Asked whether the Lancaster County Convention Center can be put on a sustainable financial footing, consultant John Kaatz answered categorically.
“There are always options,” he said. “It’s just a question of which options do people rally around.”
Kaatz, a principal with consulting firm Convention Sports & Leisure International, heads a team preparing a report on the center, one of two studies now under way. It is expected to wrap up in a few days.
The Lancaster County Convention Center Authority hired the consultant at the behest of Wells Fargo, the bank that holds its bonds.
The report is “paramount to us,” said Kevin Molloy, the authority’s executive director.
The Pennsylvania Dutch Convention and Visitors Bureau is working on the other report, expected in mid-May.
“Our main objective is to put the facts forward,” said Chris Barrett, the bureau’s president.
At issue is the authority’s ability to service the center’s $63.9 million in bond debt. Daily operations are meeting targets and the center is losing less money than projected, the authority says. However, the county hotel tax has not increased enough to assure coverage of those losses plus the debt payments.
The stakes are high, as four key Lancaster County business and economic-development organizations noted in a joint statement.
“Failure to achieve a solution is not an option,” said the statement drafted by the Lancaster Chamber of Commerce and Industry, the Lancaster Alliance, the Economic Development Company of Lancaster County and the James Street Improvement District.
“The assets being evaluated are too critical and the impact to the Lancaster community too great.”
A prominent critic of the convention center industry said it’s important for Lancaster to be as realistic as possible in its assessments.
There are no simple remedies, said Heywood Sanders, a professor of public administration at the University of Texas at San Antonio.
“This is an enormously competitive business,” he said.
Sanders argued in the mid-2000s against Lancaster building the center. At that time, proponents didn’t want their rosy forecasts challenged, he said.
“Folks heard what they wanted to hear, which was, ‘You’re going to do great. Don’t worry about it,’” Sanders said. “I think you have to be a little more grown up.”
Covering the bonds
For a decade, various Lancaster County constituencies fought over whether the convention center should be built. Eventually, its supporters prevailed. The center and its adjoining Lancaster Marriott at Penn Square opened in summer 2009 at a total cost of $178 million.
The county hotel tax is supposed to cover the convention center’s operating losses and debt service. The center is meeting its operational targets, officials say, but hotel tax revenues are growing less than projected, and are proving insufficient.
Last October, the authority refinanced the bonds. In subsequent months, the authority’s bond reserves dropped below minimums mandated in its bond agreements. As a result, the visitors bureau’s 20-percent share of the hotel tax, roughly $900,000 a year, has been diverted to the convention center starting this quarter.
Updated bond cash flow calculations provided to the Business Journal by the authority show deficits of $683,565 for 2010 and $420,128 for 2011. This year’s numbers, bolstered by the hotel tax clawback, project a surplus of $38,877.
In February, Molloy called for raising the county’s 3.9 percent hotel tax by 1.1 percentage points, arguing in part that it would forestall the visitors bureau’s loss of the $900,000, which it used for tourism marketing. Guests also pay a 1.1 percent excise tax on rooms, earmarked for the bureau, making a combined hotel tax rate of 5 percent.
Penn Square Partners supported the idea, but the Greater Lancaster Hotel and Motel Association strongly opposed it, arguing that members have seen little or no benefit from the convention center and that raising the tax would hurt business.
The refinancing deal with Wells Fargo required the authority to hire an outside consultant. The adviser would study ways to improve the center’s finances and ensure the authority’s ability to meet its bond obligations.
The original report deadline was Feb. 15, according to the authority’s request for proposal, or RFP. That was pushed back to the end of March and then to the end of April.
“I’m glad they’re taking time,” because it means they’re being thorough, Molloy said.
Concurrently, the visitors bureau convened its own task force of local business leaders and tourism officials to study the situation. The bureau has posted extensive information on the task force and its three work groups on its website.
The visitors bureau’s task force will present its report to the bureau’s board on May 10, and the board is expected to release the document shortly thereafter, Barrett said.
The task force and CSL have exchanged considerable information and the two reports will be complementary, Barrett said. It’s premature to say to what extent the bureau might propose solutions, he said.
“The message we’re stressing is we’re putting forward the facts. Final recommendations are for other people to draw out of the facts we put forward,” he said.
The authority won’t have that discretion with the CSL report. The authority pledged to Wells Fargo that it would follow all of CSL’s recommendations, unless prevented by law, existing contracts or the need to ensure the ongoing validity of the bonds, according to the RFP.
Kaatz, the CSL principal, declined to discuss the details of his company’s investigation before its report is released.
He did say CSL is not projecting market trends but focusing more on “nuts and bolts”: the center’s operations, financing arrangements and its allocation agreements with Penn Square Partners. Those agreements determine how costs and revenues are split between the convention center and the adjoining Marriott hotel, which is operated by Interstate Hotels and Resorts.
Because the report will become public, CSL must not disclose any proprietary Marriott or Interstate business practices, the RFP stipulates.
One strategy to minimize operating losses would be for the center to cater primarily to local events, said Sanders, the University of Texas professor. That reduces marketing expenses and adds events, but the trade-off is that fewer hotel rooms are booked, he said.
“To what extent is the convention center’s role to support that hotel?” he asked.
Molloy disagreed with Sanders, saying convention centers achieve success by hosting “a good mix of business.”
“By doing the mix properly, you’re able to watch the effect on the bottom line,” he said.
The center also weighs events’ benefit to Lancaster, as well as profitability, he said. Hosting events that promote Lancaster’s vitality is part of the center’s mission, he said.
Penn Square Partners declined to comment on the two studies before their release, spokesman John Sandy said.
In both cases, a hotel and convention center were proposed to revitalize the downtown of a small Pennsylvania city.
In both cases, proponents touted the benefits, while opponents called them overhyped. Both projects were built after years of controversy and protracted legal battles. Bayfront opened in 2007, the Lancaster center in 2009. In both cases, hotel taxes are used to cover operating losses.
Erie’s facility, however, differs from Lancaster’s in at least two important ways.
First, the Bayfront and its 200-room Sheraton Hotel are wholly owned and operated by the Erie County Convention Center Authority.
In Lancaster, the Lancaster Convention Center Authority owns the convention center, but Penn Square Partners, a private joint venture of High Cos. and Lancaster Newspapers Inc., owns the franchise of the adjoining hotel, the Lancaster Marriott at Penn Square.
Critics say Penn Square Partners’ arrangements with its public partners, the authority and the Redevelopment Authority of Lancaster County are overly weighted in the private entity’s favor.
Secondly, “The Bayfront has no debt service,” said Casey Wells, the Erie authority’s executive director.
State grants paid in full for the $44 million convention center. The Sheraton was financed through a $46 million revenue bond and its proceeds are satisfying the payments, Wells said.
Heywood Sanders, a professor at the University of Texas at San Antonio and a leading convention center industry opponent, put it pointedly.
“It was a free convention center,” he said.
The Lancaster convention center project received $19.5 million in state grants, Lancaster authority Executive Director Kevin Molloy said. The hotel component received separate grants and state loans totaling $37.25 million, according to the authority’s website.
The Lancaster authority uses hotel tax revenue to cover payments on $63.9 million in bond debt as well as the convention center’s operating losses, which were $3.66 million last year, according to audited financial reports.
The Erie authority also owns and operates the Bayfront’s parking garage and theater, an arena and a minor league baseball stadium, home of the Erie SeaWolves.
Erie County’s hotel tax brings in about $2 million a year, Wells said. That covers annual operating losses of roughly $1 million to $1.2 million at the authority’s various venues, while still leaving enough money to make timely payments on about $7 million in other debt and for other uses, he said.
“We have sufficient operations money as well as capital reserves,” he said.
Kevin Molloy was the Bayfront’s general manager before taking over as the Lancaster authority’s executive director in 2008. He noted additional differences, such as Erie’s site on the waterfront and its “totally different price point.”
“The business plans,” he said, “were 180 degrees from each other, no doubt about it.”