New Incentives for Downtown District of Columbia Retail
May 17, 2004
Christopher H. "Chris" Collins- Washington
The Washington, D.C., retail economy is on the rise and will continue to grow stronger due to a combination of market forces and regulatory innovations.
Nationally, the Commerce Department reported a 1.8 percent gain in retail sales in March 2004, closing out the first quarter of the year on a strong note. Locally, the metropolitan Washington area has led the country in job creation since the first quarter of 2003, and was recently ranked the best market in the country for retail real estate by Marcus & Millichap Real Estate Investment Brokerage Company. The region’s shopping center vacancy rate fell from 6 percent in the mid-1990s to fewer than 3 percent as of the fourth quarter of 2003. A recent study by Delta Associates and George Mason University showed that the metropolitan Washington retail sector experienced the biggest jump in local job growth during a recent 12 month period.
The retail sector in downtown Washington has not kept pace with the surrounding suburban jurisdictions of Maryland and Virginia but is showing signs of future prosperity. Since the mid-1970s, there have been two significant economic cycles in Washington which contributed to substantial increases in office and residential projects. But since that same time, downtown retail has not grown significantly. In fact, the number of downtown department stores has dropped from five stores to one.
Recently, there has been a sizable increase in the number of downtown restaurants and hotels. Many of these are within a few blocks of the MCI Center sports arena built downtown several years ago to act, in part, as a catalyst for the local economy. But at the same time, there are few general merchandise and apparel/accessories retailers in the downtown area. According to a recent study, the District of Columbia is presently classified as “under-retailed.” The average retail square footage per person in the city was recently calculated at 11.14, which is far below the urban industry standard of 22. The District of Columbia government has looked at this problem and has launched several initiatives.
Recent Government Incentives
Retail TIF Program
In the fall of 2003, the Council of the District of Columbia enacted the Retail Incentive Temporary Act of 2003 (ACT), which supplements the District of Columbia’s existing tax-increment financing program with a new program targeting retail development. This new law establishes a downtown Retail Priority Area along the traditional downtown retail corridors of 7th, 11th, F and G Streets, N.W. The intention of the ACT is to assist retailers to overcome “the entry barriers that have thus far impeded the establishment of retail businesses in certain priority areas in the District.” The council noted in the legislation that the present lack of a critical mass of general merchandise and apparel stores “creates the perception of risk among potential retailers.. The council further intended by this Act to promote a livelier downtown, create jobs and tax revenues, improve public safety, and provide much-needed goods and services.
As temporary legislation, the Act is set to expire in July of this year. The companion, permanent legislation was passed by the Council in early May, and is expected to become law this summer.
The permanent legislation authorizes a retail tax increment financing package, supported by the issuance of up to $300 million dollars in bonds, to pay for retail development costs in the Downtown Retail Priority Area. Retail development costs include acquisition, purchase, construction, renovation, remodeling, repair, expansion, furnishing, equipping and opening for business; as well as establishing parking programs for customers, and providing façade and streetscape improvements. Specifically excluded from the law are liquor stores, nightclubs, hotels, restaurants, banks, pharmacies, phone stores and other service retail outlets. The law also authorizes the creation of at least four other retail priority areas in other neighborhoods within the city.
Zoning Action
Several years ago, the District of Columbia Zoning Commission established a requirement for ground floor retail and service uses in new developments in the downtown area. In May of this year, the commission adopted an innovative method to create additional retail space in existing office buildings in the downtown area by allowing owners of buildings in commercial zones in the Central Employment Area the option to enclose existing “open arcades” at the sidewalk level for retail, service or arts use. This idea was first proposed by the District of Columbia Building Industry Association and was authored by attorneys in Holland & Knight’s Washington, D.C., Land Use Practice Group.
An open arcade is a recessed area along the sidewalk at the ground floor level of a building, which is intended to provide shade and shelter to pedestrians walking along the street. The zoning regulations previously encouraged the inclusion of open arcades in downtown office buildings by providing a density incentive to compensate for the arcade space that would otherwise be enclosed and occupied at the ground floor level. That provision was adopted over 40 years ago, and it was envisioned at that time that all buildings in the downtown area would include open arcades at street level, resulting in a continuous arcade from street corner to street corner. While the original intention of the prior zoning regulation was to provide open arcades along entire city blocks, the pattern of development in downtown Washington has often resulted in a patchwork quilt pattern, with some office buildings having open arcades, and other adjacent buildings without them. As a result, the open arcade zoning concept did not produce the desired uniformity.
The District of Columbia’s Office of Planning believes that open arcades do not generally promote a vibrant retail “streetscape.” The Office of Planning noted in its report on this matter that “the open arcade was invented by an architect, not by a retailer. A retailer would never design a building to distance his or her front door and single chance of catching the eye of a potential customer by placing the store away from the sidewalk, under an arcade.”
However, depending upon location and circumstances, an open arcade may in some instances actually be the preferred alternative. For example, a single building with an open arcade along an entire city block, from corner to corner (see photo), can both achieve the original intent of the existing arcade regulation and promote the current retail goals of the city. Some office buildings have a Metro subway entrance in an open arcade, which also helps to attract potential customers to the arcade retail areas. The new regulation allows, but does not require, an open arcade to be filled-in.
Why was zoning action necessary to allow an owner the option to fill-in an open arcade with retail space? Because the zoning regulation promoting open arcades actually granted a density bonus to the property owner who included an open arcade in the building. Thus, simply filling-in an existing open arcade would, in many instances, result in a building that exceeds the maximum building density permitted by zoning. Therefore, a change in the zoning regulations was necessary to allow an owner the option to enclose an open arcade.
The Office of Planning noted that “arcades have long been considered to be urban amenities. They provide shelter from hot sun, rain and snow, extend the width of the sidewalk, establish a consistent frame for retail shops set back from the street and help to define the base of the building.” The Office of Planning observed that while all of these amenities may occur, it’s often at the expense of enhancing the vitality of the retail function itself. The Office of Planning concluded that successful retail is the key to success for the downtown area to become a vibrant, active, “people” place; and they supported the new zoning amendment in their report to the Zoning Commission.
The Zoning Commission voted to approve the change earlier this year, and the
new regulation became effective on May 7, 2004.
For more information, e-mail Christopher H. Collins at
christopher.collins@hklaw.com or call toll free, 1-888-688-8500