Bonds

Indianapolis will sell up to $625 million of revenue bonds this fall to finance construction of a hotel to serve its expanding downtown convention center, a move that rescues the project after a private developer stumbled on the financing end.  

“The $510 million project fund to construct the hotel will be financed by the city” and the operating costs and debt “will be paid with the revenues generated by the hotel,” City Controller Sarah Riordan told the Metropolitan and Economic Development Committee in May.

The city introduced the ordinance authorizing the borrowing last month and the Indianapolis-Marion County Council signed off on it at a meeting this week in a 20-5 vote.

Republican members voting against the financing questioned the city’s ownership of a hotel that would compete with the private sector and voiced worries about whether it would eventually cost the city should hotel revenues fall short.

“Today’s vote will help protect and expand the 83,000 hospitality jobs in our community,” Mayor Joe Hogsett, a Democrat, said in a statement.

“It will increase business across our tourism economy and secure our spot as one of the top host cities in the country. Instead of sliding backwards through complacency, we are building a stronger, more vibrant downtown,” the mayor said.

“I understand the implications of not doing this project,” but “it’s the idea of the city owning a hotel and then competing directly against the private sector that has me concerned,” said Councilor Brian Mowery. “I don’t agree with the government competing against the private sector in this fashion.”

Kite Realty Group Trust was hired to develop the 40-story, 800-room Signia by Hilton Hotel to complement the $200 million convention center expansion. Kite was originally expected to come up with private financing but amid a rising interest environment and lower risk tolerance among investors, it struggled to draw interest at affordable rates.

“We were faced with a difficult decision earlier this year in thinking about this project,” Scarlett Andrews, deputy mayor for economic development, told a council committee last month during a hearing on the bond authorization. “That led us to make a decision…to pivot to a public project, a publicly financed and publicly owned project. We believe this project is viable especially because it does not result in any new taxes for taxpayers.”

City officials have said the new hotel is needed to support the convention center business and remain competitive with other cities.

They contend the risks are minimal to city coffers given a structure that will establish healthy reserves that could withstand a year-and-a-half of shuttered operations before a default or use of the city’s moral obligation to replenish the debt service reserve that is approved for $250 million of the financing.

The hotel is expected to open in the summer of 2026 and Hilton Hotels and Resorts would operate it. The Capital Improvement Board oversees the convention business.

The city chose Piper Sandler as underwriter based on its experience with public and private hotel financings.

The ordinance allows the financing team to put the city’s moral obligation pledge to replenish the reserve on up to $250 million of bonds.

The city will borrow more than needed to finance construction to capitalize interest during construction and establish various reserve accounts.

“That would be the maximum utilization of the moral obligation but again the moral obligation and the debt service reserve are several levels down from the money that can be utilized to repay the bondholders,” Riordan told the committee.

Councilor Paul Annee worried about the impact of the city providing a backstop on a portion of the bonds. “The deal is a little iffy,” he said.

“There are many, many, many, many steps” before a default or use of the moral obligation, including the ability to come to a bondholder agreement on a restructuring, Riordan said. “Before the general fund could be used, the council would have to appropriate that money.”

The financing team envisions crafting a deal with a senior lien that could garner an investment grade rating from S&P Global Ratings.

“That’s a very important hurdle that gives bond investors a lot of comfort,” Brad Langner, a managing director at Piper, said at the committee hearing. “There’s flexibility to use the city’s moral obligation on a portion of the debt service here and that’s just another financing tool for the project to get this financing done at a competitive low interest rate.”

Langner said the high level of planned reserves is a key factor in the structure.

“COVID was a horrible time for the hotel industry…with this structure that we have in front of you today not one of the hotels had a payment default during COVID and that was as a result of structuring these hotels with adequate reserves in place,” Langner said, citing several dozen hotel financing deals undertaken by the firm.

Other convention center and hotel financings were among the hardest hit by COVID, with some draining reserves and turning to debt restructurings.

The city has a feasibility study in hand that supports the ability of the hotel to generate sufficient revenues to repay the bonds but officials said they can’t publicly release it due to proprietary information. A published final study will accompany the bond offering documents.

The bonds will go out as far as 40 years but excess hotel revenues would go to retire them early. The ordinance allows for a final maturity of up to 44 years and a maximum interest rate of 12%.

Separately, the city has committed $200 million in financing for the convention center expansion with a $50 million allocation coming from the Capital Improvement Board, $25 million from the Metropolitan Development Commission, and $125 million in tax increment financing-backed bonds from the city.

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