Source: MULTIFAMILY EXECUTIVE MAGAZINE
Publication date: August 1, 2008
BIG PLANS: Union Place in Washington, D.C.'s NoMa area will be a victory 20 years in the making for one developer.
After Ron Cohen closed on the first parcels of land he bought in the North of Massachusetts Avenue (NoMa) section of Washington, D.C., he faced a major problem with his lenders. No, Cohen, president of The Cohen Cos. in Rockville, Md., was not snarled in the credit crunch of the past year. The holder of this developer’s debt was the federal government. And the financial crisis Cohen faced in the 1980s was the government’s takeover of private lenders.
Eventually, Cohen overcame those odds, and over the course of 18 years—from 1989 until construction of phase one began in July 2007—he amassed 42 parcels of residential land (20 abandoned row houses and other lots) in the NoMa area totaling 101,102 square feet. His goal? To deliver Union Place, a two-phase, $350 million project with approximately 700 apartments units (11 percent of which would be affordable), an interior courtyard that would be open to the public during the day, an accredited child care center, underground parking, a green roof, a fitness center, and about 4,000 square feet of ground-level retail space.
Unfortunately, just as Cohen’s project was approaching the finish line, the most recent financial crisis was looming ahead. In fact, Cohen may be one of the few developers in the country who has seen the two biggest real estate crises of the past 20 years play havoc with a single project. As such, his story is a telling study in how to manage a long development time line when faced with the endemic cycles of real estate development.
GREAT POTENTIAL
It’s safe to say Cohen, who made his mark in D.C. by developing, acquiring, and managing office buildings, hotels, and retail centers, was one of the first to see the potential in NoMa. The area, which runs north of Massachusetts Avenue (and Union Station and Capitol Hill) and extends a few blocks on either side of North Capitol Street, is just 3 miles from The White House.
“He’s been in the neighborhood many years assembling this site,” says Elizabeth Price, president of the NoMa Business Improvement District. “He and early investors knew that this area—close to the Metro and Union Station—would see the revitalization we’re seeing in other parts of the district.”
The revitalization was a long time in coming. In the early to mid-1900s, NoMa was dotted with row houses and small industrial sites. But by the mid-’60s, the row houses had been destroyed and drug dealers had moved in. By the ’80s, the District government dubbed the neighborhood “NoMa” to generate buzz (a take on New York’s “SoHo” neighborhood moniker).
But it was the area’s positioning in the District that appealed to Cohen. He knew land was rapidly evaporating in the “good” and emerging areas of town such as Du-Pont Circle and Chinatown, and he thought NoMa, where he could assemble a full block to build a large office building, was well positioned for future development. “When you study the roads system, you see that North Capital and H Street are almost at the geographic center,” Cohen says.
The land owners in NoMa didn’t realize the potential of their neighborhood, either. “When I started assembling this, people were calling me to make sure I was still alive to buy their property,” Cohen says.
By the end of his early ’90s buying spree, Cohen had accumulated and financed about 35 parcels without much trouble. Time to break ground, right? Not quite. At about that time, the government began taking over the assets of troubled lenders. Unfortunately, three of Cohen’s four lenders were taken over by the government, and he couldn’t finance the last seven homes he was buying. “On one hand, I succeeded in buying most of the property,” Cohen says. “The bad news is I had to use bank money, and they wanted it all back yesterday.”
What the one remaining bank didn’t want was the land Cohen had just bought. That’s what ended up saving him. “It was on the wrong side of the tracks,” Cohen says. “I was enthusiastic about an area they weren’t. [So] I did a little scrambling and a little negotiating [and] was ultimately able to refinance them out through personal funds and buy their notes back at discounts.”
NEW CHALLENGES
Dealing with the federal government was one thing. Dealing with the city was a different ball game. Cohen attended countless planning meetings to get what he originally wanted: 650,000 square feet of office space and a 200-unit apartment building.
But as the New York Avenue metro came in and plans for other office buildings, such as the headquarters for The Bureau of Alcohol, Tobacco, Firearms, and Explosives (ATF), took shape, Cohen changed course. “I read the market as not being able to absorb 650,000 square feet,” Cohen says. “I started from scratch. I went from [all of that] office space to all multifamily residential.”
Of course, the residents with the seven parcels he hadn’t closed on also knew about the ongoing development. When he finally did close with them, he paid twice the originally negotiated price. “The last properties were more difficult,” he says. “People were a little more unrealistic as to what they wanted.”
As Cohen approached the finish line on the project in early 2007, the country was about to stumble into the recent financial crisis—one that many people compare to the RTC turmoil in the early ’90s.
This problem has been an issue for builders in NoMa. “Some projects are slower to get started than they maybe hoped because financing is taking longer than people had originally penciled in,” Price says. “But we haven’t had any projects pulled.”
Cohen soon enlisted the help of the Washington, D.C., office of New York City-based The Greenwich Group International. That led to a connection with Westdeutsche ImmobilienBank AG in Germany, which helped bring in pension fund TIAA-CREF as a financial partner. “We weren’t even looking for a partner,” Cohen says. “[But] they were excited. They latched onto this property, and they wanted to do a joint venture.”
Even though he got through the financing process, Cohen acknowledges that he’s not certain what the market will look like in late 2009 when the 212 rental units in Union Place’s first phase, called The Loree Grand, are delivered. Since the project is one of the few rentals in an area with high home prices, Michael Sims, a longtime D.C. broker and managing director for Sperry Van Ness, a brokerage firm based in Irvine, Calif., is confident it will do well. “I think it has great potential,” he says. “It’s in an underserved area for luxury, high-end apartments.”
Cohen sees this as well. “You start looking at sale figures of [nearby] Union Station, and you realize there is real swelling,” he says. And it’s that sales pace, not the credit crunch, that is keeping Cohen in a holding pattern with the development’s second phase, which would add about 580 rental units to the market.
But long term, Cohen is bullish on the market. “I’m the eternal optimist,” Cohen says. “I think the market will correct itself. If all of these offices in the area fill up, then we’ll see a groundswell of need.”
Price sees that potential as well, especially with the project’s proximity to Capitol Hill. “There isn’t a lot of [high-rise] product in and around him,” Price says. “NoMa has nothing right now. For people who like that lifestyle, there are very few opportunities. That will be helpful for them in leasing up.”
Eventually, with ATF and other office buildings in the area, Sims thinks demand in the NoMa area will grow. The new metro won’t hurt, either. “The price of fuel has made more people urbanites,” Sims says.
ACTION ITEMS TAKING ACTION
Even if you don’t have 20 years to get a deal done, these tips can help you turn complex projects into reality.
