A city-hired consultant has determined that it is reasonable for a hotel project to be offered public subsidies.

The consulting firm also said the developers of the proposed Oread Inn project at 12th and Indiana streets are correct in contending that the hotel needs to be seven stories tall to be financially feasible.

City commissioners, though, will get the final say Tuesday night. Commissioners are scheduled to debate a variety of issues related to the project proposed to be built at the edge of the Kansas University campus. The $37 million project proposes 92 hotel rooms, 14 condominiums and an underground parking garage.

The project was getting a favorable review from key city staff members on Friday. A major reason why is a change in how the city is being asked to financially support the project.

Originally, the development team – which is made up of executives of Lawrence’s Gene Fritzel Construction Co. – had asked the city to issue bonds for up to $11 million worth of parking and infrastructure work. Increased tax revenues generated by the project would be used to pay off the bonds, with the developers promising to cover any shortfall.

Now, developers say they will privately finance all $11 million worth of improvements. The city would then reimburse the development for the costs, as long as the increased property tax and sales tax revenue from the project is sufficient to do so.

“There was just this whole public perception and sentiment about what we were asking from the city, that it became a lot easier for us to just say forget the bonds,” said David Longhurst, a member of the development team.

City Manager David Corliss said he thought the new proposal would be simpler for the city and more clear that the city was not accepting any financial risk with the project.

“It makes it more favorable for the city,” Corliss said.

At Tuesday’s meeting, commissioners will review a pair of reports prepared by Springsted, the financial consulting firm, to examine whether it was feasible to grant the use of tax increment financing and a transportation development district for the project. Both devices allow the city to direct new tax revenues created by the project to related infrastructure and parking work.

In short, the feasibility studies found that the project is expected to produce enough new tax revenue to pay for $5 million worth of the $11 million in parking and infrastructure improvements. The developer would have to use private money to pay for the remaining $6 million.

But the feasibility study also determined that the public incentives weren’t necessary to make the project profitable. The study found that the internal rate of return for the project without the use of subsidies would be 5 percent to 10 percent per year for a 10-year period. With the public incentives, it would grow to 8 percent to 13 percent per year.

The authors of the report, though, said the subsidy could be justified because the 5 percent to 10 percent rate of return was below the average return expected for a hotel project. According to industry averages, the average rate of return is 9 percent to 14 percent.

City commissioners will have to decide whether they think boosting the rate of return on the project is a valid use of the incentives. Corliss said a case could be made that it would be a good use. He said that many of the $11 million in proposed improvements are not legally required as part of the hotel project. He said developers are willing to pay for a bulk of the infrastructure work – which includes the realignment of an intersection, improved sidewalks and additional street landscaping – because they believe it would improve the area surrounding the hotel.

The use of public subsidies, though, has drawn some public opposition.

“These type of subsidies were intended to go into areas of true poverty and high unemployment. Areas that no one wants to touch,” said Dacia McCabe Maher, a Lawrence resident who has started a petition drive against the project. “That isn’t the case here. This is a prime piece of real estate.”

Historic preservationists have had concerns about the height of the project, and the city’s Historic Resources Commission was unable to recommend its approval for that reason.

The feasibility study, though, found that reducing the size of the hotel to six stories would cause the annual internal rate of return to fall to 4 percent to 7 percent, which is well below the market average.