Apartment Finance Today

PARTING SHOTS

The Lease Option

APARTMENT FINANCE TODAY • July/August 2008

JPI's latest project was built on land the developer doesn't own.

BY BENDIX ANDERSON

Bethesda, Md.—This May, JPI finished construction on two high-rise apartment buildings on the campus of an exclusive prep school for young men just outside of Washington, D.C.

“This is one of the best sites we’ve developed,” said Greg Lamb, executive vice president and regional managing partner for JPI, a developer based in Irving, Texas.

Jefferson at Inigo’s Crossing is nestled among the historic buildings of Georgetown Preparatory School, the nation’s oldest Jesuit prep school, overlooking the school’s newly refurbished nine-hole golf course, which shrank from 18 holes to make room for the development.

The apartments are next to the Rockville Pike, a major highway, and just a five-minute walk from the D.C. Metro.

Tenants have been signing leases at the transit-oriented development at the rate of 30 a month, well above JPI’s pro-forma projection for the project. The average rents of $2.20 per square foot are also slightly higher than JPI’s estimate.

Though residents don’t get to play on the school’s golf course, Inigo’s Crossing has its own amenities, like a fitness center, a landscaped courtyard, and an outdoor swimming pool. The complex is gated off from the 450 students at Georgetown Prep, 100 of whom live on campus.

When Georgetown Prep issued its request for proposals in 2003, in the middle of the condominium boom, no condo developers bid for the right to build on three acres of the school’s golf course. That’s because the school wasn’t willing to sell the land. Instead, it wanted to lease the site and use the income to pay for building a new 30,000-square-foot athletic center.

Several apartment developers, however, competed for the land, which was already zoned to allow two high-rise apartment buildings with 473 units and 750 underground parking spaces. Most planned to build as high as the zoning would allow. But JPI realized it could use much less expensive wood-frame construction instead of pricey concrete for the smaller building if it dropped the height from five to four stories. It then lengthened the building to allow the same number of apartments.

The money JPI saved on the cost of construction allowed it to make the high bid of $130,000 a month on the 99-year ground lease. Inigo’s Crossing cost $90 million to develop, with a hard cost of $75 million, or $160 per square foot.

JPI’s ability to execute ground leases helped to keep it developing apartments even as the condominium boom was inflating the price of land. Now that the boom is over and land prices are moderating, ground leases are still helping JPI score the best sites.

“It’s another way to unlock development sites,” said Lamb. “There are definitely families and entities that are not willing to sell ground but that might be willing to lease.”