MIT CASE COMPEITION 2013

the CASE 2013 MIT Real Estate Case Competition

TEAM 86

Capitol Crossing

REDEVELOPMENT PROPOSAL FOR

THE J. EDGAR HOOVER BUILDING

935 Pennsylvania Avenue NW, Washington, DC

Acquisition & Development Strategy

OBSOLETE STRUCTURE Current structure at 935 Pennsylvania Avenue does not meet FBI’s functional requirements – the building is nearly 40 years old, inefficient, and obsolete.

RENOVATION IMPRACTICAL Tailored design to FBI needs in the mid-1970’s creates impractical superstructure for current market demands in the District.

MUTUALLY BENEFICIAL This transaction will provide the GSA critical funds to relocate the FBI while allowing proactive development in the heart of DC, facilitating corporate and social growth.

RECOMMENDATION Purchase site as-is from GSA, allowing design of a self-contained campus during the three years of leaseback. Construction to begin in January 2017 on the new Capitol Crossing.

VISION Capitol Crossing will consist of high-end and sustainably-designed office, retail, condo, and hotel space, with ample outdoor amenities to supply the city with a multi-functional community to live, work, and play. Entire project will come online in July 2019.

TEAM 86 2

Development Timeline

The 3-year leaseback agreement with the Federal Government will allow ample time to complete the design and engineering for this world-class complex. Using this timeline, anchor tenants will be pre-secured through leasing agents. The compressed construction schedule of 30 months will include all tenant work, culminating in the project’s Grand Opening during the summer of 2019.

TEAM 86 3

RE-ENVISIONING L’Enfant’s D Street NW Pursuant to NCPC’s desire to extend D Street NW west to Pennsylvania Avenue as originally intended, Capitol Crossing will extend the street through its campus to become a lively, pedestrian-only community area.

Redevelopment Plan

E Street NW

9th Street N

W

10

th Street NW

D Street NW

Pedestrian Only

TEAM 86 4

SYMPATHETIC Neighborhood Addition 935 Pennsylvania Avenue is the most sought after real estate in the District. Immediate surroundings include the Federal Triangle, the National Museum of American History, the E Street Cinema, the National Portrait Gallery, the Verizon Center, Shakespeare Theatre, Ford’s Theatre, and a host of restaurants that make the property extremely valuable and attractive for residents and businesses alike. Capitol Crossing’s five-building complex will be a sympathetic addition to the community, supporting local business while adding the most desirable amenities to the area.

STRONG

PEER

ANALYSIS Capitol

Crossing City

Center

O Street

Market Square 54

Year Completed 2019 2014 2014 2011

LEED-Certified

Self-Contained

Community

Accessibility

Premier Location

Finishes

A Superior Community Space

MEDIUM

WEAK

The business district in downtown DC is fortunate to see healthy levels of development each year, driven by government demand and business growth. When Capitol Crossing enters the market in 2019 it will command premium rental rates from this city’s best tenants and job creators.

TEAM 86 5

TRENDED RENTAL RATES (2019)

Class A Office $72 / SF

Hotel $340 / night

Retail $ 62 / SF

Multifamily $750 / SF

Parking $358 / space

DEVELOPMENT ACTIVITY

Class A Office 6.9MM SF

Hotel 315 rooms

Multifamily 95 units

Development activity represents planned and ongoing construction activity in Washington, DC through 2014. Sourced: JLL.

30 Stores 160,000 SF

Capitol Crossing will satisfy the demand present in DC for top-of-the-line amenities by containing all the modern conveniences required by the sophisticated, cosmopolitan individual. The development is expected to include:

Trader Joe’s Grocery

Equinox Gym with Bliss Spa

Indoor pool and squash courts

Heated, underground parking

Exclusive restaurants from branded world-class chefs

Rooftop restaurant and bars

Club level, exclusive gym for condo residents

95 Units 132,500 SF

RETAIL CONDO

OFFICE HOTEL

315 Rooms 132,500 SF

3 Buildings 885,000 SF

Vibrant Open-Air Mixed-Use Community

Capitol Crossing will be the preeminent location for Washingtonians to live, work, and play.

TEAM 86 6

Acquisition and Redevelopment Strategy

Cost Savings

Energy Efficient

Local Materials

Reduced Footprint

Public Spaces

Green Roofs

Natural Light

Air Quality

Recycled Water

Leading by Example Through Sustainable Design

TEAM 86 7

LEED Standard: Sustainable Design The Capitol Crossing complex will uphold the highest standards of sustainable design, coming online as the model mixed-use development in 2019. Leading by example, the design and engineering will attempt to maximize energy efficiency and create a natural and healthy atmosphere for Capitol Crossing’s residents, businesses, and guests.

OFFICE HIGHLIGHTS OFFICE: Pennsylvania Avenue’s 2nd Most Exclusive Office

SPACE: 885,000 gross square feet of Class A office in the heart of the Capital’s Business District; ideal space for future GSA tenants, law firms, or expanding tech firms from N. Virginia.

UNIQUE ACCESS: Four nearby Metro stations: Federal Triangle, Metro Center, Gallery Place Chinatown, and Archives.

SOCIAL: On-site and nearby retail provides opportunity for leisure and client entertainment.

PRESTIGE: Location on Pennsylvania Avenue, just six blocks from the White House and one block from the National Mall, with direct views of the Capitol.

TEAM 86 8

OB1 OB2

OB3

FUNCTIONAL: 30 stores over 160,000 square feet of 1st floor retail space will wrap the perimeter of all five buildings.

OPTIONS: Cafés, a high-end grocery, a spa, luxury retailers, and a gym will provide residents and visitors with a multitude of options.

CONVENIENT: Retail will be open at a minimum 18 hours per day, with select stores operating 24 hours.

ARCHETYPE: This urban center will set the benchmark not only for Washington but also for the nation’s ever-evolving cities.

RETAIL: Community Support, Staples and Commerce

An awning along Penn. Ave and office perimeters for pedestrian weather protection will be included per PADC recommendation.

MULTIFAMILY

LOCATION: The 95 exclusive condominium residences at Capitol Crossing will have the privilege of being equidistant from the National Mall and the city's entertainment hub surrounding the Verizon Center.

DESIGN: By teaming with the top architecture firms, these condominiums will offer world-class living amenities.

LUXURY: The fixtures throughout the residences will represent the finest in quality in kitchen appliances, countertops, cabinets, and baths. All homes will include fine hardwood and marble flooring, as well as balcony space.

CONDO: A City Home to DC’s Power Brokers

TEAM 86 9

WORLD CLASS: The 4-star, 315-room luxury hotel at Capitol Crossing will be branded by one of the world’s leading hoteliers, drawing both tourists and Washingtonians to its amenities.

ATTRACTIONS: The hotel will feature the best restaurants in the District for nights out and client entertainment.

AMENITIES: There will be a swimming pool, racquetball and squash courts, and an exclusive gym for hotel guests.

WITH A VIEW: With only one other high-end rooftop bar downtown, Capitol Crossing’s rooftop bar will offer a new and sophisticated alternative, while boasting views of the Capitol to the southeast down Pennsylvania Avenue and DC’s other historical monuments.

RETAIL HOTEL: Providing a New Era in Luxury to the Capital

TEAM 86 10

RETAIL Financial Summary

TEAM 86 11

FINANCING ASSUMPTIONS

PHASE 1

Acquisition Price $600,000,000

LTV 85%

Senior Mortgage 70%

Senior Rate 4%

Mezzanine Debt 15%

Mezzanine Rate 10%

WACD 4.3%

Mortgage $510,000,000

Origination / Closing Cost 2%

Annual Payment $22,368,600

Term 3 years

PHASE 2

Construction Loan $700,000,000

Rate (+ LIBOR) 6.5%

Term 4 years

Common Equity $441,533,856

GP 10%

LP 90%

Total Budget $1,141,533,856

Perm Financing Loan $944,679,664

Rate 6%

Amortization 30 years

PHASE 1 Purchase asset outright with

internal equity. Finance 85% of purchase price with a

combination of 70% first and 15% mezzanine interest-only

financing.

PHASE 2 Use joint venture equity to repay

initial equity investment. Co-invest with LP alongside the $700MM construction loan.

RETAIL Financial Summary

TEAM 86 12

SOURCES & USES (PHASE 2)

SOURCES USES %

Land $600,000,000 Construction Loans $700,000,000 61.3

Soft Costs $68,001,399 Common Equity $441,533,856 38.7

Hard Costs $452,964,026 GP $44,153,386 10.0

Contingency & Escalation

$11,568,431 LP $397,380,470 90.0

Interest Reserve

$2,000,000

Loan Fees $7,000,000

TOTAL USES $1,141,533,856 TOTAL SOURCES $1,141,533,586 100

SALES ASSUMPTIONS

Closing 12-31-2016

Sale Date 12-31-2023

Exit Cap Rate 8.0%

Sales Costs 2.0%

Gross Sales Proceeds

$1,363,390,453

RETAIL Performance Summary

TEAM 86 13

JV FUND PERFORMANCE

Exit Cap Rate

IRR Multiple Net Profit

6.5% 28.1% 3.51 $1,151,497,324

7.0% 26.9% 3.25 $1,034,623,300

7.5% 25.7% 3.03 $ 933,332,478

8.0% 24.6% 2.84 $ 844,703,010

8.5% 23.5% 2.67 $ 766,500,537

9.0% 22.5% 2.52 $ 696,987,229

9.5% 21.6% 2.38 $ 634,791,110

10.0% 20.7% 2.26 $ 578,814,604

PROMOTE STRUCTURE

Hurdle Promote % of CF

GP GP Co-

investor

Tier I (pari passu)

9% 0% 10% 90%

Tier 2 16% 5% 15% 85%

Tier 3 20% 10% 20% 80%

Thereafter -- 20% 30% 70%

MARKET ASSUMPTIONS

Office Rent $72 / SF

Office Vacancy 10%

Retail Rent $62 / SF

Retail Vacancy 10%

Condo Sales $700 / SF

Condo Vacancy 0%

Condo Absorption 3 / mo

Hotel ADR $340 / night

Hotel Occupancy 70%

Parking Rate $358 / mo

Parking Vacancy 25%

*all rates in 2019 inflated dollars

DEVELOPMENT COSTS

Office $272 / SF

Condo $228 / SF

Hotel $450 / SF

Retail $251 / SF

Parking $43,134 / space

TI Total $24,362,249

LC Total $26,004,908

TOTAL $534,533,856

*all rates in 2017 inflated dollars

Res

Hotel

OB1

OB2

OB3

RETAIL Program Summary

TEAM 86 14

CAPITOL CROSSING COMPLEX

Office 1 (8 floors) 220,000 SF

OB1 Ground Retail (25,000 SF)

Office 2 (8 floors) 220,000 SF

OB2 Ground Retail (25,000 SF)

Office 3 (7 floors) 570,000 SF

OB 3 Ground Retail (75,000 SF)

Hotel (9 floors) 150,000 SF

Hotel Podium (48,000 SF)

Hotel Ground Retail (17,500 SF)

Condo (9 floors) 150,000 SF

Condo Podium (48,000 SF)

Condo Ground Retail (17,500 SF)

Parking (4 levels BG) 675,000 SF

1,588 spaces

COMPLEX TOTAL 1,985,000 GSF

PUBLIC AREAS

Outdoor / Public 75,000 GSF

Lot Size 6.6 acres

% Open Space 26%

FAR 6.90

44%

7% 7%

8%

34%

GSF BREAKDOWN

Office

Condo

Hotel

Retail

Parking

OB1 OB2

OB3

H R

RETAIL Benefits to Interested Parties

TEAM 86 15

PROJECT STAKEHOLDERS

GSA

The immediate purchase of 935 Pennsylvania will provide needed funding to develop future FBI headquarters. The leaseback agreement provides reasonable timeline for all parties’ activities.

FBI

Provides suitable operating space during 3-year lease term, allowing for smooth transition to next headquarters at beginning of 2017.

NCPC / PADC

Project recognizes NCPC’s desire to re-imagine L’Enfant’s plan by reestablishing D Street NW as a pedestrian community space. The project conforms to PADC development guidelines such as providing awnings for pedestrians and other amenities as stipulated.

DCOP

Exciting mixed-use development incorporating new housing into area, foundational retail and an active public space with leadership in energy efficiency.

Investors

Investment in a premier property while earning short-term yield and an opportunity to re-envision a transitional property within downtown D.C.. Return offers significant opportunity.

RESOURCES Materials provided in “the CASE” Jones Lang LaSalle public market reports CBRE public market reports dc.about.com dc.urbanturf.com bizjournals.com/washington Zillow.com