by James C. Sherlock

Virginia Beach’s Atlantic Park entertainment district is under construction on three city blocks of public land. It is a public-private partnership with a $300 million commitment of Virginia Beach cash and property not counting bond interest.

An investigation has turned up two major story lines, the first in the actions of the City Council during the seven-year procurement of that massive project and the second in public finance.

Since municipal bonds represent the core of how we pay for public infrastructure, they are a subject worth considering. Most who think about them at all think of municipal bonds, especially Virginia munis, as safe investments, relatively low yield but guaranteed.

This is the story of four players who worked together to get tax exempt junk municipal bonds for the surf park.

• A Virginia Beach developer,
• a North Carolina 501(c)(3),
• the Virginia Beach Development Authority (VBDA), and
• the Virginia Small Business Financing Authority (VSBFA).

The state authority, VSBFA, that issued the bonds will be assessed in the next part.

P3 Foundation. North Carolina’s P3 Foundation is not the official borrower in the bond issue, but it is the source of Virginia subsidiary 505(c)(3) P3 VB Holdings tax status and thus the tax exempt status of the bonds.

The parent company’s last financial statement currently available to the public is its 2022 IRS Form 990. It was filed three months before the March 2023 Virginia Small Business Finance Authority (VSBFA) bond issue and was not publicly available at that time.

The Foundation was in debt and had a negative net worth. Only one of three project investments in its portfolio showed a positive return. It had no experience in investing in entertainment venues.    

It has another couple of features tied to its leadership.

The IRS’ “Exemption Requirements – 501(c)(3) Organizations” starts out simply enough:

To be tax-exempt under section 501(c)(3) of the Internal Revenue Code, an organization must be organized and operated exclusively for exempt purposes set forth in section 501(c)(3), and none of its earnings may inure to any private shareholder or individual.

A 2022 article in Keith Rosten in Bloomberg Tax offered an expansive discussion of private inurement and excess benefits.

A tax-exempt organization may receive an exemption only to the extent that there are no gains to any private shareholder or individual.’
’Even though the statute refers to individuals, courts have interpreted this term narrowly to mean only insiders. Insiders means the nonprofit’s managers and others in a position analogous to owners of a for-profit organization such as officers and directors.

The primary interest of the government is to “prevent the siphoning of charitable receipts to insiders of the charity”—but “not to empower the IRS to monitor the terms of arm’s length contracts.’
’Private inurement issues typically arise in connection with an IRS proceeding seeking to revoke the tax-exempt status of the organization. The IRS will not tolerate even a little private inurement.

P3 Foundation in 2019 and 2022 reported an independent consultant, NP Asset Services LLC of Dallas. From its 2019 filing:

The business relationship continued.

In 2019 NP Asset Services was paid $149,000 by P3 Foundation; in 2022 $587,897.  The VSBA bond issue funding did not show up until 2023.

NP Asset Services is 100% owned by the Executive Secretary, President, Secretary and Treasurer of P3 Foundation. The companies listed as officers of NP Asset Services are interconnected LLCs controlled by those same persons.

There is another potential issue that is not reported in the Form 990.

• P3 Foundation President Jeffrey Klein and Secretary Stephen Fawcett work for Jones Lang LaSalle Securities, LLC in Charlotte.
• Jones Lang LaSalle (JLL) sometime after 2020 became a member of the development team for Atlantic Park.
• Fawcett testified before the board of the VSBFA representing P3 Foundation.

The Virginia Beach Development Authority. Watch the video (start at 6:23) of the 09/20/2022 Virginia Beach Development Authority (VBDA) board meeting. The board was asked to approve a Resolution Authorizing Certain Actions.

The government spokesperson said it was needed (retroactively) by the Virginia Small Business Finance Authority (VSBFA), which had already approved issuance of up to $75 million in municipal bonds for the surf park.

The resolution was part self justification, part explanation, part entreaty.  It first justified the process by which the developer had been chosen, then provided assurance that the “Mixed-Use Project (including the Surf Park)” would do a lot of wonderful things for Virginia Beach citizens.

Residents will look forward to each of them. Then it moved on.

A lot of the words in the resolution were from the purpose section of the state law that authorizes and defines the missions of industrial development and revenue bond authorities.

One member at the VBDA meeting on the resolution was appropriately skeptical. He asked the government presenter for more information on P3.  

When pressed, the government speaker passed the question to Mike Culpepper, who lead the development team. You can watch the discussion starting at about the 6:21 mark. The queries about P3 start Foundation start about a minute later.

The motion was approved unanimously by the 8:40 mark.

Commentary on P3 Foundation. P3 Foundation is a public charity certified as such by the IRS. IRS regulations controlling 501(c)(3)s are labyrinthine, as are the court rulings.  

The P3 Foundation executive director is a tax attorney, so the author assumes no regulatory violation occurred.

But he also notes that the P3 Foundation transactions with NP Asset Services and Edgesight LLC appear to open business opportunities for charitable foundation board members that he did not know existed.

Finally, JLL is a large and far-flung organization.  

But if there is a connection between JLL employees who are officers of the charity board, JLL’s investment in Atlantic Park and the ASBFA tax exempt bond issue, it is at least a bad look.

Commentary on Virginia Beach Development Authority. 

The state bond agency approved the bond issue, after which the Virginia Beach Development Authority authorized them to do it, like using a new insurance policy to cover existing damage.   

The VBDA Resolution Authorizing Certain Actions was pretty much nonsense end to end. It reads like a parody of a government resolution. But the core of it was needed to satisfy IRS and SEC requirements for the bonds.

Both the state and local bond Authorities were the victims of bad staff work. It is hard to choose which was worse.

But reasonable questions in Virginia Beach include:

• who drafted the VBDA resolution,
• who in the city’s Department of Economic Development directed them to write it and approved its submittal to the board; and
• what information was provided in the briefing package for the board meeting.