Industries Economic Development

How Virginia won the prize

A Fairfax County office building close to Uncle Sam pulls in Northrop Grumman

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Print this page by Robert Burke and Paula C. Squires

In the end, it came down to a good deal on a site close to Uncle Sam. “We were not looking for a Taj Mahal, but it had to be a nice building in a safe locale.”

Those were the marching orders, Keith Boswell, a project manager for the Virginia Economic Development Partnership, was given by defense contracting giant Northrop Grumman in its quest to find a new global headquarters. 

Boswell knew Virginia would be up against stiff competition. Indeed, the decision by the Los Angeles company to relocate sparked a bidding war between Virginia, Maryland and Washington, D.C. For months, the region’s commercial real estate community talked of little else: Where would Northrop Grumman go?  Would it buy or lease? 

After months of speculation, Northrop Grumman — whose biggest client is the federal government — made up its mind. It opted to buy an existing office building in Fairview Park near Falls Church. According to Northrop spokesman Randy Belote, the 336,000 square-foot, 14-story office tower offered “the total package.” Namely, it was available, affordable and close to many defense agencies served by Northrop Grumman, one of the world’s largest security companies.

The story behind the biggest economic development deal in Virginia this year began in late December. That’s when Boswell got a tip from a consultant. “He said, ‘I’m working with a Fortune 100 defense company that’s going to announce they’re … moving their operation to the D.C. region.’”

The next thing Boswell knew a typically secret chase of a new corporate player took a very public turn. Just as the consultant indicated, Northrop Grumman declared in January that it was moving its headquarters from California to the Washington metro region, setting off a public contest to woo a leading defense contractor with annual revenues or $33.8 billion in 2009.

“We did our search sort of backwards from how most people do it,” says Gaston Kent, Northrop Grumman’s vice president for finance. “We announced where we were going and then narrowed it down after that.”

Even people who worked at Northrop Grumman were surprised. As Belote, vice president of strategic communications, tells it, new CEO Wes Bush already had made waves his first day on the job, Jan. 4. He began by calling 300 executives across the country to discuss his expectations. “Two hours later, he announces that he’s moving the corporate headquarters,” says Belote. “He wants to move Northrop Grumman to the next level, and the best way to do that is to be close to the customer.”

The chance to land a Fortune 100 corporate headquarters with 300 new high-paying jobs sent Virginia, Maryland and Washington, D.C., into a frenzy. Virginia had long been courting Northrop Grumman, and this seemed like the perfect opportunity to make a big push. 

The company is the state’s largest industrial employer. In the Washington region, home to its information systems division, Northrop Grumman employs nearly 40,000 workers — a third of its 120,000 worldwide work force. It employs another 19,000 people at Northrop Grumman Shipbuilding in Newport News, the sole builder of the country’s aircraft carriers.

The company, however, may sell or spin off the shipyard. Last month, Bush said he saw little synergy between shipbuilding and Northrop Grumman’s other businesses, and that it was time to explore a separation. Northrop Grumman hired Credit Suisse Group as its lead financial adviser to consider options for the shipbuilding sector, which last year contributed 18 percent of the company’s annual revenue.

The defense contractor also is well known as the private partner in a controversial public/private partnership to update the state’s computer systems. The 2005, $2.3 billion deal went sour, spawning a legislative probe because of poor service and missed deadlines that ultimately led to a revised contract in April. 

But the rocky relationship apparently didn’t take Virginia off Northrop Grumman’s site list. Boswell recalls that the company had made up its mind by the time it called state officials in January. “They said, ‘We’re coming to the D.C. area.’” Boswell says Northrop told the three competing jurisdictions that it needed upward of 150,000 square feet, and the building had to fit the company’s time frame; Northrop wanted to move by summer 2011.

To assist with the site search, Northrop Grumman hired real estate company C.B. Richard Ellis Group. Early in the game, Washington offered up a $25 million incentive package of tax breaks and grants. Maryland also offered incentives. One of its state senators, Richard S. Madaleno Jr. (D-Montgomery) sent a letter to Bush urging the company to favor his state, saying its stand on gay rights better reflected the company’s commitment to gay and lesbian employees.  In 2006 Virginia voters amended the state constitution to prohibit gay marriage.

Meanwhile, Virginia’s Gov. Bob McDonnell made the state’s pitch in personal conversations with Bush and others. Boswell says personal contact helps. “If he says the state’s going to do it, then … there’s a level of certainty.” 
Gerald Gordon, president of the Fairfax County Economic Development Authority, credits McDonnell with helping to land the deal. “The governor’s office played a big role in this one. His aggressive, pro-business stance was one of the factors that brought them to Virginia rather than Maryland.”

McDonnell took office in January promising to focus on job creation. During this year’s budget negotiations, he managed to double the pot of incentive money used to close deals — better known as the Governor’s Opportunity Fund (GOF) — adding $12.1 million to the $23.6 million set aside for the 2008-10 biennium.

In putting together an incentive package for Northrop Grumman, Virginia offered $3 million from the GOF and another $10 million incentive grant, based on a $24 million investment by Northrop Grumman and 300 new jobs with average annual salaries of $200,000. Fairfax County plans to match the GOP investment by providing in-kind transportation infrastructure improvements. Plus, Northrop Grumman is eligible to receive a jobs tax credit, according to the Virginia Economic Development Partnership.   

The state’s lower corporate tax rate may have helped as well. Virginia’s rate is 6 percent, compared to 8.25 percent for Maryland and 9.97 percent for Washington, D.C.

Ironically, what started out as a contest between two states and the District of Columbia came down to a competition between two Northern Virginia jurisdictions. By April, Northrop Grumman had narrowed its focus to sites in Fairfax and a site in an urban area on North Glebe Road in Arlington County. 

With an A-list roster of other major companies such as General Dynamics Corp. and CSC — 
which relocated its corporate headquarters from California in 2008 — Fairview seems a good fit. The building at 2980 Fairview Park Dr. in Fairfax County was owned by Verizon, which until recently used it as a regional headquarters. Verizon sold the building to a subsidiary of ING Clarion Partners in September 2007 for $105 million. 

Verizon still occupies about 30 percent of the space, but is expected to move out soon. One of the many topics of speculation by real estate brokers was how much time Verizon had left on its lease — supposedly about three years — and how that might have bumped up the cost of the transaction, with Verizon having to be bought out of the lease.
Northrop Grumman isn’t commenting on the fine details of the deal. It’s got more important decisions to make, like whether it will close an existing office in Rosslyn when it begins moving people into the new headquarters next summer.
Washington leaders view Northrop Grumman’s relocation as a win not just for Northern Virginia, but also for the entire region, because it reinforces Washington’s position as a premier business location. “From community involvement to tax benefits to hiring and contracting, Northrop’s presence will be felt across greater Washington,” Jim Dinegar, CEO of the Washington Board of Trade, said in a statement.

Over the past three years, Computer Sciences Corp. (CSC), Hilton Worldwide, Volkswagen of America and Science Applications International Corp. (SAIC) have moved to Fairfax County, adding heft to the region as a business hub.
Belote says the presence of Northrop Grumman’s senior executives will mean more corporate outreach in the community. “They will align with business and educational organizations through philanthropic outreach.”

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