One might think that Douglas Goodan and Jean Barclay, the owners of the land under the posh Wyndham Checkers Hotel, would have reaped a fortune from the property, given the inn's pricey rates and prime location in the financial district of downtown Los Angeles.
But the brother and sister, who own this one piece of commercial property, are receiving just $2,000 a month from the hotel's operators--the same amount their grandfather got for the property back in 1926.
The bizarre mess that has enveloped the Goodan family for decades illustrates the pitfalls of protecting an investment over the long term. Sometimes, even the best laid plans become financial time bombs.
In the Goodans' case, acts of Congress and some tricky wording in the 188-room hotel's 72-year-old land lease prevent them from getting market rates, which their lawyer estimates to be about $400,000 annually.
Years of courtroom battles have gotten them nowhere, even though most other landowners stuck with similar antiquated leases have managed to improve their circumstances. The hotel's operators, Grand Avenue Partners, headed by Dallas hotelier Bedrock Partners, are unmoved and say the pair should be happy to get title to the glitzy hotel building when the lease expires in 2016.
The Goodans' grandfather, Edward W. Goodan, tried to protect his heirs from inflation by linking payments of the 90-year lease to the one absolute standard of that time--the price of gold--much as today's property owners peg lease rates to the Consumer Price Index.
But the gold connection proved ill-fated for the Goodans and others who own land encumbered by leases dating to the beginning of this century. Most have faced an uphill battle in claiming fair value for their property despite these so-called gold clauses--or perhaps because of them.
As legislation regarding the ownership of gold has been passed and amended, first in 1933 and then in 1977, property owners have been at turns elated and depressed as their ability to enforce the clauses has been allowed or revoked.
Douglas Goodan, speaking through his Los Angeles attorney, Edward M. Fox, said he feels Congress has rewritten the lease on his land and "deprived him and his family of the true value of his property for nearly 100 years. The law took it away from us without giving us anything in return."
Goodan's right to get full value for the property was shot down just six years after the former Mayflower Hotel opened on the Grand Avenue site, when in 1933 Congress barred private ownership of gold, at the same time striking down the enforceability of gold clauses in long-term leases and railroad and mining bonds.
Goodan's family had no recourse for decades, but got another shot to enforce the gold clause in 1994 when the previous tenant's lender, Sumitomo Bank, sold the lease it had foreclosed on to another operator, Grand Avenue Partners. That partnership is headed by an affiliate of Bedrock Partners, which owns through affiliates dozens of other hotels around the country.
Legislation passed in 1977 allowing private ownership of gold coins such as Krugerrands, allowed gold clauses to be enforced on new or substitute contracts. The Goodans say they didn't know about the legislation until they consulted an attorney after receiving a letter from the buyer's lender. They decided to take Grand Avenue Partners to court to get the money they felt was owed them.
Meanwhile, Bedrock, which owns just one hotel with a gold clause--Checkers--lobbied senators on Capitol Hill to get those obscure clauses thrown out altogether. Bedrock reportedly paid Washington lawyer Smith Davis $10,000 to lobby North Carolina's U.S. Sens. Jesse Helms and Lauch Faircloth to sponsor legislation that would make it impossible to enforce such clauses. The legislation was passed as a two-sentence addition to the 1996 Housing Act, but a wave of media attention prompted Faircloth to introduce legislation repealing the law months later.
Bedrock Partners president Alan Naul acknowledged that executives of the company had taken part in a lobbying effort, but declined to discuss the matter further.
But even though the Goodans won their case in Washington, they they may have lost their final courtroom battle. A single contentious word in the 72-year-old lease prompted the U.S. Court of Appeals this month to confirm the federal district court's 1996 decision and throw out the gold clause in the Goodans' lease, leaving the Goodans with the paltry $2,000 rent.
"It seems unfair from an equitable standpoint, but from a legal standpoint, it's correct," says Richard Honn, an associate professor of business law at USC's Marshall School of Business.
So, no matter how many rooms the hotel books at $200 a night, or how many $21 beef tenderloin lunches it sells, the Goodans, who are in their 70s, will likely receive no additional money from the property for most of the remainder of their lives. Selling the property to a speculator willing to wait almost two decades to cash out is not likely to earn them anywhere near its long-term value, analysts say. They point out, though, that the Goodans' heirs will receive a hefty inheritance of the luxury property, which underwent a massive renovation valued at over $26 million in 1989.
"We don't want to shed too many tears here. They will end up with someone else having built them a nice hotel," Honn says.
The Goodans are about the only property owners who have not been able to convince the courts to see the gold clause their way. A handful of other cases have reached an appellate court, including the 1995 case of an office building in Beverly Hills that sits on land owned by Wells Fargo Bank. All have gotten the antiquated clauses eventually enforced. But only after years of legal wrangling.
The court decided that the only thing separating the Goodans from hundreds of thousands of dollars in rent every year, is the word "direct," referring to the tenant's liability when assigning the lease to someone else. Because it was construed that Sumitomo was still on the hook should Grand Avenue default on the rent, it was not considered a new contract, and under 1977 legislation the contract had to be new or completely reassigned to make the gold clause enforceable.
The leases are problematic for landlords and lessees alike, says attorney James L. Goldman, who represents the hotel operators. Bedrock could have been in serious financial straits if its rent had risen to today's levels, he says.
"When my client bought the [hotel], they thought the rent was $2,000 a month, and the price they paid reflected that. If they thought they were going to have to pay 20 times more a month, they would have paid a lot less."
He says the Goodans, or their descendants, will be left with a tangible legacy once the lease expires in 2016--a historic building designed by Charles F. Whittlesey, who also designed the Huntington Hotel in Pasadena.
"Ultimately, members of the Goodan Trust stand to inherit a pretty nice building."