The Carmel City Council is asking for more transparency and better communication from the Carmel Redevelopment Commission after concluding a lengthy review of what led to Hotel Carmichael costing 46 percent more than the original estimate of $40 million.
The review concluded that all CRC actions were legal but that missteps occurred throughout the process — from “unreliable” cost estimates presented to the council in 2017 to steps taken three years later without council knowledge to cover the $18.5 million funding gap — that have led to a “loss of trust” between the council and CRC and resulted in Carmel residents losing trust in how taxpayer dollars are spent.
“The multiple complex actions taken over time to change the elements of the deal structure without consulting the full Carmel City Council completely undermined the due diligence that occurred between Carmel City Council and Carmel Redevelopment Commission when looking at the viability of this project’s finances,” the report states.
The 122-room boutique hotel, which opened in August 2020 at Carmel City Center, is the result of a public/private partnership between the City of Carmel and developer Pedcor. The Carmel City Council approved $18 million in bonds to finance it in 2017, and the city closed on a $25.5 million loan to cover the rest of the project in April 2019. Several city councilors expressed shock and frustration in January 2020 when they learned that the total cost would be closer to $58 million and asked for a review of what led to the disparity.
The report concluded that several factors led to the increased cost, including a “wholly unreliable” initial cost estimate, significant changes to the scope of the project after council approval and multiple factors resulting in bids coming in higher than expected.
The report states that information presented to the construction firm that made the estimate was incomplete, which resulted in the estimate being “significantly flawed.” It also states that the council was not informed about the limited information used for the estimate when it discussed the matter in 2017.
“The Mayor indicated in the 2020 hotel review hearings that the estimate was a ‘shot in the dark’ and a ‘very loose estimate,’ but Carmel City Council members were told in 2017 finance committee meetings that these estimates were affirmed by outside consultants,” the report states. “In retrospect, regardless of the rationale as to why the estimate was unreliable, presenting the Carmel City Council with such an unreliable estimate showed an extreme lack of respect for the Carmel City Council’s role in performing a thorough and transparent review of financials.”
To cover the overrun, the CRC used nearly $5 million from its operating budget and $2 million from a tax increment financing bond. It also mortgaged office space in the James building and Monon Square for $6 million and $2.3 million, respectively.
The mortgages occurred through agreements with the Carmel City Center Community Development Corp., owner of the James building, and the Carmel Midtown Community Development Corp., owner of Monon Square. Community development corporations are nonprofits formed to support and further charitable, educational and other public purposes of the City of Carmel.
The report states that communication from the CRC and community development corporations was “clearly lacking” throughout the process and that “members of the public and Carmel City Council had no way to determine total cost overruns the way information was presented in public meetings.”
The report includes several recommendations to improve transparency and public trust. They include requesting that community development corporations:
- Provide the city council with a biannual, in-person report.
- Agree to allow the council to appoint one member to all current and future corporations.
- Present its budget for council review and comment, although the council will not have authority over the budget.
Recommendations for the CRC include:
- Updating its monthly report to the council to include accurate and timely financial information and support documentation as it relates to project estimates and budgets.
- Sending budget packets to all council members and inviting them to annual budget meetings.
- Sending to councilors an updated budget proforma for Hotel Carmichael and additional budget updates on no less than a quarterly basis.
- Notifying the council prior to the transfer of any land or asset valued at more than $100,000.
- Notifying the council of any grant agreements it enters into with other entities.
Recommendations for the city council include:
- Amending city code to change the agenda to reflect community development corporation presentations and adding a monthly report from council appointees to the CRC to provide a financial update.
- Discussing obtaining a more informed estimate or a guaranteed maximum price on capital projects.
CRC Executive Director Henry Mestetsky issued a statement following the release of the council’s report.
“The report found that City Council tasked the CRC, a separate legal entity with its own spending powers, to build the state’s first autograph collection hotel and not to come back for more funds from council. It found that the CRC acted properly and legally, delivered the state’s nicest hotel, all while negotiating advancements needed to be reimbursed later out of it’s hotel partner’s profits,” he stated. “The hotel has just hosted an international conference and posted its first $1 million revenue month, so I’m focused on the next hundred years of value and civic pride the Carmichael will bring to the taxpayers.”
Current has reached out to Mayor Jim Brainard and City Council President Sue Finkam for comment.