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City's Conrad hotel investment starts to pay off for taxpayers

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A city investment in the $100 million Conrad Indianapolis project has begun to pay dividends four years after the luxury hotel made its debut.

The privately held company that developed and owns the 23-story project has made three payments totaling $85,680 this year to the Metropolitan Development Commission.

The city put up $25 million for the hotel, restaurant and condo development at the corner of Washington and Illinois streets, including $3.75 million in exchange for the economic equivalent of an 8-percent stake.

The city received the most recent payment of $4,080 in October after payments of $44,800 in June and $36,800 in July, said Deron Kintner, executive director of the Indianapolis Public Improvement Bond Bank.
 

Conrad A bellhop carries luggage outside the Conrad Indianapolis, now profitable in its fifth year. (IBJ File Photo)

The project agreement gives the city a share of any dividends, proceeds from financing, or distributions from a sale of the hotel. The recent payments fall into the category of dividends from the hotel’s operation.

If the 2010 payments indeed represent an 8-percent share of dividends, Conrad’s owners—a partnership of Kite Realty Group Trust veterans Al Kite, John Kite and Tom McGowan—would have earned more than $1 million so far this year from the hotel.

The Conrad project also is due to pay about $461,000 in property taxes in 2010, records show, as its tax liability phases in over a 10-year abatement period. The non-residential portion of the project is assessed for tax purposes at $68 million.

McGowan said the hotel is performing “in line with our expectations” and the owners are paying the city as agreed. He declined to elaborate on the hotel’s performance, citing competitive concerns. A spokeswoman for the hotel itself also declined to discuss the hotel’s numbers.

The payments to the city suggest the 241-room hotel is in a strong financial position, said Mark Eble, a hotel consultant and regional vice president for Philadelphia-based PKF Consulting Corp.

“It certainly has to be good news, it seems to me,” Eble said.

Conrad Indianapolis has exceeded expectations in the last few years after struggling to compete in a rate-sensitive market and establish an identity with travelers unfamiliar with the relatively young Conrad brand, Eble said.

In its first year, the Conrad lagged downtown’s average occupancy of 65 percent by 15 points and also was plagued by an underperforming restaurant, du Soleil, since replaced by Capital Grille. The hotel in 2009 added a wine bar called Tastings.

The hotel earned national honors in 2009 and 2010, including recognition as a Top 100 U.S. Hotel in the Condé Nast Traveler Readers’ Choice Awards, and as the No. 3 hotel in the United States on the annual Expedia Insiders’ Select List.

The next concern is a new competitor, JW Marriott, which is scheduled to open in February 2011, and will feature a luxury component expected to go head-to-head with the Conrad.

It’s not unusual for local governments to fill funding gaps for hotel projects, either through tax abatements or direct cash infusions, in the interest of attracting visitors and creating jobs. The city is pitching in more than $50 million toward the $450 million JW Marriott hotel complex.

But the hybrid model adopted for the Conrad was unusual. The original Conrad deal called for a direct subsidy of $21 million, but the developers came back after negotiations had ended and said they needed more equity to build the project.

Bart Peterson, the mayor at the time, didn’t want to give the developers all the equity, so the parties settled on a so-called participation agreement that falls short of an equity interest.

The contract gives the city the right to review the hotel’s books as opposed to receiving regular reports, in part to prevent the release of specific information that could put the hotel at a competitive disadvantage.

The city commissioned audit reports from Katz Sapper & Miller in 2007 and 2008 indicating no distribution was due, and the accounting firm has not yet delivered its report for 2009, Kintner said.

Bonds the city sold to fund its portion of the Conrad are backed by revenue from two parking garages: the Circle Block garage next door to the hotel and the World Wonders garage at Circle Centre.•

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  • To "Its an equity investment..."
    Thank you for helping my argument regarding this being a terrible investment. Microsoft would be a terrible investment; however, it has no relevance to the real estate project the city participated in.

    When you participate in real estate via equity you expect a distribution/dividend. Right now, just a blanket REIT ETF would return roughly 7% on your equity if you were to buy one and it is much more liquid and lower risk. The city took a giant risk by being an equity participant in a $100mm debt obligation backed by a speculative hotel project, thus the city should have been demanding a much higher return; 15% cash on cash and at least a 30% IRR if the project was ever sold for more than the project cost. This is unlikely due to the fact the hotel market is in the dumps and will be for a long time due to supply; as well as the fact that there are more hotels in downtown Indy than needed so why would any smart investor purchase one of these so they can slug it out against the other hotels? The city will forever be receiving their .003% return unless some dope comes along and buys them out.

    As far as other revenues; there are no property taxes for a portion of the building and all the tax money from the TIF it is in goes to pay the debt/bonds or has been funneled to the CIB for the Pacer's.

    It is what you call a ponzi scheme; Taking new money (dividends/taxes) from stabilized/revenue producing projects and paying it to "old money" like the Pacers and CIB who are broke because the tenant (Pacers/NBA) are a terribly run organization.

  • Its an equity investment...
    The thing everyone seems to forget is that the city of Indianapolis holds an equity stake in this hotel, and the payment they received was a dividend. While I am not saying whether or not I think this was a prudent investment,the fact remains that this was a dividend, not an interest payment. For instance, Microsoft has a 16 cent dividend per share, so using the logic of previous posters it would take me nearly 42 years to get my investment back. By using this logic you are completely ignoring the principle appreciation. I understand that the city's equity stake is relatively illiquid, but the fact that this investment is paying dividends( for the first time) should raise the value of the city's investment. The city could sell its equity share ( probably back to kite) for a profit. Not to mention the other revenues and benefits Indianapolis has obtained because of this investment.
    • Puff Piece 1.0
      Seriously IBJ? The city makes a $25mm investment and you are writing about it paying off? Their return is LESS THAN HALF of 1% on their investment; They could have put the money in a CD and earned more with LESS RISK. Please stop catering to the corporate welfare elite. Kite rips off a management fee most likely and I would love to know where the property taxes go from this project; oh yea, the FAILING Pacers.

      Our tax payer money should be going to best of class education, innovative and growing jobs/employers, welfare to work programs, and preventative health programs (not $700mm hospitals that discriminate non-union contractors).

      A true business journal would know to evaluate the business points of an investment before running the headline "City's Conrad hotel investment starts to pay off for taxpayers". It is not paying off; it is a terrible investment of our tax $$$ dollars that creates wealth for the corporate welfare money suckers. It seems IBJ may just be part of that group?? Please prove otherwise.
    • not so fast kjk
      This is the first year that they are paying dividends. It takes time for a hotel or a restaurant to get off the ground, develop a reputation, and start making money. $86,000 so far this year during a deep recession is more than respectable.

      In addition, you need to add in hotel taxes and other entertainment taxes when deciding whether the investment was worth it. Let's be honest, patrons of the Conrad aren't going to be stowing sandwiches in their carry-ons to eat in their rooms. These folks are going out and spending money in our city which benefits the city, owners of local establishments, and staff in local establishments. The Conrad has developed a national reputation for folks coming to Indy. It has been mentioned favorably (for free) by Rush Limbaugh, Jim Nantz, and Peter King from Sports Illustrated just to name a few. As the brand increases in value so does the city's stake in the brand.

      Look at the economic impact from more than just dividends and property taxes to get a full picture.
      • Break-even
        So at 86,000 a year, the city's break-even is 290 years? Including property tax, it is 46 years?
      • Public Private Partnership
        It is imperative to have our City spark many reinvestments like this; within our neighborhoods; where the people are living; leveraging spending our City, State, and Federal government sources, more effectively and efficiently. This is proven to leveraging more private reinvestment. Our main corridors, our historic mixed use nodes, our foundations of our communities, need to see the City's leadership. This imperative public reinvestment creates the multiplier effects of benefits, savings, and large returns for the local public reinvestment.
      • Perhaps Debt Financed Distributions?
        Perhaps not organic earnings?... What is the basis for the distribution... Corey do you know if any of the debt was refinanced?

        Kind of bizarre the 09 Audit is not available?

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