Penn Square Partners

Project Status Report

March 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) to
serve 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 property
is an appropriate way to revitalize downtown Lancaster and to generate economic
benefits 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 be
accomplished is to create a public/private partnership through which the public sector
uses its authority and resources to provide incentives that reduce the risks for private
sector 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 hotel
cannot succeed without the convention center and vice versa.

5. By providing public sector incentives to private sector participants, the project can be
funded, built and provide long-term economic benefits to the community and economic
rewards 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 so
well 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 various
government bodies to create incentives for the private sector to invest capital in projects that benefit
the public that the public could otherwise not afford. These include for example, economic
development grants and loans, historic tax preservation credits, tax increment financing, special tax
programs that municipalities are authorized to enact such as taxes on hotel rooms to support
convention center construction and tourism promotion and many others.

Requirements of public sector incentive programs were a major factor in the design of the
project.
Architects for the Lancaster Marriott and Lancaster Convention Center project developed their initial
program plans around a number of design constraints, many of them driven by requirements of
various public sector incentives upon which the private sector relied. These included the need to
locate the exhibit hall, meeting rooms, and ballrooms of the convention center facilities within the
“footprint” of the convention center itself; retaining the façade and major portions of the historic
Watt & Shand Building; PSP’s 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 the
community. As a good “community citizen” the LCCCA also wanted to respond to the tourism
industry’s 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 the
constraints placed upon it. These included, for example, limited demolition of the many smaller
buildings 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 keep
them within the footprint of the convention center.

As the next routine step in project development, the “schematic” designs for the project were
released 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 placed
on 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 that
exceeded the LCCCA’s budget by $12.5 million and PSP’s budget by $10 to $13.6 million (the higher
number includes the estimated effect of prevailing wage requirements if applied to the project.)

During delays caused by hoteliers’ litigation, money was spent defending the multiple
lawsuits and public sector incentives to the private sector changed or became
unavailable.
Throughout the history of the project, a group of local hoteliers has tried, through repeated lawsuits
and appeals, to challenge the constitutionality of a local tax that was enacted to support construction
of the convention center and promotion of tourism in Lancaster County. Defending against these
suits 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 the
private sector, economic incentives to the private sector were reduced by $8 million. Although two
major court rulings in March 2003 sent the unambiguous message that the hoteliers’ have “had their
day in court,” the hoteliers are likely to attempt further project delays through additional appeals to
the U.S. Supreme Court (the “Bold I” lawsuit) and the Pennsylvania Commonwealth Court (“Bold
II.”)

Responding to higher construction costs caused by the design parameters and facility
program plus the loss of some incentives, requires re-designing the architecture and
further integrating the relationship between LCCCA and PSP for the mutual benefit of the
parties.
Because of design constraints imposed on the architects, the initial design of the program and
schematic 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 recent
Pennsylvania Court decisions regarding Tax Increment Financing2 and prevailing wages make the
costs of accepting this incentive higher than its potential value.

1 The state agency responsible for recommending these credits considered all demolition planned to clear land
for the public convention center and limited demolition of buildings behind the façade of the historic Watt &
Shand Building in which the hotel would be housed to be excessive, even though the entire historic façade of
the building was to be preserved along with several other historic buildings. As a result, it is extremely unlikely
that 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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THE ARCHITECTURE NEEDS TO BE REDESIGNED.
The LCCCA and PSP directed the design team to reconfigure its first plan without the original
restrictions. Applying the same design principles that guided the first plan, the team suggested three
options, only one of which met all requirements and which was fully articulated and presented on
March 7, 2003 by PSP to the LCCCA. The revised plan best meets the requirements of both the
hotel and the convention center in a 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 façade of the
Watt & Shand Building still would be rescued and important historic properties still would be
incorporated into the design of the convention center. The “look and feel” of the design still would
be sensitive to its historic downtown Lancaster site. In fact design changes that are now possible
without the original restrictions are likely to result in a project that is even more sensitive to its
location than the widely acclaimed initial design, in a way that meets the program requirements
of the initial feasibility studies conducted by the LCCCA and PSP.

THE RELATIONSHIP BETWEEN LCCCA AND PSP NEEDS TO BE REDESIGNED.

At the request of the LCCCA, PSP provided a full evaluation of the project, including a complete
financial analysis of the convention center and parking garage plan. It also recommended actions to
ensure 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-term
cost to the public for operating the convention center and transfer ownership of the historic
Watt & Shand building from private to public ownership. It seemed prudent that that since the
LCCCA would benefit directly by this approach and appears to be able to provide additional
economic support, the Authority board would have recommended further exploration. This will
benefit the Authority in two significant ways. First, it will allow the project to move forward as
expeditiously 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 lowest
possible cost.

On March 22, 2003, the board of the LCCCA publicly rejected the plan it asked PSP to
develop and ordered PSP to develop a new plan, with no additional input from the
Authority, within two weeks.
At the March 22 public meeting of the LCCCA, the board voted unanimously to reject the plan it
had asked PSP to develop, before PSP and the LCCCA had an opportunity to discuss the content of
the proposal. At the same time, the chairman declared that he has “a sense of how the community
feels” and assured the attendees that the “convention center will go forward,” that the Authority’s
original budget has not changed and that the Authority will seek a new hotel developer if PSP does
not 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 the
development of a full-service hotel in the former Watt & Shand Building as part of its public/private
partnership.