The CASE 2016:
The Caribbean Way
ORGANIZED BY
GENEROUSLY SPONSORED BY
The CASE 2016: The Caribbean Way
The subject site and case, although based on an actual situation, has been prepared exclusively for the MIT Alumni Association of the Center for Real Estate CASE Competition. PortMiami has not issued a Request for Proposal and some liberties have been taken in preparing this case write-up.
The information below has been compiled from publicly available information and the following sources:
PortMiami; Skanska; CoStar Group; City of Miami; County of Miami-Dade.
Finally, we would like to thank the sponsors following sponsors whose generous help and support have made this CASE competition possible:
Boston Properties – Lead Sponsor
NAREIM – Finals Sponsor
Goulston & Storrs – Legal Sponsor
Skanska – Development and Construction Sponsor
CoStar Group – Research and Market Data Sponsor
Page 2
The CASE 2016: The Caribbean Way CASE Materials
Teams will find the following materials in their Dropbox Folders:
1. The CASE 2016 a. Background Information and Request for Proposal (RFP) 2. Guidelines a. Rules & Submission Instructions b. Judges’ Scorecard (for reference only) 3. Submission Requirements a. LOI Template (to be filled out based on acquisition strategy) b. ‘Major Assumptions’ Excel worksheet (must be fully completed and included in final submission; please see the Submission Instructions for more information on how to use this worksheet) 4. Addenda a. Access Instructions for a CoStar University Account b. Downtown Miami Economic Report c. Downtown Miami Real Estate Development Report d. Construction Cost Data (provided by Skanska) e. Residential, Office, Hotel, Retail and Industrial Market Data (provided by CoStar) f. PortMiami 2035 Master Plan: Executive Summary g. Zoning Summary: T6-36 and CI zones h. Zoning Summary: Public Benefits Program i. Port of Miami Contextual Video (https://www.youtube.com/watch?v=kKgLx54PABk)
Page 3
The CASE 2016: The Caribbean Way Development Team
Your team is the development arm of a large-scale, mixed-use, full-service real estate company. For the past 20 years your firm has been an active real estate investor, developer, and manager in projects spanning across all asset classes, and you have earned a strong reputation for execution in all of the above. During this current cycle, most of your firm’s activity in making new investments is focused on development projects; your colleagues in other parts of the company are spending most of their time managing your firm’s existing portfolio. Your current internal source of investment capital is equity provided by the firm’s partners, meaning that you have to raise (or “syndicate”) the lion’s share of capital you plan to invest in the execution of this strategy.
These days, your team is focused on new infill mixed-use development opportunities within major metros in the Southeast. For the past decade you have been tracking the development opportunities in Miami, Florida, brought about by the city’s burgeoning arts economy, its strong connections to Latin America, and the growth of its tourism industry. You like Miami’s economic forecast and its position as a major hub of international banking and shipping, especially in light of the Port of Miami’s ability to accept post-Panamax ships as soon as the Panama Canal expansion is completed in 2016. Unfortunately, these factors have not gone unnoticed by your competitors, both domestic and foreign. You have been frustrated by your team’s inability to latch onto opportunities at a reasonable basis given lack of developable parcels, and inflated asset prices – but you certainly don’t plan on giving up now.
An opportunity has presented itself for a parcel on Port of Miami land and identified in the Port’s master plan for future commercial development. There are a number of reasons to be excited about this site, and your team should begin preparing its response to a competitive RFP that the Port of Miami has just released.
Image 1 – View of Downtown Miami, Port of Miami and Miami Heat Stadium
Page 4
The CASE 2016: The Caribbean Way The City of Miami
The City of Miami is home to an estimated 417,650 residents as of 2013. Miami is the county seat of Miami-Dade County and is the most populous city in the southeastern region of the United States after Washington, DC. The Miami-Dade metropolitan area population of approximately 5.5 million inhabitants is the eighth most populous and fourth largest urban area in the United States. Miami is located in southeast Florida on a broad plain between the Florida Everglades to the west and the Atlantic Ocean to the east. Downtown Miami straddles the Miami River and is connected by a series of bridges over Biscayne Bay to the famous Miami beaches to the east.
Miami’s economy is primarily driven by tourism, finance, and international trade. In addition, conventions, beaches, and events draw more than 36 million visitors annually to the city from across the country and around the world, spending approximately $17 billion per year. Miami has a Gross Metropolitan Product of $121 billion and boasts an unemployment rate of 5.7 percent. The number of jobs grew by 2.9 percent in 2014. Four companies on the 2014 Fortune 500 list are headquartered in Miami: diversified wholesaler World Fuel Services (#68), homebuilder Lennar (#364), trucking company Ryder (#407), and diversified wholesaler Watsco (#624). Due to its proximity to Latin America, Miami serves as the headquarters of Latin American operations for more than 1,400 multinational corporations including AIG, American Airlines, Disney, FedEx, Kraft Foods, Microsoft, and Wal-Mart.
Recognized as the cargo gateway to the Americas, the Port of Miami accounts for 207,000 jobs and had an annual economic impact to Miami of $28 billion in 2014. It is the 11th-largest cargo container port in the United States and recently invested more than $1 billion toward expansions. The Port of Miami has been the number one cruise passenger port in the world for more than 20 years with more than 4.9 million passengers in 2014.
Miami continues to set mixed-use precedents with notable developments including Midtown, Brickell City Centre, and the proposed Mana Wynwood development. However, although the city has recovered from the depths of the 2007 Great Recession and is currently enjoying a period of strong economic performance, investors are cautious about the current development cycle’s longevity and how the city will adapt to the effects of climate change and rising sea levels.
Page 5
The CASE 2016: The Caribbean Way Introduction to the Port of Miami
The Port of Miami is a 520-acre man-made island in central Biscayne Bay. It is bounded to the north by the Main Channel and the MacArthur (I-395) Causeway, to the west by downtown Miami, to the east by Miami Beach and Fisher Island, and to the south by Fisherman’s Channel and Biscayne Bay.
The island is also known as Dodge Island, an island created from three smaller “spoil islands” that were combined into a single island in the 1960s. The island is located directly east of downtown Miami with auto and large ship access. It is a natural intermodal transportation hub for both cargo and passenger cruise lines. Miami is simultaneously considered the “Cargo Gateway of the Americas” and the “Cruise Capital of the World.”
Image 2 – Urban Context Map
Page 6
The CASE 2016: The Caribbean Way
Major Port Activities
Commercial activity in the Port is currently dominated by three major container cargo terminal operators and three of the top passenger cruise lines in the world.
Cargo Terminal Operators:
• Seaboard Marine - an ocean transportation company that provides direct, regular service between the United States and the Caribbean Basin, Central America and South America • South Florida Container Terminal (SFCT) - a joint venture (between Terminal Link and APM Terminals) terminal operator and stevedoring company • Port of Miami Terminal Operating Company (POMTOC) – terminal operator who has been operating at the Port for more than 10 years.
Over 7 million tons of cargo is handled annually the port and this is expected to substantially increase after the expansion of the Panama Canal in 2016.
Passenger Cruise Lines:
• Carnival Corporation (principal Miami brand – Carnival Cruise Line) • Royal Caribbean Cruise Lines (Royal Caribbean International, Celebrity Cruises and Azamara Club Cruises) • Norwegian Cruise Line
Cruise facilities are primarily located on the north side of the island, including six cruise terminals with 744,784 square feet of interior operational space plus ancillary loading and service areas. Additionally, Terminal J is located on the Southwest side of the Port and is able to accommodate cruise vessels up to 800 feet in length based upon current pilot standards. Parking and landside operations of all cruise terminals utilize approximately 52 acres, or 10% of the total island area. The remainder of the island is predominantly dedicated to cargo loading and distribution operations.
Current Port Visitors
Current visitors to the island include roughly 4 million cruise line passengers annually and more than 176,000 workers supporting the cruse and cargo industries. Cruise line passenger visitation typically peaks in the “cruise season” between November and April, with 62% of annual traffic arriving during that period. Historically most cruise passengers have arrived on the island on Saturdays and Sundays as they embark and disembark, but passenger traffic has been smoothing out over the week recently due to broader cruise line schedule offerings.
Page 7
The CASE 2016: The Caribbean Way
Image 3 – View of Cargo and Cruise operations looking West towards Downtown Miami
Projected Growth
The PortMiami 2035 Master Plan makes the case for $2 billion in capital and infrastructure improvements over the next 25 years to accommodate growth due to the nearly completed expansion of the Panama Canal, the expected increase in cruise passengers (due in part to increased travel to Cuba) and regional commercial growth. Specifically, the plan calls for:
• Continued expansion of berth sizes and channel dredging to accommodate larger cargo ships coming from the Panama Canal and the next generation of larger cruise vessels • Significant land improvements to intermodal infrastructure (utilities, rail, roads, cranes, configuration improvements, etc.) • New marina, ferry, hotel, restaurant, office and other commercial development to “anchor” the Port to the tourism industry and create a “unified waterfront global designation.”
In addition to the thousands of additional jobs from commercial and cargo distribution growth resulting from these improvements, the plan projects an increase in cruise passenger visitation at a rate of 1.79 percent growth per year, trending toward approximately 5.9 million visitors annually by the year 2035. Substantial additional daily visitation to the island is expected also as a greater variety of uses and amenities are developed.
Page 8
The CASE 2016: The Caribbean Way PortMiami 2035 Master Plan
In 2011, PortMiami, the organization in charge of the Port’s operations and land, undertook a master planning process with the goal of maximizing its long-term competitiveness. Projections called for significant growth in both cruise passengers (4.1 million in 2011 to 5.9 million by 2035) and cargo (847,249 units in 2010 to between 1.7 and 3.3 million by 2035). The Port is also readying itself for larger post-Panamax ships and such construction is set to coincide with the completion of the Panama Canal expansion in 2016. Faced with restricted space and a competitive marketplace, PortMiami seeks a sustainable plan for its future in three ways: Cargo, Cruise and Commercial.
Cargo
The Port’s Master Plan focuses on three major projects related to cargo:
• Construction of the Port of Miami Tunnel o Will connect Port traffic directly to the Interstate highway system • Dredging of the channel to accommodate post-Panamax ships o Understood as essential to Port competitiveness • Reintroduction of rail service to the Port o Will help to reduce traffic and emissions
The Master Plan also calls for an off-site distribution center to handle excess containers, consolidation of accessory uses, increasing efficient use of cargo gates, and the purchase of new cranes through 2035.
Cruise
The Master Plan explicitly states its goal of maintaining the Port’s position as the leading cruise terminal in the world. The industry is one of the County’s biggest economic drivers and is expected to grow in the future. As cruise ships get ever larger, the Port must expand its terminal complexes and transit centers.
• Increasing Size and Number of Berths o Three new berths will be added plus the extension of another berth to accommodate larger ships. After improvements, the Port will be able to accommodate nine of the world’s largest ships simultaneously. • Construction of New Cruise Terminals o To increase passenger capacity and provide operational efficiencies to cruise lines. • Construction of a New Multi-modal Transit Center
Page 9
The CASE 2016: The Caribbean Way
o Consolidating transportation in order to reduce public way footprint to allow more land for the core businesses of cargo and cruise.
Commercial
The Master Plan envisions commercial development at the Port’s southwest corner. This site is the subject of the RFP and is considered key to the Port’s future vibrancy and financial health.
“This development is the anchor that will connect the Port and the tourism industry that it serves to the community. By working together we will create a unified waterfront global destination.” – PortMiami 2035 Master Plan
This is where your development expertise comes in. The Master Plan calls for a lot, and you may or may not be able to provide all of it. But to begin, you must first read PortMiami’s RFP for Development for the Southwest Corner of Dodge Island.
Image 4 – Existing functional uses of Port of Miami
Page 10
The CASE 2016: The Caribbean Way REQUEST FOR PROPOSALS FOR COMMERCIAL REAL ESTATE DEVELOPMENT
Southwest Corner of Dodge Island
1.0 Introduction
This Request for Proposals (RFP) for the southwestern corner of Dodge Island (the “Site”) has been issued to development teams whose submissions to the Request for Qualifications (RFQ) qualified them for this RFP stage. This document articulates the Port of Miami’s intentions for this important site, provides additional information, describes submission requirements, selection criteria, and the process for developer selection, and identifies requirements of the development agreement and ground lease to be entered into with the Bidder.
The Port of Miami expects the teams to define and substantiate a compelling development vision for the Site. Its scale, location proximate to both Port activities and the adjacent downtown financial and entertainment districts, existing and planned nearby transit connections, and its tax revenue generating potential can support a project that anchors the new commercial core of Dodge Island, not just adds to it. The RFP articulates a set of Project Objectives for the Site in Section 4.0. The Port believes these Project Objectives are aggressive but achievable. Proposing teams must develop a program, design, development strategy and ground rent proposal that meet these Project Objectives. The proposal, which must include all the elements in the Submittal Requirements outlined in the CASE 2016 Rules, are due at 12:00 noon on January 10, 2016.
Image 5 – Aerial view of Site and Port of Miami
Page 11
The CASE 2016: The Caribbean Way 2.0 The Opportunity
The Port of Miami Site is approximately 9.0 acres divided into two parcels, A (2.4 acres) and B (6.6 acres), owned by Miami-Dade County under the supervision of the Port of Miami. The Site is located in the southwestern corner of Dodge Island; the Island houses all of the Port of Miami’s cargo, cruise, and commercial activities.
Image 6 – Site Map
Over the past decade, the expansion of Port activities through the growth of the cruise industry and the expansion of the Panama Canal has caused the Port to re-examine its capital needs and potential sources of additional revenue. In the December 2011 publication of the Port of Miami’s 2035 Master Plan, the Site was identified as a prime opportunity for re-development to a highest and best use of dense commercial, hospitality, and/or residential programming. The Port recognizes the scarcity of high density developable land in downtown Miami and intends to retain title to the property and enjoy long-term value growth. Accordingly, the Port of Miami
Page 12
The CASE 2016: The Caribbean Way requires that all RFPs structure this transaction as a long term ground lease for a term of 75 years. The Port values maximizing financial returns while balancing inherent development risk. This approach would enable the Port to secure a steady stream of long-term income without having to relinquish ownership of the land or take on exceptional risk.
Submitting teams are encouraged to develop creative ground lease proposals so long as they provide the Port with a reasonable return for the effort and risk they are taking on. Proposals may utilize base rent, participation and/or promoted rents, and any other applicable structures, such as those based on project phasing, project completion and occupancy, or capital events. Further, current income from Port activities throughout Dodge Island and the importance of having the right mix of uses on this highly visible corner makes holding the land a viable investment strategy should responses fail to impress.
In addition to this first, purely economic motivation, the Port has expressly stated a secondary one to which you will need to be sensitive in order to remain competitive. The RFP places considerable emphasis on the principles of sustainability outlined in the PortMiami 2035 Master Plan. These principles seek to ensure the long-term viability of the project and maximize coordination with existing commercial users on Dodge Island. The quality of design and the positive impact on the built environment are also important to PortMiami. Your development approach, in other words, must embody an exercise of responsible and sustainable design, appropriate use mix relative to the Port and its downtown adjacency, and civic engagement. Submissions should include at a minimum a ground floor site plan and massing study illustrating heights and setbacks.
Page 13
The CASE 2016: The Caribbean Way
Image 7 – Local context map
Page 14
The CASE 2016: The Caribbean Way
3.0 Site-Related Information and Conditions
Image 8 – Parcel Map 3.1 Parcel A – Surface Parking Site Parcel A is a 2.4 acre, 104,544 square foot surface lot that has historically housed accessory facilities, construction staging, surface parking, and overflow Port operations, none of which are known to have caused any significant environmental contamination on the site. The site is bounded by Biscayne Bay to its west and south, Caribbean Way to the north, and Parcel B to its east. The site is accessed by Caribbean Way, a surface road that connects to the base of the Port Boulevard bridge. Caribbean Way dead-ends at a defunct bridge on the western edge of Parcel A, which the Port envisions transforming into a pedestrian walkway that will provide additional access between downtown Miami and the Site.
3.2 Parcel B – Marine Spill Response Corporation Site
The neighboring 6.6 acre, 287,496 square foot site to the east, houses the 2-story, 59,000 square foot Marine Spill Response Corporation (MSRC) warehouse. The site also includes a
Page 15
The CASE 2016: The Caribbean Way
130,000 square foot laydown area used for the preparation of equipment and supplies to be loaded on an MSRC vessel in the event of a spill, as well as a 300 foot berth. The MSRC has leased the land from the Port of Miami since 1991, and most recently exercised a five-year renewal right in February 2013. MSRC’s Lease was extended through May 31, 2018, with three additional five-year renewal rights remaining in the current Lease through May 2033. The terms of the MSRC Lease are nominal: MSRC pays $1.00 per square foot of land annually, with 10% escalations at each of the remaining three renewal periods. The Port recognizes that the re- development of this parcel to its highest and best use must take into consideration relocating the MSRC and should exceed the current returns generated by having MSRC on the site.
The Port of Miami values the relocation of MSRC to an alternative location at a cost of $6.2 million, a cost that must be taken into consideration when providing an offer to the Port for the parcel. This structure is not considered capable of supporting vertical improvements or historically significant, and it is assumed that any development on the parcel will involve the demolition of the MSRC warehouse. The site is flat and bounded by Parcel A to the west, Caribbean Way to the north, the headquarters of the Royal Caribbean Cruise Line and its adjacent surface parking lot to the east, and Biscayne Bay to the south.
3.3 Planning and Land Use
The City of Miami originally zoned Dodge Island as Government/Institution (G/I) prior to the release of its Form-Based Code. In the Miami21 Form-Based Code codified in May 2010, the entirety of Dodge Island was changed to a zoning of Civic Institutional (CI).
While both parcels are currently zoned CI, the Port of Miami anticipates that the 6.6-acre Parcel B site will be rezoned, with a target zoning of T6-36. Parcel A is expected to remain as Civic Institutional (CI). Details related to allowed heights, FAR, and uses on the T6-36 and the CI zoning designations can be found in ADDENDUM G, ZONING: SUMMARIES, T6-36 and CI. For the T6-36 zoning designation, additional FAR can be obtained on site if certain public benefits are achieved. For the purposes of this RFP, the only public benefit that may be considered applicable for additional FAR is the provision of on-site affordable/workforce housing, the details of which can be found in ADDENDUM H, ZONING: PUBLIC BENEFITS PROGRAM.
Importantly, because of the ecologically fragile state of the Miami waterfront and the Port of Miami’s desire to enhance sustainability measures in all future commercial development, all proposals should include a 150’ setback from the waterfront along Biscayne Bay.
Page 16
The CASE 2016: The Caribbean Way
3.4 Site Stakeholders
The Port of Miami is a subdivision of the Miami-Dade County Government and is located within the boundaries of the City of Miami. As a result, there are a number of stakeholders who will be involved in evaluating the development proposals, and your team’s proposal should take into consideration the desires and interests of each party. Successful proposals will balance the economic, environmental, and social needs of each of the following groups.
• Port of Miami: The Port is interested in financial returns balanced with financial security, as well as the long-term viability of fundamental Port activities. • Miami-Dade County Commission: County Commissioners are interested in tax revenues and promoting sustainability measures. • City of Miami: The City is interested in protecting the interests of the adjacent downtown business community, alleviating the traffic impacts of new development through transit improvements, maintaining real estate market values, and the provision of affordable housing. • Miami-Dade County Trade & Tourism Committee: The T&T Committee, which will take up the development proposal at public hearings for approval, are interested in promoting tourism to the County and in approving a project with complementary uses to existing Port activities. • Royal Carribbean Cruise Lines: The RCCL Headquarters are located immediately to the east of Parcel B, and RCCL has been vocal about its desire to be involved in the planning and development process for the Site. RCCL may be interested in an option to expand to either parcel in the future. • Marine Spill Response Corporation: MSRC currently leases Parcel B from the Port and is interested in re-locating elsewhere on Port land, to the cost of $6.2 million.
Image 9 – Current Commercial and Cruise uses
Page 17
The CASE 2016: The Caribbean Way
3.5 Sustainability
While the Port of Miami’s 2035 Master Plan considers the three major areas of Cargo, Cruise, and Commercial activity, all three areas must comply with sustainability measures described in the Master Plan. A successful proposal will take into consideration some of the following elements, which will help to protect the waterfront and ensure the long-term viability of the Port:
• LEED Building: All new buildings should strive to meet a minimum of LEED Silver compliance. • Green Energy Initiatives: Initiatives including photovoltaic panels, electric vehicle charging stations, multi-modal transit enhancements such as shuttles and bus lines to connect the Site to other commercial areas of the Port, as well as assistance in financing a light rail line across the Port Boulevard bridge would all be viewed favorably by Port officials. • Waterfront Setback: All proposals should adhere to a 150’ waterfront setback on Biscayne Bay and identify resiliency initiatives to ensure the long-term safety of the Site from storm surges and waterfront erosion.
3.6 Marina
It is the goal of the Port of Miami to provide a 200-slip marina in Biscayne Bay to house private boats. For the purposes of this RFP, your development team has partnered with a marina operator and developer who will handle the financing and construction of the marina separate from your team. Please include a marina in your project design but exclude it from all financial analysis related to the Site’s development plan.
4.0 Project Objectives
Development teams should note that the Port of Miami intends that all of the objectives below be met and is seeking a partner with the vision, commitment and capability to do so:
• A substantial and predictable financial return to the Port, paid over the term of the lease through a ground lease structure that addresses the pace and amount of anticipated development. • An outstanding team that has demonstrated experience developing complex, urban mixed-use projects with the flexibility to work cooperatively with the Port. • A creative, mixed-use development program that: o Adds long-term financial, civic and design value to the surrounding development and community with consideration of a risk profile required by a public agency;
Page 18
The CASE 2016: The Caribbean Way
o Takes advantage of the Site’s large area and flexible morphology, prominent waterfront location and city skyline views, and transit accessibility to create here what cannot be easily created elsewhere on the Miami waterfront; o Establishes a year-round destination serving employees, local and regional residents, cruise visitors, hotel guests, convention attendees, and other visitors; o Includes an activated public realm and supports pedestrian activity and waterfront engagement along Biscayne Bay; o Creates a range of employment opportunities, potentially including jobs in 21st century industry and production, office and research, hospitality, retail, recreation, and/or entertainment. • Excellence of design that creates a distinctive image for the Port of Miami and responds to surroundings by providing active street level public accommodations to the extent practical, taking advantage of the waterfront, and providing prominent views to and from the Site.
5.0 Selection Criteria
Proposals will be considered by the Port based on the following criteria in order of importance:
• All-in present value of consideration to the Port; • The overall financial feasibility of the proposed redevelopment; • The creativity and feasibility of the deal structure; • The strength of the redevelopment program; and • The project design and attractiveness to the Port and City.
Proposals will need to propose specific lease terms (i.e. Base Rental Rate including escalations, Cash Flow Percentage Rent and/or Capital Event Participation Rent). The ground lease rent consideration should at minimum better the Port’s existing financial position both on a future value basis relative to the NOI generated by existing operations on the Site and on a present value basis using a rigorously defended discount rate (opportunity cost of capital) that is consistent with the return that the Port could expect to receive by investing the proceeds of an outright sale in the market for investments with a similar risk profile.
Finally, it is almost certain that teams will not have sufficient internal capital to fund the costs of this development. To be awarded this project, teams must identify potential sources of capital and present compelling reasons to believe that they will actually be able to finance the proposed project. To do this, teams must show the anticipated returns on the capital invested in this development and identify the likely source of such capital based on both the quantitative and qualitative characteristics of this investment. If teams bring an equity partner or partners
Page 19
The CASE 2016: The Caribbean Way into this deal they will need to clearly describe that joint venture structure with respect to the allocation of the development’s cash flows.
6.0 Conclusion
To summarize the foregoing, there are a few important interests at play for the Port: investment return, a cohesive and well planned urban redevelopment project, and consistency with the PortMiami 2035 Master Plan vision including sustainability measures, complementary uses, and accessibility. Proposals must meet the needs of the Port while at the same time creating a compelling core investment opportunity for the development company and investors. Accordingly, the proposal submitted on January 10, 2016 at 12:00 noon must be well conceived and carefully drafted.
Although the development programming, design, and financial feasibility will be important, the Port will be most interested in delicately balancing the maximization of their return while minimizing risk. A compelling bid will achieve fair risk-adjusted investment returns. The Port of Miami desires a clear understanding of the phasing and programming of the redevelopment plan and the financial benefits to all parties. They are also keenly interested in ability to execute. Complete transparency throughout the negotiation will be extremely important to facilitating a mutually beneficial deal.
Additional material is available to development teams thanks to Skanska for construction cost data (ADDENDUM D) and CoStar Group for Office, Retail, Hotel, Multifamily and Industrial market information (ADDENDUM E).
Page 20