Development

Private-private partnerships may hold key to revitalization

by David Versel   •   August 22, 2012 3:18 pm

With local governments exercising more caution about investing public dollars in development projects, partnerships among diverse private interests have become increasingly important the financing of the infrastructure improvements needed to support development.

Photo by sfdc.org on Flickr.

The most prevalent form of public-private partnerships for urban redevelopment has long been tax increment financing (TIF). A TIF agreement sets aside a portion of the future property tax stream from new development activity to fund the public improvements needed to support the development.

TIFs, which we have extensively discussed here, have helped finance many high-profile developments in the DC area, including DC USA, the Mandarin Oriental Hotel, and National Harbor. In Fairfax County, where local leaders have been hesitant to make use of TIFs, recent partnerships in Tysons Corner and along Richmond Highway highlight new possibilities for future urban redevelopment.

Although TIFs have proven to be successful in a variety of situations around the country, they have long been criticized as corporate welfare for wealthy developers, politically motivated giveaways, or risky propositions that wager public funds on an uncertain real estate market. In the wake of the national recession the latter argument has come to the forefront. Since TIFs only work if the valuation of the properties within the district rises, declines in property values could lead to financial disaster.

Fairfax County has long been reluctant to use TIFs. The Community Development Authority approved in 2009 for the Mosaic District in Merrifield represents the county's only TIF to date. Although Fairfax County's Board of Supervisors enthusiastically supported the Mosaic deal, county leaders have not expressed enthusiasm about replicating the Merrifield model elsewhere.

The ongoing saga of how to pay for the improvements needed to fulfill the county's plans for Tysons Corner demonstrates county leaders' ambivalence. Though the Tysons issue is not yet resolved, the proposal currently on the table calls for a mix of private developer "contributions," a special tax district, and other as-yet-unidentified public funding. While the public and private sectors will be technically sharing the costs for building the infrastructure to support the new Tysons, this arrangement cannot really be called a partnership, as the public sector is not sharing in the project's risks.

In response to the county's activities, landowners and corporate interests in the Tysons area came together in early 2011 to form the Tysons Partnership. This "private-private partnership" includes representatives from some of the largest development interests in the region, including Lerner, Macerich, AvalonBay, B.F. Saul, General Growth Properties, and Federal Realty. The members of the Tysons Partnership will be coordinating efforts to fund their share of Tysons' future infrastructure improvements.

Elsewhere in Fairfax County a different sort of private-private partnership model is coming to the forefront, as developers team up with longtime landowners to undertake revitalization projects. This trend directly responds to rising land costs for parcels along older suburban corridors, which presents a strong challenge to redevelopment. For example, the asking price for redevelopment parcels in the Penn Daw/Groveton area along Richmond Highway is in the range of $3 million per acre. At this price, the land acquisition cost of an apartment development with a relatively high density of 50 units per acre would average $60,000 per unit, even before considering infrastructure and site development costs. Current rents in the area simply do not justify this sort of investment in the acquisition of a property.

A proposed revitalization project in this section of Richmond Highway presents an excellent test case for this new partnership model. Developer Capital Investment Advisors LLC has signed a joint venture agreement with the longtime owner of a small strip retail center at the corner of Richmond Highway and Shields Avenue in the Penn Daw area. The proposed project, The Grande at Huntington, will include about 300 apartments and 30,000 square feet of ground level retail and dining space. While the developer will not realize as great of a return on its investment due to its partnership agreement, its level of risk will be far lower.

The emergence of these partnership agreements represents a shift in how revitalization is being achieved in Fairfax County. If these models succeed they will likely lead to the formation of additional private-private partnerships for future revitalization efforts.

David Versel is the Executive Director of the Southeast Fairfax Development Corporation (SFDC), a nonprofit organization that promotes economic development and revitalization along the Richmond Highway corridor. David has a B.A. in Architecture from Washington University in Saint Louis, and a Master of City Planning degree from the Georgia Institute of Technology. He has worked for the past 15 years as a planner and real estate consultant.