A rendering of the 20-story project that would have replaced the Public Safety Building. (BizSense file)
The dispute between Richmond and VCU Health over tax payments tied to a failed downtown development could be headed to mediation – or litigation.
The city on Monday sent a letter to VCU Health requesting that the parties enter into mediation to resolve their disagreement over annual real estate taxes stemming from the aborted redevelopment of Richmond’s old Public Safety Building site.
The letter, from Mayor Levar Stoney and City Council President Kristen Nye to VCU Health CEO Marlon Levy, states that the city “is prepared to pursue all available options, including litigation,” to collect owed and future payments that, if paid in full, would total nearly $56 million for a project that was never built.
However, the letter adds, “we would prefer to participate in a collaborative dialogue to reach a mutually beneficial agreement. To that end, we write to invite VCUHS to engage in mediation.”
Nye and Stoney’s letter was sent Monday afternoon, weeks after Levy reported an impasse in negotiations with the city to the Virginia General Assembly, following a directive from state legislators for VCU Health to find a way to stop the annual payments.
Three initial payments had been made before and after VCU Health pulled out of the project in late 2022. But the health system has not made a roughly $2 million payment that was due this year, and in his report, Levy maintained that it is not obligated to make further payments in light of the state directive and the unrealized development, which was to include a high-rise office tower for the health system.
Mayor Levar Stoney and City Council President Kristen Nye in a press conference last month. (BizSense file photo)
Stoney and Nye’s request cites a letter of support that VCU Health submitted to the city as part of developer Capital City Partners’ unsolicited proposal four years ago to purchase and develop the site at 500 N. 10th St. The health system’s letter called the project “a significant source of economic development for the City” and said that tax revenues from it “will meaningfully support city services,” Stoney and Nye said.
“Despite its recognition of the importance of this site to the immediate neighborhood and City services more broadly, VCUHS no longer seems to have a sense of duty or urgency to uphold the terms of the previously negotiated contract,” their letter states, adding that the city has been willing to work toward a resolution but that VCU Health “has not made a serious settlement proposal.”
The letter alleges that VCU Health and Virginia Commonwealth University “have impeded the City from finding a new use” for the site, due to requests from senior university leadership to hold the site for development of a new School of Dentistry. VCU is now planning that project at its nearby Larrick Student Center property.
“The City honored this request, assuming good faith on the part of the University’s leadership. Ultimately, VCUHS and VCU chose not to build that project,” the city’s letter states, adding later that the institutions’ willingness “to default on their contractual obligations will significantly hamper future collaboration.”
“VCU’s reputational costs may easily translate into ballooning actual costs as the City and other business partners negotiate under the assumption of a greater likelihood of VCUHS defaulting on its contractual obligations,” the letter states.
“We are confident, however, that the City, VCUHS, and VCU can return to a place where we are planning for the future of Richmond together without reservation or mistrust. To do so, the City depends on VCUHS’ good faith efforts to resolve its contractual obligations.”
The letter ends with a request for a response by Dec. 6 on the mediation request.
A VCU Health spokesperson said the health system received the letter Monday and looks forward to reviewing it.
Parties met five times in past year
Demolition of the old Public Safety Building wrapped up in recent months, with VCU Health footing the $5 million bill. (BizSense file photo)
The letter was sent a week after City Council met in a closed session to consult with legal counsel on the Public Safety site. It also follows Levy’s report to the state last month, in which he said it was VCU Health that “worked in good faith” to understand the city’s position and “propose solutions that would be acceptable to both parties.”
“One of those proposals was the sale of the Property to VCUHSA. Unfortunately, the City and VCUHSA were unable to reach an agreement,” Levy said in his report, adding that health system leadership met with city administrators on the issue five times in the past year, from December 2023 to this June, when this year’s payment was due.
Marlon Levy
“VCUHSA’s position remains that it is not obligated to pay the Tax Deficiency Payment,” the report stated, 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.”
Earlier this year, in response to the VCU Health directive that was included in the state budget, Stoney issued a statement that the health system’s obligation to make the payments is contractual and remains legally binding. In a press conference last week, Stoney reiterated that stance, adding, “it’s my hope that we can come to some resolution on the agreement that they made on the Public Safety Building.”
When the city took back the property in 2023 after the project collapsed, VCU Health and VCU said in a joint statement that they would “uphold our obligations as they relate to prior real estate tax commitments.” The annual payments, also called general obligation payments, were included in an agreement with the city and CCP to ensure that the property would be tax-generating for the city, as real estate owned by VCU or VCU Health 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.
Months after the agreement was signed, CCP informed VCU Health that the original project couldn’t be built, citing challenges with the site that were driving up costs further fueled by the pandemic and inflation. To back out of the project, VCU Health had to pay a $73 million exit payment to the project’s investor group.
The exit payment added to an overall cost to VCU Health that has included $5 million to complete demolition of the site, as well as the three obligation payments that have been made so far, totaling about $2 million. Gov. Glenn Youngkin has said the costs to VCU Health could total $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.
Levy was named VCU Health CEO last week after two years in an interim role. He succeeds previous CEO Art Kellermann, who fought for VCU President Michael Rao and others to reconsider the deal before ultimately signing off on it at the urging of university leadership. Kellermann later resigned at Rao’s request for undisclosed reasons.