Originally published in the Lancaster Post on September 26, 2008
In March of 2006, the Penn Square Partners released a document titled "What's the Risk?", which was designed to reassure the public at a time when controversy was at a peak over the hotel and convention center project in downtown Lancaster. The local media then heavily promoted the claims of this document as proof the project is a good idea.
"What's the Risk?" focused on the potential cost to taxpayers of public guarantees for the project, but only if it were to be a complete failure, or if revenue from the "hotel tax" were to collapse. No mention was made of what would happen if the convention center or hotel would generate less revenue than needed to pay its obligations.
The concept behind a convention center in downtown Lancaster seems to have been "if you build it, they will come." In 1998, the Lancaster Campaign commissioned the Pinnacle Advisory Group of Boston to study the possibility of a downtown convention center. Its report, which was never released to the public, clearly spelled out that a convention center would be inappropriate for downtown Lancaster.
Consequently, the Lancaster Campaign in 1999 commissioned Ernst & Young LLP of Philadelphia to perform a second study, focusing on the Watt & Shand site. This report was widely proclaimed as justification for the project. However, the report's own introduction includes many limitations and qualifications, which casts doubt on its own conclusions.
As further justification for the project, the fledgling Lancaster County Convention Center Authority in 2000 ordered yet another report by PricewaterhouseCoopers LLP (a company which appears to have never issued a negative report to one of its clients about a proposed convention center). Updates were provided by PWC in 2002, and C.H. Johnson Consulting in 2003, as justification for the massive expansion of the project. These reports are still being quoted on the LCCCA and Penn Square Partners' web sites to this day, in spite of PWC's withdrawal of their conclusions in March of 2005.
Several "pro-forma" estimates of convention center income and expenses were released to the public before its construction bond sale in March of 2007. Each subsequent estimate included less operational income that the previous one, but all included projected losses that just fit within the "hotel tax" proceeds which are expected to remain after bond payments. More recent "pro-forma" estimates have been produced by Interstate Hotels and Resorts, the manager of both the hotel and convention center, which again show operational losses that would barely be covered by the "hotel tax". But no one will explain how these estimates were arrived at.
What would happen if the convention center were to lose more money than expected?
The "hotel tax" could be increased to the maximum amount allowed by law, 5% for the convention center by itself, and 2% for the Pennsylvania Dutch Convention and Visitors Bureau. If this revenue is insufficient, Lancaster County would be forced to raise real estate taxes, since the LCCCA has no other source of operational funding.
To make matters worse, Wachovia's construction bond guarantee is only for five years. If revenue from convention center operations consistently falls well below previous estimates, Wachovia would be within its rights to refuse to renew the bond guarantee. This would greatly increase the interest cost of the "seven day demand" construction bonds, leaving even less revenue from the "hotel tax" to pay for operational losses.
An even bigger risk is in the "private" hotel. Only $11 million in "equity" - which has never been explained to the public - has been invested in the hotel by its private partners. Another $24 million is supposed to come over 20 years from future earnings of the hotel. The remaining anticipated $40 million cost to build the hotel and its part of the "shared space" is from taxpayer dollars via the Redevelopment Authority of the City of Lancaster, which holds title to the hotel building.
The Penn Square Partners have taken out a five-year $24 million construction loan as their share of the construction costs. At the end of five years, PSP is obligated to convert the balance into a mortgage. If hotel revenue does not meet expectations, obtaining a mortgage for the hotel could be difficult. If PSP cannot refinance the construction loan, it could declare bankruptcy (without affecting its parent companies), leaving Lancaster City taxpayers stuck with an unprofitable hotel.
The biggest risk is to Lancaster City itself. If the convention center and hotel fail to generate the amount of economic development needed to justify the cost of this project, tens of millions of taxpayer dollars over five decades will have been wasted. A convention center that is dark most of the time, plus an under-utilized hotel, would be a drag on Lancaster's economy from which there would be no escape.
