Belchertown State School site redevelopment highlights the importance of due diligence when buying or selling real estate Reply

The lack of progress of the redevelopment of the former Belchertown State School is a basic case of a lack of due diligence.

The lack of progress redeveloping the former Belchertown State School site is a basic case of a lack of due diligence.

The redevelopment of the former Belchertown State School property is a classic case of what results when a buyer and a seller fails to conduct due diligence when buying or selling real estate.  Not only does a buyer need to investigate the property they are purchasing, but the seller needs to ensure a buyer’s ability to perform.  The quasi-governmental organization that owns the property has failed to perform adequate due diligence as a buyer and as a seller since taking ownership of the property in 2002, which has cost them money and has significantly slowed the process of redeveloping the site. 

At an annual town meeting in the early 1990’s, Belchertown voted to form an economic development and industrial corporation to take ownership of the property, which included several parcels of land with a total of 263 acres of land.  According to Mass.gov, an economic development and industrial corporation must consist of people with the following qualifications:  one member experienced in industrial development, one member experienced in financial matters, one member experienced in real estate matters, one member representative of low income people, and one member experienced in municipal government.

It should be noted that most of the current members of the EDIC were not involved in most of the situations discussed here.

The Belchertown Economic Development and Industrial Corporation (EDIC) took ownership of the property in 2002. The price that they paid was $10 because they agreed to take the property in “as is” condition, despite the fact that the commonwealth was willing to convey the property after a full remediation of the hazardous materials in the former State School buildings and tunnels.  About $5 million was spent partially remediating the site at that point.

As a condition of taking the property in “as is” condition, however, the EDIC agreed to accept the liability risks as well.  This included all liability that may stem from the hazardous materials on the site from when the commonwealth owned the property.  This was stipulated in an indemnification clause that was to transfer with the deed.  So whomever the property was conveyed to in the future would have to accept this risk as well.

For example, a former patient of the Belchertown State School develops respiratory problems as a result of being at the facility and sues.  They would have to sue the owner of the property and not the state.  No reasonable developer would agree to take ownership of the property with this condition.

At the time, the EDIC figured that they would be able to finance the multi-million dollar finance costs either through sale of some of the undeveloped parcels or by letting developers assume those costs.

However, things didn’t turn out that way largely due to the EDIC’s failure to conduct their own due diligence when taking ownership of the property, or when they conveyed the property to others.

When they started working with the first master developer for the former State School campus site, according to a very critical state audit, whose conclusions the EDIC and Belchertown Board of Selectmen were critical of, the EDIC failed to adequately evaluate the developer’s ability to bring their plan to fruition.   As a consequence, according to the state auditor’s report, after signing a development agreement in May 2006 and a purchase and sale agreement being executed in September 2007, a second deposit check for $100,000 bounced.  Although the EDIC continued to work with the developer despite this demonstration of the developer’s inability to pay, the relationship eventually dissolved and over a year was lost.

Then came the EDIC’s sale of Parcel E, which is where an office building, Tractor Supply, and Planet Fitness are currently located.   When

When the EDIC sold parcel E, they failed to do their due diligence when conveying the property. As a result, the developer profited nearly $2 million, while not making crucial previously agreed-upon infrastructure improvements.

When the EDIC sold parcel E, they failed to do their due diligence when conveying the property. As a result, the developer profited nearly $2 million, while not making crucial previously agreed-upon infrastructure improvements.

the EDIC conveyed this property to another developer, they did so at a deep discount as it was agreed that a number of infrastructure improvements would be constructed.  The 44 acre parcel was sold for $125,001 with the understanding that the developer would install a sewer pumping station, install over 2000 feet of water and sewer lines, conduct a traffic study, and install a traffic light.   What’s more, the developer turned around and sold the property for a nearly $2 million profit, according to the state auditor’s report.

These improvements were not made as agreed to because the EDIC didn’t conduct adequate due diligence when conveying the property.  They didn’t ensure that the agreement for the improvements was legally binding, i.e., through a restrictive covenant attached to the deed, which is a common sense tool that could have been used to protect the town’s interests Further, the EDIC lost an opportunity to profit from the sale of the parcel and use those funds to remediate the buildings on the campus site.   What’s more, as was the case with the master developer of this site, and as the state auditor’s report points out, it turns out that the EDIC didn’t do their due diligence when selecting this developer whose business practices proved questionable.  This was demonstrated by the fact that a number of liens were placed on the one building he developed at the site, as well as complaints from tenants.

In response to the criticism regarding the sale of this parcel, known as Parcel E, the EDIC chairman reportedly said, “Back in 2002, we had no money, had never done a development, and had sent two requests for proposals on that property and received zero responses.”

Regardless, the EDIC also didn’t proactively market the property and they didn’t do their due diligence when arriving at a price, which was based lower than an appraised value of the undeveloped parcel, according to the audit report.  A request for proposals is hardly a way to get the word out to a larger pool of developers and get the highest and best price with the best terms.

Most recently, the EDIC lost another developer for the former Belchertown State School Campus site.  In 2010, the EDIC was optimistic about the potential of Weston Solutions, an Ohio-based company with experience in redeveloping properties that require remediation.  They were working to acquire a portion of the campus site and make significant investment in remediation.  The loss of this most recent developer is likely a direct result of the time lost dealing with the indemnification clause from when the EDIC took ownership of the property from the commonwealth’s Division of Capital Asset Management (DCAM).

As any real estate professional knows, time is the enemy of any real estate transaction.   The more time it takes to close a deal, the better the chances of the deal falling apart.   In this case, according to June 2013 EDIC meeting minutes, it seems that the situation for Weston Solutions had changed since they first approached the EDIC several years ago.  It is likely that if the indemnification clause didn’t need to be navigated, that Weston Solutions would have taken ownership of the property prior to a change in their circumstances, and the site and redevelopment would have begun.

Although it has recently been reported that MassDevelopment has taken over as master developer of the campus site, this is also a result of a lack of due diligence by the EDIC.  According to the June 2013 meeting minutes of the EDIC, ““Instead, MD declared that they would be the Master Developer for the project.  Although the Town Coordinating Committee members commented that the Memorandum of Agreement (MOA), which MD had with the EDIC and the town, did not provide for that, MD asserted that it did.”

The town agreed to work with MassDevelopment largely because it was seen as an advantage to getting $10 million in bond money released from the commonwealth, which was approved as part of a larger bond package by Governor Deval Patrick and the state legislature in 2008.  However, it was MassDevelopment who ended the negotiations with Weston Solutions after the latter changed their proposal as a consequence of their situation changing.

While I personally think the fact that MassDevelopment is going to spear head remediating the site, the fact that they ended their involvement with Weston Solutions and the re-development services that they provide is another example of the EDIC failing to conduct their due diligence.   It was reported that working with MassDevelopment to get the funds released is far from a guarantee.  The capital $2 million expenditure to get started, for example, needs to be approved by the commonwealth in the fall, according to a recent news report.

In conclusion, the redevelopment of the former Belchertown State School property is a classic demonstration of the quagmire that can occur when due diligence is not conducted appropriately.  While I think that a case could be made that the failure of due diligence originated with the Belchertown Board of Selectmen, which is responsible for appointing the members of the EDIC, based on the how this process has played out thus far as it seems they appointed people not qualified to take on this effort; the first mistake was taking ownership of the property with the condition that an indemnification clause be tied to the deed, which led to the most recent redevelopment deal falling apart.   A lack of due diligence was demonstrated when the EDIC failed to properly vet the first master developer that proved not to be financially viable, which resulted in the loss of more than a year; a lack of due diligence was demonstrated when they conveyed an undeveloped parcel to a developer at a deep discount and failed to ensure that the condition that certain infrastructure improvements be made were made; and a lack of due diligence was demonstrated when they executed an agreement that gave MassDevelopment master developer status inadvertently.

One member experienced in industrial development, one member experienced in financial matters, one member experienced in real estate matters, one member representative of low income people, and one member experienced in municipal government should have been able to avoid the pitfalls that have plagued the EDIC since taking ownership of the property.

As a consequence of the EDIC’s lack of due diligence, despite the fact that tax revenue has been generated from some of the businesses that have been developed since 2002, the status of Belchertown’s redevelopment of the former Belchertown State School and the subsequent economic development would be in much better shape than it is now, regardless of the state of the economy.

The redevelopment of the Belchertown State School property offers many lessons of why performing adequate due diligence is so important.  The due diligence required for a residential real estate transaction are much simpler than required to redevelopment a commercial property to bring business to town improve the tax base of a community, but basics are the same.  It is why residential purchase and sale agreements include language that stipulate exactly how a transaction is to proceed, i.e., time limits for conducting a home inspection and obtaining a mortgage approval, and clean title contingencies. Due diligence is also why sellers and listing agents require a preapproval from a bank before proceeding with a transaction.

If you are planning on buying or selling a home in the Pioneer Valley, make your first call to Michael Seward at 413-531-7129 or email michael.seward@comcast.net.

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