Aerial shot of Forest City Hawaii Military Community homes at Ford Island.

By Allen Kenney

On Dec.7, 1941, Hawaii's Pearl Harbor secured its distinction in history as the place where World War II began in earnest for the United States. The U.S. military installations at Pearl Harbor survived that day of infamy and are now home to more than 13,500 armed forces personnel.

Today, Forest City Enterprises Inc. (NYSE: FCE.A) is helping those servicemen make Pearl Harbor their home. The publicly traded real estate company's Hawaiian military properties are included in the portfolio of its subsidiary Forest City Military Communities LLC (FCMC).

In 1996 Congress established the Military Housing Privatization Initiative, a cost-cutting program aimed at turning much of the ownership and operation of many military housing properties over to the private sector. The legislation authorizes the U.S. Defense Department to work with private real estate companies to develop and refurbish residential military properties using a variety of financial strategies, such as direct loans and limited partnerships. The objective of the program is to harness the expertise and capital available from commercial developers and financiers to build homes faster and more efficiently.

Forest City created FCMC shortly after the privatization initiative took effect. Today, FCMC claims to "offer military families housing options and community programs that surpass the military's standards for excellence." FCMC currently holds a total of nearly 12,000 military housing units in Colorado, Hawaii, Illinois, Indiana, Tennessee and Washington state.

Rehab Boot Camp

In Hawaii, FCMC serves as the managing member of a partnership with the U.S. Navy, which aims to maintain and revitalize neighborhoods around naval installations in Pearl Harbor and the island of Kauai, as well as those in the vicinity of the Marine Corps Base Kaneohe.

Quarters A—one of Forest City Hawaii's historic homes located at the Hale Alii, Pearl Harbor.

The partnership owns and operates approximately 6,500 houses reserved for military personnel, which have been divided into a series of Navy- and Marine-specific neighborhoods. Forest City's residential management arm operates the Hawaii properties, which has been credited with boosting the Hawaii site's overall occupancy by 3 percent. In addition to increasing occupancy, the partnership has won the Navy Installation Housing Team of the Year award from the Professional Housing Management Association (PHMA) two years in a row.

The Navy transferred control of 1,950 housing units, consisting of multifamily, duplex and single-family homes, to FCMC in 2004. Subsequent transfers have occurred to expand the portfolio to its current level of 6,500 homes, spread across 34 different Marine and Navy neighborhoods. Most of the housing units were built during the 1960s and 1970s, making a massive overhaul necessary. Following the first property transfer, Forest City instituted a program to demolish and rebuild approximately half the houses in that portfolio and perform large-scale renovations to well over 1,000 additional homes. All of the construction and renovation intended for the original 1,950 housing units that were transferred into the partnership is complete, which Wallenstrom calls "a significant accomplishment" for both Forest City and the Navy.

Amenities Aplenty

Wallenstrom cites the new eco-friendly aspects of FCMC's Hawaii sites as one of their most "compelling" selling points. Some of the neighborhoods are entirely LEED-certified, the industry's gold standard for green conscious development. For example, solar water heaters were installed in all of the newly constructed homes, while the older structures are being retrofitted with the energy-saving heating systems. Many of the properties are up to 35 percent more energy efficient than local building codes require, according to Wallenstrom.

"We've replaced drafty homes built in the 1970s that had a whole host of problems with green, sustainable houses," Wallenstrom says.

Additionally, each different community offers its own set of amenities, including parks and playgrounds. Forest City is also in the process of adding new features to enhance the neighborhoods, such as swimming pools, sand volleyball areas and basketball courts.

Best of Both Worlds

FCMC's Hawaii properties currently provide homes for 5,573 Navy and Marine families and more than 540 families from other military branches. The company allocates military housing in Hawaii based on a five-tiered order of preference. Navy and Marine Corps families have first priority, followed by members of the U.S. Army. Next in line are retired members of the armed forces, followed by the military bases' civilian personnel. Lastly, the company can open up rentals to the general public if space is available.

Newly constructed homes at the U.S. Navy Community of Catlin Park.

At present, the Hawaii properties currently boast nearly full occupancy. While in theory the housing units could be rented to anyone, Wallenstrom says the demand from active Navy and Marine personnel has been so strong that FCMC hasn't yet needed to open residences to renters outside the armed forces. He doesn't foresee things slowing down any time soon.

"The odds of Pearl Harbor closing down are very slim," he says. "With this type of deal, we're leasing to a pretty defined and secure market, so we've got this substantial population out there who need homes."

However, Wallenstrom says he genuinely feels the rewards of Forest City's Hawaiian military housing program extend beyond running a profitable asset.

"The biggest reward is providing housing for Navy and Marine families, because all of our residents are serving this country," he says. "I feel very fortunate, and it's really nice to give our military clients the kind of houses that they've never had before."

Of course, a partnership between a massive government agency and a nimble real estate developer is not without its challenges. Wallenstrom admits that the two partners can often have divergent agendas, given that Forest City is more of an "economic animal" by nature.

"We look at the world differently," he says. "Obviously, the Navy is a very smart group and Forest City is a very smart group. The Department of the Navy has thought through the different mind-sets of the partners when structuring the deal. At the end of the day, it is all about the families."

While the differences can provide challenges and tensions, Wallenstrom points out they've also produced "superior results" in the form of projects completed on time and under budget.

"Together we are able to leverage significant resources from slightly different perspectives," Wallenstrom says. "You take a government organization and a developer, and when you put them together, you can get the best of both worlds."