Whether it is partially in the spirit of responsible journalism, or putting a horrid situation in the best possible light in anticipation of future taxes, or conceivably even a bit of back handed ‘mea culpa’, the Sunday News published a responsible article concerning the financial woes of the Convention Center. Nevertheless, much remains unsaid and unexplained.
Therefore below is a commentary on “Convention center is coming up short” in the order that subjects are broached. The Lancaster County Convention Center and Marriott Lancaster, as seen from Penn Square.
“The Lancaster County Convention Center Authority is running low on money.”
This was predicted by the PKF Feasibility Report:
“Although we are not thoroughly familiar with the background of this project, and we have not performed an economic impact analysis, our findings lead us to conclude that the potential economic benefits are not likely to be sufficient to justify the risks involved, including the potential need to raise the hotel tax to fund operating deficits after several years should the reserves become depleted. We therefore recommend that, prior to proceeding further with this project, the parties involved consider exploring a downsizing of the project or an alternate use for the site.”
“Stung by higher-than-expected utility bills and especially by lower-than-expected hotel tax revenues, the authority soon could see the amount it holds in reserve fall below what it is required to keep in its rainy-day funds.”
Investor-Builder Robert Field (NewsLanc’s publisher) was stunned the first time he visited the completed facility to see that the vast and half of the time idle ‘break out area’ of the convention center was continuous with the lobby of the hotel, thus requiring the multi story space to be heated and air conditioned to the same level as the lobby throughout the year. NewsLanc wrote about it at the time. It was sheer stupid and irresponsible design. Moreover, the ‘last minute’ contracts which were never reviewed and properly discussed before approval by the then ‘Darcus’ LCCCA Board called for the Convention Center to be responsible for the payment of the utility bills for the entire combined areas.
According to what the lead architect and the managing partner of the architectural firm told Robert Field of NewsLanc (and later reversed their position), not separately metering the convention center from the hotel was a decision made by project sponsors who were led by Tom Smithgall, Project Manager for the managing High Group.
“The problem is that authority officials, in their 2011 budget, anticipated a 5.5 percent rise in hotel tax revenue for the year.”
For the past half century, Lancaster’s relative prosperity has been in part due to a thriving tourist business. The 5% hotel room sales tax had the same effect on the consumer as if the hoteliers had raised their prices by 5%. In addition to making visits to Lancaster less attractive pricewise, it drained off or in some cases eliminated hotel profits. Without profits, hoteliers cannot afford the ongoing renovation required to remain competitive with other tourist destinations. Thus the hotel room sales tax was a blight on the tourist industry, not only impacting the hotels but also restaurants, attractions, and employment.
Furthermore, the suburban and exurban hotels received no benefits from the downtown Convention Center or the largely publicly subsidized Marriott Hotel. Instead, they lost essential Rt. 30 East Host Resort and Convention Center business to downtown, thus further injuring the industry.
“If that happens for two consecutive quarters, the portion of the hotel tax revenue that now goes to the tourism bureau will be automatically redirected to the convention center authority to stabilize its finances.”
Promotion money from the hotel room sales tax for the tourist industry and the Convention Center will cease to exist. Alternatively, the room sales tax will be increased to the maximum 7% permitted by law, further hamstringing tourism. Do we recall the warnings from Dick Shellenberger and Molly Henderson?
“When [projections] were done, people didn’t anticipate the worst recession since the Great Depression,” Fry said.
With all due respect to LCCCA Chair Kevin Fry, his statement is inaccurate. The recession has discouraged more expensive foreign travel and should have made Lancaster a more attractive destination for the 20 million people who live in the greater New York, Philadelphia, Baltimore and Washington, DC areas.
“Late last month the authority voted to refinance $63.9 million in debt — in part, because the authority was unable to make a $545,000 principal payment on that debt.
“At the same meeting, the authority voted to borrow another $750,000 — partially to pay the costs associated with the refinancing, but also to help it pay its bills through the rest of the year.”
2.1%is the current rate for a AA guaranteed, tax exempt, weekly term note such as was floated by the CC. So with the approximate 1% payment for the guarantee, the financing expense would come to 3.1%.
However, in order to entice Wachovia to guarantee the bond issue, the LCCCA committed to paying the current national bank prime currently 3.25% plus 3% for a total of 6.25% if, in the absence of other bidders, Wachovia acquired the bonds after the initial five years. (Wachovia Bank was subsequently acquired when on the verge of bankruptcy by Wells-Fargo.) No one ever told the LCCCA board members about this when they were approving the last minute loan documents….unread by most and perhaps stacked four inches high.
Yes, this year the LCCCA faced interest rates under the terms of the original bond financing and SWAP agreement that will soon be twice as high as current market rates for interest and fees! And this will again likely be the case after the recently negotiated 18 month extension.
(To further maximize borrowing capacity, a SWAP arrangement was entered into which stabilized interest rates but turned out to have been a bad bet due to the current record low cost of borrowing money.)
“But after March 2012, the new rate on the bonds kicks in. It’s higher, about 5.45 percent in total (compared to the 4.83 percent the authority would have paid on its debt as of last Thursday).”
As we see above, the “5.45%” is higher than the 3.1% for interest and the bank fee that would be the case had the project merited a guarantee from another financial institution and the SWAP deal not been made. That is half again as much, or around $900,000 more than needed to be for a truly credit worthy project.
“The new deal is also in place for just 18 months; when it expires, the authority will have to renegotiate with the bank. At the Aug. 25 meeting at which the authority board voted for the new agreement, Beckett acknowledged that ‘yes, this isn’t the greatest deal in the world, and yes, we’re going to have to go out and renegotiate in 18 months, but that is the nature of the beast.’”
In fact it is a lousy deal forced onto a public against its opposition by an almost 80% consensus, according to a Fox 43 survey in reference to county guarantee of hotel bonds.
“The responsibility for heating, cooling and other utilities in the ‘integrated facility’ — the convention center and hotel — is governed by agreements between the authority, the Redevelopment Authority of the City of Lancaster — which owns the hotel tower — and Penn Square Partners, the developers of the hotel who lease the tower from the redevelopment authority.”
The agreements are the most egregiously one-sided arrangements the Watchdog has ever encountered. This includes the Convention Center paying many costs that should be borne by the hotel, revenue that should go to the convention center going to the hotel instead, receiving minimal concession fees, and ranging to such absurdities as any further state grants for the convention center being share with Penn Square Partners and, to top everything off, S. Dale High as an individual receiving special privileges for purchasing the naming rights!
“Molloy and Fry say electric bills in particular have been expensive; the authority has hired an ‘energy allocation specialist’ who may be able to recommend ways it can cut its utility costs.”
Major savings can’t be realized due to the open design of the common areas of the facilities, short of building a multi-story glass wall to separate the areas and making very expensive modification to the heating and air conditioning systems.