Browning Investments' failure to secure funding for renovation of Evansville's former Executive Inn says less about the project itself and more about the state of the hotel construction market, a representative of the company said last week.
Dennis Dye, an executive vice president for the Indianapolis development firm, said Browning's trouble all along has been in securing the type of loan needed to make a renovation of the hotel succeed.
Dye announced Wednesday that Browning Investments plans to turn the former Executive Inn over to the city later this month as a way of giving other development companies an opportunity to take on the project.
Dye said it's a misconception that Browning is taking that step because of a failure to persuade a bank to lend for a hotel renovation. The trouble instead relates to the size of the loans Browning can get.
He said banks are requiring developers to pay 50 percent of the cost of a hotel project up front as equity. Before the recent recession, the standard for equity was closer to 20 percent.
He said investors who provide that equity often demand a rate of return of about 17 percent, far higher than the interest rate of roughly 8.25 percent Browning would have to pay on a bank loan. Before the recession, being able to borrow more of the total amount of money needed for projects had made the total cost of the projects far lower, he said.
Browning's great fear in trying to open a convention hotel in Downtown Evansville, Dye said, was that the property would not generate enough money quickly enough to keep up with payments to banks and investors.
He cited data gathered by the research firm STR, showing that a group of Evansville hotels similar to the proposed Downtown convention hotel were filled about 60 percent of the time on average in 2009.
If the proposed hotel were to perform in the same way, the rates charged there would have to be more than $120 a night to give Browning the kind of cash needed to make payments, an amount fairly high when compared with the rates usually charged in this market, Dye said.
Additional obstacles came from the former Executive Inn's structural deficiencies and from the fact that the structure wasn't built to current hotel standards. Given those circumstances, getting the kind of loan needed to do the project properly would have been difficult even in a strong economy.
"Put it in 2009 or 2010, and it was impossible," Dye said.
Mike Alley, chairman and chief executive officer of Integra Bancorp, said he knows little about Browning's precise situation. But the predicament the company finds itself in is not surprising.
Loan defaults
He said regulators have reacted to the high rate of commercial-loan defaults seen across the country by strictly enforcing standards that have caused many banks to curtail their commercial lending. That has likely been the source of Browning Investments' frustrations, Alley speculated.
"The banks in commercial real estate, they don't have the appetite for these kind of arrangements," he said. "I'm sure that's what they found."
The city, though not cutting ties completely with Browning, now plans to give different development companies an opportunity to open a Downtown convention hotel. But their chances of success may not be much better.
David Dunn, president and chief operating officer of Dunn Hospitality, based in Evansville, said he thinks most developers will encounter the same obstacles Browning did.
"Just as much as anything, it's a product of the climate we are in today and of finding financial partners that are willing to participate in that kind of project," Dunn said.
Dunn Hospitality likewise is having trouble getting the financing needed to move forward with several hotel projects, despite its past successes, Dunn said. In Evansville, the company operates the Hilton Garden Inn, Holiday Inn Express Hotel & Suites on the East Side and HomeLife Studios and Suites.
Dunn, who also sits on the Evansville Convention & Visitors Bureau board, said he understands the importance of having a convention hotel in Downtown Evansville. But asked if he and his partners would like to take on that project, he expressed hesitation.
"We have looked at the building so many times over the years," he said. "We've got a number of projects ourselves that are in varying stages of development. ... I'm not sure it makes sense to look at a project of that magnitude on top of the projects we are working with."
Dunn said Browning Investments is certainly no lightweight in the development arena. The company was founded in 1977 and has a history building warehouses and office space for manufacturers in Indianapolis.
Browning is known for developing five downtown buildings there that stand among the Indianapolis landmarks: the Pan American Plaza, the 300 North Meridian tower, the Landmark Center, the Capital Center and the Gateway Plaza.
Redirected efforts
The company changed its direction in the early 1990s. On its website, Browning says the "adverse market conditions that prevailed in investment real estate in the early 1990s prompted the company to redirect its efforts to the industrial market."
It built a 500-acre plaza in Plainfield, Browning also constructed buildings that are home to major office space in Carmel, a suburb north of Indianapolis, as well as factory stores in counties that surround Indianapolis.
In recent years, though, Browning has again changed its specialty, this time to life sciences.
Browning plans to begin this month constructing a new headquarters for the Indiana Spine Group in Carmel. The building will contain 60,000 square feet of space, spread over three floors, and is to open next year.
In 2009, Browning drew much attention in Indianapolis after ground was broken for an 80,000-square-foot facility in Browning's Northwest Technology Park, that will house 100 researchers working for Dow AgroSciences. The agricultural company signed a 15-year lease with Browning.
Browning's difficulties in finding lenders for projects are not new. For the Dow building, the company used loans from a regional bank, the Lake City Bank of Warsaw, after more traditional lenders backed away in the midst of the economic downturn.
Taking possession
Local officials, meanwhile, are working on the terms under which Evansville will take possession of the former Executive Inn. A development agreement signed with Browning Investments gives the city the option of buying the property for $300,000.
That will come on top of the $11.9 million Evansville already gave Browning as an incentive to take on the project. John Kish, arena project manager, said the same development agreement contains a provision that forces Browning to transfer money to the city as a compensation for failing to live up to certain commitments.
He said he expects that provision will enable local officials to get both the former Executive Inn and a small amount of money from Browning at the same time.
In the end, Kish said, the city will pay about $11.9 million for:
The demolition of the section of the Executive Inn that stood on part of the arena site.
For that part of the arena site itself.
For the section of the former Executive Inn left standing after the demolition and its site.
And for the parking garage and its site.
Kish said it's easy to forget that city officials had once considered buying the D-Patrick Ford car lot Downtown several blocks from the current arena site. That plan would have been accompanied by no improvements to the Executive Inn, a property that has gone through several owners in recent years and was recently foreclosed on by a bank.
"We would not have solved the convention-hotel problem," Kish said. "People need to remember the Executive Inn has been an issue for a long time."
Staff writer Eric Bradner contributed to this report.