VCU Health spends $73M to bail on big development

For the VCU Health System, there was a hefty cost to leaving a downtown development project in Richmond.

VCU Health confirmed it paid $73 million to bail on its master lease for the redevelopment of the Public Safety Building at 500 North 10th Street in the Virginia city, Richmond BizSense reported. The revelation came on the heels of Freedom of Information Act requests from the publication regarding the project, which essentially met its demise in February.

The city sold the property to the developer, Capital City Partners in 2021 for $3.5 million. After determining the project wasn’t meeting a development requirement, however, Richmond took the property back in February.

VCU Health was set to lease the property for 25 years.The project was expected to cost $325 million. 

VCU Health was going to be on the hook for $617 million over the course of its lease, starting with a $12.8 million lease in the first year, which would’ve increased over time. In its statement, the health system’s interim CEO said it needed to back out to do the pandemic and financial concerns.

The payment from VCU Health went to a previous owner of the building, an affiliate tied to Oak Street Real Estate Capital. Oak Street, itself a division of Blue Owl Capital, was handling financing on behalf of the developer.

The scope of the project changed last year when Capital City pivoted from a 20-story, 545,000-square-foot building to a three-building complex spanning 463,000 square feet. Office space to support VCU Health was replaced by laboratory space. The reduced plan led to legal action from the city.

The health system’s operating funds generated the one-time payment. It’s a particularly dramatic hit to VCU Health, which reported an operating loss greater than $62 million during the first seven months of its fiscal year.

VCU — technically a separate entity from the health system — recently approved a $415 million project on the same site to host the school’s dentistry center. First, it will likely have to acquire the three-acre site from the city.

— Holden Walter-Warner