Hampton Roads Ventures: Local project on tap
City officials raised questions about Norfolk housing authority subsidiary’s practices
Hampton Roads Ventures, the controversial subsidiary of Norfolk’s housing authority, will try to add a Norfolk project in the next application for tax credits used to finance projects in distressed areas.
The corporation came under fire from some City Council members after a Virginia Mercury series revealed it had won $360 million of New Markets Tax Credits from 2003-21, but invested only a fraction of that in Norfolk. Instead, HRV has funded projects worth hundreds of millions of dollars as far afield as Texas, Nebraska, and Idaho.
The promise came after meetings between city officials and representatives of the housing authority and fact-finding by City Attorney Bernard Pishko, who raised questions about HRV’s practices and requested its financial files. In email exchanges with Pishko and others, Delphine Carnes, the lawyer for the Norfolk Redevelopment and Housing Authority and Hampton Roads Ventures, stops short of definitively agreeing to include Norfolk projects in the next application, due in early 2023.
“As previously discussed, we will work to include one or two eligible Norfolk projects in HRV’s pipeline for the next NMTC application,” she wrote in an email to Pishko Jan. 19. In a later email, she detailed a process where the Department of Economic Development would vet potential projects and submit them to the for-profit subsidiary of the NRHA for consideration.
A public meeting between City Council and representatives of the housing authority is scheduled for the May 10 work session. In preparation for the meeting, Pishko and the city’s head of economic development, Jared Chalk, have traded emails with Carnes and met at least twice. Last September, HRV won a $50 million allocation of tax credits, one of 100 community development entities (CDEs) earning awards from the U.S. Treasury Department’s Community Development and Financial Institutions Fund.
The email by Carnes was one of several dozen files surrendered by the city in response to public records requests by the Mercury for exchanges between the NRHA
and the city from December through March 24.
The records provide a fuller picture of the finances of Hampton Roads Ventures and the funds available to the housing authority, the subsidiary’s expenses, and chronicle the attempt by Carnes to explain why the community development entity has not invested in Norfolk. They include 10 years of audits, a spreadsheet of earnings from fees over a decade, and a list of salaries and benefits paid to HRV’s four (now three) employees. Norfolk charged $118 to retrieve the material.
HRV, the files show, had about $10 million in “retained earnings” at the end of 2020. Operating expenses have been roughly $1 million annually in recent years.
In March, a Virginia Mercury reporter received an email from an agent in the Inspector General’s Office of the Department of Housing and Urban Development seeking information about HRV. The reporter declined, referring the agent to published stories and available documents. The agent did not answer an email in late April asking whether the investigation is moving forward.
‘HRV cannot focus on Norfolk transactions’
Of the $250 million Hampton Roads Ventures had invested by the end of 2019, the last year federal records are complete, only $35.2 million was in Norfolk. No projects have been funded in Norfolk since 2008. Since then, HRV has moved to focus on rural investments it says are more likely to win allocations during the annual competition for funds. About 20 percent of allocations go to rural projects.
In a January email, Carnes brushed aside an initial request that HRV pursue only projects in the city.
“HRV cannot focus on Norfolk transactions at this point based on its agreements with the CDFI Fund. Reversing that course would mean that HRV is in violation of its agreement with the U.S. Treasury,” she wrote. “HRV has been a rural CDE for years, and the CDFI Fund does not favor changes in strategy. HRV does not have a sufficient urban track record at this point to justify an award using this strategy.”
One of the reasons for that, she added, was HRV’s fault. Projects in Norfolk, notably the Attucks Theatre refinancing and the investment in a boat hotel near East Beach, had compliance problems and would not be permitted under current rules.
She supplied Pishko with a spreadsheet showing an annual average of $456,000 in upfront fees and $723,000 in management fees HRV has collected over the past 10 years. The average income from all fees over that decade was $1.4 million annually. Net income in recent years has been about $500,000. But relatively little of that has been transferred to NRHA.
Why HRV has sat on what grew to $10 million in reserves by January is not clear.
“The 2020 operating expenses are over $1,000,000,” Pishko wrote. “Is there any industry benchmark, is this high or low or in between? The 2020 salaries and benefits are $495,268. Please provide a breakdown of who was paid what salary and an explanation of benefit cost. Has consideration been given to whether HRV can be operated for less by using NRHA employees?”
In a response, Carnes reported that Jennifer Donohue, HRV’s chief executive officer, earns $191,533 in salary and benefits. The two other HRV employees, the compliance officer and administrative assistant, earn $84,447 and $81,629 in salaries and benefits. John Kownack, the former executive director of NRHA, earned $90,287 before he left HRV in November. The rest of the expenses for salary and benefits went toward parking, payroll administration, taxes, and workman’s compensation.
HRV also committed in 2016 to paying a $75,000 annual premium for 10 years for a cash surrender life insurance policy in the name of a “key employee” that appears to be Donohue, according to audits obtained through a different records request. HRV has a split dollar agreement with the employee.
Five years after the premiums are fully funded in the amount of $750,000, the outstanding principal and interest of 2% annually is due from the employee. Such arrangements permit a corporation to fill the void if the employee perishes. They can also serve as a low-interest loan or an additional retirement plan for the employee. It’s not clear exactly how the HRV insurance policy is structured.
Carnes dismissed the idea of using NRHA employees, as they were in the past, adding “that has not proven helpful.” HRV reimbursed NRHA more than $1.3 million for work by the housing authority’s staff between 2006-20. “The NMTC program is very complex and requires extensive financial knowledge and training,” she said. “Using NRHA employees is no longer a viable consideration.”
An atypical CDE
Companies like Hampton Roads Ventures are called community development entities. They may be offshoots of banks, nonprofits, public agencies or other financial institutions. They apply for new markets tax credits from the U.S. Treasury Department and, if they prevail in the highly competitive process, they match projects and investors who earn a 39% tax break over seven years. The Treasury Department says for every dollar invested in the program it spurs $8 in private investment on average.
The deals are complicated, generally offering lower interest rates and fees to developers. The program targets distressed and severely distressed neighborhoods with high poverty rates that otherwise would not attract investment. In a simple example, the borrower — a developer or business — would get a $10 million investment in a project at a cost of about $7.2 million.
Hampton Roads Ventures appears to be a rarity, a private, for-profit CDE created by a public body. St. Louis, with a population of 300,000 compared with Norfolk’s 240,000, had $1.4 billion in New Markets Tax Credits projects through 2019, the last year compiled in a federal database. The city’s nonprofit community development entity, the St. Louis Development Corporation, has won $493 million in allocations, all invested in the city, creating more than 6,800 jobs.
Unlike HRV, the St. Louis Development Corporation puts out a request for proposals after earning an allocation, holds public monthly board meetings and subjects itself to public documents requests (as a nonprofit, its tax returns are public).
Donald Musacchio, the chair of NRHA’s board of commissioners, and Ronald Jackson, NRHA’s executive director, refused requests for interviews through Carnes.
Under Treasury Department rules for New Markets Tax Credits, the 39% tax break is spread over seven years. Carnes, in another email to Pishko, said that means HRV must maintain operating reserves “equal to one year worth of operating expenses, which is $1,322,355.” She also said HRV needed another reserve in case a project fails and the credits are “recaptured” by the Treasury Department. That amounts to $5 million, she wrote.
Not all CDEs operated by public agencies, however, maintain reserves for possible project defaults. Some parent companies make the guarantee. And some New Markets Tax Credits consultants handle compliance and guarantee their services against any default or recapture of the credits by the Treasury Department.
Carnes told Pishko that HRV was founded to create a revenue stream for NRHA because HUD funding had declined. But the objective of the program is to spur private investment in neighborhoods like the 16 severely distressed census tracts in Norfolk. The Treasury Department says every dollar invested in a New Markets Tax Credits project attracts an additional $8 of private investment. By focusing exclusively on projects outside the city, Norfolk does not reap that benefit.
Investing in housing is not part of HRV’s strategy
HRV was formed in 2003. But through 2021, only $1.3 million flowed into the housing authority, all since 2016. In a January email, Pishko also asked why HRV had not contributed more funding to NRHA. Carnes said NRHA had been “prudent” in seeking distributions. “The objective is not for NRHA to spend all the HRV available funds at one time,” she added.
HRV did transfer $970,000 to NRHA after The Virginia Mercury filed a records request on March 8 with the housing authority seeking any distribution of funds since the stories were published. NRHA responded two days later with a letter from Ronald Jackson, the executive director, dated March 9, requesting that HRV transfer the money to the authority. HRV completed the transaction the next day.
The $970,000 is the largest single contribution HRV has made to NRHA and raises the total since 2016 to $2.3 million. Before 2016, it is not clear that HRV, which began in 2003, contributed any funding beyond reimbursing NRHA for staff working on HRV projects.
In a March 14 email to Chalk, Carnes outlined what she called a process for Norfolk projects to be considered by HRV.
In the memo, she outlined the proposed process, which relies on the city to do the original vetting:
The city’s Department of Economic Development would coordinate submissions. Developers would first go through the city, not HRV, and submit the proposed project, budget, source of funds and the community impact, including the number of jobs. The city staff would then do the preliminary investigation into whether the project was a good candidate.
The city would then submit the project to HRV for review and confirmation that it fits within what she called HRV’s approved asset classes: manufacturing, medical facilities, and retail projects including a grocery store or other “food” component.
The city’s inquiry began on Dec. 22 when Pishko emailed Carnes. “Delphine, we have read Jim Morrison’s article regarding HRV providing their new market tax credits to investors developing outside of Norfolk and need to know why they were not provided to developers in Norfolk. Please advise,” he wrote.
“One of the main issues,” Carnes wrote back, “is that developers must have a commercial building with no housing at all or very little housing in order to qualify for new markets tax credits. Most Norfolk transactions we have been made aware of over the years are transactions where there are apartments and an ancillary commercial or retail use,” she replied, in part.
That description from Carnes, who markets herself as an expert in New Markets Tax Credits, is inaccurate, according to the CDFI Fund and other experts. Mixed-use developments with rental housing are permissible if 20% of the income is from commercial or retail. Using tax credits to invest in for-sale affordable housing has become more widespread in recent years with nonprofits in St. Louis, Atlanta, Indianapolis, Baltimore and a couple of dozen other cities responding to the affordable housing crisis using the program.
In St. Louis, $18.3 million in New Markets Tax Credits helped Habitat for Humanity build more than 100 for-sale affordable homes, the majority of them in the city’s highly distressed JeffVander-Lou neighborhood, doubling the percentage of homeownership. Crime dropped by half within two years.
Asked by email in a series of questions if she wanted to explain her replies, Carnes wrote, “I simply do not have time.”
The one question she did answer was about housing. Investing in housing, she wrote, was not a current strategy of the housing authority’s for-profit subsidiary.
“In response to your question regarding residential rental housing and for-sale housing, the answer is yes, those activities are eligible for NMTC financing if structured properly. HRV financed a couple of mixed-use projects including affordable rental housing many years ago and has chosen to focus on other asset classes since then. Mixed-use projects can be very challenging from a structuring and ongoing compliance standpoint, and those projects are often much better candidates for LIHTC financing.
“Regarding for-sale housing, yes it is feasible and I am aware that some CDEs invest in that type of project,” she wrote. “It is simply not something that has ever been part of HRV’s strategy.”