Why Cleveland doesn’t rock: Q&A with Nashville medical mart CEO

For Bill Winsor, building a successful medical mart is all about attracting a “critical mass” of health products sellers.

It’s been a popular catch phrase for Winsor in recent months, and it reflects his belief that creating a successful medical mart hinges on drawing a wide enough array of vendors to get hospital purchasing agents to come back again and again — with checkbooks in hand. In Winsor’s view, the Nashville project has what it takes to create that critical mass, and Cleveland’s competing medical mart doesn’t.

To Winsor, size matters. Nashville’s plans call for 1 million square feet of showroom space for the medical mart — an untested concept that’s designed to bring together product showrooms from sellers of everything from hospital beds to medical software to bone implants. That’s 10 times the 100,000 square feet of showroom space that Cleveland is planning.

Nonetheless, Cleveland has claimed more progress to date, signing letters of intent with 35 prospective showroom tenants. Plus, Cleveland has a big advantage in that it has a dedicated source of public funding for its project, making it the odds-on favorite to open for business first — though each project is shooting for a 2013 opening date.

In contrast, Nashville must find private financing, so it must lease about 65 percent of its showroom space to secure a loan. So far, though, it’s only publicly announced two tenants — and none since April. Perhaps feeling local pressure to show progress, Winsor did a round of interviews with several Nashville news outlets in recent weeks to assure the local audience that the project is moving forward. In one of the interviews, he said Nashville is in the final stages of negotiating leases with 15 tenants.

Winsor has been CEO of Dallas-based Market Center Management Company, the property developer behind the Nashville Medical Trade Center, since 1993. He spoke with MedCity News about why he believes the Nashville project’s size advantage over Cleveland is so important, why you can’t take letters of intent to the bank, and whatever became of New York’s medical mart bid.

Q: What’s the advantage of your strategy of signing tenants to leases, rather than letters of intent?
A: In our business model and the other marts we’ve managed or expanded, we’ve always had the goal of preleasing with a long-term commitment. We’ve never used letters of intent because they’re nothing more than someone’s intent. You can’t take those to a lender, so we’ve never used them for any type of assurances of commitment.

I know Cleveland has a different model with taxpayer funding, so to the people there, leases may be irrelevant. But for us, to get a financially durable commitment, it has to be a lease. We’ve picked 25 to 30 of what you’d call marquee healthcare companies across several different areas of the industry, and that’s our primary target. We’ve been working diligently toward that since we got approval for re-use of the Nashville Convention Center.

Q: What sort of penalties, if any, do your lease agreements call for if a company backs out?
A: They’re binding. The rent is due. If you sign a contract, you’re obligated for the term of that lease. If you want out, you can pay your rent out. It’s a standard business practice. If they have out-clauses, that would be pretty unique. Some of the companies we’re talking to are unsure about how much square footage they’ll need, so we’re giving them rights of first refusal on space. We have to be flexible in the contract to give them the opportunity to expand or contract based, on a formal evaluation of their needs.

Q: Why do you think Nashville’s advantage in the amount of showroom space it has to offer is so important?
A: I think scale is vital in terms of critical mass. If you don’t establish critical mass in devices, furniture, imaging or whatever that industry segment might be, you won’t get buyers to return. There’s not a building that we’ve owned or managed that’s had anything less than 1 million square feet. There’s a critical mass requirement, and if you can’t establish that, you’re not creating a destination that people will feel the need to go back to many times.

Q: Do you think it makes sense to build a medical mart with just 100,000 square feet of showroom space?
We’ve never been able to make that proforma work because the return doesn’t offset the costs of creating traffic and drawing buyers to the building. If you start at 100,000 square feet and take out space for meeting rooms, bathrooms and hallways, for example, you’ll get to about 80,000 square feet. It’s hard to establish scale in that amount of space.

Q: When you talk to potential tenants, what has the reaction been when you explain to them how much more showroom space Nashville will have over Cleveland?
A: I don’t try to draw a comparison unless the question comes up. Most of the people, when you walk them through the concept, get it. They understand that this is a sales and marketing environment. It’s not real estate. It’s an opportunity for them to more efficiently access a broader and more diverse supply of customers than they’d otherwise be able to see for the same investment.

Q: The Cleveland project’s backers always say their biggest advantage is they already have secured a source of funding, and Nashville hasn’t. What would you say to a potential tenant that says it’s leaning toward Cleveland over Nashville for that reason?
A: Again, in the private world of financing, if you prelease to a certain level, then you can securitize it in a way that’s affordable. Building a mart that doesn’t have certain preleasing goals is a huge risk. Merely getting a building open does not secure its success; having it occupied with a critical mass of important industry resources and services will make it successful.

Q: Do you consider the New York medical mart project to be dead?
A: From all that we’ve been told, I think their employees have been terminated. Plus, we’ve not heard any announcement from them for awhile. For them, I think it was just a cost issue of trying to construct something like this in Manhattan. To build a new building from the ground up there would be virtually impossible with the cost structure, and it wouldn’t be easy to retrofit an existing building there either. (Editor’s note: A voicemail left for the New York project’s developers wasn’t returned.)