Saturday, November 06, 2010

Conrad Hilton Provides Another Cash Cow For City Elites To Tap For Their Chosen Projects

The IBJ's Cory Schouten has a very interesting story in the latest issue discussing how the City's investment in the Conrad Hilton downtown, which includes a hotel, restaurant and luxury condos, is starting to pay dividends. This is the sort of the thing that normally gets overlooked by our media until the Metropolitan Development Commission or CIB needs money to give away to private developers or billionaire sports team owners and money that was unavailable to fund other basic city services magically appears. Schouten explains how the City invested $25 million in the Conrad Hilton, which was developed by political insiders and close pals of former Mayor Bart Peterson, Al and John Kite, on vacant land owned by the City at the corner of Illinois and Washington Streets. Schouten notes the City originally agreed to invest $21 million in the project. After the deal was consummated, Schouten explains Kite came back and said the developers needed a larger equity interest in order to make the development happen so the City pumped more money into the deal in consideration for an equity interest in the project equal to 8% of the $100 million project.

Flash forward four years from the date the project opened for business and Schouten says the City is now starting to reap financial benefits from the deal. Schouten writes:

The privately held company that developed and owns the 23-story project has made three payments totaling $85,680 this year to the Metropolitan Development Commission . . .

The city received the most recent payment of $4,080 in October after payments of $44,800 in June and $36,800 in July, said Deron Kintner, executive director of the Indianapolis Public Improvement Bond Bank.

The project agreement gives the city a share of any dividends, proceeds from financing, or distributions from a sale of the hotel. The recent payments fall into the category of dividends from the hotel’s operation . . .

If the 2010 payments indeed represent an 8-percent share of dividends, Conrad’s owners—a partnership of Kite Realty Group Trust veterans Al Kite, John Kite and Tom McGowan—would have earned more than $1 million so far this year from the hotel.

The Conrad project also is due to pay about $461,000 in property taxes in 2010, records show, as its tax liability phases in over a 10-year abatement period. The non-residential portion of the project is assessed for tax purposes at $68 million.
The next question I have, which is not addressed in Schouten's story, is where the money Kite's development is paying to the city is going? "Bonds the city sold to fund its portion of the Conrad are backed by revenue from two parking garages: the Circle Block garage next door to the hotel and the World Wonders garage at Circle Centre," Schouten writes. Presumably, the revenues from the parking garages have been sufficient to cover the bond debt to date. Normally, the property taxes, which he says total $461,000, would be distributed among the various taxing districts (i.e., the schools, library, city, township, etc.). Because the hotel is in a downtown TIF district, those proceeds go to the TIF district. Those tax payments will only escalate in coming years as the 10-year tax abatement is phased out. Incidentally, Kite owns one of those luxury condos and is personally enjoying the benefit of the 10-year tax abatement on his condo, in addition to his $100 million project.

Schouten says the project is performing much better than it did when it first opened. Average occupancy at the upscale hotel was just 50% (well below average occupancy rates for other downtown hotels) and the original restaurant, which has since been replaced by the Capitol Grille, did not fare so well. Based on the dividend being paid to the City, Schouten estimates Kite's investment returned a profit of more than $1 million this year. How do we know those are the true numbers? Schouten says the City commissions the accounting firm of Katz Sapper & Miller to audit the developer's books to determine whether payments are due to the City. Audit reports for 2007 and 2008 determined no payments were due to the City according to Schouten. The City is awaiting a report for 2009 he says.

So we now have another revenue-generating pot of money that is totally off the books so far as the City-County Council is concerned when it comes to establishing the City's annual budget. I would hearken back to the point I've repeatedly made concerning the City's claim it has no other choice than to privatize the City's parking meter assets in order to generate sufficient revenues to modernize the parking meter asset with an electronic parking meter system. There is plenty of money flowing into the City and these TIF districts to be invested in the parking meter asset. Mayor Ballard would rather keep that money off the books and use it as a slush fund when a political insider who enriches his campaign coffers comes along and asks for an "investment" in his or her private development. I don't think any other city in America operates to pick winners and losers in the realm of real estate development in their cities quite the way the City of Indianapolis operates.

I'm left wondering about Simon's downtown corporate headquarters into which the City invested a similar amount of money and handed over to Simon Property Group a city-owned parking garage its employees get to use for free. Is it beginning to pay dividends? If so, how much? And what pet project will those dividends be used to fund? It's pretty safe to assume it will not be used for mass transit, the parks, libraries or any other basic city services.


Downtown Indy said...

And how long before the hotel begins crying about the 'burden' of increasing property taxes and starts pleading for relief?

Hoosier in the Heartland said...

I'm guessing none of you have yet read Dick Cady's book, Deadline: Indianapolis.

City corruption is nothing new. He tracked it under Lugar and Goldsmith, and surely none of us is surprised it continues under Ballard.

Mann Law, P.C. said...

So in 5 years the city has made $85,600 on a 25 million dollar investment. This is paying dividends? This is 3 tenths of a percent in 5 years.

Downtown Indy said...

TC: And lost $461K x 5 = $2.3 million in prop tax payments.

Marycatherine Barton said...

Will be reading DEADLINE; INDIANAPOLIS. Thank goodness for the internet!

Hoosier in the Heartland said...

And, PS, it's the Conrad. Not the Conrad Hilton.