Biscuit backstory: Flips would have rewarded Craig's fees

In its first two years in the hands of speculators, doomed housing development Biscuit Run rang up over $7 million in expenses, including nearly a quarter million dollars paid to lead investor Hunter Craig. That's according to a court filing in the lawsuit in which Craig and company, already partially bailed out by taxpayers, are suing for nearly $20 million in additional public funds.

According to the filing at the Albemarle County Courthouse, the former owners concede they paid $240,000 to Craig Management LLC to oversee the property's rezoning in 2007. That's more than the group, organized just two years earlier, paid its environmental engineers, its traffic consultants, or to the civil engineers who designed the master plan for an intended 3,100-unit development on the nearly 1,200 acres southwest of Charlottesville.

Most expense categories, however, fall far short of what the group spent in its first two years on legal fees– over $700,000– and on the biggest expense of all: millions in interest on borrowed money that pushed their company, Forest Lodge LLC, to the brink of insolvency and so traumatized one of its lenders that it issued a special report to shareholders about the delinquent loan.

Much of the bleeding came to a halt on December 30, 2009, when Biscuit Run was sold to the Virginia Department of Conservation and Recreation as a state park, a deal heralded by the outgoing governor, Tim Kaine, as a "bargain." However, investigative reports later revealed that Virginia taxpayers shouldered a burden of $21.5 million in cash and credits, more than double the $9.8 million Kaine initially described as the price.

In their October 12 lawsuit, Craig and company demand nearly $20 million more, a move that, as reported last week, has drawn howls of protest from both sides of the political spectrum.

"I don't blame the developers; I blame the state," says independent Albemarle supervisor Dennis Rooker. "The state should not be talked into doing deals like that."

All of the investors with whom this reporter has spoken, several men who participated as so-called "limited partners," have indicated that they lost 100 percent of their investments– in some cases as much as $1.3 million– but that the damage to Craig and his father-in-law was much deeper. The investors portray Craig and father-in-law Wick McNeely as having made personal guarantees on a bank loan and are the only men now scrambling to lessen their losses. Each interviewed investor said he was not aware of the lawsuit until a reporter's phone call.

"I just didn't like being lumped in with someone who is driving this and using the system and his connections to get a bailout," one of the investors says in an email. "It sucks to be dragged into something and be labeled a bad guy when you are an investor being kept in the dark and have nothing to gain from what is being done."

Meanwhile, lawsuit exhibits unseen during the reporter's first courthouse visit shed further light on what was clearly planned as a flip, a quick sale to another company. If Craig were bragging to potential investors that then-Wall Street giant Lehman Brothers would fund his flip, he has mustered some evidence.

In February 2006, Pulte Homes, one of the nation's largest home builders and then an occasional Lehman partner, allegedly issued an offer to buy Biscuit Run, less than four months after Craig's team consummated its $46.2 million purchase. A Lehman-funded flip to Pulte would have covered all the proffers– about $40 million worth of gifts to Albemarle in exchange for the rezoning– and still have paid Craig's team $130.8 million, a handsome return on investment.

Additional interest emerged from Newland Communities. In September of 2006, that San Diego-based company issued a purchase contract, again offering to pay the proffers and sending Craig's team $101 million. (The court file also includes mention of a third potential flip, this one from an entity described as Entertainment Enterprises, whereabouts unknown and date unspecified, which allegedly wanted to pay $113 million.)

Curiously, the flips appear to pre-date the 2007 rezoning when Craig committed the property to an array of proffers, including land contributions such as a 12-acre school site, a 403-acre park, and another 564 acres of green spaces. The developer also committed to construct streets, sidewalks, curbs, and an extensive network of underground utilities. Proffers totaled $41 million, including construction of two new public roads, off-site traffic signals, and over $2 million for transit. Cash donations included $200,000 for park planning, $875,000 to Albemarle Fire & Rescue, and a million-dollar gift to Habitat for Humanity.

But like a Grand Canyon pack mule, Biscuit Run was suddenly saddled. A 2009 state-commissioned appraisal pegged the value of a rezoned Biscuit Run at just $12 million, but a prominent Albemarle developer, speaking anonymously, claims it wasn't worth as much as a dollar.

As the economy made abundantly clear, timing counts. In September 2008, in one of the nation's most spectacular business blow-ups, the real estate-dependent Lehman filed for Chapter 11 protection, the biggest bankruptcy in American history. And yet Craig's team found appraisers willing to claim that Biscuit Run– empty land in a busted market– was still worth as much as $87.7 million. Getting the state to accept such suspect appraisals, the grounds for additional tax credits, is the basis of their suit.

"I'm not an appraiser," says Supervisor Rooker, "but I can assume that if they could have been privately paid as much as they were paid in tax credits they would have taken it."

One media account asserts that a successful lawsuit could trim the loss to Craig's team– including his asset-shedding father-in-law, Wick McNeely, who sold a racehorse November 6 for $2.3 million– from $24 million to $5 million.

While Craig has declined all comment, the lawyer who submitted Craig's request for tax credits now serves on the Albemarle County Planning Commission. Also serving as a Commissioner during the 2007 Biscuit Run rezoning, Duane Zobrist was not in public office when he submitted the controversial paperwork, and he says there was nothing fishy about the documents or the people.

"I selected Pat by her experience," Zobrist says of Orange-based appraiser Patricia O'Grady-Filer. "I'll bet Pat's done 150 of these appraisals."

Zobrist says he also selected a Midlothian-based appraiser to pen a letter affirming O'Grady-Filer's nearly $88 million valuation.

"We're very conservative and careful," says Zobrist. "I'm not going to touch anything if I think it's going to be audited."

Noting that Virginia's conservation tax credits have been getting bad publicity, Zobrist contends that they are actually responsible for perpetually preserving hundreds of thousands of acres of land, and he says that he's never seen one of his tax credit packages receive so much scrutiny. Particularly troubling, Zobrist says, is that the tax department balked at issuing the full amount of requested credits.

No longer involved in Biscuit Run, Zobrist surmises that the suit will be settled with a compromise between the $11.68 million in issued credits and the total $31.16 million requested. The onus falls on Attorney General Ken Cuccinelli, whose spokesperson has promised to file a response by November 21. But the Hook's legal analyst, David Heilberg, says that the burden of proof lies with Craig's team to show that the tax department ruled improperly.

"It's going to depend on the fact-finding," says Heilberg, noting that this type of trial must go before a judge, not a jury.

As for Rooker, he was hoping Biscuit Run would have fulfilled its promise as a high-density development inside Albemarle's growth area, an effort representing decades of person-hours by County officials and one that would have provided a free 403-acre park as part of the package.

"This is not an appropriate use of the tax credit system, and I blame the state for that," says Rooker. "They should not be accepting donations of growth-area properties. It's undermining the whole basis for smart growth in Virginia, and it results in them paying exorbitant prices.

"And," Rooker adds, "as we've seen, the tax credit route can be an uncertain route."