January 9, 2004

 VIA FAX AND REGULAR MAIL

Samuel M. Kroll,
EsquireWilliams Mullen
222 Central Park Avenue,
Suite 1700
Virginia Beach, Virginia  23462-6762

             Re:            31^st Street Project

Dear Mr. Kroll: 

In your letter to Jim Spore dated December 30, 2003, regarding the 31^st Street Project, you stated the developer’s position on numerous issues and requested specific responses from the Municipal Parties[1].  While I do not intend to further inflame a situation that appears to have resolved itself at this point, it is necessary that I address many of your assertions in order to clarify the position of the Municipal Parties and to address your request for responses to particular issues. 

Project Timeline 

            Development Agreement Obligations.  You state in your letter that the Municipal Parties have not fulfilled their obligations under the Development Agreement to provide the required documents to the Developer in connection with the design of the Parking Garage, the Streetscapes and the Park.  The Municipal Parties’ obligations under the Development Agreement as they relate to providing Plans to the Developer are as follows: 

·                   Parking Garage Plans.  Deliver the Construction Plans for the Parking Garage to the Developer not later than 30 days prior to the OL (Oceanfront Land) Closing Date and allow the Developer to review and comment on the Plans for the construction of the Parking Garage at schematic, design development (approximately 55%) and at final construction.

·                   Restroom Plans.  Deliver the Plans for the Restrooms to the Developer such that it can review and comment on them prior to the Municipal Parties’ bidding of the Project.

·                   Park Plans.  Prior to entering into the Development Agreement, the Parties agreed on the Park Plans.  The Development Agreement contemplates that the Master Plan reflect the Park Improvements and modifications to the Park Plans to reflect the expansion of the Public Park, the location and exterior design of the Restrooms, the relocation of the Entertainment Venue and the Scale-Back List.  If the budget for the Park Improvements exceeds $1,000,000 (the construction cost for which the Municipal Parties are obligated), the Parties are, prior to construction bid solicitation, to enter into an arrangement to pay for those costs, or to utilize the Scale Back List.

·                   Streetscape Plans.  The Development Agreement does not give the Developer the right to receive the Plans for the Streetscapes, nor the right to review and/or comment on those Plans. 

The Municipal Parties have not breached their Development Agreement obligations as they relate to providing design and development documents to the Developer for review and comment because (a) the OL Closing Date has not yet occurred (and is not scheduled to occur until late-February), so the Parking Garage Plans are not yet required to be provided to the Developer under the Development Agreement; (b) the Municipal Parties are not yet ready to bid out the construction of the Restrooms, therefore the Restroom Plans are not yet required to be provided to the Developer under the Development Agreement; (c) the Park Plans were modified in connection with the Master Plan (and, in fact, have since been modified beyond the scope of the Master Plan to add restrooms in addition to those included in the Master Plan), and the Park Improvements have been included in both schematic design and in design and development drawings though that is not required by the Development Agreement; and (d) the Developer does not have the right to receive the Plans for the Streetscapes nor the right to review and or comment on those Plans. 

            The Municipal Parties’ other obligations under the Development Agreement as they relate to Plans and construction are as follows: 

·        construct the Park Improvements in accordance with the Park Plans by the later of the Hotel Completion Date or 210 days after the Park Site is released by the Developer to the Municipal Parties for construction

·        complete the Parking Garage no later than the Hotel Completion Date substantially consistent with the Master Plan

·        construct approximately 26,000 square feet of retail shell space substantially consistent with the Master Plan

·        construct the Walkway as part of the Parking Garage project

·        construct the Streetscapes simultaneously with the construction of the Parking Garage

·        construct the Restrooms substantially consistent with the Master Plan 

The Municipal Parties intend to timely comply with these and all of their other respective obligations under the Development Agreement in accordance with its terms. 

            Developer’s Project Timeline Expectations.  You state that the Municipal Parties have been deficient in their compliance with the Project timeline.  It is important to distinguish between the contractual timelines set forth in the Development Agreement and ongoing project milestones set by the Parties to assist in meeting contractual deadlines.  As you correctly state in your letter, to accommodate an accelerated Project schedule, the Parties established a working timeline that sets forth interim actions and deadlines for the Project.  In addition, the Parties established protocols for the calling of meetings (both emergency and regular) to facilitate successful communication, coordination and Project management.  The Municipal Parties acknowledge that adherence to this Timeline and adherence to the established protocol are important elements to successful completion of the Project; however they are not requirements of the Development Agreement.  The Municipal Parties acknowledge that they have fallen behind in meeting certain of the dates set forth in this working Timeline.  We regret that performance in this regard has not met the Developer’s expectations and assure you that it is the intent of the Municipal Parties to adhere to mutually established milestones.  Though we acknowledge that we have fallen behind on certain deliveries under the working Timeline, we remind you, that those deliveries are not obligations under the Development Agreement. 

            Additionally, the Municipal Parties do not accept full responsibility for Timeline delays.  Negotiations initiated and continued by the Developer about changes to the garage size, massing and circulation, adding restrooms to the first floor of the Parking Garage, garage operations, signage and branding have impeded the ability of the Municipal Parties to meet timelines.  In addition, the Developer has a keen desire to be involved in all details of the public portions of this Project beyond the reach of the contract documents.  That continued involvement likewise has contributed to the difficulty in meeting Project timelines.  

Parking Garage Completion   

You state that the Developer is afraid that the Municipal Parties will be unable to meet the contractual deadline for completion of the Parking Garage.  A comprehensive schedule was delivered to the Developer on January 7, 2004, and as demonstrated in the schedule, the Municipal Parties intend to have the Parking Garage open in accordance with the contractual requirements, i.e., no later than the coordinated opening date of the Hotel, which, at this time, is scheduled for February 1, 2005.           

Gateway Completion 

You state that the City is responsible for completing the Laskin Road Gateway improvements contemporaneously with the opening of the Parking Garage.  It is important for the Developer to remember that the Gateway improvements are not a contractual obligation of the Municipal Parties.  The City does, however, intend to construct the Gateway pursuant to its approved Capital Improvement Program as expeditiously as possible and to minimize any inconvenience to the 31^st Street Project due to construction of the Gateway improvements.  

By letter dated April 9, 2003, the City Manager indicated his intent that the Laskin Road Gateway Project improvements would be completed in conjunction with the Hotel, and he attached a sheet from the City’s Capital Improvement Program more accurately setting forth a schedule providing for funding prior to completion of the Hotel and actual construction completion in 2007.  The letter is a statement of intent, not a contractual obligation, and it does not modify the Development Agreement.   As we indicated at our January 7, 2004, meeting, we are expediting the Gateway project as much as possible and may be able to complete various elements of the project in advance of the 2007 date in the C.I.P. 

The Developer’s desire to have completion of the Gateway project and the 31^st Street Project coincide is understandable.  However, all Parties are aware that the construction of public roadways is a governmental function, the management and control of which cannot be contracted to others.  In addition, the schedule of the Gateway project is uncertain given the inherent complexity in redeveloping an existing roadway.  There are land acquisition issues, public funding issues, independent regulatory agency review and permitting, and public procurement requirements involved, as well as necessary coordination with private parties and interests.  In fact, the Developer has had involvement with the owner of a property necessary to the Gateway development and is aware of that owner’s delay in responding to the City’s initiatives to acquire necessary right of way.   

Master Plan Deviations           

You express the Developer’s concern that it believes that the Municipal Parties may make design decisions in violation of the Development Agreement and the Master Plan.  The Municipal Parties intend to comply in all respects with the terms of the Development Agreement  (including the provisions of the Development Agreement as they relate to the Master Plan). 

There is an issue here, however, that should be addressed.  The Developer continues to interpret the Master Plan for public improvements as if it were a completed construction drawing and insists on compliance by the Municipal Parties with every detail of that Plan.  The Master Plan, as provided in the Development Agreement and in the letters from the Municipal Parties to the Developer approving it, clearly set forth that the drawings comprising the Plan are “Schematic Submission[s]” and is “a conceptual plan only . . . obviously subject to design, and review of that design by all parties . . .” and “nothing . . . shall be deemed to limit the City’s power to design and construct the City Garage and improvements within the public right-of-way.”  Further, it has been repeatedly expressed to the Developer that construction of the public improvements cannot be subject to the control of others.  Notwithstanding the contractual provisions and legal limitations, the Municipal Parties desire to work with the Developer to ensure that a coordinated Project is developed.  To that end, the Municipal Parties will continue, as provided in the Transaction Documents, to permit Developer review of and comment on public improvements.  

Plans Submissions 

            You stated in your letter that the Municipal Parties’ plan submission for the public improvements on December 18, 2003, was deficient.  At our meeting on January 7, 2004, we believe we came to agreement on most, if not all, of the issues related to the schematic plans for the Parking Garage.  As indicated on the schedule delivered to the Developer at that meeting, the Municipal Parties intend to deliver design development drawings (55% plans) to the Developer for the Parking Garage and the Streetscapes on January 15, 2004. 

Municipal Team Performance  

You raised specific objection to the coordination efforts of the municipal project team and you take specific offense to an outburst that occurred on December 18, 2003.  In short, the Municipal Parties cannot condone or approve the outburst of one of its team members and the comments reportedly directed to Mr. Thompson.  The Municipal Parties apologize for the specific comments directed at Mr. Thompson.  The Municipal Parties are committed to restoring a professional atmosphere and have designated a new Project team chaired by Mr. Clarence Warnstaff.  I trust that this adjustment will restore a productive dialogue between the Parties.  

The Municipal Parties also acknowledge that the Developer has consistently been prepared for Project meetings and that the Municipal Parties’ may have fallen short in this regard.  Please accept our apologies and let us assure you that moving forward, the Municipal Parties are committed to coordinating and communicating with the Developer and its team to ensure that the Project is successfully and timely completed as smoothly as possible for all sides. 

Increased Cost Due to Delay for Acquisition of Block 72 

            Your letter alleges that the Developer has incurred increased costs of construction as a result of delays caused by the Municipal Parties’ acquisition of Block 72, the public Parking Garage site.  The Municipal Parties take issue with that allegation.  The Parties entered into the original Development Agreement in August of 1999.  The original Project timeline negotiated by the Parties commenced on the date that the City acquired the northern half of Block 72 -- it gave the Municipal Parties until December 31, 2002, to achieve that acquisition, and provided two full calendar years for the “Planning Year” and the “Construction Year” with the Hotel opening to be January 15 of the third calendar year following the “North Parking Garage Site Acquisition Date”.  Under that set of facts, the Hotel would have been scheduled to open January 15, 2005 – within 15 days of its current scheduled opening.  In addition, the Developer negotiated a right to extend all dates by one year if it failed to obtain its financing.  If it had done so, the Hotel would have been constructed during 2005, and would not have opened until January of 2006. 

The Municipal Parties instead achieved the North Parking Garage Site Acquisition in December of 2000.  That accelerated the project schedule by two years, and fixed 2001 as the “Planning Year”, 2002 as the “Construction Year” and the scheduled Hotel Completion Date as January 15, 2003.  At the Developer’s request, the Parties spent 2001 and half of 2002 negotiating an amended Development Agreement, including an amended schedule for the Project under which we are currently operating.   The Municipal Parties were ready and willing to timely fulfill their respective obligations under the original Development Agreement – it was the Developer’s desire to modify the transaction and the lengthy negotiation to accomplish the amended transaction that have “considerably delayed” the Project. 

            In addition, the Developer’s redesign of the Hotel to account for the correct measurements of the parcel on which it is to be built necessitated a delay to the Project of at least three months and an untold increase in both design and construction costs.   

Delivery of Promotional Materials 

            You also state in your letter that the Municipal Parties have failed to timely provide the required promotional and marketing materials for the Project.   The Development Agreement provides that the Authority is to provide appropriate promotional material for the Project, including a trailer, a scale model of the Project and marketing materials that promote the Project.  A construction trailer was timely delivered to the Project site as required by the Development Agreement.  Though the Authority has ordered these materials, and did so within the timeframes provided in the Development Agreement, continued modifications to the Project have made the model and certain of the other materials a moving target which has been impossible, until recently, to hit.[2]  Specifically, the Developer and the Municipal Parties had concerns that the slated 800-car parking garage may not provide enough parking in the Project area.  To address that concern, and to obviate any need to later “add-a-deck”, the Municipal Parties formally approved a plan to increase the Parking Garage size from 800 spaces to nearly 1,000 spaces.  This increase in size necessitated a change to the Parking Garage design and aesthetics.  The scale model could not be completed until the decision to increase the size of the Parking Garage was made and until the impact of that size increase on the design and elevation of the Parking Garage could be evaluated.   

Requested Response by Developer 

In your letter, you asked that the Municipal Parties (a) specify their intentions to comply with their obligations under the Development Agreement, (b) address the Developer’s claimed increased costs and expenses, and (c) limit the Developer’s potential future damages.  The Municipal Parties reiterate their commitment to providing first-class public improvements that complement the private improvements being constructed by the Developer in accordance with the terms of the Development Agreement.  The Municipal Parties intend to comply with their obligations under the Development Agreement in accordance with its terms.  The Municipal Parties assume no responsibility or liability for any delay associated with the Project except as set forth in the Development Agreement. 

Additional Issue 

There is one additional issue of which I must advise you.  While we are delighted that the Developer is making progress with respect to the construction of the Hotel, there is a contractual provision that is being overlooked by the Developer.  As you know, the Parties entered into an Escrow Agreement dated as of July 24, 2003 (the “Escrow Agreement”), to accommodate the Developer’s desire to begin construction of the Project on the OL Land without having first complied with the conditions contained in the Development Agreement, the OL Contract and the Oceanfront Ground Lease.  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 Developer’s E&S and Foundation Permits.  We understand that the Developer was issued its Building Permit on or about November 20, 2003, and has commenced vertical construction of the Hotel on the Land.  The Municipal Parties are concerned that vertical construction has commenced without the Developer’s providing the Municipal Parties the Construction Contract and the Construction Bond.  Please advise me immediately of the Developer’s intentions to address this issue. 

Sam, I believe that the conflicts and issues raised in your letter boil down to a few salient points.  First, the Developer is concerned that the Municipal Parties will not meet the Project schedule.  I assure you, the Municipal Parties are committed to providing first-class public improvements that complement the private improvements being constructed by the Developer in accordance with the terms of the Development Agreement.  The Municipal Parties intend to comply with their obligations under the Development Agreement in accordance with its terms.  In addition, the City Manager delivered a revised schedule for the public improvements to the Developer on January 7, 2004.   Second, the Developer is concerned that the public elements of the Project will change from what has been represented.  The Developer must understand that it cannot dictate or control the design of the public improvements; though the Municipal Parties intend to work with the Developer to ensure that the public improvements complement the private, the ultimate decisions about the design and the cost of the public improvements must remain with the public body.  That being said, please understand that the Municipal Parties are committed to submitting the plans for all public improvements, not just the Parking Garage and the Restrooms, to the Developer for its review and comment, and to try to address issues and concerns raised by the Developer in those plans, in an effort to achieve a public/private development that is a success for the Developer and for Virginia Beach and its citizens and visitors.   Last, the Developer is concerned that the process is not running smoothly at a point in the development where every day counts.  We are committed to ironing out any wrinkles in the process.  We believe, however, that going forward, all Parties must work together to prioritize Project issues to ensure those obstacles that are critical to Project milestones are addressed first and that those issues that are secondary and tertiary get pushed to a point in time where they do not de-rail the rest of the process.  

We look forward to an improved spirit of cooperation and working together in this new year and beyond to achieve the development, construction and operation of a successful project. 

Very truly yours, 

Leslie L. Lilley
            City Attorney