by James C. Sherlock

In Bloomberg, author Allison Nicole Smith commented on the Atlantic Park bonds. She wrote:

Muni deals funding tourist attractions have a checkered past. The list of defaulted bonds is a long one, including a water park in Edinburg, Texas, and an iron and steel manufacturing-themed park in Bessemer, Alabama.

Like the development in Virginia Beach, those parks were speculative bets conceived to invigorate local economies. But many have gone under because success was reliant on enough people consistently showing up, year after year.

The “speculative bet” part was never communicated to Virginia Beach taxpayers. Not In a hundred print and TV news reports over seven years. Not in press releases. Not in the records of public sessions of City Council or its development authority.

Extensive risks are described buried deep in Atlantic Park bond documents prepared for investors because they are required to be there. The investor prospectus for the state’s surf park bonds is 616 pages long. The one for the city’s parking garage bonds issued on the same day is over 1,000 pages long. Each of those issues were revenue bonds, requiring listing of risks to revenue.

Even those lists are incomplete.

Four examples of unlisted risks:

1. Staffing. The Park will need 1,600 employees.

Virginia Beach population has not been growing for some time and temporary summer workers are scarce. Our unemployment rate is much lower than nationally. Jobs in this region generally don’t pay enough to draw skilled workers from other areas. 

Even before COVID, city businesses had formally expressed to the City Council a growing concern about resort businesses being able to get the number of seasonal employees needed to meet demand.

After Covid, the shortage of restaurant, hotel and tourism industry workers has been severe. Other resort-area businesses still struggle to fill shifts.

2.  Utilities. The new entertainment district will draw a lot of new electrical power. It is not immune to the ongoing challenges to utility costs and availability.  

Natural gas supplies to this region are already constrained by pipeline capacity. The biggest customers, including the Navy, often face rationing in cold weather.

3. Security. Virginia Beach has an excellent police force and low crime statistics.

But the corridor between Norfolk and the resort district is a problem. Atlantic Park is being built in Virginia Beach’s biggest crime corridor.

The risk from Virginia Beach-based gangs is low overall. Norfolk, with its sky-high gang activity, appears to be the source of most of the gang problems seen in the resort area, especially in the summer. Gangs will attempt to gravitate to Atlantic Park like they plagued Town Center after it opened.

Atlantic Park will have an ABC license for outdoor drinking within the boundaries of the development. Vagrants and buskers who hang out on the boardwalk may find the Park attractive.

All told, the Park will need an excellent security force and significant police presence. Second precinct headquarters is nearby, but like Town Center, Atlantic Park may require a substation.

4. Noise. The city will own the concert venue in which a wall rolls back to accommodate 1,500 outdoor customers. It has been exempted by Council from city noise ordinances. That may prove more than just annoying to onsite apartment dwellers and nearby neighborhoods.

“Certain Bondholders Risks” detailed in the surf park bond offering memorandum are summarized below.

5. “Payment of debt service.” The primary issue is the debt load on the surf venue.

6. “Lack of operating history.” The developer of Atlantic Park has never managed a surf park facility but will manage this one. He has hired an Australian operator with surf park experience.

7. “Combination or layering of multiple risks may significantly increase risk of loss.”

8. “Risks associated with a multi-component development operational plan and multiple funding sources.”

9. “Failure of any component to realize its expected results whether in timing or in degree of traffic, usage, rent up or overall economic and financial success may adversely affect the operational results” of the others.

10. “Competition.” The signature feature is the surf venue. A surf park is planned near Richmond to be three times the size of the one in Atlantic Park.

Competition is abundant in the resort district for the new park’s restaurants, offices and apartments. Most will not be subject to special taxes, fees and assessments from the Atlantic Park Community Development Authority (the CDA).

A new public private development a few blocks away near the conference center has been under active consideration for some time. If built, it will compete with Atlantic Park retail and restaurant businesses as well as its apartments. Like them, they will be subject to the CDA’s special tax and fee levies.

11. “Economic Conditions.” National economic conditions, such as inflation or recession or both, resulting in a decline in discretionary income.

12. “Insurable liabilities and the costs of insurance.” The surf park should be particularly expensive here.

13. “Risks of construction delay.” That has already happened.

14. “Pandemic risk.” Covid resulted in the abandonment of other entertainment projects.

15. “Risks from nature.” Include hurricanes, flooding, sea level rise and lightning strikes. The management assumptions, to their credit, mentioned weather shutdowns. Most people are unaware that swimming pools must be shut down when lightening is within ten miles. That happens often enough in Virginia Beach to be a factor with the surf park.

16. “Environmental Regulation.” Electricity, natural gas and water use and trash generation are all extremely high in the resort district. Atlantic Park will add significantly to consumption. All are subject to regulation.

17. “Enforcement of Remedies.” Other parts of the Park will suffer if, for example, the surf venue is closed for an extended period by court action.

18. “Dependence on third parties” and “bankruptcy.” What happens, for example, if P3 Foundation or Wavegarden, the sole supplier of the surf park machinery, goes bankrupt?

19. “Cyber attack.”

20. “Actual results may differ” from projections of economic activity at the Park.

21. “Inability … to control increases in operating costs … without being able to obtain corresponding increases in revenues.“

22. “Risk of Audit by the Internal Revenue Service.” The VSBFA tax exempt bonds bear that risk.

23. “Tax Exempt Status of the Borrower, P3 foundation.”

Commentary. Among council members, only Councilman John Moss appears to be on record addressing risk in public session.

He pointed out in 2021 that the costs of commercial construction were soaring. He urged reconsideration of the project based on the new facts. The rest of the Council offered no recorded comment. In May of this year Moss wrote about Atlantic Park spending and risk with knowledge and passion. 

Moss abstained from closed-door Atlantic Park Council meetings and public votes because of a self-identified conflict of interest in that he might benefit financially if it were built. From his comments and his public interest track record, he would have voted against the Atlantic Park deals. But his would have been the only “no” on most votes.

If the City Council discussed these risks, members did not do so in public session when transparency required it. If the city had created a business plan, it would have factored the risks into multiple decision points. It did not create one.

The developer is surely working to mitigate the challenges he can affect. The city and the developer together should address risk mitigation both in writing and in public session well before Atlantic Park opens.

Council has left citizens with a huge stake in its success.