A Double Flop for the Fontainebleau

Like many of the men who built South Florida, Donald Soffer is a transplant, a native of Pennsylvania steel country who began making his fortune putting up shopping centers in and around Pittsburgh. Turning to Miami in the late '60s he plunked down more malls and branched into condo towers and planned communities. His son Jeffrey helped steer Turnberry Associates, the family business, toward more upscale projects—then overreached. In 2005, Jeffrey formed Fontainebleau Resorts and spent $3 billion of mostly borrowed money renovating the iconic Fontainebleau hotel in Miami Beach and starting work on a lavish casino resort in Las Vegas.

His timing could hardly have been worse. The unfinished Vegas project has already been lost to bankruptcy—billionaire investor Carl Icahn scavenged it in February—and Jeffrey Soffer is now fending off lawsuits and scrambling to hold on to the Miami resort.

"Soffer made a big bet on the Fontainebleau that went very wrong, twice," says Dan Fasulo, managing director of New York research firm Real Capital Analytics. "It's a mess."

"Very few people foresaw the depth of the economic and lending crisis of the past few years," says Jeffrey Soffer, 42, in his only comment for this article. "I regret that we didn't see Fontainebleau Las Vegas to fruition but remain proud of our efforts there and in Miami."

Fontainebleau Miami Beach hasn't made loan payments since September after borrowing more than $620 million to redevelop the property. On Mar. 17, Soffer and his partner in the venture, Mideast investment group Dubai World, offered to put up an additional $100 million as part of a restructuring plan. Bank of America (BAC) and other lenders are now weighing the proposal. Dubai World and BofA declined to comment.

The projects have led to a welter of claims from creditors and contractors against Fontainebleau Resorts, various affiliates of Turnberry, and Jeffrey Soffer himself. Bankrupt Lehman Brothers is suing Soffer over $400 million in personal guarantees he made on loans to build the retail portion of Fontainebleau Las Vegas. Soffer has said that Lehman's claims are not valid.

The Fontainebleau troubles mark a major reversal for the Soffer family, whose Turnberry Associates has developed more than $7 billion in commercial and residential property since Donald Soffer, 77, founded the firm more than 50 years ago. Delving into Florida real estate in 1967, Donald transformed 785 mosquito-infested acres along the Intracoastal Waterway in north Dade County into Aventura, a planned city bordering Miami that now encompasses the Turnberry Isle Resort & Club and Aventura Mall, Turnberry's 2.8 million-square-foot shopping center.

Jeffrey Soffer joined his father's firm in 1987, not long after graduating from high school; he did not get a college degree. A fixture on the Miami social scene, Jeffrey, who is divorced, is often photographed with model Elle Macpherson and has a taste for expensive toys. He races Ferraris and has a pilot's license. Madsummer, his 257-foot yacht, features a spa, movie theater, and a helicopter pad. Madsummer is now listed for sale.

Jeffrey helped shift Turnberry's focus from suburban malls and planned communities to lavish Miami and Las Vegas resorts and condominiums, riding the real estate mania in what would become two of the nation's most overheated markets. Soffer's early efforts in Las Vegas were successful: Turnberry Place, a complex of four 38-story condo towers off the Las Vegas Strip, and three condo-hotel towers at MGM Grand casino, a joint venture with MGM Mirage, (MGM) sold out.

But Soffer's winning streak didn't last. In 2005 he oversaw Turnberry's acquisition of the grand but aged Fontainebleau Miami, a local landmark opened in 1954, which he viewed as the foundation of a resort brand that could be marketed around the world. Teaming up with Glenn Schaeffer, former president of Mandalay Resort Group, he formed Fontainebleau Resorts to renovate the hotel and develop 27 acres on the Las Vegas Strip with a 100,000-square-foot casino, 4,000 luxury hotel rooms, and 3,300-seat theater. Plans called for spending $500 million on the Miami renovation and $2.9 billion in Las Vegas.

As costs mounted—the final bill for Miami Beach was $1 billion—Soffer sought partners to share the burden. Australian billionaire James Packer paid $250 million in 2007 to acquire a 20% stake in Fontainebleau Resorts. Packer declined to comment. Nakheel, the development arm of Dubai World, ponied up $375 million for half the Fontainebleau Miami in 2008.


Then the economy turned. In 2008, Las Vegas suffered a devastating slump in which property values, room rates, and gambling revenues fell sharply. In November of that year, when the Fontainebleau Miami reopened—advertising an oceanfront "poolscape" where James Bond and Goldfinger sat "for a heated game of gin rummy"—the U.S. was already a year into the deepest recession since the Great Depression. The revamped resort, with 1,504 rooms, 11 restaurants and nightclubs, and a 40,000-square-foot spa—had 2009 revenue of about $170 million through November, nearly 25% less than was budgeted, according to a person familiar with the operation.

"Fontainebleau Miami is a victim of the collapse in room rates, not of flawed renovation," says Bill Lerner, a Las Vegas-based analyst at Union Gaming Group. "It's a great hotel reopened at the wrong time."

Debt ultimately tripped up both ventures. In Las Vegas, BofA, Deutsche Bank (DB), and other lenders refused to fund an $800 million construction loan, saying the project was "$130 million over budget" and in default. Fontainebleau Las Vegas then sued the banks and filed for bankruptcy, blaming the lenders for "brazen breach of contract." In bankruptcy court in February, Icahn paid $156 million for Fontainebleau Las Vegas, on which Fontainebleau Resorts had spent $2 billion.

Sources involved in the Miami Beach negotiations suggest that lenders may accept Soffer and Dubai World's offer, allowing the owners to keep control of the hotel for now. The challenge would then be for the partners to hang on until the economy turns. "The Fontainebleau brand has a lot of value," says Real Capital Analytics' Fasulo. "It's a matter of for whom."

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