Carmel hotel project more than $20 million over original budget

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Carmel’s high-end boutique hotel project, The Hotel Carmichael, is expected to cost at least $20 million more than the city first estimated in mid-2017.

City officials, on Friday night, said the total price tag for the city-backed project has risen to $58.5 million due to rising construction and labor costs. The hotel is slated to open in May.

IBJ began inquiring about rumored cost overruns on the project in mid-January, but the Carmel officials did not respond until issuing a general press release Friday night.

Carmel also announced Friday that the Hotel Carmichael will contain a full-service French restaurant called Vivante managed by Tulsa, Oklahoma-based Coury Hospitality, a consultant hired by the city to help with the hotel in early 2017.

According to a project summary Mayor Jim Brainard presented to Carmel City Council members in July 2017, the estimated budget for the hotel was $38 million. By the time officials approved about $18 million in bonds two months later, the price had risen to $40 million.

The six-story hotel, which is being developed by Pedcor Cos., will operate as part of the high-end Autograph Collection by Marriott. Plans call for 106,347-square-foot hotel to contain 122 guest rooms and suites and about 3,200 square feet of meeting space. The structure will be connected to the Carmel City Center and is across the Monon Trail from the Palladium.

Henry Mestetsky, director of the Carmel Redevelopment Commission, blamed rising construction material and labor costs for the 46% increase over the previous $40 million budget. The city now lists $41.9 million in “hard construction” costs, $3 million for the land and $13.5 million in soft costs.

“We’re dealing with a crazy construction market,” Mestetsky said by phone Friday night. “Everyone is building. Everyone in Carmel is building. Everyone across the state is building. And the market just blew up. Between mid-2017 and 2020, it exploded.”

Mestetsky said the 2017 estimated budget was based off other local luxury hotels that were being built at the time, such as the Ironworks and Alexander hotels in Indianapolis.

HVS Global Hospitality Services, a New York-based hotel consultancy firm, published the results of a 2018 survey in September to show constructions costs for new hotel projects have risen “exponentially” in recent years.

In 2018, the cost of materials increased at a pace of nearly 10%, and several key materials and resources increased even more, including oil, iron, steel, lumber, aluminum and asphalt paving mixtures, the report states. Those costs were due in part to natural disasters and tariffs on Chinese goods.

Low unemployment rates across the country are also contributing to increased construction costs, as developers deal with labor shortages.

“This isn’t surprising,” Mestetsky said. “Every step of the way, we tried to cut costs and value-engineer. There were almost $2 million in cuts. We saw what was happening.”

Despite a switch to cheaper facade materials and a shingled roof instead of slate, the Carmel Redevelopment Commission found itself responsible for filling the multi-million dollar gap.

Mestetsky said the commission has identified about $4.7 million in its operating budget, about $7.6 million in new mortgages on the James Building and Monon Square, as well as $2 million from a pre-existing tax increment finance bond issued in 2016.

“This isn’t new issuance; this isn’t new debt,” Mestetsky said. ” This is a bond we’ve been making payments on all along.”

As a result, Mestetsky said, there will not be an impact to taxpayers or the city’s interest in the project. He said the CRC will be reimbursed $12 million from the hotel’s profits, after its debts are paid.

Mestetsky said the commission will collect 75% of all hotel profits before they’re distributed to the hotel’s investors, including Pedcor. If the hotel does well—as he expects it to—it could take as little as five years for the CRC to make that money back, Mestetsky said.

As a result, Mestetsky said, Pedcor will also have to wait a longer time to realize a profit.

“This is the nature of public private partnerships,” Mestetsky said. “The commission’s preference has always been to build the right hotel, the hotel that is going to be the centerpiece of the city.”

Reporter Samm Quinn contributed to this story. 

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13 thoughts on “Carmel hotel project more than $20 million over original budget

  1. Anyone “shocked & amazed” by this developing news? Seemingly every public/private partnership Carmel is involved in goes WAY over budget. Get out of real estate, development & fairy tale crafting. Let development occur organically. City didn’t learn anything from the dramatically underutilized & astronomically over budget palladium project. White Elephant. Guessing the crazy priced Hoagie Carmichael tribute statue is going to help the palladium? COUNTLESS budgetary development stories in this little burg. Wish I could issue bonds for my fun ideas. Would be much easier than trying to win the lottery.Sorry, I digress.
    Still left wondering why we didn’t elect Fred Glynn.

  2. Let’s see if we can summarize

    Project was $38M and with the bond issuance fees Council approved $40M

    CRC borrowed $43.5M

    Now project is $58.5M after supposedly value engineering. Materials went up 10% and project went up over 50%. Land that we essentially gave to Pedcor whuch they then used as their skin in the game has now gone up in worth $3M. Is that how they are being made whole for waiting longer for payback?

    To cover the shortfall CRC took out mortgages on property that currently has existing debt on them. My understanding is anything over $2M has to go in front of Council. This didn’t or hasn’t yet. Jeff Worrell is on CRC but hasn’t said a word

    So far from history this is SOP of Jim Brainard, Jeff Worrell, and rest of CRC. They will under the table start paying hotel expenses via various city departments and come to Council for more money which the Council will have no choice but to fund or let the hotel collapse.

    Just another Carmel project playing out as the “malcontents” predicted

    1. All great points. I have been in development for many many years and I have developed over $1B and if I ever had a project that was >~5% over budget I would be extremely irritated with my team and odds are…I probably would never be doing another project for that client again.

      Where is the accountability on all sides here?

      Where does the money come from when they are this much over-budget on the operations of this hotel? This type should be a huge and vocalized concerned of the citizens of Carmel.

  3. Should just rename the town Pedcor – they have gotten so much help from the city over the years not sure where the company’s interests end and the city’s begin.

    1. Robert S: May 21, 2016 was a Saturday – IBJ publication dates are Fridays…when crawling IBJ.com[1], Google finds no stories like what you’re describing. There *was*, however, a story in the Indianapolis Star on May 31, 2016, “Developer Pedcor Owns Carmel’s Bank” found here: https://www.indystar.com/story/news/local/hamilton-county/2016/05/31/pedcor-deepens-ties-carmel/84903080/
      .
      .
      [1] using this Google search criteria: [ site:ibj.com “United Fidelity” pedcorp ]

  4. Another Carmel fiasco. Cost equates to $479,500 per room! I doubt the JW Marriott downtown cost that much per key! The hotel is going to have to have an average room rate of $375-$400/night to breakeven. These fools in Carmel don’t have a clue what they’re doing including their favorite developer Pedcor.

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