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When planning started in 2007, Sheridan Station was a glittering vision of progress for the historic, but dilapidated, neighborhood of Anacostia.

A former public housing complex off Suitland Parkway, Sheridan had gotten special federal funds to become a mixed-income community, with residents of the demolished old buildings renting apartments next to buyers of brand-new condos. Developer William C. Smith had already covered swaths of the city east of the Anacostia River with no-frills rentals, but for Sheridan, it brought on a name-brand architect to design three-story, all-brick townhouses replicating some of the little details—cornices, columns, porch lanterns—that scream Logan Circle, not downtrodden neighborhood.

W.C. Smith finished a big chunk of the rentals, and 32 of the planned 165 condos and townhouses. But selling the latter was unexpectedly difficult. Home values nearby have sunk by an average of $100,000 since the financial collapse, meaning appraisals came in lower than expected. Banks wouldn’t lend enough to cover purchase prices, in the high $200,000s, which meant the developer couldn’t sell condos for enough money to cover construction costs and subsidize the affordable rentals.

Now, W.C. Smith says it can’t build more than 80 units to sell, and will have to convert the remaining 85 into rentals or risk losing $4 million in federal funds. Instead of being split half-and-half between owners and renters, Sheridan Station could be about 25 percent owners, 75 percent renters—mirroring the ratio of Ward 8 as a whole. That’s unwelcome news to many Anacostia residents, who desperately want to bring in more people who’ll buy houses and spend money on them.

“The whole point of community support was to create more homeownership opportunities,” says Gregg Justice, who sits on Advisory Neighborhood Commission 8A, which just asked the Zoning Commission to reject W.C. Smith’s request to change its plan. “What we’re trying to get away from is supplying all the affordable housing for the entire city. You want to put all the low-income housing in one ward, and you expect for conditions to change?”

The problem Sheridan Station faces is likely to come up again and again in Anacostia. For-sale homes are held hostage by the low appraisals of the short sales, foreclosures, and abandoned homes all around them; Four Points Development’s long-planned condo project at 13th and W streets SE has stalled over the same issue. That means that no matter how many people want to pay for new homes near the Anacostia Metro station, across the bridge from Nationals Stadium, or on a planned streetcar line—factors that make this neighborhood perhaps the most attractive of any east of the river—builders won’t be able to meet the demand. And without higher-income buyers, it’s hard to make a case for the kind of stores and restaurants that everybody says they want.

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Just how low is the value of Anacostia’s existing housing stock? Last year, a consultant commissioned by the city found that 15.5 percent of houses in greater Anacostia (not just the historic district) were vacant—many of which are in poor condition and saddled with tax debt. Sales volume has decreased steadily since 2005. Forty-two properties sold in Anacostia’s ZIP code in the first quarter of 2012, with prices hovering in the mid-$100,000 range, which is less than half the city’s average. You can find a cheap place to live there, but may not want to renovate if you ever plan to sell: Low appraisals mean you may not be able to recoup as much of your investment as you could in a healthier neighborhood.

The appraisals are an unintended consequence of measures taken to stave off another foreclosure crisis. In 2010, federal regulators forbade appraisers from communicating on home sales with banks, realtors, or developers, who until then had all coordinated to make deals work to sell homes to people who probably couldn’t really afford them. Now, besides suggesting a few similar homes the appraiser might have overlooked, they can’t make a case that a neighborhood should be worth more on paper.

“A lot of appraisers went, ‘Oh, I’m going to be the most conservative appraiser on the planet,’” says Lamont Green, a branch manager with mortgage broker NFM Lending. “You’ve created a perfect storm to create low valuations. They’re getting what they asked for.”

The foreclosed and vacant units create good deals for investors, who Darrin Davis of Anacostia River Realty says account for about 60 percent of sales in the area. The investors pay bargain-basement prices, which also depresses values. But even if they’re just looking to make a buck off the neighborhood’s troubles, at least they’re making the units livable and renting them out. Population, no matter what income level, is important: No retail business wants to locate in an area that loses people every year. Same goes for developers.

“That, to me, is the biggest impediment,” says Brian Jackson, a vice president with EYA, which specializes in building high-quality townhouses in Metro-accessible neighborhoods. “From a developer’s perspective, and the investor’s perspective, when you look at a lot of vacancy, you wonder if there’s a floor of how low the price can go. You could lose a whole lot of money.” Of course, that applies to individual homebuyers too, which creates a cycle that’s hard to break.

The District Department of Housing and Community Development has picked up a handful of vacant properties in the neighborhood, planning to auction them off to developers to get someone living in them. A federal grant has also allowed the agency to offer more down payment assistance for home purchases in Anacostia. But that money is almost gone, and the District hasn’t stepped up to fully replace it.

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Is there still hope for Sheridan Station to get some new residents into the area? Last Sunday, streets through the half-built neighborhood were lined with new-looking cars, with would-be homebuyers tromping through model units. One family was renting in Arlington after relocating from the New York area, and knew nothing of Anacostia’s reputation—they were just looking for an “up-and-coming” neighborhood on a Metro line. Printouts of an article announcing the eventual arrival of a Busboys & Poets fueled their optimism.

The most promising buyers are those with no prejudice against neighborhoods east of the river, and those with a deep connection to it. Darryl Harris grew up in Anacostia, and is looking to relocate his environmental-services business to the neighborhood as well as buy a place to live nearby. It’s not just the real estate, though.

“I don’t want to put $300,000 into a house and look out the window and see old apartment buildings. I don’t just live here. I live everywhere,” Harris says, gesturing widely around him. “You can’t just throw this into the mix and not fix the old infrastructure around it.”

Photo by Darrow Montgomery

Got a real-estate tip? Send suggestions to ldepillis@washingtoncitypaper.com. Or call (202) 650-6928.