3.3.2.1 Location
The city of Frankfurt, with approximately 660,000 inhabitants, is found in the Bundesland of
Hessen in the centre of Germany. The Gutleut neighbourhood is approximately 800 m south
of the central train station at the western end of the downtown of Frankfurt and is demarcated by the facilities of the central station, industrial companies, a power plant, and the former western harbour. Today the neighbourhood is the home of approximately 5,400 inhabitants. It began as a residential neighbourhood for workers and is influenced by its proximity to in- dustrial plants and railway equipment of the central station. Because of its isolation between various commercial uses, there are only a few links to other neighbourhoods. There is hardly any free space available in the neighbourhood and there are only a few facilities for social in- frastructure. Characteristics of the neighbourhood are a high proportion of immigrants, a low- income level and an above-average number of unemployed people and of people being on supplementary benefit.
South of the neighbourhood lies the city’s western port facilities, the so-called Westhafen, completed in 1886. In the second half of the 20th century, the use of the port was in continual decline. Only coal for the adjacent district heating station, as well as sand and gravel for con- struction sites within the city, was still delivered via the port. The area was increasingly used for normal commercial operations. In 1989, there were 96 businesses with 860 jobs in the area. Since the 1970s, the use of the port was repeatedly put in question and a repurposing of the harbour discussed.
3.3.2.2 Project
The port covers approximately 17 ha, including water area; the land area alone without the port basin covers 12.6476 ha. In the initial phase of development, it was intended to create an equal amount of space for residential, office and commercial usage. The residential space was to be divided into 1/3 each of freely financed, rental units and subsidised housing. Fur- thermore, a school and other facilities for social infrastructure were to be built in the area.
Figure 23 – Westhafen planning concept (Source: WPG)
In the course of development, the distribution of usage has shifted. Today, approximately 121,700 m² of gross floor space is being built for office use. This greater share of commercial space is also attributable to the noise exposure of the surrounding usages. Approximately 90,800 m² of gross floor area will be built as housing and social and private infrastructural fa- cilities. The type of residence has changed in the course of project development. The city decided against financing subsidised housing in the area. The great majority of the units will thus be freely financed, high quality residential space. 85 residential units will be built with fixed rents for the following twelve years. A supermarket and several retail and gastronomy businesses augment the provision of the neighbourhood. The originally planned school was not built, as there was insufficient need for one. There is space for two kindergartens in the area. The Protestant church built a community centre in the area. Altogether, residential space was created in the area for approximately 1,650 inhabitants and commercial space for approximately 3,500 jobs.
Figure 24 – Residences in the Westhafen
The port basin was maintained and is used today as a harbour for sailboats and motorboats. The high maintenance port walls and the port basis itself were sold with the land to the pri- vate investors and remain in the property of the home and flat owners adjacent to the port basis. These owners are also responsible for financing the maintenance activities.
Today most parts of the area are brought to market and already developed. The project de- veloper plans to sell the remaining lots in 2008. The project development company will be dissolved after the completion of the development and GWG will pay the second rate of the purchase price back to the city of Frankfurt on the basis of the outcome of the project deve- lopment.
3.3.2.3 Financing
The concrete development of the Westhafen refers to the period from November 1994 to 2008. The total costs for the project from the perspective of the Grundstücksgesellschaft
Westhafen (GWG) come to € 113,378 m:
Overhead costs 705.000
Site:
- Purchase of site 23.008.000
- Additional costs of site 1.029.000
- preproduction costs 1.023.000
- Revision tenancy agreements 11.842.000
Costs for demolition and other clearance 4.546.000
Total costs of decontamination 8.103.000
- Reimbursement by city of Frankfurt 3.162.000
= Remaining costs of decontamination 4.941.000
Costs for preparation of land 30.614.000
Costs for alternate retention space 990.000
Costs for bridges, rearrangement of dock 7.105.000
Additional construction costs 11.063.000
Marketing costs 2.839.000
Total financing costs 8.446.000 0
- Interest on decontamination costs (100 % city of Frankfurt) -591.000
= Remaining financing costs 7.855.000
Value added tax 5.818.000
Total costs 113.378.000
Figure 25 – Total costs of the Westhafen project in € (from GWG’s perspective)
Nearly € 37 m is directly attributable to the land. In addition to the purchase price payment of € 23,008 m by the GWG to the city of Frankfurt, this also reflects the costs of € 11.842 m in particular to completely vacate the Westhafen. Before the area could be further developed, it was necessary to decontaminate it, which cost a total of € 8.103 m, 39 per cent (or € 3.162 m) of which was borne by the city of Frankfurt alone. It is also necessary to distinguish be- tween geogenic (natural) and anthropogenic (manmade) waste. The purchase contract stipu- lated that the city of Frankfurt, as the prior owner, was to pay 60 per cent of the costs of re- moving the latter waste35. Only the remaining 40 per cent are considered construction costs
in the project’s books and then split 50:50 as the purchase contract stipulates. All in all, the city paid for 80 per cent of this decontamination. In contrast, the public and private partners agreed to split the costs for disposing of the geogenic waste 50:50. These costs were not immediately discharged by the city, but rather pre-financed by the private owners; in return, the GWG is to be reimbursed an estimated € 591,000 in interest on decontamination costs. The € 30.6 m in costs for preparing the land represent the largest cost item. According to the
35 The city of Frankfurt was partly able to hold the creators of the waste – the former renters of the harbour area – responsible for the costs, thereby lowering the decontamination costs of the city and the private part- ners from € 9.27 m to € 8.103 m.
interview partner, for every task to be carried out worth more than € 2,500 for the develop- ment of the Westhafen, three (five for greater sums) different tenders were solicited.36
The total costs for the Westhafen project are – with the exception of the share of the decon- tamination costs still to be reimbursed by the city – (pre)financed by the private partners. In- sofar, an analysis of the Westhafen Projektentwicklungs GmbH would not be very meaningful at this point, because the company only serves as a steering and control organisation for car- rying out the project. It does not have any assets and hardly any staff37. The entire financing
of the project can thus only be seen on the balance sheets of the GWG:
in € 2006 2005 2004 2003 2002 2001 2000
Non-current assets - Financial assets
- Shares in affiliated companies 65.713 65.713 65.713 65.713 65.713 65.713 188.158
- Financial investment 1 1 1 1 1 1 76.694
Current assets - Stocks
- Unimproved sites + similar land rights 20.011.022 23.887.915 29.804.345 40.051.970 36.249.718 43.426.325 40.850.256 - Own buildings under construction
- Trade and other payables
- Trade creditors 305.160 6.408.545 8.767.203 1.135.537 5.370.225 295.715 841.689 - Other assets 108.185 740.658 1.254.592 895.285 1.191.609 395.923 256.032 - Cash and cash equivalents 976.583 715.134 830.866 3.786.904 2.645.270 507.891 1.670.396 Total assets 21.466.664 31.817.966 40.722.721 45.935.411 45.522.537 44.691.568 43.883.225 Equity
- Share capital 52.152 52.152 52.152 52.152 52.152 52.152 52.152 - Accumulated profits/ deficit 132.735 1.654.858 1.466.777 1.576.496 1.126.294 380.411 -317.356 - Profit of the year 59.758 -1.522.123 188.081 -109.719 1.575.202 745.883 697.767 Total equity 244.645 184.886 1.707.010 1.518.929 2.753.648 1.178.446 432.563 Accruals 13.519.720 14.876.077 12.972.805 13.280.072 18.908.286 16.878.062 12.324.857 Liabilities 7.702.299 16.757.002 26.042.907 31.136.410 23.860.603 26.635.060 31.125.806 - Bank dept 4.221.132 14.614.000 19.184.000 15.678.727 5.828.727 8.896.479 8.896.479 Total equity and liabilities 21.466.664 31.817.966 40.722.721 45.935.411 45.522.537 44.691.568 43.883.225
Figure 26 – Balance sheets of the private Grundstücksgesellschaft Westhafen (GWG) (in €)
The equity is comprised of the subscribed share capital paid in by the three partners and the profit or loss for each year. The strong fluctuations of the latter item are due to the fact that the only purpose of the GWG is the allocation and subsequent sale of the land prepared for development. In the years in which high development costs were borne (basically as prelimi- nary costs), but which were only offset by little or even no sales revenues, there was a high net loss, which was then balanced out in the following years by greater sales. Because of the fluctuations brought about by this prescribed accounting method, it makes little sense to compare it to a multi-year project analysis.
On the other side of the balance sheet, it can be seen that the share of outside capital in the
GWG was approximately 97 per cent in 2006. The main source of financing was bank loans.
These were secured through guarantees by the partners and taken out from the Landesbank
Hessen-Thüringen, which at the same time is the parent company of the OFB Projekt- entwicklung GmbH, one of the private partners. Furthermore, there are commitments to part-
ners. The partner Westhafen-Gelände Frankfurt/M. GbR, which bundles the interests of the three private partners, extended an interest-free loan of € 77,000 and interest-bearing capital now totalling € 780,000. These partner loans, which can be considered as debt mezzanine, even showed far higher amounts in 1999/2000: € 1.5 m. They have meanwhile, however, mostly been paid back to the partners.
36 The tender procedures did not follow the VOB (contracting rules for the award of public works contracts), however, because the contracting body is a 100 per cent private entity.
37 The only demonstrable business transactions for the WPG are the sales revenues for the construction ser- vice fees of the GWG on the one hand, and the costs for the agency contracts on the other.
The principal use of capital on the asset side of the balance sheet can be seen in the item “unimproved sites and similar land rights”, which is listed among the already developed but not yet disposed land. The “shares in affiliated companies”, listed among the assets, origi- nate from the fact that the GWG purchased a company with hereditary leasehold already lo- cated on the site. The € 1 investment is symbolic for the investment of the GWG in the joint project development company WPG.
3.3.2.4 Empirical project analysis
In order to calculate the project earnings, the revenues from the sale of the Westhafen pro- perty ready for construction have to be compared to the total costs. The expected revenues (including minor property rental income of € 25,000) come to € 121.974 m:
in € (1994 - 2008)
Revenue from sale of properties 121.949.000 + Property rental income 25.000 = Total revenue 121.974.000 - Total costs 113.378.000 = Project profit to be distributed 8.596.000 Share for each partner 4.298.000
Figure 27 – Calculation of shares of project profit (in €)
The difference is net project profit of € 8.596 m, of which each project partner is due 50 per cent. At present, this amount comes to € 4.298 m and can rise a little, as long as the current interest provisions are not needed and can thus be recognised and added to earnings.
The PPP model for the Frankfurt Westhafen is not only innovative in the way the city of
Frankfurt sold an inner city brownfield to a private investor, but also in the way it invested in
the property development (under the parallel usage of exit rules and governance regulations, see Chapter 3.3.1.2) and simultaneously contractually secured a share in the project profit. Insofar, an analysis of the success of the project has to distinguish between the perspective of the public partner and that of the private one.
For the city of Frankfurt there is surplus cash of € 23.553 m from the sale of the Westhafen area, which is the sum of the two purchase price payments of € 23.008 m + € 4.298 m less the decontamination costs of € 3.162 m and the decontamination financing costs of € 0.591 m. It would be a mistake to call this profit, however, as the city has only traded as- sets – land for cash. Nevertheless, the city managed to transfer a part of the costs for remov- ing the anthropogenic waste, which it bears alone as the former owner pursuant to the “pol- luter pays principle” to the private partners. Its own decontamination costs were furthermore completely offset by the second purchase price payment.
From the perspective of the private partners, a share of the profits equal to € 4.298 m does not meet the usually expected returns of private investors. This can already be directly de- duced from the total project return. Although for both partners together this comes to (€ 8.596 m revenues/€ 113.378 m total costs =) 7.58 per cent, this does not relate to one year – as other non-project-specific return benchmarks, but rather to the entire duration of
the project38. If one limits the project duration to the years 2000 to 2008, in which nearly all
of the project costs were due, one is left with an annual project yield of only 0.84 per cent39.
This perspective, which relates purely to the land development, however, does not take the primary motive of the private investors into account: to ensure the option to buy preferred land in the Westhafen area. This is a matter of the last remaining free space located in the city centre, which is why it was of primary importance to the investors that they get an oppor- tunity to buy this land. In the contract between the city of Frankfurt and the three private in- vestors, it was agreed accordingly that property in the Westhafen could only be sold to third parties if none of the three private partners exercised their options to buy.
The private end investors and end developers, to whom the decontaminated and prepared properties were sold by the GWG, are facing a differentiated price and rent level in the West-
hafen: whereas top prices of up to € 3,200/m2 can be earned for newly built freehold flats lo-
cated directly on the water and the requested rental rates of € 13/m2 are above the average for Frankfurt40, this is not only true for newly built office space. In the Westhafen, this is
leased on average for € 16.63/m241, which is at the lower end of the average for well-situated office property in Frankfurt42. The development in the publicly registered ground value for
land prepared for building is also interesting. This came to top prices of € 590 to € 4,500/m2 in the Westhafen in 2002 and then continuously fell (2004: € 470 to € 4,000/m2; 2006: € 420 to € 3,300/m2) – as it did nearly everywhere in the city.43
3.3.2.5 Urban development and planning
Planning
Repurposing the Westhafen has occupied Frankfurt urban policy since the 1970s. There are thus declarations on this area to be found in various plans.
In the Consilium Stadtraum Main, an urban development policy discussion took place from 1990 to 1992 regarding the use of city land along the river. In this informal advisory council, outside professors, administrative heads and private individuals discussed repurposing the land along the river to increase the quality of life in the city. Several spaces in the city were identified in this context and new construction development was encouraged. The Consilium
38 The calculation of annual return figures, such as ROE, is omitted because of its lack of informative value. As seen in F , net profits and losses for the year fluctuated between € 1.57 m and € -1.5 m due to the al- ternating investments and revenues of the GWG on the one hand and, on the other, the equity of the GWG was so low that the partially very high ROE derived from it gives a false image of the company. Furthermore, it is not possible to calculate the amount of equity that would have been necessary if the private partners had had to fulfil their guarantees.
igure 26
39 If one uses the geometrical mean rather than the arithmetic mean, this yields an annual return of 0.815 per cent.
40 Cf. the Westhafen data in Immobilienzeitung dated 5 April 2007, p. 21, and the rent index of the city of
Frankfurt 2006 for comparative data.
41 Cf. Immobilienzeitung dated 5 January 2006, p. 25.
42 The average rents for office property in the best locations in Frankfurt came to between € 24 and € 31/m2 in
2006, for space in good locations € 13.5 to € 23/m2 (cf. DEGI Research Marktreport 2006, p. 65).
43 The upper value relates to the price immediately adjacent to the Westhafen Tower, whose floor space ratio of 4.0 is also the highest and thus shows the greatest amount of development; the lower value relates to a floor space ratio of 1.0.
Stadtraum Main thereby created a conceptual framework for individual areas and the plan-
ning for the whole city and set important incentives for public discussion.
The urban planning concept for repurposing the area was created over a longer process. The plans drafted in an investor competition in 1990 intended that far more be constructed in the area and that most of the pier be built over. The city had a planning office revise these plans to develop a building concept which was less dense, for one, and which encouraged public spaces along the riverbank for another. In the discussions with investors, a draft was finally drawn up which worked in the essential elements of urban planning.
The Flächennutzungsplan (FNP) of the Umlandverband Frankfurt is the official plan setting the framework for land usage in the Greater Frankfurt area. According to the revisions to the
FNP, as decided on 5 May 1999, the former harbour space became a mixed zone on which
both commercial and residential buildings could be planned.
The Zoning Map is the official plan for defining public and private space, the type of construc- tion which can be done, the density of construction, and additional specifications. The Zoning
Map for the former Westhafen went into effect on 10 August 1999 and forms the legal foun-
dation for individual planning permits.
The real estate company and the project development company have furthermore drawn up additional specifications for the design of buildings in individual parts of the area, and these specifications must be committed to in the purchase contracts. The land was only sold on the basis of a concrete building project, the completion of which was set in the purchase contract to occur within a certain deadline.
Urban renewal
The structural and social problems in the Gutleut neighbourhood were already the cause for urban renewal measures before the development of the Westhafen. The neighbourhood was identified as a redevelopment area from 1985 to 1999. During this period, more than € 20 m of public grants were invested in the area. This money supported the redevelopment of pri- vate residential buildings and redesign of the public space. At the same time, a former mili- tary barracks was repurposed. The city’s building society ABG Holding constructed social housing on former commercial land directly adjacent to the Westhafen. While these urban renewal steps improved the living conditions in the neighbourhood, they did not solve its fun- damental problems.
3.3.3 Analysis of the case study
3.3.3.1 Public interest
The repurposing of land in the Westhafen was in the public interest from the city’s point of view. The repurposing meant that the space close to the city centre could be given higher quality usage and thus the city centre strengthened. Repurposing the space along the river also introduced new qualities to the city. The neighbourhood itself benefits by opening it to the river and from new infrastructural facilities. At the same time, moving the commercial o- perations reduces exposure to noise. From the perspective of both the neighbourhood and the whole city, there is therefore a public interest in repurposing the space. As the land be- longed to the city, there were no legal ownership issues standing in the way of the project.