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Real Estate Legal Environment
Group Project:
Making Use of Commercial with Multi-Use Conversions
Instructor Name: Professor Erin Fitzsimmons
Section Number: BU.132.615.R1
Student Name: Michael T. Cagle, Silvanna Valencia, Junxi Zhong, Lida Zeng
Date of Submission: December 13, 2023
Making Use of Commercial with Mul6-Use Conversions
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Introduction
In March 2020, a global pandemic required countries with advanced economies to adopt
social distancing policies forever changing the way we conduct business. Commuting to large
office parking, the conduct of staff meetings with dozens of employees gathered around the
conference room table, and the team collaboration session at a nearby cubicle seem to be
antiquated. Although the number of workers teleworking at the start of the pandemic due to
COVID-19 factors has decreased from 35% to 5% in September 2022, municipalities recognize
that the lack of diversity in building usage can result in reduced tax revenues and a locally
depressed market if a market sector experiences a downturn. (Bureau of Labor Statistics, 2023)
Meanwhile the real estate industry sees low supply and high demand pressures creating elevated
valuations and slowing sales. People looking for a home, new or used, were suddenly unable to
find suitable accommodations. The Federal government recognized the national need and
announced support to the conversion of high-vacancy commercial buildings to residential use
new financing efforts, technical assistance, and sale of federal properties. The Federal focus is to
create residential units that are affordable, energy efficient, near transit and good jobs, and
reduce greenhouse gas emissions. (The White House , 2023) With favorable market conditions,
Canopy saw an opportunity to delve into this development. This paper will detail the selected
project, identify legal issues in the development process, layout the project timeline, and
Canopy’s approach going forward.
Project Conception
Canopy conducted market research for commercial properties in the Washington DC
metropolitan area suitable to rehab and conversion into residential or mixed-use development.
Properties were required to be located near public transit hubs such as Metro and commuter rail
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centers; short distance from private and public centers of business, convention centers and hotels
to facilitate ease of access to major area employers, workers, and tourists. These factors
encourage the establishment of a variety of retail, entertainment, and personal service
establishments to meet the needs of the surrounding area’s residents, workers, and visitors
stimulating greater economic growth. Mixed-use buildings have a strong ability to adapt to
changing social and economic environments mitigating risk to owners.
During the conception phase, Canopy analyzed its portfolio of properties with low
occupancy rates to see where the office-to-residential conversion concept could prove successful.
The chosen property, 700 11th Street NW, was selected due to its age, size, immediate proximity
to metro access, and short distance to main centers of attraction, such as the Capital One Arena.
Completed in 1992, 700 11th Street NW is situated on a .86-acre site bounded by 11th, G and
12th Streets, directly above the Metro Center Metrorail station. This station provides public
transit via the Red, Orange, Blue and Silver Metrorail lines. The 13-story building is one block
from the City Center DC mixed-use development, two blocks from the Walter E. Washington
Convention Center and the new Marriott Marquis Hotel and four blocks from the White House.
(BusinessWire, 2023) The property rests squarely in the D-7 zone which is designated to permit
high-density commercial development and reinforce Pennsylvania Avenue’s unique role as a
physical and symbolic link between the White House and the US Capitol. (District of Columbia
Office of Zoning, 2023)
Canopy’s financial and delivery position in this project is strengthened by the fact that
there is no need to acquire the property. The acquisition alone would present legal implications,
such as the drafting or detailed review of a Purchase and Sales Agreement and the review of the
Making Use of Commercial with Mul6-Use Conversions
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property title report. In addition, no acquisition funding is needed, leaving Canopy only pursuing
financing for the construction and then the permanent loan once the project is completed.
Consequently, ownership of the property will allow Canopy to submit the applications for
necessary land use approvals without extensive documentation of site control.
Pre-development
Washington DC has a unique governance structure. The US Congress has direct
authority over the city’s budget and reviews all legislation before it can become law. In 1973,
the District of Columbia Self-Government and Governmental Reorganization Act delegated
many powers providing the city three branches of government which operate like most state and
local governments. While the conversion of property from commercial to mixed use is not
novel, the effort requires additional approvals and coordination with the District of Columbia. In
this case, the DC Office of Planning, the Zoning Commission and Board of Zoning Adjustment,
Department of Consumer and Regulatory Affairs, and the DC Council have stake in the approval
and permitting process.
700 11th Street NW is not in an area zoned for Mixed-Use. It is in the Downtown zoning
area designed for high density commercial use. The District of Columbia’s Mixed-Use zones are
intended to promote facilities for housing, shopping, and business needs that include residential,
office, service, and employment centers. Each of the 15 Mixed-Use zones aims to achieve a
balance of uses conducive to a higher quality of life and environment for residents, businesses,
employees, and institutions in the zone. (District of Columbia Office of Zoning, 2023) Most
Mixed-Use zones are located near the Potomac and Anacostia waterfronts. However, Dupont
Circle, Georgetown, and Thomas Circle are zoned as Mixed-Use opening the possibility to the
inclusion of other areas of the city.
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The legal implications of rezoning requests and zoning variances encountered during the
conception phase would typically take several months or even years to be finalized before the
project can break ground. Both the Zoning Commission and Board of Zoning Adjustment
regulate zoning ordinances and will be the first point of contact for modifying zone requirements
for this project. If rezoning efforts are denied by the Board of Zoning Adjustment, the DC
Office of Planning and the DC City Council are appropriate avenues for appeal. Appeal to the
DC Superior Court would be contingent on the reason for the denied rezoning request. To
address the matter in the Federal court system there must be a Federal issue. However, the US
Supreme Court has held that zoning ordinances usually fall within the legitimate police power of
local governments. (Justia, 2023)
The legal implications of rezoning requests and zoning variances encountered during the
conception phase would typically take several months or even years to be finalized before the
project can break ground. However, the economic gap created by mass vacancies will likely
result in an environment of better cooperation between the approving authorities and the
developers. Additionally, the renovation of the building will require the implementation of
municipal building codes. Commercial, office, and residential construction have different
standards creating a myriad of requirements for a contractor to comply with. In addition, 700
11th Street NW is a Leadership in Energy and Environmental Design (LEED) certified
facility. Maintaining or improving on this building efficiency standard is essential for project
funding and government incentives. The Department of Buildings is responsible for regulating
construction activity in the District of Columbia and protects the safety of residents, businesses,
and visitors and advance the development of the built environment through permitting,
inspections, and code enforcement. (Government of the District of Columbia, 2023)
Making Use of Commercial with Mul6-Use Conversions
Frequent interaction with the planning approval and inspections divisions will help
preclude costly errors and future. These divisions in conjunction with the Green Building
Division are important to the day-to-day advancement of construction objectives and tax
incentive financing. One of the documents carrying numerous legal implications is the Revised
Preliminary Program. Canopy will use this document to shop for financing and, therefore, will
need extensive review to understand its legally binding clauses. Additionally, appropriate
marking and distribution to protect its content should be considered. The resulting financing
commitment documents will also need to be fully vetted by the legal team.
Once in operation businesses will need to be certified and licensed to operate. The sale
of prepared food and alcohol are two immediate factors. Residences will need to be certified as
habitable. There is an implicit partnership with the Washington DC government and the
developer. Through zoning and land use controls, the local government determines what gets
built where and, through the local jurisdiction’s adopted building code, how it gets built. In
many ways we the developer manage the speed of the project and thus the time horizon for
return on investment. We must look for ways to partner with the local government to expedite
the process of grants and finance incentives, rezoning, permitting and inspections.
(Smirniotopoulos, 2016)
As Canopy moves into assembling the development team, multiple legal documents,
such as contracts, the scope of work docs, payment schedules, and liability limitation
agreements, will have to be drafted and reviewed. The entity under which Canopy will develop
700 11th Street NW must also be legally formed. Canopy will likely need a communication and
public relations services company to address marketing and public relations. A legal review of
the agency agreement will be necessary.
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The preliminary infrastructure assessment will guide the scope of utility improvements
necessary for the office-to-residential conversion. The legal team will have to draft a
Memorandum of Understanding detailing both parties’ commitment to delivering the needed
upgrades to support the increased use. Environmental concerns associated with the increased use
of the dwelling, which will likely result in additional sewage, carbon footprint, and parking
requirements, will have to be addressed to ensure that Canopy complies with local and federal
environmental laws.
Construction
Canopy will likely encounter most legal challenges during the construction phase.
Construction will start once due diligence has been performed, and the site is thoroughly
evaluated. The demolition process always uncovers issues that couldn’t have been fully planned
for but that should have been accounted for through financial and timeline contingencies. This
project will require extensive retrofitting of existing systems to reach code compliance for
residential dwellings. Hiring a third party to perform additional inspections should prove to be
very beneficial. Such an agreement will need to be vetted by Canopy’s legal team to ensure the
appropriate liabilities are in place.
Any agreement and contract made with general contractors and subcontractors,
including change orders, should be in writing and vetted by the legal team. The schematic
designs from the engineering and design teams will be crucial in finding creative space
allocation solutions that meet residential code requirements. Windows, ventilation, and egress
compliance are just a few aspects that will need careful consideration when repurposing office
spaces into residential units. The contracts and scope of work for these teams should include very
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detailed deliverables and unlimited revisions to address code compliance and aesthetics
challenges. These documents also need to be closely reviewed as the project advances to
ensure all parties are performing according to the stipulated agreement.
Stabilization
In the completion and stabilization phase, the legal team must deal with potential conflict
resolutions and contract close-outs. Once Canopy receives the Certificate of Occupancy it will be
ready to transfer responsibility to the property management team responsible for the leasing.
The agreement with the property manager and lease template documents will require legal
reviews. In addition, Canopy must secure a permanent loan since Canopy plans to keep this
property in its portfolio. This set of commitment documents, such as liens and promissory notes,
will also present legal implications and must be thoroughly reviewed in advance.
Conclusion
The conversion from office to residential units will no doubt present challenges that
cannot be completely predicted since this is technically a new type of development. The project
has many aspects that make it feasible, financially sound, semi-predictable from a timeline
perspective, and achievable because many of the hurdles encountered during the predevelopment process is out of the way since the footprint of the building is already in place.
There will be little horizontal construction, limiting the time spent preparing the site for
occupancy. Because the challenges and risks are primarily associated with zoning, code
compliance, and inspection approvals, we expect the biggest legal hurdles to come to light early
in the construction process. Multifamily rentals are generally reliable income-producing assets,
more so when the location and building conditions are adequate and this particular asset is in a
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prime location. In addition, Canopy should plan to seek tax incentives by allocating a good
percentage of affordable dwelling units to the mix.
As discussed earlier, the COVID-19 pandemic transformed how we, as a society,
interpret the meaning of “office” and “going to work.” The economic impact on surrounding.
businesses and even on transportation ridership has left many cities and municipalities with an
appetite for creative solutions, and the District of Columbia is no exception. Government and
industry leaders are open to exploring options. The timing is as good as ever for developers to
push the envelope on previously questionable projects, which were mainly seen as such because
of the excessive amount of red tape, regulations, approval delays, and the costs associated with
required studies. Approving authorities are primed to embrace these types of projects and work
with the developers to revitalize office spaces and address the housing shortage simultaneously.
We recommend moving forward with the project, as most risks can be managed through clear
deliverables with contractors and finance and timeline-adjustment contingencies.
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References
1. Bureau of Labor Statistics. (2023, December 8). Monthly share of workers who worked from
home due to the COVID-19 pandemic in the United States from May 2020 to September
2022. Retrieved from bls.gov: https://www-statistacom.proxy1.library.jhu.edu/statistics/1261486/us-monthly-share-workers-teleworkingcovid-19/
2. BusinessWire. (2023, Decmber 4). Businesswire. Retrieved from HFF Arranges $135 Million
Refinancing for 700 11th Street NW in Washington, D.C. :
https://www.businesswire.com/news/home/20160201006218/en/HFF-Arranges-135Million-Refinancing-for-700-11th-Street-NW-in-WashingtonD.C.?itid=lk_inline_enhanced-template
3. Clark, D. M. (2023, November 15). Akerman. Retrieved from Washington, D.C. to Provide
Tax Abatements for Conversions to Residential Properties:
https://www.akerman.com/en/perspectives/washington-dc-to-provide-tax-abatements-forconversions-to-residential-properties.html?itid=lk_inline_enhanced-template
4. District of Columbia Office of Zoning. (2023, December 1). Downtown Zones. Retrieved
from Zoning Handbook A guide to the official Zoning Regulations of: 2016:
https://handbook.dcoz.dc.gov/pages/downtown-d-zones#D-7
5. Government of the District of Columbia. (2023, December 12). About: DOB Divisions .
Retrieved from DC Department of Buildings: https://dob.dc.gov/page/dob-divisions
6. Justia. (2023, December 4). Property Rights & Land Use Supreme Court Cases . Retrieved
from Justia: https://supreme.justia.com/cases-by-topic/property-rights-land-use/
7. Smirniotopoulos, P. E. (2016). Real Estate Law. Routledge.
8. The White House. (2023, November 16). FACT SHEET: Biden-Harris Administration Takes
Action to Create More Affordable Housing by Converting Commercial Properties to
Residential Use . Retrieved from Whitehouse.gov: https://www.whitehouse.gov/briefingroom/statements-releases/2023/10/27/fact-sheet-biden-harris-administration-takes-actionto-create-more-affordable-housing-by-converting-commercial-properties-to-residentialuse/
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