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Like many urban centers, the District of Columbia has experienced a renaissance in some parts of the city in the past 10 years. Many neighborhoods that were beset by neglect, urban decay, and crime in the early 1990s have been transformed into vibrant urban destinations and livable communities. This revitalization has occurred as a result of the confluence of many factors, including a vibrant economy and an activist District government. The District government’s role has evolved over time as the mayor, the D.C. Council, the chief financial officer’s office, and other D.C. agencies have worked to find ways to balance social, political, and economic concerns, and bring about development that benefits both citizens and the business community. Their ultimate goals are to make all of the city’s wards more attractive places to live and work and to strengthen the tax base of the city. The District’s progress has required that a number of groups work together to meet the city’s need for improved public infrastructure, high-density residential housing, and retail centers. At the same time, all of these groups have had to recognize the intricacies of District politics, culture, and social policies. In fact, the process of urban revitalization and economic development in concert with public-private partnerships requires a greater level of collaboration and is more complex than traditional real estate transactions. We can succeed only when there is a true partnership of private and public interests. The city’s commitment to economic growth has also led to the development of a variety of public financing and economic-development tools that provide incentives for developers to create housing, hotel, office, and retail opportunities. The economics are such that if the District did not provide public financing, tax subsidies, or other benefits, urban revitalization would be too expensive for private developers. Thanks to public financing used by the District, urban revitalization has led to the DC USA shopping-complex project, the Mandarin Oriental Hotel, Gallery Place, the convention center site, housing developments, the Nationals’ ballpark stadium, and numerous other significant projects. Other projects are in the works. The political machinery of the District adds distinct challenges to the already-complex processes of pioneering real estate transactions in many affected areas of the city. Real estate deals involving public entities and public figures are very different from transactions between private entities. For example, transactions coupled with public assistance bring different and heightened levels of public scrutiny. In the District that scrutiny frequently extends to Congress. Negotiation and decision-making by committee inevitably delay the deal, as the transaction is dissected, debated, and often voted on by the various levels of government. The process is, in short, often an unavoidable maze, navigable only by those who have tenacity, patience, wit, and good legal advice. One good example of a project that recently went through this process and closed in February is the DC USA project in Columbia Heights. THE PROJECT Since 1997, residents and key stakeholders have been working in earnest to develop a strategy to revitalize the 14th Street commercial corridor in Columbia Heights. This redevelopment effort included not only the District government but other District agencies, such as the National Capital Revitalization Corp. (NCRC) and the RLA Revitalization Corp. (RLARC). After the opening of the Columbia Heights Metro station, the District government, the D.C. Office of Planning, the NCRC, and RLARC focused their efforts on the properties in the 14th Street commercial corridor nearest to that Metro station. After a long period of competition among developers for a site at 14th & Irving streets Northwest, RLARC (the landowner) signed a land disposition and development agreement with the developer, DC USA Operating Co., in January 2003. The developer includes the New York-based development team of Grid Properties Inc. and Gotham Organization Inc. with the participation of Joseph Searles and the Development Corporation of Columbia Heights. This team won the rights for the redevelopment of what was called Parcel 27 — “the DC USA parcel.” The original agreement stated that the District would provide more than $80 million of tax-increment financing (TIF), supported principally by new sales taxes expected to be generated for the District. In the almost three years it took to close the transaction, the structure and economics for the developer changed significantly from what was initially expected. The District’s goals for this development centered on the creation of a mixed-use facility around the Columbia Heights Metro station. The District also wanted to encourage private investment through tax incentives for developers and major retailers in order to create jobs, provide much-needed retail outlets for District residents, and generate sales tax revenue by attracting major retailers to this part of the city. In order for the 500,000-square-foot retail center (to be anchored by Target) to be economically viable and comply with zoning, however, it required a parking garage with at least 1,000 parking spaces. Unfortunately, the cost of building an underground parking garage made DC USA financially infeasible without public assistance. The mayor’s office, through the Office of the Deputy Mayor for Economic Development (under Eric Price), realized that public subsidies using taxes generated by DC USA alone (drawing in revenue from retail stores that otherwise would have likely gone to the neighboring jurisdictions of Maryland and Virginia) would be more than enough to pay for a public parking facility. They also concluded that this would make economic sense and would be an important catalyst for further revitalization of all of Columbia Heights. Initially, the DC USA development was to be divided into two condominium units with an approximately 180,000-square-foot Target store, owned by Target upon completion, and an additional approximately 310,000-square-foot retail center (a total of 500,000 square feet) with a 1,000-spot or larger parking garage owned by the developer. But when the CFO required that the parking garage be owned by the NCRC (a part of the District government), the condominium element of the deal had to change. In order for three different entities to own portions of DC USA upon its completion, the condominium structure had to be expanded to three commercial units. As a result, the financing plan for DC USA had to be renegotiated and changed yet again to accommodate a “public purpose” NCRC revenue bond, rather than a District TIF bond. This change became necessary because the TIF bond, which was initially to have been issued by the District as a “private activity bond” under the Internal Revenue Code with payments made solely from tax increments, was changed to a “public purpose revenue bond” issued by the NCRC as the owner of the garage unit. This, in turn, changed the operation and control of the garage unit so that the NCRC, rather than the developer, became the operator of the garage unit. Since the issues related to garage operations (parking fees, security, hours of operation, reserves, repairs, and so on) are critical to the developer, Target, and the retail tenants, a series of complex agreements were necessary to establish operational ground rules for the garage unit. Other related changes, increased costs, and the financing of the construction loan and the NCRC revenue bonds became more complex. Accordingly, DC USA will now be a commercial condominium with three units that together will contain approximately 500,000 square feet of commercial and retail space plus two levels of subsurface parking, all to be used as a multilevel retail complex. It will be the largest retail complex in the District. Other than the Target anchor, the complex will include other major retailers such as Bed Bath & Beyond, Staples, and Best Buy. The critical elements of DC USA were the garage and the public financing. The process of closing the financing changed, and each time seemed to become more complex. As a result, the project ended up facing significantly increased costs during a period when construction costs escalated dramatically. THE PLAYERS How did this happen? At the beginning of the process the deputy mayor of planning and economic development agreed to seek approval for the project’s funding and financing strategy. For the developers, the strategy took into consideration the creation of a local improvement district and the use of tax-increment financing for the parking structure, as well as other tax incentives for the developer and retailers, including existing retailers already located in Columbia Heights. The District had previously used TIF so it could raise capital in the bond markets by pledging incremental tax revenues generated by new developments that, in turn, would pay debt service on bonds. But in this case the District did not issue TIF bonds for DC USA. Instead the city ultimately issued a so-called TIF Note to the NCRC for $46.9 million, and the NCRC issued revenue bonds that were purchased by Citibank and used to construct the parking garage. Citibank also played the role of the construction lender for the retail portions of DC USA. The bonds the NCRC issued were secured by the TIF Note, net parking revenues, and certain reserve funds. Together, the funding sources for DC USA included $39.4 million net proceeds from the NCRC revenue bonds, $88.6 million in a construction loan, and equity. The D.C. Council passed legislation that authorized the financing and also exempted the development from certain real estate, sales, and other taxes. The D.C. Council’s role did not end there, however. D.C. Council member Jim Graham (who represents Ward 1, where the project is located) along with other Council members played an invaluable role in introducing and supporting the economic-development legislation needed to provide public financing for the project. Having one or more D.C. Council members strongly behind a project was an essential element in the process. Each of the District-related entities involved in the financing had its own perspective on the legal, legislative, and policy issues connected to the project. In fact, the developer dealt with four public entities — the mayor’s office, the CFO’s office, the NCRC, and RLARC. The mayor’s office was driven principally by its concerns regarding economic revitalization in the District and ensuring that District residents benefited from the construction and development of DC USA. The CFO’s office was most clearly intent on meeting its statutory mandates and maintaining the city’s fiscal health. RLARC owned the land that was sold to the developer. RLARC’s request for proposals outlined the critical site requirements that became part of the land disposition and development agreement. And, finally, the NCRC was involved because the CFO insisted that a District agency own the parking unit. The NCRC was concerned about DC USA’s ability to generate enough revenue to repay the NCRC’s bonds and its ability to control operation of the parking unit that it would own. It was also protective of its long-term ownership rights and benefits connected to the garage. In short, these sometimes-competing objectives — even between D.C. government entities — often make it difficult for any developer to finance and create a project that keeps everyone happy and is economically viable. THE ROLE OF COUNSEL Complex transactions of this type require different skills from attorneys representing each party. Lawyers involved in a deal like this must be able to bring both experience and judgment to handle the diverse range of challenges that emerge in such large, complex real estate and public finance financings. The complexity of these transactions requires the talents of lawyers with expertise related to the District and federal government legislative and political processes, government contracts, structured finance, environmental issues, and tax issues. There is no precise formula or script that counsel can follow to ensure success for their client in a transaction like the DC USA project. Yet, in addition to a good understanding of basic real estate and real estate finance issues, lawyers should have several other abilities. • An understanding of federal and state tax laws relating to municipal finance

• An understanding of the administrative and legislative processes • Extensive experience in drafting legal documents and negotiating with public entities • Patience and the ability to temper the expectations of clients, given the delays, complexity, and often competing economic and public policy goals inherent in dealing with public entities • An appreciation that transactions with public entities may be subject to significant changes and delays These transactions are multidimensional. Attorneys involved in these deals should be flexible and innovative in order to find solutions to the inevitably complex financial, legal, and public policy issues that may arise.

Kenneth Lore is a partner and a group leader in the real estate and finance group of Bingham McCutchen, located in its Washington, D.C., and New York offices. He headed the group that represented the developer in the DC USA transaction and similar financings.

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