all of the property it had bought.
The company donated 83 acres to the Forest Service, 10 acres to Elwood and 60 acres to a wetlands conservation project, and it made other side deals, too. CenterPoint is financing the $2.4 million addition to a high school and the $1 million construction of a new village hall. Also, it bought a farm to make the parcel contiguous with Elwood so the village could annex the site and grant the tax financing.
“Nobody didn’t like it,” Mr. Gates said of the project, “they just wanted to put their own twist on it.”
Around the time of the final negotiations, J. Dennis Hastert, Democrat of Illinois, became the speaker of the House. “His district is near here, and he took an interest,” Mr. Gates said. “That didn’t hurt.”
Part of the project’s appeal outside Elwood is the notion that it could draw trains away from Chicago, where the streets have grown steadily more clogged with the accompanying truck traffic for a century. That notion is merely conjecture so far, Mr. Gates acknowledged, but it was one of the successful selling points for the project.
For Elwood, the appeal was straightforward. Mr. Mullen told the residents that the center could create 8,000 to 10,000 construction jobs and perhaps as many permanent jobs, a number comparable to the arsenal’s employment at the height of wartime.
“Those kinds of numbers were kind of what helped sell the project,” said Lawrence M. Walsh, a member of the Illinois Senate who also serves as the supervisor of Jackson Township, which includes the village of Elwood. The village annexed the site and agreed to sell bonds worth $125 million to finance infrastructure improvements, with a provision specifying that the money would be payable to CenterPoint for the improvements solely from increased tax revenues over 23 years.
CenterPoint expects real estate taxes of 70 cents to 90 cents a square foot of commercial space, and the previous tax base was nonexistent because states cannot tax federal installations.
The company has also securitized the lease to Burlington Northern, essentially raising $90.2 million by selling the income stream to institutional bondholders at a rate tied to the railroad’s own credit rating, to the delight of the Wall Street analysts who cover CenterPoint’s own stock and debt.
“They’re adding a whole lot of revenues, but they’re not tying up a lot of capital,” said Mark Berry, a fixed-income analyst for Fitch Ratings.
All this cooperation from the federal, state and local governments has given CenterPoint the ability to undercut the asking rents of competing developers, said Mark E. Bratt, a principal at LendLease Real Estate Investments.
“That’s a concern we have as a real estate investor,” he said, but he added that Elwood’s ability to grow will ultimately determine the outcome for the village, and for Mr. Gates.
“I’m sure this is going to be good for their job creation, but they’re going to have to grow to keep up with it, or people will have to trek down from the suburbs,” Mr. Bratt said “They’re clearly going to have some growth implications if this is going to be as big a success as CenterPoint says it will.”