U.S. Grant Struggling With Debts and Losses

The businessman sat alone on a corner couch of the expansive--and empty--marbled lobby. Too bad more people aren’t staying at the U.S. Grant, he said, but the lower occupancy does have its advantages.

“The restaurant isn’t crowded,” said Larry Margolis, an investment specialist from Sacramento. “You can get an elevator. You can get to the desk . . . .”

While the sagging business at San Diego’s historic downtown hotel is a boon for guests like Margolis, the lack of hustle and bustle has cast a pall of uncertainty over the fate of the Grant, considered to be a key component in the city’s downtown renaissance.

While other pieces of the center city redevelopment puzzle--Horton Plaza, housing, office buildings and other hotels--seem to be coming together, the possible failure of the Grant looms as downtown renewal’s biggest setback to date.

A $79-Million Problem

Today--less than two years after it reopened in December, 1985, to accolades and glowing predictions--the 77-year-old hotel has become a $79-million problem.

Its New York owners haven’t made mortgage payments since February, failed to pay its property taxes in April and the hotel has not paid some of its suppliers since June.

Heavy losses totaling $9 million during its first year, caused by crushing debt compounded by overly optimistic estimates on the number of guests, prompted locally based Atlas Hotels to quit managing the hotel 11 months ago. The owner, a partnership headed by Sybedon Corp., has been unable to find another hotel operator to step in.

To cut costs, Sybedon has laid off a third of the hotel staff, including 45 people let go one night last week. One of its two restaurants, the Garden Room, has been closed down for good and room service has been discontinued to 60% of the hotel’s rooms.

Although the owners say the hotel is in no danger of closing down, they will petition the City Council today to make concessions in the terms of the Grant’s $6-million government loan so that the owners can arrange a quick $1-million infusion from a private lender.

The low-interest Urban Development Action Grant was awarded to the hotel in December, 1984, as part of a federally funded program to aid urban revitalization. At the time, the city cited the prospect of increased downtown employment, tax revenues and the “general enhancement to the downtown area” as reasons for giving approval.

Grant General Manager Chris Venner, who says he needs the new private loan to pay bills and to continue operating the luxury hotel, is confident the City Council will go along with the concession.

“If this little hotel went down, which is truly the only luxury hotel in San Diego, it would say this city does not want to be as sophisticated as it says it does,” Venner said.

At least two council members, however, expressed caution about the Grant’s request. Mayor Maureen O’Connor said the city has “got to take a look at it to see if we’re going to be protecting the taxpayers. I don’t know what the answer is going to be.”

Councilwoman Gloria McColl said she would be “extremely reluctant” to approve the Grant’s request, which would subordinate the $6-million government loan to the anticipated $1-million infusion. The action would, in effect, move the city $1 million further back in the line of creditors if the Grant went under and had to be sold off to pay debts.

“If it looks like by allowing another million dollars is going to include another loss for us, then it is time to decide we should say no,” McColl said.

O’Connor said the Grant’s problems do not threaten downtown redevelopment. The mayor--who owns a hotel with her husband, former Jack in the Box founder Robert O. Peterson, in Mendocino--said the Grant’s owners failed to provide the necessary start-up capital to get the hotel through its lean years.

“It was a great tax deal, but I don’t think it was a great business deal,” O’Connor said, referring to the tax advantages available to the Grant’s owners for historic renovation.

Yet Venner blamed the Grant’s problems on the slower-than-anticipated pace of downtown redevelopment, including the two-year construction delay for the waterfront Convention Center, now set to open in late 1989.

“Even though we are not a convention hotel, (the convention center being open) would have taken other rooms out of the marketplace, leaving us more of the businessmen and tourists coming into town,” said Mitchell Davis, senior vice president of Sybedon.

As it is, the Grant’s target market of luxury business travelers and tourists willing to pay up to $145 per night has proven too thin. Occupancy during its first year was an anemic 40%, below the 60% projected by Sybedon.

While the hotel industry in San Diego was reporting banner occupancy rates citywide of 76.6% through July, the Grant so far this year has limped along at about 52%, far below their own projections of 60% to 65%.

Still, Venner insists the Grant will succeed over the long haul.

“Tell me that this city isn’t to be believed in,” Venner said. “It is to be believed in. The timing just got screwed up, that’s all.”

Financial Hole?

Others disagree, saying that the Grant’s financial problems have more to do with the hotel itself.

They say that cost overruns for renovation, inadequate marketing, too few rooms to attract the right kind of trade groups and meetings, and unrealistic occupancy expectations for the first years have put the Grant in too deep a financial hole.

The hotel’s disappointing performance, heavy losses and loan default raise serious questions about the Grant’s ability to stay open. The hotel could be foreclosed on by Home Federal as early as January, although Venner raised the specter of the owners’ filing a Chapter 11 reorganization plan under the federal bankruptcy code to stave off that possibility.

Barring foreclosure, many tourism and hotel officials say the key question is whether the Grant can hang on until late 1989, when the San Diego Convention Center opens and creates a rising tide of tourism that will buoy the business of all downtown hotels. In the meantime, the Grant will have to slug it out with the recently opened Omni and four other hotels scheduled to open downtown over the next year.

“The real key is can you get from here to when the Convention Center opens?” said a San Diego developer familiar with the Grant’s finances.

Financial distress is a recurring theme in the Grant’s history.

In fact, the Grant opened in 1910 only after Ulysses S. Grant Jr., the second son of the 18th President of the United States, went broke after building the shell of the hotel a year earlier. Two well-heeled investors took it over and completed the furnishing of the structure.

Ownership of the luxury hotel changed hands several times over the years, going through two bankruptcies in a five-year period ending in the early 1970s. The Grant eventually became a run-down ghost of its halcyon days in the 1920s, when doormen with top hats greeted movie stars as they stepped from their cars.

In the 1970s, the hotel became a retirement home, charging $250 a month. The bar, called Grant’s Tomb, featured paintings of nude voluptuous women. Outside, downtown was going to seed as businesses moved to Mission Valley, leaving the center city to sailor bars and tattoo parlors.

The hotel was in an advanced state of dilapidation when San Diego developer Christopher Sickels bought the building in 1979 from Joseph Drown Foundation and Peterson. Sickels bought the land in 1983, paying $10 million for the property.

Costly Repairs

Sickels, a former schoolteacher who got rich building houses and apartments, had planned to spend only between $10 million and $15 million on a cosmetic refurbishment, said a San Diego developer familiar with the Grant’s finances who asked not to be identified.

Once the repairs began in earnest, however, Sickels was in for a shock.

After tearing down walls, he discovered that the building lacked “structural integrity” and that its load-supporting pillars and beams would have to be replaced. What followed was a “gut rehabilitation” that cost a whopping $64 million. A Sickels associate said that the only original part of the hotel that remained after the rehabilitation were the four exterior walls.

The high costs forced Sickels to look for an investment group to take over.

Sybedon Corp., a New York real estate investment company specializing in historic rehabilitations of large hotels, bought the Grant in 1984 for $79 million. Through underwriter Prudential-Bache, Sybedon raised $30 million in cash through the sale of 300 partnership shares costing $100,000 each. Many of the investors were San Diegans.

The Sybedon group also took on nearly $50 million in debt, including a $6-million first mortgage held by the Drown Foundation, a $32-million Home Federal second mortgage, a $6-million Urban Development Action Grant loan from the city, and about $6 million owed to Sickels.

Sybedon chose Atlas Hotels, owner of the Town & Country Hotel in Mission Valley and 10 other hotels, to run the Grant. “(Sybedon) figured it was a logical choice. For them not to operate it well, they would embarrass themselves in their own home town,” said the San Diego developer.

Image Problem?

But a hotel consultant with Pannell Kerr Forster, a national accountant firm with an office in San Diego, said the image of Atlas wasn’t a good fit for a luxury hotel like the Grant. Consultant Karen Johnson said Atlas was too closely identified with the “mid-market” Town & Country Hotel to appeal to a more exclusive clientele.

Corporate meeting planners may have formed a “perception of the Grant based on who was managing,” Johnson said.

Image aside, the Atlas marketing program before the Grant reopened in December, 1985, was not strong enough, Venner and other observers said.

“I don’t blame Atlas,” said Venner. “It’s not as simple as that. Certainly, we didn’t pre-market a hotel the way it should be marketed, slowly building up confidence.”

Atlas Hotels President Bob Richards, however, disagreed. He said his company spent “millions of dollars” promoting the hotel and that the Grant received plenty of publicity through newspaper articles prior to and during its opening .

Richards said the hotel’s main problem is that it cost too much money to develop, evidenced by its cost to Sybedon of $280,000 per room. Based on what the Grant is charging for rooms--its average daily room rate is currently about $105--the cost should have been less than half that figure, Richards said.

“We penciled it out that the hotel would have to charge between $150 and $175 per night to make it. But that room rate is some years away from being attainable, possibly after the convention center opens,” Richards said.

Why, then, did Atlas agree to operate the Grant when it knew that economically viable room rates were beyond its reach? “At the time we agreed to it, inflation was going on and room rates were going up 10% to 12% per year. The whole thing was based on (the assumption of continuing) inflation and, as we all know, that has died,” Richards said.

Off to Slow Start

Whatever the reasons, the hotel got off to an abysmal start and was only 40% full its first year. As a result of its losses, the $5 million letter of credit that Atlas and Sickels put up to help guarantee payment of the Home Federal loan was used up the first year. An additional $4 million in red ink brought the hotel’s first-year loss to about $9 million.

In November, 1986, Atlas threw in the towel and walked away from managing the Grant.

Ever since, Sybedon has operated the hotel itself as it has looked for a replacement for Atlas. And while the hotel’s occupancy so far this year is up, it’s significantly less than hoped for. Venner, citing the hotel’s drastically reduced staff and services, said it will lose $800,000 this year on operations, not counting the $5.3 million annual mortgage payment owed to Home Federal.

Sybedon has not paid Home Federal since February, and was $2.8 million in arrears by the time the institution filed a notice of default in late September.

In addition, the Grant failed to pay a $259,000 property tax bill in April, prompting the county to slap a tax lien against the hotel in June. The county could auction off the property in five years if the lien is not removed.

Since June, some of the Grant’s suppliers have gone unpaid, said Venner, who said he couldn’t disclose how much is owed or to whom. Many suppliers now insist on cash payment on delivery, he said.

Venner also said he’s been forced to trim the hotel staff dramatically. Of the 353 employees working at the hotel when it reopened, only 221 remain. Most recently, the hotel cut 30 people on Oct. 1, and another 45 last Tuesday.

Venner, who has been hotel managing director since it opened, also plans to leave the Grant. He’s accepted a new job with San Diego hotel development firm Seaport Manfred. But he says he will stay with the Grant until a new operator is found.

Status in Jeopardy

Hotel experts say the Grant’s staff cuts jeopardize its status as a luxury hotel. Ronald K. Watanabe, also of Pannell Kerr Forster, said luxury hotels typically have a ratio of one or more employees per room. The Grant’s ratio is now 0.8 employees per room, about the same as a Holiday Inn. The staff cuts are bound to negatively affect the Grant’s quality of service, he said.

Despite the cuts, Venner said he still considers the Grant a luxury hotel and has no plans to cut room rates. Some of the staff will be hired back, he said, if Sybedon gets its infusion of $1 million, which Home Federal has agreed to provide.

One of the conditions that Home Fed has set before it lends the $1 million is that the amount be added to the existing Home Federal mortgage, a request that would mean the city has to subordinate the payback of its $6-million UDAG grant to the new funds.

The city’s loan is already on shaky ground. A city manager’s report earlier this month recommending the approval of the loan subordination says that because the “value for the existing hotel (is) less than the existing debt load of $41.2 million senior to the city’s note . . . the city’s debt would probably not be covered in foreclosure.”

Sybedon paid $79 million for the structure three years ago, but a city Property Department official said he was told by Sybedon officials that the hotel may only be worth $35 million today.

Venner said the $1 million is only a stop-gap measure. The long-term solution, he said, is to find a new hotel operator that is willing to invest money to help build 96 new rooms on top of the Grant’s parking garage, an addition that would make the hotel more appealing to larger groups.

“(The $1 million infusion) gives us time to find somebody that we want in this hotel,” said Venner.

Sybedon, however, has been searching for just such an operator-investor for a year without success. And Palo Alto-based hotel developer Jack Bariteau said the trend among hotel management firms these days is not to invest in properties. “I don’t think the odds are that great” that Sybedon will find such an operator, Bariteau said.

Hugh Scott, a principal in GUS Enterprises, a San Francisco-based hotel company that owns and operates several Sheraton hotels in the Bay area, said an operator’s willingness to invest in a property depends on whether it’s a healthy property.

“When you have a good piece of property, people will pay to be a part of it. When you have a losing proposition, you have to pay an operator to get in there,” Scott said.

Told that the Grant’s development costs were $280,000 per room, Scott said the project would have to undergo a “major refinancing to bring down the value” before it can attract a credible operator-investor. “You’re going to have to get rid of a lot of the debt,” Scott said. “This sounds like a tough one.”

Meanwhile, signs of the Grant’s financial distress are not lost on its customers.

“I never saw anyone on my floor,” said Kerry DeRochi, a reporter from the Virginian-Pilot in Norfolk who stayed at the Grant three nights in early September for an assignment.

“There was never anyone else waiting for an elevator with me,” she said. “It wasn’t like a bustling hotel or anything.”

DeRochi said she also had problems with the service. Grant employees forgot to give her a 6:30 a.m. wake-up call for an 8 a.m. appointment and forgot to deliver a newspaper to her door, she said.

When DeRochi paid cash for her room in advance, the Grant management also asked her to put up an additional $50 a night as a “deposit . . . in case I had a wild party in my room,” she said.

“I told them I would stay there one night and leave, and they went back on what they said,” DeRochi said.

But Bruce A. Race, a government consultant from San Francisco who stayed at the Grant last week, said he thought the hotel was “quiet” and “elegant.”

“This is a flagship hotel downtown,” said Race, whose company has been hired by the City of San Diego to study the possibility of building a new city administration building. “Historically, it is important.

“It would be a shame if it can’t make it,” he said.