I'll preface this by saying I work in Facilities Management at VCU, the University, not the health system. VCU Health is a separate entity from the university but there are several people who have dual roles. It is important to understand that context. This is a major screw up, there is no other way to say it. The site in question is the Public Safety Building in downtown Richmond. The city abandoned the building several years ago and the property is highly coveted by both the university and health system due to its location adjacent to the Academic Medical Center Campus (MCV Campus). When the Navy Hill development died, thankfully, (another long story). the city issued an RFP for developers to redevelop the site. The developer that was selected proposed several buildings which included a large office building to be leased to the VCU Health System, a new child care center for the health system and relocating the non profit Doorways which houses families of out of town patients. Then came COVID, the health system, as many employers did, re evaluated there office needs. The developer scaled back the project and proposed a research building. The city saw this as bait and switch and declared the developer to be in default and took back the land under a quit claim. The terms of the lease agreement were not made public and included a $73M payment for failing to sign the lease. It also included that VCU Health would also pay the city a PILOT (Payment in Lieu of Taxes) until the city could find another buyer. This is $1.3M per year +/-. The agreement also specified that the health system would pay to demolish the building. All of this for property that they don't own. The cost will be closer to $80M when all is said and done. Ridiculous. The public is calling for heads to roll and they have. Over the past 12-18 months, there have been several high profile "resignations" including the CFO and CEO of the health system. Those of us on the universty side were unaware of the terms of this lease and were scratching our heads over all of the resignations but now it all makes sense. We heard about this at the same time as the general public. No university funds were used in this and this is squarely on the health system and not the university. The president of the university is also the president of the health system board and it is not clear what he knew or when. The proposed Dentistry project is separate from this deal and would be state/university funded and is completely separate from the health system. Our Dental school has obsolete facilities and is in dire need of a new building. There is no available land on the campus and this site is perfect for it, both location and size. Of course the university would need to acquire the property first. This screw up is good news/bad news for the project. The site is available so that's good but the publicity may mean that elected officials are reluctant to fund our dentistry project, which would be unfortunate. There is an article in today's Richmond Bizsense about the investigation into this and it basically says there was little oversight into the deal. If this were a university project, the terms of that ease would have been reviewed by our Capital Assets and Real Estate group as well as university counsel. I can confidently state that the university would never have agreed to these terms.

the University. It really IS very bad and I was shocked. I am blown away that anyone would sign ANY agreement with a $73M quit clause. Plus, as you say, VCU Health is still on the hook for lost taxes and demolition. They got royally screwed. This being the City of Richmond would have automatically put me on "high screw alert". Construction and large projects being my background, I'm amazed the developer got that monster quit clause in there. I also read where the VCU Health CFO was going to act as the Project Manager. That alone is completely nuts. I'm sure you would agree with your background...Isn't that like having a plumber take out your appendix?! I was blown away when I heard of this, and I am sure there is plenty left to happen before this is really put to bed. Thanks again for your info!

Did you ever run across my good friend Jay Klingel from up at UVa?

World Class Dentists including…. Ahem…. Moi

without Covid this sounds like it goes off without a hitch? Why is this a bad deal, I understand in the sense that it sounds like the health system was left holding the whole bag with no risk for the city or developer so I get that part of it. However, how many of these deals were like this up to Covid for anyone not just the health system AND how many or like this now? Was this a bad deal altogether? Bad timing? Both? HokieForever

Historic construction inflation and rising interest rates. All of that will wreck a pro forma. Walking away was probably the smart play. However, the terms of the deal were poor to begin with, but once that deal was signed, they were between a rock and a hard place. Following through would have saddled them with a ton of unneeded office space and a long term lease.

another few hours :>)

by KeithHokie89 he fills in a lot of the blanks and highlights the known breakdowns to date. Great overview in my opinion! Sadly, and just as someone looking in from afar, when you get the City of Richmond and real estate involved and then you throw in developers, public private partnerships and maybe even some not as traditional funding/financing options things can get sideways before people realize. Didn't or isn't something similar going on with the Diamond? Finally, Michael Rao has been fairly adept in his career at avoiding having missteps stick to him or become mortal injuries. However, the ultimate financial impact to the Health System will be closely watched. As you say it is important to distinguish between the University and the Health System but, the reality is probably that future negative financial news surrounding rates, operations, etc. that may arise will likely include a reporter trying to link these negative events in some manner.

they are different. The city issued an RFP and selected a developer. They have agreed to sell the land to the developer and the developer has agreed to a certain development density and program. These are the similarities. The difference is the developer who has been selected, Thalhimer, is reputable. The developer of the VCU Health site has proposed several projects around town and built nothing. Interestingly, the $73M payment did not go to the developer, Capital City Partners, it went to their financiers. CCP is the developer of the Henrico "Green City" project so for all the folks saying the county will succeed where the city failed, be wary. I would be wary that they can build all that they have proposed, including an arena.

this should make for some interesting reading as investigators dig deeper and everybody goes into CYA mode hurling accusations at their former business partners. Sounds like nobody will escape this thing without at least some egg on their face. The City may not have been fully forthcoming and/or CCP due diligence less than thorough and that is before considering why a developer associated with the failed Navy Hill project would get a second bite at the apple. The health system had deep pockets and likely a shallow or low control system they either skirted or ignored. My original observation still stands that following the money will be the quickest way to the bottom of the story. One more thing, if I was a betting man the money paid to CCP financiers likely covered a number of debts and not all directly associated with just the current project. ** Edited by 2hhoop3 at 6/15/2023, 3:32:27 PM

but the developer didn't have the ability to provide a property for them to lease since the city took it away. Is that right? Does VCU have a law school? If it does, they need to do better, because that seems like something that could at the very least be litigated to death or until the developer was bankrupt or willing to settle for something less absurd. Simple answer, when you have a building at the location we agreed to that we can lease, we'll sign the lease...until then, buh bye.

system backing out of the office lease. The developer was ready to switch gears and do a research building instead but the city said that this was not what was in the agreement and took back the land. That triggered the default payment. No, VCU does not have a law school and that shouldn't matter as the health system should have had their counsel review the lease (and maybe they did) and the board should have had to sign off on a commitment of this size. We need to get BOV approval of contracts in excess of $5M so I can't imagine they did that without the board knowing about it.

but my overall premise is still somewhat true though, it seems the health system doesn't have very good lawyers or leaders if they can't come up with a better answer than paying out $73mil. Seems they and the developer were willing to work together to make something work, then the city stepped in and blew it up. At the very least, the health system should be banging on the city to take some fiscal responsibility for forcing them into a $73mil payment and I suspect that since the city took the land back that they are going to do something with it that will make them more than they were going to make, though that assumes the city acted in an intelligent fashion which is usually a bad assumption when talking about government officials.

They issued an RFP with certain requirements, evaluated proposals, picked what appeared to be the best one and made the award. The developer and VCU Health dropped the ball. The city acted responsibly and took action when the developer defaulted.

enough about the other bids and they(the City) were certainly within their rights taking action upon default. My questions for the City and the developer were who knew what and when about the old public safety building and the subterranean suitability for the the originally proposed VCU health structure? Could any of those things been unearthed(pun intended) in the Navy Hill project run up and ignored/not disclosed/whatever? If so, the City as the owner of land/building and the developer/purchaser got a get out of jail free card for construction and site prep costs that theoretically could/should have affected the sale value of the property and the ability to deliver on the original lease.

the City and the developer already had egg on their face from the failed Navy Hill project and were looking to salvage something. Along comes VCU Health System with deep pockets, an original perceived need for office space and management that was willing to skirt or ignore basic due diligence. That willingness got the City and the developers off the hook for their own due diligence oversights associated with the failed Navy Hill project and nicely hung it around VCU's neck. The investigation report from all of this should be interesting and depending what crops up VCU MIGHT be able to get a good deal or improved deal on the property for a new dental school. Just reading the publicly available information I am not sure either the City or the developer are free of exposures. One thing I am sure of is this is the lawyer's version of the Fram oil filter commercial and VCU would have been wise to pay the money up front to review the deal as opposed to paying it on the back end to investigate the deal. I expect VCU Health System Board members are also squirming, if for no other reason than the harm of the PR to reputation.

is out in the public yet. Headline grabbers like the VCU $73MM payment are obviously out there and I think that payment number is expected to go higher but, no where near the $600MM+ lease commitment had the project run to term. Also of note I think the new project has VCU participation and that is a $400MM+ deal. I have only partially followed but, questions surrounding the deal, who initiated, why the changes to the original project, what is Richmond City role, etc., etc., all need more disclosure to get the full picture. So far, this is another dust up in the long running feud between the former governor and the VCU president. However, the trail to the real story is the same as always, FOLLOW THE MONEY.

sounds like nothing significant was done. It was nice of VCU to spend $75million to pay off the loan. ** Edited by Guy LeDouche at 6/15/2023, 10:47:22 AM

Daughter graduated from there and son entering sophomore year. Rao has cut numerous student services and recently announced he’s getting rid of dozens of teachers that teach a required core multi semester course for all students. If this can be tied back to him (doesn’t seem likely), I hope he gets dumped.

** Edited by hoosnowahokie at 6/15/2023, 9:55:14 AM

...development.