Bad men? New numbers show spiraling cost of Biscuit Run

A year ago, an outgoing governor hailed the purchase of a flailing subdivision called Biscuit Run as a "bargain" for Virginia taxpayers. Now, however, newly leaked documents show that taxpayers may end up paying more than twice the price promised for a new park by then governor Tim Kaine. Moreover, the documents show that while thousands of Virginians were battling banks and losing their homes to foreclosure, Kaine's deal scooped up millions in tax credits to bail out some of Virginia's wealthiest people from their bubble-era bet.

Thanks to this deal, it appears that Dave Matthews Band manager Coran Capshaw and the Band's fiddler, Boyd Tinsley, are among the well-heeled investors who could end up losing little or no money on Biscuit Run, even though the nearly 1,200-acre parcel on the south side of Charlottesville appears to be a mammoth botch in the annals of real estate speculation.

"I think somebody's head has to roll," says Rob Schilling, a former Charlottesville City Councilor who now works as a radio talk-show host. And it's not just conservatives who are unhappy. The Democrat who created the conservation tax credit system worries about abuse of the program.  

As for the man who lured the notables into Biscuit Run, veteran real estate speculator Hunter Craig, he isn't talking. But documents that slipped over the Hook's transom around Christmas are speaking volumes.

 

A friend in Orange

In the fall of 2009, a year after the Wall Street collapse, Biscuit Run was in need of a lifeline. Craig had led a team to buy it four years earlier for $46.2 million. Despite a lifetime in the construction industry and a hard-fought rezoning that gave his team the right to build 3,100 homes, Craig had not built a single one.

Saddled with property taxes pegged to the bubble-era purchase price as well as an eight-figure mortgage that had gone into delinquency, Biscuit Run gave every appearance of becoming the biggest foreclosure in Albemarle history. Until unusual things began happening.

When Courteney Stuart penned her investigative cover story two months ago, she theorized that the only way the tract's wealthy investors could have wriggled out of their delinquent loans and retained their investment was finding an appraiser willing to value the place over $86 million. Such a number would pave the way for the state to issue tax credits based on the notion that the sellers are donating land to the citizens of the state.

However, in order to win conservation tax credits, the investors would have to find an appraisal showing that the 1,194 acres of land– even though now mired in an unforgiving housing market– were worth more than the $9.8 million cash they received as payment. And if they were really lucky, they'd want to find an appraiser who determined that the property– contrary to the tides of the souring economy– had actually increased its value. Apparently, they found the appraiser to do just that in the form of Patricia O'Grady-Filer.

Working from an office on Main Street in Orange as Piedmont Appraisal Company, O'Grady-Filer valued the land at $87.7 million, nearly double the bubble-era price paid for the property.

"That's a big number," says State Senator Creigh Deeds. "That's just a big number."

Deeds has a reason to take it personally; he's the father of the conservation tax credit program, and he says he wants to protect it–- just as he wants to protect open space. Back when he was a Delegate representing the greater Bath County area, he pushed fellow Virginia lawmakers to enable the program.

"The tax credit program was my baby because I was convinced we had to create incentives to protect open space," says Deeds. "When I see the tax credit program abused, it really bothers me."

 

The victory lap

At a January 8, 2010 press conference some called a victory lap, outgoing Governor Tim Kaine grinned broadly as he announced that the state had purchased Biscuit Run for the "bargain" price of $9.8 million. However, according to the leaked documents, the actual cost to taxpayers has more than doubled– and it could still go higher.

"It was a very pleasant surprise," Dave Matthews Band fiddler Boyd Tinsley remarked at the press conference where he and Kaine publicly commented on their close personal friendship. Tinsley noted that he'd been unaware of the donation until just weeks earlier.

"Any loss we've taken pales in comparison to the contribution we've made to the community," he said, confessing he wasn't certain about all the logistics of the deal.

The documents show that he and the other wealthy investors, operating as Forest Lodge LLC, were eventually offered $11.7 million in conservation tax credits. Sold on the open market at about 80 percent of their value, they're almost as good as cash. But they weren't enough for Craig's crowd.

Craig's team took the credits, the documents show, and have appealed for a higher amount based on the $87.7 million appraisal by O'Grady-Filer– an amount which, if used to recalculate the credits, would unleash more than $31 million for Forest Lodge.

The end-of-2009 deal garnered immediate controversy shortly after the announcement for yanking the land out of Albemarle's long-planned growth area. Soon the secrecy-shrouded appraisal would take center stage even as the amount remained hidden. Throughout various media investigations, state officials insisted that revealing the number would somehow compromise private taxpayer information.

"That this number had to be dug up," says talk-show host Schilling, "shows that somebody was scared of the media finding out."

And thus the leaked documents.

 

The envelope

The envelope arrived around Christmastime, six weeks after a pair of local features on the Biscuit Run deal including the Hook's October 28 cover story. Inside the bulging, taped-up envelope, was evidence that O'Grady-Filer was the lifeline thrown to Forest Lodge, which was attempting to leverage it to maximize recovery of their ill-fated speculation.

Among the documents was a December 30, 2009 letter from O'Grady-Filer to Forest Lodge explaining that her appraisal was estimating the fair market value of the property. And she asserts that her fee was not contingent on the value.

Her letter doesn't mention that a prior appraisal put the value at less than one seventh of her $87.7 million figure.

"If they could have gotten anywhere near that, they would have sold it for that," says Dennis Rooker, an Albemarle Supervisor, who's repeatedly expressed displeasure with the deal. "Additional parkland is alway nice," Rooker says, "but I don't think this was an appropriate use of the system."

Before the deal closed, O'Grady-Filer's verdict was already receiving scrutiny, and another document shows that Craig brought in another appraiser to review her work.

"I called to her attention several items that required additional clarification, support, and correction," writes Midlothian-based appraiser James H. Boykin. "With the requested changes and clarifications now having been made by Ms. Filer," writes Boykin, "I am pleased to recommend approval of her valuation."

However, even if the developers and this fellow appraiser were smiling, O'Grady-Filer's number ran into some scrutiny from another arm of the state, the Department of Taxation, which knew about the earlier, much lower appraisal.

 

Taking a risk

A purchase price of $46.2 million seemed steep even in bubble-fueled 2005, say several people with long histories of watching the ups and downs of real estate deal.

"It might have been that they were still giddy with the endless growth," says real estate agent Roger Voisinet, who recalls that by that point, experienced property watchers were already worrying that the exuberance would soon be coming to an end.

The $46.2 million was only the beginning of the expense of turning a rural property into homes and infrastructure-backed neighborhoods. At 1am on September 13, 2007– after nearly two years working with lawyers, planners, and consultants– Hunter Craig at last won the rezoning.

"This will be the gold standard for the neighborhood model plan," he promised the Supervisors, according to an online report by Charlottesville Tomorrow. Craig's plan would place 3,100 homes on 828 acres and hand over nearly 400 acres for a school and a new county park.

To win the rezoning, Craig committed the built-out Biscuit Run to paying $41.15 million in cash and non-cash proffers, according to the Charlottesville Tomorrow report. Although over $20 million of the proffers were land, Biscuit Run had just saddled itself with $17.9 million in cash obligations. 

The deal had begun in 2005, the year that saw two-bedroom bungalows on Charlottesville streets selling for over $400,000– some after bidding wars had broken out. It was also the year that A&E network debuted a new show called "Flip This House."

Who didn't want to get involved in the real estate frenzy?

 

The Midas touch?

Biscuit Run is named for the meandering stream on the south side of Charlottesville where for years the Breeden family invited the community for potluck dinners and into-the-night discussions of soapstone sculpture. The late family patriarch, I.J. Breeden, who had northern Virginia development experience under his belt, had purchased the tract in 1971 for $1 million, believing that county development would focus on the southside because of its proximity to Interstate 64.

Hunter Craig was no stranger to savvy real estate deals. Son of [Daley Craig and brother of] Sam Craig of Craig builders, he graduated from Hampden-Sydney College and eventually became son-in-law to concrete magnate Wick McNeely.

In the late 1990s, he identified a set of parcels at the corner of Hydraulic and Emmet, bought it, sold it at a profit, and let others struggle to develop what may eventually be called Albemarle Place. He would also develop the Crozet neighborhood known as Western Ridge– quite a feat since that tract was landlocked until Craig won the right to construct a private bridge over CSX tracks. Most recently, he threw his real estate acumen into unlocking a complicated property involving a long-term land lease for a soon-to-open Whole Foods supermarket next door to the K-Mart along Hydraulic Road.

But even a master chess player occasionally makes a move that begs for a do-over.

 

The seeds of destruction

By the time Hunter Craig stood in front of the Albemarle Supervisors three years ago in apparent triumph, the undoing of Biscuit Run had already begun.

Pundits would later look back and point to 2007 as the year that the housing bubble had already begun to deflate. The annual climb in real estate valuation ceased, providing an external clamp on new projects. But internally, Biscuit Run had another problem: carrying costs.

Craig certainly wasn't the only one to identify real estate as the next big thing in the new century. Out in Crozet, a father-son development group created Old Trail Village by nestling a golf course under a scenic Blue Ridge backdrop. Closer to town, another team launched an eco-friendly community called Belvedere. Neither neighborhood has come close to completion. But neither could compare to Biscuit Run in sheer size or financial audacity.

In addition to at least $12.3 million in cash put up by the investors, Biscuit Run was funded with a $33.3 million loan from banking behemoth UBS. If Forest Lodge were paying the typical prime rate of interest– the best rate given to commercial customers– it was initially paying seven percent.

In April 2008, Craig's team refinanced their debt in a higher amount– $34.3 million– with Bluefield, West Virginia-based First Community Bancshares. The loan was so big that First Community farmed out the risk to other banks.

It may have seemed big to the Forest Lodge investors, too. For starters, they were borrowing a million more than the original loan. And even if they were now paying just a five percent rate, interest alone might have amounted to $4,700 per day, $143,000 per month, $1.7 million per year. That's a relentless drain on coffers– particularly for a property producing zero income.

On the September 2007 morning when Craig made his "gold standard" comment after winning the rezoning, the residential real estate market had already begun unraveling. Belvedere looked like a ghost town. Old Trail had been used as a location for a Steve Carell comedy, Evan Almighty, involving an unfinished housing development. And Biscuit Run would soon show signs of a struggle.

 In its November 2009 quarterly report, the bank revealed that Biscuit Run's new owners had fallen behind on their note. But unlike the ordinary people who lose houses and dreams to the nightmare of foreclosure, Hunter Craig and company had some powerful allies.

 

When good deeds become good deals

Thanks to Creigh Deeds and other legislators, Virginia is home to a conservation tax credit program that's among the most generous in the country. It's a key reason that Governor Kaine was able to meet his stated goal of putting 400,000 acres under conservation by the end of his term.

But it comes at a cost.

If an investor buys a parcel of land for $3 million, then turns around and immediately gives up the right to develop it (either by donation to the state or to a non-profit group), all the public hears is that the land has been saved from development. But what if that investor finds an appraiser like Patricia O'Grady-Filer, someone who can find value above what the market will bear?

If the appraiser will value the land at, say, $15 million without objection from the state tax department, then millions in tax credits are unleashed. Conservation tax credits are 40 percent of the donation, i.e. 40 percent of the appraised value minus any cash tossed into the transaction.

Such appraisal-fueled donations, however, unleash not only conservation tax credits. Accountants say that such "donors," many of whom may never have wanted to develop their sprawling estates anyway, can also take state and federal tax deductions on their "losses."

Land records suggest that big names and big farms have participated. For instance, in late 2006, Craig's father-in-law, Wick McNeeley donated development rights at his 1,478-acre Chapel Springs Farm in Free Union.

The value of McNeely's donation– made to the Nature Conservancy– might have run into the millions. Yet it remains secret, as the state tax department insists that this is private information between the two parties to the gift.

Ironically, however, the program operates under total secrecy to the people funding it: the taxpayers.

Thanks to that veil of secrecy the public might never have known how sweet the deal was for the Biscuit Run investors. However, Forest Lodge wasn't satisfied with donation. Their desire for state cash inadvertently brought scrutiny that may have undone the work of Patricia O'Grady-Filer.

 

The fly in the soup

One of the more controversial aspects of Biscuit Run was putting nearly $5 million in so-called transportation "enhancement funds" into the deal. Enhancement funds are federal money, but they entail state oversight.

When the Virginia Department of Transportation was asked to commit $4.8 million to Biscuit Run, it ordered an appraisal. And VDOT found the property worth just $12 million.

The earlier VDOT appraisal sparked a debate when the Virginia Department of Taxation was shown the request from Craig's team to issue tax credits based on O'Grady-Filer's $87.7 million figure.

"Because the fair market value of these appraisals differed so significantly," the Department wrote in an unsigned report issued just two months ago, "the Department authorized another appraisal that indicates a fair market value of $39 million."

That translates into $11.7 million in tax credits to Forest Lodge. That puts the total cost to Virginia taxpayers for cash and conservation credits at $21.5 million.

According to another over-the-transom document, Forest Lodge took its tax credits and sold them– all the while continuing to appeal for the right to use O'Grady-Filer's valuation.

 

'the decision to jump on it'

Albemarle County had long made Biscuit Run a centerpiece of its multi-decade growth plan. So there were raised eyebrows when plans to make it a park were suddenly announced.

"If they were looking for parkland in the area, they probably could have gone down the road to Mead and gotten four or five times the land for less money," says Albemarle Supervisor Dennis Rooker, "and they wouldn't have eviscerated the county's growth area."

He's talking about a tract recently sold by MeadWestvaco. A former logging site of nearly 5,000 acres near Ash Lawn-Highland, it sold around the time of the Biscuit Run deal for $23.75 million.

The buyer, a company headed by Greenbrier Resort owner Jim Justice, paid about what taxpayers have already paid for Biscuit Run– and got four times as much land. (And Rooker notes that because 400 acres of Biscuit Run was already dedicated for parkland, the state really got just 800 acres for its money.)

"I don't blame the developers at all," says Rooker, who says the state abdicated its duty to seek out the best deal. "I don't believe the state acted as a proper gatekeeper for tax credits."

Not everyone is so harsh in their assessments.

"I really think it was a decision that was born out of opportunity," says Rex Linville of the Piedmont Environmental Council. "They made the decision to jump on it."

That opportunity, however, meant a lost opportunity for a local family.

Up near the Rivanna Reservoir, the eight-brother Murray family had been carefully nurturing their 800-acre Panorama Farms as a mulch business and as a place for recreation with its scenic views of the Blue Ridge and easy proximity to the city's populous northern suburbs.

Even though it's in private hands, Panorama has become an unofficial park, a site for athletic events including UVA track meets, bicycle rides, and the annual footrace honoring the late Kelly Watt, the Albemarle High standout who died of complications from heat stroke in the summer of 2005.

 While Murray family members say they don't want to talk about what could have been, sources indicate that Panorama has been groomed as a possible park site. By contrast, Biscuit Run was long planned for development since as early as the 1960s when developer Charles Hurt owned the land.

"That's a big chunk of change coming off the tax bill," notes Albemarle assessor Bob Willingham. 

The rush to deal also leaves a 100-home subdivision still lying within the confines of Biscuit Run.

 

The donut hole

By all appearances, the Breeden family might appear to have been the biggest winner in the Biscuit Run deal when they sold it to Forest Lodge for $46.2 million. But in fact, says Elizabeth Breeden, it's not exactly the case. She was left holding a tract of land in the middle of what will become a state park and is now looking to negotiate with the state to swap the landlocked parcel with a parcel closer to a public road.

The right was included in the sales contract, but what hasn't been fully straightened out is what sort of proffers the Breedens might get stuck with. Obviously, 100 houses don't require the same level of infrastructure as 3,100, but the County, according to several sources, hasn't been clear on what they may attempt to extract, and Rooker admits that's a question for which no one yet has an answer.

"I would think there would be some proffers that would go with that part of the property," says Rooker.

Meanwhile, says Elizabeth Breeden, she and her family are left paying hefty real estate tax on the donut hole of now residentially-zoned land inside the state park perimeter with no idea of when they might be able to start developing.

Breeden hopes it will be sometime in the next 10 years and says that's why she agreed to go along with the sale of the land to the state in the first pace– a deal she and her family members could have vetoed if they'd objected.

But, like so many, she realized that the market for mammoth housing developments had soured.

"I thought it was going to be 30 years before we'd get to develop if they hadn't sold," she says. "This way, I think it might be within my children's lifetime– not just my grandchildren's."

 

Mining the opportunities

The donut hole sitting in the middle of a future state park isn't the only oddity of the Biscuit Run deal. Since the state stepped in to limit the tax credits below what Craig had wanted, the bank didn't get fully paid back. In fact, if the sale produced only the $9.8 million cash and $11.7 million in cash, then the bank might remain owed another $12.8 million.

In a shareholder report, First Community Bancshares once cryptically alluded to "additional collateral" as securing Craig's troubled loan.

That has banking sources suggesting that one or more of the principals, including Craig himself, might have pledged additional property to guarantee the loan. One intriguing clue comes in a report from the bank that Hunter Craig helped found, Virginia National.

Last year, in a proxy report, VNB noted that all 203,947 shares of VNB stock Craig owns– worth about $3 million at the current stock price of $15– have been pledged to cover an unnamed commitment.

Could Craig be forced to part with the bank he helped create? Could First Community Bancshares, a bank with its roots in the coal country, find itself suddenly owning over eight percent of a Charlottesville-based bank?

Another possible issue– at least for anyone wishing to luxuriate in a pastoral setting at Biscuit Run State Park– is that First Community Bancshares has another way to get paid back: mineral extraction.

According to the deed of sale filed December 30, 2009, First Community Bank reserved the right to mine the site for the next seven years. The PEC's Linville says he doubts there's anything worth mining at Biscuit Run– and he points out that a counterintuitive piece of the state's law regarding conservation donations requires that in the cases of full donations of land, mining rights must be retained.

Linville may be right that Biscuit Run wouldn't be worth mining for minerals, but actually, Albemarle County is already home to some mines. The most prominent is the mountain-top removal underway by Martin Marietta Aggregates on Red Hill Road in North Garden.

While such strip mining at nearby Biscuit Run is forbidden by the agreement, other extraction may occur as long as the bank follows a state-vetoable written plan and as long as it removes its machinery and restores "any disturbed ground to its original contours."

 

What if?

What if the state hadn't stepped in to buy Biscuit Run? Given the current sluggish state of the real estate market– particularly for massive developments– it seems likely that Forest Lodge investors were headed for foreclosure,  a situation that would have put them in the same boat as Patricia Kluge, whose foreclosure auctions on multiple high-end Albemarle County properties have made news on several occasions this year. 

As stated earlier, carrying costs– mortgage, property taxes– had climbed well into the millions over the four years Forest Lodge owned the Biscuit Run property, and the loan to First Community Bank was already delinquent by September 2009– three months before the sale was announced. 

If the property had hit the auction block, would anyone have stepped up to buy– and what price might the land have brought?

Looking at several other recent Albemarle County land transactions, it's hard to imagine the land– saddled as it was with more than $40 million in cash and non-cash proffers– would have brought anything close to the $46.2 million Forest Lodge paid in 2005. Proffer-free 4,500-acre MeadWestvaco sold for $23.75 million– a per-acre cost of just over $5,000. And just down the road from Biscuit Run, a 277-acre property with five houses sold earlier this year for just $3.5 million, a per-acre cost of $12,600. 

If a potential buyer used that per-acre cost, by the Hook's calculations he would have paid $15 million for the Biscuit Run property– leaving Forest Lodge investors still deep in the hole and the new buyer still saddled with those proffers and a slumping housing market that wouldn't support 3,100 new homes anytime soon.

If the property had foreclosed, who would have been stuck with the loss, Forest Lodge or First Community Bank? That, say financial experts, depends on several things. If Forest Lodge declared bankruptcy, they might have gotten out from under the $34.3 million loan– but not if any of Forest Lodge's investors had personally guaranteed the loan– something the bank may have insisted on before issuing such a sizable chunk of change. First Community spokesperson Robert Pettry did not return the Hook's call, but has previously declined to comment on any specific loans.

If a new buyer had come forward, they might have purchased Biscuit Run for a song– along with all the development rights. Craig and company would have suffered, but the development area in the County would have been preserved and the state's tax coffers might be $20 million fuller– or the state might have bided its time and worked out a state park deal with one of the other property owners in the area, a move that would have deprived Kaine of his end-of-term conservation celebration.

Of course, that's not what happened– and it now seems possible that the hefty appraisal was a factor in Forest Lodge's agreeing to the $9.8 million sale price.

 

A regulated industry

After dialing myriad appraisers over the summer, Hook reporter Courteney Stuart got a hunch that O'Grady-Filer was the appraiser with the magic number.

"I can't help you with that– I'm sorry," O'Grady-Filer said before hanging up the phone and then declining to return subsequent calls. New requests for comment, left by email and voice-mail in late December, have not been returned.

Records on file with the state's board of professional regulation show that O'Grady-Filer earned her appraisal license in 1995.

The Department of Professional and Occupational Regulation's records indicate that two appraisers had their licenses revoked last year and that already this year there have been four revocations in addition to various other lesser punishments for appraisers who fail to abide by professional standards set by the federal government.

"The entire industry has been getting more scrutiny due to the real estate bubble," says Mary Broz-Vaughan, the Department spokesperson.

Broz-Vaughan notes that anyone can file a complaint about an appraiser but that the state is prohibited from revealing whether any active complaints are lodged against any particular appraiser. The record shows no evidence that Filer has ever been the subject of a completed investigation. She will, however, need to renew her license by next October.

If the Filer-O'Grady appraisal is allowed to stand for use on the conservation credits, and if Forest Lodge LLC's owners could receive the full amount of state and federal tax deductions on their capital loss, then the investors might end up turning a profit, and the total cost to taxpayers could actually climb as high as $72.82 million– which is nearly $27 million more than Biscuit Run developers paid for the property at the height of the real estate bubble in 2005.

The anonymous document leaker worries that the combination of state-enforced secrecy combined with retreating media scrutiny could allow something like that to happen.

There is, however, a precedent for revoking credits based on inflated valuations.

In 2003, the Silver Companies placed 430 acres along the Rappahannock River into conservation easement and sold off the credits. However, three years later, the state– claiming the appraisals were overblown– revoked the credits, leaving Silver to deal with hundreds of individuals who'd purchased the credits and who now owed back taxes. The matter wasn't fully settled until mid-2010 when Silver refunded $7.2 million to the investors and the state.

 

Epilogue

The secrecy, say critics like Schilling, is what needs to change. After all, with a deal like Biscuit Run, how is anyone to judge whether the taxpayers were ripped off? And there were certainly other options for parkland.

And although it was a Democrat who smiled on the Biscuit Run deal, his Republican successor Bob McDonnell has previously expressed his own support for the deal– prior to details about the appraisal emerging. A promised response from the Governor through his spokesperson for this story was not forthcoming. Just like Kaine, McDonnell hopes to place an additional 400,000 acres in conservation easements during his term. 

Although there have been calls for McDonnell or Attorney General Ken Cuccinelli to investigate the transaction, it doesn't look like that will happen. McDonnell, who has received over $63,000 in campaign contributions from Hunter Craig, recently appointed Craig to the UVA Board of Visitors. Cuccinelli's office handled the Biscuit Run closing. Through his spokesperson, Cuccinelli declined comment. 

As for Creigh Deeds, the state senator says he plans to introduce legislation enacting stricter standards for open space donations during the upcoming session of the General Assembly. 

–with extensive reporting by Courteney Stuart

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Note: The printed version of this story contained an error. Craig's father's name is Daley, and his brother is Sam. A few bracketed words above fix the error in this online edition.

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