City to take over financing of $510M hotel at Pan Am Plaza
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The Hogsett administration is taking over the financing of Kite Realty Group Trust’s redevelopment of Pan Am Plaza, with plans to spend at least $510 million—and likely more—to build a 40-story hotel tower on the site starting this summer.
City officials said the move was necessary to save the project after Indianapolis-based Kite told the city it couldn’t secure suitable financing for the 814-room Signia by Hilton hotel planned for the southwest corner of the plaza, delaying construction that was expected to start earlier this year. The change means the city will own the hotel and associated meeting space, although Kite will stay on as the project’s developer.
The Signia is part of a larger redevelopment of the Pan Am block—which sits south of Georgia Street, between Illinois Street and Capitol Avenue—that is to include a $200 million expansion of the Indiana Convention Center, which the city is also financing. In all, the city now plans to invest at least $710 million in a project that is intended to bolster the number and size of conventions Indianapolis can host—as well as retain some $2 billion in existing convention business over the next decade.
City officials said rising interest rates and a tightening commercial lending market meant Kite couldn’t obtain the financing for the project under terms it considered reasonable. Since March 2022, there have been 10 increases to the Federal Reserve’s key interest rate, most recently on Wednesday.
Kite did not respond to several questions from IBJ about its decision to step back from the financial piece of the project, including what interest rate it could have secured for the project. Instead, in a statement from a spokesman, Kite said it would “continue to work closely with the city.”
But Scarlett Andrews, Mayor Joe Hogsett’s deputy mayor for development, said Kite approached the city and the Capital Improvement Board earlier this year to express concerns about financing.
“We had an honest conversation together about, ‘Can we do this as a publicly-financed, publicly-owned project?’” Andrews told IBJ this week. “We [concluded] we’re in a position, especially because of our consistently strong credit ratings, that we can seek out lower interest rates through tax-exempt financing.”
Under the new deal, Kite will still develop the site, with Indianapolis-based AECOM Hunt as the general contractor, but Kite will no longer have a financial or ownership stake in the project once it’s completed. The city will own the property and expects to hire an asset manager to oversee the building, while Hilton will manage the hotel and its event spaces, much like it does for the Kite-developed Conrad Indianapolis luxury downtown hotel.
City officials said the project won’t require tax increases. Instead, revenue generated by the hotel will be used to pay off the project’s debt. City officials believe that’s possible, Andrews said, because the hotel will be city owned and therefore won’t need to generate a profit, meaning the proceeds can be used to pay the bonds.
A bigger price tag
The city takes over the project with prices on the rise.
The city first announced in late 2018 that it had selected Kite from among three bids to build two hotels at Pan Am Plaza and develop the city-funded convention center expansion. At the time, the convention center expansion was expected to cost $120 million; Kite didn’t release cost estimates for the two hotels.
In July 2020, in the midst of the pandemic, the city announced it had reached a deal with Kite to delay the projects by up to two years, until late 2022—a move intended to give downtown’s hospitality industry time to recover from the drop in visitors and Kite time to find financing for the first hotel, which it said then would cost $300 million. The deal did not include city subsidies or incentives for the hotel project. Officials also said they would delay construction on the second hotel.
Today, the Signia is expected to cost at least $510 million. And city officials say the price is likely to increase more as construction costs continue to rise. As a result, they will ask the City-County Council to authorize up to $625 million in bonds for the project. That would create a $115 million buffer to account for both ancillary spending associated with the financing as well as potential increases to interest rates and construction costs.
That resolution is set to have its first reading in front of the council on Tuesday.
Andy Mallon, executive director of the CIB, which operates the Indiana Convention Center, said while he expects the cost to increase by the time financing is finalized and work gets underway, the city will “only borrow what we need to borrow and not a penny more.”
City officials have already authorized the CIB to spend $200 million for the convention center part of the project. That includes $125 million in tax-increment financing that was expected to cover the original price of the project, plus $50 million from the Capital Improvement Board and $25 million from the city’s Metropolitan Development Commission, approved last year to address rising construction prices.
“While the rates are higher than they were two or three years ago, [tax-exempt bonds are] still a great benefit” and make the project possible, Mallon said. “Our ability to switch from market-rate interest rates to the tax-exempt rates is how we’re going to get this across the finish line. With public ownership, you remove the profit motive, and specifically with tax-exempt financing, profit motive isn’t allowed. All the revenue goes to operations and then goes to the benefit of the bondholders and that is the case ,and that will be the case as we get through this.”
Sarah Riordan, executive director and general counsel for the Indianapolis Bond Bank, said the structure of the deal is different than what Indianapolis has done to pay off projects in the past. Typically, the city uses single-site tax-increment financing or larger multi-site TIF districts. A TIF district captures property taxes paid in the district to be used to pay for projects within its boundaries.
The city has also used professional sports development areas—which capture not only property tax revenue but also income taxes and sales tax revenue—as a tool for development in the downtown area. The planned Eleven Park at the Diamond Chain site is expected to rely on a PSDA for a portion of its funding.
For the Pan Am project, the city is borrowing against future revenue generated by the hotel, projections for which are still being finalized. That revenue would include all money brought in by the property through commercial operations, from room nights to meals to laundry service. While a portion of that revenue would be used to maintain the property and pay for its management, the remainder would be used to repay the bonds.
Because the hotel would be owned by the city, it won’t be on the Marion County property tax rolls. However, the property would still be subject to sales tax and the hotel employees would still pay income taxes for their work at the property.
‘Failure was not an option’
Visit Indy officials say the Pan Am project will allow Indianapolis to retain more than $2 billion in major conventions over the next decade, including the annual National FFA meeting and FDIC International events.
It is also expected to drive more than $570 million in economic impact by allowing the city to host two major conventions at the same time, bringing in new groups that have dismissed Indianapolis in the past because of a lack of space or scheduling conflicts with other conventions.
“We’re ecstatic, we’re relieved, we’re happy that this is moving forward, because it’s a big deal as we look to grow the tourism industry,” said Chris Gahl, executive vice president of Visit Indy.
To date, Visit Indy has spent about $500,000 advertising the project to meeting planners across the country, including at 10 convention industry-focused trade shows. The organization expects the expansion to give it the ability to host 82% of North America’s 250 largest trade shows.
“The main challenge for this team was that failure was not an option for this project,” said Dan Parker, the mayor’s of chief of staff. “And if you think about what we’re doing here, we’re betting on ourselves, and we’re betting on [Visit Indy] being able to fill this and grow our convention business.”
Parker said pulling away from the project or reducing its scale would have been the equivalent of “giving up on our convention industry.”
The city declined to make Mayor Joe Hogsett available to talk about the project, referring questions to his deputy mayors.
Indianapolis isn’t the first city to explore a model under which it wholly finances and owns a hotel. The $500 million Signia by Hilton in Atlanta, set to open in early 2024, is being financed by the Georgia World Congress Center Authority using a similar mechanism. That authority also operates Atlanta’s convention center.
And in Fort Lauderdale, Florida, nearly $400 million in bonds have been approved for a Omni Hotel that will be connected to that city’s convention center.
“This may be new for Indianapolis, but it’s not new across the country,” Parker said. “So, if we want to play in the big leagues, we’ve got to put our chips in the middle of the table and go for it. And that’s what we’ve done.”
Bryan McCarthy, Kite’s senior vice president for marking and communications, said in the statement to IBJ that the city is pursing a “proven municipally owned capital structure that has been utilized in major convention-hotel projects throughout the United States.”
Some changes
Despite increases in cost, the scope of the Indiana Convention Center expansion and the sky scraping hotel remain largely the same as when they were originally announced. The deal with Hilton remains in place. And the 143,500-square-foot convention center expansion will still consist of extensive pre-function space, a 50,000-square-foot ballroom and an enclosed skywalk connecting the expansion to the existing building across Capitol Avenue.
The second hotel, however, remains tabled, although some of the underground infrastructure that would be used for that portion of the project will be completed as part of the convention center and Signia construction. Under a deal struck in 2020 to appease other downtown hotel operators, the second hotel could only be developed if the Signia has two consecutive years of 72% occupancy or higher in its first five years in operation.
If those conditions are met and city officials believe downtown can support another hotel, Kite will have first crack at developing the second site. But for now there’s no expectation the hotel will be put on a fast-track.
“We’re going to be ready for it … but it has to be at the right time, and we’re not doing it right now,” Mallon said. “There are provisions [for it], and we would we would love to have Kite as our developer of the second hotel … when it works. We’ll have conversations over the next 20 years about when is the right time for the second hotel.”
The Signia hotel project is expected to create more than 400 jobs with a $14 per-hour minimum wage, as well as at least 2,500 construction jobs over the next three years.
Preliminary site work under the plaza is expected to begin this month, using money that has already been authorized for the convention center expansion portion of the project. The City-County Council is expected to vote on a resolution approving bonds for the project in June.
A ceremonial groundbreaking is set for this summer, with the project expected to be completed in summer 2026.
Indianapolis-based Ratio is the architectural firm on the project.