Case Study

Washington, DC’s Waterfront Station II 

8 min read

Waterfront Station II in Washington, DC is a big project, big in every way. It is multifamily with multiple uses, multiple income levels and multiple partners, including both public and private sources. On the financing end it uses both four and nine percent Low Income Housing Tax Credits for the 136 affordable housing units planned for the 449-unit building, something which kept the lawyers busy. 

“This was an immensely complex deal with unique bond structures, three construction loans, three forward commitments, LIHTC twinning, three ground leases, master lessor/lessee structure, real estate tax exemptions and asset and taxation (A&T) lots versus a condominium structure,” according to Marsha Goff, executive vice president of Merchants Capital, which committed $141 million to the project. 

The “trifurcated” nature of the project (the two affordable components and one market-rate component) led to some interesting complexities and interesting language to describe them, as in units “floating like islands in the sky” (don’t worry, the laws of gravity still apply). 

Waterfront Station II is so complicated “it really took a force of nature,” said Jon McAvoy, executive vice president of asset management and finance at Washington, DC-based lead developer Hoffman & Associates, at a breakout session on the $181 million project at the recent Spring Developers Forum of the National Housing & Rehabilitation Association. The association held its meeting in Washington within view of the site of the 12-story, 400,000-square-foot single building. 

And according to Matt Greeson, an attorney with Reno & Cavanaugh PLLC, “It’s actually three projects in one space. Each project is separately owned and financed but to a unified plan of finance. There’s a construction loan that includes the market rate, permanent takeouts on both the affordable projects, and LIHTC equity and a sponsor loan on the affordable.” 

The project is rising near the massive Wharf development of Southwest Washington and a block from a transit station. Of the projected 136 affordable units, half will be for those at 30 percent of the median family income for the area while the rest will go to those at 50 percent of the median family income.      

“Its location provides access to the green line metro station less than one block away, several bus routes, the SW Neighborhood Shuttle, Capital Bike Share stations, bike paths and proximity to I-395/I-695,” said McAvoy.  

The project’s orientation toward transit has been one of its key pillars since its inception, embracing its location as a key feature for residents. 

“Additionally, The Wharf neighborhood is just three blocks away,” McAvoy pointed out. The biggest neighborhood development in the history of Washington, DC, The Wharf, will be substantially delivered in October of 2022, making Waterfront Station II’s proximity to the neighborhood even more meaningful.  

The Wharf already provides the community with a full pedestrian mile of waterfront offerings, including restaurants, shops, marinas, piers, parks and entertainment venues.  

Like The Wharf, Waterfront Station II will bring retail, entertainment and gathering space to the community, adding 29,000 square feet of neighborhood offerings, including a theater space, AppleTree Public Charter School, a DC-based early childhood education provider and a neighborhood restaurant by Good Company Doughnuts.  

“With Waterfront Station II, we are proud to be able to continue creating meaningful spaces for the Southwest community to live, work and connect,” said McAvoy. 

The affordable housing developer in the joint venture is AHC Inc. of Arlington, VA. The architect is Torti Gallas & Partners, Washington, DC. Grosvenor Americas is a joint venture partner, having contributed $25 million towards Waterfront Station II. It has American offices in Washington, DC and San Francisco. 

According to the architect, “Waterfront Station II is designed to achieve LEED Gold certification through a combination of stormwater, water-use, wastewater, lighting and HVAC strategies. The design is carefully crafted to enhance the community with a design that is vibrant and beautiful, yet considerate and responsible, and fits into the heart of Southwest DC.” 

Describing some of the many complications on the project, Greeson told the NH&RA meeting, “There was a single ground lease that was subsequently trifurcated. But then you have the fun of a “twinning” deal (using both kinds of LIHTCs), which is complicated enough on its own, but then you have a twinning deal within a larger market-rate project. 

“We have three owner entities, all of which are fundamentally owned by the sponsor JV. The affordable projects qualify for District real estate tax exemption by virtue of control by the nonprofit member of the JV,” he noted. 

The “twinned” four and nine percent LIHTCs provided problems in themselves, which were exacerbated by the inclusion of the market-rate units. 

Can’t Have a Taint 
“You can’t have nine percent tax credits “tainted” by tax-exempt bond financing. There can be no benefit between the two of them. So, if there is a cross-default between the project, that can be an imputed taint to the nine percent credit that can lead to a recapture of them. So, it’s critical to avoid that problem,” he said. 

Other deals with twinning aspects have used a condo structure, but Greeson said that wasn’t possible with Waterfront Station II. 

“In the District, the condo structure was not possible on a leasehold interest,” said Greeson, “so we used A&T lots. The projects truly are tax lots that are divided in the sky.”  

Waxing metaphorical, Greeson said, “They’re sort of islands floating out there. So, because it’s checkerboarded, the four and nine percents are floating among the larger market-rate project.  

“That creates a host of issues from the operation, financing and construction perspectives. How do you operate these projects within a larger market-rate project and how do you finance them, so everyone has sufficient security for their investment?” he asked. 

McAvoy provided more of the back story of the project, which had some bad luck in its timing. He had his own metaphor for the project—a Rubik’s Cube. 

He said Waterfront Station II marked a lot of firsts for Hoffman & Associates as a company. “We went to a host of trusted lenders we had good relationships with. But the first thing we ran into was COVID-related.” 

McAvoy remembered, “We were forced to take down land from the District in April 2020. We had an agreement with the District that had already been passed through Council that we had to close on the land by a certain time. And it was impossible to have a project financed in April 2020.” 

With the complication brought on by the pandemic, “We literally had to close on the project and deal with the completion guarantees that went along with it at the same time,” he said.  

By July and August 2020, conditions had eased enough for Hoffman & Associates that “we held a number of meetings with folks we normally would have gotten the deal done with,” but the roiled markets meant “that took months and months to work its way through.” 

Solving the Rubik’s Cube 
But with the arrival of Dwayne George as executive vice president and national head of production for lender Merchants Capital, Carmel, IN, “We were able to tackle this as the next complicated Rubik’s Cube together,” McAvoy said. 

George had just moved over from Freddie Mac, but he found Freddie Mac was being quite conservative on projects like these, even though Merchants formed participations with some smaller lenders. Eventually, the financing went to its rival, Fannie Mae. 

More equity was required. “In the end, I think this deal ended up penciling in the 70 to 75 percent loan-to-value range, with a total of up to $50 million of equity between developer equity and LIHTC equity,” he said.  

George said Merchants Capital was confident because “there was all this government support and there was $50 million of equity, and there was a solid tax credit investor.  

“Because of that, we pitched this to Fannie Mae, which for the first time seemed more amenable than Freddie to take a look at twinning opportunities in larger properties.” 

The final complexity was the Fannie Mae vehicle that was used, the MBS As Tax-Exempt Bond Collateral (MTEB). 

Asked to give a simple definition of a MTEB to the NH&RA developers, George thought for a moment and described it this way: 

“It is a bond structure where the bonds are collateralized during construction by the construction loan. Tax-exempt bonds are issued, and at the conversion, the MBS, which is collateralizing the project, pays off the construction loan and pays down the bond.”  

Mark Fogarty has covered housing and mortgages for more than 30 years. A former editor at National Mortgage News, he has written extensively about tax credits.