Case studies questions answers

©2014 by the Kellogg School of Management at Northwestern University. This case was prepared by Professors Denise Akason and William M. Bennett. Cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. To order copies or request permission to reproduce materials, call 800-545-7685 (or 617-783-7600 outside the United States or Canada) or e-mail [email protected]. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means— electronic, mechanical, photocopying, recording, or otherwise—without the permission of Kellogg Case Publishing.

DENISE AKASON AND WILLIAM M. BENNETT KEL799

Hemisphere Development LLC: Betting on a Brownfield

In June 2009, a team from Duke Realty and Hemisphere Development, along with Hemisphere founder and CEO Todd Davis, visited the 1.5 million square foot Delphi Automotive plant near Columbus, Ohio. As the team walked through the plant, it was like a journey back in time. The dimly lit manufacturing facility exuded the odor of industrial fluids from the nearly sixty-seven years of intensive manufacturing activity that had taken place on the worn wood- block flooring. Hard hit by the rapid decline in the American automotive industry, Delphi Automotive was in the midst of a bankruptcy filing, and this facility—which had once supported thousands of workers and their families—was slowly becoming yet another contaminated brownfield1 that would linger in the portfolio of a bankruptcy estate.2 “The [opportunity] at that time looked like a brownfield redeveloper’s perfect storm—you had a depressed real estate market, a huge piece of real estate with vast empty buildings replete with asbestos, and substantial (but not yet fully characterized) environmental issues involving a seller in bankruptcy. Even for a sophisticated team, this is not a deal I would characterize as easy pickings,” explained an employee of Hemisphere.3 Further, the team had not identified a clear economic use for which to redevelop the property.

A few months later, in early 2010, Davis found himself in the middle of a complex opportunity. At community stakeholders’ urging not to construct a casino at an originally planned location in downtown Columbus, Penn National Gaming was now considering the Delphi Automotive site for one of its two new casinos in the state of Ohio. Importantly, Penn would only give the job to the Duke-Hemisphere partnership if—among other stipulations—it could shift all the environmental-related project risks to the redevelopers. Meanwhile, Davis worried that the project might be alarmingly risky, especially given the treacherous regulatory environment surrounding casinos in Ohio. As Davis evaluated the potential deal, he wondered: How should the development partnership be structured, and how would the project be financed? Further, how much capital was he willing to put up for the project, and what type of return did he require in order to be willing to move forward?

1 Brownfield land refers to an industrial or commercial property that remains abandoned or underutilized in part because of environmental contamination or the fear of such contamination. Environmental Law Institute, http://www.brownfieldscenter.org/big/ glossary.shtml (accessed January 13, 2014). 2 “Duke-Hemisphere Transforms Bankrupt Delphi Facility Into $400 Million Casino Development,” HemisphereDev.com (accessed November 14, 2013). 3 Todd S. Davis, “Gaming Goes Green: Rolling the Dice on Sustainable Development,” Brownfield Renewal, Oct.–Nov. 2010.

For the exclusive use of H. Akdemir, 2018.

This document is authorized for use only by Hasan Akdemir in New Venture Fall 2018 taught by GEORGE CHRISTOPHER NAPOLITANO, SUNY - New Paltz from Aug 2018 to Jan 2019.

HEMISPHERE DEVELOPMENT LLC KEL799

2 KELLOGG SCHOOL OF MANAGEMENT

Hemisphere Development

Hemisphere Development LLC was a small, entrepreneurial redevelopment firm based in Cleveland, Ohio. It delivered specialized expertise on all aspects of brownfield redevelopment— including the complex environmental, legal, real estate, financial, and political hurdles involved in sophisticated redevelopment projects. The company was founded by Todd Davis, Hemisphere’s CEO, in 1994.

Hemisphere generally took an ownership position in redevelopments (i.e., made a direct investment or took an equity position) and oversaw remediation and demolition, ensuring that the land was clean and clear of all environmental issues. Land was then redeveloped into an appropriate new use. Most of the company’s portfolio was located in the Midwest, and the redevelopment of former industrial sites was Hemisphere’s expertise. Sites in Hemisphere’s real estate development portfolio generally met the investment criteria in Figure 1.

Figure 1: Hemisphere Development’s Investment Criteria

Source: “Investment Criteria,” HemisphereDev.com (accessed November 14, 2013).

The Delphi Site

At the time of Davis’s site visit in June 2009, the Delphi Automotive property had been on the market for years. No one had been able to work through the significant challenges to make a redevelopment plan feasible from an environmental or use perspective.4 The 121-acre site had a

4 “Duke-Hemisphere Transforms Bankrupt Delphi Facility.”

In general we:

 View deals from a long-term ownership perspective (e.g., Would we want to own this site ten years from now?)

 Are not deterred by any type of environmental contamination  Prefer deals with at least twenty contiguous acres  Prefer, for existing, reusable facilities, at least 100,000 square feet of space  Prefer redevelopment opportunities requiring in excess of $5 million in capital

through stabilization of the property  Do not have a preferred real estate product type (i.e., retail, residential, industrial,

etc.) for our redevelopments

However, exceptions to Hemisphere’s investment criteria are made for compelling real estate with a unique attribute that creates exceptional value once the site has been remediated.

For the exclusive use of H. Akdemir, 2018.

This document is authorized for use only by Hasan Akdemir in New Venture Fall 2018 taught by GEORGE CHRISTOPHER NAPOLITANO, SUNY - New Paltz from Aug 2018 to Jan 2019.

KEL799 HEMISPHERE DEVELOPMENT LLC

KELLOGG SCHOOL OF MANAGEMENT 3

number of positive attributes, including its proximity to a major interstate. However, the vacant plant also posed a number of significant redevelopment challenges, including depressed market conditions. The Duke-Hemisphere team had a keen interest in the site, assuming it could find an attractive economic use for the redevelopment. Initially, the redevelopment strategy anticipated reusing the site for a major warehouse or distribution facility, but the area’s manufacturing base had long been shrinking. The struggling housing market made residential development problematic in the near term, and the U.S. recession was causing retailers not to make new commitments of the scope necessary to develop the site as a shopping mall.

See Exhibit 1 for photos of the Delphi site.

Complex Environmental History

The space had long been a site for heavy manufacturing, beginning in 1945 and ending when Delphi Automotive Systems—a company that produced automotive components such as door latches, door locks, and window frames—closed its plant in 2007.5 Historically, manufacturing operations at the plant included stamping, welding, painting, automated assembly molding, plating, heat treating, and roll forming.6

Railroad tracks bisected the site and ran into the main manufacturing buildings. These buildings contained several press areas, subsurface lubing systems, quench oil pits, and furnaces. The plant had been powered by its own on-site, coal-fired power plant, and partially used piles of coal still littered the large storage yard. Additionally, the majority of the site’s buildings had substantial quantities of asbestos-containing materials in their insulation.7 See Exhibit 2 for remediation information on the Delphi site. Still, the property contained nearly 1.5 million square feet of buildings, and if a suitable use could be found, Davis was sure that the purchase price would not be an issue.

Casino Gaming Comes to Ohio

In November 2009, Ohio voters issued four licenses to construct casinos in the cities of Cleveland, Columbus, Cincinnati, and Toledo. Similar ballot issues since the early 1990s had failed to win voter approval, but the need for substantial job creation and an immediate boost to Ohio’s tax coffers seemed to have swayed voters to take a chance on casino gaming. Spearheading a well-orchestrated campaign, the publicly owned Pennsylvania-based company Penn National Gaming secured the licenses for casinos in Columbus and Toledo. Penn had selected a remediated brownfield site in Toledo as the location for one of its new facilities, but its initial choice to locate its Columbus casino on eighteen acres near downtown was considered controversial by several constituencies in the community.8

5 Ibid. 6 Davis, “Gaming Goes Green.” 7 “Duke-Hemisphere Transforms Bankrupt Delphi Facility.” 8 Davis, “Gaming Goes Green.”

For the exclusive use of H. Akdemir, 2018.

This document is authorized for use only by Hasan Akdemir in New Venture Fall 2018 taught by GEORGE CHRISTOPHER NAPOLITANO, SUNY - New Paltz from Aug 2018 to Jan 2019.

HEMISPHERE DEVELOPMENT LLC KEL799

4 KELLOGG SCHOOL OF MANAGEMENT

Figure 2: Casino Site Plan

Source: Image provided by Hemisphere Development.

After discussions with numerous community stakeholders, Penn agreed in early January 2010 to evaluate alternative locations for its Columbus casino. Immediately, a torrent of developers offering alternative locations entered the race to provide a development site for the casino, and Davis knew that the time to act was extremely short. Davis and his colleagues also knew that they would have to present a compelling case to Penn for it to choose the Delphi site. Penn made clear that although it liked the location of the Delphi site, it wanted absolutely no environmental risk in the deal.

Creating a Development Team Davis knew that substantial resources would be required to make the Delphi site a casino.

Fortunately, he had recently negotiated a co-development agreement with an affiliate of Duke Realty, a public real estate investment trust (REIT) with substantial financial capacity as well as a brand name, which would help assuage the concerns a public company such as Penn would have with a large project that might expose it to environmental liabilities. The Duke-Hemisphere team immediately expressed interest in evaluating whether the 121-acre Delphi facility could be a good location for a massive casino and hospitality project. Davis also thought there might be a possibility to gain not only public support but also public financing for the project.

Duke Realty

Duke Realty Corporation was one of the largest publicly traded, vertically integrated office and industrial real estate companies in the United States. It specialized in the ownership, construction, development, leasing, and management of office, industrial, and healthcare real estate. It owned, managed, or was in the process of developing more than 145 million rentable square feet in twenty-four major cities across the United States. Duke also controlled more than 7,100 acres of land, representing more than 107 million square feet of future development, and provided nationwide real estate solutions through its national development division.

For the exclusive use of H. Akdemir, 2018.

This document is authorized for use only by Hasan Akdemir in New Venture Fall 2018 taught by GEORGE CHRISTOPHER NAPOLITANO, SUNY - New Paltz from Aug 2018 to Jan 2019.

KEL799 HEMISPHERE DEVELOPMENT LLC

KELLOGG SCHOOL OF MANAGEMENT 5

The Columbus casino project would be the first opportunity for a deal under Hemisphere’s new co-development agreement with Duke, so Davis was extremely eager to make the deal successful. A bad first deal could set a negative tone for the overall Duke-Hemisphere relationship.

Hull & Associates, Inc.

Hull & Associates was a project development and engineering consulting firm specializing in environmental work, including brownfields, that would work as a subcontractor on the site. Hull had more than twenty-five years of experience working on complex brownfield sites similar to the Delphi plant. The firm brought substantial environmental engineering, remediation oversight, and due diligence expertise to redevelopment opportunities.

Potential Public–Private Partnership Information

Due to the property’s status as a brownfield, a number of governmental and regulatory incentives were potentially available to facilitate the site’s redevelopment. The site was eligible for Ohio’s Voluntary Action Program, which offered technical assistance from the Ohio Environmental Protection Agency’s (EPA) on-site investigation and remediation services. In coordination with the Ohio EPA’s Voluntary Action Program, Davis and his colleagues also met with U.S. EPA Region 5 personnel from its Automotive Redevelopment Task Force. The environmental regulatory authorities understood that providing expedited input on critical projects of this nature was the key to facilitating large-scale redevelopment.9 Other organizations on the project’s Environmental Due Diligence and Remediation Team included Hull & Associates, S. G. Loewendick & Sons, Environmental Management Specialists, Inc. (EMS), and Ohio Technical Services, Inc. (OTS).

Environmental Complexity One of the deal’s greatest challenges would be quickly identifying and quantifying the site’s

historical environmental information in order to determine the likely cleanup cost and timeframe necessary to complete the remediation. Unlike most comparable projects, the redevelopment constraints imposed by Penn were twofold: (1) if the team could not convince Penn it could quantify the environmental liabilities quickly, the deal would not happen; and (2) if the team could not execute the redevelopment strategy, including performing demolition and remediation as well as securing necessary regulatory approvals (all within an extremely tight timeframe), the redeveloper would incur substantial financial penalties in the form of liquidated damages from Penn for each month of delay. Penn’s goal was to open the casino as soon as possible.

Delphi Automotive Systems had performed extensive investigations at the site over time, but its information was incomplete and did not quantify potential cleanup costs. Further, although regulatory authorities were likely motivated to facilitate the redevelopment, the project team knew that these authorities would not provide any guarantees or reliable timeframes on approving regulatory requests, and that certain environmental permitting issues were beyond anyone’s

9 “Duke-Hemisphere Transforms Bankrupt Delphi Facility.”

For the exclusive use of H. Akdemir, 2018.

This document is authorized for use only by Hasan Akdemir in New Venture Fall 2018 taught by GEORGE CHRISTOPHER NAPOLITANO, SUNY - New Paltz from Aug 2018 to Jan 2019.

HEMISPHERE DEVELOPMENT LLC KEL799

6 KELLOGG SCHOOL OF MANAGEMENT

control. For example, wetlands had emerged in a former hazardous waste lagoon that required coordination between both the U.S. Army Corps of Engineers and the Ohio EPA. When multiple agencies were involved in the permitting process, timeframes to complete relevant issues became even more unpredictable.

Political Risks Given the high-profile nature of the project and the fact that gaming itself was a controversial

subject, the project also had the potential for substantial political intrigue. Sure enough, furious litigation between Penn and the City of Columbus soon ensued as a result of the city’s refusal to provide water to the site as a tactic to force Penn to agree to the city’s tax-sharing plan. Although Duke-Hemisphere was not directly involved in the dispute, the political fallout affected the developer. To increase its negotiating leverage, the City of Columbus advocated the quashing of any public grant funding currently in process to support redevelopment efforts. Although the Duke-Hemisphere team had worked hard to position itself as the top-ranked project to win state grant funds available for Ohio brownfield sites (which would help mitigate environmental cleanup costs), the new governor of Ohio, in a political move to support the City of Columbus in its battle against Penn, introduced legislation to block the project team from securing a $3 million grant on the eve of the award.

Current State The contract negotiation with Penn was nearing completion and, with a total contract value of

$33 million, the economic upside was incredibly attractive given the anticipated project budget. The redevelopment team’s risk of incurring huge liquidated damages for failing to deliver the project on time was also substantial, however, and at the very last minute Penn demanded the ability to exit the deal with a one-time fee at any time after closing, for any reason whatsoever. This put the project’s potential return out of the developer’s control.

The diligence period under which Davis controlled the Delphi site would conclude in ten days, and he believed that an additional $1 million in cleanup costs (above the original budget) would be required. Additionally, Duke’s investment committee was expressing discomfort in participating in such a politically charged, environmentally risky investment.

Hemisphere barely had the capital to take down the Delphi site on its own. The question weighing on Davis’s mind was: How much risk capital was he willing to invest in this project? Additionally, should he devote a huge percentage of Hemisphere’s economic resources to the project: (1) without understanding where he would be able to get the funds for the remaining portion of the development; (2) with a buyer that could walk away and a contract containing the possibility of liquidated damages charges that could turn the potential profit into a loss; and (3) while being dependent, in large measure, on a government bureaucracy? Time was running out fast, and his head began to spin with all the potential risks and issues not entirely within his control.

DIRECTIONS FOR STUDENTS: YOU ARE NOT TO LOOK UP THE ACTUAL PROJECT DETAILS IN PREPARING YOUR ANSWERS TO THE CASE.

For the exclusive use of H. Akdemir, 2018.

This document is authorized for use only by Hasan Akdemir in New Venture Fall 2018 taught by GEORGE CHRISTOPHER NAPOLITANO, SUNY - New Paltz from Aug 2018 to Jan 2019.

KEL799 HEMISPHERE DEVELOPMENT LLC

KELLOGG SCHOOL OF MANAGEMENT 7

Exhibit 1: Photos of the Delphi Site

Source: Images provided by Hemisphere Development.

For the exclusive use of H. Akdemir, 2018.

This document is authorized for use only by Hasan Akdemir in New Venture Fall 2018 taught by GEORGE CHRISTOPHER NAPOLITANO, SUNY - New Paltz from Aug 2018 to Jan 2019.

HEMISPHERE DEVELOPMENT LLC KEL799

8 KELLOGG SCHOOL OF MANAGEMENT

Exhibit 1 (continued)

Source: Images provided by Hemisphere Development.

For the exclusive use of H. Akdemir, 2018.

This document is authorized for use only by Hasan Akdemir in New Venture Fall 2018 taught by GEORGE CHRISTOPHER NAPOLITANO, SUNY - New Paltz from Aug 2018 to Jan 2019.

KEL799 HEMISPHERE DEVELOPMENT LLC

KELLOGG SCHOOL OF MANAGEMENT 9

Initial Portion 112 acres

• Phased Remediation Strategy

• Timing of Releases Critical

• Maximize Initial Developable  Acreage (min. 40 acres) 

• Minimize Cost/Exceed Applicable  Standards

• Project Components • Major Demo • Impacted Soil • USTs/ASTs • Lagoons/Wetlands

HISTORICAL SITE CONDITIONS

Exhibit 2: Brownfield Remediation Information

Source: Image provided by Hemisphere Development.

For the exclusive use of H. Akdemir, 2018.

This document is authorized for use only by Hasan Akdemir in New Venture Fall 2018 taught by GEORGE CHRISTOPHER NAPOLITANO, SUNY - New Paltz from Aug 2018 to Jan 2019.