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.
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.
Thanks for keeping us informed on this Jonathan! The only ones benefiting from this debacle are the lawyers for both parties.
Sounds like ole Marlon forgot to donate to the Stoney for governor campaign.
Let us know when people start losing their jobs.
The lease payment and real estate tax obligation should have terminated when the development was deemed not feasible. Both the developer and the city took advantage of VCU. Who and where was the attorney representing VCU? Where was the oversite from VCU’s real estate team, administration and board? Most one sided deal ever!
VCU isn’t exactly a naive child, they’ve done enough real estate development over the past several decades to be the real estate development experts in Richmond. They just let their greed get the better of them and now want to renege on a contract because the tides turned and they got caught swimming naked.
Agreed Dan, one member of the team did try to stop the deal but was overruled and in the end VCU got schooled to the tune of ~$100 million…..
How’s the Green City scheme with CCP working out for you, Henrico County?
Crickets on Green City for quite some time…
Housing is prep is starting but that is all (and only cause) it was sold off to Markel Eagle Homes too. Funny too cause on maps now it is 110 acres Scott’s Farm property for residential ONLY and 100 acres more or less for “Green City” site that as said nothing in about a year but still says arena will open in 2026. Construction was start in “early 2024” as we end 2024…..It is never getting built.
Kinda seems like this whole affair sets up a huge conflict of interest for Levar Stoney’s desire to become Lt. Governor. How, on one hand, can he advocate for the city’s attempt to milk every last dime from state coffers for this project, yet be voted into an office a few months later that would help uphold vigorous opposition to the continued liability of the state? Either his candidacy should be suspended, or he should resign as mayor.
VCUH is a non-profit hospital, a fixture in Richmond, and its mission is to help people. Their leadership, real estate and legal teams screwed up in a big way on this deal (and heads should roll), but I can’t see how it’s in the best interest of the city to enforce this tax.
If there’s a legal mechanism (or lack thereof) that prevents the city from forgiving the tax commitment, then the city should just say so. Otherwise, it’s just bad business.
How in the world can anyone blame the city for any of this. VCU owns a lot of valuable downtown and close downtown real estate that they pay no taxes on. VCU willing and with approval from their attorneys signed the deal. Now they and the state, (that will be providing funds to pay these taxes) are crying foul, and not wanting to pay. Yet Mr. Rao (sp) just received a pay raise. Why aren’t the people that signed the deal and VCU attorneys paying for consequences of squandering taxpayer money. I believe the City of Richmond has every right… Read more »
Curious how the impending cluster fugazi was communicated to Dr. Rao? Why was Dr. Kellerman the only one pushed under the proverbial bus on this? Hey, we’ll all sleep better at night knowing Dr. Rao had his contract extended and a double digit raise awarded because – uh he might leave and he’s a high ranking board member. Nothing to see hear folks – move along.