Mr. Holiday Inn He Ain't

Will Middle America check into Ian Schrager's hip hotels?

New York hotelier Ian Schrager is living proof that when you move in the right circles, a checkered financial past need not stand in the way of a bright, star-studded future.

A former co-owner of Studio 54, the defunct nightclub that symbolized the excesses of the 1970s, the 49-year-old Schrager served time for income-tax evasion and later developed, with various partners, three trendy luxury hotels in New York. More recently, he bought one in Miami and another in Los Angeles. Tapping Schrager's Studio 54-era connections with the rich and famous, his hotels have catered to celebrities and wannabes in the media and entertainment worlds. Those connections also have helped finance new ventures; Madonna is a business partner in the restaurant at the 238-room Delano in Miami Beach, his newest hotel, which opened last June.

Although Schrager's major New York projects have spent time in bankruptcy or defaulted on loans, that has not stopped the charismatic, soft-spoken entrepreneur from attracting high-powered investors such as Apollo Advisors LP, headed by Leon D. Black, and Amstar Group Ltd., a Denver-based real estate investment concern.

And in a bid to build a national network of stylish boutique hotels, Schrager is eyeing his biggest deal yet--a joint venture that could involve as many as 20 hotels in New York, Atlanta, Seattle, and smaller cities. He's mum on details, but industry sources say Schrager is talking with Starwood Lodging Trust, a real estate investment trust with interests in 48 hotels, including the 652-room Doral Inn in New York. Starwood CEO Barry S. Sternlicht declined to comment. Schrager admits the deal would test whether his hotels' trademark avant-garde style can gain broad acceptance. "This is put-up-or-shut-up time," he says.

Indeed, industry experts remain skeptical that these kinds of hotels will make money in mainstream America. If it comes off, his new venture also will test whether Schrager can lay to rest a reputation for overborrowing, financial wheeling and dealing, and hardball tactics. Schrager shows investors "great projections--and then finances to the hilt," says one former associate. Investors "like riding on his PR." For his part, Schrager says "the businesses were always successful, but they were overleveraged." He also attributes the hotels' earlier financial difficulties to the recession and the downturn in the New York real estate market; his hotels, he says, now generate $120 million in annual revenue and operate in the black.

Expanding his empire will require Schrager to give up some duties to professional managers and resist his stubborn--and costly--urge to fuss over every design feature, from toilet paper holders to mirrors. To bolster his operation, Schrager recently hired experienced top executives from the Omni Hotels and Marriott International Inc. hotel chains. The new hires have installed centralized reservation and purchasing systems. Another thing going for him now is timing: Experts forecast record profits for the industry in 1996.

Schrager actually got his start as a lawyer in the 1970s representing college buddy Steve Rubell's steak-house chain. Together, they launched the Studio 54 nightclub in 1977 and became deities of the disco set. But the Internal Revenue Service crashed the party by discovering sacks of unreported cash. Convicted for evading $800,000 in taxes, Rubell and Schrager received 3 1/2-year jail sentences, reduced to 20 months after they fingered other club operators.

After prison, they pooled their remaining $60,000 in 1982 and approached New York real estate investor Philip Pilevsky to arrange $6.1 million in financing to buy a seedy, 154-room hotel they renamed the Morgans. Pilevsky took a 50% interest and Schrager and Rubell split the rest. After two years and $4 million in renovations, the Morgans opened in October, 1984, and soon posted occupancy rates of more than 85%. The partners' friendships with such entertainment figures as Bianca Jagger and David Geffen added cachet.

That celebrity aura, former associates say, also helped lure lenders. In 1987, at the peak of the real estate boom, Schrager and Rubell opened their second New York hotel, the Royalton, a pricey establishment with surreal, avant-garde design and $230 average room rates. A year later, the Bank of Tokyo Ltd. extended a $46 million refinancing on the hotel, and in 1989, it refinanced the Morgans for $30 million.

Then came a string of misfortunes and troubled deals. Rubell died of hepatitis in July, 1989. The recession took its toll. The Paramount Hotel, which Schrager opened in August, 1990, siphoned guests from his other hotels. The Morgans filed for bankruptcy protection in 1991, and the Royalton filed three years later. Meanwhile, a partnership involving Schrager defaulted on a $3.5 million loan secured by the Paramount.

Other deals failed. Plans to convert the Barbizon Hotel into an urban spa sputtered when renovation financing didn't materialize, and lenders, including the Bank of Tokyo, foreclosed on the property in 1993. Nonetheless, the partnership of Pilevsky, Schrager, and real estate developer Arthur Cohen still managed to extract a hefty fee for arranging a sale to a third party.

SELF-RELIANCE. But Schrager's deft maneuvering left lenders, contractors, and other creditors holding the bag. With the backing of Amstar Group, Schrager bought back the Morgans in October, 1994, for $12 million and spent an additional $1.6 million on renovations. Now he's planning to buy the Royalton out of bankruptcy.

Moreover, some vendors claim that Schrager clips them on bills. "It was always a nightmare getting paid," says one frustrated Morgans creditor "We watch every penny and fight for every penny," Schrager concedes. By late December, subcontractors had slapped about $400,000 in liens against the Delano, although they are now being satisfied. For a renovation this complex, $400,000 in liens isn't much, says Schrager.

In part, Schrager blames his troubled track record on easy money. "It was a feeding frenzy among the banks--everyone wanted to get into hotels--and I wasn't smart, and I made a mistake, and I didn't say no to the money."

Now, even though banks are cautiously making hotel loans again, Schrager says he's relying more on equity investors--including himself. For example, of the total $26 million cost of buying and renovating the Delano, only $14 million is borrowed. The rest is equity, primarily from the Apollo Group.

Apollo and Amstar, Schrager's new partners, "drive harder deals than the real estate guys," he says. Amstar CEO David B. Agnew says that after invest-ing in the Morgans and monitoring the Delano, he concluded that the boutique concept could be expanded to other cities and invested in the $17.4 million acquisition of Mondrian Hotel in Los Angeles, now undergoing renovation. "One thing certain about Ian is that he brings a special niche to the hospitality industry," Agnew says. Maybe. But how profitable that niche will prove in the long term is questionable.

    Before it's here, it's on the Bloomberg Terminal.