A rendering of the 20-story project that would have replaced the Public Safety Building. (BizSense file)
A potential legal battle appears to be brewing between VCU Health and the City of Richmond over real estate tax payments stemming from a failed downtown development that’s already cost the health system more than $80 million.
The two entities have seemingly drawn lines in the sand over whether VCU Health remains obligated to pay the annual real estate taxes that it agreed to pay the city when it partnered with developer Capital City Partners on the since-aborted redevelopment of Richmond’s old Public Safety Building site.
The health system pulled out of the ill-fated project in late 2022 but has remained on the hook for the annual payments, which were worked into an agreement with the city and CCP to keep the property tax-generating for the city. Three of those payments have been made so far, totaling about $2 million.
But VCU Health has not made the latest roughly $2 million payment for this year that was due to the city June 5, following a directive from Virginia legislators that was included in the state budget ordering the health system to find a way to stop the payments and report back to the House and Senate money committees by Oct. 1.
That report was submitted to the committee chairs this week by Marlon Levy, interim CEO for the VCU Health System Authority (VCUHSA), who said the health system met with city administrators five times from December to June to attempt to resolve the issue – including an offer by the health system to purchase the Public Safety Building site – but that the two parties “were unable to reach an agreement.”
The day before this year’s payment was due, according to the report, the health system notified the city that it would not be making the payment in light of the state directive. A week later, the city issued a default notice to VCU Health for the missed payment, which Levy’s report refers to as a “tax deficiency payment.”
“The City’s position remains that VCUHSA is obligated to make the Tax Deficiency Payment,” Levy says in the report, going on to add that the city “asserts that without most of the value being paid, City Council will not approve any agreement related to the Tax Deficiency Payment.”
If paid in full over the 25 years laid out in the agreement, the annual payments, which increase incrementally, would total nearly $56 million to the city for a project that was never built.
“VCUHSA’s position remains that it is not obligated to pay the Tax Deficiency Payment,” the report states, adding that the health system’s “statutory mission is to provide care to the City’s most vulnerable citizens, not to subsidize government revenue because of CCP’s failure to create a revenue-generating project.”
Lincoln Saunders, Richmond’s chief administrative officer, confirmed that the 2024 payment has not been received and said the city is weighing its options – which could include legal action against VCU Health.
“VCU Health has failed to pay their contractual obligation, and we are considering our options to bring them to meet their obligation,” Saunders said.
Payments were worked into project agreement
The Public Safety Building as viewed along Ninth Street in 2020, with the under-construction VCU Health outpatient building rising behind it.
The annual payments, also called payments in lieu of taxes or general obligation payments, were included in the agreement to ensure the city would receive real estate tax revenue from the property, which the health system would have been able to purchase at the end of its 25-year lease of the planned building. Real estate owned by VCU Health or Virginia Commonwealth University typically is exempt from local taxes.
If the project for whatever reason did not generate the annual real estate tax revenue forecasted in that agreement, CCP and VCU Health, as the project’s master tenant, agreed to cover the missing amounts. The agreement put that obligation on CCP, with CCP delegating it to VCU Health.
Three of those payments have been made so far, totaling about $2 million and contributing to an overall cost to VCU Health that has included a $73 million exit payment to the project’s financing group and $5 million to complete demolition of the site. Gov. Glenn Youngkin has said the costs to VCU Health could end up totaling $100 million.
VCU Health has maintained that backing out of the $325 million project avoided much larger financial obligations that came with its deal to be the project’s master tenant, including $617 million in rent over the 25-year lease.
As Levy puts it in his report, “After the City and CCP closed their deal, CCP was unable to meet the performance requirements contained in the CCP Agreement. CCP was not able to provide the parking required for the office tower and the soils on the City’s land could not support the planned office tower at the estimated budget cost. As a result, the City declared CCP to be in default.”
The report continues: “As now well-publicized, CCP was not able to construct the building on time and on budget. CCP’s building did not materialize to provide the benefits the City sought and the property tax revenue the City wanted. Thus, the Property reverted back to City ownership.”
The report also notes interest from GRTC to develop a permanent bus transfer station on the site, to replace the temporary station across Ninth Street. Levy states in the report that such a use “will not generate real estate taxes for the City,” though GRTC’s plan calls for the new station to be part of a mixed-use development with apartments and retail space that would be taxable.
Saunders, the city CAO, said Tuesday that the city is actively working with GRTC on potential development of the site, though he added that a final decision has not been made as to whether the project would rise on that site or the temporary site that’s also city-owned.
Saunders has said the city would not sell the Public Safety Building site at 500 N. 10th St. unless development of it generated revenue to the city comparable to the aborted VCU Health project. The project initially called for a 20-story tower but was later reduced in size by CCP.
Health system authority ‘worked in good faith’
Demolition of the old Public Safety Building has been underway for months, with VCU Health footing the $5 million bill.
Earlier this year, in response to the VCU Health directive included in the state budget, Richmond Mayor Levar Stoney said the health system’s obligation to make the real estate tax payments is contractual and remains legally binding.
“The VCU Health System community makes many contributions to our city and we’re glad to partner with them on a myriad of projects,” Stoney said in March. “But, VCU Health System should not be looking for ways to get around paying their fair share and the state should not be in the business of negating legally-binding contracts.”
When the city took back the Public Safety property last year after the project collapsed, VCU Health and VCU said in a joint statement that they would go through with the site demolition and “will uphold our obligations as they relate to prior real estate tax commitments.”
Levy says in his report that health system leadership met with city administrators on the issue five times in the past year, on Dec. 5 and 20, Feb. 5 (during the regular General Assembly session), June 3 (before the June 5 payment due date) and June 13.
“Over the course of these five (5) meetings and in a conversation between legal counsel for both City and VCUHSA, VCUHSA worked in good faith to understand the City’s position with respect to the Tax Deficiency Payment and to propose solutions that would be acceptable to both parties,” the report states. “One of those proposals was the sale of the Property to VCUHSA. Unfortunately, the City and VCUHSA were unable to reach an agreement.”
In maintaining that VCU Health is not obligated to make the annual payments, Levy says the city “has already received significant value” from the property, including $3.5 million that CCP paid for the site and $4.2 million “in savings” from VCU Health’s demolition, which Levy’s report says is now completed.
A VCU Health spokesperson said Tuesday that the health system had nothing to add beyond the contents of the report.