Editor's note: This story first appeared Sunday as an exclusive for our print readers.
A pair of Tucson real-estate investors sought to bring local control to signature properties as they built an impressive hotel portfolio.
But they bought as property values were near their peak. And like thousands of Arizona homeowners, they borrowed too much for overpriced real estate, and found themselves unable to pay their bills.
Starting in 1998, Michael Hanson, Randal Dix and their partners swept up nine increasingly prominent hotels, culminating with the Westin La Paloma Resort & Spa in December 2007. Their aim was to significantly upgrade the Westin and other properties, but their timing was terrible.
Revenue per available room, a key measure of a hotel's performance, began plunging in Tucson that same month, now considered the official beginning of the Great Recession. All the hotel properties have either gone into bankruptcy or been foreclosed upon by the lender, and their company, Transwest Partners/NCH Corp., has emerged a more conservative entity.
"We're not interested in expanding," Hanson said in an interview Friday at the company's Catalina Foothills office. "Right now we're just interested in taking care of what we have."
Their story is one of local guys with good intentions and zeal for deals, undercut by economic currents. In Hanson's case, the debacle played out at a grand scale and in the public eye, affecting thousands of workers. He also paid a personal price, ending up in bankruptcy himself.
"He was at one time the largest hotel operator here in Tucson," said J. Felipe Garcia, head of Mexico marketing for the Metropolitan Tucson Convention and Visitors Bureau, who helped Dix and Hanson cultivate Mexican customers. "For them it was not greed or ambition. It was just bad timing."
SARVER GROUP TAKES OVER
When Hanson and Dix bought the Westin La Paloma in late 2007, they intended to add about 130 rooms, expand the ballroom and build a new parking structure.
"Our plan was that we would do those improvements and then La Paloma would be even a greater icon in Tucson and attract more people to come here, which would be great for the community," Dix said.
They took on about $240.5 million in mortgage debt to acquire it and the Westin Hilton Head Island Resort & Spa in South Carolina. The resorts have since been valued by the U.S. bankruptcy court at $92 million.
Just after buying the properties, they planned to bring in new investors, including Robert Sarver, the majority owner of the Phoenix Suns, to help pay back the loans. But by summer 2008, as the economy began to crumble, that hope vanished. Faced with foreclosure, Hanson said he worried about the properties going back to the lender. So, in November 2010, the companies that owned the Westin properties filed for Chapter 11 bankruptcy protection.
Hanson and Dix did eventually lose control of the properties, but it wasn't to the lender. Southwest Value Partners, an investment group led by Sarver, took over the resorts with plans to pour more than $60 million into them.
"Our goals will be accomplished," Hanson said. "Unfortunately we won't be the owners."
The new money flowing into La Paloma will benefit the community, Hanson said. Tom Tracy, president of a Tucson-based hotel-management firm, The Lodging Company echoed that sentiment.
"The transfer of La Paloma and the infusion of capital will clearly help the entire market," Tracy said. "You don't want one of your premier assets to begin to deteriorate."
FINDING NEW INVESTORS
Hanson and Dix said they tried to negotiate with LNR Partners - a company that services loans on behalf of investors in commercial mortgage-backed securities - to refinance their debt on the Westin properties. But the effort proved fruitless.
"They had only one thing in mind: that was to foreclose. And we didn't think that was a good idea for the community and for the property," Hanson said.
He and Dix had dealt with LNR before. They had owned an Embassy Suites in Phoenix and allowed it to go into foreclosure. Afterward, the hotel lost the Embassy Suites banner, closed down and 200 people lost their jobs.
"That experience terrified us," Hanson said.
Filing for bankruptcy protection let Hanson and Dix retain control of their properties while they worked to renegotiate their debt and find new investors. But Attorney Dean Waldt, whose law firm Ballard Spahr represents LNR, said the company isn't in business to foreclose on properties. "Their responsibility is to maximize value and sometimes it can be done by recasting the debt and sometimes it's done by taking the asset back," Waldt said.
It's unlikely the series of bankruptcies will have a significant effect on the local lodging market, experts said.
"The underlying real estate asset may be in play, but the brand and the management of a brand may make a smooth transition from one owner to the next," said Lynn Ericksen, general manager of the Hilton El Conquistador and chairman of the Tucson visitors bureau's board.
FIRST, A HAMPTON INN
Hanson's entry into Tucson's hospitality sector was a departure. He grew up on a farm in Nebraska and moved to Tucson in 1972 to attend the University of Arizona.
In 1977, he entered the local real-estate business, and he formed his own brokerage, Tierra Limited, in 1981. His first purchase was a fourplex on West Kelso Street.
A 19-year-old whiz kid, Dix started working for Hanson in 1989, when he was still a UA student. By that time, Hanson was deeply involved in apartment complexes and poised to go deeper. Hanson and Dix formed a partnership and founded a new brokerage, Transwest Properties, in 1992.
One of their big ventures was buying apartment complexes in Oklahoma along with other investors, and that indirectly led to Hanson's entry into the hotel market.
"I was doing business in Oklahoma City and we'd always stay at a Hampton hotel because the price was reasonable and it included breakfast," Hanson said.
Tucson didn't have one at the time, so in 1998 he and Dix decided to build a Hampton Inn & Suites at North Oracle Road and West Rudasill Road.
Soon, their company bought the nearby Cliff Manor Inn, remodeled it and turned it into La Posada Lodge & Suites. Then they built another adjacent hotel, the TownePlace Suites by Marriott.
It grew from there. They purchased the Embassy Suites Tucson Williams Center on East Broadway in December 2003; the Plaza Las Glorias in Puerto Peñasco, Sonora, in December 2004; the Doubletree Hotel Tucson at Reid Park on South Alvernon Way in March 2007; and the two Westin properties in December 2007.
They owned nine properties with more than 1,800 rooms, about 1,200 of them in the Tucson area. But the month of the Westin purchase was the precise month when Ericksen, of El Conquistador, noticed groups canceling meetings, and future bookings dwindling.
"We started to understand that something was going wrong," he said.
LEVELING OUT THE PAY SCALE
As a boss and business partner, Hanson was terrific, said people associated with his projects.
The company's generosity caused a stir in Rocky Point. At Hotel Peñasco del Sol, the former Plaza las Glorias, Hanson and Dix ordered a $2 million renovation and revamped the wage structure, increasing wages for low-level workers beyond the citywide standard of $8 per day. At hotels in Mexico, Dix said managers make substantially more than workers on the bottom tiers, so he tried to level out the pay scale.
"I just felt like that was the right way to do it because our hotels up here make a profit and those were the wages that we could afford to pay our people up here and we had the same plans for the Rocky Point hotel," he said.
Other hotels did not follow suit.
Even so, Hanson and Dix said their method builds a team of loyal, hardworking employees. For Hanson, it goes back to his first work experience.
"I was a dishwasher and a car hop and I saw how the front-line people in a lot of cases weren't treated very well. And I said, 'You know what? I'm going to own my business, and I'm going to treat the front-line people much better than I was treated when I was the dishwasher and the car hop and the landscaper.'"
Financial woes abound
All of Transwest Partners/NCH Corp.'s hotels have ended up in bankruptcy or faced foreclosure.
The Transwest company that owns the Doubletree Hotel Tucson at Reid Park, which has $31 million in mortgage debt, received notice last March that it was in default on its loan. The company, Reid Park Properties LLC, filed for bankruptcy protection in May and the court has since valued the property at $17 million.
Under the terms of a reorganization plan, still to be considered by Judge Eileen W. Hollowell, local hotelier and apartment complex owner Humberto S. Lopez would get an ownership stake in the property for a $2.1 million investment. But Reid Park Properties' bankruptcy attorney, Eric Slocum Sparks, said in a previous interview that LNR Partners, which is the loan servicer on that debt, has expressed interest in taking over the property and will likely fight the plan's implementation.
Lopez has already purchased another property once owned by Michael Hanson and Randal Dix. Through a separate bankruptcy plan, Lopez paid $600,000 and assumed the written-down debt on the Embassy Suites Tucson Williams Center. As part of that plan, Lopez must enter into a new franchise or brand agreement with an upper or upscale brand by Jan. 1, 2014.
Hanson said he's still working on finding investors that will allow him to stay involved with the three bankrupt hotels - the Hampton Inn & Suites, La Posada Lodge & Casitas and TownePlace Suites by Marriott - at North Oracle and West Rudasill roads. The servicer on that loan is also LNR Partners.
As for the property in Puerto Peñasco, which was renamed Hotel Peñasco del Sol, Hanson said it's going to back to the lender, Textron Financial Corp. The Transwest company that owns the hotel filed for bankruptcy protection in August. Hanson said he tried to work with Textron to repay the property's $13.5 million debt, but hotels in Mexico face additional challenges because of increasing drug violence there and its impact on tourism.
Contact reporter Dale Quinn at email@example.com or 573-4197.