When Dominion Energy announced this month it will demolish its One James River Plaza office building downtown, it remained noncommittal on whether it will move forward with its previously announced plans for a new tower on the site.
That apparent indecision looms large over the financial projections of the proposed Navy Hill development that the company’s CEO is spearheading, potentially determining how much city tax revenue would go toward paying down debt for a new arena that would anchor the massive project.
The utility giant, which this year completed a new 20-story tower next door to the prospective tower site, maintains its office plans are unrelated to Navy Hill, a $1.5 billion proposal touted as the biggest economic development project in city history.
But Navy Hill’s financials – specifically those relating to a proposed tax-increment financing district that would be used to help fund the arena – are based and rely heavily on an assumption that a second Dominion tower will indeed be built, as council members were told at a work session last week.
If the second tower is built, its inclusion in the TIF district would help the city pay down more than $300 million in revenue bonds that the city would float to fund the new arena.
If the tower isn’t built, council members were told, revenues from the TIF district, as projected in its latest iteration, would not generate enough debt service coverage for underwriters to sign off on the bond amount needed for the arena – a $325 million project considered the linchpin for the larger mixed-use development, the rest of which would be funded through private investment.
Dominion submitted plans for the second tower last year, and Navy Hill’s backers have said they based their projections for TIF revenues on those plans having been filed with the city. They also said the projections are based on real estate TIF revenues derived solely from the two Dominion towers, meaning no other new development is factored into the projections beyond new construction for Navy Hill.
Council was told if the second tower is not built, the latest TIF projections for the arena – the 26th set of projections to be tabulated for the project so far – would not work.
“Our analysis that is the basis for this bond financing does not include any development projects other than looking at the planned second tower for Dominion Energy,” Susan Eastridge, one of the lead developers on Navy Hill, told council at the Oct. 14 session.
Eastridge said that, beyond the two towers, the projections also assume a 2 percent assessment growth on properties within the 80-block TIF district that would be driven primarily by new Navy Hill construction, such as the project’s planned 2,000-plus apartments, a new hotel, and hundreds of thousands of square feet of office and retail buildings.
Council members took note, scrutinizing the soundness of a plan that is based on a property improvement that, according to Dominion, remains up in the air.
“There’s a lot predicated on having the second tower come online,” council president Cynthia Newbille said.
The scenario raises questions as to the timing of a decision from Dominion, in light of the filed plans and the review process underway for Navy Hill, which Dominion CEO Tom Farrell and the company have maintained is separate from Dominion. Council member Kristen Larson posed such questions at the meeting.
“Has Dominion made a commitment to this second tower?” Larson asked. “Is the second tower being rebuilt contingent on this plan?
“The new Dominion tower is our highest-assessed property in downtown Richmond, so I assume if the second tower would be built, it would be equal or more than that,” she said. “This is a significant source of revenue that is being put in this TIF and will help fund this project, and I feel like we’re talking around it and we’re not directly addressing it.”
Dominion spokesman Ryan Frazier, in response to questions from BizSense about the decision’s timing, referred to a previous statement he provided after the demolition announcement:
“Our decision on whether or not to move forward with the new tower will be made on our future work place needs in downtown Richmond. Whether we go or not has nothing to do with Navy Hill.”
However the second tower has a lot to do with Navy Hill’s financial plan, the soundness of which could determine whether council signs off on the project.
Towers add to TIF revenues
Both tower sites are within the proposed TIF district, an 80-block area that would stretch between First and 10th streets and between Interstate 95 and the Downtown Expressway. The district was expanded beyond Navy Hill’s original core 10-block project area north of Broad Street to include more taxable buildings, including the two Dominion sites.
Real estate tax revenues from new development and increased assessments in the district would go toward paying off the arena bonds, while taxes on valuation levels of existing property, as of June of this year, would continue to go to the city’s coffers.
With the second tower, along with factors such as projected economic “uplift” from the Navy Hill development, the project’s backers have said the arena debt service – estimated at $620 million over 30 years – could be paid off faster, in 18 to 20 years, potentially bringing that cost down to $495 million at a savings to the city of $125 million.
Paying off the bonds faster also would free up real estate tax revenues that the TIF would otherwise pull from – a portion of the city’s tax base that could then go toward supporting public services, such as schools, roads and public safety.
An analysis last year by Hunden Strategic Partners, a Chicago-based firm that the city commissioned for a third-party review, projects that the 80-block TIF district, with the two Dominion towers, would produce $1.1 billion in total incremental real estate tax revenues over 30 years.
The latest financials for Navy Hill show that, in that time, the two buildings alone would produce $213.7 million in TIF revenue – to be paid by Dominion – that could be used toward debt service on the bonds. That’s assuming the second tower is built by the end of 2022 and taxed at its completed market value – projected at $353.5 million, the same value assigned to the first tower for the 2023 tax year.
TIF revenues for each tower site would be determined based on their city valuations as of June 2019, when projected assessments for the 2020 tax year were sent to property owners. That’s in keeping with a valuation baseline of July 1, 2019, set forth in ordinances that the city rolled out for Navy Hill in August.
600 Canal Place, the first new Dominion tower that was completed this year, has a baseline value of $163.9 million – the assessed value assigned to it in June. The projected assessment for the 20-story, 1-million-square-foot building for the 2020 tax year is $326.5 million, so the tax rate on that difference – about $162.6 million – is considered incremental tax value that would be used to calculate TIF revenue.
Based on the city’s ad valorem tax rate of $1.20 per $100 of assessed value, that $162.6 million would produce over $1.9 million in TIF revenue from Dominion that year that would go toward debt service.
While about half of the first tower’s taxable value would initially be eligible for TIF, the second tower, if built, would produce considerably more.
The base value for the second tower site is the existing building’s assessment as of June, just over $55 million. If the new 17-story, 900,000-square-foot tower is built by the end of 2022, the completed value of that building – $353.5 million, according to Navy Hill’s projections – would be taken against that baseline, producing $298.5 million in TIF-eligible tax value.
At $1.20 per $100 of assessed value, that would produce about $3.5 million in TIF revenue that year.
Both towers’ values are projected to increase with inflation by 2 or 3 percent annually. After the 2022 tax year, Navy Hill’s projections assign the same annual values to both towers for the rest of the 30-year period.
By the end of the 30-year period, the two towers are projected to be valued at $568.5 million each, or $1.13 billion combined, producing about $11 million combined in TIF revenue that final year, listed as the 2048 tax year. If the bonds are paid off according to that plan, that revenue then would start contributing to the city’s general fund.
Only real estate TIF revenues would go toward paying off the arena bonds. An estimated $1 billion in additional incremental revenues projected from the project, including sources such as sales and meals taxes, and parking revenues, would be allocated with $500 million going to schools, $150 million to housing, $10 million to support local arts initiatives and $340 million to support general city services.
The non-recourse revenue bonds would be underwritten by JPMorgan Chase and Citigroup. NH District Corp., the local group pushing the project led by Farrell, has not publicly identified investors signed on for the project.
‘Significant source of revenue’
At last week’s work session, consultants with Richmond-based Davenport & Co. and other firms involved said the removal of the second tower’s TIF revenues from the projections would reduce total TIF funds below a desired debt service coverage ratio of 1.5 percent, meaning the city would have $1.50 in TIF funds for every $1 in debt service.
CitiGroup executive Bill Corrado said excluding the second tower would reduce the ratio to about 1.3 percent, below the coverage level that he said the underwriters require.
“If those revenues came out, we would not be at the 1.5 times coverage requirement, so the amount of bonds we could issue would be that much less,” Corrado said, responding to questions from council member Larson. “If we lose revenues from the second tower, we can support less debt service from a lower amount of revenues.”
When Larson asked if Dominion has made a decision on the tower, and if the building is contingent on the TIF projections, Sharon Ebert, the city’s deputy chief administrative officer for economic and community development, said the plans filed with the city last year – as well as the demolition plan announced this month – indicate that the tower will be built.
“The fact that they’ve paid for the fee for the building permit gives me every indication that they plan to move forward with the second tower,” Ebert said.
Eastridge, whose Concord Eastridge firm is handling the financial side of the Navy Hill plan, said the second tower was worked into the projections but other development in the TIF district is likely.
“The decision to include in our projection a second Dominion tower was based on the fact that we wanted to look at anything in the pipeline currently in planning at the city of Richmond,” Eastridge said. “Undoubtedly there will be other projects that we will see in our projections over the next four to six months. There are other things that are being planned; we just didn’t include anything that wasn’t active in the city yet.”
Davenport’s David Rose said the uncertainty of the second tower is something that underwriters will have to factor into their assessment of the project and its financials.
“That is a risk that the underwriters take,” Rose said. “They have to have a very good feel, or a belief, that that second tower will be built. That’s why, in a non-recourse mode, that really falls on the underwriters and their investors.
“If that second tower doesn’t get built and they can still sell those bonds, to the extent those revenues are short, that is going to fall to the investors, not to the city or to (the city’s) debt capacity,” Rose said. “That’s the beauty of why this is set up the way it is.”
Rose added that, if the second tower isn’t built, Hunden’s analysis finds that surplus revenue resulting from Navy Hill would create enough economic “uplift” to reach the 1.5 percent debt service coverage ratio that is needed.
“If you look at not having that second tower anytime soon, but you incorporate that Hunden uplift, you will find that we will more than meet that 1.5 times coverage, because the whole area of belief is that there is a substantial uplift,” he said.
Larson maintained that the uncertainty surrounding the second Dominion tower is being underplayed in the presentations to council. Last week’s meeting – the third in a series of work sessions that are scheduled to continue into December – came just days before the city Planning Commission gave Navy Hill an initial endorsement. A council-appointed advisory commission also is reviewing the project.
In the days following the meeting, Larson reiterated her concern about basing Navy Hill’s financials on a building that may not be built.
“We are projecting the revenue of the second tower that Dominion has not yet publicly committed to building,” Larson said in an interview with BizSense. “It’s a ‘what if.’ That’s why I asked: is this written somewhere in this agreement, that Dominion will build this if City Council approves this plan?
“I’m just trying to get clarity on all the relationships here, and I think that’s important for the public to know.”