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Cleveland Bets Vornado Can Revamp City as Health Hub

Planned Cleveland Medical Mart
An artist's rendering showing the planned Cleveland Medical Mart. Source: Merchandise Mart Properties Inc. via Bloomberg

Cleveland, which has poured almost $1 billion into such projects as three sports stadiums and the Rock & Roll Hall of Fame, is on the verge of spending $465 million in an effort to remake itself as the epicenter for the sale of medical equipment and supplies.

The city’s planned Medical Mart & Convention Center, scheduled to start construction next month, would transcend earlier renewal efforts and attract the kind of high-tech jobs the area needs, said Tim Hagan, a Cuyahoga County commissioner who has championed the project.

“I don’t think a baseball stadium or football stadium or even the Rock and Roll Hall of Fame really redefines a community,” said Hagan, 64, who leaves office next month after 22 years as a county commissioner. “High-tech medical, biotech, that’s going to be the new face of the community. What we hope is when you think of Cleveland, you think of a medical center.”

The city of 416,000 is teaming up with a unit of New York- based Vornado Realty Trust to redevelop the space underneath the 14-acre Cleveland Mall, a public square overlooking Lake Erie, as it seeks to build a reputation as a health-care hub with the nearby Cleveland Clinic hospital.

Critics ranging from local activists to comedian and Cleveland native Drew Carey opposed the project, saying it puts too much of the risk on county taxpayers. Under the terms of the deal, the public would pay the entire $465 million construction budget and also subsidize Vornado’s operating expenses.

Tax Surcharge

The county last month signed agreements with the developer, the city, the construction contractor and affected landowners, according to County Administrator James McCafferty. The planned 422,000 square-foot (39,200 square-meter) exhibition center will be funded mainly with a quarter-cent sales tax surcharge that was adopted in 2007.

All told, taxpayers may put as much as $840 million into the development, including costs of amortizing over 20 years and about $40 million from a tax on hotel bookings, said Tim Offtermatt, senior vice president at Stifel Nicolaus & Co., the St. Louis-based investment bank that is managing a county bond offering for the project.

Vornado is contributing about $20 million for tenant installations and $8.5 million through forgoing lease payments. It also is responsible for cost, repair and operating overruns, Offtermatt said.

‘Shot in the Dark’

Whether the new concept will pay off in terms of jobs and revenue is an open question, said Tom Murphy, a senior resident fellow at the Urban Land Institute in Washington. The Medical Mart has yet to sign any permanent tenants for its showroom.

“It’s a shot in the dark in some ways, in their ability to create a new economic diversity for their economy,” said Murphy, who was mayor of Pittsburgh from 1994 through 2005. “I would want to see some commitments before I would spend that kind of money.”

Vornado unit Merchandise Mart Properties Inc., operator of Chicago’s 4.2 million square-foot Merchandise Mart showroom complex, is Cuyahoga County’s partner in the project. Dave Johnson, a Merchandise Mart spokesman, declined to comment on the project or the funding criticism.

The Medical Mart project is unfolding against the backdrop of a federal corruption probe that resulted in the September arrest of County Commissioner Jimmy Dimora on 26 counts of bribery and fraud, none of them related to the development. Dimora and Hagan were two members of the three-person commission to vote in 2007 to tax residents for the project.

No Participation

Two companies run by people associated with businesses targeted in the probe -- an electrical and a heating/plumbing firm -- have sought contracts to work on the Medical Mart, the Cleveland Plain Dealer reported on Nov. 5. The county has assurances that neither of those individuals will have participation in the project, said Jeffrey Appelbaum, an attorney from the firm Thompson Hine LLP of Cleveland, who represents the county on the project. The county has the right to reject anyone “if it’s determined they have some role with the corruption,” he said.

The Plain Dealer last year questioned whether Hagan’s ties to Merchandise Mart President Christopher Kennedy and his family were a conflict of interest. Christopher Kennedy is the grandson of Kennedy family patriarch Joseph P. Kennedy, who bought Chicago’s Merchandise Mart building in 1945. It stayed in the family until its 1998 sale to Vornado.

40-Year Friendship

Hagan said he has had a 40-year friendship with the Kennedy family, serving on their charitable foundation. He is also the godparent to one of the children of Christopher Kennedy’s sister Kathleen Kennedy Townsend, he said.

“There was not one other entity in the country that showed any interest when it was open for discussion,” Hagan said. “No one approached us. So you deal with the person who wants to dance with you.”

Merchandise Mart Properties calls itself the world’s leading owner and operator of showroom buildings and trade show venues, hosting more than 300 events a year. Its namesake Merchandise Mart is one of Chicago’s signature buildings, a 25-story hulk by the Chicago River.

The Merchandise Mart division produced $194.4 million of revenue through the first nine months of this year, or about 9 percent of Vornado’s $2.1 billion of sales, most of which comes from New York and Washington office buildings. The unit’s revenue was down 2 percent from the same period last year.

Cleveland Clinic CEO

The Medical Mart is the brainchild of Delos “Toby” Cosgrove, chief executive officer and president of the Cleveland Clinic, a sprawling complex east of downtown that ranked fourth this year on U.S. News & World Report’s list of top U.S. hospitals. The clinic is where shooting victim Connie Culp became the nation’s first face-and-jaw transplant recipient in 2008.

The medical center is the largest non-government employer in northern Ohio and second-biggest in the state, with about 40,000 workers.

Since 2000, Cuyahoga County has lost 41 percent of its manufacturing jobs, which totaled 68,500 in 2009, according to the Ohio Department of Job and Family Services. Jobs in health-care and social assistance increased 19 percent to 118,000.

Saudi Arabian Sheik

The Medical Mart idea sprung from a conversation about 12 years ago between Cosgrove and a Saudi Arabian sheik, who was considering a similar project in Dubai, Cosgrove said in an interview. He was the hospital’s chairman of cardiothoracic surgery at the time.

“I thought gosh, this would be something that would be perfect in Cleveland, though it never came to pass in the Middle East,” said Cosgrove, who became the clinic’s CEO in 2004. “In order to build a hospital, I wound up traveling all over the country and the world to see various pieces of equipment. It would be nice to have all those things in one place.”

Customers would be able to see the latest in medical equipment on display and then watch them in use at the clinic, Cosgrove said. If done right, the showplace will do more than just fill hotel beds and restaurant tables. Suppliers and manufacturers will be compelled to locate operations in the area, creating permanent jobs, he said.

Soon after Cosgrove became CEO, a friend, John Cushman III, co-chairman of the real estate services firm Cushman & Wakefield Inc., set up an introduction to Vornado. Cosgrove arranged for Christopher Kennedy to meet then-Mayor Jane Campbell.

Mall Site

After considering other sites, Cleveland settled on a plan to use the underutilized convention center beneath the lakefront mall. The mall, designed by turn-of-the-century architect Daniel Burnham as a smaller version of Washington’s National Mall, was meant to be the center of city life. It is surrounded by Beaux Arts buildings including the Public Auditorium, which has hosted Elvis, the Beatles, two Republican conventions, and the 1980 Carter-Reagan presidential debate.

The underground halls were the U.S.’s first modern convention center, said Linda Henrichsen, staff planner of the city’s planning commission. The center’s ceilings are too low, and its columns too massive and close together to accommodate today’s exhibitors, she said.

An overhaul may fail to bring in enough revenue to cover costs. Publicly subsidized convention halls are “loss leaders” for cities even when the business for industry meetings is thriving, said Heywood Sanders, professor of public administration at the University of Texas-San Antonio and a critic of publicly subsidized convention centers.

Delivering on Expectations

Vornado is “getting a convention center and the Medical Mart property essentially for nothing,” Sanders said in a phone interview. “The question is can it deliver on its expectations?”

The exhibition and trade show industry slumped along with the economy in 2008 and 2009, according to the Center for Exhibition Industry Research, a Dallas-based trade organization for exhibitors. Revenue dropped 16 percent nationwide last year, and square feet sold declined almost 14 percent.

Medical and health care shows, the biggest industry group, fared better. Space sold fell 4 percent, while revenue increased 1 percent. Attendance decreased 6 percent, compared with an 8 percent decline overall.

Nashville Competition

Market Center Management Co., the trade show management arm of Dallas-based Crow Holdings LLC, is building its own health-care showcase in Nashville, Tennessee, scheduled to break ground next year. That project will have about 10 times the 100,000 square feet of permanent showroom space for medical products planned for Cleveland, Bill Winsor, president and CEO of Market Center Management, said in a phone interview.

Unlike the Cleveland project, the Nashville center already has an announced tenant, Chicago-based Healthcare Information & Management Systems, a nonprofit international organization that promotes information technology for medical providers.

In its most recent project update, dated Nov. 12, Vornado’s Merchandise Mart said it has 40 letters of intent for the Cleveland facility’s permanent showroom, and another 16 letters of intent for conferences, conventions and trade shows. It hasn’t released the names of any of the signees.

Merchandise Mart and its general contractor, Turner Construction, will take control of the site on Jan. 3, and should begin construction soon afterward, said Appelbaum, the attorney representing the county. The project is scheduled to be completed by 2013.

‘Skin in the Game’

Local criticism of the development has centered on Merchandise Mart’s lack of “skin in the game,” and the sales tax surcharge, said Michael Polensek, a city councilman for 32 years. Opposition has subsided, and now residents want to something to show for their investment, he said.

Matt Bolek, who ran unsuccessfully for county office this year, said the city would get a bigger benefit if the money being spent was distributed to grassroots efforts to support local small businesses. He cited as an example the city’s Gordon Square Arts District, where new and restored theaters and housing are attracting restaurants and shops.

“That’s how you rebuild a city, slowly, neighborhood by neighborhood,” he said. “Not digging a big hole and then putting it back.”

Carey, the host of television’s “The Price is Right” and former star of the Cleveland-set sitcom “The Drew Carey Show,” criticized the Medical Mart in an online documentary for the Reason Foundation titled “Reason Saves Cleveland.” The Los Angeles-based foundation is a libertarian organization that believes in minimal government involvement in the economy.

‘Silver Bullet’

The video excoriated the project as “the next redevelopment silver bullet” requiring hundreds of millions of tax dollars.

“I didn’t know Cleveland was such a bustling convention city,” Carey said in the video. “Take that, Vegas!”

Carey declined a request to elaborate through his representative Christina Papadopolous.

Assuming 25 conventions a year, the project could generate $124 million of spending, $7 million of tax revenue and a total annual economic benefit of $205 million for Cuyahoga County, according to a 2008 study by Team NEO, a business organization that promotes the region. NEO stands for northeastern Ohio.

The quarter-cent sales tax would generate more than $800 million over its 20-year lifespan and be used to make non-tax revenue available to pay debt service on the $350 million of bonds that will be sold to finance the Medical Mart, said Offtermatt of Stifel Nicolaus.

Surcharge Dissenter

Peter Lawson Jones, the lone county commissioner to vote against the tax surcharge in 2007, said he preferred to seek the state’s permission to raise hotel, food and beverage levies so visitors would bear more of the costs. He also wanted Merchandise Mart to contribute more.

“I was looking for sources of revenue where there was a more appropriate nexus between who was being taxed and who would benefit,” Jones said in an interview. “I thought the sales tax was regressive.”

Cuyahoga County voters have since replaced the commission form of government with a county executive and an 11-member council. In the Nov. 2 election, Democrat Edward Fitzgerald, who supports the project, defeated a Republican candidate who pushed for a “rigorous” reconsideration of the plan.

Recent negotiations have resulted in more risk exposure for Merchandise Mart and Turner Construction, Appelbaum said. For example, unspent funds would revert to the county, whereas under the prior agreement they went to the developer, he said.

Jones said that while he still thinks the arrangement favors Merchandise Mart, the project “could have a lot of positive spinoffs, not only boosting our tourism industry, but also further burnishing our reputation as the epicenter for health care, at least in the United States,” he said.

Cosgrove said he doesn’t see many disadvantages.

“What’s the worst thing that could happen if this fails?” he said. “You have a brand new building and a new convention center. So the downside isn’t too bad.”

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