Clearing a Hurdle for the Potomac Yard Metro Station

The addition of a Washington Metropolitan Area Transit Authority (WMATA) rail station at Potomac Yard is a central feature to successfully redeveloping a 300-acre former rail yard into an accessible and walkable mixed-use development, poised to give an economic boost to the area.

But until recently, it seemed possible that uncertainty surrounding the station’s cost and real estate development timing might derail plans that have been in the works since 2009, as City of Alexandria officials were trying to determine how best to plan and budget for the new station.

“Given its scale, its close proximity to the Washington, D.C. metropolitan area, and adjacency to the Metrorail Blue and Yellow lines, a Metrorail station at Potomac Yard would increase the economic development potential of Potomac Yard, as well as ease vehicular traffic demand along the Route 1 corridor,” said Tim Thornton, principal consultant for economic analysis and strategy at WSP.

For the past 10 years, WSP has been providing the city with ongoing financial analysis consulting services to assist several City of Alexandria departments, including the city manager, planning & zoning, and the department of finance on how best to pay for the new station. The initial work culminated in a value-capture analysis to fund the new rail station, followed by ongoing assistance and updates as the project evolved from planning to implementation.

The firm’s initial analysis led to a viable solution that kept the $320 million station project on track.

“Our team developed a financial analysis, which demonstrated that channeling revenue from new real estate development surrounding the station through several value capture mechanisms would completely pay for the station,” Thornton said. “This helped shape the terms of a station funding plan and developer agreement adopted by Alexandria City Council in 2010.”

As the project evolved, he said WSP helped the city officials evaluate critical decisions and generate additional potential funding sources for the station.

The three-mile stretch between the Braddock Road and Reagan National Airport Metrorail stations is currently the longest distance between two stations inside the Capital Beltway (Interstate 495). Alexandria officials felt a new Metrorail access point between those stations was essential to the success of the overall redevelopment plan, and sought innovative financing strategies that would serve residents, employees and businesses.

“The biggest challenge initially was determining not just the most financially viable revenue scenario, but the most politically feasible combination as well,” Thornton said. “With revenue sources from net new taxes, special district taxes and developer contributions, a diverse set of stakeholders are impacted, and striking that balance where everyone is happy with the outcome is a huge challenge.”

He said that traditional federal, state and local funding sources for infrastructure are becoming increasingly scarce, and require more outside-the-box thinking to find solutions.

“Value-capture represents an innovative alternative source, particularly in locations with real estate development potential,” Thornton said. “Fortunately, with the scale of development planned at Potomac Yard, the resulting revenue was sufficient to cover the entire station.”

WSP gathered and analyzed several inputs in the process, which included estimating revenue over time and required an understanding of commercial and residential real estate values, retail sales potential, hotel occupancies and other drivers of city fiscal revenue.

“The real key to our ability to add value had to do with our team’s approach to financial modelling, which involves a methodology that allows for the development of flexible models that can run several scenarios and be adapted on the fly,” Thornton said.

This flexibility allowed WSP to be very responsive to new client questions, and answer questions quickly, even at times when there were three different real estate buildout scenarios and four different station location alternatives, resulting in a dozen different scenarios to analyze.

Three key revenue-generating mechanisms emerged from the analysis that showed the project could be financed solely on revenue generated by the nearby development without any impact on the city’s existing tax base. The city’s station fund began collecting revenue from these sources in 2011 in advance of station construction:

• Net new taxes created from the development – this tax-increment finance-like structure accounts for the fiscal costs of new development—including public safety, schools and other city services—then channels the remainder to the station fund.
• Two tiers of special taxes – a higher tier for the district located closer to the station that will derive greater benefit from it, and a second tier for land further away from the station.
• Developer contributions based on square footage of new construction within a quarter-mile of the station.

“Each of these value capture mechanisms have been used in the past in various forms by other jurisdictions, but it is unusual to combine them in this way so effectively, without diverting revenue away from a city or county’s general fund,” Thornton said.

City officials also negotiated a shortfall guarantee provided by the developer, such that if station fund revenue collected was not sufficient to cover the city’s debt service in a given year, the developer would fill the gap, further reducing the city’s financial risk.

WSP’s involvement and advice put Alexandria in a stronger financial position for the next stages of the Potomac Yard station project.

By demonstrating this revenue stream, WSP was able to help the city with a successful application for a $50 million loan from the Virginia Transportation Infrastructure Bank (VTIB). WSP also advised the city on securing a Transportation Infrastructure Finance and Innovation Act (TIFIA) loan of approximately $88 million.

WMATA and the City of Alexandria recently announced the selection of the contractor for the Potomac Yard Metrorail Station. The $213.7 million construction contract is the most recent milestone in the effort to bring a new transit station to Alexandria.

It’s a project that will provide 12 million square feet of new commercial and residential development and introduce 26,000 new jobs and 13,000 new residents to the revitalized neighborhood. Seeing that impact, it’s a milestone that hits Thornton close to home.

“In my position at WSP, I work at the intersection of real estate economics and infrastructure finance; so, it has been a very rewarding opportunity to work on something like Potomac Yard, which calls for knowledge of both areas,” Thornton said. “I lived in Alexandria for a time and know the area well, and have an appreciation for what the new station will contribute to that community.”