VCU administrators call this an “abnormality.” Gov. Glenn Youngkin declared it a “wake-up call.” Former Gov. Doug Wilder called it “financial fraud.”
What became known as the “historic lease” was years in the making, but now VCU Health System’s controversial and expensive downtown development deal has been revealed and unraveled. That was until 2023.
The ill-fated redevelopment of the public safety building site, where the health system had signed on as master tenant, stalled for months before the city of Richmond took back the site in early February, marking the end of the $325 program. The Million Project was born from the failed Navy Hill project.
At the time, VCU Health said only that it would continue to work on developing the long-sought site, including more expensive projects, including a new home for the Virginia Commonwealth University School of Dentistry. He did not say why the stalled project failed or why the health system withdrew from the project.
Nor did he volunteer at the time to discuss what the Richmond BizSense report would reveal months later: VCU Health had to pay $73 million to back out of the contract. . The exit payment was only revealed in response to a Freedom of Information Act request from BizSense, which made news in May.
An investigation was immediately called for by Mr. Wilder, a former Virginia governor, Richmond mayor, and current professor and namesake at VCU’s L. Douglas Wilder School of Government. Wilder, who has been a vocal critic of VCU President Michael Rao, also called for Rao’s removal by the university’s Board of Visitors.
Rao and other officials decided to withdraw from the project, a multi-building complex that was slated to include a high-rise office tower for VCU Health, given the challenges posed by the course of the pandemic and the financial obligations that come with it. maintained the health care system that determined the The deal includes $617 million in rent over a 25-year lease term.
However, additional FOIA requests revealed that the health system’s financial obligations extend far beyond the terms of the lease.
VCU Health is at risk for project cost overruns and real estate taxes due to a deal it signed with a development group led by Oak Street Real Estate Capital, a Chicago investment firm now part of New York-based Blue Owl Capital. It was decided that Payments to the city will continue.
In rescinding the plan, they also agreed to deal with and pay for the estimated $5 million cost of demolition of the public safety building. That effort began in recent months.
But what drew the most criticism from Youngkin and members of Virginia’s congressional delegation, including Sen. Tim Kaine, Sen. Mark Warner, and Rep. Bobby Scott, was the $73 million withdrawal fee and the lead-up to it. It was the circumstances.
Email communications and other documents obtained through FOIA reveal discord between VCU Health, the city of Richmond, and Capital City Partners, the same development team that backed Navy Hill under a different name.
The documents also show reluctance on the part of VCU Health to move forward with the project, including then-CEO Art Kellerman, who fought for Rao and others to reconsider the agreement, and ultimately The agreement was signed at the recommendation of university leadership.
Three months later, the developers notified the health system that the original project could not be built, citing field challenges that were driving up costs and increased construction costs due to the pandemic and inflation. A scaled down version of the project was proposed, but negotiations turned to a way out of the project, ultimately failing to save the project and leading to a $73 million payout.
At the time, Mr. Kellerman was out of town and resigned at Mr. Rao’s request for undisclosed reasons.
Local observers familiar with the VCU Health deal and similar development deals question whether exit money was even necessary. They also questioned why, as revealed in the Withdrawal Agreement, the loan amount secured by financial backers to fund the project was $100 million more than the expected cost of development. ing.
A third-party study commissioned by VCU and VCU Health found that “inadequate due diligence,” leadership turnover, and a “lack of in-house real estate expertise” contributed to costly health system exits. It turned out that there was. A subsequent report from a health care consulting firm, also commissioned by the Health System and University Commission, recommended changes to VCU Health’s governance structure.
There are still many unknowns about this story, but more may be revealed next year. The Joint Legislative Audit and Review Committee, a watchdog arm of the Virginia General Assembly, has committed to conducting and completing its own investigation into the matter in 2024.
Questions remain about what will happen at this site and whether the state will financially or politically support VCU building a dental project there. JLARC’s research could help answer that question and others.