When the Carmel City Council approved $40 million in 2017 for what would become known as Hotel Carmichael, councilors made one thing very clear: they would not approve additional funds for the project.
That’s why, when Carmel Redevelopment Commission Executive Director Henry Mestetsky knew by mid-2019 that the project could not be completed to the city’s standards near the budgeted amount, which included $18 million in bonds and a city-backed $25.5 million loan, he looked elsewhere to fund the gap.
“I thought the council was pretty clear when they initially approved the bonds that $18 million was going to be it,” Mestetsky said.
City Councilor Jeff Worrell, who voted in favor of funding the hotel, remembers it that way, too.
“At the vote, I remember Councilor (Kevin) Rider saying, ‘Don’t come back for any more money.’ I remember saying that myself,” Worrell said. “In fairness, why would they come back to us when we were so clear that is not acceptable?”
More than two years after the 2017 vote, the City of Carmel revealed in a press release issued the Friday evening of Jan. 31 that the hotel will cost $58 million – a total that several councilors said they heard for the first time only a day or two before the public did. At a Feb. 2 city council meeting, their reactions ranged from frustration to shock, with some calling for an audit of the processes that led to the higher price tag and ability of the Carmel Redevelopment Commission to cover the $15 million gap on its own.
Mestetsky, who said he welcomed the audit, said he never misrepresented any aspect of the project to the city council.
“I don’t want a conversation about auditing practices to have some kind of insinuation that a single rule or vote taken by the CRC in public or in private were somehow not above board,” he said.
Councilors questioned why Mestetsky didn’t publicly alert them to the rising costs – which he said are caused by labor shortages, tariffs and a saturated market – when he knew for at least several months that the hotel would cost significantly more than budgeted. Mestetsky presents a CRC update to the council monthly, and even at the Feb. 3 meeting his presentation continued to list the amount budgeted for the hotel – $41 million – rather than the actual cost. Mestetsky, who became the CRC director at the end of 2017, said that the format of the monthly report was agreed to by the council and his predecessor.
Mestetsky said the delay was intentional. He said he wanted to wait on providing the final cost until he was sure it would not be exceeded.
“As costs exceeded budget it was our duty to see what costs could be cut and see how to fill those gaps,” Mestetsky said. “When we know that we have a control on the costs, it’s time to update the budget to match the costs and explain how we filled those gaps.”
Those steps include mortgaging Monon Square (which the city bought for $15 million in 2018) and office space at the James Building, using CRC operational dollars and extra funds from a 2016 tax increment financing bond. None of them are expected to affect tax rates.
Mestetsky said the measures either didn’t need approval, such as using the TIF bonds that had already been authorized by a council ordinance for use for the hotel, or were approved in public CRC meetings as agenda items or through claims.
A search of 2019 and 2020 CRC meeting agendas listed items to transfer Monon Square and the James Building from the CRC to community development corporations and the related grant agreements to support loans. They did not mention why this was being done, nor did the CRC discuss the items at all before voting to support them. The hotel was never mentioned publicly as being related to these votes.
Rider, who served as the council’s representative on the CRC in 2019, said when he realized the hotel cost was rising he thought the matter would go before the city council, but he said he was told by Mestetsky that would not be the case.
“We had a lot of discussion during your presentation about the partnerships (the CRC and council) have had over the years. When I asked the first question after (finding out the hotel was) over budget, I was told the council had no say in any future expenses,” Rider said at the Feb. 3 council meeting. “That’s not a partnership. For any future project we do, I would work with the rest of the council and we would have steps in place so that it would be part of the council purview.”
Worrell said he was “getting signals” from the CRC in 2019 that hotel costs were rising.
“You don’t have to be a rocket scientist to figure out something’s got to give,” Worrell said. “That’s when (Mestetsky) would say he was working on value engineering or they’re making changes.”
Mestetsky did not provide a number to show how much money has been saved through value engineering.
“It’s tough to divide savings between choices made before bidding to save costs (in the millions) and choices made after bidding to save costs (also millions),” he stated in an email. “We continue looking to save costs every day.”
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.”
As of Feb. 6, Mestetsky said so far the CRC has spent approximately $31 million on the hotel and approved nearly $39 million in bids. Those amounts are likely to change at the next CRC meeting, he said, but it’s not clear yet how much. The meeting is open to the public and is scheduled for 6:30 p.m. Feb. 19.
While Worrell pointed out that the CRC hasn’t “spent a penny” beyond its budget, he said he’s frustrated because the city found itself in a similar situation before with the Center for the Performing Arts, which was originally projected to cost $80 million but ended up costing $175 million.
Worrell was not a city councilor at that time but served on the CRC, and he tried to use what he learned from that experience to prevent what’s happening now.
“My first attempt at trying to do better was by supporting the hiring of consultants early in the process to avoid this and it still happened,” Worrell said. “I think one of the problems is the scope of these projects changes and that causes cost increases. I think we’ve got to change that.”
Hotel Carmichael isn’t the only project being affected by rising construction costs.
Rhonda Cook, a deputy director for Aim, an association for Indiana municipalities, said she’s seeing this happen all over the state.
“Because of the tight labor market it’s not uncommon that projects are going out to bid and coming back with bid responses that are much higher than what anyone thought they would be,” Cook said. “A lot of cities and towns are struggling with that.”
According to information from by 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 project $850,000 for 2019-20, a 54 percent jump.
Carmel Redevelopment Commission Executive Director Henry Mestetsky said the hotel cost was estimated using 2015-17 non-publicly bid costs.
“By the time the hotel was fully publicly bid out in mid-2019, we had absolute certainty that the rough budget estimates discussed at council in mid-2017 were off base,” Mestetsky said.
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.
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.”
The Carmel Redevelopment Commission plans to use hotel revenues to replay much of the $15 million it’s using to pay for the Hotel Carmichael cost overrun. That means Pedcor, the developer partnering with the city to build the hotel, will have to wait longer for its share.
Pedcor will only receive approximately 8 percent of hotel profits as long as they are being used to repay $12.5 million to the CRC. CRC Executive Director Henry 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.”
Pedcor President & CEO Bruce Cordingley said he believes the CRC handled an “unfortunate” situation “very well.”
“Since this was not a misjudgment of what this hotel was going to cost so much as it was a macro event, meaning it’s happening broadly throughout the whole country and this area, this means all hotels went up in cost, particularly luxury hotels,” Bruce Cordingley said. “I think the city will see on its share, after the $12 million is repaid, a better return than it otherwise was going to get because it has ownership in this unique asset.”