The flip that flopped: Biscuit Run men want $20 million more from taxpayers

Biscuit Run is the gift that keeps on… taking. Initially sold to the public as a $10 million state park, the nearly 1,200-acre tract has actually extracted more than $21 million from state taxpayers in what has been called one of Virginia's biggest corporate bail-outs. Now, nearly two years after the sale, the former owners are seeking nearly $20 million more, and, in the latest chapter of this saga, they have filed suit to collect.

"That sounds outrageous," says Creigh Deeds, the state senator who inadvertently allowed situations like this to happen.

The background
As avid Hook readers already know, Biscuit Run is both the priciest and most controversial land deal in Albemarle history– and that was before the lawsuit, filed without fanfare October 12 in Albemarle Circuit Court.

Located southwest of Charlottesville, Biscuit Run takes its name from a waterway that meanders through the property, a 1,194-acre tract of forested hills and rolling meadows just a mile south of Interstate 64 between Old Lynchburg and Scottsville Roads. It offers distant vistas of the Blue Ridge; and, at sunset, there are gleaming views of nearby Monticello, Montalto, and Carter Mountain.

Six years ago, near the height of what has now been identified as a housing bubble, a team of some of Charlottesville's most prominent businesspeople submitted the winning bid of $46.2 million to buy the property. Nearly double the second biggest land deal on the books, the price set an eye-popping record for local land transactions that still stands.

Another surprise ensued in January 2010 when outgoing governor Tim Kaine announced that the state had just bought Biscuit Run as a state park in a deal made possible by alleged seller philanthropy. However, earlier this year, appreciation turned to outrage when a secret appraisal that might have triggered another $31 million payout was leaked.

The state has already handed the former owners a total $21.48 million in cash and tax credits. Now, as dozens of people are camped out in Charlottesville as part of the "Occupy" movements that have captivated a nation whose middle class has been losing financial ground, the owners of Biscuit Run seek another $19.48 million.

Downtown in Lee Park, a reporter asks a man standing next to a "plutocracy stinks" sign what he thinks of Biscuit Run. Ed Sefer says he's delighted by the preservation of land for a state park. Informed that the seller has begun suing the state for nearly $20 million in tax credits, the mood shifts.

"It's really insane," says Sefer, who says he hasn't been able to find work in 18 months, "how the rich get richer and the poor get poorer."

It's not just Occupiers who see greed at Biscuit Run.

"Asking the taxpayers for an additional 20 million," says Tea Party supporter Clara Belle Wheeler, "when the taxpayers are already counting pennies of their own is really audacious."

Size (of appraisal) matters
Why should an appraisal matter after a sale– aren't appraisals just for getting loans? It turns out that Virginia is one of about a dozen states that allows certain property owners to convert an appraisal into cash. It happens via a program called conservation tax credits. The bigger the appraisal, the bigger the value of the "gift" when property is sold or encumbered by a non-profit entity. This year, Virginia will issue about $107 million in such credits– paying people to give up the right to develop their land.

"Right now, we don't have that kind of money to be throwing at people," says Norman Leahy, contributing editor to a conservative political blog called Bearing Drift. "Especially with people losing jobs, the priorities here are completely out of whack."

Based in Richmond, Leahy has noticed that despite their noble conservation purposes, the credits have become a "riskless lottery" for many affluents who never intended to develop their farms.

"It's not fulfilling its original purpose– to preserve the family farm– but instead serves to gold-plate a come-here's estate," says Leahy.

What the men of Biscuit Run tried to do was snag millions in credits based on the amount of their so-called gift. They calculate their donation as the difference between the $9.8 million they accepted when selling the place and what they're claiming is Biscuit Run's true market value: $87.7 million.

How anyone could peg the value of Biscuit Run at nearly $88 million– raw land in a smashed housing market– is the story of Biscuit Run. And it's been cited as further evidence of what some are calling a "racket."

The 'appraisal racket'
There's a lot riding on conservation tax credits, with a strong incentive to concoct unrealistically high valuations. The "appraisal racket," Slate recently dubbed it, has been blamed for both the S&L crisis of the 1980s as well as the more recent mortgage meltdown.

George Dodd has long railed against what he sees as corruption in his industry. But in a state with few regulators and a low bar to entering the profession, the formerly Mechanicsville-based Dodd asserts too many appraisers determine that it's easier to reach a client's target value than risk angering the client and losing out on future jobs.

"The appraiser," says Dodd, "should be acting as a professional in an unbiased manner and not pushing some arbitrary number drawn up in the back room."

While Dodd, who recently sold his Virginia practice to take a government job in Texas, says he isn't familiar enough with Biscuit Run to slam the private appraisals as fraudulently high, he opposes the Virginia law– passed unanimously in 2008– making it a crime to reveal the amount of tax credits won on each property.

"As a taxpayer, I'm outraged," says Dodd. "If you're going to spend my money, then you have to open it to public scrutiny. Whenever you try to hide stuff, it creates a vehicle for corruption."

And yet the architect of Virginia's system, state senator Creigh Deeds, despite expressing outrage at both the $88 million appraisal and the lawsuit, says he has no plans to unshroud the numbers.

"I'm willing to have that discussion," says Deeds, "but I'm not sold that that's a solution to the problem."

The programs trace their existence to a non-profit firm that's now one of America's largest corporations. A little over a decade ago, the Nature Conservancy convinced legislators in several states including Virginia to enact such credits. It was Deeds, then just a Delegate, who patroned the bill that launched Virginia's credit program, now considered among the most generous in America.

Today, big non-profit firms like the Conservancy– which has an annual budget of nearly $5 billion– as well as smaller ones like the Warrenton-based Piedmont Environmental Council teach landowners how to put their land under easement and thereby lower annual tax bills while garnering upfront payments in the form of the credits.

And that's not all. Anyone who donates easements also stands to receive tax deductions for making "donations" on both their state and federal income tax returns. It's like giving a pile of old clothes to Goodwill, only bigger. But it can also trigger some second-guessing, and that's what happened with Biscuit Run.

Tim Kaine was right
This was a deal with the chance to derail the political career of Tim Kaine. Like his most headline-grabbing move, an effort to let convicted murderer Jens Soering return to more gentle justice in his native Germany, Biscuit Run was sprung on the public in January 2010, the final days of Kaine's term as Virginia's governor. Even though his presumed opponent for the U.S. Senate, Republican George Allen, has shown little interest in criticizing, he has recently begun defending it.

"We made no deal on tax credits," says Kaine. "All we did was buy a $40 million parcel for nine million bucks to accomplish a 20-year state goal, and I thought that was a smart thing to do."

Indeed, uncontested facts laid out in the lawsuit tend to support the notion of Kaine's administration as more fiscally hard-nosed toward Biscuit Run than his Republican successor. Under Kaine, the state's appraisal pegged the value at just $12 million with Culpeper-based appraiser James S. Damer noting that rezoning the tract for 3,100 units may have actually decreased its value due to the promise of over $40 million in land and cash proffers.

By contrast, the state-funded appraisals conducted during the term of current governor Bob McDonnell have come in at $32.2 and $39 million. McDonnell, who has received over $60,000 in campaign contributions from Craig, suggests that he has taken a hands-off approach, calling this "a matter between the respective taxpayers and the Virginia Department of Taxation."

Under McDonnell, the state investigated the near $88 million appraisal by Patricia O'Grady-Filer, but it closed her case without punishment due to "insufficient evidence." A recent check of the records shows that the Orange-based O'Grady-Filer allowed her appraisal license to expire in October, and her state real estate license expired a month earlier. However, she broke a long pattern of declining to return a reporter's phone messages by revealing that the expirations were an "oversight" and that she's in the process of renewals.

As for declining to discuss Biscuit Run, she says, professional standards prohibit comment.

"I can't discuss it," says O'Grady-Filer, "any more than your CPA can talk about your tax returns or your doctor can discuss your medical records."

King of the flip
Hunter Craig has developed many neighborhoods: Western Ridge in Crozet and both the Mill Creek and Mill Creek South subdivisions. But in some circles he's known as a flipper.

For instance, a decade ago, he snagged and then unleashed one of the key parcels that would eventually become part of the mammoth Stonefield shopping center, under-construction. Around that same time, he paid the City of Charlottesville about a quarter million dollars for a parking lot by the C&O Restaurant before selling it to Bill Nitchman to develop the Holsinger condominiums.

In 2005, he converted the Hessian Hills complex from apartments to condominiums and later did the same thing with the residential tower known as 1800 JPA. While those may have been successes, his attempted flip of Old Salem apartments was something else. Having rebranded them as Barracks West condos toward the end of the real estate bubble, he found himself sitting on so much inventory that in 2007 he hired an out-of-town firm to attempt to sell 277 of the 364 units. The condo conversion craze hit a brick wall of consumer distress.

And speaking of distress, a decade ago, he cobbled together a pair of parcels on the corner across from the former home of Martha Jefferson Hospital and then convinced both the hospital and tax authorities that he'd made a donation. The parcels, however, appear unsellable due to a 99-year lease he engineered.

His biggest flip of all would have been Biscuit Run, as, according to his lawsuit, he contracted in the year after acquiring it to sell it to a California neighborhood development company. Why the men of Forest Lodge didn't sell to San Diego-based Newland Communities for the lawsuit-alleged price of $108 million is left unsaid in the suit– and left unsaid by Newland Communities, which did not return a reporter's call. But as a top Martha Jefferson Hospital official recently commented when contemplating the Hospital's acquisition of Craig's corner parcels, "Timing is everything."

Other men
A form filed with the federal Securities and Exchange Commission shows that Craig raised $17,915,000 in capital to fund Biscuit Run with each investor expected to bring at least one million dollars. The form names Atlantic Coast Athletic Club founder Phil Wendel and Craig's father-in-law, Wick McNeely, as among the largest investors in the holding company, Forest Lodge LLC.

As the managing partner, Craig and any others he may have recruited into another group called Forest Lodge Management LLC may now be bearing the brunt of the pain. Sources indicate that in exchange for a higher return on the upside, the managing partner may have assumed greater liability on the downside.

So far, the taxpayer payout, large as it may sound to some citizens just trying to put food on the table, wouldn't have come close to covering the amount of the loans which totaled over $34 million at one point and which were listed as delinquent by the lead bank, Bristol-based First Community Bankshares, at the time of the sale.

With the exception of Craig himself, who has been dealing with unhappy investors and who has been pushed to pledge all his stock in Virginia National (the bank he founded in the late 1990s), perhaps nobody has felt the pain of Biscuit Run as much as Craig's father-in-law, Wick McNeely. A longtime owner of Allied Concrete and Eagle Corporation, McNeely appears to have divested himself of those investments, and he has spent the last few years unloading assets– some at a huge loss– to raise cash.

In January, McNeely unloaded the farm long known as Burning Daylight, which he had purchased in 2005 with a $16 million loan, for just $9.15 million. Last month, he dropped out of Farmington Country Club and parted with a waterfront Nova Scotia mansion that had been listed for $6.4 million. Even his Garth Road residence, Morrowdale Farm, is now for sale. (During the time of his ownership, McNeely won conservation tax credits of unknown amounts on both Burning Daylight and Morrowdale.)

Neither McNeely nor Craig, who still owns cool local stuff like the landmark eight-story Wells Fargo tower on the Downtown Mall, returned phone calls.

7,000 competing spots
The lawyer who filed the suit, Craig Bell of the Richmond office of McGuire Woods, portrays the suit in vastly different terms from Creigh Deeds.

"I don't know why he'd say it's outrageous," says Bell. "The lawsuit is just an effort to get the tax department to follow the law that Senator Deeds crafted and shepherded through the General Assembly."

One of the suit's more blistering allegations is that the most recent state-sponsored appraisal grossly inflated the number of available building lots in the county. The idea is simple supply-and-demand. If there are lots of lots, then over-supply would drive down prices and make selling the bits of Biscuit Run harder. Or both.

The suit claims that state-hired appraiser Larry Salzman "grossly" overestimated when he claimed that there are about 7,000 available building sites in Albemarle. By contrast, the Craig-hired appraiser, Ivo Romenesko, claimed that Albemarle has just 243 lots. That would help explain why Romenesko figured that Biscuit Run was worth nearly as much as O'Grady-Filer contended and that the owners could reasonably expect to sell 290 lots each year, exhausting their supply in just a little over 10 years.

"If they are talking about selling 290 residential units per year, I would find that very surprising," says Charlottesville realtor Jim Duncan, who points out that Old Trail– a burgeoning Crozet-area community and what Duncan calls "one of the most successful neighborhoods in the area"– has been annually selling just 40-60 single- and multi-family units, and Duncan notes that only 385 of this year's 2,054 transactions are new construction.

"My crystal ball says that it's feasible that Biscuit Run would garner at least 25 percent of the new construction market," says Duncan, "but I find it difficult to believe that it would achieve a 75 percent market share.

As for the suggestion that the claim of 7,000 building lots was fanciful, a recently released County report found that there are actually more than 8,000 lots prepared for sale.

Boyd's retreat
The bailout of Biscuit Run– so hastily constructed that a "donut hole" of private land zoned for 100 residential units was left within its borders– received a dramatic public debut nearly two years ago at the Monticello visitor center when Kaine announced the creation of the new state park. Since then, however, big names have tried to distance themselves.

Grammy-winning musician Boyd Tinsley of the Dave Matthews Band, for instance, appeared at the press conference seemingly as an investor willing to take a hit for the good of the public. He even said, "Any loss we've taken pales in comparison to the contribution we've made to the community." As news of the deal's back-room bargain began leaking, however, a highly-placed associate contacted this reporter to say that Tinsley simply misspoke, that he was there as a friend of the governor and never actually owned a piece of the Biscuit.

Then there's Coran Capshaw. The manager of the Band, he is a frequent investor in Craig's projects, having extracted millions from taxpayers via conservation tax credits, including one deal that augmented Craig's Farmington neighborhood yard with protected property. As for ACAC owner Phil Wendel, he expressed ignorance about the lawsuit and referred questions to Craig. Other investors include Castle Hill co-owner John Carr, former radio magnate Brad Eure, and lawyer Dave Dallas. Each declined a request for an interview.

Here's a conversation with Jeff Buckalew, a recent arrival to Albemarle.
Hook: "I understand you're an investor in Biscuit Run."
Buckalew: "I don't talk about my investments."
Hook: "But my source indicates that you're an investor, and I'm doing a story."
Buckalew: "That's your prerogative."
Hook: "I believe my source is reliable."
Buckalew: "Your information may or may not be good; you better check your sources."
(silence)
Buckalew: "Is there anything else you want to talk about?"
Hook: "How 'bout the weather?
Buckalew: "It's a beautiful fall day out there, isn't it?"

Epilogue
Multiple sources close to the deal indicate that each of the passive investors has already written off his million-dollar loss and would stand little chance of collecting any money from a successful lawsuit which, the sources say, would merely shrink the losses for Craig and McNeely, who appear responsible for the still-outstanding debt.

Meanwhile, the state has begun the planning process for Biscuit Run State Park. Ironically, in a County that already has thousands of acres of parks and which borders Shenandoah National Park, this new one won't provide the one thing for which many community leaders have been clamoring: athletic fields. Moreover, whatever develops won't happen soon.

"We still don't have money for development, staffing, anything," says Gary Waugh, spokesperson with the Department of Conservation and Recreation, who guesses– and he stresses that it's a guess– that the park may not open before the year 2020.

Although the situation was hatched by his predecessor, current governor Bob McDonnell is the one who appointed Craig last year to the prestigious Board of Visitors at the University of Virginia and now has to deal with any fallout from Craig's lawsuit. And with the exception of a carefully-worded statement earlier this year about some sort of review to "reassure" taxpayers, the Attorney General's office has remained tight-lipped about what– if anything– it plans to do about Biscuit Run. However, because Craig and company filed, the AG doesn't have the option of continuing in silence; spokesperson Brian Gottstein says his office must file a response by November 21.

As for official reform, blogger Leahy lauds a recently passed law to create an "inspector general" to fight fraud in Virginia, but what he really wants is a repeal of the secrecy law. Until that happens, he says, the lure of millions of dollars in tax credits will continue to reward those who manipulate appraisals.

"It's better than the lottery," says Leahy, "because you will win."

Attached Documents: 

cover-biscuitlawsuit-action.pdf