Another local governing body has approved additional funding for the Pan Am Plaza redevelopment project. The Capital Improvement Board of Marion County on Friday approved up to $50 million from its balance sheet to cover inflation-related costs for the Indiana Convention Center expansion portion of the project.
The board voted unanimously during its board meeting to authorize the funds, which will be earmarked for the convention center addition that is being built directly across Capitol Avenue from the existing facility. The addition, connected to the rest of the facility by a new skybridge, will include the state’s largest ballroom and more than 100,000 square feet of public meeting space.
The addition—which previously was expected to cost $125 million and funded through an expansion of the downtown tax-increment financing district—is part of a larger development that is anchored by an 800-room, 40-story hotel tower from Kite Realty Group Trust, which will bear the Signia by Hilton flag.
Neither the city nor the CIB are giving a direct subsidy to Kite for the hotel portion of the project, but the meeting and event space will be co-managed by CIB and Hilton as part of a project agreement that was finalized in 2020.
“Now that we’re out of the pandemic, we’re seeing construction costs and inflation on the rise—the financial markets are reacting, too,” Andy Mallon, executive director of the CIB, told IBJ. “Even so, we remain committed to the project … so, the CIB [is adding] $50 million to the pot to pay for the construction inflation on Phase Six of the convention center.”
The money will come from the CIB’s fund balance, which was bolstered in October by $50 million in revenue replacement funds through the federal American Rescue Plan Act. Those funds had been sought by the CIB to recoup some of its significant losses during the pandemic, but because the money was not guaranteed, it was not incorporated into any budget projections for 2022 or beyond.
Mallon said the use of those funds for the project makes fiscal sense given the amount the CIB has dipped into its reserves in recent years. The maneuver allows the CIB to contribute to the project without taking on additional debt.
“The use of this money is important to keep us on the path we’ve been on for the last 50 years of continually investing in our facilities,” he said.
The approval comes two days after the Indianapolis Metropolitan Development Commissioned gave its OK to spend another $25 million in tax-increment financing dollars for a separate component of the convention center project. That approval, which gives the city more ownership of the so-called “podium” portion of the development, also included an increase to interest rates that would be allowed for new bonds, going from 5% to 8%—a measure also approved by Indianapolis City-County Council.
The new funding comes as the development team begins preparing the site for a spring 2023 groundbreaking. Crews this week cordoned off the plaza to begin several months of work to add support columns for the Pan Am Tower structure at the northwest corner of Capitol and Georgia Street, ahead of demolition to the existing subterranean garage structure.
That work is being led by Indianapolis firms AECOM Hunt and Powers & Sons Construction through a preliminary project agreement also approved Friday by the CIB. Ratio Architects is the design firm on the overall project.
The garage is expected to remain open for the next several months.
The additional funding is part of an amendment to the project agreement that also delays closing on the financial portion of the project by about four to six months versus the original target of the end of this year. The delay gives the city and Kite additional time to secure financing for their respective portions of the project—the public entities through the Indianapolis Bond Bank and Kite through private markets.
“Essentially the entire financial world believes that we’ll have greater clarity on what the Fed is going to do in response to inflation and how their inflation control measures continue affecting the private borrowing and equity markets,” Mallon said. “So we’ll push that closing into first part of next year. If we push much past the spring, we’re going to start to impact that construction schedule in a way that the endpoint would bump into some of the 2026 conventions that are reliant upon this project.”
Andrew Urban is a capital markets expert and broker at the Indianapolis office of Colliers International, a Toronto-based commercial brokerage company. He said he’s not surprised by the increase to the budget for the development. He said how much the overall costs will go over the original budget is dependent on what kind of interest rates can be secured.
“The landscape has changed really rapidly,” he said. “‘I’m not inside the tent, so to speak, but a project of this scale—given how quickly the global economic winds are changing and evolving—I do expect that all their costs have gone up. There’s inflation on the construction materials and delivery of those plans, but the cost of debt and equity have gone up in tandem, too.”
He said interest rates are floating at about 6% for commercial projects, up from about 4% a year ago. That could result in tens of millions of dollars more to finance a project of this size. When a deal was finalized in 2020, the hotel alone was expected to cost about $300 million.
According to a public document obtained by IBJ, Kite expects to spend at least $20 million more on its portion of the project, largely to cover financing cost overruns.
Kite declined to answer emailed questions, including how much of an increase it expects in its budget for the hotel or the importance of the additional financial commitments to the project from the city and the CIB. But Kite President and Chief Operating Officer Tom McGowan said in a written statement that the firm is working to secure funding for the hotel.
“Despite recent capital market disruptions, we remain fully committed to the project and focused on finalizing the capital source structure in the most efficient way possible,” he said. “We continue our diligent work with the city and CIB to bring this landmark development to fruition.”
Several groups have already committed to host their events in Indianapolis contingent on the completion of the project.
According to Visit Indy, the five biggest annual conventions to have made such a commitment—FDIC International, Gen Con, the Performance Racing Industry, PRI, the National Truck Equipment Association and National FFA—are expected to account for nearly $1.2 billion in economic impact from 2026 to 2030.
Other big groups like the American Dental Association and American Society of Association Executives have also signed on to host their events in Indianapolis based on the Pan Am project.
“Overall we have an appreciation for the city and the CIB for their unwavering support for this project, truly ensuring that as a city we continue to be bold and build upon our tourism strategy,” Chris Gahl, executive vice president of Visit Indy, told IBJ. “With the city taking [full] ownership of the expansion of the Indiana Convention Center, it ensures that there’s continued focus on this transformative project.”
Gahl said the organization plans to continue marketing the convention center addition and new hotel to prospective clients. Among the strategies is to bring in meeting planners for tours of the construction site after ground is broken to give them a first-hand look at the work being done.
That effort comes as other cities like Cincinnati and St. Louis—regional competitors for Indianapolis on some events—make investments in to their own convention facilities. Cincinnati has proposed a $200 million renovation to its convention center, as well as an 800-room hotel. And St. Louis is spending $210 million to redesign and improve its convention center.
“We [think] that seeing is believing … so we’ll be very aggressive in leveraging this project to get meeting planners and decision makers on the ground, before hopefully having them clutch a pen and paper to sign up for Indianapolis in the future,” Gahl said.