City wants to take another look at 27th Street hotel project, revise resort action plan on incentives

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The $80 million Hyatt House hotel project began construction with a funding gap of $23 million. Developers want the state and city to rebate taxes to fill that gap under a tourism program that needs local and state approval. (Judah Taylor/Southside Daily)
The $80 million Hyatt House hotel project began construction with a funding gap of $23 million. Developers want the state and city to rebate taxes to fill that gap under a tourism program that needs local and state approval. (Judah Taylor/Southside Daily)

VIRGINIA BEACH — The city’s top official wants the City Council to update its policy on an incentive program under which developers asked for millions in public aid for a hotel they were already building.

City Manager Dave Hansen told the City Council Tuesday that events surrounding the $80-million Hyatt hotel project under construction at 27th Street highlighted issues in city policy about the incentive program and its application review processes. The problems arise from undefined terms and whether applications for projects under construction should be considered.

The Council and city need to fix them, Hansen said.

He made no recommendation in his briefing to approve or reject the 27th Street project, which began construction while developers were seeking $23 million in state and city aid. Instead, he said the City Council should request the Virginia Beach Development Authority to reexamine the project, which it deferred in January. The authority is one three bodies that must approve the developer’s application for incentives. The other two are the state and City Council.

The developers of the hotel project asked last year for help obtaining a third of their financing under the state’s Tourism Development Financing Program, also known as the gap financing program. They need $23 million and were said to have exhausted private means of obtaining more capital.

A 2011 state law outlining the incentive program says that to qualify for the assistance, a project must “fill a void identified by the (locality’s) Tourism Marketing Plan.”

In Virginia Beach, that plan is the Resort Area Strategic Action Plan, the city’s vision for the Oceanfront. It was created in 2008, about four years before Virginia created the gap financing program to help developers create large tourist draws in the state. Neither the city’s Resort Area Strategic Action Plan nor the state defines what a “void” is for the gap program.

That has lead to debate on whether the Hyatt hotel qualifies for public help under the program. The project’s plans include a 156-room Hyatt House, 27,000 square feet of retail space on Atlantic and Pacific avenues, and a 448-space parking garage at 27th Street. A second phase, with a Hyatt flag hotel with 150 to 175 rooms, is also planned.

Hansen said Tuesday that the city should appoint a committee to rethink the Resort Area Strategic Action Plan with the gap financing program in mind. That committee would answer questions stemming from the state incentive program, and the City Council could then reshape its policy on the program around the committee’s suggestions.

Hansen told council members the city needs to reevaluate “deficiencies” in the resort plan, especially regarding projects that qualify for gap financing.

Most importantly, he said, “we need to have a decision on out-of-the-ground, after-the-fact applications.” On that point, he added later, “Our policy doesn’t address it and it looks like the state doesn’t care.”

In January, after staff had pitched the 27th Street project to the City Council, the Virginia Tourism Corporation said the state could not sign off on gap financing for the development because it would not be dissimilar from other Oceanfront hotels. That prompted Mayor Will Sessoms to call for a pause on applications to the gap program.

Less than a month later, the Virginia Tourism Corporation reversed course and said the project qualified.

Sessoms said the Council wants to treat the 27th Street project fairly but that the current situation is unfair to the city and the developer.

He had advice for developers considering asking for funds under the incentive program:

“Don’t go out of the ground until you have your total financing package in place — especially your gap financing that you’re looking for,” he said.

Councilwoman Barbara Henley said she’s unsure how the city should approach applications to the gap program but has a few general ideas.

“Somehow or other, I think we have get this very objective, make sure we know everything (about who the developers are and how they’re organized) and take all the politics out of it,” she said.

Councilman John Uhrin, who represents the Oceanfront, said the he thinks the Resort Area Strategic Action Plan is fine. Instead of rethinking it, he said, the city should consider developing a separate “Tourism Marketing Plan” to satisfy state law regarding the incentive program and to outline how the city wants to use it.

The gap financing program returns 1 percent of the city and state sales taxes generated at a project to the developer for a period of time, to help them secure financing. In the case of the Hyatt project, the state, city and developer each would pay more than $7 million over 30 years to bridge the $23 million gap.

City staff estimated the project would yield a positive net fiscal impact of $63 million for Virginia Beach during those 30 years.

The project’s developers were able to obtain only about 70 percent of the money they needed to build the project through loans and equity.

“These are smart business people who are building this,” Councilwoman Shannon Kane said. “And they’re not going to do something knowing that they are $23 million short if they weren’t given some type of signal that this was going to be OK.”

Hansen said that question is best put to the developers. The company behind the project is 27th Street Holding Company LLC, a company led by A. Russell Kirk, Armada Hoffler’s vice chairman. Armada Hoffler is also building the hotel.

City staff and an Armada Hoffler spokeswoman have said previously that construction began when it did last year because the developers wanted to open the hotel by the 2017 resort season. At the time, they believed their application for gap financing would be approved, according to Stephanie Maheu, the Armada Hoffler spokeswoman.

If the gap financing is not authorized, the developers said in a February presentation, they would have to cut from their plans 150 to 250 full-time jobs, the parking garage, the second hotel, and the project’s “overall ambiance,” among other features.

Hansen said Tuesday that such an outcome is a real possibility. The city’s Development Authority could take up the project as soon as next week.

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