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Path of Destruction

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

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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.

In theory, benefit to the city will also come as new businesses catering to Med Mart clients fill in vacant downtown office space and the businesses create new jobs. But these economic effects, too, must be measured sometime down the road.

"If they have to lower rents or give shows away for free to meet the requirements, then that is what they will have to do," Applebaum says. "But we want MMPI to make a crateload of money."

MMPI did not respond to questions about its planned rental rates, but Williams says the company is charging more than a dollar per foot for convention center space. "From what I've seen, their quotes have varied, but they are in line," he says. "We will be competitive."

That is not the case, according to one of the country's leading independent convention center experts. "With a center the size that's planned, Cleveland isn't competitive for anything," says Heywood Sanders, a professor in the public administration department at the University of Texas in San Antonio. "Almost without exception, public convention centers in this country operate at a loss."

The $10 million in taxpayer money MMPI will receive to run the facility is adequate; the Pricewaterhouse survey showed that similar centers spent an average of $9.8 million to keep running last year. But turning a profit is a different endeavor. Whatever price MMPI is asking for convention center space may not matter at all. According to the survey, it can expect to actually draw around nine cents a square foot per day.

Sanders says there are too many convention centers competing for business; therefore, most deeply discount rates or give space away for free. Any money made comes from mark-ups on sales of food and convention services, and those are not usually enough. For example, the convention center in Philadelphia loses about $10 million a year, and a new center in Washington, D.C., runs at an $18 to $20 million loss annually, according to Sanders.

On the Med Mart side, MMPI is apparently already willing to dole out rent-free space. On May 5, The Plain Dealer reported that Industrial Woodworking Corp. of Michigan was offered a free showroom for three years along with $20,000 in cash to outfit it.

Indeed, while everyone involved hopes the Med Mart will pump oodles of cash into MMPI's coffers, Boston and other cities have learned that bad things can happen when Vornado doesn't see a sufficiently handsome profit. In some cases, the company has simply walked away from its obligations.

A HABIT OF BAILING

Three years into their crater problem, Boston officials now worry that the hole in the middle of Downtown Crossing could threaten the new businesses they worked so hard to attract. The complex Vornado was supposed to build would have been the star attraction.

"It was the catalyst to get the other nearby vacancies filled," says Jessica Schumaker, spokeswoman for the Boston Redevelopment Authority. (A spokesman for Boston's mayor said he did not want to comment further on Vornado.)

Today, there is little that can be done to roust the shopping district out of its arrested development. The city has considered pulling building permits for the site in an effort to force Vornado to move forward or risk having to go through the costly permitting process again. In response, Vornado has put its hole in the ground up for sale in a move the city views as pure posturing. The company bought the site for $100 million in cash in 2007, though it is now worth less than that because the market is down and the buildings were demolished. Vornado is asking $200 million anyway.

And Boston isn't Vornado's only battleground. Fairfax County in northern Virginia is plagued by a similar nightmare brought on by the company. In 2006, Vornado bought the sprawling Springfield Mall, pledging to redevelop the 80-acre site by adding more than one million square feet of office space (about the size of the I-X Center's exhibit hall and meeting rooms), a 225-room hotel, and more than 2,000 apartments, all in a park-like setting.

But zoning delays and other hold-ups plagued the project, and in 2009 Vornado defaulted on the $171 million loan used to keep the Springfield mall open before new construction started. Industry analysts call this a "strategic default," which allows a company like Vornado to basically restructure its debt. The mortgage holder, unable to find another buyer for the mall with its increasing number of boarded-up stores, put it up for auction, but there were no takers. In December 2010, the lender gave in to Vornado, selling the property back to the company for just $115 million.

Citing substantial savings from replacing the old mortgage with the much cheaper one, Vornado promised again to turn the languishing mall into a vibrant community asset. To capitalize on the momentum, Fairfax County officials pushed through permits so construction could start at the beginning of the year. So far, nothing has happened.

"I expected to see bulldozers on the site by now," Fairfax County Supervisor Jeffery McKay said in a recent newsletter. "I haven't seen any signs that Vornado is backing away from the project, but I'm now at the 'show me' point."

As Fairfax County awaits its show-me moment, there is nothing more it can do. Meanwhile, the mall continues to draw crime and deteriorate, says a spokesperson for McKay.

But to the Port Authority of New York and New Jersey, Boston and Fairfax County must appear unreasonably antsy about getting their projects done. Both were initiated not long before the recession hit, after all. New York, meanwhile, has waited more than a decade for Vornado to build a promised office tower above the port authority bus terminal in Manhattan.

In 2000, the port authority gave Vornado and a partner the rights to develop the tower, which would also add bus parking and loading areas to the woefully congested hub.

Both The Wall Street Journal and Crain's New York Business have reported on the start-stop nature of the pact, which existed long before the 2008 recession. According to the papers, the deal has been called off at least once for unknown reasons, and at other times, economic conditions have not been quite right for Vornado to actually start the project. Meanwhile, many of the 6,000 buses bringing commuters to New York each morning must return to New Jersey for the day because the anticipated parking spots still don't exist at the New York terminal.

When contacted by Scene for this story, Vornado spokesman Mark Semer quickly responded to a request for an interview and asked for a list of questions to be forwarded to company officials. After receiving the list, which included questions on stalled Vornado projects as well as the nature of Vornado's involvement with the Med Mart project, Semer told Scene that company officials decided not to comment.

SMITTEN BY FURNITURE

Joseph P. Kennedy bought Chicago's massive Merchandise Mart in 1945 because the idea of a one-stop-shop for designers intrigued him. MMPI was born as another Kennedy family business specifically to manage Merchandise Mart trade shows. While cultivating a specialty in managing mart-style facilities, MMPI expanded to include a few other design and apparel marts in Chicago, New York, and Washington, D.C.

When Vornado bought the Merchandise Mart and MMPI in 1998, MMPI's business grew.

Under Vornado, MMPI acquired vast furniture-mart spaces in North Carolina. These showrooms followed the Merchandise Mart model, allowing furniture buyers to see virtually all styles from a large number of manufacturers. MMPI's expertise in managing mart-style businesses sold Cleveland and Cuyahoga County officials on the company. Former County Commissioner Tim Hagan is reportedly a close Kennedy family friend, and he was instrumental in convincing his fellow commissioners to take on the Med Mart project.

Since talks began in Cleveland, Vornado has divested MMPI of all its North Carolina furniture mart holdings. Last July, Vornado defaulted on a $191 million loan and walked away from the largest of these: the 2 million square foot High Point Furniture Mart.

Since 1986, MMPI and the Chicago Merchandise Mart have been headed by Chris Kennedy, the son of Robert Kennedy. But after weathering his family business' sale to Vornado and staying on to spearhead the Med Mart project, Kennedy is also walking away. He will step down as President of MMPI on July 23.

Until recently, Kennedy provided oversight in Cleveland, where there was little evidence of Vornado's presence. Insiders say that has changed; in the last month, Vornado representatives have been a fixture at the Med Mart's regular closed-door construction-review sessions. MMPI did not respond to emails or phone calls seeking to confirm Vornado's involvement.

A call last week to Vornado's New York-based VP of design and construction revealed he was out of town. "He's in Cleveland," said the woman who answered the phone.

A complicated operating agreement dictates that the county pay MMPI $40 million each year in rent, while MMPI returns $36 million a year in lease payments to the county. According to the agreement, if MMPI fails to fill the Med Mart and convention center or defaults on its payment to the county, MMPI can basically be fired.

But given Vornado's recent history, the more pertinent question may be whether MMPI and Vornado will make enough money to stay in the game. In either case, Cleveland would be left with a $465 million complex that attracts no crowds and has nobody to run it.

"They are going to have to be prepared to run a convention center," Sanders says of Cuyahoga County, "and whatever operating losses there are with it."

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