City leaders and developers tasked with building Carmel's luxury Hotel Carmichael have released more details about what put the luxury hotel roughly $18.5 million over its original estimated $40 million price tag.
Originally, in a news release the city said the 46% increase was "due to a variety of economic factors," including increased labor costs and tariffs on materials. But that wasn't necessarily the whole picture.
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In a series of city council finance committee meetings last week to review the cost overruns, Kevin Hunt, president and chief operating officer for construction manager Shiel Sexton, estimated market conditions only led to about 35-40% of the cost increases.
Here's what else may have contributed to the increase:
Initial estimates were rough
During the three meetings, Hunt and Henry Mestetsky, the director of the Carmel Redevelopment Commission, emphasized that the original price tag of the hotel was based off minimal details. Shiel Sexton helped Mestetsky's predecessor with the hard costs while Coury Hospitality, the company that will be operating the hotel, helped develop the estimate for what's known as soft costs, which includes furniture.
Hunt said much of their estimate was based off how much the company spent building the Indianapolis' Ironworks hotel, a boutique hotel like Hotel Carmichael.
"What we had at that point was six 8½-by-11 pieces of paper," Hunt said. "We had no drawings, no specifications, no elevations, no renderings. The interior designer was not on board. This was just an idea."
But it was an idea that the Carmel City Council voted on. In September of 2017, the council approved $18 million worth of bonds for the project, backed by both income taxes and property taxes from the hotel. An additional $25.5 million was later covered in a loan, that will be paid back using hotel revenue.
Mestetsky argued that the Redevelopment Commission didn't want to spend too much money getting exact designs up front. Getting more precise estimates would have cost millions he said.
“If the council did not approve the hotel deal," Mestetsky said, "then any amount of money on it would have been wasted.”
The Feinstein Club
Because there were only rough schematics available for the initial cost estimate, when developers estimated the cost for the Feinstein Club, they estimated it as a generic public gathering space.
“The Feinstein thing was out there," said Paul Coury, the CEO of Coury Hospitality, "but no one knew what the details were to that, what was the fit and finish of the Feinstein.”
The Feinstein Club will be a supper club operated by Michael Feinstein, the artistic director of the Center for the Performing Arts and namesake for the hotel. The venue is poised to be a unique space, similar to his Club 54 Below in Manhattan.
Because it will focus on music, considerations such as acoustics are important.
"This isn’t what you have in a common lobby of a common boutique hotel," Hunt said. "This is something different, something unique."
Strict Marriott standards
The initial estimates had another potential flaw: They were based off a hotel that was not part of Marriott's Autograph Collection.
Hotel Carmichael will be the first Autograph hotel in the state, and because of that, standards were higher than they would be for a typical boutique hotel.
“The bar had to be somewhat higher I think than an average Autograph, in order for Marriott to even approve this site," Coury said. "We had a lot of push back from Marriott because they just didn't think Carmel was the size city that could handle an Autograph.”
In Marriott's eyes: in order to draw people to Carmel, the hotel had to tell a story that fit with the rest of City Center, Coury said.
Size increase
The size of the hotel also increased from about 104,000 square feet to 112,000 square feet from the time city council approved the bonds. That in itself likely raised the cost $2.5 million, Hunt estimated.
At least part of that size increase was prompted in order to make the rooms large enough for couches. Coury said when he first saw the design of one of the rooms, it just didn't feel special without that addition.
"t was important to the design and the ultimate room value we’re going to get there," Coury said.
Public bidding
The initial estimate also didn't take into account that the project would be publicly bid, Mestetsky said.
That can increase costs because it requires companies to take out surety bonds, which covers the cost of finishing the project if anything goes wrong, Mestetsky said. He added that it can also cut out certain parties who would otherwise want to work on a project, because they can't cover the bond requirements.
Hunt estimated public bidding adds 10% or 15% to the cost of a service.
Market factors
Market factors did still play a significant role in the cost increase, Mestetsky and the developers said during last week's meetings. It's not just a Carmel issue: Hunt said luxury hotel costs went up 37% across the country.
President Trump imposed tariffs on Chinese products in 2018, just before hotel construction started.
Hunt said within that same year, steel was already 40% more costly. Those same tariffs have also impacted furniture and fixture costs, Mestetsky said.
Likewise, Coury said there was a shortage on certain trades.
Still, those changes didn't account for all of the cost increases on the project. Hard costs may have increased from $28 million to $34 million or $35 million, but not the $40 million hard costs Mestetsky is estimating the city will have now.
What the CRC did to fill the gap
To cover about $17 million of additional costs not covered by the bonds or loans, the CRC is using more than $4.7 million from its operating budget; $700,000 from the CRC's 2020 budget; almost $2 million from unspent property taxes from redeveloped areas; $5.3 million from a mortgage on the James Building; and $2.3 million from a mortgage on the Monon Square.
None of the additional money is coming from the city's general budget.
The CRC is eventually expecting a reimbursement of the more than $15 million from hotel profits. Previously Mestetsky emphasized that the hotel is almost certain to make a profit, even after it makes yearly debt payments on $25.5 million in loans taken out for the hotel.
But it's unclear how quickly the CRC will be paid back now, considering hotels could suffer impacts of coronavirus economic fallout for some time. That means the CRC might have to wait to pursue some projects, due to limited funds.
"These major land aggregations that we would use cash for," Mestetsky said, "they will have to go on hold for a bit until the hotel overcomes a world pandemic."
The committee could meet again to ask more questions. Eventually the committee will release a report of its findings
Call IndyStar reporter Kaitlin Lange at 317-432-9270. Follow her on Twitter: @kaitlin_lange.
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