City fails to stop developer from work on 31st Street Hotel in violation of contract

Hotel work progressing in violation of agreement with city

The developer of the 31st Street hotel project, who recently cited the city for numerous violations of the joint partnership contract and threatened action for damages, is operating illegally under terms of the Development Agreement with the city.

Despite the fact that the developer hasn't closed on the property, developer Bruce Thompson as of Friday was building the 1st floor of the 'Top Drawer Hotel' as he has called it.  Yet he has indicated that unless the city takes immediate action, the project could be in jeopardy.

City puts developer on notice of violation of Development Agreement

On Jan. 9, after responding point-by-point to the developers charges the city was responsible for delays and increased costs, City Atty. Les Lilley dropped the bombshell:

"There is one additional issue of which I must advise you.  While we are delighted that the Developer is making progress...there is a contractual provision that is being overlooked by the Developer....  Pursuant to the Escrow Agreement, the Developer was given the right to commence construction on the Land but only to the status permitted under the Developerís E&S and Foundation Permits.  We understand that the Developer ... has commenced vertical construction of the Hotel on the Land.  The Municipal Parties are concerned that vertical construction has commenced without the Developerís providing the Municipal Parties the Construction Contract and the Construction Bond....

See full text of letter

Vertical construction was not to be allowed until after the developer had posted a $2.6 MILLION letter of credit and the final agreement signed.

Asked where are the protections for taxpayers since unauthorized vertical construction has begun, assistant city attorney Carol Hahn, handling legalities of the project for the city, said, "The parties are discussing the issue of the vertical construction and what protections (in addition to the existing indemnity agreement from the Developer in favor of the Virginia Beach Development Authority which covers any loss) may be put in place to address the City's concern."

"It is obvious," said one source, "the city was caught asleep at the switch, yet I'm sure dozens of city employees and officials pass the site every week.  Never once did it occur to them that the construction was illegal"  (The developer does have a legal building permit, but under the agreement he is prohibited from vertical construction until the final agreement has been signed and the letter of credit posted.)

The city, after an Escrow Agreement dated July 24, 2003 was executed, cleared the developer to drive test piles, issued a foundation permit, but specifically prohibited vertical construction.

Now each side is accusing the other of delaying if not jeopardizing the entire project.

The reason for the letter of credit was to not allow partial construction that could be abandoned by the developer, leaving the city holding the bag for the unfinished project.

Will the city have to bail the developer out of the hotel's financial rubble?

Sources familiar with the on-again, off-again hotel deal, which was overwhelming rejected by the voters in a 2000 referendum, say the city's costs may have just begun.

The parking garage, which the city is obligated to build for the developer has already increased in cost from about $16.7 MILLION to about $25 MILLION +/-.

(If you were building a house and it escalated the same amount your payment would go up from $1,260/mo to $1,904.  Click here to see comparison)

In a Dec. 30 letter to the city, the developer laid out what he called a fairly strong case for monetary damages because of delays to the project caused by the city.

One source said, "It is only a matter of time until the developer tells the city, 'My costs have gone up so much because of your delays, I'm going to need additional compensation for damages' to make up the construction budget shortfall.

"You watch," said one, "the taxpayer hasn't seen the last of his skyrocketing costs to build this project he overwhelmingly rejected.

"Council will have to bail it out financially."

City Director of Public Works Dean Block was recently fired as project manager after a verbal clash during a meeting with Thompson in his office and replaced by Director of Public Utilities Clarence Warnstaff.  In fact, Thompson even threatened to have Block arrested if he didn't leave the premises. 

The issue that caused the verbal explosion was Thompson's allegation that he was moving ahead, but the city was failing to meet its development timelines causing him to be  unable to get financing for the project.

Atlantic Ave. closed

The city has closed Atlantic Ave. between 30th and 31st St. for utility work. It will remain closed for about a month.  Jay Bernas, P.E., project manager, public works/beach management explains: 

"Atlantic Avenue is closed between 30th and 31st Street to extend domestic water service, fire suppression and sanitary sewer to the 31st Street Hotel and a sanitary sewer stub to the 31st Street Parking Garage. A new manhole along the existing sewer main on Atlantic Avenue is required to provide sanitary sewer connections to each property. The new manhole is approximately 16 feet deep, which requires well-points to dewater and a large trench (approximately 15' x 15') to facilitate construction.

"City staff from Public Works and Public Utilities evaluated alternatives to perform the work leaving a lane of traffic open but due to the location of the manhole and connections required on both sides of the street, the consensus was to close this portion of Atlantic Avenue for safety reasons. Due to the size of the trench, it would be unsafe for passing motorists and construction workers to provide a lane of traffic. Barring any unforeseen weather delays, the work is scheduled to be complete within a month."

Following that meeting, Thompson's lawyer sent the city a 6-page letter, with timeline attachments, building his case for damages because of the delays and cost increases he alleged the city had caused.  Among other things, Thompson claimed the city had lied to him and his lender about the completion date of massive improvements to 31st Street converting it into a 'gateway' ending at the hotel, jeopardizing success of his project.

He wrote the city:  "...All work to date...has been funded solely by the developer, the lender has yet to fund a construction draw.  Before a construction draw can occur, the developer must finalize its contract with the general contractor and must provide the lender, for approval, a final project budget as well as plans and schedules for the city's portion of the project.  The developer cannot accomplish either of these prerequisites to funding unless the city complies with the terms of the Development Agreement....If construction funding does not occur, or is delayed, the project will be delayed beyond the scheduled opening date.

"Unless the city takes immediate steps, the developer will continue to incur substantial additional costs and expenses, which could include those arising out of the developer's inability to complete the hotel (or complete the hotel in a timely manner."

City Atty. Les Lilley in a January 9 letter back to Thompson and his lawyer, emphatically denied the city was irresponsible in any way in meeting its commitments or caused any delays or increased costs to the developer.




See also:

Rising cost of 31st Street
taxpayer owned parking garage
Comparison of a taxpayer's home
if cost overruns rose by same percent
Change in monthly
house payment
Orig Est  $16,700,000  
Orig Est  $167,000  
Rev Est   $21,000,000  26% incr.
Revised   $210,000  26% over orig. est.
Current   $25,000,000  50% incr.
Current  $250,000  50% over orig. est.

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