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Prominent Ward 8 power broker Phinis Jones is looking to make an already-pretty-sweet-deal he made with the District even sweeter.
Through his firm, Old Congress Heights School Redevelopment Company LLC, Jones has leased the District-owned space at 3100 Martin Luther King Jr. Ave. SE, which he agreed to develop and renovate, since 2008. According to an amendment to the original 65-year lease, the District agreed to waive Jones’ rent payments for seven-and-a-half years, to the tune of about a total of $1 million, starting in 2018.
The D.C. Council is set to vote Tuesday on a proposed sublease between Jones’ LLC and the University of the District of Columbia. Under the proposed 15-year agreement, UDC would pay the LLC about $3 million in rent and operating costs in the first year. Those payments would increase every year of the lease, to about $5 million in the final year.
During a public roundtable held the morning of July 5, Council Chairman Phil Mendelson raised concerns over how much Jones aims to charge the District to lease its own property.
“From the standpoint of a government asset, we’re paying substantially more than your cost for a government asset based on a deal that was made 10 years ago,” Mendelson said.
Flanked by his business partners Monica Ray and Andy Botticello, Jones explained that the rate he’s charging is actually more than reasonable. Based on an appraisal he had completed in 2017, he’s charging the District less than the market rate, he said.
“We started with the university with a higher rate and negotiated because they were purchasing another building and they didn’t have the money,” Jones said. “And we actually dropped the rate below the market rate in this case.”
“It’s much more complicated to look at costs and risk and assess whether they’re fair as opposed to what’s the market value of this property,” Botticello added. He told attendees at the roundtable that in the eight years he, Jones, and Ray operated the building, “we’ve had two different tenants go out of business.” The latest tenant, public charter school Democracy Prep, announced in 2018 that it would officially close at the end of the 2018-2019 academic year.
“So there is risk involved with operating this type of property because it’s unusual,” he said. “It’s not the type of building that we can fill up with any tenant out there.”
Ray pointed out that UDC was “well represented” in the negotiations by a brokerage firm and a team of lawyers.
“It’s not like they were in a back room talking to Andy and Phinis,” she said.
Neither Jones nor Ray returned LL’s calls seeking comment.
The UDC Board of Trustees voted in June to approve the proposed sublease, which includes options to purchase the property after six years and 15 years. UDC would use the property to consolidate programs currently spread across three sites: at United Medical Center, at the Shadd campus on East Capitol St. SE, and at the Patricia R. Harris Education Center on Livingston Road SE.
In the decade since Jones and the District inked their original lease agreement, it’s been amended at least five times, including in 2008, twice in 2010, in 2016, and in 2018.
In the first amendment, Jones and the District realized, apparently for the first time, that a restrictive covenant from 1866 requires the land be used for “school purposes … for the free instruction of youth in said County, or a dwelling for one or more teachers, of free schools.”
The 2016 and 2018 amendments show that Jones owed the District $502,000 in unpaid rent, not including late fees. The District then forgave $326,310 of that debt, and Jones repaid the remaining $175,705.
During the oversight hearing last week, Botticello said it costs the LLC more than $1.3 million a year in loan and mortgage payments for the renovations, which were completed in 2011. Renovations to the building cost about $13 million, he said, and construction of an additional structure cost an additional $11 million.
Still Mendelson pushed back, calling the lease “very favorable” to the LLC and pointing to UDC’s financial struggles.
In an interview this week with LL, Mendelson said he expects the sublease to be approved, and adds that UDC and Jones’ LLC are now negotiating for the university to purchase the property for $28 million.