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A Site Selection Web Exclusive, December 2010
WEB Exclusive story

Terminal Marks New

Keystone Coal goes from ‘slow take’ to ramp-up in Jacksonville.

by Adam Bruns
Occupying a former Jefferson Smurfit paper mill site, the new Keystone terminal is being developed on the major waterfront parcel along the St. Johns River — a key factor in determining its value in the company’s eminent domain battle with the Jacksonville Port Authority three years ago.
Photos courtesy of Keystone and Brigham Moore

landmark eminent domain victory in Jacksonville two years ago is finally moving toward imminent imports of Colombian coal.

It's expected to create 35 jobs initially. But Keystone Coal's US$20-million, 67-acre private coal and bulk cargo terminal (the only such private terminal at the Jacksonville Port Authority) is about a lot more than direct jobs. It's also about import of Colombian coal, to be moved to markets via a rail loop connecting to Norfolk Southern and then CSX and Florida East Coast Railway lines.

But mostly it's about private property rights.

Keystone closed on the purchase of 38 acres from the port for $13.2 million on March 1, 2010, adding the property to the 70 acres it already owned along Talleyrand Avenue. The port had purchased those 38 acres in 2006 from Jax Maritime Partners (JMP) for approximately $5.7 million.

The original Keystone parcel was the focal point of an acrimonious eminent domain case that ended in July 2008 when the port decided not to pursue acquisition of the property following a jury's finding of its value at $67.4 million — the largest eminent domain jury verdict ever in circuit court in the state of Florida

The port, in seeking to exercise taking powers, had said it was worth only $15.2 million. Three years earlier, Scholl had acquired the property for a bargain price of $8 million, due in part to the risk inherent in 12 acres of industrial landfill on the parcel. Not long thereafter, the port authority condemned the property and attempted to exercise "slow take" rights to the property. But the timing was against it from the beginning: The landmark "Kelo v. New London" eminent domain ruling by the U.S. Supreme Court had raised hackles and awareness across the nation, with many states hurrying to pass legislation barring the taking of property in order to benefit private economic development projects.

A court case was born.

The judge in the eminent domain case in 2008 ordered the port authority to pay $10.5 million in Keystone's attorney fees. Eventually, subsequent to the attorney's lowering of his fee to $6.6 million in order to smooth the way to a deal, a settlement was reached whereby Keystone owner Tom Scholl would pay $6.6 million for the property and pay the attorney's fee as well.

Keystone eventually may invest as much as $100 million at the site, with the possibility of helping create 620 jobs over the next 14 years. The first step in project development was cleanup of that landfill on the site, which previously was operated by paper company Jefferson Smurfit.

The Lay of the Land

Keystone Coal is part of Keystone Industries, based across the state in Fort Myers., Fla. The company also has a citrus division. Its coal operations include a mine in Marmet, W. Va., near Charleston, and sources in Indonesia and Venezuela. The coal company was founded at the close of the Civil War in 1864, producing limestone and fireclay (for brick manufacturing) as well as coal. Rail lines and coke ovens were built. New mines were opened in 1872 and again in 1904.

According to Keystone's Web site, it now maintains a terminal in Ironton, Ohio, and offices in Montreal, Beijing and Seoul.

Repeated calls to Keystone by Site Selection have not been returned. However, in a wide-ranging unpublished interview two years ago, Keystone's lead counsel, Andrew Brigham of Brigham Moore, explained how and why this milestone case was the new "Exhibit A" when it comes to defending industrial property owners' rights.

Key to the story was the first sale of the 111-acre Smurfit property, decommissioned in 1998 and put on the market in 2003. Scholl was a bidder, but was outbid by JMP, which was jointly managed by construction firm The Haskell Co. and a paper company from New Hampshire.

"Smurfit was most interested in having someone assume environmental liability," says Brigham. "It wasn't just dollars they were looking at. JMP won the bid, purchased

Keystone's terminal will be able to receive hard limestone and other commodities from abroad in addition to coal.

the property for $4 million, with $3 million in escrow for environmental remediation." The site had a known black liquor still, and when breaking down forest products, they used a series of white, green and black liquors, which had spilled on the property in the early '90s. But eagerness to remediate was not the primary impetus for JMP either.

"The motivation for JMP to purchase was they knew Jaxport was attempting to get the commitment of Mercedes Benz to build a roll-on roll-off facility, in competition with Georgia Ports Authority in Brunswick," explained Brigham. "JMP wanted a foot in the door and a design-build opportunity Jaxport wanted to lease it to a private industry, but they were thinking Mercedes-Benz. They were never able to secure a commitment. JMP lost confidence that Jaxport would come though with the Mercedes-Benz opportunity, so they sold 70 of the 111 acres to Keystone Coal." (Mercedes-Benz's commitment to both communities continues to unfold with new facility investments.)

In addition to the import of South American coal, a key part of the Keystone terminal investment is the refurbishing of kilns on the property. Brigham said Scholl negotiated to keep those kilns in order to process hard limestone from abroad into the quality of chemical lime in demand in the Southeast (Florida limestone generally is too soft, and the closest quarry for the harder variety is in Birmingham, Ala.)

So while the port authority was viewing the kilns from a salvage value perspective ($300,000), the Keystone side viewed them as a useful economic unit ($11 million). The differences extended to the value of the land, with the port's side at $7 per sq. ft. and Keystone at $18 per sq. ft.

At its core, said Brigham, the case is about whether someone with foresight gleaned from over 30 years in the coal marketplace should be penalized for it.

"He saw something before others did, and recognized [the Jacksonville site] as a gateway for South American coal," said Brigham, noting the usual path to power plants in Florida and Georgia traveled by coal from the Powder River Basin in Wyoming or from Appalachia. "He's very familiar with producing and moving domestic coal, transloading down the Mississippi River, and selling his coal internationally or domestically. But he also brokers coal, and has done so since the 1970s. When you broker coal, you travel to countries, buy a boatload, and sell a boatload elsewhere. He sits down with utility companies and negotiates coal supply. He goes to Indonesia, buys coal, insures it and sells it in Korea. He's traded with Turkey and China. He's a great example of an American entrepreneur in global trade."

The Old 'Picasso in the Corner at the Garage Sale' Ploy

That kind of drive was what kept Scholl fighting when the port authority passed a taking resolution not long after his purchase of the property.

"The difference with Tom Scholl is he's an owner/user. He wasn't looking to invest in the real estate. He was looking to use it."

Meanwhile, as Scholl was lining up coal concessions in Colombia, Jaxport was working with Drummond Coal and Norfolk Southern on a deal to use the remaining acreage of the Smurfit site for its own Colombian coal transload facility. For Norfolk Southern, it was an opportunity to break into an area dominated by CSX.

And as 2006 changed to 2007, a new constitutional amendment limiting the scope public authorities had to exercise their taking powers in private-to-private transfers was not yet in effect. Scholl lost his initial fight on Dec. 20, 2006. But a window remained: The port opted for a "slow take," which meant that instead of quickly securing the title and paying just compensation, a jury convening in May 2007 would decide what the port had to pay, at which time the port could decide whether to take the land or walk away. Brigham called the slow take option "slow and painful."

"Essentially it allows the government the right to make an election after evaluation trial as to whether to proceed to condemn or not, which introduces even greater uncertainty to the owner. It's not just a cloud, it's a thunderstorm."

Off in the distance were other factors that moved Keystone's value equation this way and that: Coal-fired power plants on the drawing boards were coming under fire under Gov. Charlie Crist's watch, which soured the picture for the coal import terminal. With such factors in the air, the judge requested a pro forma based on a sales comparison approach (to comparable properties) rather than an anticipated income approach, which was dismissed as too speculative. Crist's coolness also was a factor that drove Drummond to pull out of its deal.

At the same time, however, port property throughout the Southeast was increasing in value as the Panama Canal expansion completion in 2014 inched closer. Brigham said the value trend was evident in a property purchase for the nascent Jasper County port project across the Savannah River from downtown Savannah by the Georgia Ports Authority. Even without construction in the immediate future, the property purchase from Colonial Oil of a parcel including former dredge soils involved a $32-million appraisal and an eventual $57-million transaction. "Do you see a trend there?" Brigham asked.

Meanwhile, said Brigham, the trial showed there was no comparable parcel on the St. John's River that had as many advantages as Keystone's. But could Brigham's team bridge the gap from Keystone's recent purchase price of $8 million, beyond the government's price range of $18 million, toward a value appraisers were pegging at north of $60 million? Among the experts called to the task were Franco Pigna of AEGIR and John Giles, president of the Florida East Coast Railway Co. The jury included a CFO from a private school, a golf course developer and a foreperson who managed intermodal work for a railroad, a truck driver familiar with the port and a home-schooling mother. Brigham used an art analogy to reach the diverse group during jury selection.

"When Tom Scholl bought the property, he saw something the market didn't," said Brigham. "He paid a bargain price. Jaxport was not only using economic development, they wanted to steal the bargain. When we were selecting jury on voir dire, I asked each juror to imagine someone familiar with art who was at a garage sale, saw a Picasso in the corner, recognized it, and was insightful enough to pay whatever price the seller wanted. Then sometime later the government finds out there's a Picasso, and they have a really nice art museum. If they use the power of eminent domain to take the painting, what should they pay? The garage sale price or the market value of the Picasso? The jury has to follow the law, so if the law indicates the owner is to receive full compensation, and that measurement is fair market value, would you pay market value or would you discount or average or compromise, simply because the owner purchased it at a bargain price? Each juror said they would not discount market value."

In an eminent domain trial, the jury visits the property in question. What they saw was 70 acres on the water, with a full kiln complex. Then, as if on cue, said Brigham, "as we are looking at it, a container ship goes by."

And Keystone's ship came in. Or did it? While the litigation proceeded, Keystone lost some momentum with its coal customers, including the declaration of force majeure on a coal shipment.

"The owner, who never gave up, was finally rewarded by what?" asked Brigham. "He owns the property. Even if the government reimburses the owner for cost and fees, it's a tremendous sacrifice, motivated by principle. Tom Scholl is a unique person. Some people are in it for immediate dollars. Some look at an asset that has greater value long term.

"What's really neat now is they've moved from litigation to fulfilling their dream of what he wanted," he said. "It's the only terminal property connected to Norfolk Southern between Charleston and Mobile. To have the competitive railroad have a beachhead makes it unique for coal.

Mr. Scholl said he wanted the property and not the money. Now I'm seeing why."

Story in Pictures

Keystone’s terminal will be able to receive hard limestone and other commodities from abroad in addition to coal.
Click for a larger view.
Click for a larger view.

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