Bruce Thompson zones in on Norfolk. Bye, bye air rights

Norfolk City Council

The $126 million hotel and conference deal hinges on the creation of a Virginia Tourism zone by Norfolk City Council. Today. 

Legislators and Governor Bob McDonnell in 2011 approved this designation in the 2011 General Assembly session.

To create a zone, localities must adopt an ordinance first.

2014 Downtowner of the Year 

Guess who thought of this idea?

Bruce Thompson and his other cohorts on the Tourism Finance and Development Committee -- of which Thompson was the chair --   of the governor’s Commission on Economic Development and Jobs Creation.

Virginia Beach adopted a tourism zone March 2012 and the General Assembly approved an amendment to the Beach’s zone at this year’s legislative session.

But nothing indicates that developers have flocked to the city’s doorstep in response.

Instead, supposedly, Thompson dumped the idea on Norfolk, a city whose top dogs are desperate for a hotel and conference center, as well as another parking garage.

The tourism zone sets up a mechanism for gap financing.

Let's say, for example, a developer wants to build a hotel in Norfolk, yet he can only cobble together $64 million in debt and equity for the $126 million project.

The city obliges with some of its own funds to close a portion of the gap.

But where does the rest of the money come from?

The city approves a tourism zone, which permits the city to allocate a portion of the sales tax to the project and gives the developer the right to charge an access fee.

Of course, this is all explained in the 117-page master development agreement which the city will most likely approve today at its meeting. 
A tourism zone also comes with some goodies.

Localities can reduce taxes for up to 20-years and waive zoning requirements within the zone.

One of the requirements of the zone is for a developer to enter into a performance agreement with a local or regional industrial development authority or a political subdivision, such as Norfolk Redevelopment and Housing Authority, outlining the developer's responsibilities.

The performance agreement requires the developer to impose a fee and invest a minimum amount of money, and the funding streams must pay the principal and interest on the shortfall.

The fee and the portion of the sales tax are not directed to pay the debt until the project generates sales taxes.

So the funds aren't available during construction and build-out of the project.

Click here 58.1-3851  for information on the creation of local tourism zones and here  58.1-3851.1 for details about the tax revenues from a tourism zone. 

Attorney Vince Mastracco

The Virginia Beach Taxpayer Alliance castigated the Beach’s tourism zone proposal, saying it was an entitlement program for developers.

The group, a critic of Virginia Beach’s financial policies, argues that the key word is gap, meaning the developer can’t get the financing for the entire project, so a government mechanism subsidizes the balance.

Here’s a footnote on the master development agreement.

The deal would be set up as a two-unit condominium agreement between the housing authority and Thompson’s company.

The city owns one unit, which includes the land, garage and the conference center while Thompson’s company owns the other unit, which includes the hotel and a perpetual city give away.

That is – the air rights. In other words, Thompson gets to lease or sell the air rights above his hotel, not the city. The same arrangement is in place with the Wells Fargo Center and 150 West Main Street.

The right to the “air” is a sweet little perk for developers and a loss for localities. 

Thank Kaufman & Canoles attorney Vince Mastracco, who represents Thompson, for this arrangement, since he finagled the same type of agreement for the Wells Fargo Center and 150 West Main Street.

One more thought. 

Which properties will be included in this zone, in addition to the hotel and conference center?