The profit-sharing agreement proposed between the city and the developers of its Metro Center redevelopment project is similar to a financing method dropped three years ago by Metro officials after they found it unworkable for developments atop other subway stations.
The Metro Center proposal provides for developers Oliver T. Carr and Theodore R. Hagans to pay the city 25 percent of any income from the project (up to a total of $22.6 million) that remains after they pay all operating expenses and take a 15 percent profit on their investment. It marks the first time that city officials have agreed to accept some of a project's future profits as part of the payment for a piece of city-owned land.
Until 1980, Metro, which operates the area's bus and subway system, took a percentage of the profits generated by projects built on its land on top of or beside subway stations.
But the transit agency changed its policy after finding that developers wanted to deduct so many expenses, thus reducing their profit and Metro's share, that "the arguments became endless" between Metro officials and the businessmen, said M. Richard Miller, Metro development manager.
Even though Metro officials had the right to audit the developers' books, Miller said: "There was so much controversy over what was a reasonable deduction. So much became debatable when you tried to go from the gross income to the net."
City housing director James E. Clay said he did not think that the city would run into this kind of a problem with Carr and Hagans, adding: "You have to assume that your partners are interested in the same thing you are interested in: making money. You must assume you are working with a developer who is a prudent business manager and he will not take unbusinesslike means in order not to share with the District."
Phillip Carr, spokesman for the Carr Co., which generally manages its own projects, said that some disagreement could arise over expenses.
"I can understand how the problems came up before" with Metro, he said. "I think there will be those types of problems in the future, but we don't anticipate a problem until we have it."
Washington's urban renewal agency, which must approve the Metro Center agreement before it can take effect, has set a public hearing on the proposal for April 19.
To avoid disagreements with developers, Metro officials in 1980 changed the system by which they charge for projects on Metro-owned land. They now determine how much income a project must earn to pay its normal operating expenses plus a certain profit, then take a percentage of the gross income that exceeds that point.
For example, Metro has leased land at the 14th and I Street subway entrance to a group of developers who are completing a large office building. The transit agency will earn 10 percent of any gross income over $4 million that the building generates each year.
Metro has similar agreements with developers at three other Metro stations, Bethesda, Farragut North (Connecticut and L streets NW) and Van Ness, and currently is earning $1.3 million a year.
The transit agency usually gives developers 50-year leases rather than sell its land, because Metro wants to retain sufficient control to prevent interference with the subway's operation or its entrances.
District officials have preferred to sell urban renewal property, partly to raise money needed to repay federal dollars lent to Washington for its urban renewal program.
On the Metro Center project, the developers will buy the land in parcels over the next few years. They will pay a total of approximately $14.5 million down and $14.5 million in long-term notes, in addition to the $22.6 million paid as a 25 percent share once the office buildings and hotel complex planned for the site begin to show profits.
If the project does not show a profit, the city will not receive this $22.6 million. It is not clear when the project may show a profit.
A Hecht's department store is planned for one of the parcels, but the city would not share in those profits under the proposed accord.
The payments guaranteed by the proposal are substantially smaller than the $37 million in cash that Carr and Hagans had offered to pay for the land last year. The city had rejected the offer and had demanded $51.6 million for the property.
The Metro Center agreement was negotiated last November by James O. Gibson, then city planning director, and subsequently was modified by Ivanhoe Donaldson, deputy mayor for economic development.
Gibson said that, in the negotiations, the city's "overriding concern was the loss of Hecht's and those jobs, and not to lose money for the city." During the negotiations on the Metro Center, Hecht's had threatened to leave Washington unless the disagreements were settled.
Donaldson said in a letter to the RLA that usually the city would "delay sale until the market improves," but "in the case of Metro Center the administration concluded that other public benefits warranted the non-standard terms of the payment."
Donaldson said that the proposed agreement is "fiscally prudent, as well as capable of being financed in these difficult economic times."