The Carmel City Council is considering an independent review of the construction management and oversight processes of Hotel Carmichael after the city revealed Jan. 31 that the project will cost 46 percent more than originally projected.
Construction of the 122-room boutique hotel at Carmel City Center – a public private partnership between the City of Carmel and developer Pedcor – is estimated to cost $58.5 million, $18.5 million more than the estimated project cost in late 2017, when the Carmel City Council approved the sale of $18 million in bonds to help finance it. The city closed on a $25.5 million loan to cover the rest of the project in April 2019, bringing its total funding to $43.5 million at that time.
The steep increase is the result of rising construction costs, labor shortages, tariffs and a saturated market, according to Carmel Redevelopment Commission Executive Director Henry Mestetsky.
At the Feb. 3 council meeting, several councilors expressed support for a proposal by Councilor Tim Hannon – in his second meeting on the council – to take a look at the processes that allowed the cost increase and measures to fund it to occur without input from the city council. Hannon said he didn’t learn about the cost overrun until Jan. 30, when he expected a request for more funds from the council to follow.
Instead, Mestetsky outlined plans to cover the funding gap in other ways, such as mortgages on city-owned properties and available funds in the CRC operations budget, which Hannon found even more concerning.
“If you asked for money from the council I’d understand this is the first time it’s come up, but the fact that for a year or more you were able to cover $12 million to $15 million I was flabbergasted,” Hannon said to Mestetsky during the meeting. “How could you have access to $12 million to $15 million in funds and never come to council for any sort of approvals or notifications?”
Other councilors echoed Hannon’s frustrations.
“You had an opportunity almost every single council meeting to say something,” said Councilor Tony Green, one of two councilors to vote against funding the hotel in 2017. “You gave the perception to the council members that we’re staying the course.”
Mestetsky said he became aware that the project would cost $55 million in early 2019. He said the he waited to provide an update on the cost until he could “say with absolute certainty there isn’t going to be a dollar more spent.”
“The last round of bids happened in early 2019, at which point we generally knew the cost of the hotel we were working with,” he said. “Certainly there were indicators, national trends that forecasted that the bids could come in high, so we started making value engineering cost cuts before we even bid some things out.”
Hannon said he found that concerning, too, because it meant the hotel – as designed – was even more expensive than original estimates.
Mestetsky said most of the $15 million price increase will be repaid through hotel profits. He expects the hotel will make enough profits to cover its $25.5 million loan and repay the CRC for covering the increased cost.
“That quality of hotel will have zero issues doing that,” he said. “It would be impossible for the hotel not to generate enough revenue to not make a profit. There will be a profit, and that profit will repay the CRC its advancements.”
Mestetsky said the CRC’s actions occurred at its monthly public meetings and never required a council vote. He said he welcomes an independent review.
“I don’t want a conversation about auditing practices to have some kind of insinuation that a single rule or vote taken by the CRC in public or in private were somehow not above board,” he said.