MCLEAN CBC WORK SESSION #1 - Fairfax County, Virginia...Office Public Open Space ZONING ORDINANCE • REGULATIONS TO IMPLEMENT THE PLAN Residential districts: R-C, R-1, R-12 ... •

MCLEAN CBCWORK SESSION #1

M A R K E T I N F L U E N C E S & D E V E L O P M E N T D E C I S I O N M A K I N G

J U N E 4 , 2 0 1 8

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SUPERVISOR JOHN W. FOUST

Fairfax County Board of Supervisors

Dranesville District

WELCOME AND THANK YOU!

@JohnFoustva

@DranesvilleSupervisor [email protected]

https://www.fairfaxcounty.gov/dranesville/

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mailto:[email protected]

https://www.fairfaxcounty.gov/dranesville/

DPZ OVERVIEW OF THE

PROJECT• Authorization

• Task Force

• Visioning Process

• Suggestions for Land Use Change

• Analysis

• Formation of Recommendations by Task Force

• Staff drafts Comprehensive Plan text

• Public Hearings

Community Outreach

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THE COMPREHENSIVE PLAN

• Role: A GUIDE for decision-making about the County’s land use

• Scope: Anticipates change over the next 20 years

• Statutory mandate: required by the Code of Virginia to shape the orderly development of the county

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PLANNING VS. ZONING

COMPREHENSIVE PLAN• GENERAL LAND USE GUIDANCE Residential Industrial Retail Institutional Parks Mixed Use Office Public Open

Space

ZONING ORDINANCE • REGULATIONS TO IMPLEMENT THE

PLAN Residential districts: R-C, R-1, R-12 Commercial districts: C-1, C-2, C-5 Industrial districts: I-3, I-4, I-5 Planned Development districts: PDC, PDH

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ABOUT STREETSENSE

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SETTING GROUND RULES

• Share all relevant information.• Explain your reasoning and intent.• Focus on interests, not positions.• Test previously held assumptions.• Assume that everyone has the best

intentions.• Listen.• Don’t be afraid to ask questions, but

please hold them until the end.June 15, 2016

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WHY ARE WE HERE?The development process requires the forecasting of future economics based on current conditions.

COMMUNITY EXPECTATIONS:• What are they?• Can they be conceptualized?

Can they be built? Or not? 9

MCLEAN CBC

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MCLEAN CBC…DOWNTOWN MCLEAN?

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DOES MCLEAN NEED A DOWNTOWN?

Community offers the promise of belonging and calls for us to acknowledge our interdependence.

– PETER BLOCK, COMMUNITY

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WHAT DOES IT MEAN ANYWAY?

Community (noun):

• A group of people with diverse characteristics who are linked by social ties, share common perspectives, and engage in joint action in geographical locations or settings.

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DOWNTOWN AS A THE GREAT UNIFIER

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WHAT’S “A THIRD PLACE”

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WHAT’S MCLEAN’S THIRD PLACE?

“To belong is to act as an investor, owner, and creator of this place. To be welcome, even if we are strangers. As if we came to the right place and are affirmed for that choice.” 16

THE IMPACTS OF MARKET AND PLANNING

Real Estate Market Conditions

Zoning/Comprehensive Plan/Regulations Macroeconomics

Each of these exerts some measure of control over development opportunity.

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HOW A DEVELOPER THINKS:DEVELOPMENT FILTERS

Does the project make financial sense?Economic

Can the project be built?Design

Will the community (and regulators) allow it?Political

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DEVELOPMENT PROCESS

What you might think it looks like….

What it actually looks like.

Planning Financing Construction Leasing Opening


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REAL ESTATE CYCLES

• Risks and stagnation

• Opportunity

• Different uses at different times

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REAL ESTATE CYCLES

• What’s possible when?

• Where are we now?

• Where are we going?

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THE DEVELOPER & THE COMMUNITY

Both will assume risks, and both should be rewarded (in appropriate measure).

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DEVELOPMENT = RISK

Time Change

Opportunity Disruption

Development Loss of Costs Control

PRIVATE SECTOR PUBLIC SECTOR

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POSSIBLE DISADVANTAGES TO REDEVELOPMENT

• Traffic volumes and available parking

• School overcrowding• Unattractive or unrepresentative

buildings • Crowded (We don’t want to be

Tysons!) • Jeopardize familiar tenants (We

don’t want to be Falls Church either!)• Disruption during construction

processMcleanah.com

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POSSIBLE ADVANTAGES TO REDEVELOPMENT

• Creating a downtown commercial core for McLean

• Community pride• Opportunities for a “third place”• New buildings/architecture• New retail spaces• New public spaces (possibly) • Diversified tax base • Improved property values

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VALUE VS. COSTS

Community measures Developer measures development value in…. development value in….

- Community impact - Current value in US Dollars- Social value - Future value in US Dollars - Architecture- Access to goods & services

The community and the developer do not use the same “currency” to measure the cost and the value of development. Difficult to measure conversion value.

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MITIGATING RISKS

Community wants to….

- Reduce the unknowns - Add level of predictability

(of the end product and the development’s community impacts).

Developer wants to….

- Reduce the unknowns - Add level of predictability

(of time and money). Information & Expectations

The community and the developer can have a mutually beneficial relationship to mitigate risks through expectation-setting and transparency.

What are the important elements necessary for real estate transformation?

How do real estate developers evaluate real estate investment options?

THE DEVELOPER & THE OPPORTUNITY

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WHY DO DEVELOPERS DEVELOP?

1.Shortage of high-quality real estate

2.Capital seeking long term investment opportunities

3.Ability to spur economic and neighborhood development

This means…All three reasons are motivated by making a profit….either making money now or making money later.

IS IT WORTH IT? IS THERE A PROFIT?Development Costs

• Cost of land • Cost of construction (hard & soft costs)• Permitting and zoning fees • Leasing costs (broker commissions) • Taxes incurred during development

(loss of money if construction is delayed)

• Any additional asks by the community (gathering space, community, amenities)

• Any additional asks by the municipality

Rate of Return• Total Purchase Price

OR• Total Rental Income x # of years

This means…Rate of return MUST equal the development costs in order for the project to be financial viable.

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MEASURING PROFIT ( IT VARIES) Many metrics • Cap Rates (Trailing and Initial) • Internal Rate of Returns (IRR) • Gross Operating Income (GOI) • Loan to Value (LTV) • Cash on Cash Return (CCR) • Net Present Value (NPV)• Debt Service Coverage Ratio (DSCR) • Gross Rent Multiplier (GRM)

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And then there is a developer’s tolerance for risk…

Developers can look at the same opportunity differently…

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LOOKING AT OTHER MARKETS

Where there is…

- More available land

- Easy to assemble

- Existing development momentum

- Financing incentives

- Closer to public transit

This means…Developers may chose to invest in other competitive markets that have less hurdles to jump (assemblage, zoning, etc).

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CAN ENOUGH LAND BE ASSEMBLED?

The ability to gain control of multiple parcels of land for a redevelopment project.

• Developers gain control through purchasing the property, thus all current owners must sell

• Most common in urban areas • Not easy, but not impossible • Often takes several years

Owner 2

Owner 3

Owner 1

Redevelopment Area

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ISSUE OF ASSEMBLAGE

FOR EXAMPLE: 20 owners

McLean Redevelopment Map Office of Community Revitalization, Fairfax County

In CBC, retail and office condos have split the ownership and land control of these parcels.

This means…A lot more people need to agree on a price and course of action.

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ISSUE OF ASSEMBLAGE

Redevelopment Map Office of Community Revitalization, Fairfax County

This means…Can’t do anything if there the sole owner doesn’t want to develop or sell.

In McLean CBC, a few single entities have control over a large and significant piece of land.

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Phase Timing Spending $? Producing $?Planning 3 months – 3 years YES NOFinancing 3 months – 3 years YES NOConstruction 1 year – 3 years YES NOLeasing 6 months – 2 years YES NOOpening & Occupancy

6 months – 2 years YES YES

Risk

Return

Developers spend significant money before return is in sight.

SUFFICIENT FINANCING UNTIL INCOME?


Spending money Making money

Spending money without making money = assuming risk

SUFFICIENT FINANCING UNTIL INCOME?

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RISKS - HARD COSTS & SOFT COSTS

Hard Costs: Shovels in the ground –building materials, sitework, etc.

Soft Costs: Pen to paper –legal work, design, architecture, planning, etc.

www.realestatefinancing.com

MUNICIPAL IMPACTDevelopment Costs

• Cost of land

• Cost of construction (hard & soft costs)

• Permitting and zoning fees

• Leasing costs (broker commissions)

• Taxes incurred during development (loss of money if construction is delayed)



Rate of Return

• Total Purchase Price

OR

• Total Rental Income x # of years

FAR

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COMMUNITY IMPACTS Development Costs

• Cost of land • Cost of construction (hard & soft costs)• Permitting and zoning fees • Leasing costs (broker commissions) • Taxes incurred during development

(loss of money if construction is delayed)



Rate of Return• Total Purchase Price

OR• Total Rental Income x # of years

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SAMPLE CASE STUDY (FICTIONAL)

How does the community and the local government impact the relationship between development costs and rate of return play out in a development scenario?

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DEVELOPMENT CASE STUDY DESCRIPTION

• On 75,000 SF of land the developer wants to build 7 stories of apartments over 15,000 SF of retail.

• Project requires 200 parking spaces

(not based on reality at all)

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EVALUATING THE OPPORTUNITY

Return on Costs • A future looking cap rate if the

property is improved for a higher NOI (net operating income or revenue).

• Also known as return on yield.

Prime considerations: Development and stabilization costs

This means…The developers use the return on costs metric to answer the question,

“What is the relationship between the potential revenue streams and cost needed to develop and stabilize the property?“

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RETURN ON COSTS CALCULATION

Return on Costs = Future Net Operating Income / Sales Price

Property Income (revenue from rent) - Operating Expenses

Net Operating Income (NOI)

Purchase price of asset + Development & Stabilization

Developer’s financing requires at least a 7.0% return on costs. 44

DEVELOPMENT COSTS OF PROPOSED PLAN DEVELOPMENT COSTS

Land Costs (per assessed value) $1,725,000

Closing Costs 10% of LC $172,500

Sitework & Infrastructure $750,000

Base Building Hard Costs & Contingency (Retail)

15,000 SF $150 PSF $2,250,000

Parking Structure 200 spaces $15,000 per space $3,000,000

Residential Building Hard Costs & Contingency

105,000 SF $180 PSF $18,900,000

Soft Costs (Legal, Architecture,Permitting, etc)

11% of Hard Costs $2,326,500

Tenant Improvements (Retail) 15,000 SF $35.00 PSF $525,000

Leasing Commissions (Retail) 6% on 10 Year $495,000

Leasing Costs (Residential) 3% on 1 Year $90,000

Contingency 10% of TPC $3,023,400

TOTAL COSTS $33,257,400

(for illustrative purposes only)

FUTURE NOI OF THE DEVELOPER’S PLAN

REVENUE (Annualized)

Apartments (Rents) 105 units $2.80 PSF (month) $2,998,800

Apartment (Fees) 105 units $750.00 (year) $78,750

Retail (Base Rent) 15,000 SF $55.00 PSF (year) $825,000

Retail (Pass Through) 15,000 SF $10.50 (year) $157,500

REVENUE $4,060,050

OPERATING COSTS

Operating Expense (Residential) 38% of GPR ($1,139,544)

Operating Expense (Retail) 15,000 SF $13.50 ($78,750)

Vacancy & Credit Loss (Residential)

5% of GPR ($149,940)

Vacancy & Credit Loss (Retail) 10% of GPR ($15,750)

OPERATING EXPENSES ($1,383,984)

NET OPERATING INCOME (NOI) $2,676,066


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RETURN ON COSTS AS PROPOSED

RETURN ON COSTS

Net Operating Income $2,676,066

Sales Price + Development $33,257,400

Return on Costs 8.1%

Return on Costs = Net Operating Income /

Sales Price + Improvements

COMMUNITY PROPOSED CHANGES • Reduce to 4 stories (from 7 stories)

• Residential setback will reduce the upper stories from 15,000 SF to 10,000 SF

• Upgrade the building materials

• Put parking underground instead of in an above ground structure

• 7,500 square foot green space area for community garden • Developer will need to reduce the retail foot print from 15,000 SF to

8,000 SF

DEVELOPMENT COSTS OF MODIFIED PLAN DEVELOPMENT COSTS





8,000 SF $150 PSF $1,200,000

Parking Underground 200 spaces $30,000 Per Space $6,000,000


40,000 SF $200 PSF $8,000,000


11% of Hard Costs $1,012,000




Community Garden $25,000




FUTURE NOI OF THE MODIFIED PLANREVENUE (Annualized)





REVENUE $1,778,000

OPERATING COSTS (Annualized)

Operating Expense (Residential) 38% of GPR ($465,120)



5% of GPR ($61,200)


OPERATING EXPENSES ($678,320)



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RETURN ON COSTS AS MODIFIED

RETURN ON COSTSNet Operating Income $1,099,680Sales Price + Development $21,411,742Return on Costs 5.1%

But the developer’s threshold for return is 7%...

This means…The developer & the community need to….1. Communicate!2. Compromise! 3. Common

Ground – find it.

THE COMPROMISE

• 5 stories of Residential over Retail

• Settle for midrange apartment design

• Developer pays $1 M to a parking authority in lieu of dedicated spaces

• 2,500 square foot green space area for community garden • Developer will need to reduce the retail foot print from 15,000 SF to

10,000 SF

DEVELOPMENT COSTS OF COMPROMISE PLAN DEVELOPMENT COSTS





10,000 SF $150 PSF $1,500,000

Payment to Parking Authority $1,000,000


75,000 SF $190 PSF $14,250,000


11% of Hard Costs $1,567,500




Community Garden $15,000




FUTURE NOI OF THE COMPROMISE PLANREVENUE (Annualized)





REVENUE $2,929,750

OPERATING COSTS (Annualized)

Operating Expense (Residential) 38% of GPR ($843,030)



5% of GPR ($110,925)


OPERATING EXPENSES ($1,143,955)



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RETURN ON COSTS AS COMPROMISED

RETURN ON COSTS Net Operating Income $1,785,795Sales Price + Development $23,899,211Return on Costs 7.4%

This means…The developer & the community need to….

1. Communicate!2. Compromise! 3. Common Ground – Find it!

VALUE VS. COSTS

Community gets….

- Community garden - Lower building height- New retail - Upgraded building

Developer gets….

- Return on Costs of 7.4%

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INCORPORATING REAL ESTATE THINKING INTO COMMUNITY PLANNING EFFORTS

There may not be a comparable currency to measure value and costs, but each party has a tipping point in their negotiations.

Achieving balance allows opportunities to be discovered.

Understand the relative strength of

your negotiating position – strong

but limited

Community demands that limit

development opportunity is effectively a choice of “no development”

Creating a shared community

business center for all of McLean

might be worth the risk.

Visioning Kick Off Workshops

Plan Development

Process

Open Houses

Final Vision Plan

Spring 2018 Fall 2018Summer 2018

valuationsiagnostics eview of Materials

Focus GroupsOnline Surveys Workshops Video Content

Presentation Online Content Public Comment Direct Feedback

Regular MeetingsOnline UpdatesCommunication

Regular Meetings Online Updates Communication

EDR

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THE VISIONING PROCESS

PLACEMAKINGJUNE 13, 7-9PMWhat are the site planning considerations needed for residential, office, retail, and mixed-use design?

What are the most important design elements for vibrant placemaking? How do these change by “place type”?

What is the cost-benefit assessment of different placemaking strategies from other communities?

What is type of place creation is desired for the McLean CBC?

W O R K S H O P # 2

Project Kickoff and

Project Work

Work Sessions

Plan Development

Process

Open Houses

Final Plan and

Council Approval

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QUESTIONS?

Please make sure to ask into a microphone.

WEB - https://www.fairfaxcounty.gov/planning-zoning/mclean-cbc-studyEMAIL - [email protected]

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Documents

MCLEAN CBC WORK SESSION #1 - Fairfax County, Virginia...Office Public Open Space ZONING ORDINANCE • REGULATIONS TO IMPLEMENT THE PLAN Residential districts: R-C, R-1, R-12 ... •