DATE: Sunday, April 6, 1997                 TAG: 9704050515

SECTION: BUSINESS                PAGE: D1   EDITION: FINAL 

SOURCE: BY MYLENE MANGALINDAN, STAFF WRITER 

                                            LENGTH:  116 lines

SHELL BUILDINGS ARE BIG ON THE PENINSULA

Hampton Roads drivers have probably seen them - large, shiny glass and metal boxes rising from empty parking lots. Located in office parks near crucial interstate junctions, they offer high ceilings and vast, open space.

Shell buildings - bare bones structures with only a foundation, a roof and walls - are big business for the Peninsula, dotting the cities north of the Hampton Roads Bridge Tunnel on Interstate-64. While they may be sterile and empty, economic development officials are betting they will generate thousands in tax dollars and jobs. Some local developers and commercial real estate brokers disagree, arguing that city-financed shell buildings undercut the the private commercial real estate sector.

Debate on the merits of public sector development rages because Peninsula cities are pursuing these shell buildings aggressively. James City County has one, Newport News is building its fifth and Hampton has one on the drawing boards. South Hampton Roads cities, however, have shied away from assuming a developer role.

Of the five shell buildings in Newport News, four have been sold or leased to companies. The fifth one is still under construction but will be occupied by Consolidated Integrated Technologies Inc., which will move out of the city's fourth shell building into the new one. The fourth shell building will move back into the city's hands.

More building inventory exists in South Hampton Roads, so there's more opportunities for finding available space, deleting the need for city-sponsored shell buildings. In addition, many of the city governments are opposed to funding shell buildings because they have other pressing concerns like schools and roads.

``We have other things we need to be doing with our dollars,'' said Donald Z. Goldberg, Chesapeake economic development director. ``It would be another burden on the city to go into shell buildings. It's really the private sector's role more so than the public sector.''

Local developers also worry that municipalities make bad decisions when they're unloading a shell building.

Tyrolit Abrasives bought Newport News' third shell building in 1991 for $1 million. It had planned to open a manufacturing facility but disappointed the city when it turned into merely a sales and distribution office, Miller said. Now, it's selling the building for $1.9 million.

Whether shell buildings pay off for municipalities will depend on the long-term outcome of the companies that move into them.

Competition for relocating or expanding companies has intensified in recent years as states such as Alabama and South Carolina gave away millions of dollars in incentives to lure car manufacturers. Tax credits, tax abatement, rent rollbacks, roads or simply cash are some of the sweeteners used to sway companies.

Shell buildings are used to lure expanding firms. Companies can move into new quarters immediately and without spending money for construction. They receive the option to rent or to buy the property. In some cases, companies that don't qualify for a building loan can take space in a city-backed building.

``The shell building acts as a carrot,'' James N. Bradshaw, executive director of Franklin/Southampton Economic Development Department. ``It gets them to come to an area.''

From 70 percent to 75 percent of prospective companies are looking for a building and a site, said Paul Miller, Newport News director of planning and development. Shell buildings offer business prospects a specific site. It's the economic development equivalent of a car buyer kicking the tires.

``It's the tangibility that's very important to customers,'' Miller said. ``If you have a building to take them to, they can start comparing it to what they want.''

Small rural towns such as Danville and Emporia began constructing shell buildings a decade ago, precisely because they didn't have anything else to show prospective businesses. Empty office or industrial space didn't exist and the private sector wasn't building unsold or unleased structures in those communities, said Abe Ellis, senior vice president at Virginia Commercial Real Estate Services.

Around 1987, rural towns began forming private-public partnerships or receiving assistance from the state to construct shell buildings. Municipalities learned that they could afford to shoulder the risk.

Local governments often owned the land where the building would be located so construction costs were their only out-of-pocket expense. They could issue bonds or obtain low-cost loans allowing them to carry the building cost until it was leased or sold, Ellis said. Or they could tap into city funds that didn't require them to pay any interest.

The state of Virginia endorses public sector involvement in development. It sponsors a shell building program, resulting in seven projects since the program's inception in 1989. The Virginia retirement system puts up the capital for the program and the Virginia Economic Development Partnership pays the interest for five years, said Jill Lawrence, a VEDP spokeswoman. Hampton's planned shell building at the interchange of I-64 and Big Bethel Road is funded by the state.

This financial power worries developers.

``The municipalities are competing so aggressively against each other that there's no way the private sector can effectively compete,'' said Bill Hamner, president of Hamner Development Co.

Private developers have more initial expenses, including buying the land at market prices. To get a loan, they must convince a bank that they can sell or lease the building quickly. They also need to worry about paying the bank back soon so they don't lose their entire profit by paying interest on a loan.

The environment for speculative building, construction without tenants signed beforehand, hasn't been bright. Banks have been reluctant to finance speculative construction since the 1990-92 recession when many developers couldn't repay their loans and lost properties to foreclosure.

Banks are still not lending money based on speculative building because it's too risky, said Jonathan Guion, an industrial specialist at S.L. Nusbaum Realty Co.

That's why many municipalities are filling what they consider a gaping need.

``It's a way to level the playing field,'' said Matthew James, director of economic development in Portsmouth. ``I think you're going to see more communities do that.''

In the case of James City County, the lack of existing or empty buildings cost the county prospect visits, said Keith Taylor, economic development director of James City County. Solarex, a solar panel maker, arrived to look at the county's shell building, decided it didn't want that one but built its own there.

``It serves as a valuable marketing tool even if you don't sell it right away,'' Taylor said of the shell. ILLUSTRATION: Map

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