All-in cost of Pan Am Plaza hotel, convention center expansion might surpass $1.6B

A renderingn of the Signia by Hilton planned as part of the Pan Am Plaza redevelopment.

The city of Indianapolis could ultimately pay in excess of $1.6 billion for the redevelopment project at downtown’s Pan Am Plaza.

The cost for the project, which consists of an expansion to the Indiana Convention Center and an 800-room Signia by Hilton hotel tower, is significantly higher than the $751.6 million figure first reported by IBJ earlier this week after taking into account the total debt service the city is expected to owe on hundreds of millions of dollars in bonds for the project.

The city on Wednesday and Thursday sold $581 million in bonds for the development through the Indianapolis Local Public Improvement Bond Bank, consisting of $436.8 million in tax-exempt revenue bonds for the hotel portion of the project, and another $155 million for the convention center expansion.

Including interest, the total cost for the project is now expected to be around $1.63 billion.

The hotel bonds alone are expected to create $1.15 billion in debt for the city over a repayment period of up to 44 years. All of that debt is expected to be paid through revenue generated by the hotel itself, rather than new or existing tax revenue streams.

City officials said Thursday an aggregate interest rate of 5.41% was secured for the three series of municipal bonds tied to the Signia. When the bonds were initially approved by City-County Council, the city was authorized to have interest rates of up to 8%, which would have resulted in hundreds of millions of dollars more in interest over the life of the debt service.

The city was able to negotiate better terms for those bonds because they were oversubscribed—or in greater demand from investors than the total bonds available—when the sale occurred Wednesday. In fact, the city received a combined $2.76 billion in orders for the bonds, nearly seven times their face value.

The average annual debt service for the hotel is expected to be $26.6 million, with the high mark being $43.9 million in a single year. Depending on the success of the hotel operation, the city could also pay off its debt early, as it will be required to put any revenue exceeding operating costs (and not allocated for reserve accounts) toward its balance. The bonds already account for a reserve fund of at least $30 million for the project.

A city-commissioned study conducted by New York City-based LW Hospitality Advisors projects the hotel will generate about $50.6 million in room revenue during its first year, based on an occupancy rate of around 67%. By the fifth year of operation, it’s expected the hotel will be operating at 77% occupancy and generate about $72.3 million in annual revenue.

“The wisdom of capital markets has spoken: Indianapolis is set up for success as we build the Hotel Signia by Hilton and the Convention Center expansion,” Mayor Joe Hogsett said in written remarks. “This news indicates clear support from the market for our vision for Downtown and the next era of Hoosier Hospitality in our city.”

The city expects to issue another $25 million in bonds for the hotel at an unspecified date. Hilton Worldwide Holdings Inc., which will manage the Signia hotel, has pledged to contribute $39.7 million toward construction of the hotel.

For the convention center expansion bonds, the city will owe $344.9 million in debt service. Those bonds will have average annual payments of $14.28 million, with service as high as $29.2 million in a single year.

Those bonds are expected to fully mature in 2048, with repayment coming via property taxes generated by properties in the city’s Downtown tax-increment financing district.

The city secured a rate of 5.34% for the convention center bond issuance, which city leaders said was also oversubscribed, to the tune of $1.22 billion.

That portion of the project  will receive more than $100 million in contributions through the acquisition of land and cash from the Capital Improvement Board of Marion County and the city’s Metropolitan Development Commission.

City officials told IBJ it’s difficult to know what the city’s rates would have been for the bonds had they not been oversubscribed. The convention center bonds received an AA+ rating from financial rating agency S&P Global, while the hotel bonds all received a rating of at least BBB-.

The BBB- rating indicates the agency believes the city will be able to meet its financial obligations related to the hotel, but that the project still presents a moderate risk to investors.

The interest rates are likely much better than what previous developer-owner Kite Realty Group Trust likely would have been able to secure on the private market, as the current Wall Street Journal prime interest rate is 8.5%. Kite in May asked the city to take on the project because it was unsuccessful in securing favorable enough rates to move forward with the project itself.

The demand for the bonds represents continued interest in Indianapolis as a market for investors, even amid uncertainty related to construction costs and inflation, said Chris Reckley, director of acquisitions for Michigan-based Dietz Property Group.

“I think this large of an oversubscription … really shows the strength of the Indiana economy and demand for investment in Indiana, specifically Indianapolis,” he said. Investors find Indiana to be a safe haven while treasuries have seen record volatility.”

The city in June acquired the 3.1-acre Pan Am Plaza property from Kite Realty Group for $54.3 million. Kite remains involved in the project as a development partner—it will collect $13.7 million for the development, in addition to what it received for the land—but the company won’t have an ownership stake once the project is completed.

The bonds are expected to close in December, but infrastructure work on the construction site is already underway, using funds already allocated for the project by the CIB and MDC.

The development is expected to be completed by October 2026.