Report calls Carmel’s Hotel Carmichael financing process ‘deeply flawed’ but legal

A new report analyzing the Hotel Carmichael’s $18.5 million in overruns includes recommendations to ensure that problems in what the document calls a “deeply flawed” but “legal and proper” process aren’t repeated.

Carmel City Council President Sue Finkam, the council’s former finance chair, compiled public commentary, three days of public hearings, testimony from Carmel Redevelopment Commission leadership, hotel contractors and consultants into a 327-page report the council will discuss at a meeting Monday.

The document, published more than a year after that public review, formally criticizes the way the city’s administration and Carmel Redevelopment Commission handled the 122-room boutique hotel‘s construction as well as the way they announced the project’s ballooning costs.

“Communication by the Carmel Redevelopment Commission to the Carmel City Council and public was grossly inadequate and needs to be improved in a variety of specific ways,” the report said.

The report recommends ways future public-private partnerships might be better-managed to avoid similar issues.

“When voters go to the ballot box and cast their vote, they’re putting their trust and their future in our hands,” Finkam told IBJ. “I hope that by releasing a report, they can understand that we really did dig deeply to try to understand the issues and prevent this from happening again on their behalf.”

The project, which sits across the Monon Trail from The Palladium, is the brainchild of seven-term Carmel Mayor Jim Brainard, who first envisioned building a destination hotel for the city decades ago. But the Carmel council didn’t act on the idea until 2017, when it approved a $15 million bond for the project. That was to be combined with $25 million in private loans for what the city estimated would be a $40 million project.

However, the committee’s report finds that estimate was “hastily completed and wholly unreliable.”

“We had been led to believe it had been vetted by outside consultants,” Finkam said. “It’s like building a house: If the foundation is poorly poured, the rest of the house is going to be shaky. That’s what I think we saw throughout this entire process.”

In late January 2020, the CRC publicly announced the cost for the Hotel Carmichael had exceeded the original estimate by $18.5 million to reach a total $58.5 million.

CRC Director Henry Mestetsky and the Brainard administration said at the time that the estimates were preliminary. They blamed circumstance beyond their control for the overrun, including international tariffs and labor shortages—as well as the strict standards needed to meet the requirements of Mariott’s Autograph Collection.

“This report counters the contention that was initially made by city administration and Director Mestetsky, that the cost of these overruns was because of the Trump tariffs and construction costs rising,” City Councilor Tim Hannon said. “A third or less of the cost increases were associated with the increased input costs.”

The report also states that significant modifications were made to the hotel project after the council approved its funding. That includes a roughly 7,000 square foot addition to the project’s footprint, as well as the inclusion of the Feinstein’s at Hotel Carmichael cabaret and jazz club.

The report said the council was unaware the CRC had advanced millions of dollars on the project to pay for architectural and legal fees that were not included in the original $40 million estimate. The city’s public-private arrangement assures the CRC will be paid back before it shares revenues with its partner, Carmel-based Pedcor, but not including those fees made the disparity in the final costs larger.

Finkam said the council’s decision to pursue the project in the first place was based on an estimate, payoff structure and exit strategy that were all changed after the approval—without the full council’s consultation.

“Unfortunately, the public process used to gain Carmel City Council approval and to educate the public was deeply flawed,” the report said.

Not all of the report’s findings were critical. The document notes, through bid alternatives, the CRC was able to lower the cost of the project by $5 million.

Also, the CRC identified $5 million from its operating budget, $2 million from a tax-increment financing bond and roughly $8 million from the mortgaging of CRC-owned office space to help cover the overrun—$12.5 million of which will be recovered through a profit-sharing plan with Pedcor.

IBJ sought to speak with Mestetsky and Brainard about the report but the city instead sent a statement from Mestetsky.

“The report found that city council tasked the CRC, a separate legal entity with its own spending powers, to build the state’s first Autograph Collection hotel and not to come back for more funds from council,” Mestetsky said in the written comment. “It found that the CRC acted properly and legally, delivered the state’s nicest hotel, all while negotiating advancements needed to be reimbursed later out of its hotel partner’s profits.”

Finkam and Hannon have their reservations about that solution, though. In the report, Finkam writes the mitigation plan greatly reduced the CRC’s cash reserves to the detriment of its operations. Recently, the CRC requested around $1 million in bonds for maintenance items.

Hannon said the fact that a CRC can find so much money with no notification or approval from a city’s legislative body is shocking.

“It should be a wakeup call for every council around the state of Indiana,” he said.

The report recommends all not-for-profit community development corporations formed to support the city:

• Send the Carmel City Council their meeting notices and minutes.
• Provide the council with a biannual and in-person report.
• Allow the city council an appointee on their boards..
• Have their books audited as part of the city’s audit.
• Present their budgets to the city council.
• Allow the city controller access and signatory responsibilities for their bank and trustee accounts.

Recommendations for the CRC include:

• Providing updated, accurate and timely information, as well as support documentation, for its monthly council reports (including project estimates, budgets and tracking).
• Sending budget packets to all council members.
• Giving the council quarterly confidential Hotel Carmichael financial updates.
• Notifying the city council prior to transferring any land or asset worth more than $100,000.
• Notifying the council of any grant agreements entered into with other entities.

The report also includes recommendations for the city council, including:

• Monthly financial updates from council appointees to the CRC.
• Discussing the potential for obtaining more-informed estimates or guaranteed maximum prices on capital projects.

Finkham said the city council tried forming an interlocal agreement to formalize additional transparency measures with the CRC, but the council’s attorney said it would be a violation of the entities’ separation of powers to do so.

“That’s why we didn’t have bigger teeth” in the report, Finkam said.

The Carmel City Council is scheduled to discuss the report at its next meeting at 6 p.m. Monday.