Hotel Carmichael is going to cost a lot more than originally projected.
Construction of the 122-room boutique hotel – a public private partnership between the City of Carmel and developer Pedcor – is estimated to cost $58.5 million, which is 46 percent higher than the $40 million price tag in late 2017, when the Carmel City Council approved the sale of $18 million in bonds to help finance it. The city closed on a $25.5 million loan to cover the rest of the project in April 2019, bringing its total funding to $43.5 million at that time.
The steep increase is the result of rising construction costs, labor shortages, tariffs and a saturated market, according to Carmel Redevelopment Commission Executive Director Henry Mestetsky.
“Construction costs of luxury hotels blew up 37 percent since the estimates of when we were bidding things out,” Mestetsky said.
According to information from HVS Global Hospitality Services, a consulting firm that provides services to the hospitality industry, compiled by Shiel Sexton, Hotel Carmichael’s construction manager, the national average cost per hotel room has risen from $550,500 in 2016-17 to a projected $850,000 for 2019-20, a 54 percent jump.
The city’s new cost estimates for Hotel Carmichael are $41.9 million for construction, $3 million for the land and $13.5 million for soft costs. Construction is on schedule for a May opening in advance of the International Making Cities Livable conference’s Indiana debut.
The CRC is planning to cover the $15 million difference in several ways and expects to receive approximately $12 million back from hotel revenues.
The CRC will mortgage the office space in the James Building – which also houses the Booth Tarkington Civic Theatre – for $6 million. It will also mortgage Monon Square – which the City of Carmel purchased in 2018 – for $2.3 million. Mestetsky said lease payments from tenants in the James Building and Monon Square are enough to cover interest payments on both mortgages, although some funds from the mortgages will also be set aside for that purpose. Neither site had an existing mortgage.
Rents from tenants in the James Building are typically collected by the Carmel City Center Community Development Corp. to help cover lease payments for arts organizations in the Arts & Design District. Mestetsky said the CRC will make payments for the arts leases until hotel revenues pay off the mortgage.
Mortgaging Monon Square isn’t expected to alter the future of the site, which is expected to be redeveloped in the coming years.
“The rents for Monon Square were not being used to do anything,” Mestetsky said. “It was being collected by the CRC while we ensure the tenants stay as long as they can (while we) come up with a plan for Monon Square.”
The CRC has also identified $4.7 million in its operating budget and $2 million from a 2016 tax increment financing bond to help cover the difference.
Besides the CRC, Pedcor is expected to feel the biggest impact, as it will only receive approximately 8 percent of hotel profits as long as they are being used to repay $12.5 million to the CRC. Mestetsky said he expects that to equate to approximately $100,000 annually through 2028. Previously, Pedcor was set to receive 34 percent of hotel profits for its first 10 years and 50 percent thereafter.
“Companies don’t do deals like that,” Mestetsky said. “We’re all sacrificing and adjusting to market realities.”
Current has reached out to Pedcor for comment.
Mestetsky said the project team looked for cost savings as they saw construction costs increase. For example, they decided to use a shingled roof rather than a slate one and selected porcelain instead of marble for the floor. At the same time, they sought to maintain a certain level of quality.
“At a certain point there are changes that should not happen,” Mestetsky said. “One of the potential changes was to go with all carpet. We did not choose to go with carpet in the lobby. It was not the right choice for a hotel like this.”
Mestetsky said the additional $15 million for the hotel will not affect tax rates, nor will the hotel’s performance.
“Nothing related to hotel operations has any effect on the repayment of this money,” he said. “All the money put into the hotel is being repaid from sources totally unrelated to hotel operation, regardless of how well the hotel does there is no risk to the taxpayers.”