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Cavalier decision on the fast track

Updated: June 28, 2013 - 2:34 pm

Posted: June 21, 2013

by Jared Council

jared.council@insidebiz.com

Virginia Beach residents will have their chance Tuesday night to voice their opinions about the city's proposal to invest $18 million in the Cavalier Hotel properties, a proposal that includes the largest economic development grant in the city's history.

Bruce Thompson, the Gold Key | PHR Hotels & Resorts CEO who won the bid to buy the 86-year-old hotel and its sister properties, expects to close on them before a July 22 deadline. He needs a chunk of the city's offer by then in order to preserve the old hotel, and city officials firmly against demolishing the historic structure said they're rushing because of that court-ordered deadline.

"In a perfect world, we would not be voting on July 2," Virginia Beach Mayor Will Sessoms said at a June 18 city council meeting, "but we have a court date here."

Fairfax County Judge Jane Roush approved Thompson as the buyer of the properties on June 10 after the owners involved in a lawsuit agreed to sell them. Roush gave him 40 days to close.

If council approves the deal, the city's economic development authority board is scheduled to vote July 16 on an $8.2 million grant that's part of the offer. That grant, which would come from the Economic Development Incentive Program fund, would mark largest grant in the city's history and would leave approximately $1.9 million in the fund.

Sessoms has been saying for weeks that residents he's spoken to have been advocating that the hotel be preserved. After city leaders announced June 14 that they struck the $18 million deal with Thompson, Sessoms said he's been getting some emails from people not in favor of the deal.

Few, if any, residents appeared at the June 18 council meeting, at which Deputy City Manager Steve Herbert went through a 28-slide briefing on the details of the offer. But some resistance and questions were aired by council members.

"One of the things that I'm concerned about is the $8 million - that high amount of the EDIP - and paying it up front is a major red flag to me," Councilman Bob Dyer said about the fund, which typically awards grants after the initial private investment is made.

"I think that sets a precedent that we have to talk out and vet," he said, "but unfortunately, facing a public hearing and July 2 deadline, we may not have that opportunity."

Most of the grants the city's EDA awards are in the six-figure range. Here are some of the largest, according to EDA Project Development Coordinator Mark Wawner:

* Amerigroup - $2 million grant awarded in 2003, leveraging a $56 million private investment.

* Gold Key's Beach Center Project on Laskin Road - $1.8 million grant in 2011, leveraging $74 million.

* Olympia Development Group - $800,000 grant in 2008, leveraging $22.3 million.

* Stihl USA - $700,000 grant in 2006, leveraging $78.4 million.

* LifeNet Health - $500,000 grant in 2010, leveraging $20.6 million.

The city awarded some $13.5 million in EDIP grants since 2000 for Town Center; these were distributed over four phases. Armada Hoffler Properties is the developer. Wawner said the Town Center grants were different from the others because they were "for the infrastructure to support the economic development park as opposed to going toward an entity."

If the $8.2 million grant for the Cavalier is approved, the fund will be depleted by more than 80 percent. The next replenishment would come in July 2014 and is estimated to be about $2.71 million. These annual appropriations, which are funded by a 65-cents-per-pack cigarette tax, are expected to decline as smoking habits change, city officials forecast.

City officials may need EDIP funds to assist Dallas-based developer Michael Jenkins in building an entertainment complex on the former Virginia Beach Dome site, but no grant commitment has been made. City Manager James Spore said a relatively low EDIP fund balance will not hurt the city's ability to help fund that project or offer competitive grants to businesses looking to invest there.

Spore and Herbert, the deputy city manager, said council members have indicated that they'll find the money in other sources to cover big economic development deals if EDIP funds aren't enough.

When asked if there were any drawbacks to such a large withdrawal to the EDIP fund, Spore said, "I don't see any. We're just glad we've got the capacity to do that. This, as the mayor pretty well stated, fulfills the council's priority of saving the building, No. 1, but also getting a quarter-billion-dollar private investment."

Thompson has agreed to invest $259.4 million. That includes $107.3 million on the west side of Atlantic Avenue to develop the old Cavalier site, $54.2 million of which is slated for building about 100 single-family homes.

Across the street, Thompson has proposed investing $117 million to overhaul the Oceanfront Cavalier, renovate the adjacent Beach Club and build a new tower. The remaining $35.1 million will be used to buy the 21.2-acre site and its buildings, Herbert said in his presentation.

According to Herbert, Thompson is partnering with John Lawson, president and CEO of construction firm W.M. Jordan Co., and the Ruffin Family Trust. Businessman Ed Ruffin has been Thompson's business partner in the past.

Thompson has selected architecture firm Hanbury Evans Wright Vlattas + Co. for historical renovation. Its projects have included Virginia's Executive Mansion, built in the 1810s. For the residential component, Thompson is working with developer Bart Frye. He's behind a roughly 700-home development in Norfolk's East Beach neighborhood.

During his presentation, Herbert said that if council approves the offers, the city would have to pay roughly $11.8 million by the closing date. That includes the $8.2 million grant, a $2.37 green-space easement purchase, and half of a $2.45 million purchase of Cavalier Drive, which would become a public street.

That total should grow to about $13 million sometime next year, Herbert said, and the remaining $5 million in incentive payments will be paid over the next several years.

At the meeting, city Finance Director Patricia Phillips said the city is not expected to get its investment back for about a decade. But after 20 years, the net fiscal impact is expected to be at least $41 million or $52 million, figures based on two conservative scenarios.

"The break-even years are 10 to 12 years out," she said. "But this investment has a very healthy payoff in the long run."nib