|By Douglas Hanks, The Miami
HeraldMcClatchy-Tribune Regional News
May 5, 2008 - South Beach's Royal Palm hotel enjoys a prime location in one of the country's hottest vacation markets, built with a subsidy most developers only see in their dreams.
Why has it been a nightmare for its investors?
Lenders have tried to seize the oceanfront Miami Beach resort from majority owner Guy Mitchell, citing an overdue loan and mismanagement. The suit follows a split among the partners amid allegations the hotel was losing as much as $12 million a year.
"This hotel, quite frankly, has languished," said Gregory Rumpel, of Jones Lang LaSalle Hotels in Coral Gables. "They have not been running this hotel to its potential by any means."
The hotel has suffered from a stormy three years as its new owners faced financial shortfalls, internal strife and the fallout from a failed condo venture.
In part, the key handicap for the hotel -- too much debt -- can be tracked back to the stormy negotiations with city leaders that ultimately netted developer R. Donahue Peebles a reported $48 million profit for building the city-owned hotel.
Key to the windfall was a concession Peebles won from Miami Beach after claiming the city-owned site was flawed, causing costly construction problems. Miami Beach agreed to let him convert about 150 rooms to condo-hotel units, an option that prompted Mitchell and partners to pay a record $128 million for the Royal Palm in 2005.
But the purchase price and an ambitious renovation plan for the units brought a mortgage too big for the room rates that tourists and business travelers are willing to pay there, industry watchers said.
And with the condo market in a meltdown and the condo-hotel conversion stalled, millions in sales revenue never arrived to relieve the monthly debt burden.
"They underwrote the financing based on residential fundamentals which are no longer relevant," said Mark Lunt, a South Florida hospitality analyst for Ernst & Young.
The Royal Palm has another weakness tied to its debt: the lack of a national hotel brand on the front door.
When Peebles opened the Royal Palm in 2002, Crowne Plaza was the operator. Even then, the mid-scale chain catering to business travelers seemed out of place for the prime oceanfront location in a style-setting hotel market.
"In hindsight, we recognize that it was not the best flag for South Beach," Peebles banker Michael Browarnik wrote in a 2004 memo to potential lenders.
But that was the brand Peebles chose as he competed for the hotel against a team aligned with Hyatt. Miami Beach offered the hotel site and a $10 million loan to black developers after facing a tourism boycott over perceived racism in a snub of South African leader Nelson Mandela by county leaders in 1990.
"I've replayed that deal in my mind over the years," said former Miami Beach mayor Neisen Kasdin, who squabbled with Peebles over a different project. "I think a Hyatt would have been much better for the city than a Crowne Plaza. . . . The brand affects the standards you build to."
Peebles says Crowne Plaza made sense for the South Beach he saw in the 1990s, a market where a new large hotel had not opened for 30 years before the Loews debuted next door in 1998. "The Victor was vacant. The Tides was vacant," Peebles said of two posh hotels now commanding top rates on Ocean Drive. "The Loews wasn't built."
Even as a Crowne Plaza, though, Peebles said the hotel made enough money to cover debt on his original $55 million loan. "The property cash-flowed perfectly the entire time we owned it," he said.
But Crowne Plaza rates wouldn't be enough to justify the hefty asking prices expected for the Royal Palm condo-hotel units.
CHANGE OF PLANS
Peebles, who partnered with Crowne Plaza parent Intercontinental Hotels to build the resort, had planned to spend $20 million upgrading the hotel to an Intercontinental. Instead, he sold to Mitchell and partner Robert Falor, then one of South Florida's most prolific condo-hotel converters.
Falor would eventually see his budding condo-hotel empire unravel: Two hotels on Ocean Drive set for conversion, the Breakwater and Edison, went into bankruptcy after a branding deal with celebrity socialite Nicky Hilton fell apart. A condo-hotel conversion at the Mayfair in Coconut Grove also ended in litigation with partners.
There were signs of a cash squeeze early on at the Royal Palm: Peebles wound up keeping a 12 percent share in the hotel after Falor and Mitchell requested a short-term $8.5 million loan to close the deal, and the broker later sued to collect a $500,000 loan she claims Falor and Mitchell needed at closing.
Troubles seemed to mount: A promised conversion to a Hard Rock Hotel never materialized. Neither did the planned Maxim lounge named after the popular men's magazine. Sol Melia was brought in briefly to run the hotel but left before putting its name outside.
Mitchell and Falor seemed to have the cash early on for the upgrades -- they borrowed at least $134 million -- but the improvements were never completed. Meanwhile, debt snowballed: Court filings show a $25 million loan made to the property in 2005 ballooned to $37 million last fall with late penalties and unpaid interest.
HEADING TO COURT
Last year Peebles sued Mitchell and Falor, citing "gross mismanagement" and claiming the hotel posted as much as a $12 million yearly loss. No condo-hotel units had been sold, and renovations were stalled. The suit followed a missed loan payment in the summer of 2007 as short-term mortgages for the conversion came due.
Mitchell ousted Falor and brought in new management, while Falor blamed Mitchell -- who owns roughly 80 percent of the hotel and bankrolled the purchase -- for not allowing the Royal Palm to reach its potential.
"The occupancy has always remained strong at the Royal Palm," Falor said in a statement e-mailed by his brother and business partner, Chris. Room rates "failed to lead the market due to the renovation not being completed, this [was] another item not controlled by [Falor] but by the majority owner and management companies that were in place."
Mitchell has not returned phone calls seeking comment. Carbon Capital II, a fund controlled by investment giant Blackrock, sued Mitchell earlier this month after a $25 million loan came due March 31.
As lawyers battle out that dispute, Mitchell has put the hotel up for sale. Two hotel executives familiar with the offering documents put the price at $220 million.
That's too high for a hotel that's still in need of an upgrade, two brokers said.
But there's no denying the interest in the Royal Palm: Hyatt was on the verge of buying it in the fall before that sale fizzled, and brokers have been fielding calls from deep-pocketed investors eager to gobble up one of Miami Beach's largest hotels.
"I get calls every week about it," said Rumpel, of Jones Lang LaSalle in Coral Gables. "This is one deal nobody has been able to get a hold of."
Given the fighting partners, debt issues and other handicaps, Rumpel thinks the Royal Palm may need to hit bottom before hitting its stride.
"Quite frankly," he said, "I think a lot of people are waiting for this thing to go back to the bank."
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