Falanga on the Med Mart deal

MMPI vice-president Mark Falanga also talked with me about several details in the company’s new deal with the county.

-Why MMPI was reluctant, at first, to assume responsibility for any construction cost overruns: “We always recognized that was important to the county. To get to the point where we could make that commitment, and understand our relationship with the county, the architects, and the engineers, took a little time and effort. …

“We’ve done a lot of architectural due diligence. We have a strong relationship with the architect and engineering firm. [We decided we] could mitigate those risks and build the building from the budget available.”

-What information will remain private under the deal’s “trade secrets” provision: “The leases we have with tenants in the buildings, license agreements with different trade show producers. We don’t want to reveal our private agreements we have with our customers. We think if we did, it would be a great disincentive for companies to relocate into Cleveland. No other center opens up its licensing deals to the public.”

-Why the deal is so complex, with control of the mart and center cycling between the county and MMPI in three leases, while streams of money cycle back and forth: “Much of the complexity [is because of] how the bonds will be raised. Some is driven by the fact that we are a real estate investment trust. Some is just the nature of a public-private parntership.”

-What the payments are for: “Most of the money the county pays us, we pay the county back, to pay down the loan for this project. The loan will be somewhere in the $300 million range. … The county pays us roughly $45 million a year. We then pay the county $36 million. That is paying down the principal and interest. The difference between those two is the money used to operate the building, to pay for expenses, staffing, management, day to day operations, and to attract tenants.”

-When the county will start making payments to MMPI: “Those payments start when construction commences -- in one year’s time, more or less.” That means the deal will last from about April 2010 through September 2027: 17 1/2 years. Total cost to the county (my calculations, not Falanga’s): about $815 million, plus a few unknowns.

Falanga argues: “The economic impact Cleveland stands to benefit, with all the activities here, far outstrips the money being transferred between our organizations or the money required to build this facility.”

-The county will reimburse MMPI for all “pre-development agreement expenses” above $1.5 million. That includes spending in the next year, Falanga says. So far it’s spent $1 million. It’ll have “quite a lot of pre-development costs: all of the sales marketing and planning to build a facility.”

-Taxes: The deal says the county will have to pay any taxes on the facility, but Falanga hopes there won’t be any, since the county will own the land. (Note: This is in dispute. As of today, the county's negotiator, Fred Nance, still says MMPI will own the facility until 2027.)

MMPI and the convention business

To succeed, Cleveland's new convention center won't just live off the Medical Mart. It'll also book non-medical conventions. MMPI, as the center's manager, will have to win back convention organizers who used to book events in Cleveland until a few years ago, when our obsolete 1920s-era convention center was surpassed by competition in other cities.

My impression is, that's a different business than what MMPI does elsewhere. Its website bills the company as "the world's leading owner and operator of showroom buildings and trade show facilities." Compare the events at its current centers with events at the Pittsburgh convention center. Pittsburgh books trade shows, but also conferences where professionals get together to talk shop, rather than buy stuff.

MMPI VP Mark Falanga says the company has plenty of experience relevant to booking conventions. It works with third-party show producers at its other facilities, such as Pier 91 and 94, its convention facility in New York, he says.

If MMPI doesn't have all the experience it needs, it'll turn to those who do: "We plan to work with the Greater Cleveland Partnership" to book conventions, Falanga says. "We'll also hire in staff that has done this for other convention centers. We think this is a good overlap."

I didn't hear him say MMPI would work with Positively Cleveland -- which is, after all, our convention and visitors' bureau. There may be a reason for that, which I'll post about soon. Update, 4/13: MMPI says it does plan to work with Positively Cleveland. See this new post, halfway down.

MMPI's Falanga: the case for a Med Mart

I talked today with MMPI vice-president Mark Falanga, who gave me a better explanation than I've heard before about why MMPI thinks the Medical Mart will be successful.

To succeed, Cleveland's Medical Mart has to attract at least three audiences. 1) Medical manufacturers have to rent showrooms in the mart. 2) Medical conferences and trade shows have to book the convention center. 3) Non-medical conventions have to book the convention center too.

The showrooms will offer "tremendous economic benefits for a company," Falanga says. "They can set up their equipment in a manner best suited for showing off the benefits of their equipment. They'll have permanent displays, and not have to move all over the country. The company can benefit from the traffic of each of the trade shows cycling through the facility over a year."

The Medical Mart should give Cleveland an advantage in attracting medical conferences and trade shows. "The showrooms will, by and large, be occupied by anchor companies... with more customers than anyone else," Falanga forecasts. So, "each of those trade shows will be anchored by some of the largest manufacturers in the business. Those manufacturers will drive a lot of customers into those shows." So the showrooms will attract more attendees -- medical equipment buyers. The promise of more buyers will attract more temporary exhibitors, and vice-versa, making the trade shows successful, MMPI believes.

That's how MMPI's other facilities, including the Merchandise Mart in Chicago, succeed. "We pioneered this concept of marrying a temporary trade show to a permanent showroom," Falanga says.

But it hasn't been done in the medical industry before. Talking to Cleveland city council in February, Falanga talked about the possibility of Cleveland attracting 10 percent of all the nation's medical trade shows and 5 percent of all medical conventions -- or 60 shows and 100 conferences a year. That's what MMPI's estimate of $1 billion a year in economic spinoff is based on. "I was using that as hypothetical example," Falanga says. "I just wanted to put into perspective how attainable that is."

Last month the Plain Dealer cast doubt on the $1 billion a year figure, in part by asking if 60 medical shows will really come to Cleveland. The PD noted that San Diego -- which doesn't have a Med Mart, but does have immaculate weather -- hosts 16 medical conventions in a year.

Is 60 shows optimistic? "It might be," says Falanga. "We’ll see how it all goes."

The worst-case scenario is spelled out in the county's deal with MMPI. If the company can't book five trade shows or conferences and 10 showrooms in the next year, the county can back out.

Falanga says the bookings may start slow, but will build on each other. "The reality is, we'll attract some showrooms, which will attract trade shows and conferences, but doing that will attract more showrooms, so we'll be able to attract more trade shows and conferences," Falanga says.

"It’s going to take many years for this to ramp up, for Cleveland to prove itself to the medical community. It’s a long term plan, but we’ve got a clear focus on what we’re going after, and we think it’s all attainable."

I'll post more about my conversation with Falanga this weekend.