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D.C.’s WHITE ELEPHANT: A $36 million liability

City says developers won’t be required to pay off old convention center bonds

(Published March 10, 2003)

By JOHN DeVAULT

Staff Writer

As the city prepares to shut and demolish the 20-year-old Washington Convention Center, the District still owes $36 million of the original $111 million bond issue that financed construction of the old center, according to the city’s budget office.

Annual service on the debt is about $4 million, an official said, and is paid from residents’ tax dollars out of the city’s general fund.

Critics are asking why D.C. taxpayers should go on paying for a soon-to-vanish building – as the city prepares to open a new and bigger facility a few blocks away – and criticizing city officials’ handling of not just past but also future financial deals for the site.

"So where’s the money to pay off the bonds going to come from now?" asked John Capozzi, a Democratic State Committee member and former D.C. shadow representative. "Once they tear it down, it’s certainly not going to be producing any more income for the city."

Capozzi also protests that District officials apparently do not plan to ask future private developers of the valuable site to assume the old center’s outstanding debt.

Local activist Debby Hanrahan, the Statehood Green Party’s candidate for city council chairman last fall, said she believes the $4 million in annual debt service being picked up by taxpayers could be better spent.

"That’s enough to pay for the city’s trash recycling program," she said. "Libraries are cutting back their hours right now, because the city is scratching around for dollars."

The old convention center, occupying most of two square blocks in downtown Washington at Ninth and H streets NW, will close at the end of the month after hosting its last event on March 30 – three days after the official opening of the new center at Mount Vernon Square.

Soon after, city officials said, they want to demolish the building – which D.C. planning director Andrew Altman last week called "not exactly an architectural masterpiece." He added, "I don’t think there’s any great loss there."

The city plans to use the site for a parking lot and open space until it can be redeveloped, officials said.

They also said they hope the site won’t be vacant for long.

Last week the city held a public meeting at the convention center where seven competing private development teams made pitches to win the right to develop the site – as much as a $1 billion project, officials have said.

The city’s wish list for the site includes at least 600 housing units, a large amount of street-level retail shopping space and, possibly, a new central library and music performance facility. The city hopes to choose a development team by early summer.

The plan, Altman said, "is about creating a great destination place downtown – a place that Washingtonians will call their own."

But talk of the project has also prompted questions from critics.

Capozzi asks why the city isn’t making repayment of the $36 million a condition of the chosen developer’s right to redevelop the site.

"If they want a whole city block, that should be part of their fee," he said. "Otherwise, we’ll just keep kicking (the debt) under the rug, and another generation of taxpayers – my kids – will have to pay it off."

In an interview last week on WAMU’s "D.C. Politics Hour," Altman called the downtown acreage "a prime site" and said that no city location has had more competition for development in recent years.

The plot is "the hottest real estate site on the East Coast, if not in the country," according to D.C. Councilman Jack Evans, D-Ward-2, who represents the area in which the site is located.

But, in an interview with The Common Denominator, Altman said the city would not make the debt a part of negotiations with developers.

"The debt is not going to be a part of that," Altman said.

One member of a local team competing to develop the site, Kingston Gould III, confirmed that the city has not raised the issue with his group.

"That discussion may be one that needs to be had," said Gould, president of Gould Property. "But no one from the city has approached us on that one at this point."

Last week, neither Altman nor Eric Price, deputy mayor for planning and economic development, seemed eager to discuss the old center’s overhanging debt.

Both declined to answer questions about the still-pending $36 million, referring questions about it to Lewis Dawley, general manager and chief operating officer of the Washington Convention Center Authority. The authority manages the current center, and built and will run the new one.

Dawley, sounding somewhat exasperated, asserted that the authority has no responsibility for paying off the debt.

"D.C. is responsible for paying off that debt," he said.

According to Dawley and other officials, the now semi-autonomous authority was largely severed from the city government in 1996 in order for it to take responsibility for funding and building the new convention center. That project’s $550 million in bond debt is to be repaid through taxes levied on local hotel and restaurant revenues, and Dawley said the authority bears the responsibility for seeing that those bonds are paid off.

By contrast, Dawley said, a provision of the 1996 agreement was that the remaining bond debt from the old convention center would remain the responsibility of the city.

"That’s got nothing to do with the authority," Dawley said.

D.C. treasury official Lasana Mack affirmed that accounting. "Yes, the city has the responsibility to pay those bonds," Mack said.

He said the financing for the old center, originally funded in the late 1970s with U.S. Treasury funds, was converted into general obligation bonds held by the District as the city achieved greater home rule in the 1980s.

Mack also pointed to a possible problem for the city with that debt.

If future development at the old convention center site is largely private, Mack said, the city might be forced to pay back the entire $36 million in full – because the terms of the original general obligation bond issue require that their proceeds be used only for public, municipal development.

Carole Brown, an official at Lehman Brothers in Chicago who helped refinance the convention center bond issue in the 1990s, said that such a use-change for the site could indeed trigger a need to pay off the bonds in full. But she cautioned that without knowing further details of the development, it was not possible to say if that would actually occur.

In comments last week, Altman seemed to assert that the city does expect much of the development at the site to be private. Speaking on "D.C. Politics Hour," Altman answered a Common Denominator reporter’s question about how the city was handling the debt by saying, "We’re looking at significant private development at the site." He then cited the hoped-for retail and housing development.

"The economics of it will be handled in terms of private development," Altman said.

Evans said the need to pay back the whole $36 million on short notice wouldn't be a large problem, even if it occurred.

"You’d just borrow more money to pay (the bonds) off. I don’t mean to minimize $36 million," he said, "but I think that’s a number we could handle."

Hanrahan said she thinks city officials should insist that the Washington Convention Center Authority take on the old center’s debt, which she said should be paid for from the same special taxes on hotel and restaurant monies that are financing the new center.

"Why should the taxpayers go on paying that bill?" she asked.

But authority head Dawley rejected that idea.

"I think that’s an easy thing to say," he said. "But we have $550 million of our bondholders’ money. We could not co-mingle the two. We’d have to go back and re-do our bond deal."

Dawley said he could imagine only one way the authority might take on the old debt: if the city were to transfer control of the site’s future development to the authority, too.

"There’s an option," he said. "If the city wanted to turn the old center over to the authority to develop, then I suppose we could discuss that."

City officials were not suggesting that possibility last week.

Copyright 2003, The Common Denominator