VA, LCOR Sign $160 Million, 2,000-Job Public-Private Development Deal in Durham

Week of January 21, 2002
Snapshot from the Field

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'Enhanced-Use Leasing' Meets 'City of Medicine'

The Durham VA Medical Center is affiliated with the Duke University School of Medicine, the nation's third-largest medical school. Pictured: Duke Chapel, which Aldous Huxley once cited as "the most beautiful and successful experiment in neogothic form in the world."

VA, LCOR Sign $160 Million,
2,000-Job Public-Private
Development Deal in Durham

By JACK LYNE, Site Selection Executive Editor of Interactive Publishing

DURHAM, N.C. -- Capitalizing on a piece of U.S. legislation that boosts real estate flexibility, the Dept. of Veterans Affairs (VA at www.va.gov) and Berwyn, Pa.-based LCOR (www.lcor.com) have signed a master agreement for the largest public-private development in the VA's history.
On the public side of the ledger, the agreement will expand the health-care services provided by the 502-bed Durham (N.C.) VA Medical Center. The private side of the agreement will trigger the creation of "the City of Medicine Center" - a US$160 million, 2,000-job mixed-use development that will be built on VA hospital property. LCOR, which was selected as private-sector partner after what VA officials called "a nationwide search," will be the master developer for both sides of the project.
Durham VA Medical Center
On the public-sector side of the development, LCOR will construct a 15,000-sq.-ft. (1,350-sq.-m.) clinic within the VA's existing Durham Center (pictured above), plus up to 40,000 sq. ft. (3,600 sq. m.) of research and lab space.

The agreement creatively employs 1991 legislation authorizing the VA's use of "enhanced-use leasing" to the private sector. While that legislation has been utilized on previous projects, none has been this large, according to Daniel Hoffmann, director of the VA's Mid-Atlantic Health-Care Network.
"The agreement we've signed today is significant," Hoffmann said. "This is the largest new prototype privatization project undertaken by VA to date."

Durham Center Director:
Pact Adds 'Critical' New Space

On the public-sector side of the agreement, LCOR will construct a 15,000-sq.-ft. (1,350-sq.-m.) clinic within the VA's existing Durham Center, plus up to 40,000 sq. ft. (3,600 sq. m.) of research and lab space. In addition, LCOR will expand parking capacity at the VA's Durham operation to 1,351 spaces, an increase of 100 spaces.
"The project will replace, expand and modernize VA medical and research facilities on the Durham VA Medical Center campus," Hoffmann said.
While considerable, the public-sector side of the development is substantially smaller than the private-sector side. Nonetheless, the agreement will add sorely needed new space to the VA's operations, explained Michael Phaup, director of the Durham VA Medical Center.
"I am very pleased that VA has signed this agreement," Phaup said. "It is critical that we expand health-care services, especially as our veteran population continues to age."

LCOR Signs 75-Year Ground Lease

On the public side of the equation, LCOR will sign a 75-year ground lease for eight VA-owned acres (3.2 hectares). LCOR will use the acreage to plan, develop, manage and maintain as many as nine buildings that will span a total of some 650,000 sq. ft. (58,500 sq. m.). LCOR will also build a 500,000-sq.-ft. (45,000 sq.-m.) parking garage.
The City of Medicine Center will include a broad range of uses, LCOR officials said. Among those uses will be private-sector medical office buildings, research labs, commercial and educational administrative office space, a pedestrian-oriented retail center, a suites hotel, and a residential facility.
The project will be financed by a combination of bond financing and conventional private debt and equity, LCOR officials explained. The City of Medicine Center, they added, will create 2,000 permanent jobs and more than 1,500 construction-related jobs.
The VA also gets a bottom-line boost from the complex. Under the provisions of the 75-year ground lease, LCOR will make payments to the VA. Those payments will offset the federal agency's costs in using the City of Medicine Center's space and services, according to VA officials. In addition, ownership of the facilities in the development complex reverts to the VA at the expiration of the lease, unless the lease is extended at that time.
LCOR's 75-year ground lease also includes making payments in lieu of taxes to the city of Durham.

VA's Praised for 'Creatively
Maximizing Portfolio's Utility, Value'

The enhanced-use leasing underpinning the Durham development was spurred by a General Accounting Office (GAO) study of the VA's real estate portfolio. The VA's portfolio is vast, including more than 4,600 buildings and 23,000-plus acres (9,200 hectares) of land.
That portfolio, the GAO's study determined, was also aging and underutilized. The VA was spending multimillions of dollars each year in maintaining millions of square feet of vacant space, the GAO found.
As a result, Congress initially authorized enhanced-use leasing in 1991; it has since reauthorized the legislation through 2011. Enhanced-use leasing gives the VA far more discretion in real estate decision-making than at most federal agencies. It allows the agency to leverage its under-performing assets when it can create revenue, realize operating-cost reductions or secure private investment in VA facilities, programs and services. The VA will realize all those goals with the LCOR agreement, agency officials said.
LCOR Vice President John Infantino praised federal officials for their innovative use of enhanced-use leasing.
Said Infantino, "The dedication and commitment of VA officials, both in Washington and in Durham, is driving this process, as VA seeks to creatively maximize the utility and value of its national real estate portfolio in support of quality medical care for veterans."

Durham Mayor William Bell (pictured above) called the VA-LCOR partnership "a model for public-private development nationwide."

Durham Mayor: 'A Public-Private Model'

As required by the enhanced-use leasing legislation, local government also worked in close coordination in the development process.
Said Durham Mayor William Bell, "The partnership [that the VA and LCOR] forged with each other and with our city is a model for public-private development nationwide. As a result, our veterans may be better served, and the community could benefit from additional services, revenues and jobs."
The name for LCOR's City of Medicine Center echoes the "City of Medicine" moniker that Durham adopted in 1981.
The name fits. One of every three Durham residents is employed in the fields of medicine, pharmaceuticals or biotechnology. Durham hosts a population that includes four times the national per-capita average of physicians, and three times the national average of nurses. The North Carolina city is also home to the nation's third-largest medical school, Duke University Medical Center.

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