The City's Dilemma
Affordable housing is badly needed in the City of Falls Church. The City's housing costs are among the highest in the DMV: median priced for sale house is $1,005,000; and average rent is $3,122. Recruiting employees for the City's stores, restaurants and public agencies is increasingly difficult, yet the production of affordable housing has been minimal-only 69 last year.
Given this dilemma, it is imperative that the City preserve all the affordable housing now occupied. To that end, the City has focused on it's Virginia Village subdivision. Although not subsidized, Virginia Village's 20 quadruplexes-comprising 80 units-- function as affordable housing as their rents are far below the average due to their age and condition. Each quad sits on its own fee simple lot owned by individual owner-investors'. Concerned that these owners will renovate and raise rents; or worse, sellout to owners who will assemble multiple parcels to demolish for more profitable uses.
The City's plan for nearly a decade has been to purchase individual quad sites to keep them affordable. But only 6 lots have been purchased. This is too slow to effectively preserve these valuable, affordable rental units. A new plan was needed. The Falls Church Department of Planning and Economic Development invited George Mason University graduate students to create a new plan to save, or even increase, affordable housing at Virginia Village.
Capstone Team
The City's invite was accepted by Michael Curran, professor of practice in the MS in Real Estate Development (MRED) program in George Mason's Costello College of Business. Curren teaches the Capstone Class, designed to stimulate the work of private sector teammates whose development company has assigned them to analyze a piece of land and create a buildable/financeable/profitable project. Once a site and willing owner are identified, Professor Curran recruits the consultants from the development industry normally utilized by a development team: zoning attorney, civil engineer, architect, lender, marketing, sales/leasing agent, etc.
Finally, over 10 weeks Professor Curran coordinates the Capstone Team's discovery of relevant facts, engagement with consultants, writing a final report and presenting to the client. In this case the City of Falls Church.
The Clients' Goals
1. Recommend a strategy to increase the purchasing pace for the remaining 14 Virginia Village parcels.
2. Create a land use plan that: (a) minimally retains and renovates the existing 80 units of affordable housing; or (b) maximally demolishes the 20 quads and redevelops the site into a mix of market rate and
3. Affordable housing units at a higher density. Whatever plan is proposed, the end result must not go below 80 affordable units
Project Challenges and Team Solutions: A Summary
The Capstone Team identified 3 challenges generated by the Client's goals which informed their deal structure, land use and finance solutions.
1. Challenge: Fast-tracking the assemblage of 14 separately owned parcels will be expensive and City funds are inadequate as evidenced by the City's slow progress to date. Solution: Private sector equity must be attracted through a Public Private Partnership with current Virginia Village parcel owners.
2. Challenge: Regardless of the effectiveness of an improved assemblage strategy, purchasing 16 parcels will take too much time to insure success. Solution: Dividing the project into 2 phases will shorten the timeline for initiating redevelopment of Virginia Village.
3. To successfully build dense affordable housing in Falls Church, creative zoning strategies must be formulated with the city, and Virginia Village neighbors must not feel threatened. Solution: Combining 2 City zoning categories and an overlay district should ease any City zoning concerns and attentive land use planning in phase 1 should mitigate neighborhood concerns with density.
How to Phase Virginia Village
Ten years of minimal land acquisition success going parcel-by-parcel strongly suggests a different strategy is needed. The Capstone Team recommended a two phase project where the first phase is relatively small and focuses on adjacent parcels. Minimizing the number of owners necessary to assemble a buildable site should speed-up assembly. But how to solve such a multi-variable problem?
The Capstone Team solved this Rubik's Cube by identifying 5 Virginia Village lots that are all adjacent and owned by only 3 entitles. The City of Falls Church owns 3 and 2 private investment LLC’s own the others. Combining the 5 lots (pius 4,700 SF by incorporating a portion of Shirley Street which is under Falls Church’s control) creates a 40,000 SF site suitable for multifamily development.
Quick assembly should be achieved working with only 2 entities who are inclined to sell as investment-oriented owners. The City can deal directly or engage a private sector partner.
Phase 1 Development Program
Based on the City’s goals, the Capstone Team proposed the following land uses.
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A 5-story apartment building (stick) over a 2-story above-grade parking deck. Provides a total of 115 rental units with 55 set aside as affordable for renters earning 60% AMI. Note: Phase II (not described here will include a 160 unit apartment building with approximately 80 units affordable to renters earning 60% AMI. The resulting 135 new affordable units far exceeds the City’s minimum goal of 80.
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Market rate for sale Town Homes on 2-3 levels and 18-20 feet wide as current market analysis prescribes.
The stabilized NOI from this development program is estimated to be $1.9MM assuming an operating expense ratio of 35% and market rents ranging from $2,100 to $4,000. A 14 month lease-up and 5% vacancy at stabilization were proforma’d. A sale in year 10 was assumed , with a projected equity multiple of 1.46X and an IRR of 9.72% over the hold period. Such returns should easily attract a developer to join Falls Church in a PPP.
Phase 1 Site Plan
Beyond the geometry problem of fitting 124 housing units on a 40,000 SF site, the Capstone Team recommended the site plan be sensitive to potential community opposition from a well organized town home enclave directly east. Their opposition to placing the 7-story apartment next to these town homes could kill the project.
With the eastern side of the site filled with 14 town homes, the remainder of the site would be a tight fit for 114 multifamily units. Fortunately, the Team had consulting advice from Michael Foster of MTFA Architects. Working together produced the solution: a 5-over-2 multifamily building that fit, created valuable density with structured parking, yet provided returns that were financeable—even with the subsidized unit rents.
Capstone Team Members
The team was composed of 4 graduate students pursuing an MS at George Mason’s Real Estate Development program: Natalia Fedorova (Project Portfolio Manager at Fund Yug Ltd. In Russia), Jittinun Leerueng (real estate feasibility consulting for 15 Business Advisory Ltd. In Thailand), Brad Nicolas (Project Executive with John Moriarty & Associates—local large scale commercial GC) and Emily Pascarelli (Asset Management at AvalonBay—national apartment REIT).