Property Group Partners and Washington Reach Agreement

The District’s Center Leg Freeway, the scooped-out limb of Interstate 395 that splits downtown D.C., could be decked over as soon as 2013 and built out three years later with swift movement on permits, environmental studies and land acquisition, the developer and District leaders say.

Louis Dreyfus Property Group and Mayor Adrian Fenty’s administration are finalizing terms on the purchase price for a sliver of District-owned land around the freeway and the air rights above, and perhaps just as important, how the site bounded by Massachusetts Avenue, Second, Third and E streets NW will be assessed for the purpose of property taxes.

The deal calls for a payment in lieu of taxes, or PILOT, through which Louis Dreyfus would remit a negotiated fee — rather than real estate taxes based on an Office of Tax and Revenue assessment — for the air rights over the highway until the freeway deck is completed.

“We believe the use of a PILOT is a creative way to assure a fair taxation of this real estate asset during construction,” Robert Braunohler, Louis Dreyfus regional vice president, told a D.C. Council committee during a recent public hearing.

Under the arrangement, PILOT payments would accrue until Louis Dreyfus requests its first vertical building permit, at which point all payments would be due, minus $2.4 million to offset 50 affordable housing units. Each building on the deck, once the shell is finished, would be taxed like any other D.C. real estate.

John Ross, senior adviser in the office of the chief financial officer, estimated the city will lose roughly $5.1 million in the PILOT, because the deal as proposed “will result in payments to the District that are significantly less than what would otherwise be paid in real property taxes.”

The 2.1 million-square-foot development will be mostly Class A office space, with some residential and retail. F and G streets NW, which stop suddenly on either side of the freeway, will be reconnected over it, though the G Street extension will be open only to pedestrians.

“There is no more important project because it will undo much of the damage caused by the construction of this semi-freeway going right through downtown,” said Councilman Jack Evans, D-Ward 2. “It really erected a division.”

The District has wanted to build above I-395 since 1988, when then-Mayor Marion Barry turned over development rights to Conrad Monts’ Washington Development Group. D.C. later sued to regain control and lost in court, a judgment that cost the city more than $8 million.

The price for the air rights has not been finalized, officials said, and the amount of the initial PILOT payment won’t be determined until closing. Legislation authorizing disposition of the air rights to Louis Dreyfus, and establishing the PILOT, is currently before the council.

The District and the developer are expected to go to the Federal Highway Administration for its approval of the deck this summer. Then the environmental impact statement process begins. Officials will evaluate issues such as what effect decking over a highway will have on vehicle emissions.

Braunohler said the plan is to finish the deck by 2013 and build out by 2016. Louis Dreyfus is partnering with The Jarvis Co. LLC on the project.

The air rights disposition is a major step in the effort to “re-knit the city’s grid” and eliminate “the scar downtown,” said Councilman Tommy Wells, D-Ward 6, who represents the project area.