Taxpayers Picking Up Tab for Desert Resort Fiasco : S&L; bailout: U.S. inherited ‘bad asset’ from a troubled firm and now can’t find a buyer for the hotel.

Here in the desert outskirts of Palm Springs sits the Doubletree Resort Hotel, a can’t-miss project that did.

Thanks to the nation’s savings and loan fiasco, taxpayers own the sand-colored resort, its 289 rooms, 27-hole golf course, 10 tennis courts, 84-by-48-foot swimming pool and two windowless restaurants, one of which opens only on weekends. Every man, woman and child in the nation has about 16 cents invested here, by no choice of their own.

This is what the government calls a “bad asset”--no reflection intended on the room service or the upkeep of the putting greens. Bad in this case means the government--which inherited the property from a troubled savings and loan--can’t sell the property. Bad means that the tab keeps soaring for the nation’s savings and loan debacle, with costs now estimated at more than $500 billion through 2030. As long as those bad assets remain unsold, the meter is running.

The four-story resort is part of the biggest collection of bad real estate and other assets ever assembled, $168 billion worth from failed savings and loans now deposited in the Resolution Trust Corp.

Savings and loans--in this case the defunct Gibraltar Financial Corp. in Beverly Hills--paid sky-high rates for deposits, then used the money to fund their own real estate ventures or to finance developers. The result is a nation bulging with hotels, offices, apartments, housing tracts, mini-malls, industrial parks and other real estate that only a builder could love.

Developing all that real estate now seems easy compared to selling it. In the case of the Doubletree, the resort once commanded an asking price of $42 million. In January, a prospective foreign buyer offered $29 million, but backed away. In April, the asking price was slashed once again, from $29 million to $24 million.

The government still can’t sell it. Nor will the RTC talk about the resort.

Today, the Doubletree finds itself in something akin to real estate purgatory. It is waiting for an auction to be scheduled this fall, which could deliver it to life after the RTC.

How the Doubletree got to where it is can be traced to early management problems. More important, however, was bad timing that saw the hotel start up amid an unprecedented industry glut fueled by the kind of easy money that no longer exists.

“This doesn’t just say something about this property, but the times we are in,” said Paul DeMeyer, hotel specialist with the accounting firm Kenneth Leventhal & Co. in Los Angeles.

Where the Doubletree goes from here is an open question. Few people have the money to buy a resort these days, particularly with tourism hurting from the recession. Add to that a growing reluctance by banks and other lenders to make risky real estate loans, especially on something as unpredictable as a hotel.

That wasn’t the case six years ago, when the resort opened. Thanks to generous tax shelters, investors were pouring money like fresh concrete into hotel projects. So were savings and loans. Overall, roughly 1 million new rooms around the nation were added during the 1980s, about 13 times the number of rooms in all of Los Angeles County.

Hotels everywhere are paying for that construction gluttony today as they slash room rates. It may be a bonanza for travelers, but it’s a disaster for investors.

Caught up in all of this overbuilding was the Doubletree, originally christened and operated as the Desert Princess. From 1985 to 1988, the Palm Springs area alone added more than 5,000 rooms through the building of new hotels or the expansion of existing ones. The number of rooms soared by about 50%, to 15,000, or about one room for every 11 people living in the area. Nine hotels, among them the Desert Princess, were new, including yet another Gibraltar-financed resort in nearby Indian Wells.

Conceived as a joint venture between Santa Monica developer Watt Industries and Gibraltar, the $30 million resort and golf course was the centerpiece of a $120-million, 385-acre project facing the San Jacinto Mountains. Included would be what amounted to a small city of 1,000 condominiums clustered among the fairways, priced from $98,000 to $150,000, many of which were rented out when the owners were away.

Gibraltar had the money and was experienced when it came to making loans to hotels. Raymond A. Watt, one of Southern California’s best-known developers, had the ability to get it done.

“He was a good developer, and it seemed to be a well conceived idea. It had the golf course and the amenities required for the Palm Springs area,” former Gibraltar Chief Executive Herbert J. Young said.

Trouble is, a lot of other people also were eager to tap into the Palm Springs resort market. Add to that an economy that began to slow. Occupancy now averages 57% over a year, well below the industry average of 62%.

“A lot of them went after the same market at the same time,” said Mike Fife, president of the Palm Springs Desert Resorts Convention and Visitors Bureau.

The “Princess” in the name came from Princess Cruises, the people who run the “Love Boat” excursions made famous by the old television series. The cruise line, trying to build a hotel management business in the 1980s, was hired to run the resort.

The resort attracted its share of sales conventions, Rotary luncheons and even a charity telethon to benefit a children’s center named after Frank Sinatra’s wife, Barbara. Singer Michael Jackson once paid for a room--but didn’t stay in it--to throw off track the mob of teen-age fans who follow him around.

But Princess lacked the reservation system of a Hilton, Hyatt or Marriott, and also lacked the hotel industry connections to book in sufficient numbers the group meetings needed to support the hotel. Unsuccessful in its efforts to build a major hotel operation, Princess got out of the business in 1988, although a sister company continues to operate a hotel in San Diego.

Shortly after the resort opened, Watt bought the hotel in a Gibraltar-financed deal. But Watt soon discovered the resort was bleeding cash. One former Gibraltar executive estimates Watt had to put as much as $4 million to $5 million into the project.

Today, Watt insists that the project initially did well, but that it hit the market at the wrong time. “It was no different than 25 other hotels in California. It was the timing in the cycle,” Watt said.

Watt first tried to sell it, asking $40 million for the hotel and $10 million for the golf course. Eventually, a deal was cut for Gibraltar to take the hotel and golf course.

Gibraltar, one of the industry’s high-flying thrifts, added the project to its growing collection of problem assets. The thrift invested in risky junk bonds issued through Drexel Burnham Lambert, bet heavily on real estate developments that included a “horse condo” project involving horse stalls, and was a major buyer of securities backed by mortgages that lost much of their value when interest rates jumped in 1987 and 1988.

Gibraltar was seized by federal regulators in March, 1989. Subsequently its branches and deposits were bought by Security Pacific Corp. The RTC was left trying to sell its problem assets, including the Doubletree.

Just before Gibraltar’s failure, it sought new management to replace Princess Cruises as manager. Doubletree, controlled by a Canadian firm, took over the management in January, 1989. The previous year, the hotel ran an operating loss of about $500,000, with less than 50% occupancy.

Some drastic changes were needed. Robert DeVoe, a Doubletree executive who manages the hotel for the RTC, said he noticed immediately that the hotel was overstaffed by about 20%. He inherited 32 managers alone.

At the risk of alienating some guests, DeVoe trimmed some of the luxury services that cost a lot but were rarely used. Room service at 3 a.m. is out of the question because the kitchen shuts down at 11 p.m. Valet parking stops in the off season. DeVoe said there have been few complaints.

“We can’t please everyone. What we have to do is please the vast majority,” DeVoe said.

Other cost-saving steps were made. Towels and sheets are now laundered starting at dawn and are dry before the last wake-up calls because electricity is cheapest then.

New emphasis was put on going after group meetings, which make up 60% of the hotel’s business. One of the best customers he has found is a group of Orthodox Jews from around the world that books every room in the hotel for eight days at Passover, which happens to coincide with the annual college spring break invasion that gives other hoteliers ulcers. The group brings its own kosher food. DeVoe hires elevator operators to work on the holiest days, when even pressing the buttons of an elevator can be construed as prohibited work.

The biggest change, however, was recognizing that the Doubletree will never be a Ritz-Carlton. This is Cathedral City, which is to the posh neighboring communities such as Rancho Mirage and La Quinta what Van Nuys and Culver City are to Beverly Hills. The hotel no longer tries to market itself as glitzy, DeVoe said.

“We want to be a well-run Chevrolet in a valley of Cadillacs,” DeVoe said.

The hotel now generates an operating profit, although the number is deceiving because the hotel effectively has no mortgage payments to make because it is government-operated. Still, it’s not bleeding as it once did.

“We’re not making money,” DeVoe concedes. “But we’re not losing millions of dollars.”

Still, the financial damage has been done. All told, about $42 million has been sunk into the hotel and golf course. Former Gibraltar executives and others estimate that the hotel, if sold, will end up costing taxpayers $15 million to $20 million when all is said and done.

Now that the resort is becoming profitable, why hasn’t it sold?

For the most part, the resort itself isn’t the problem. Aside from the 6-year-old hallway carpet that needs to be replaced, the hotel is in good condition. Gusting winds, which blow so strong in the area that 5,000 propeller-like windmills nearby generate electricity, can be bothersome. And the land the hotel sits on is leased, which has discouraged prospective foreign buyers who are used to buying land when they make real estate investments.

Real estate experts instead believe that prospective buyers will remain cautious as long as the hotel industry’s future is clouded, and credit remains tight.

Still, they suggest, at a low-enough price--probably about $20 million--a buyer will probably emerge. After all, there aren’t many Cadillacs in the RTC’s portfolio. Buyers may have to settle for a well-running Chevrolet.