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Heads I Win, Tails I Still Win
The McDonnell administration figures the state can't lose with an $80 million loan to build roads for the Kincora development in Loudoun County. Not everyone agrees.
by James A. Bacon
Even in Northern Virginia, the land of mega-development projects, Kincora in Loudoun County is a big deal. The massive, mixed-use development north of Washington Dulles International Airport calls for erecting 3.7 million square feet of office space, a half million square feet of retail, 1,400 apartment and condominium units, 570 hotel rooms, a cultural arts center and a baseball stadium, all of which will create an estimated $1.8 billion in taxable real property value.
The project stalled for several years because its location near the intersection of Rt. 7 and Rt. 28, two of the most heavily traveled roads in Northern Virginia, would aggravate the area's hellish traffic conditions. County government approved the Kincora rezoning contingent upon the developer, NA Dulles Real Estate Investor LLC, spending $80 million up-front to make major improvements to Pacific Boulevard and the Gloucester Parkway. But that was a non-starter. NA Dulles could not find the financing.
In stepped the commonwealth of Virginia. In June, the Commonwealth Transportation Board (CTB) authorized an $80 million loan from the State Transportation Infrastructure Bank (STIB) funneled through Loudoun County's industrial development authority. Not only did the developer get the financing, it enjoyed a below-market 2.83% interest rate on the debt. Suddenly, the project was a go. Work on the roads has begun.
Transportation Secretary Sean Connaughton says the deal does exactly what the infrastructure bank was designed to do: leverage local or private resources to get roads built -- which in this case happen to be the top transportation priorities in Loudoun County, Virginia's fastest growing locality. If the county had relied upon development proffers to be paid as the project was phased in over two decades, it would have been years before the road improvements were complete.
This way, says Connaughton, "We get the infrastructure beforehand. The day the roads open, we expect 25,000 vehicles per day" from commuters now using existing roads. "We get the improvements 10 to 15 years earlier than we would otherwise."
While Virginia's Smart Growth community has not made a major issue of the Kincora financing, some observers do express reservations about the deal. Conceding that NA Dulles' mixed-use development is preferable to scattered, low-density "by-right" development, they warn that mixed-use projects work best when they can access mass transit -- and this project doesn't.
Moreover, Kincora will be competing in the commercial real estate marketplace with major projects planned in concert with the building of the METRO Silver Line through Tysons Corner, Reston, Dulles airport and points beyond. What happens if NA Dulles' forecasts don't pan out? What would be the state's exposure?
"The question I keep asking, what if this project doesn’t make a go of it? The developer is supposed to pay back the bonds," says Ed Gorski, Loudoun County land use field officer for the Piedmont Environmental Council. "The Virginia taxpayers would be left holding the bag."
Driven by Commercial Real Estate
When NA Dulles purchased the Kincora property in 2005, the developers thought it a great location to build Class A commercial office space, says Mike Scott, a senior member of the Kincora development team. Loudoun's population was growing by leaps and bounds but first-rate commercial development lagged. Much of the office space that existed, like the giant AOL facility, was clustered in insular campus settings.
Self-sufficient corporate campuses provide their own food services and other amenities for employees on site. But few corporations are big enough to support such an infrastructure on their own. Scott envisioned a mixed-use environment where employers would function as part of an ecosystem of businesses and homeowners that could. "Amenities will not locate in a nine-to-five office park," he says. "You need to create activities in the evening and on weekends. Our idea was to bring those things together with residents and some destination attractions like the cultural arts center and the baseball stadium."
Loudoun County officials did not immediately embrace the proposal, despite the prospect of dramatically expanding the county tax base. There were numerous issues relating to the project, the most daunting of which was the horrendous traffic in the eastern half of the county. The two main traffic corridors there -- the east-west Rt. 7 corridor and the north-south Rt. 28 corridor -- were hideously congested, as was another east-west arterial, Waxpool Road, located south of the project.
Kincora sat athwart two smaller roads that the county wanted to upgrade, the Gloucester Parkway and Pacific Boulevard. The thinking was that Gloucester could serve as an east-west alternative to Rt. 7 and Waxpool Road while Pacific could function as an option for north-south traffic.
Although Kincora's offices and housing would generate more traffic in an already congested area, completing planned improvements to the two roads would result in a net gain for the county. "Kincora traffic is projected to constitute 30% of the traffic on the extension of Gloucester Parkway. They [Kincora] will construct 100% of the cost of that critical transportation link," wrote attorney John McGranahan in 2007 correspondence to Loudoun officials. Kincora also would spend roughly $12 million on its own internal roads and utilities.
Seeing things much the same way, county tried to strike a deal with NA Dulles.
Commonwealth to the Rescue
The original idea was to finance the improvements by means of a Community Development Authority (CDA), which entailed selling private-sector bonds and repaying them from revenues flowing from a special tax district. That tool had proven effective in dozens of projects across Virginia during the 2000s real estate boom but a number had raised financial red flags during the recession. NA Dulles could not line up private financing, so the project languished.
Loudoun County couldn't finance the project either. The fast-growing jurisdiction had already borrowed heavily to finance construction of new schools and other public facilities and could not take on more debt without jeopardizing the AAA bond rating won in 2005. Among other self-imposed guidelines, debt service expenditures could not exceed 10% of government spending.
In 2010, the county opened up discussions with NA Dulles and the McDonnell administration to see if the project could be undewritten by a proposed Virginia Transportation Infrastructure Bank (STIB) to be funded by surplus General Fund revenues and a transfer from the Commonwealth Transportation Fund. The idea was to create a revolving fund that would lend money to support infrastructure projects and would be replenished as the debt was repaid with interest.
The General Assembly created the STIB in 2011, and the bank made its first loan in January 2012: $157 million to support a toll-backed project in Chesapeake. This June Loudoun County submitted an application for Kincora. The Virginia Resources Authority rated the project 30 points out of 37, enough to meet STIB standards, and the loan was officially authorized by the CTB that month.
Under the terms of the deal, NA Dulles would draw down most of the $80 million over the first three years to pay for the road construction and minor right-of-way acquisition. As collateral, NA Dulles assigned a Deed of Trust to the entire Kincora property to the VTIB. The developer would pay back the loan, plus interest, from revenue generated by real estate sales equivalent to an estimated $30,000 per residential unit and $8.86 per square foot for office and retail.
METRO stations, both proposed and under construction, along the Silver Line.
Risks, Risks, Risks
The big question is whether Kincora can generate enough revenue through its real estate activity to support the debt payments.
While there will be ample demand for new housing, Kincora will face considerable competiton to supply it. Loudoun County projects the need for 17,000 multi-family units through 2040. As of January 2009, the county had already approved nearly 12,800 multi-family units, according the VRA review. Approving the Kincora rezoning added another 1,400.
The VRA forecasts demand for nearly 7.9 million square feet of retail space in Loudoun by 2040, far more than the 0.5 million square feet contemplated at Kincora.
However, there will be heated competiton to supply the demand for commercial real estate in Loudoun and neighboring Fairfax County, especially in the corridor to be served by the METRO Silver Line.
Proximity to Dulles airport will be a major advantage in attracting business tenants, as will a location close to the Rt. 7/Rt. 28 intersection. The project will have two major destinations: a cultural arts center and a minor league baseball team. Also working in Kincora's favor, the project will provide Loudoun's highly educated workforce a shorter commute to a major employment center. Says Scott: "I think employers will realize that they can offer a higher quality of life for their employees if they're not sitting in traffic two-and-a-half hours a day getting to and from work."
Against those advantages, Kincora suffers from a major drawback: lack of mass transit. Each of the 10 new METRO stations, including one at Dulles airport and two others in Loudoun County, will be surrounded by the kind of walkable, mixed-use development that employers increasingly are seeking.
While the Piedmont Environmental Council (PEC) normally advocates mixed-use development, the organization opposed the Kincora project. "We're in favor of mixed use. But mixed use needs to be located where there's transit," says Gorski. "This mixed use has no possibility in our lifetime of having transit access. It's miles from the METRO. There are no plans for any real bus transit up and down Rt. 28 and Rt. 7, other than commuter buses."
There is yet another risk. Population and economic growth projections for Loudoun County today are far less optimistic than in the mid-2000s when the project was conceived. Federal spending increases have decelerated dramatically since the go-go years for defense, intelligence and homeland-security spending and, if budget sequestration becomes a reality, the Northern Virginia economy could be hard hit. In that case, anticipated growth on the western reaches of the Washington metropolitan region could fall far short of expectations.
"It's a gamble," says Dan Holmes, director of state policy for the PEC." You're making a fairly heavy investment with the idea that your projections are sound." Those projections don't always pan out, as infrastructure financier Transurban learned this summer when it wrote off $181 million on its investment in the Pocahontas Parkway (Route 895) when development in eastern Henrico County failed to materialize as expected and toll revenues fell short of projections. Says Holmes: "We've learned that you're taking a fairly big risk" when you bet on real estate.
While it is theoretically possible for the state to lose money on the deal, the terms of the loan do provide significant protection. Under the terms of the loan approved by the CTB, the infrastructure bank is assigned a first lien deed of trust on the 400-acre property. Repayment terms on the 20-year loan are flexible year to year but the principle balance cannot exceed $53.6 million ten years following closing. If NA Dulles defaults, the state takes over the property. Worst case scenario: STIB gets the Kincora property, which will be considerably more valuable after the road improvements are made than before. No matter what, VDOT still gets high-priority roads that Loudoun County needs.
All things considered, says Transportation Secretary Connaughton, "This is a no brainer for us."
This article was made possible by a sponsorship of the Piedmont Environmental Council.