The City of Topeka’s planned $20 million renovation of Hotel Topeka at City Center, acquired for $7.6 million in October 2023, is a significant financial commitment with substantial risk of cost overruns. Cost overruns occur when actual expenses exceed initial budget estimates, a common issue in large-scale renovation projects, particularly for distressed properties like this 224-room hotel with a history of deferred maintenance and reported issues (e.g., non-functional air conditioning, bed bugs, outdated infrastructure). Below is a detailed exploration of the factors contributing to potential cost overruns, their likelihood, financial implications, and associated risks, emphasizing why the city’s involvement in this private sector venture heightens fiscal exposure.
1. Factors Contributing to Potential Cost Overruns
a. Poor Existing Condition and Deferred Maintenance
- Current State: The hotel, built in 1998 and in decline since 2013 under prior ownership (Heart of America), suffers from significant neglect. Guest reviews on platforms like TripAdvisor (2.8/5 rating) highlight issues such as broken HVAC systems, dirty rooms, outdated furnishings, and even bed bugs. These symptoms suggest extensive deferred maintenance, increasing the likelihood of costly repairs.
- Hidden Issues: Renovations of older buildings often uncover unforeseen problems, such as:
- Structural Damage: Cracks in foundations, water damage, or weakened structural elements could require reinforcement, adding $500,000–$2M.
- Asbestos or Mold: As a 1990s construction, the hotel may contain asbestos in insulation or tiles, requiring remediation at $10–$30 per square foot. For 22,000 square feet of meeting space alone, this could cost $220,000–$660,000. Mold from poor maintenance (e.g., water leaks) could add similar costs.
- Obsolete Systems: HVAC, plumbing, and electrical systems, likely original, may need full replacement rather than repairs. Replacing an HVAC system for a 224-room hotel could cost $2M–$5M, far exceeding budgeted estimates if only partial upgrades were planned.
- Likelihood: High. The hotel’s receivership status and reported issues indicate minimal investment by prior owners, making hidden defects probable.
b. Supply Chain and Labor Market Challenges
- Material Cost Increases: As of 2025, construction materials like steel, lumber, and HVAC components remain 10–20% more expensive than pre-2021 levels due to lingering supply chain disruptions. For example, a budgeted $2M for HVAC upgrades could rise to $2.4M if material costs increase 20%.
- Labor Shortages: Skilled trades (e.g., electricians, plumbers) are in short supply, driving up wages. Construction labor costs have risen 5–10% annually in recent years. For a $20M project, a 10% labor cost increase could add $1M–$2M, especially if specialized work (e.g., asbestos removal) is required.
- Delays: Supply chain delays (e.g., 6–12 weeks for custom HVAC units) could extend the project timeline, increasing labor costs and overhead. A 6-month delay at $50,000/month in overhead (e.g., project management, equipment rentals) adds $300,000.
- Likelihood: Moderate to High. While inflation has stabilized, supply chain and labor constraints persist, particularly for complex renovations in smaller markets like Topeka with limited contractor availability.
c. Scope Creep and Ambiguous Planning
- Broad Objectives: The city aims to transform the hotel into a competitive convention hub to support the Stormont Vail Events Center, but public records lack a detailed renovation scope. Ambitions to add high-end amenities (e.g., advanced AV systems, luxury finishes) to attract 50,000 bookings annually could expand the project beyond the $20M budget.
- Change Orders: Mid-project changes, such as upgrading meeting spaces to compete with Kansas City venues, could trigger costly change orders. Industry data suggests change orders add 5–15% to renovation costs, or $1M–$3M for a $20M project.
- Lack of Transparency: The purchase and renovation process faced criticism for limited public input and unanswered questions (e.g., council members Sylvia Ortiz and Christina Valdivia-Alcala’s concerns). Without a locked-in scope or competitive bidding, costs could escalate due to poor planning or last-minute additions.
- Likelihood: High. The absence of a detailed, publicly disclosed plan and the city’s inexperience in hotel renovations increase the risk of scope creep.
d. Regulatory and Compliance Costs
- Building Code Updates: Renovations must comply with 2025 building codes, including energy efficiency (e.g., LED lighting, low-flow plumbing), accessibility (ADA requirements), and fire safety (sprinkler systems). Retrofitting a 1998 building to meet these standards could add $500,000–$1M, especially if elevators or bathrooms need upgrades.
- Permitting and Inspections: Delays in obtaining permits or failing inspections could extend timelines, increasing labor and overhead costs. Permitting fees for a $20M project could range from $50,000–$200,000, with additional costs if revisions are needed.
- Environmental Regulations: If asbestos or hazardous materials are found, compliance with EPA regulations could delay work and add $100,000–$500,000 in disposal and remediation costs.
- Likelihood: Moderate. Compliance is mandatory, but costs depend on the extent of required upgrades, which may not be fully anticipated given limited pre-renovation assessments.
e. Inflation and Market Volatility
- Construction Inflation: Construction costs have risen 3–5% annually in recent years. For a project spanning 1–2 years, a 5% annual increase could add $1M–$2M to the $20M budget if not locked in via fixed-price contracts.
- Interest Rate Impact: If renovations are debt-financed, rising interest rates in 2025 could increase borrowing costs. A $20M loan at 6% (vs. 5%) over 20 years raises annual payments from $1.6M to $1.7M, adding $2M in total interest.
- Likelihood: Moderate. Inflation is stabilizing, but long-term projects remain vulnerable to cost escalations unless contracts mitigate price volatility.
2. Likelihood and Magnitude of Overruns
- Industry Benchmarks: Hotel renovations often exceed budgets by 10–30%, with older or distressed properties at the higher end. For a $20M project, this translates to:
- 10% overrun: $2M, total $22M.
- 20% overrun: $4M, total $24M.
- 30% overrun: $6M, total $26M.
- Topeka-Specific Risks: The hotel’s poor condition, lack of detailed planning, and Topeka’s smaller contractor market (fewer competitive bids) suggest a 20–30% overrun is plausible, especially if structural or hazardous material issues arise.
- Probability:
- 10% overrun: 80% likelihood (minor issues, supply chain delays).
- 20% overrun: 50% likelihood (structural problems, scope creep).
- 30% overrun: 20% likelihood (major unforeseen issues, e.g., asbestos and HVAC replacement).
3. Financial Implications of Cost Overruns
- Increased Total Investment:
- Base case: $20M renovation + $7.6M purchase = $27.6M.
- 10% overrun: $22M renovation + $7.6M = $29.6M.
- 20% overrun: $24M renovation + $7.6M = $31.6M.
- 30% overrun: $26M renovation + $7.6M = $33.6M.
- Revenue Recovery Challenges: The city projects $1.44M annually ($1M sales tax + $440,000 TGT) from 50,000 bookings by 2027. Break-even timelines extend with overruns:
- $27.6M: ~19 years.
- $31.6M: ~22 years.
- $33.6M: ~23 years. These assume no operating deficits, which is unlikely given the hotel’s history and competition.
- Debt Service Burden: If financed, a $24M renovation (20% overrun) at 5% over 20 years increases annual payments to ~$1.9M, exceeding projected revenues ($1.44M), requiring subsidies or budget cuts. Interest costs alone could rise by $800,000 over 20 years compared to the base case.
- Resale Risk: Overruns increase the total investment, making it harder to recoup costs through resale. A $31.6M investment may not yield a proportional sale price in Topeka’s mid-tier market, leading to losses if the hotel sells for less than invested (e.g., $25M).
- Operating Subsidies: If renovations overrun and revenues underperform (e.g., 20% below projections at $1.15M/year), operating costs (~$5M/year for a 224-room hotel) could create deficits of $3.85M/year, necessitating taxpayer subsidies.
4. Broader Fiscal and Strategic Risks
- Budget Strain: Topeka’s ~$260M 2023 budget is heavily allocated to public safety and infrastructure. A $4M overrun (20%) represents ~1.5% of the annual budget, equivalent to funding ~40 police officers or resurfacing 8 miles of roads. This diverts resources from core municipal priorities.
- Credit Rating Impact: Overruns requiring additional borrowing could strain Topeka’s debt capacity, risking a credit rating downgrade. This would raise borrowing costs for future projects, compounding fiscal pressure.
- Public and Political Fallout: Cost overruns could fuel public backlash, as seen in dissenting council votes (Ortiz, Valdivia-Alcala). Political pressure to “save” the project could lead to further spending, escalating losses.
- Precedent for Risky Ventures: Overruns reinforce critics’ arguments that the city should avoid private sector projects. A failed renovation could deter future economic development initiatives or erode trust in municipal governance.
5. Mitigation Gaps and City Inexperience
- Lack of Contingency Clarity: Industry standards recommend a 10–20% contingency ($2M–$4M) for renovations, but it’s unclear if Topeka’s $20M budget includes this. If not, any overrun requires new funding, likely through debt or budget reallocations.
- Limited Due Diligence: The rushed purchase process suggests inadequate pre-renovation inspections (e.g., structural, environmental assessments). Unknown conditions increase overrun risks.
- Inexperience in Hospitality: Topeka’s lack of expertise in hotel renovations heightens the risk of poor contractor selection, weak oversight, or misaligned upgrades (e.g., over-investing in luxury features for a mid-tier market).
- No Fixed-Price Contracts: Without locked-in contracts to cap material and labor costs, the city is exposed to market volatility. Competitive bidding and early contractor involvement could mitigate this, but no evidence suggests such measures are in place.
6. Quantitative Risk Scenarios
- Base Case: $20M renovation, no overrun.
- Total investment: $27.6M.
- Annual debt payment (5%, 20 years): $1.6M.
- Break-even: ~19 years at $1.44M/year revenue.
- Moderate Overrun (20%): $24M renovation.
- Total investment: $31.6M.
- Annual debt payment: $1.9M.
- Break-even: ~22 years.
- Deficit risk: If revenues are $1.15M (20% below projections) and operating costs are $5M, annual deficit = $3.85M.
- Severe Overrun (30%): $26M renovation.
- Total investment: $33.6M.
- Annual debt payment: $2M.
- Break-even: ~23 years.
- Deficit risk: Deficit rises to ~$4M/year with same revenue shortfall.
- Worst-Case Example: Combined 30% overrun ($26M) and 50% revenue shortfall ($720,000/year) with $5M operating costs could create a $4.28M annual deficit, requiring significant subsidies or asset write-downs.
7. Counterpoint Consideration
Proponents argue that renovations are essential to restore the hotel’s competitiveness, projecting 50,000 bookings and $20M in economic impact by 2027. They claim cost overruns can be managed through careful planning and that the hotel’s strategic value justifies risks. However, the lack of a detailed scope, Topeka’s inexperience, and the hotel’s poor condition undermine confidence in cost control. Optimistic revenue projections do not account for market competition or the high likelihood of overruns, leaving the city vulnerable to financial losses.
Conclusion
Cost overruns are a significant risk for Topeka’s $20 million hotel renovation due to the property’s poor condition, deferred maintenance, supply chain and labor challenges, ambiguous planning, and regulatory complexities. A plausible 20–30% overrun ($4M–$6M) would increase the total investment to $31.6M–$33.6M, extending break-even timelines to 22–23 years and risking annual deficits if revenues underperform. The city’s inexperience, lack of transparent contingency planning, and exposure to market volatility exacerbate these risks. By entering the private sector with a high-risk renovation, Topeka faces potential fiscal strain, diverted resources, and public backlash, reinforcing arguments that the city should have avoided this venture. Robust due diligence, fixed-price contracts, and a clear scope could mitigate risks, but current evidence suggests these safeguards are insufficient.
