Paradise Lost for Wealthy Resort Novice
By Kris Hudson
The Wall Street Journal
December 7, 2009
ANGUILLA, British West Indies -- Robert Sillerman amassed a billion-dollar fortune buying and selling media and entertainment companies. Among his most successful deals: the purchase of television franchise "American Idol."
Mr. Sillerman's winning streak ended on an alluring stretch of beach on this tiny Caribbean island.
His luxury hotel, condominium and golf resort here, Temenos, languishes half-built and out of money. "American Idol" creator Simon Fuller and novelist Dan Brown, among others, have put down deposits on million-dollar villas. It's not clear when or if their vacation homes will be completed.
"I do feel remorseful, and I do feel regret," Mr. Sillerman said in an interview at his Manhattan office. He said he no longer expects to recoup the $180 million he personally invested in Temenos. "I think that I exhibited an element of hubris," he said. Resort development "was not my area of expertise by any stretch of the imagination."
For some ultrawealthy Americans like Mr. Sillerman, trophy hotel investments made during the real-estate boom have turned into major burdens.
Some newly opened properties aren't generating enough cash to cover operating expenses. Construction of others is being halted as lenders and investors pull out. During the first nine months of the year, developers postponed or canceled 43 luxury hotels totaling about 9,300 rooms in the U.S. and the Caribbean, according to research firm Lodging Econometrics.
While veteran hoteliers are accustomed to booms and busts, the newcomers are getting a sobering lesson in the risks of owning and developing high-end lodging, which has been hit hard by the real-estate bust.
An investment group headed by Dell Inc. founder Michael Dell teamed with Rockpoint Capital LLC to acquire the Four Seasons Hualalai in Hawaii in 2006. Since then, the 243-room hotel's annual cash flow has fallen to $7.9 million, from $20.6 million, and its occupancy rate declined by 33 percentage points to 54%, loan documents indicate. A hotel executive says part of the decline was due to a renovation that temporarily closed some rooms.
Ty Warner, the Beanie Baby mogul, might lose his slumping Four Seasons New York and three other luxury hotels to foreclosure unless he can land a one-year extension on the properties' $345 million securitized mortgage, which comes due Jan. 9, according to credit-rating company Realpoint LLC.
Microsoft Corp. founder Bill Gates has run into several problems on the hotel front. In 2007, his personal investment company teamed with Saudi Prince Alwaleed bin Talal to acquire Four Seasons Hotels & Resorts, which manages 82 luxury properties, for $3.4 billion. Since then, revenue per available room at those properties is down 25%. In addition, his investment company is foreclosing on the 582-room Terranea Resort in Palos Verdes, Calif., which defaulted on a $110 million loan from Mr. Gates's firm shortly after opening in June.
EBay Inc. founder Pierre Omidyar is a major investor in Montage Hotels & Resorts, which owns two luxury hotels in California and one about to open in Utah. At its new Beverly Hills boutique hotel, occupancy is running about 60%, and only four of its 20 residences have sold so far.
Years ago, most large hotels and resorts were owned by companies such as Hilton Worldwide Inc. and Marriott International Inc. But in the late 1980s, the big hotel companies began selling off their properties to focus on managing and operating hotels owned by others.
Wealthy investors sometimes view high-end hotels and resorts as a way to highlight their personal approaches to luxury living, says Jim Taylor, vice chairman of the Harrison Group in Waterbury, Conn., which tracks the spending and investing habits of the wealthy. "It's a business...where they'd have a distinctive idea of what works," he says. "There's also ego value in ownership of a hotel."
The industry is now in a major slump. Since 2007, revenue per available room at North American luxury hotels, including in the Caribbean, dropped 26%, to an average of $141.58, according to Smith Travel Research. That compares with an 18% decline to $56.53 for all U.S. hotels. This year, occupancy rates at North American luxury resorts have declined 10 percentage points to 60.3%, outpacing the eight-point slide for all North American hotels, according to Smith Travel.
Potentially making matters worse, luxury hotels begun in the final years of the boom are now being completed, adding to the supply. "I think we're looking at seven to 10 years before luxury can get back to where it used to be," says Bjorn Hanson, an associate professor of lodging at New York University.
Mr. Sillerman also has problems in Las Vegas, where one of his companies bought 18 acres on the Strip to build a casino-hotel. The project never got started, its $475 million mortgage is in default, and the land is slated to be auctioned as part of a prepackaged bankruptcy filing.
Prior to diving into the hotel industry, Mr. Sillerman had a sterling track record building businesses and selling them. A slender, balding 61-year-old with a thick mustache, he speaks in a halting rasp due to a battle with cancer in 2001.
Mr. Sillerman, a New York native, started buying radio stations in the 1970s, teaming up on some deals with disc jockey "Cousin Brucie" Morrow. Over the next two decades, he bought many radio and television stations. In 1998, he sold his 120-station company, SFX Broadcasting, to Capstar Broadcasting Corp. for $1.2 billion. "It's hard to script anything that went better than SFX Broadcasting," he says.
He then began expanding a business that bought concert venues and music-promotion companies, betting that greater scale would give him more clout in booking pop and rock musicians. He sold that company, SFX Entertainment, to Clear Channel Communications Inc. in 2000 for $3 billion.
He even had good luck on Broadway. After meeting entertainer Mel Brooks in 1998, Mr. Sillerman agreed to chip in $2 million to help finance Mr. Brooks's "The Producers." The musical went on to become one of the highest-grossing productions in decades.
Mr. Sillerman formed his latest venture, CKx Inc., in 2004. It spent $100 million for an 85% stake in Elvis Presley Enterprises, which includes management of Graceland, the late singer's Memphis, Tenn., estate. He bought the marketing rights to boxer Muhammad Ali's name. In 2005, after the third season of "American Idol," CKx bought 19 Entertainment, producer of that hit program and the dance-competition show "So You Think You Can Dance," for $190 million. Its shows and related business lines generated $224 million in revenue and $75 million in operating income for CKx in 2008, the company reports.
Jonathan Knee, a former banker at Goldman Sachs Group and Morgan Stanley who has negotiated with Mr. Sillerman, says the investor has an "incredible instinct for good business" and always was careful not to let star power influence entertainment-business decisions. "My guess is real estate is an area that requires some industry-specific knowledge," Mr. Knee says. "And I'm not aware that that was Bob's particular expertise."
Mr. Sillerman first set foot on Anguilla in 1982, and over the years, visited often, completing a home there in 2007. The island -- a small, flat area of limestone, coral and scrub vegetation -- has a population of only 14,000. Its pristine beaches and coral reefs don't draw as many tourists as other Caribbean islands.
Anguilla's government has positioned the island as a destination for wealthy vacationers, restricting the size of resorts to little more than 150 hotel rooms. A handful of luxury retreats dominate the tourist trade, including the 102-unit CuisinArt Resort & Spa opened in 1999 by Leandro Rizzuto, owner of the Cuisinart and Conair Corp. home-goods brands.
In 2002, Mr. Sillerman proposed to Anguilla's government that he build the island's first golf course. Anguillan Chief Minister Osbourne Fleming suggested that Mr. Sillerman build a five-star resort to accompany the course. The politician envisioned the resort providing 500 permanent jobs and hundreds of construction jobs. He committed to waive taxes on imported furnishings and building materials for the hotel.
Mr. Sillerman pitched the idea to Flag Luxury Properties LLC, a hotel developer in which he is an investor. Flag Chief Executive Paul Kanavos warned him that hotel development in the Caribbean is risky, often hinging on the whims of local governments, recalls Mr. Sillerman. In addition, since most building materials and labor have to be imported, developments in the Caribbean often take twice as long to build and cost at least 30% more than in the U.S.
Messrs. Sillerman and Kanavos decided to proceed despite the risks. "I guess it was a combination of wanting to do even more for the island and believing it would be a productive investment," Mr. Sillerman says.
Mr. Fleming's government cobbled together 200 acres to lease for Temenos and its golf course, and Flag purchased an additional 80 acres. Construction started in 2005. Some of the 78 planned villas and estate homes sold to Mr. Sillerman's friends and associates, including to Mr. Fuller, the "American Idol" creator, and Mr. Brown, author of "The Da Vinci Code." According to Flag, by last year, three-quarters of the units were under contract, with buyers paying deposits of up to 30%. The golf course and clubhouse opened in 2007.
The developers planned a 32-unit hotel, to be run by Starwood Hotels & Resorts Worldwide's St. Regis brand, with nightly rates from $900 to $1,500.
Temenos -- a Greek word meaning sanctuary -- was soon beset with problems. Fuel and freight costs rose sharply during construction. Building-material costs rose by 30% from 2005 to 2007, says Flag's Mr. Kanavos.
Anguilla had stipulated that first consideration for construction jobs go to Anguillans. Mr. Kanavos says that requirement led to labor shortages and inefficiencies, which produced delays. Flag didn't get the government's permission to import workers until two years after construction began, he says. Anguilla also required that construction equipment be leased from local companies, which Mr. Kanavos says added millions of dollars to costs.
Mr. Fleming, Anguilla's chief minister, denied in an interview that government construction guidelines had led to the cost overruns. "There were deficiencies" in Flag's planning, he said, declining to elaborate. Flag officials note that the company has completed construction of several U.S. resorts on time and on budget.
St. Regis, the Starwood Hotels brand, demanded an expansion of the resort's manor house, slowing development further. St. Regis pulled out of the project in November 2007, and was replaced last year by Baccarat Hotels & Residences, a luxury-hotel brand launched by Barry Sternlicht, Starwood's former chief executive.
With costs mounting, Flag turned to Mr. Sillerman repeatedly to contribute more capital, asking for $5 million to $10 million each time. Mr. Sillerman says he met many of the requests, but eventually stopped. "I had to adopt a more objective approach to it," he says. "It seemed like there was no end to the requests, and the best choice was to reorganize" by seeking outside investors.
Mr. Sternlicht's Baccarat pulled out, citing the project's failure to land additional financing. Mr. Sternlicht sued Mr. Sillerman in New York state court in June, seeking to recoup $25 million his company invested. Mr. Sillerman denies that he owes that money.
Recently, Mr. Sillerman paid $21.4 million to satisfy a personal guarantee on the resort's $180 million mortgage, which is in default, adding to the $180 million he already has sunk into it.
The golf course, designed by Greg Norman, has closed. Flag estimates that up to $120 million more is needed to complete construction of the resort. But after more than a year of searching, Flag and Mr. Sillerman haven't yet found new backers.
With the project stalled, it hasn't produced the expected local jobs and tax revenue. That contributed to Anguilla's need to make spending cuts such as reducing government salaries by 5% to 15%, Mr. Fleming says.
"That project was the most important project Anguilla ever had," Mr. Fleming says. "Every person in Anguilla has been affected negatively by its nonperforming."
Mr. Sillerman says Temenos eventually will be completed. "I'd like to get it finished, more for the villa owners and the people of Anguilla," he says. "I've long since written off any possibility of getting my money back."
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