A $170 million convention center and a 19-story hotel are changing the skyline of downtown Lancaster, even as critics decry perceived conflict of interest and the soaring cost and scope of the project.

From an initially envisioned 50-50 private-public venture, it has evolved into a mostly publicly financed effort. Three of Lancaster's leading corporate citizens - the High Cos. led by S. Dale High, Lancaster Newspapers Inc., and Fulton Financial Corp. - got the ball rolling 10 years ago.

Critics say one or more of them now stand to benefit as the project transitioned to relying mostly on public funds.

A decade of controversy and litigation is over. The 220,000- square-foot center is set to open in March.

But the intense feelings and allegations of conflicts still persist. On one side are ardent critics, including two former county commissioners. On the other are some of Lancaster's most influential businesses.

High and the newspapers are investors in a 300-room Marriott hotel being built within the Beaux Arts façade of the 110-year-old Watt & Shand department store at Queen and King Streets. (Fulton Financial withdrew from the partnership.)

Proponents, including Mayor Rick Gray, say the project will revitalize an aging downtown as people empty their wallets in the quaint shops, restaurants, galleries and hotels.

Opponents, including hoteliers who sued to block a 5 percent hotel-room tax that will help pay for the center and tourism, worry that the complex will not attract the anticipated crowds, that it will not cover operating expenses, and that the financial burden ultimately will fall on county taxpayers.

Now, state and some private money and the hotel tax are paying the tab.

"County taxpayers are on the hook for next to nothing," Gray said.

Turning the vacant Watt & Shand department store into a hotel and adjacent convention center was an idea hatched in 1998.

Jack Buckwalter, president and chief executive officer of Steinman Enterprises, owner of the Lancaster New Era, Intelligencer Journal and Sunday News, recalled that he, Dale High and Rufus Fulton, chief executive of Fulton Financial, said: "We'll buy it. We didn't have any idea what to do with it. We wanted it in private hands to do something for the community." They paid $1.25 million.

High and the newspapers formed Penn Square Partners and are investing $11 million in equity to build the hotel.

Initial construction estimates in 1999 were for a $45 million private hotel and a $30 million publicly funded convention center.

But in 2003, the project changed; the hotel and convention center were no longer separate buildings. It became one structure, with a single heating and cooling system and one kitchen. The center grew in size from 61,000 to 220,000 square feet.

In December 2003, outgoing county commissioners, days before leaving office, borrowed $40 million and agreed to guarantee a financing package for the center, said Ronald Harper Jr., copublisher of the Lancaster Post, an alternative weekly tabloid newspaper.

Before any construction estimates were nailed down, the county effectively tied its own hands. The new commissioners, Molly Henderson and Dick Shellenberger, tried to "wiggle out of the debt. They couldn't," Harper said.

In early 2005, Penn Square Partners said it could not afford to pay real estate taxes on the private hotel and still build it. It approached the school board, asking for 20 years of tax abatement. The school board said no.

When Penn Square Partners threatened to walk away from the deal, the Lancaster City Redevelopment Authority bought the Watt & Shand property for $7 million. ($1.25 million for the building, $3.11 million for architectural work already done, and $2.7 million for maintaining the building over the preceding seven years.)

The city agreed to build the hotel and part of the "shared" convention center space and to lease it back to Penn Square Partners over 20 years.

In exchange, the private investors would make payments on a $24 million construction loan over 20 years.

The $100.7 million convention center tab will be paid by state grants and the hotel tax, said Lancaster resident Randolph Carney, who closely tracks the project's finances.

The $75 million hotel will be funded by $11 million in private equity; a $24 million mortgage (which is now a construction loan) to be paid by Penn Square Partners over 20 years, and about $40 million in state grants, Carney said. (Last November, officials requested an additional $5.97 million from the state for the proect.)

Rodney Gleiberman, general manager at the Continental Inn, is angry that a public agency can stand in as hotel developer so Penn Square Partners does not have to pay property taxes for 20 years. (At the end of 20 years, Penn Square Partners has the option to buy the hotel for well below the $75 million cost to build it, opponents say.)

"Really, what they are doing is laundering public money," Gleiberman said.

Penn Square Partners says the city will share in the revenue after the hotel becomes profitable. Once the private partnership gets a 12 percent return on its equity investment, 30 percent of the profits will go to the city, for 20 years, said Mark Fitzgerald, chief operating officer for the private partners.

"We, and the city, think that's a very good deal," Fitzgerald said.

Critics say the appearance of conflicts applies to the hotel investor, High Cos., an umbrella group for several High businesses.

High Real Estate Group is the hotel-convention center developer. High Construction Co. has the general-trades contract for the interior and finish work. High Concrete Structures Inc. handled the precast concrete on the job. High was low bidder, or the only bidder, on those jobs.

While supporters see the convention center as a catalyst to spur growth, the city's renaissance really began in the 1990s, said pharmacist and former mayor Charles Smithgall. Lancaster has a new minor-league baseball stadium, burgeoning art galleries, and the Pennsylvania Academy of Arts. Housing prices have shot up; new restaurants have come to town.

"I've been here for 20 years. Artists have been revitalizing the city all along," said convention center critic April Koppenhaver, owner and founder of Mulberry Arts Studios.

"Altoona has a convention center; it sits empty. Scranton has a convention center. Now Lancaster?" she said. "Why does one state need all these convention centers? If you find one successful convention center, I'll be surprised."

Indeed, convention centers do not make money. "They lose money typically," said Arthur Morris, Lancaster Convention Center Authority chairman and mayor in the 1980s.

Lancaster's new center will be a "tremendous community asset" but also a challenge, Morris said. "This is not an easy project." Budgets will be tight in the early years, but "we believe we will get through."

Molly Henderson said she supported the project initially, but after taking office as county commissioner in 2004, that changed.

"Things started to look really strange - the cost, the bidding, where the money was moving, what was going on with the hotel," Henderson said. "First it was going to be taxable - all the money would go to the school district. Then Penn Square Partners turned the hotel over to be owned by the City Redevelopment Authority, so it's tax-exempt."

Former Commissioner Dick Shellenberger said his concern was "simply taxpayer protection. I knew the hotel tax in place now is not going to pay the bills. They are going to have to up the tax," he said. "I was against that."

After Henderson lost her bid for reelection last fall, she sued Lancaster Newspapers, alleging the coverage of her actions as commissioner was biased because of the paper's ownership stake. She said the stories had defamed and discredited her as commissioner.

Lancaster Newspapers' Jack Buckwalter said in an interview that every story about the hotel and convention center had run a disclaimer stating the papers' involvement.

"We bent over backward to be totally open and fair and our coverage was impartial," Buckwalter said. "We carried letters to the editor from opponents that were extremely critical of us, but we kept running them."

Mayor Gray dismisses the critics as "the people who are against damn near everything."

Meanwhile, 16 events are booked for 2009 in the convention center set to open in March - three trade shows, eight consumer shows, and five other events such as dinners, galas and a cheerleading competition, said Josh Nowak, director of sales and marketing. "We are 40 percent to our 2009 goal already."

Contact staff writer Linda Loyd at 215-854-2831 or lloyd@phillynews.com.