status report 032803

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Penn Square PartnersProject Status ReportMarch 28, 2003

Background

The Lancaster Marriott and Convention Center project was conceived as a public/ private partnership

of the Lancaster County Convention Center Authority (LCCCA) and Penn Square Partners (PSP) toserve as the centerpiece of the economic revitalization of downtown Lancaster. This partnership,like thousands of others undertaken throughout the United States to accomplish important public-benefit goals, was based on several fundamental facts:

1. The economic revitalization of downtown Lancaster is a critical community priority;

2. Developing a hotel and convention center complex centered around an historic propertyis an appropriate way to revitalize downtown Lancaster and to generate economicbenefits for the entire community;

3. The initial costs of developing a hotel and convention center are prohibitive either for

the public sector or the private sector alone;

4. The only way in which an economic revitalization project of this scope can beaccomplished is to create a public/ private partnership through which thepublicsectoruses its authority and resources to provide incentives that reduce the risks forprivatesector participants and to make private sector participation economically feasible.Developing a project of this size and scope is an all or none proposition, i.e. the hotelcannot succeed without the convention center and vice versa.

5. By providing public sector incentives to private sector participants, the project can befunded, built and provide long-term economic benefits to the community andeconomicrewards to the private sector participants.

Public support for public/private sponsorships is built-in to local, state and federal law.

The logic behind and the success of public/ private partnerships for economic development are sowell accepted that the infrastructure to support them is enshrined in local, state and federal law.There are numerous economic incentive programs offered to the private sector by variousgovernment bodies to create incentives for the private sector to invest capital in projects that benefitthe public that the public could otherwise not afford. These include for example, economicdevelopment grants and loans, historic tax preservation credits, tax increment financing, special taxprograms that municipalities are authorized to enact such as taxes on hotel rooms to supportconvention center construction and tourism promotion and many others.

Requirements of public sector incentive programs were a major factor in the design of theproject.

Architects for the Lancaster Marriott and Lancaster Convention Center project developed their initialprogram plans around a number of design constraints, many of them driven by requirements ofvarious public sector incentives upon which the private sector relied. These included the need tolocate the exhibit hall, meeting rooms, and ballrooms of the convention center facilities within thefootprint of the convention center itself; retaining the faade and major portions of the historicWatt & Shand Building; PSPs intention to apply for historic tax credits and Tax Increment Financing(TIF) support; and the need to build in and around existing historic structures valued by thecommunity. As a good community citizen the LCCCA also wanted to respond to the tourism


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industrys desire for more exhibit space than initial market studies indicated was required immediately.Responding to these issues became design goals for the architects.

In pursuing these goals, the architectural design team made recommendations appropriate to theconstraints placed upon it. These included, for example, limited demolition of the many smallerbuildings comprising the interior of the former department store and the expensive engineering

required to stack convention center ballrooms on top of a large, column-free exhibit hall to keepthem within the footprint of the convention center.

As the next routine step in project development, the schematic designs for the project werereleased for estimates, to determine the likely costs of the plan. When estimates were studied,LCCCA and PSP learned that the cost of design choices that were made given the constraints placedon the design team resulted in 125,000 square feet of excess space to support stairwells, escalators,elevators, public circulation and other pre-function spaces. This resulted in estimated costs thatexceeded the LCCCAs budget by $12.5 million and PSPs budget by $10 to $13.6 million (the highernumber includes the estimated effect of prevailing wage requirements if applied to the project.)

During delays caused by hoteliers litigation, money was spent defending the multiplelawsuits and public sector incentives to the private sector changed or becameunavailable.

Throughout the history of the project, a group of local hoteliers has tried, through repeated lawsuitsand appeals, to challenge the constitutionality of a local tax that was enacted to support constructionof the convention center and promotion of tourism in Lancaster County. Defending against thesesuits has cost millions of dollars that otherwise would have been spent to develop the project.Combined with new interpretations of laws that would have provided public sector incentives to theprivate sector, economic incentives to the private sector were reduced by $8 million. Although twomajor court rulings in March 2003 sent the unambiguous message that the hoteliers have had theirday in court, the hoteliers are likely to attempt further project delays through additional appeals tothe U.S. Supreme Court (the Bold I lawsuit) and the Pennsylvania Commonwealth Court (BoldII.)

Responding to higher construction costs caused by the design parameters and facilityprogram plusthe loss of some incentives, requires re-designing the architecture andfurther integrating the relationship between LCCCA and PSP for the mutual benefit of theparties.

Because of design constraints imposed on the architects, the initial design of the program andschematic design both for the public and private portions of the project is an estimated $24.1 to$26.1 million over-budget. Further, PSP cannot qualify for historic tax credits1 and recentPennsylvania Court decisions regarding Tax Increment Financing2and prevailing wages make thecosts of accepting this incentive higher than its potential value.

1 The state agency responsible for recommending these credits considered all demolition planned to clear landfor the public convention center andlimited demolition of buildings behind the faade of the historic Watt &Shand Building in which the hotel would be housed to be excessive, even though the entire historic faade ofthe building was to be preserved along with several other historic buildings. As a result, it is extremely unlikelythat the agency will recommend the approval of historic tax credits for the hotel project.2 See http://www.courts.state.pa.us/OpPosting/Cwealth/out/1079CD00.pdf.

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http://www.courts.state.pa.us/OpPosting/Cwealth/out/1079CD00.pdfhttp://www.courts.state.pa.us/OpPosting/Cwealth/out/1079CD00.pdf


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THE A RCHITECTURE NEEDS TO BE REDESIGNED.

The LCCCA and PSP directed the design team to reconfigure its first plan withoutthe originalrestrictions. Applying the same design principles that guided the first plan, the team suggested threeoptions, only one of which met all requirements and which was fully articulated and presented onMarch 7, 2003 by PSP to the LCCCA. The revised plan best meets the requirements of both thehotel and the convention center ina more efficient package at the budgeted cost. The design changes

would be transparent to a visitor to the hotel or to the convention center. The historic faade of theWatt & Shand Building still would be rescued and important historic properties still would beincorporated into the design of the convention center. The look and feel of the design still wouldbe sensitive to its historic downtown Lancaster site. In fact design changes that are now possiblewithoutthe original restrictions are likely to result in a project that is even more sensitive to itslocation than the widely acclaimed initial design, in a way that meets the program requirementsof the initial feasibility studies conducted by the LCCCA and PSP.

THE R E L A T IO N S H IP BETWEEN LCCCA AND PSP NEEDS TO BE REDESIGNED.

At the request of the LCCCA, PSP provided a full evaluation of the project, including a completefinancial analysis of the convention center and parking garage plan. It also recommended actions toensure the success of the project both for PSP and LCCCA. The proposed restructuring would

provide the most expedited approach for PSP to proceed with the project, reduce the long-termcost to the public for operating the convention center and transfer ownership of the historicWatt & Shand building from private to public ownership. It seemed prudent that that since theLCCCA would benefit directly by this approach and appears to be able to provide additionaleconomic support, the Authority board would have recommended further exploration. This willbenefit the Authority in two significant ways. First, it will allow the project to move forward asexpeditiously as possible and allow both parties to capitalize on historically low interest rates.Second, it allows the LCCCA to construct the maximum amount of rentable space at the lowestpossible cost.

On March 22, 2003, the board of the LCCCA publicly rejected the plan it asked PSP todevelop and ordered PSP to develop a new plan, with no additional input from theAuthority, within two weeks.

At the March 22 public meeting of the LCCCA, the board voted unanimously to reject the plan ithad asked PSP to develop, before PSP and the LCCCA had an opportunity to discuss the content ofthe proposal. At the same time, the chairman declared that he has a sense of how the communityfeels and assured the attendees that the convention center will go forward, that the Authoritysoriginal budget has not changed and that the Authority will seek a new hotel developer if PSP doesnot comply with his demand to develop a new plan, without additional input.

Despite this recent vote PSP wishes to make it clear that it still desires to play an integral role in thedevelopment of a full-service hotel in the former Watt & Shand Building as part of its public/ privatepartnership.
http://www.pennsquarepartners.net/faq.asphttp://www.pennsquarepartners.net/faq.asp

status report 032803

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