CC Chapter Thirteen Revised: The Money Grab

By Christiaan Hart-Nibbrig

The crocodile cries of convention center project sponsors after the TIF defeat turned to cheers upon “unveiling” their “new” miracle plan in late March, 2005.

The ‘new’ plan involved the financing of the hotel portion of the project.  The basic elements of the complicated scheme were that the Redevelopment Agency of the City of Lancaster (RACL) would first buy the Watt & Shand building from Penn Square Partners.  Then, RACL would apply for two state bonds totaling $36 million from the Department of Community and Economic Development (DCED): one for $24 million and another for $12 million.

Penn Square Partners would then lease the to-be-built hotel tower from RACL.  The lease payments from Penn Square Partners would cover the RACL debt service on the $24 million “lease-revenue” DCED bond.

Under the lease agreement between RACL and Penn Square Partners, after 20 years Penn Square Partners would have an option to buy the hotel building from RACL for $2.25 million, a small fraction of its likely appraised value at that time.

The $12 million bond would be funneled through a specific program funded by the DCED, and used for construction and “infrastructure” costs of the hotel.

According to the arrangement, the Marriott Hotel, privately run for profit by Penn Square Partners, would be exempted from paying any real estate taxes for 20 years.

The Intelligencer Journal, which had reported this very plan four months earlier, kept up the charade of the ‘last-minute’ negotiations in an article on March 29th , 2005:

“The new financing plan was put together late last week and this weekend after [Sen.] Armstrong, [Rep.] Sturla and [Mayor]Smithgall failed to win their support for the [TIF]. The two state legislators and city leaders spent Easter weekend forging the new plan, which they unveiled during a series of meetings Monday.”

In the article, the newspaper reported that Mayor Smithgall received a phone call at 11:20 p.m. on Sunday evening, March 28th, informing him of the final details of the plan.

“This whole project is too important for the city to let go.  The Watt & Shand building has been called the heart and soul of this city,” said the relieved mayor about the ‘new’ plan.

The impression left by Mayor Smithgall, Sen. Armstrong, Rep. Sturla, and reported by Lancaster Newspapers, was that the plan was some kind of breakthrough solution, hashed out in late night meetings after the School Board shot down the Penn Square Partners TIF plan.

This was simply not the truth.  They knew it, especially Sen. Armstrong.

Almost exactly one year earlier, on April 1st, 2004, Governor Edward G. Rendell signed an amendment to the “Infrastructure and Facilities Improvement Program” (IFIP).

The IFIP, originally ratified by the Pennsylvania legislature in 1990, was a state financial assistance program in which the DCED provided multi-year grants and loans to eligible applicants.

The 2004 amendment signed by Rendell was known as “Act 23,”  and it added “convention centers” and “hotel establishments” to qualify for state funding under the IFIP.

Senator Gibson ‘Gib’ Armstrong was a co-sponsor of Act 23

The signing of Act 23 was not covered by any of the Lancaster Newspapers at the time.

Another sponsor of Act 23 was state Senate Majority Leader, David ‘Chip’ Brightbill, a Republican from the 48th District, representing Lebanon County, and parts of Berks, Dauphin, Chester, and Lancaster counties.

After leaving the Senate the following year, Sen. Brightbill went to work for the Stevens & Lee law firm, the authors of the 1994 Third Class County Convention Center Authority Act and the solicitor of both Lancaster County and the Lancaster County Convention Center Authority.

In a press release in December, 2006, announcing Brightbill’s addition to the firm, Stevens & Lee Chairman, President, and CEO, Joseph M. Harenza, enthused:

“Chip Brightbill combines the skills of a lawyer with those of an experienced legislator who understands economic development, which is a unique fit for both he and our Stevens & Lee platform.”

Joseph Harenza himself had ties to the convention center project.  Harenza, personally, was the registered lobbyist in Harrisburg for High Industries.

On April 12, 2005, the Lancaster City Council voted to support the RACL purchase of the Watt & Shand building for $6.8 million.  On that day, the Council also passed Ordinances Numbers 5 and 10, both by 6-1 votes.  (Republican Luis Mendoza voted against each ordinance.)

The City Council ordinances authorized – and guaranteed — the $36 million RACL applications for the two DCED/IFIP bond issues.

The two Lancaster City guarantees were:

  1. City Ordinance No. 5 :  A $12 million guarantee, which covered a $12 million Act 23 bond sought by RACL through the IFIP; and,

2.   City Ordinance No. 10:  A $24 million guarantee to cover real estate taxes due on the Marriott Hotel over a 20-year period during which RACL held title   to the hotel.

In addition to the bond guarantees, the City later agreed to waive all applicable fees related to the hotel’s construction, including construction permits.  It also waived a Traffic Impact Study requirement for the project.  The convention center and hotel were to be constructed in the most car congested section of Lancaster city

The fee waivers alone deprived the city of Lancaster of approximately $1 million in revenue.

It is an old saw – the one about the boiled frog. If you put the frog in boiling water, it jumps out.  But if you put the frog in cool water, and warm the water gradually, it cooks itself to death

When the hotel and convention center project was first pitched in 1999, the sponsors put the cost at a cool $75 million, more than half, they said, coming from the private sector

They told the public that the $30 million “public” convention center funds were to come from a $15 million state grant, and $15 million in matching funds from hotel room tax revenue.  The room tax would come from “out-of-towners,” the sponsors said

And regarding the hotel, Penn Square Partners – Lancaster’s three most esteemed business leaders — was to privately finance, and presumably pay all applicable taxes, and develop their $45 million “private” hotel

Simple enough.  Cool water

Now, five years later, the entire project was to cost $129 million, and that figure was still heating up.  It had more than doubled in physical size.  And the amount of taxpayer involvement – originally 40% of the total project – was now more than 90%

Still, not a spade of dirt had been turned.

After the RACL bonds and give-a-ways, the city was now nearly $40 million into the project as a landlord to a hotel.

As for the-now $69 million convention center, it was funded by the $40 million county-backed bond, a $15 million state grant, and about two-and-a-half million dollars a year in hotel room tax revenue.  100% of this was taxpayer money.

Penn Square Partners was reported at this time to have $10 million in “private equity” in the hotel, but that contribution has not been itemized nor confirmed.

By the middle of 2005, a project that was sold as “public-private,” was really “public-public,” with very little private capital or private risk.

At this point, that the convention center and hotel project’s funding loans, grants, taxpayer-backed bonds, and taxes exposed Lancaster City and County taxpayers to almost $100 million in debt liability.

Slowly, but unmistakably, the taxpayers of Lancaster were getting cooked alive.