Arizona Hotel Exemplifies Lincoln S&L;’s Extravagance

What’s bizarre about the upper-class Phoenician Hotel here is that everything appears so normal.

Nestled at the base of Camelback Mountain, a Phoenix-area landmark, the hotel reeks of elegance and money, from its $25-million art collection to afternoon teas that are served in the marble-floored main lobby. Daily fact sheets provide each guest with weather reports and hotel activities.

The still waters are deceptive.

The Phoenician is the erstwhile crown jewel of Charles H. Keating Jr., the controversial Phoenix businessman who stands as the center of the storm over the massive taxpayer bailout of the savings and loan industry.

Financed by Keating’s Lincoln Savings & Loan in Irvine, the hotel represents one of the excesses of the thrift industry in the 1980s, a period when many thrifts went from mortgage lender to real estate developer, often with poor results.

Although many in Phoenix rave about the resort’s beauty and style, some hotel consultants believe that the Phoenician is a financial white elephant doomed to unprofitability because it was far too expensive to build. The complex cost almost $300 million, government figures show.

The hotel, which has more than 600 rooms on 130 acres, would have to charge about $500 a night to make money, according to estimates by Richard A. Warnick, partner in the Phoenix office of Laventhol & Horwath, an accounting firm.

That’s more than three times the average room rate in the luxury hotel market in the Phoenix area. “At that price, they won’t make money in my lifetime, and I’m not that old,” said Warnick, who is in his early 40s.

Keating disputed that reasoning, however, saying in an interview that the outside consultants were “absolutely dead wrong.” He maintained that the hotel was already making enough money to pay its operating expenses and had potential for great profit if sold in a few years.

Keating’s real estate and banking empire collapsed in 1989 after years of bitter feuding with the bureaucrats who regulate the nation’s thrift industry. Keating’s development company sought refuge in bankruptcy court, and Lincoln Savings was seized by government savings and loan regulators as part of what’s expected to be the costliest thrift failure in U.S. history.

Federal agents delivered the final indignity Nov. 16, when they ousted Keating and his cohorts from management of the hotel during a pre-dawn raid that was barely noticed by the guests.

Government regulators are now faced with the formidable task of finding a buyer for the hotel. One possible acquirer is the Kuwait Investment Office, which already has a 45% interest in the property.

The hotel was plagued by building revisions and luxurious excesses that added millions of dollars to its eventual cost, according to those familiar with its construction. The building changes were usually mandated by Keating and his wife.

But the early evidence also indicates that the hotel has fallen on hard times since Keating was removed. During one three-day stretch in early December, the Phoenician seemed uncommonly empty during the normally busy tourist season.

The hotel’s new government-installed manager, Hans D. Turnovszky, confirmed that the hotel had an occupancy rate of only 50% to 55% early this month, and angry Keating loyalists say the hotel has sustained widespread cancellations since the government seizure. The resort was 95% occupied at the time of the raid, regulators said.

“I have good sources who tell me that November was way below expectations, and December looks just as bad,” said Bradley J. Boland, a Keating spokesman and son-in-law. He added that “1990 looks bad because no one wants to stay in a government-owned hotel.”

Keating, who is seeking to regain control of the Phoenician through litigation, argues that he could have eventually sold the resort for a profit of several hundred million dollars if he had been allowed to finish his plans to expand the resort to more than 850 rooms.

In a telephone interview earlier this week, the 65-year-old developer said he also had plans to bolster the hotel’s finances by selling some of the surrounding property for real estate development.

Those moves would have increased the Phoenician’s value and made it more attractive to potential investors, particularly those from Japan who recently have paid princely sums for luxurious resort properties in the United States, he said.

“That resort was built to be sold,” said Keating, who also maintained that the hotel cost only $275 million, not $296 million as banking regulators contend.

Regulators who supervised the investments of Lincoln Savings viewed the Phoenician with alarm in its early stages of development, but their concerns ebbed somewhat later on. The hotel was not a major contributor to the collapse of Lincoln, which was seized because of risky loans and questionable investments in other real estate development projects.

Several months before the hotel opened, regulators placed the Phoenician on a special watch list, but they did not require Lincoln Savings to write off any value in the project, according to regulatory records that are now part of a lawsuit between Keating and the government.

In late 1986, Laventhol & Horwath estimated that the hotel was worth only about $200 million if it had an occupancy rate of 70%. But regulators later agreed the property had a market value of $297 million after the Kuwait Investment Office (KIO) paid $134 million for its minority stake in the property, the regulatory records show.

The KIO, based in London, is an arm of the Kuwait Finance Ministry that invests in real estate and hotels worldwide. Officials of the agency could not be reached for comment.

The Phoenician was a very personal undertaking for Keating, who closely supervised its construction. His wife, Mary Elaine, designed the hotel interior after the firing of several professional interior designers.

The family stamp is all over the grounds. One restaurant is named Mary Elaine’s, and a nightclub is known as Charlie Charlie’s. A crucifixion scene along a golf-cart trail behind the hotel is an apparent reflection of Keating’s deep religious beliefs.

Joe Gilbreath, general manager of a Phoenix firm that performed glass work at the Phoenician, recalled that Keating lived at the hotel in the two months prior to its Oct. 1, 1988, opening. “He was roaming around the place like a guard dog 20 hours a day,” Gilbreath said.

At the same time, construction was plagued by costly changes. Gilbreath said Keating once ordered him to encase one marble stairway in glass, a job that cost more than $25,000, then ordered him to tear it down when he didn’t like the look.

“There were well over 1,000 change orders,” Gilbreath said. “I’ve been in (the construction) business for 31 years, and I’ve never seen anything like it.”

The history of the Phoenician goes back to the late 1970s, when Canadian investors leased the land around the historic Jokake Inn, once the home of artist Jessie Benton Evans.

The inn, turned into a tearoom that took overnight visitors, was once a fashionable resting spot for famous winter tourists such as the Astors and Rockefellers. But its glory days were over by the 1970s, and it closed in 1979.

The Canadian investors planned to build a hotel known as the Four Seasons Phoenician Hotel, but they sold the leases in 1984 because American Continental, Keating’s development firm, “made us an offer we couldn’t refuse,” one investor said.

Construction of the Phoenician was a massive and turbulent undertaking.

Keating quarreled loudly with Phoenix city officials over how much water could be used on the property for the golf course, swimming pools, and decorative lakes and ponds. Delays caused by the fights were a “perfect example of how to bankrupt a developer,” Keating charged at a news conference in 1987.

The hotel is also entangled in messy litigation over unpaid bills. Dozens of subcontractors claim that they are still owed about $13 million, but they have yet to be paid because of a continuing dispute between the hotel and the general contractor.

What eventually happens to the Phoenician depends largely on bureaucrats such as Anthony Scalzi, western region head of the Resolution Trust Corp., the government agency created this year to liquidate the assets of failed savings and loans.

Scalzi confirmed that the Phoenician may eventually be sold to the Kuwaitis, but he also suggested that the bargaining would not be easy. “There is a chance” of a sale, he said in a recent interview, “but we are not going to give it away.”

Free-lance writer Steve Webb in Phoenix contributed to this story.

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