Path of Destruction

The Med Mart’s parent company has a history of unfinished business

The city of Boston has gone to great lengths to snazzy up its historic Downtown Crossing. A pedestrian-only shopping destination for more than 100 years, the intersection had long been flanked by premier department stores, including Filene's, which opened there in 1912.

Like many shopping areas throughout the country, Downtown Crossing has fallen prey in recent years to bankrupt businesses and shuttered stores. Though it's still far from attracting the throngs of shoppers the city hopes to see there, the redevelopment efforts have led to the emergence of 40 new small businesses in recent times.

There is just one problem: The huge pit in the ground that sits smack in the middle of it all.

Boston Mayor Thomas Menino is weary of the questions; after all, the spot where a popular Filene's once stood has sported a crater for three years now.

"People say to me: 'Oh, you've got a hole there,'" he told the owners of new businesses in April, according to The Boston Herald. "So what! The hole is going to be there until those folks from New York understand we in Boston know how to do development. And just because they can't get development done, that's not my fault."

The New York folks he refers to happen to be Vornado Realty Trust, the group that owns Merchandise Mart Properties Inc., developer of Cleveland's future Medical Mart and convention center.

Vornado promised to build a showcase 39-story hotel, office, residential, and retail complex — including a new Filene's — atop the hole created when it tore down the store in 2008. But the company ran out of money for the project at a most inconvenient juncture: immediately after the wrecking ball stopped swinging. Downtown Crossing has been without its anticipated centerpiece ever since.

Vornado, the second-largest real estate investment trust in the country, juggles nearly 400 office and retail properties, including Chicago's fabled Merchandise Mart, Cleveland's own Med Mart and convention center, and eight others operated and managed by MMPI. By all accounts, Vornado is successful and recovering nicely from the economic downturn. Its stock is on the rise, and it's drawing higher rent from tenants.

But Vornado's success appears to come from shrewd dealings that save the company from spending a dime more than it has to, even as the fur flies in Boston and other cities where Vornado projects languish, leaving locals wondering who pulled the plug.

Funnel Cloud of Cash

One fate unlikely to greet Cleveland is a gaping hole in the ground where the new Med Mart and convention center are supposed to go. Vornado-backed MMPI has too sweet a deal here to let that happen. The company doesn't have to find investors or spend its own millions; funding for the $465 million project is provided by a quarter-cent Cuyahoga County sales tax, making it impossible for construction money to run out.

Crews broke ground on the Med Mart site in January. So far, the former underground convention center has been gutted, and the foundation for the new one is being laid underneath Public Hall and Malls B and C. The adjacent four-story Med Mart will offer permanent showroom space to medical manufacturers. MMPI plans a grand opening in the fall of 2013.

Regardless of how fruitful the relationship proves to be, Cuyahoga County assumes it will be lengthy: The county is on the hook to pay MMPI to run the complex for the next 20 years, to the tune of $10 million annually.

Any money made from leasing Med Mart showroom space and bringing in trade shows and conferences goes directly into MMPI's collection basket. For its trouble, the county gets nothing. As far as convention centers go, this arrangement is not unusual, says Dan Williams, vice president of sales for Positively Cleveland, the nonprofit charged with luring conventions to Cleveland and promoting tourism. "All the other cities have been doing it this way for years."

But data from PricewaterhouseCoopers suggests otherwise. A 2010 survey of publicly funded convention centers shows that only about a third opt to pay a private company to manage their facilities. Most are run by the governments that own them or by designated quasi-governmental organizations.

Prior to MMPI's arrival, Positively Cleveland, one of those quasi-governmental organizations, was responsible for drumming up business for the old convention center at the seemingly thrift-store price of one dollar per square foot, with proceeds benefiting the City of Cleveland. Under the new arrangement, Positively Cleveland continues to lure non-medical shows to town, while MMPI is charged with wooing medical conferences. All profits from both are pocketed by MMPI.

Meanwhile, neither the county nor the city has much say in how MMPI conducts its business here.

"The theory is, right now, that the public sector paid a fortune for the facility [that MMPI] will operate and manage, and they have to meet key performance requirements," says Jeff Appelbaum, an attorney who has been the county's main liaison and contract-maker with MMPI.

Those county requirements simply state that MMPI must bring in a certain number of trade shows and have a certain number of Med Mart tenants at various points during the 20-year lease. During the first two years after opening, MMPI must have the Med Mart showrooms about 83 percent full and have the convention center operating at 20 percent of its annual capacity.

So what do Cleveland and Cuyahoga County get? No one will know until 2013, when the facility opens and any increase in convention traffic and out-of-towners using hotel space can be measured. MMPI's agreement with the county states that after the first seven years of operation, MMPI must bring in 214,500 attendees a year. If that happens, it could equate to as much as $800 million of visitors' money being spread through the area annually, most of it going to hotels, restaurants, and entertainment spots.

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