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It may be a gateway destination, but DC has been affected by slowing investment sales like just about every other city. So the area was thrilled when Mayor Adrian Fenty announced that the District and Forest City Washington are forming a public-private partnership to build a $42 million waterfront park along the Anacostia River. Not only is it a new project — but it is one that is receiving a significant boost from the local government.

Public-private real estate development has always been a complex affair, with the participants having to balance competing goals, such as job creation, profit motivation and tax payer approval, as they build the capital stack. Still, though, this give-and-take has usually been worth it for developers over the last several years as cities, flush with funds, happily invested in their local landscape. That DC, which last quarter began running a deficit, is still investing in these projects is a good sign, observers say. Forest City will begin construction on the 5.5-acre park, using $42 million Payment-in-Lieu-of-Taxes funding.

Unfortunately, though, the project may well prove to be more the exception than the rule going forward – and not just for DC, but for most cities. Simply put, these projects are suffering from twin forces: a dwindling tax base thanks to recessionary pressures, and the tight credit market.

“In general local governments have less revenue to spend, which cuts margins for developers even further,” says Debra Yogodzinski, a partner with Arent Fox, who along with several other colleagues at the firm, is an expert in this particular strategy. “Also, the government will not have the revenue to devote to infrastructure as it should, which will further add to the crunch,” she tells GlobeSt.com.

The private lending sector, as well, is experiencing constraints, as anyone who has tried to get funding for a real estate project knows, Edward Rogers, partner, with Arent Fox, tells GlobeSt.com. “Private sector lenders to these projects have put into place more stringent underwriting requirements, which will likely remain even after the economy recovers. The result is that developers will not get as high an amount of financing as they might have previously. So developers have to have more skin in the game.”

As a result right now a lot of projects are in suspended animation from a financing perspective, says Yogodzinski. “One client, for instance, has a pre-development loan that is coming due and had hoped to get construction financing in place,” she says. The client, which has a six-month extension on his loan, plans to take that because there are no good options in the construction finance market right now.

There is so much volatility in the market that if a developer can hold off for nine months to a year he will do so, Ellen McCarthy, Land Use & Planning Director with Arent Fox, tells GlobeSt.com. “Developers are thinking about leasing cycles too right now – the last thing they want to do is deliver a project into a low-demand market where they will be forced to cut deals with prospective tenants.”

That all said, many projects still in developers’ pipelines are salvageable, say some in the industry. “If you have a strategic land position, restructuring of existing deals is a focus among lenders right now,” one consultant in the industry tells GlobeSt.com. “You can reposition some projects – we have found construction lenders that are willing to take a loan vertical, for instance, say turn a multifamily component into purely senior housing.”

Local governments are also proving to be more flexible, this person continues, will to renegotiate permitting, for instance, especially as few municipalities are issuing bonds right now. “Government officials don’t want to be seen as rejecting projects that could increase the tax base – after all they have to justify their existence on the payroll at some point.”

It is also important to keep in mind that there are other sources of government money available besides local financing, ElChino Martin, counsel with Arent Fox, tells GlobeSt.com. “Municipalities get money through federal programs – New Markets Tax Credits, affordable housing tax credits, transportation funds – these will all depend on the new presidential administration’s budget.” As local revenues continue to decline, he adds, “those sources of funds will become even more important.”

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