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‘We weren’t making any money’: Hampton Roads Ventures’ ex-CEO defends investing elsewhere
Other cities, however, succeed in keeping investments local
Hampton Roads Ventures, created by the Norfolk Redevelopment and Housing Authority, is headquartered in this office building in Norfolk. (Jim Morrison/ For the Virginia Mercury)
John Kownack says Hampton Roads Ventures, the for-profit community development company created by the Norfolk Redevelopment and Housing Authority, was facing an existential crisis when he took over in 2011.
The company, which Kownack led for 10 years, hadn’t won any new allocations of federal tax subsidies in a couple of years. It had made some missteps investing in Norfolk projects not favored by federal funders. But it had money in reserve. A 2012 audit obtained through a public records request, shows Hampton Roads Ventures had net income of more than $2 million in 2011, but a loss of nearly $28,000 in 2012 when it had $3.8 million in reserve.
“The entity was in serious trouble,” said Kownack, who retired from the housing authority in 2019 and left HRV on Nov. 1 after working there since 2011. “HRV would have ceased to exist if we just continued doing what we were doing, the way we were doing it.”
The two reasons for creating HRV were to further neighborhood revitalization efforts in Norfolk and create a new revenue source, he said during nearly four hours of interviews over two days defending the subsidiary’s work. Through the lawyer for NRHA and HRV, Kownack and others from the authority and the for-profit community development agency had previously declined interview requests.
NRHA, he now says, had to become entrepreneurial as funding began to wither. Why Hampton Roads Ventures funded major projects in communities across the country instead of in Norfolk and how it compensated employees were among the questions housing authority and HRV officials refused to answer in a two-part Virginia Mercury series last month.
Norfolk City Council has asked the city attorney to look into Hampton Roads Ventures and report back. And Del. Jackie Glass, D-Norfolk, introduced a bill in the General Assembly this week that requires any entity formed by a local redevelopment and housing authority to expend funds or utilize tax credits only in support of projects within its area of operation.
Why is a Norfolk community development entity investing everywhere but Norfolk?
As an NRHA executive, Kownack worked with Hampton Roads Ventures from its start in 2003, before taking over as CEO in 2011. After the initial rush — funding four projects in Norfolk — Kownack said HRV ran out of takers in town. Developers and businesses were not interested in the New Markets Tax Credits program for a variety of reasons, including not understanding the program and not being willing to meet the regulatory requirements. More than that, he said, there’s a culture of doing business in Norfolk in which developers or businesses expect grants. They viewed HRV as the “hometown folks” and weren’t interested in paying the fees while a developer in Tulsa would be happy for the opportunity.
“Why should I bother with your New Markets Tax Credits program because all I see are rules and reporting requirements and legal fees and accounting fees,” he said of the local reaction. “You’ve got to want this and you’ve got to want to be able to comply. And, you know, this may sound bad, but that environment, at least for HRV, does not exist in Norfolk.”
A management fee mystery solved
John Kownack, the retired executive director of the Norfolk Redevelopment and Housing Authority and the former head of the subsidiary Hampton Roads Ventures says he was not paid by both entities while working two jobs, showing his tax returns as proof.
Kownack worked at NRHA from the time Hampton Roads Ventures began and he headed the subsidiary after its founder Robert Jenkins left in 2011 and remained an executive until leaving in November. In about 2012 or 2013, turnover in the HRV office meant HRV didn’t have the staff to handle its work. So the company was run out of the housing authority’s Housing Reinvention office by NRHA employees, he said.
“We didn’t get paid anything in addition,” he said. “We just spent hours over there, submitted that on our timesheet, and NRHA would be reimbursed for our costs and that’s salaries, benefits, whatever.”
In a denial of a Freedom of Information Act request for HRV’s records, Delphine G. Carnes, the lawyer for NRHA and HRV, told the Mercury no public funds were provided to HRV. She was bolstering her argument by noting that NRHA was compensated for the work of its employees, not saying they were paid separately, Kownack said.
Kownack also solved a mystery that the housing authority refused to explain — the management fees memo.
In response to a records request, NRHA issued a page showing payments from HRV for “Hampton Roads Ventures Management” ranging from $1,666 to $360,157 annually from 2006 to 2020. They total $1.35 million. The sheet also listed transfers for “HRV Management Fee” paid to NRHA for $30,000 annually from 2008 through 2019 totaling $360,000. There were no payments for Hampton Roads Ventures Management in 2003, 2004 and 2005, according to the document.
Why would HRV be paying a “management fee” to NRHA if the housing authority has no control? NRHA offered no answers. When an NRHA spokesperson was asked for details about those transfers, Carnes replied by email, saying the Freedom of Information Act does not cover explanations. “NRHA is not required to address your request for an explanation or clarification regarding the data provided,” she wrote.
Kownack said the memo summarizes payments from HRV to NRHA for work by NRHA employees. The $1.35 million is for salaries and benefits. The other payments are for IT and other support provided by NRHA.
Among the largest reimbursements by HRV to NRHA was nearly $193,000 in 2012 and more than $360,000 in 2013, years when HRV received an allocation of new markets tax credits after a dry spell. Kownack said in those years he and other NRHA employees visited the proposed HRV projects, which were in places like Texas, Louisiana, Illinois and Florida, and then submitted timesheets for HRV to reimburse NRHA. Those were often one-day trips scheduled around weekends to minimize time lost working at NRHA, he said. The bulk of the reimbursements during those years, he said, likely came from the authority’s Housing Reinvention staff working to support HRV.
NRHA employees would submit timesheets for reimbursement of their time by HRV, he noted. In response to a public records request for those timesheets, Carnes said NRHA would charge $716.77 for their retrieval.
Didn’t having NRHA employees work for HRV take away from their focus on Norfolk projects?
Kownack said the work for HRV came as some funded programs had wound down or were winding down. NRHA had laid off a few employees, but also kept others waiting for new projects and researching new revenue streams. “I’m opening up another can of worms by saying stuff like this, but we had more capacity (staff) than we had work to do, to tell you the truth,” he said. “These people really did spend time on HRV. It’s not a lie. Nobody cooked their timesheets, but we were happy to have them devote some time and energy to an activity that had revenue attached to it. ”
“If there’s a concern that we were diverting time that NRHA employees could have been spending on Norfolk activities to this HRV stuff, what we were really enthusiastically doing was trying to find other funding sources,” he added. “This did not erode our ability to work in Norfolk.”
Carnes said part of her reply to an email asking her to explain her response to a public records request was taken out of contest. The relevant portion reads:
“HRV is a for-profit entity that receives no financial support from NRHA and no public funding of any kind. The statements in your letter bear this out. You specifically make reference to HRV’s administrative fees earned for its new markets tax credit (“NMTC”) work on a nationwide basis and the fact that HRV has contributed funds to assist NRHA in providing community services, rather than accepting public funding from the housing authority. With respect to HRV’s employees, any NRHA employee who provided services to HRV was compensated for those services by HRV, not by NRHA. There is no factual basis for your erroneous conclusion that HRV was somehow the beneficiary of public funding through its employees.”
— Jim Morrison
Hampton Roads Ventures has won $360 million in tax allocations, but has invested only $35.2 million in Norfolk. Including allocations from all sources, Norfolk was the beneficiary of about $90 million in new markets tax credits by 2019, the last year federal records are available. The last Norfolk project was funded in 2009 by U.S. Bank’s community development entity, according to the database. Other cities, though, have leveraged the program to attract hundreds of millions of dollars in investments.
Jared Chalk, who has been director of Norfolk’s Department of Economic Development since November 2018, said there have been talks with HRV about a couple of projects, but nothing was a fit.
“I think we need to leverage it (HRV). Your story has brought to light an entity that exists under the housing authority,” he added. “In my role, it’s what kind of tools can we put in the toolbox? Whether that is city incentives, whether that is HUBZone, Enterprise, Zone, Tourism Zones, Opportunity Zones or whether it’s new market tax credits, historic tax credits. The idea is to put as many tools in the toolbox as you can and, as projects surface, you explore your options.
“The more tools that we can have in our toolbox to help businesses and help our mission, which is to support the businesses and residents of the City of Norfolk, Virginia, the better. So I would hope that if there’s a way to benefit Norfolk residents by leveraging what they’re doing, we can do that,” he added.
Through the New Markets Tax Credits program, individual and corporate investors earn a 39 percent tax break over seven years. The Treasury Department says for every dollar invested in the program it spurs $8 in private investment on average.
The deals are complicated, generally offering lower interest rates and fees. The program targets distressed and severely distressed neighborhoods with high poverty rates that otherwise would not attract investment. In a simple example, the borrower — a developer or business — would get a $10 million investment in a project at a cost of about $7.2 million.
The program is capped at $5 billion a year so earning an allocation is very competitive. In 2019, 206 community development entities applied for $14.7 billion in New Markets Tax Credit allocations, but only 76 community development entities won awards totaling $3.5 billion. Community development entities compete based on their track record in completing development projects, their financial management, and their ties to the communities receiving investment. Over the life of the program, the District of Columbia received the highest level of total project cost per person in eligible communities, followed by Rhode Island, Louisiana, Maine and Wisconsin, according to a 2021 Urban Institute report.
The CDFI Fund, which makes the awards, looks for projects benefiting low-income areas. Norfolk has 16 severely distressed census tracts, plus more labeled distressed. Severely distressed tracts are defined as having a poverty rate of at least 30 percent, an unemployment rate of at least 1.5 times the national average, or a median family income that is at or below 60 percent of the metro median family income. In Norfolk, the poverty rate in some of those tracts ranges as high as 80 percent and the unemployment rate tops out at 40 percent.
“Local development capacity can be a challenge in some markets. It takes time,” said Brett Theodos, a co-author of the Urban Institute study. “My hope is that this (investment in distressed local areas) is exactly what local CDEs can help build.”
Some cities have had success with the program, though their economies differ from Norfolk and their potential for investments may vary. St. Louis, with a population of 300,000 compared to Norfolk’s 240,000, had $1.4 billion in New Markets Tax Credits projects through 2019, the last year compiled in a federal database. The city’s nonprofit community development entity, the St. Louis Development Corporation, has won $493 million in allocations, all invested in the city, creating more than 6,800 jobs.
Unlike HRV, the St. Louis Development Corporation puts out a request for proposals after earning an allocation, holds public monthly board meetings and subjects itself to public documents requests (as a nonprofit, its tax returns are public).
Chicago has done the same with the nonprofit Chicago Development Fund (CDF), which has won $411 million in New Markets Tax Credits since 2006, all used for projects in the city. The CDF’s finances are public as are its quarterly governing board of directors and advisory board meetings.
Community development entities investing in Providence, with 180,000 people, had won $363 million in NMTC allocations through 2019. Tulsa was at $182 million. Wilmington, Delaware, with 70,000 people had won $98 million, roughly the same as Norfolk. St. Paul has won $257 million and Durham has won $357 million.
Kownack predicted that in the wake of The Virginia Mercury stories about Hampton Roads Ventures that the city would announce a new process in which HRV works with the city’s Department of Economic Development to seek qualified projects.
But he doubted they would be funded by the program. “We’ll end up probably using local funds because most of the developers that they’re talking about know that you don’t have to deal with the intricacies and the complications and the strings attached to a program like the New Markets Tax Credits program when you can just stomp your feet and get a local grant,” he said.
He cited past projects where developers declined the federal tax subsidies. For the Berkley shopping center development early in HRV’s history, the developer declined an offer of tax credits because it would invoke federal wage requirements, he said. But they then accepted Empowerment Zone money funded through NRHA that required them.
Kownack said HRV founder Robert Jenkins helped secure the donation for the Ray and Joan Kroc Corps Community Center in Broad Creek built by the Salvation Army. “We offered them New Markets Tax Credits,” he said. “By putting New Markets Tax Credits in it, we could have expanded the recreational component, we could have expanded some of the architectural features. The Salvation Army just said we don’t know the program, we don’t understand the program, we don’t need to do the program. So thank you very much.”
Putting together local projects isn’t something HRV does, he said. “It’s up to NRHA and the (City’s) Economic Development Authority and Council and the private sector to come up with projects that would want to use New Markets Tax Credits,” he added.
The key to earning New Markets Tax Credits is winning allocations from the CDFI Fund, which scores applicants based on their past projects. Three of the four HRV projects in Norfolk were not the kind the fund favors, Kownack said. The Attucks Theatre was a refinancing of a project already completed, something no longer permitted by the CDFI Fund. The Fort Norfolk Plaza Medical Building project wasn’t in a distressed neighborhood, a red flag to the fund. In addition, the project declared bankruptcy in 2013. The boat hotel in East Beach was in a distressed census tract based on the numbers before NRHA redeveloped the area into an upscale waterfront community. But it didn’t generate jobs, a focus of the program.
“They led to us having less and less chance of getting more allocations,” he said. And because HRV was the “hometown” development entity, it didn’t earn the kind of fees it makes elsewhere. “Not only were these projects that were jeopardizing our future as a community development entity with the CDFI Fund, we weren’t making any money,” he said.
As the new markets program evolved, Kownack said, it became clear that HRV’s focus needed to shift from the twin paths of investing in Norfolk and making money for NRHA to just making money. Without new allocations every few years, HRV would cease to exist.
“HRV definitely adapted and became a non-Norfolk community development entity. That’s the truth. And it’s not nefarious,” he said. “It’s just what it became. If we hadn’t become that 2014 allocation ($55 million) would have been the last one we received.”
That meant earning the favor of the CDFI Fund, which allocates the credits. One way was to look at the geographic gaps in funding. Those were in rural areas for healthcare facilities, job growth, and food service. So the NRHA offshoot transformed from a corporation that attracts “private sector investment capital for innovative real estate projects in lower-income neighborhoods, particularly inner city and rural communities” to one that now defines itself as a “rural community development entity committed to attracting private investment capital into innovative economic community development projects primarily in severely distressed rural areas.”
“The goal was to generate a half a million dollars a year without gutting HRV,” he added, money that would go to NRHA services including workforce development and youth services. With $100 million in allocations in the last two years to invest nationally, HRV is on that path.
Kownack sees HRV as more than just a stable revenue stream for NRHA. “I love Norfolk. I’ve worked my whole career in Norfolk, but I’m not a nationalist. I’m not a local-only type of person,” he said. “In my mind, I’m on this earth to do good things. And, frankly, I have loved being able to go to some of these places around the country, and being a part of really good projects. It has never even dawned on me, nor do I believe, that helping build a headquarters for traveling nurses in Fremont, Nebraska, takes anything away from the City of Norfolk.
It’s all good stuff that helps distressed areas, attract private investment and revitalize themselves.”
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