The Massive New Headquarters Planned For The SEC Is In Jeopardy
The deal to build a new, 1.2M SF headquarters for the Securities and Exchange Commission in Northeast Washington, D.C. — one of the largest-ever federal government leases — is at risk of falling apart, Bisnow has learned.
The federal agency has been slated for years to move to a huge new development about a mile north of its current home next to Union Station, but the developers behind the project have yet to secure the nearly $700M they need to start construction.
Now, one of the largest developments in the region is in jeopardy of not moving forward if the team building it — a partnership between local developer Douglas Development Corp. and New York-based Midtown Equities — is unable to secure construction financing or adjust its deal with the federal government.
The Douglas and Midtown venture, named Cayre Jemal’s Nick LLC, was initially scheduled to start construction in June 2022 on a 6-acre site at the intersection of New York Avenue NE and North Capitol Street after being publicly awarded the lease in September 2021. CJN missed that date in part because of a legal dispute with the agency’s current landlord, but the court case closed in September and construction has yet to move forward on the site.
News outlets reported last summer the CJN venture was working to obtain $700M in construction financing for the project. The developers still have not secured that financing as of this month, two industry sources with knowledge of the process tell Bisnow.
The General Services Administration and CJN have been engaged in a back-and-forth dialogue in recent weeks, with the government pushing the developer to show it has the financial ability to move forward with the project as planned, the sources said.
While the development team has continued to file applications with the city for a variety of building permits, the site has no active construction occurring as of this week.
There are still a range of outcomes for how this dialogue could end, sources said: CJN could secure financing and start the project; the parties could agree to modify the deal, adjusting terms to economic conditions and giving CJN more time to raise the money; or the GSA could terminate the agreement and restart the competitive process for the SEC’s new headquarters.
“The GSA has identified there’s a problem and given the developer the opportunity to cure the problem,” said one industry source with knowledge of the GSA’s process, who declined to be identified due to the confidential nature of the negotiations. “The way it traditionally goes is they can figure something out and cure it. Or they are not able to cure, and then if they’re not able to cure, the developer goes into default and then GSA and SEC have to figure out a plan.”
Douglas officials declined multiple requests for comment. Clark Construction, the project’s general contractor, also declined a request to comment. A Midtown Equities official declined to comment. A GSA spokesperson said the agency wouldn’t comment on “the administration of an active contract.”
The government canceling one of the biggest leases it has ever awarded at this point in the process would not only mean a financial loss for the development team that has spent years working on the project, but it could also mean a significant loss of taxpayer money and a lengthy delay of the SEC’s headquarters relocation if it must restart the search process.
The financing challenges come as interest rates have soared over the last year, construction has continued to get more expensive, and stagnant demand for offices has made lenders leery of putting any more money into the struggling asset class.
While a 1.2M SF, long-term lease with a tenant as creditworthy as the U.S. government would typically be enough to overcome those challenges and secure a construction loan, the specific financial terms of the lease between the GSA and CJN have made this deal difficult to finance, sources said. The prices that the parties agreed to for rent payments and a purchase option are too low to make the financing math work for a new office development in today’s environment, sources said.
Lease documents obtained by Bisnow show the parties agreed to an annual rent of $66.24M for 15 years, with the first four months free. The lease provides an option for a 10-year extension, and it says the first seven months of that extended term would be free. The lease defines the building’s rentable square footage at 1,229,345, bringing the annual rent per square foot of the deal to $53.88.
The average asking rent for Class-A offices in D.C. last quarter was $58.07 per SF, according to brokerage firm Savills.
The lease also gives the government an option to purchase the property for $598M after the initial 15-year term, a figure valuing the buildings at $486 per SF. It provides an additional purchase price option for $615M after the 10-year renewal term, valuing it at $500 per SF.
The lease also states that within 10 days after it was awarded, the lessor or a representative shall provide “[a] firm commitment of funds in an amount sufficient to perform the work.”
While the lease was awarded in September 2021, Douglas and Midtown were reportedly working last summer to obtain $700M in financing, according to reports in August from CoStar and from Green Street.
The 10-day clause and the Green Street article were later raised in a lawsuit brought against CJN by the SEC’s current landlord, Property Group Partners, as evidence that the developer violated the lease contract. The judge ruled in favor of CJN in September, concluding that one of four bank letters the developer provided the GSA outlining a “conditional commitment of funds” for a loan of $625M met the financing requirement.
Bisnow has also obtained a loan request offering memorandum from mortgage banking firm Walker & Dunlop that the team was using last year to market the deal to lenders. Two sources confirmed that the materials appear to be accurate, but the development team declined to say whether it has since changed any of the loan terms.
When asked about figures from the document, officials from Douglas, Walker & Dunlop and the GSA declined to comment.
The loan offering states Douglas and Midtown are seeking a $694.9M, nonrecourse, floating-rate loan with an 85% loan-to-cost ratio, meaning the sponsor would put up $121M of equity for an estimated total project cost of $816M.
This represents a high leverage ratio, especially for an office project in today’s market, sources said. But having the building fully pre-leased to the government could give banks the security to loan more on a project, and sources said the loan-to-cost ratio on an offering memo typically represents a starting point for negotiations that could be reduced.
The memo also breaks down the construction cost estimates for the project, including $361M of hard costs, $51M of soft costs and $150.5M of leasing costs and tenant improvements, three areas that are vulnerable to fluctuations in construction pricing. Construction costs in April were 39.5% higher than in February 2020, before the pandemic created supply chain issues, according to an Associated Builders and Contractors report.
Regardless of the specifics of the SEC deal, experts said any new office project is difficult to finance in today’s market because most banks — amid pressure from regulators — are seeking to reduce their exposure to office real estate and aren’t considering any new deals. More than 570 U.S. banks exceeded regulatory guidance on commercial real estate loan concentration in the first quarter, a 30% increase compared with the same quarter last year, according to the Government Accountability Office.
“Every bank, both large regional banks and smaller banks are having to report extensively on their commercial real estate and specifically office, how much they have in their portfolios, so that’s a challenge in and of itself,” said United Bank Regional President Kevin Reynolds, who said he hasn’t been involved in financing discussions around the SEC project.
“In order to do this kind of construction financing, lenders would have to be willing to add to their already-high office building exposure,” Reynolds said. “It’s a big deal in terms of construction financing dollars needed, it’s not a small number, meaning it’s going to require a syndication of lenders to do it.”
NoMa Business Improvement District President and CEO Maura Brophy, whose district includes the SEC site, said she hasn’t been updated on the project recently, but she is confident it will ultimately move forward and hasn’t been concerned about the delay.
“I’d say the status of the project is typical for where the market is, if not beating the market,” she said. “Office projects are a different animal than they used to be right now.”
A Project Seven Years In The Making
Construction has not yet begun on the project. Part of the site is being used for parking, while another part has concrete mixing equipment that Brophy said she expects to be used for the SEC headquarters construction in the future.
The development team is moving through the permitting process with the District of Columbia, however. Reviews are in process for a foundation permit and a new building permit, according to D.C.’s Department of Buildings database. Meanwhile in March, 700 drawings and supporting documents for the development were submitted to the DOB, including floor plans, architectural and structural details, construction costs, zoning documentation and land assessments. They are all labeled as “under review."
When the GSA released its Request for Leasing Proposals in July 2018, it wanted the SEC to move into a new space by spring 2023. But that was pushed to January 2025 “at the earliest” by the time GSA announced the lease award in 2021, according to an email to all SEC employees provided in court records, after Covid and interagency disputes delayed the process. Under the new timeline, the development was scheduled to break ground last June.
In court documents from September, the government said the project’s construction start was delayed while the legal action brought by the agency’s current landlord played out.
In a March 29 House Appropriations Committee hearing on the agency’s 2024 budget, SEC Chair Gary Gensler told Congress his agency is preparing to vacate one of its three Station Place headquarters buildings in D.C. by the end of this fiscal year.
The decision not to renew Station Place III, a move corroborated by reporting from credit analytics firm Morningstar, will decrease the agency’s D.C. footprint by 210K SF, saving it $14M per year, Gensler said at the hearing.
The SEC’s other two leases, at Station Place I and Station Place II, are set to expire on Sept. 30. But the SEC is negotiating renewal agreements through the end of 2026, with the option to extend 10 years, according to Morningstar. The proposed lease has an execution deadline of July 1, 2023, according to the analytics firm.
The process to construct a new headquarters for the SEC has been in the works since 2016, and it has gone through a series of legal disputes that have contributed to the lengthy delay in starting the project.
In December 2016, the GSA requested permission from Congress for a new, 1.274M SF lease for the SEC headquarters. Senate and House committees approved the cost of the lease prospectus — $63.7M annually for up to 15 years — in November 2017 and April 2018, respectively.
After releasing its request in July 2018, the GSA received three proposals, public records show: one from the SEC’s current landlord, Property Group Partners; another from the Douglas and Midtown team; and a third from Redbrick LMD.
Redbrick was excluded after the GSA determined it did not meet the RLP’s amenities requirement, and its subsequent protest of that exclusion was denied. Douglas and PGP submitted final proposals on June 21, 2019.
One month later, PGP filed a bid protest with the United States Court of Federal Claims challenging the GSA’s requirement that it would have the option to purchase the SEC’s HQ. The judge denied the protest.
The GSA notified the Douglas-Midtown team that its proposal was selected in March 2020, according to court documents, but it didn’t publicly release the decision until over a year later. According to court records, the lag was due to the pandemic as well as the SEC refusing to sign necessary documentation for the project due to disagreements over the requirements.
The parties resolved the dispute on Sept. 30, 2021. The same day, the GSA announced it awarded the lease for a SEC headquarters, branded as Financial Plaza, to Douglas Development and Midtown Equities for a 1.3M SF development at 60 New York Ave. NE, in NoMa. The release stated that over 4,500 employees would be expected to move into the new facility.
The total value of the contract was $1.368B, according to the award page.
The deal signified one of the largest-ever federal government leases, coming in just smaller than the Department of Transportation’s 1.47M SF headquarters in the Navy Yard, delivered in 2007 on government-owned land.
PGP filed a number of post-award protests with the GAO, alleging errors in procurement, improperly waived requirements and faulty price analysis, among other claims. All were denied or dismissed.
Eight months after the lease award was announced, PGP again turned to the courts with another lawsuit against the GSA, again alleging a flawed procurement process. PGP’s eight-count claim, submitted on March 4, 2022, was similar to its GAO protests, including protesting a lack of due diligence surrounding Douglas and Midtown’s ability to fund construction.
Judge Kathryn Davis ruled against PGP on all counts.
While the deal has gone through these legal and financial challenges, the 6-acre site where the project is planned has remained a large, undeveloped hole in an otherwise fast-growing neighborhood. Douglas Development Managing Principal Norman Jemal, speaking to Bisnow in October 2021 after the lease was announced, said he sees the SEC headquarters as beneficial for NoMa’s growth.
"This is really spectacular for the neighborhood and the community, because it’s going to bring a lot more daytime population, and areas that have daytime population and residential density are typically really great areas, very vibrant neighborhoods," Jemal said at the time.
