Brian Cummins · Council passes resolution encouraging parties to expedite Medical Mart & Convention Center Facility Project on Mall site.

March 2nd, 2009

And — In search of a Medical Mart mathmatical formula…
…and more details!

First the Resolution – Council speaks…

Excerpts:

Resolution No. 255-09
Council Member Kelley, Polensek, Zone, Cummins, Keane, Sweeney, Westbrook, Cleveland, Pruitt, Brancatelli, Brady, Reed, Dow, Coats

AN EMERGENCY RESOLUTION
Supporting the Cuyahoga County Board of Commissioners’ and MMPI’s site selection and encouraging quick movement towards site control and construction of the new Cleveland Medical Mart and Convention Center.

WHEREAS, a Cleveland Medical Mart and Convention Center would capitalize on Cleveland’s tremendous healthcare industry and further Cleveland’s position as the leader in this field; and…

WHEREAS, Merchandise Mart Properties, Inc. (MMPI) is committed to applying their extensive knowledge and experience in the trade show and convention business to the Cleveland area market; and…

WHEREAS, these exhaustive studies have concluded that positioning the new Cleveland Medical Mart and Convention Center at the site of the existing convention center is the most advantageous location for this premier facility; and…

WHEREAS, this Council encourages expedited, good-faith negotiations with our partners at the Cuyahoga County Board of Commissioners to move towards site control and construction of the new Cleveland Medical Mart and Convention Center; and…

WHEREAS, this Council is committed to being an active partner in this process; and…

BE IT RESOLVED BY THE COUNCIL OF THE CITY OF CLEVELAND:

Section 1. That this Council supports the Cuyahoga County Board of Commissioners’ and MMPI’s site selection and encourages quick movement towards site control and construction of the new Cleveland Medical Mart and Convention Center…
===================================

To comment regarding just a few of the varied and numerous postings on this subject –

In the beginning…

Legalities of the tax — There was a question of the legalities of how the County Board of Commissioner’s passed the .25% sales tax. In discussions with the General Counsel to the Commissioners, the response was that the Ohio Revised Code allows for the tax to be passed as it was. This appears to be true, but many of us believe it was done out of spirit with the law as it clearly states that if the funding is intended for the sole use of a convention facility. See below – it was passed based on A3 as opposed to A1 that would of required a vote of the people, see #10 paragraph 3 of the ORC section referenced below (5739.026 County sales tax for specific purposes).
————————-
A(1) To provide additional revenues for the payment of bonds or notes issued in anticipation of bonds issued by a convention facilities authority established by the board of county commissioners under Chapter 351. of the Revised Code and to provide additional operating revenues for the convention facilities authority;…

A(3) To provide additional revenue for the county’s general fund;
————————-
REF: 5739.026 County sales tax for specific purposes.

http://codes.ohio.gov/orc/5739.026

Does the project have merit? Big question that’s short on solid answers. As most of the BFD readers know by now, convention facilities are recognized as loss leaders. In and of themselves they do not make money they loose money. But, the theory goes that the economic benefit they attract via the spending of the folks attending trade shows is supposed to be greater than the losses the facilities generate.

This question then leads to what are the capital and bonding costs and operating costs for the 20-year life of the project. These are estimated as follows based on the publicly available information to-date:

$425 construction costs (current estimates for Mall site)
$375 financing (taxable bond issuance) (1)
$103 operating costs (County to pay MMPI, source of funds not yet identified)
——
$903 million

And, what might be the return on investment? A wild guess –
$3.3 billion total return or a simple annualized ROI of 13.3%.

This is calculated by estimating only 50% of the cited potential revenue of $330 million per year in “additional, direct local spending” calculated by MMPI and the County estimating 50 trade shows per year (2). I did not bother to try to factor in interest earned etc…heck no one else has either so far as I know.

Bed Tax Q’s — There are other rumblings about the County striking a deal with the City to allow the City to retain the existing $6.5 million we collect for the current annual operations of the Convention Center. No price has been released yet for the County’s purchase of the Public Auditorium and Malls, but the potential of the City retaining the current bed tax is an interesting possible kind of annuity that would total $130 million for the 20 year period. There has not been any mention of what would happen to the $8 million per year bed tax that Positively Cleveland receives. They are worried.

That’s all for now. Please add your thoughts and perspectives, particularly regarding the potential return on investment.

One thing that is very difficult to consider is the cost of not doing this and what the City will be left with in terms of dealing with the existing convention center. And an even more difficult question that seems somewhat moot, is what else could we do with a half a billion dollars? From my perspective of a Cleveland City Council representative, with the tax being a done deal and the project to be built somewhere, I of course want it built on the existing site so our City can benefit from the re-investment of a public asset.�

REF:
(1) Med mart bonds cost millions more with private company
Posted by Joe Guillen/Plain Dealer Reporter February 21, 2009
http://blog.cleveland.com/metro/2009/02/med_mart_bonds_cost_millions_m.html
(2) Cleveland Medical Mart & Tradeshow Facility
Paired with a new Cleveland Convention Center
July, 2007, Cuyahoga County Board of Commissioners
http://www.cuyahogacounty.us/pdf/SALES_TAX.pdf 

Last 5 posts by Brian Cummins

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8 Comments »

8 Responses to “Council passes resolution encouraging parties to expedite Medical Mart & Convention Center Facility Project on Mall site.”

  1. SomeGuyOnBridge Says:
    March 2nd, 2009 at 9:54 pm

    Does the project have merit? – Big question that’s short on solid answers.

    That in itself is the solid answer you want. If the sharpest “economic development” people in Cleveland still can’t clearly justify this thing on its merits, it’s because there aren’t any. Think of it as our own “Weapons of Mass Destruction” scenario if you like–if you can’t find them, it’s not because you didn’t look hard enough. They don’t exist. Period.

    This is calculated by estimating only 50% of the [c]ited potential revenue of $330 million per year in “additional, direct local spending” calculated by MMPI and the County estimating 50 tradeshows per year.

    Oh for heaven’s sake, Brian, you’re smarter than that. The number fifty was pulled straight out of Jimmy Dimora’s ass. (Sorry for the visual.) Were you here on BFD when I used enhanced interrogation techniques to get the CVB “source” for that estimate?

    I repeat my offer to anyone reading BFD: I give two-to-one odds on the fifty conventions statistic. Give me $5000 when the place opens, and I’ll give you $400 for each and every medical convention that actually takes place there in the first five years.

    Who wants to double their money? (50 x 5 x $400 = $10,000.) Nobody? Why not?

    Brian, you’re being way too cautious about this. There is no debate about the convention center and medical mart. The economic projections are 100% fantasy and the funding plan has less credibility than a Nigerian email scam.

    But I hope someone takes my bet, because my kid needs braces.

  2. SomeGuyOnBridge Says:
    March 2nd, 2009 at 10:15 pm

    Yeah, some math major I am. I meant $40! Otherwise it’s 20:1 odds!

    *cough* carry on

  3. Ed Morrison Says:
    March 3rd, 2009 at 8:14 am

    Here’s a way to put the unit number of the shows in the context.

    If we assume that all 50 shows a related to healthcare field, then the promoters of the Med Con are projecting that Cleveland will break the top 10 cities in healthcare meetings. (I am basing this on 2006 data, available here: http://snurl.com/d07ka )

    We will rank ahead of New York, Baltimore, Philadelphia, Tucson, Phoenix, Miami, Nashville, New Orleans and Denver.

    But let us assume that only two thirds of the projected meetings are related to the health care field. That means we will have 33 healthcare related meetings a year. That is still puts us tied with Philadelphia and ahead of Tucson, Phoenix, Miami, Nashville, New Orleans and Denver.

    It’s a pretty remarkable projection.

    Earlier this month, the local paper in Orlando surveyed the convention market:

    Companies and industry groups are scaling back their big, out-of-town meetings and annual gatherings — or canceling them altogether — which leaves convention destinations such as Orlando fighting over fewer events and fewer potential visitors. The stepped-up competition means that, for meeting planners, deals abound — and they know it.

    http://snurl.com/d07t6

    And, as I noted in another post, the meeting market for health care is undergoing some structural shift:

    Large healthcare and pharmaceutical companies are shying away from sponsoring these events. The business model underlying the events is shifting:

    http://snurl.com/d081a

    (One pharmaceutical executive is quoted as saying: “I don’t see these medical exhibit halls working in the future.”)

    Not surprisingly, attendance is dropping:

    http://snurl.com/d081r

  4. SomeGuyOnBridge Says:
    March 3rd, 2009 at 10:41 am

    It’s a pretty remarkable projection.

    And it’s one with no support whatsoever. They really did just pick the number 10%. They could have easily said 3% or 40%.

    The Med Con promoters are not reality-based. They’re, uh… looting-based.

  5. Ed Morrison Says:
    March 3rd, 2009 at 11:23 am

    There is another factor to consider. The Med Con is effectively a permanent exhibit space, as I understand it. This is just the type of space that the pharmaceutical executive says is becoming obsolete in today’s market.

    At the same time, the viability of the Med Con depends on building traffic. If the convention center does not meet its aggressive market goals, it’s quite conceivable that the financial support for the Med Con could quickly collapse.

    MMPI will not be the party that bears the risk of this collapse. They can easily walk.

  6. John Polk Says:
    March 3rd, 2009 at 11:47 pm

    Interesting to note that this week’s edition of CRAIN’S also contained an article reporting on the uncertainty facing the convention and trade show industry. The people who are IN the business here locally are concerned not just about the current economic crisis, but also about what they’re seeing as long-term trends away from big meetings in big facilities.

    This is a trend that people in the hospitality industry have been tracking for a decade. Trend followers know that even such premiere venues as Vegas and Orlando are getting seriously squeezed. The evidence is all around.

    In philosophy class, we were taught that “faith” is “sustained belief in the face of contrary evidence.” Even for those who’d dearly love to believe in the efficacy of the MedCon concept, the required level of faith is hard to come by.

    Another issue raised here is the constitutionality issue. Maybe this is a matter in which the Institute For Justice might have an interest. It’s certainly worth a little due diligence…however ex post facto…

  7. Ed Morrison Says:
    March 4th, 2009 at 7:55 am

    From the 10-K filed by Gaylord Entertainment:

    We believe that we are the only hospitality company whose stated primary focus is on the large group meetings and conventions sector of the lodging market….

    In recent quarters, we have experienced declines in hotel occupancy, weakness in future bookings by our core large group customers, lower spending levels by groups and increased cancellation and attrition levels. We believe that corporate customers in particular are delaying meetings and events and seeking to minimize spending. While we have re-focused our marketing efforts on booking rooms in 2009 and 2010, rather than later years, there can be no assurance that we can achieve acceptable occupancy and revenue levels during continued periods of economic distress, in light of decreased demand. We cannot predict when or if hospitality demand and spending will return to favorable levels, but we anticipate that our future financial results and growth will be further harmed if the economic slowdown continues for a significant period or becomes worse.

    On the constitutionality issue, this would be an excellent case for a group of law students to tackle. Surely, we can find an aggrieved taxpayer for a client.

  8. SomeGuyOnBridge Says:
    March 4th, 2009 at 8:28 am

    Even for those who’d dearly love to believe in the efficacy of the MedCon concept…

    I don’t think it’s a matter of faith. Go find me one high-profile supporter of the Med Con who doesn’t stand to gain power or make money even if it fails.

    They know it’s a scam. There is nothing about the Med Con that is not a scam. They’re okay with that. It’s that simple.