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An Urbanist Mecca: CityCenterDC won’t have bank branches, which planners dislike anyway. (Darrow Montgomery)

In early April, the city’s development mucketymucks gathered at 10th and H streets NW to celebrate the official start of something that was nearly two decades in the making: Construction on CityCenterDC, a massive residential and retail project on the site of the old convention center. It was one of the first truly hot spring days, and an array of sweets frosted with CityCenterDC’s logo sat melting as Mayor Vince Gray heralded the “last piece of the puzzle” that would help complete D.C.’s “living downtown.”

There were more than the usual dignitaries sweating up front on the dais. Along with politicos, developers, and construction executives, the group was joined by representatives of the project’s new majority owners: Mohammed bin Ali Al Hedfa, CEO of Qatari Diar, the real estate investment arm of the Persian Gulf petro-state of Qatar. The deal took most in attendance at the groundbreaking by surprise, given that the $700 million undertaking is by far the largest move on D.C. real estate by a sovereign entity other than the U.S. itself.

Qatari Diar isn’t like most other foreign investors, though. The District found that out months later, when The New York Times reported that the development would have to conform to Islamic law, known as Shariah, which prohibits the charging of interest (that’s why the Qataris’ $620 million contribution was all equity, not a loan) or investment in property that would sell pork, alcohol, or tobacco. A strict reading of the rules would also prohibit movie theaters, casinos, strip clubs, and hotels.

Naturally, that sent a shockwave through the right-wing blogosphere, raising fears of Islamist influence taking root blocks from the White House. Other than Manhattan’s World Trade Center*, CityCenterDC is the biggest construction project underway in any American downtown at the moment, and Qatar’s first investment anywhere in the United States. “This is indeed a form of Islamic imperialism to impose Shariah restrictions on our way of life,” wrote the Center for Security Policy. “City lands and tax abatements used to prohibit bars, liquor and infidel banks?” asked the popular conservative blog Atlas Shrugs (the project actually got no tax incentives). “And this hasn’t created a firestorm?”

You didn’t have to be an anti-Muslim paranoiac to have misgivings about the new rules: Although banks have never been an asset for street life, bars are an integral part of the living downtown Gray was talking about, putting eyes on the street even late at night.

There’s no need for an anti-Shariah secular jihad, though. Because of how Islamic finance has adapted to Western markets—and how CityCenterDC had planned to operate all along—Shariah strictures won’t make the consumer experience any different than if the investor had been true-blue American. Besides, we don’t have much choice. While U.S. investors stay skittish, “Shariah funds” backed by states like Saudi Arabia, Oman, and Kuwait are some of the fastest-growing sources of cash for development in U.S. markets and abroad. If D.C. got cold feet, Arab investors would be more than happy to go somewhere else. District real estate may be doing better than elsewhere, but does turning down the chance at massive investments really make sense?

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D.C. already has a ton of foreign money flowing into real estate, and when the investments don’t bring up Mideast geopolitics and vague notions of a clash of civilizations, it’s usually considered a good thing. The District is just behind New York on the Association of Foreign Investors in Real Estate’s survey of their global membership’s preferred destinations for capital investment. Remote funders still think U.S. assets—and particularly those in a government-stabilized market like D.C.—are the safest homes for their dollars.

In downtown D.C., dozens of buildings are owned, at least in part, by non-Americans. Columbia Square, at 555 13th St. NW, is largely owned by a German insurance company. Next door, 600 13th St. NW belongs to Union Investment, also based in Germany. Japanese conglomerate Sumitomo bought 1750 K St. NW in 2008. The Homer Building, at 601 13th St. NW, is mostly owned by the Investa Property Group out of Australia. 2099 Pennsylvania Ave. NW is owned by Vico Capital, a British company. The list goes on and on.

But while those groups will often reserve the right to approve tenants, they’re usually vetted for financial viability, not conformance with religious law.

As it happens, developer Hines’ plans were already in accordance with the Qataris’ requirements. A 2006 leasing plan drawn up between Hines and the District—way before the Middle East was involved—includes five restaurants, 14 café-type establishments, and 10 “market food” sellers. It didn’t include a casino, liquor stores, or bank branches, which Hines took the progressive step of excluding; city planners think banks kill street life, because they’re only open during the day and draw little foot traffic, but it’s unusual for a developer to forego such a reliable and lucrative tenant. Hines did plan for a “wine store” and “wine bar/café,” but those are apparently kosher with the Qataris (or halal, rather).

“In our plan terminology, a wine store or wine bar/café would serve food or sell specialty foods,” Hines Senior Vice President Bill Alsup says by email. “A stand-alone bar or liquor store would not sell food and would not be consistent with the lively, enjoyable, and neighborhood-friendly shopping and living environment we are trying to create.”

But the major reason there’s apparently no difference between what the Qataris wanted and what Hines would have done anyway is the Qataris’ flexibility. All restaurants will be able to serve alcohol and pork. There’s no prohibition on leasing to, say, a lingerie store. According to Alsup, the leasing guidelines don’t even explicitly prevent bringing in a bank branch if Hines believes it would enhance the project down the road; several ATMs are already planned. You might call it “Shariah-lite.”

Such flexibility is possible because of the decentralized nature of Islam. Though there’s an international body that standardizes Islamic financial practices, there are no hard and fast rules when it comes to deciding what sort of tenants Shariah truly bans and what an investor can probably get away with. Funds will usually consult an ulama, or expert in Islamic law, to figure out what’s appropriate. But they can always get a second opinion, and clever lawyers will help a fund adhere to their religious obligations without putting a damper on their profitability. For example: Mini-bars in hotel rooms financed by Shariah money have been rationalized by saying that customers choose to serve themselves alcohol; nobody’s forcing it upon them.

“There are always ways to make Shariah flaws more flexible,” says one broker, who didn’t want to be named, discussing ways around religious guidelines. “At the end of the day, it’s almost become a non-issue.”

Even if the Qataris did demand changes, there’s no reason to worry about the church-state implications of having tenants in a building on public land that’s been leased to a developer with religious restrictions. According to Art Spitzer of the local American Civil Liberties Union, as long as no class of individuals is being discriminated against, there’s no constitutional problem.

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No matter how you feel about an Islamic state owning a large chunk of downtown, at the moment, Qatar and Kuwait are the entities with the biggest wads of cash to invest in international real estate. They also have the biggest incentive to buy American: Much of the oil they sell is paid for in dollars, which are easy to turn into U.S. assets. And there are a lot of projects in the District in search of capital infusions.

Could the sheiks pay for redevelopment of the McMillan Sand Filtration Plant, for example? How about Poplar Point or Hill East, which are indefinitely delayed due to market conditions? Perhaps they could underwrite big infrastructure needs, like the rest of a 37-mile streetcar system, which costs $40 million per mile to build. If the District could structure a deal to create a long-term revenue stream, like ticket fares or increased taxes from neighboring properties, the streetcar could be an attractive investment.

But those projects might not have the prestige necessary to attract that Mideast cash. Since they can’t charge interest, the Qataris and those like them are looking for trophy assets and trophy partners with a guaranteed, long-term yield. Thus far, Qatari Diar’s international forays have been largely confined to London, where they’re funding an 80-story skyscraper called the Shard of Glass and the redevelopment of an upmarket neighborhood with such a high profile that Prince William got involved.

In contrast, D.C.’s fringe neighborhoods are on nobody’s international radar screen. After CityCenterDC, there are a couple other big pieces of downtown in the pipeline: Massive buildings planned for the air rights over I-395 and Union Station rail yard, each of which will cost hundreds of millions of dollars. According to Louis Dreyfus Property Group’ Robert Braunochler, the I-395 project already has a domestic financing partner. The Union Station project is still looking for someone to foot the bill, and developer Akridge isn’t ruling anybody out at this point. But Akridge, based in D.C., might not be big enough for Middle Eastern funds to partner with—Hines and Archstone, with their global reach and reputation, are the kinds of entities that sovereign wealth funds prefer.

The best thing the District could do to attract more millions, says financial consultant Roger Staiger, is advertise these potential investments as “socially conscious,” and make it easy for deals to comply with religious law. So far, the U.S. has been reluctant to do that, allowing Western Europe and Asia to mop up much of the available oil money. But the Qataris say they want CityCenterDC to be the first of many projects here.

“We’re on their radar,” says Downtown Business Improvement District director Richard Bradley. “Can we develop a product that they want?”     CP

Visit the Housing Complex blog every day at washingtoncitypaper.com/blogs/housingcomplex. Got a real-estate tip? Send suggestions to ldepillis@washingtoncitypaper.com.

* Edited to reflect the fact that the World Trade Center is a larger project.