Updates from Letty – October 20, 2017
Blog posts are the personal views of Letty Hardi and not official statements or records on behalf of the Falls Church City Council
Between the weather finally feeling like fall, yard signs, and the intense debates, the home stretch of the fall election season is upon us. We had great citizen turnout at our walking tour of downtown Falls Church, and I’ll share highlights below. The big topic I’m writing about this week is RISK. No one disputes that the GMHS bond of up to $120M is a big lift for us, and there are risks. We’ve been fielding a lot of one off information requests about the City’s approach to risk planning, and since all of the responses are public, I wanted to share the information. Regardless of your position for the referendum or if you’re still undecided, this is an important part of your decision-making. While we’ll never be able to plan for *every* possible risk or scenario, I hope you’ll read on and see that we’re not going into this blindly – risks have been identified by us and by experts, and several key mechanisms for risk mitigation, some inherent in the way we’re structuring the project, are in place.
There are two remaining forums to learn about candidates. The School Board candidates will be in City Hall tonight and again next Wednesday night at the American Legion. Also, with Halloween around the corner – check out this listing of Halloween-related events for the rest of the month to get into the spirit (pun totally intended) around town. It’s a good example of government, local businesses, and schools collaborating to promote the City.
What Happened This Week:
We had a record turnout at Monday night’s walking tour of the proposed Broad and Washington project and most recently completed West Broad and Lincoln at Tinner Hill projects. Walking tours are a good way to visualize proposed setbacks, building heights, entrances/exits, etc in the context of the neighborhood and existing conditions. We also walked to the Harris Teeter/West Broad and Lincoln at Tinner Hill buildings where we discussed sidewalk widths, outdoor dining, pedestrian crossings, bike share stations, landscaping, public art, traffic calming, and many other observations to be used as learnings for future projects. Much of this seems like minor details, but the 3 hour investment by City Council and staff to walk the City and discuss these details underscores our priority on economic development and transforming our commercial areas into more vibrant, walkable, and welcoming places.
We expect the Broad & Washington project, with new changes to address height and massing along Lawton Ave and additional retail commitments since the last submission (2 restaurants and a small grocer added as ground floor tenants) will be submitted soon. Staff will then review and analyze fiscal impact before it goes to City Council for a first reading vote tentatively scheduled for November 13.
GMHS Risk Planning
One of the common concerns I hear about the GMHS $120M bond question is “it’s too risky!” Yes, there is risk – I agree with you! Financially, this is a significant undertaking for a city of our size. This is also a complex project – besides building a new school, we are also sequencing adjacent economic development and bringing our neighbors to the table so we take a holistic, long view of the west end of the City. Likewise there is risk with inaction and repair/renovation options, but that is another blog post. I voted to put the GMHS referendum on the ballot, but I did not support the full CIP that was adopted this summer (for a refresher from the summer, see here and here) due to my assessment of risk, so I feel an extraordinary obligation to ensure we’re mitigating the risks I see.
Below are three risks I regularly hear and my take on the planning and discussions we’ve had to mitigate such risks. More robust analysis is in the risk assessment reports written by our real estate consultants Alvarez & Marsal (starting on page 11, including the mitigating steps to begin if referendum passes) and by Davenport, the city’s financial consultants, if you’d like to see the original sources.
(1) Market risk – as a key part of the financing of the project involves the lease or sale of the 10 acres to partially offset school construction costs, a reasonable and common concern is that we’ll be subject to market risk. “What if there is a recession and no economic development happens? What if we can’t lease or sell the land? What if the land is worth less than we think?” There are many “what if” scenarios!
Starting with the last “what if” scenario – besides my Fact vs Fiction post where I included information about comparable commercial parcels that have recently sold, we’ve also had two different sources (Urban Land Institute’s TAP study in 2014 and Alvaraz & Marsal’s 2017 valuation) evaluate the 10 acres, and they both concluded with similar valuations of $40-45M for the initial land transaction.
To mitigate the broader market risk – a key strategy is the way the school bonds would be issued. As currently modeled, the debt would be structured in three tranches, with the first issuance (15%) to pay for architecture and design fees. The majority of the debt (85%) for actual construction would occur in the second and third issuances, and issued only after we have a developer agreement in hand for the 10 acres. This is a key lesson learned from Mt. Daniel, and I personally would be cautious in proceeding with school construction before we had assurances for development. In essence, the two project paths are more linked than commonly believed.
The risk would remain where the developer defaults on that agreement due to a change in market conditions, or for any other reason, during the period of time while the new high school is under construction. The recourse, or cures, available to the City for such a default will be spelled out in the development agreement itself.
(2) Operating cost risk – “How would we handle operating costs for a new GMHS? With both capital and operating budgets increasing, taxes are going to skyocket!” A common misconception is that operating costs would radically increase if a new high school is built. One could argue that maintenance and utility costs in a more energy efficient building would be lower than the current building. 80+% of the school budget is personnel costs, and those costs largely grow when school enrollment grows (ie, more students = more teachers if we maintain class sizes) – those personnel costs don’t necessarily grow when the building grows.
A related risk is that if economic development were to proceed and includes mixed use development, such development would generate more service costs, further driving up operating budgets – that is another common misconception. First, if the referendum passes, there would be a RFP process for the economic development. While mixed use is a probable scenario, the exact mix of residential vs commercial will depend on the bids we receive. We can mitigate the risk that mixed use development will increase operating costs because the City will decide on the details of the development for the 10 acres, much like the public development process that occurs elsewhere in the City. For each project, detailed fiscal impact analysis is done before City Council ever takes a vote (and we continue to monitor fiscal impact after projects are done – the latest report shows that the overwhelming majority of projects are net positive). Also, relatively conservative modeling of service costs has been done. Based on actual pupil generation ratios from existing buildings, an estimated 101 students that would be generated from a 10 acre development at the GMHS campus. To be conservative, that assumption was increased by 50% (152 students) to model the education expenditures, which still results in a $3M net annual tax yield for the 10 acres (in addition to the ~$40M from the land transaction) once the economic development is complete and stabilized.
All that being said, operating cost does merit more discussion across the City Council and School Board, as we currently project 3% organic revenue growth for FY2019 based on the latest financial data. Our current planning for FY19 budget development is that expenditures for schools and general government cannot exceed that percentage growth, unless we further raise taxes to cover those operating costs. In looking at 3, 5, and 7 year historical averages, the growth in school budget transfer has ranged from 5-8% and the growth in the government budget in the same years has ranged from 2-6%. The CFO’s FY17 year-end-financial report (presented on September 25, 2017) includes the details of these prior year trends and future high level 5 year projections.
(3) Loss of commercial land – “We can’t sell the 10 acres – we won’t have any commercial land left! What if we need to expand the school and we need that land in the future?” This is a common risk/concern I hear from those who have lived in Falls Church for years and recall the sale of several school parcels when school enrollment was actually declining (!). Without a time machine, those decisions cannot be undone, so we have given this risk much thought.
Lease vs sale – you’ll see in Alvarez & Marsal economic development feasibility study, a long term ground lease was proposed and studied. Based on their experience, A&M has seen other comparable land transactions structured as leases without a significant sacrifice in value, provided the timeframe of the lease was sufficiently long. Therefore, a long term lease is what has been used in the financial modeling and what’s currently preferred by the City, although much like the specific mix of uses discussed above – lease vs sale will depend on the actual bids we receive.
Expansion possibility in school designs – in the school feasibility work by Perkins Eastman, a key requirement was that locations for future expansions are identified for MEHMS and for GMHS so we wouldn’t be shortchanging the space needed for education. Both locations are identified in the preferred option (Community School) chosen by the School Board – so yes, it’s feasible to free up 10 acres for economic development, build a new school with all of the necessary athletic fields and green space, and *still* have room for future expansions if necessary. If the referendum passes, a RFP to elicit actual designs will be the next step. Ultimately the School Board is responsible for the school specs, design, and construction, so if this is important to you – let them know!
Future land acquisition – I believe that 10 acres of land at the outskirts of the City and adjacent to Metro is strategically important for economic development especially when it’s an important lever in the financing plan for GMHS, if the referendum passes. I understand the concern about the loss of green space. As mitigation, City Council regularly considers land acquisition opportunities across the City for parks, school expansion, etc. and we will continue to do so. In fact, in the recently amended CIP adopted over the summer, we have allocated money for land acquisition opportunities should those come up.
For a more thorough discussion of additional risks and mitigation steps, see the two reports by Alvarez & Marsal and Davenport.
What’s Coming Up:
- Tonight, October 20 at 7 pm – School Board Candidate Forum (City Council Chambers)
- Monday, October 23 at 730 pm – City Council Meeting (topics include Q1 financial report, Miller House, City Hall, and more)
- Wednesday, October 25, from 4-7 pm – GMHS Tour. Visit and learn from student and adult tour guides about the high school facilities.
- Wednesday, October 25 at 730 pm – School Board Candidate Forum (American Legion)
- Monday, November 13 at 730 pm – City Council Meeting