A SPECIAL REPORT : Kareem’s Financial Crisis : Balboa Inn Goes From a Landmark to a Major Liability

The Balboa Inn was an elegant landmark in the 1930s and ‘40s when movie stars such as Gary Cooper, Humphrey Bogart and Cary Grant pulled up in their luxury cars, danced at the old Rendezvous Ballroom next door, then slumbered in their rooms at the inn.

The two-story hotel and its tower also served as a beacon along the Newport Beach coast for rum-runners bringing in illegal liquor during Prohibition. In its walls, workers on a remodeling job once found a stash of counterfeit money.

But despite extensive renovation, the Balboa Inn apparently has seen its best days.

Far from the freeways and lacking adequate parking, the inn is expensive to operate. No one has learned that lesson more than the ninth owner in its 58-year history--the limited partnership headed by professional basketball stars Kareem Abdul-Jabbar of the Los Angeles Lakers and Ralph Sampson of the Houston Rockets.

The 34-room structure at the foot of the Balboa Pier was to have been the jewel in the crown of hotel and restaurant investments that one-time business manager Thomas M. Collins was putting together with borrowed money for himself and 10 of his clients, including Abdul-Jabbar, Sampson and six other current or former professional basketball players.

Instead, it became a sinkhole in which the partnership lost the $4.2-million purchase price and nearly $2.55 million more in cost over-runs for the renovation. In addition, the partners now have to pay taxes on $859,000 that they had taken in 1985 as tax credits related to the project.

Owing about $5.7 million, the partnership, Balboa Improvements Ltd., filed a petition in U.S. Bankruptcy Court in Santa Ana Oct. 20 to reorganize its debts. The debts did not include an unsecured $1.8-million loan the partners, as individuals, had taken out for down payment on the property. The hotel, the partnership’s only significant asset, was never appraised at more than $6.8 million, according to partnership financial records.

Of the ventures that went sour for the athletes, the hotel was one of three Orange County properties providing the major headache for the investors. The neighboring Bank Restaurant, which has never opened, carried a $1.9-million debt last fall, including the $1.2-million purchase price. The Inn at Laguna in Laguna Beach, which went into bankruptcy last month, carries a $6.3-million debt.

On Feb. 19, the Balboa Inn’s bankruptcy petition was converted into a liquidation proceeding, paving the way for a foreclosure sale 12 days later.

The hotel failed to bring the minimum bid of $2.74 million at the March 3 foreclosure sale, and the property reverted to previous owners Chien Shan (Sherman) Wang and his wife, Huei Yu Wang.

“It’s a gorgeous structure with a wonderful view,” a former hotel employee said. “How could 11 limited partners allow this to slip through their fingers?”

That the building went to a foreclosure sale was “a tragedy that never should have happened,” maintains John Glenn Mangun, owner of Merlin Management Ltd., a Huntington Beach firm hired by the partnership last fall to find a buyer.

The Merlin firm founded First Wellington Las Casitas Associates Inc. in Costa Mesa, which was assembling a hotel chain and agreed in November to buy the Balboa Inn for $5.75 million. Even though the deal would have been up to the bankruptcy court to approve, a majority of the partners rejected it.

“The limited partners may have gotten greedy,” Mangun said. “They were hoping for a higher price because a Texas investor was talking about bailing them out.”

They also wanted to avoid losing their income tax benefits and paying taxes on their 1985 write-offs, he said.

First Wellington came back with a second proposal Feb. 4 that would have allowed the limited partners to recoup most of their losses and stay on as part owners until 1991 when their tax benefits would have been fully realized. Abdul-Jabbar and Sampson, for instance, had written off more than $191,000 each but those write-offs required that they keep the property for five years.

David Semas of First Wellington said he was never able to get through to Abdul-Jabbar’s lawyers, to partnership operators or to the bankruptcy lawyer for the partnership, Michael J. Bartlett of Laguna Hills.

“We’d keep calling and leaving messages, but nobody would get back to us,” Semas said.

According to Leonard Armato, one of Abdul-Jabbar’s lawyers who also acts as his spokesman, however, the Balboa Inn, was a “top priority” for Abdul-Jabbar’s lawyers, and any telephone calls on the property were acted on “immediately” by handling callers directly or referring them to Coldwell Banker, the broker and marketing agent for the property.

The second proposal was sent to the partnership’s on-site manager and to lawyers for each of the limited partners, according to a written statement filed in bankruptcy court by John H. Malmrose, another of Abdul-Jabbar’s lawyers.

The statement said that Malmrose had talked to Bartlett at least three times and that he thought Bartlett was going to present the plan--which included $400,000 for unsecured creditors--to the court.

Bartlett said that the first proposal was presented to the bankruptcy court, despite the limited partners’ rejection, and the court had given the partnership until the end of February to complete the deal.

The second proposal was made too late to be completed by the deadline, he said, and did not contain enough information he thought necessary to persuade the court to extend the deadline. No one, for instance, was willing to continue the monthly $26,000 interest payment to the Wangs to stall the foreclosure, he said.

Bartlett said he also converted the reorganization to a liquidation because the only representative of the partnership who was managing the property had walked away after he was named in the suit Abdul-Jabbar had filed against Collins and others.

Such an ignoble end to the partnership had certainly not been foreseen two years ago, when Collins was negotiating with the Wangs to buy the Balboa Inn. The hotel had fallen into disrepair but Balboa Improvements Ltd. had big plans.

Those plans called for a remodeled hostelry with new concierge service, more meeting space, more retail space, a lobby and improved rooms. There were to be some “owners’ suites” with larger doors, higher ceilings and longer beds to accommodate the athletes and other very tall patrons.

The partners also planned to replace the hotel’s Mexican restaurant, which reportedly was doing $1.3 million a year in business, with an upscale place for the coat-and-tie set. The higher-priced fare at what was eventually called The Grill was projected to bring in $2 million a year, according to a feasibility study Collins commissioned.

“It looks like Tom picked a winner this time,” Abdul-Jabbar was reported to have said as he toured the facility at the time. Neither he nor Collins would discuss the Balboa Inn deal for this story.

To buy the hotel, the limited partners took out an unsecured loan from the Bank of California to make the $1.8-million down payment. The Wangs agreed to hold a second mortgage for the remaining $2.4 million on the purchase price. The partners also took out a $2.4-million construction loan, giving Lloyds Bank a first trust deed.

Abdul-Jabbar and Sampson each owned a little more than 19% of the partnership. Alex English of the Denver Nuggets and Terry Cummings of the Milwaukee Bucks each had a 12.75% interest. Owning less than 5% each were Collins; Ricky Sobers, a former player with the Phoenix Suns; former Laker Charlie Scott; Brad Davis of the Dallas Mavericks; Rudy Hackett, a former New York Net who now plays professional basketball in Italy; Tustin management consultant Danny Cox; and Joni Eareckson Tada, a quadriplegic who illustrates religious books with a pen clenched in her teeth. Tada’s husband, Ken, a high school teacher, joined his wife in the investment.

“They were 11 individuals who were rarely ever in the same time zone,” a former hotel employee said.

The limited partners hired an offshoot of the successful Griswold’s Hotels in Claremont and Fullerton to manage the inn and oversee the renovation. The company, Griswold’s Development Corp., became the general partner of Balboa Improvements Ltd. and got a 15% ownership interest.

Griswold’s was headed by Raymond L. Sanford, son of the Griswold’s Hotels owner. Sanford also formed Griswold’s Hotel Services, which managed the hotel and, later, the Inn at Laguna.

Sanford’s group included George P. Auger, a former accountant with Sanford’s father’s hotel company, and James B. Salter, a former owner of the Balboa Fun Zone, whose bid to turn the amusement area near the Balboa Inn into an office and commercial center ended in a series of lawsuits in 1983.

Sanford, Salter and Auger refused to talk about their roles in the management of the Balboa Inn.

Renovation started shortly after the partnership had bought the hotel in April, 1985. The rooms were closed for most of the rest of the year and retail shop owners tried to continue operations despite the construction and what half a dozen former hotel employees and business tenants said were efforts by Sanford, Salter and Auger to get rid of them.

Newell and Carolyn Chesterton, who operated Chesterton’s Famous Cone in one of the inn’s retail units, said that Salter told them he wanted them out so their space could be turned into a hotel conference room. They said they were told that if they stayed, they would have problems.

They stayed--for a while. During that time, they said, benches in front of their shop were taken out, a load of dirt was piled in front of the shop, and their ceiling collapsed, apparently damaged by water from a broken pipe.

In August, 1985, the Chestertons agreed to sell their lease to the partnership. They said they are still owed $46,000, including interest.

The renovation was nearly complete in November, 1985, when limited partner Hackett held his wedding there.

Then finally, at the end of the year, the inn was ready. Abdul-Jabbar and other partners attended a number of openings, including a gala event at The Grill, the expensive new restaurant.

But the seeds of financial ruin were already in place, according to former employees, business records and bankruptcy documents:

--Cost over-runs on the renovation amounted to $500,000, the partnership paid $200,310 in interest as part of $865,000 in expenses in its first eight months, and the hotel was in the middle of its slow season when barely half the rooms were occupied. The result was a lack of operating capital. Sampson provided a $40,000 loan to meet daily needs.

--The sparkling facade belied some shoddy work inside. One drain often backed up, once spewing raw sewage into the kitchen; a sink drain was never connected properly, dumping water waste into a five-gallon bucket. A screaming female guest was found holding onto a sink in her room trying to prevent it from falling--with pipes attached--from the wall. New brass faucet handles in guest rooms were breaking off, and Jacuzzis in four rooms were so noisy that they sent vibrations through the structure.

--The lack of capital left little money for advertising and promotions. No brochures, for instance, were ever printed.

--Sanford, who left in July when there was no money left to pay salaries, and Auger, who took over, went through five hotel managers in one year.

--The Grill proved to be a disaster, losing an estimated $20,000 a month until it was closed at the end of July. Griswold’s, apparently following the feasibility study, didn’t realize until it was too late that area residents, who had supported the casual Mexican restaurant, did not want to wear suits and dresses to a beachfront dining room.

In addition, the limited partners were not getting detailed financial information they had been asking for, according to a former hotel employee who fielded calls from them.

Griswold’s has claimed that it provided all the information Collins sought on behalf of the limited partners, and Collins had provided his clients with summary monthly financial statements, though he was behind on getting many of them out.

Griswold’s made recommendations for the athletes to put more money into the hotel, but after Abdul-Jabbar left the partnership, one Griswold’s insider said, the remaining partners could not agree on much of anything, and the recommendations went unheeded.

The limited partners were not exactly strapped for cash because they were using money borrowed on the strength of their earning capacities, or more appropriately, the earnings of the major stars--Abdul-Jabbar, Sampson, English and Cummings.

Yet they had spread themselves thin. All or most of them had bought the aging, 13-story Hotel Redmont in Birmingham, Ala., and one of two Tony Roma’s restaurants in Texas within a matter of days in late 1984. After buying the second Tony Roma’s in March, 1985, and the Balboa Inn in April of that year, they picked up the Bank Restaurant three months later and the Inn at Laguna that December.

As with the Balboa Inn purchase, the Bank of California provided the down payments through unsecured loans for the Bank Restaurant and the Inn at Laguna. When the last loan came up, the bank and Collins, who had power of attorney for his clients, agreed to wrap the three loans on the Orange County properties into one $4.05-million loan.

The consolidated loan made everyone jointly and individually liable, which meant that in case of default, the bank could seek full repayment from any one or more of the players.

Because he earned the most and lived nearby, Abdul-Jabbar would have been the easiest target for the bank, said Armato, an attorney for Bushkin, Gaims, Gaines and Jonas, the Century City law firm that has represented Abdul-Jabbar since he severed his relationship with Collins in January, 1986.

Abdul-Jabbar’s lawyers were angry after learning about the consolidated loan. Abdul-Jabbar had signed the note and apparently never knew or never realized that it also covered the Inn at Laguna, a purchase he had not been part of.

Abdul-Jabbar sued his former business manager and others last fall for $59 million on a variety of complaints involving 11 investments, including the three Orange County partnerships.

Although the partnerships for the two Orange County hotels have gone bankrupt, the partnership for the Bank Restaurant is still operating, though its future is doubtful.

The partners leased the premises to a company that is two-thirds owned by Griswold’s Development Corp., the general partner in all three Orange County investments. Griswold’s has been unable to obtain a liquor license for the restaurant, lawyers and investigators said.