Sunday Pearlstein: What Washington doesn’t need: A Trump Tower
They are two of Washington’s architectural and historical gems: The Old Post Office Pavilion on Pennsylvania Avenue and the Smithsonian Arts and Industries Building on the Mall. The good news is that both are slated for renovation and what the bureaucrats like to call “re-purposing.” The bad news is that, in both cases, the process is headed in the wrong direction.
Let’s start today with the Old Post Office and the General Services
Administration’s curious selection of Donald Trump and Colony Capital to develop it into a luxury hotel.
I say curious not because of any concerns about the hotel concept, or even out of concern for what might be called the “Trump aesthetic,” the over-the-top sensibility that tends toward the big, the fancy and the gaudy. My guess is that by the time the historic-preservation police are finished with their painstaking reviews and requirements, any traces of an architectural comb-over will have been thoroughly expunged from the plans, along with any profit from the five-year pro forma.
No, the curious thing is why the GSA would choose to pass over established, deep-pocketed hoteliers such as Marriott, Hyatt and Hilton in order to choose a lead developer who has spent so much time in U.S. Bankruptcy Court that he qualifies for elite frequent-flier status.
Trump’s first trip through bankruptcy reorganization was in 1991, during one of the real estate industry’s periodic downturns, when he couldn’t make the interest payments on the mountains of high-yield junk bonds he had issued to build the $1 billion Taj Mahal hotel and casino in Atlantic City. A year later, he was back in court with a prepackaged bankruptcy of the neighboring Trump Plaza Hotel and Casino, and then another for New York’s famed Plaza Hotel. It took several more years before Trump was finally able to restructure all of his debt, forcing him to give up his entire stake in the New York Plaza, along with the Trump Shuttle (remember that?) and a huge swath of land on the West Side of Manhattan that he had proposed for development.
In fall 2004, following yet another real estate downturn, Trump returned to bankruptcy court, this time seeking protection from creditors for his Trump Hotels and Casino Resorts. Although the Trump name survived the restructuring, Trump was forced to give up his management role and majority ownership stake. Four years later, the same company was back in bankruptcy again, but not before rejecting Trump’s offer to buy the company back.
It’s not clear how much weight the GSA’s review process gives to the “financial reliability” of the lead developer, but apparently it’s not much. But the GSA apparently gave great weight to the fact that Trump was willing to invest more money in the renovation of the Old Post Office ($200 million) and pay a higher rent (around $3 million a year, according to one industry source) than any other bidder.
In fact, none of the other experienced bidders came anywhere close to those numbers — and for good reason: They make no economic sense. Industry experts tell me that to justify that level of investment and that rent, Trump would have to fetch average room rates of at least in $750, which is far above the $500-plus average that even the city’s top hotel, the Four Seasons in Georgetown, commands.
Perhaps the GSA was willing to overlook Trump’s rocky financial history because he brought in as his partner Colony Capital, a well-known private-equity firm with more than $30 billion under management that specializes in real estate. Trump and Tom Barrack, Colony’s founder, have known each other at least since 1988, when Barrack earned a quick $50 million for his boss, investor Robert Bass, by selling the Plaza Hotel to Trump for what was then the astronomical sum of $390 million. Barrack also refinanced one of Trump’s troubled Atlantic City hotels back in the 1990s.
These days, however, Barrack has a few hotel problems of his own. The Las Vegas Hilton, which Colony owns with Goldman Sachs, is in receivership and has lost its Hilton franchise. Along with Goldman, Colony was recently forced to forfeit control of the giant Atlantis resort in the Bahamas after failing to refinance the $2.5 billion in debt it took on to buy Kerzner International, a resort group. Meanwhile, Colony’s Atlantic City Hilton recently managed to avoid foreclosure only by allowing creditors to foreclose on two properties in Mississippi and receiving special permission from New Jersey gaming officials to offer 25-cent chips in its casino.
Like many in the real estate game, Colony and Trump are high-risk gamblers who play all the angles and have a habit of overpaying and overleveraging. When projects get into trouble, as this one surely will, they think nothing of handing the keys over to the lenders and moving on to the next deal. They have no roots in Washington and precious little experience with major structural renovation of historic properties.
In short, they are hardly the kind of steady, reliable, long-term partners the government needs for the redevelopment of a problem-plagued property on America’s Main Street.
Next week: The Smithsonian Arts and Industries Building.