Matt Klein, President of Akridge
Armond Spikell, Founding Principal of Roadside Development
Monty Hoffman, Founder and CEO of PN Hoffman
David Brainerd, Chief Investment Officer of Madison Marquette
Keeping with the theme of “Common Ground,” the Capital Markets panel featured the developers of two transformational projects in the District of Columbia, City Market at O and The Wharf.
City Market at O (“City Market”) represents the revitalization of a two city block area in the Shaw neighborhood that was the O Street Market, which was originally constructed in 1881 and was one of several public markets that served Washingtonians during the 19th Century. Over the years, the market fell into disrepair and Roadside Development purchased the partially fire damaged building occupied by Giant Foods in 2002. Over the next 12 years, Mr. Spikell and his team at Roadside worked to redevelop the site into a one million square foot mixed use project that now features a flagship Giant Foods Supermarket, 650 residential units of which 90 are set aside as affordable for active adults, a 182-room Cambria Suites hotel, street level retail and over 500 parking spaces.
The undertaking of City Market faced three major challenges at the onset. Giant wanted a new store that would be something special, the District wanted the historic building preserved and the community wanted street retail in addition to a pledge to keep the neighborhood affordable to its existing residents. Mr. Spikell and his team worked successfully to address all three constituencies.
The next major hurdle was raising the capital necessary to execute a one million square foot mixed-use project in the midst of the worst recession since the Great Depression. The Roadside team approached the District and presented the following proposition, “if you will help to pay for the project, we will develop a project that will generate over $300 million in taxes.” This compelling argument convinced the District to support the issuance of TIF bonds. Roadside then successfully secured HUD financing to pay for the residential units, parking and grocery store. Roadside also became one of the first developers to successfully take advantage of EB5 financing, a program created by Congress to stimulate the U.S. economy through job creation and capital investment by foreign investors. When all was said and done, Roadside secured over 10 sources of capital, including traditional bank financing to fund the project.
The Wharf (“Wharf”) is a $2 billion mixed-use project consisting of 27-acres of land and 50-acres of water along a one mile stretch of the Southwest Riverfront. Phase I of the project broke ground approximately one year ago and will include the development of three hotels, one office building, 660 for rent apartments, 230 for-sale condominiums, 20 restaurants, approximately 40,000 square feet of soft goods retail and a 6,000 person concert hall.
Wharf is the result of a 2006 RFI that was issued by the District Government for the redevelopment of a stretch of land on the Potomac. PN Hoffman (“Hoffman”) won the bidding process with Madison Marquette (“Madison”) finishing second. Hoffman worked to assemble additional land and attended over 500 meetings to obtain the necessary entitlements. The overall magnitude of the project required substantial equity capital and Madison joined the partnership in 2010. Over the next four years, the partnership invested equity in order to deleverage the risk to a point that was able to attract institutional capital.
The total cost for Phase I of the Wharf is $1.2 billion of which approximately $900 million is associated with the commercial and residential components and the remaining $300 million is associated with the hotels. The District government agreed to issue approximately$115 million in TIF bonds to help pay for the project’s infrastructure. The balance of the project’s capital consists of equity from the development team, equity from an off-shore pension fund and traditional bank financing.
Matt Klein, as moderator, asked a number of questions that expanded beyond the capitalization of the projects. The following is a list of some of those questions and the panelists’ responses:
Question: What was the motivation for undertaking the respective projects?
Answer: Hoffman/Madison both saw the Wharf as a unique waterfront site that was close to metro, the Capital and the CBD. Roadside saw the gentrification of the city moving towards the east and knew it was only a matter of time for the trend to reach O Street Market.
Question: Why would you undertake such large projects with so many moving pieces and would you do it again?
Answer: These projects were once in a life time opportunities. While they take many years and are very challenging, both developers said they would do it again.
Question: What are some of the lessons learned from the undertaking of these projects?
Answer: 1) Be prepared to take more rejection than you think you deserve; 2) Mixed-Use projects are a very high stakes game; 3) The right team of partners (architect, engineer, contractor, etc.) is critical to success; 4) There is a lot of capital available for commodity product but less available for mixed-use projects so the development team needs enough equity to de-risk the project to the point where you can attract the rest of the capital; 5) Capital will be available to successful sponsors with a proven track record.
The standing room only audience had a number of questions but one that every investor wanted to know was the return that these projects generated. Only those in the audience know the answer so be sure to join us at the Trends Conference in 2016 for another exciting panel!
Click here for an audio recording of the panel.