IKON Hotel Gets Loan Extension

When the Common Council and Mayor Tom Barrett approved a subsidy in 2019 to develop the IKON Hotel at W. Fond du Lac Ave. and W. North Ave., everyone knew it was a challenging project.

In fact, a City Comptroller report called it a “significant risk” and said the city could end up owning the former Sears department store.

Then COVID-19 hit.

But developer Kalan Haywood reports progress was made and that the Haywood Group is committed to moving the project forward. “We still feel good about it,” said Haywood to the board of the Redevelopment Authority of the City of Milwaukee (RACM) on Thursday night.

“We have been putting together a deal that we knew would be difficult from the start,” said the Haywood Group leader. “Then COVID turned the world upside down.”

The project calls for the three-story, 211,298-square-foot building, constructed in 1928, to hold a hotel on its upper floors. An addition would be built to house a conference center along W. North Ave.

The Department of City Development is trying to help bring the project to fruition. It’s proposing to modify the terms of the city loan, secured by a mortgage on the property, to help the estimated $36 million, 82-room project.

The interest-free period on the $4 million, 20-year loan would be extended to add a third year. The interest-only payment period on the 4.5% loan, would also be delayed a year. Full payments on the principal and interest would begin in year six.

If the city doesn’t modify the terms, the Haywood Group would owe approximately $13,500 per month starting this fall. It has drawn down $3.6 million on the loan.

“Given the cash flow of the building, it’s unlikely those payments would be made,” said DCD economic development specialist Dan Casanova. He said taking ownership of the building in a default would require the city to expend funds on its upkeep and security.

The revised terms also require Haywood to commit to formal quarterly reports, though Casanova said communication has been frequent to date.

Interior demolition work started in 2019 and is 92% complete said Haywood. The building is now sealed from the outdoors and protected, something that wasn’t the case previously.

“The building is walkable. Before you couldn’t walk without to take a swim,” said Haywood of the internal conditions. He also described ductwork filled with bird excrement on the upper levels, which have been vacant since Sears closed in 1981.

The first floor was used as the Milwaukee Mall until Haywood bought the building in 2018.

“Every time we take down a wall we find something new,” said the developer of delays to the process.

It appears other people want to see what’s happening. “We get a lot of attempted break-ins no matter what we do,” said Haywood. But he said there is really nothing to steal at this point. A small fire and flooding also occurred during the demolition process.

From the $3.6 million in loan funds, approximately $1.7 million was used to repay a Milwaukee Economic Development Corporation loan used for the building’s acquisition, approximately $1 million went to contractor JCP Construction for demolition and abatement, $380,000 went for architectural services and historic preservation tax credit preparation, $290,000 for operating costs including electricity and $200,000 for property taxes. Engberg Anderson Architects is leading the project’s design.

There is no plan to replace the hotel concept with something else. “The hotel was really born out of the community,” said Haywood. Additionally, during the approval process city leaders noted the complete absence of a central city event venue.

But the first floor is being rethought. Haywood said the focus is now on finding income-producing tenants. The earlier plans called for a co-working space that Haywood said wouldn’t have produced income.

The developer said discussions with prospective investors have taken place and that a community-based funding opportunity would be brought forward.

The project is located across the street from the Fondy Food Center, which in 2019 played host to a ribbon cutting celebration for the extensive amount of green infrastructure built in the area. The city has designated Lindsay Heights its first “eco-neighborhood,” and is hoping to draw eco-tourism to the area. But Haywood said investors have expressed concern about the perceived lack of activity in the area.

Casanova said the latest census data, which the city is likely to contest, shows that the surrounding census tract lost 22% of its residents in the past decade.

“We had never done a predevelopment loan. It was kind of new for us,” said Casanova. But he said access to predevelopment capital is an issue the department routinely hears about from minority developers.

An additional $5 million loan was approved in September 2019, but will not be awarded until Haywood secures $15.5 million in equity and loans. It would be repaid by the developer and secured by a second mortgage. Haywood said the funding commitment has made it easier to talk to investors.

In the event of a default the city would need to use overperforming tax incremental financing districts or other revenue sources to repay the debt associated with the tax incremental financing district created to issue the loan.

The RACM board unanimously approved the modification of the terms. The Common Council must still approve the revised agreement.

Renderings

Pre-Demolition Interior Photos

Exterior Photos

UPDATE: An earlier version of this article incorrectly referred to the architecture team as Eppstein Uhen.