Quarterly: Spring 2002

CBQ >> Spring 2002 Issue

Public/Private Partnerships Come to the District
by Michael Goodwin, Arnold & Porter

The "public/private partnership" has become a buzzword in urban development across the nation. It has recently arrived in the Nation's Capital in a big way.

Public/private partnerships encompass a broad spectrum of different approaches to development. Their common denominator is that the public sector is an active participant in advancing the development process. These partnerships recognize that the public sector benefits from development, and has unique tools that can maximize the public benefits of development and at the same time provide the private sector with a reasonable return on investment.

Historically in the District, the role of the public sector in development has been to apply the brakes, not the accelerator. The District's involvement was typically limited to regulating the development process: imposing zoning restrictions on the building envelope and uses; requiring design restrictions in the redevelopment of historic properties; and subjecting certain aspects of development to tax. In a few limited areas, such as PUD approvals and alley closings, the District conferred benefits or incentives in exchange for public amenities or direct payments.

But increasingly, the District government is wakening to the tools at its disposal for incentivizing development, and how these tools can guide development along paths that maximize the public sector return. There is a growing recognition that these tools, if creatively used, can expand the District's population, broaden its tax base, create new jobs for residents, and improve the quality of life by expanding opportunities for arts, retail, waterfront activities and other amenities.

The District's tools are still emerging and evolving. At one end of the spectrum, the District confers a financial benefit in exchange for specific commitments from the developer to create certain public amenities. At the other end, the District actually acts as developer and solicits private sector involvement as needed. A catalogue of the key tools that have been used to-date would include:

TIF: Tax increment financing was enacted by the City Council in 1998, and represented the District's first substantial foray into public/private partnerships. In a TIF project, the District makes a portion of the future tax revenues to be generated by a project available to fund the development of the project. Just as the developer mortgages its share of project revenues to obtain debt financing, the District mortgages its share of the tax revenues and grants the proceeds to the project. In exchange for this contribution, the developer commits to uses that advance public economic development goals. The International Spy Museum TIF has closed, and the Gallery Place and Mandarin Hotel TIFs are scheduled to close early this year.

Tax Revenue Sharing: Now that the concept of TIF has begun to be accepted in the District, the District has used tax revenues to incentivize projects in other ways. For example, in January of the this year, the City Council approved the use of tax payments to be made by CarrAmerica's Terrell Place office project to subsidize the development of an adjoining theater for The Shakespeare Theater. Instead of paying real estate taxes to the District, the owner of Terrell Place will make a payment-in-lieu-of-tax to The Shakespeare Theater, which will provide seed capital for the development of the new theater. This public investment will help realize the long-standing goal of creating an E Street theater spine and 7th Street entertainment corridor.

Special Assessment Districts: In order to finance a new Metro Station at the intersection of Florida and New York Avenues, the District expanded tax revenue sharing a step further by imposing a new and targeted tax. The District created a special assessment district in the area surrounding the new Metro station, and imposed an annual assessment on commercial properties in this district. This annual assessment will reimburse the District for a $25 million advance made by the District to finance the station.

Tax Abatement: The simplest vehicle for making future tax revenues available to subsidize a project is tax abatement. In 2000, the City Council authorized real property tax abatement targeted to the development of new grocery stores in certain areas of the District, and in January 2002 approved real property tax abatement for new housing. In special circumstances, the Council has authorized real property or sales taxes to be abated or deferred for specific development projects.

Strategic Dispositions: Strategic dispositions of District-owned land represent an old approach to public/private partnerships that is now experiencing new life. Many District-owned sites that languished in the waning years of the RLA are now being moved quickly to the market by the National Capital Revitalization Corporation. With each project, NCRC as seller can impose the development controls it needs to guide development of special uses. Witness NCRC's pending disposition of the Wax Museum site, where the developer, Horning Brothers, will be required to develop housing and arts that will help jump start the redevelopment of the Mount Vernon triangle.

District as Developer: Finally, the District may step into the role of the private sector and serve as the owner/developer of a project. We may be seeing the beginnings of this in the NCRC's beachhead on the Southwest Waterfront, as well as the District's possible ownership of the new convention center headquarters hotel. Where the District owns a project, the traditional roles of public and private are reversed: the public sector assumes the risks and rewards of development, and the private sector provides targeted assistance (expertise, financial assistance, etc.) on a contractual basis.

Under each of these public/private partnership structures, the District achieves its specific development objectives for a site. The District also seeks to achieve collateral benefits, such as the hiring of District residents, the engagement of District-based businesses, and the use of Davis/Bacon wage levels.

We have a creative City Council and an energetic executive function in the Office of the Deputy Mayor for Planning and Economic Development. There is also a growing appreciation that the District's involvement in a real estate project can be good for both the public and private sectors.

Given the challenges that confront the development of uses other than office projects, we can expect that public/private partnerships, which have now firmly taken root in the District, will continue to flourish in new and increasingly creative forms.

About The Author

Michael Goodwin is a partner with Arnold &Porter in Washington, D.C. Mr. Goodwin practices in the area of commercial real estate, with particular focus on development projects in Washington, D.C.

He was involved in the formulation of the District's TIF Act, the processing of the principal TIF projects that have been approved by the District, the creation of the special assessment district for the New York Avenue Metro, and in a variety of on-going public/private partnership projects in the District.