O’Neill Properties reportedly spent about $125 million to develop the Arsenal on the Charles complex from a former Army base in Watertown.

In a deal that would kick the 2001 commercial property sales market off with a major bang, Harvard University has reportedly agreed to purchase the Arsenal on the Charles mixed-use complex in Watertown from O’Neill Properties. Industry sources placed the sales price between $175 million and $180 million.

Harvard spokesman Joe Wrinn said last Friday that the entity which is looking to buy the property is Harvard Business School Publishing. A division of the university, the publishing group already leases 112,000 square feet at the Arsenal and is negotiating for another 21,000 square feet there. Wrinn said that HBS Publishing has a right of first refusal to buy the property due to a stipulation in its lease.

“The owners [of the Arsenal] have had conversations with [HBS Publishing], but I cannot comment further as Harvard Business School Publishing does not comment on private business matters,” said Wrinn. He declined to discuss the financial details or the motivation behind pursuing the 30-acre development, one crafted out of a former army installation that was shuttered in 1995. As for the status of the talks, Wrinn was unable to say how far the matter has proceeded, but one industry source said a letter of intent has been signed and the two sides are now working on a purchase-and-sale agreement.

If the sales price is accurate, it would be less than the $185 million asking price, but would still represent a sizeable fiscal coup for both O’Neill and the community of Watertown. Under its agreement with O’Neill, the town is to receive a percentage of the sales price should the developers sell the complex, with one source estimating that the town would receive $2 million to $3 million via that provision. Although O’Neill officials did not return phone calls to discuss the matter, sources said acquisition and development costs for the project ran in the $120 million to $125 million range.

“They’ll do well,” the source said of the sellers. “It’s a nice turnaround.”

Philadelphia-based O’Neill surprised several local companies when it swooped in seemingly overnight and won a competition to redevelop the base in March 1998. After paying an estimated $24 million for the site, O’Neill undertook an extensive renovation of the existing properties, plus the addition of a few new buildings.

Leasing activity was brisk from the beginning, and was highlighted by a 360,000-square-foot pact in June 1999 with Arthur D. Little, the Cambridge-based consulting firm. Renamed the Arsenal on the Charles, the project became symbolic of so-called infill development, referring to the use of underutilized sites close-in to Boston that are being revamped for commercial use. With traditional office markets bursting at the seams from activity, projects such as the Arsenal and the nearby Brighton Landing office development in Brighton became popular destinations for tenants.

The ADL deal became a bit muddied later in 1999 when the company abruptly decided to stay put at its home in Cambridge’s Alewife section. In another twist, ADL had sold its longtime headquarters to O’Neill Properties, which subsequently sold what is now known as Acorn Park to the Bulfinch Cos. this past autumn.

After backing out of the Watertown move, ADL began marketing the Arsenal space for sublease, all of which is located in the hulking Building 311 which dominates the site. ADL successfully convinced several dot-com companies to take the bulk of the commitment.

According to the source following the Harvard purchase, the prospect of buying back the master lease from ADL represents a measure of upside in the project. Several of the subtenants have struggled since the shakeout of the technology industry last autumn, and the source maintained that ADL would be motivated to cash out on the project.

“Building 311 is going to be an ongoing headache for them,” said the source. “If they could walk away from it, I think they would be more than happy to do that.”

Efforts to discuss the matter with ADL were unsuccessful, while O’Neill officials did not respond to inquiries.

Harvard Beats Yale?
According to sources, Harvard was a late suitor to buy the Arsenal, with such firms as the Bulfinch Cos., Berkeley Investments and Yale Properties all supposedly chasing the facility when it was first placed on the block last summer. One source said Berkeley actually had the property under agreement at one point, but the deal fell apart in the final moments. Calls to Berkeley officials were not returned, while officials at Trammell Crow, which is marketing the Arsenal, declined to discuss the process.

As for Harvard’s intentions, the source noted that it could be looking to buy the Arsenal simply as a long-term investment, but added it would also give the school the possibility of moving some of its ancillary operations there. The source noted that the development is “a stone’s throw” from Cambridge. Several bus lines run past the Arsenal from Harvard Square, for example.

The approach is certainly a different real estate strategy from that employed by Harvard in Allston-Brighton, the Boston neighborhood which abuts Watertown. In 1997, the school generated a storm of controversy when officials confirmed they had secretly been buying up properties in Allston-Brighton for the previous decade, using the Beal Cos. as a straw to make the acquisitions. By the time it had concluded the spending spree, Harvard had shelled out some $88 million for 52 acres of land and accompanying buildings. Among the holdings were a health center, McDonald’s, automobile dealership and a shopping center.

With a long history of friction between Allston-Brighton residents and colleges looking to expand there, the announcement yielded criticism from local activists all the way up to Mayor Thomas M. Menino, who called the process “total arrogance” on the university’s part. Harvard argued that it had to keep the deals quiet or property owners would have inflated the asking price.

In a more open environment, Harvard successfully bid this past May on a 48-acre swath of land overlooking the Charles River in Allston. The school is now underway in discussions with city officials and residents on its plans for that parcel, which Harvard paid an estimated $151 million to acquire.

Calls to Watertown planning officials were not returned by B&T’s deadline, but one source familiar with the town and the Arsenal project predicted a Harvard interest would be well-received by the community. The source noted that Watertown had been excited about the prospect of luring ADL to the project, and said Harvard would project a similar level of stability.

Sellers Are Seeing Crimson At Arsenal on the Charles

by Banker & Tradesman time to read: 4 min