PALM DESERT, Calif. -- The Desert Springs resort here is one of the premier hotels under the Marriott flag. Guests pay $250 or more a night to hit the links on two coifed lakeside golf courses, play tennis on grass courts or relax in a spa offering ayurvedic facials and Thai massage.
So why is Irwin Randolph, one of its owners, complaining? "This turned out to be a real turkey," he says. "It's a lovely place but not for our benefit."Randolph, 81, is one of about 1,100 private investors who bought Desert Springs through a limited partnership from Marriott Corp. in 1987. Marriott projected they would receive about $140,000 each in earnings over the following 10 years. In fact, they got about $79,000.
Each partnership share cost $100,000. At the start of this year, Host Marriott Corp., one of two companies into which Marriott Corp. has split, bought the resort back. It paid $40,880 per share.
Over the past two decades, Marriott has transformed itself from a cautiously expanding hotelier in suburban Washington, D.C., into a world hospitality power, partly thanks to partnership investors. Twenty-two thousand of them poured $1 billion into 17 limited partnerships in the 1980s and early 1990s, buying hotels from Marriott and hiring it to manage them.
Marriott used part of the money, as well as proceeds from lucrative management contracts, to build more hotels. The arrangement has been a boon for Marriott and its stockholders, dominated by the Marriott family itself. The value of securities representing the units into which the old Marriott Corp. has split is up 700 percent from Marriott's stock price in 1990.
But many partnerships continue to struggle, leading some investors to complain that the deck was stacked against them. Their main gripes: Instead of paying out most of the hotels' earnings to investors, Marriott put much of the money into hotel improvements and saddled the partnerships with debt. They also say some of Marriott's management contracts were cripplingly expensive.
At Desert Springs, Marriott -- the general partner in the partnership that owned the resort -- poured resort earnings into expansions and renovations of restaurants, the nightclub, five swimming pools, conference facilities and the spa. The work was so costly that the partnership sometimes had to borrow from Marriott to pay for it. By 1996, the partnership had become so strapped for cash that it briefly defaulted on a $168 million mortgage loan.
As limited partners, the individual investors didn't have any say over these decisions. They also couldn't legally sell the hotel without Host Marriott's agreement as general partner. Nor was there an organized secondary market in which the individuals could sell their partnership shares.
So when Marriott offered to buy their partnership shares back, more than half approved the deal, and it went through, despite a price far below their cost.
About one-quarter of the investors have gone to court. They contend that Marriott charged excessive management fees, failed to disclose important investment details such as the overbuilt condition of the hotel market and both sold and managed the partnerships fraudulently or without regard for fiduciary duty.
Those 275 Desert Springs investors are among about 1,800 investors in all who have sued, representing 11 of the 17 hotel partnerships. The suits, filed in Delaware Chancery court, Texas state court and federal court in Maryland, name Host Marriott and the other main descendant of the Marriott Corp., Marriott International Inc. (Host Marriott is a real-estate investment trust that owns hotels, while Marriott International manages hotels.) Law firms handling some of the suits have sought out limited partners as litigants, and some suits seek or have won class-action status.
Officials of Marriott International and Host Marriott say the suits, which seek unspecified damages, are without merit. As general partner, Marriott spent what it had to to maintain the hotels and was within its rights in doing so, the officials say. They also say that offering statements clearly warned of the investment risks and that Marriott relied on the advice of outside consultants, such as the investment bankers who marketed the partnerships, to ensure that investors were fairly treated.
Officials argue that the partnerships fared poorly for reasons outside of Marriott's control: unexpected competition, a downturn in travel and tax-law changes that wiped out tax advantages of several early partnerships. "Hotel owners take those risks," says Laura Paugh, Marriott International's vice president of investor relations. "We wish the partnerships had done better. . . . But we can't change what happened."
Officials note that top Marriott executives themselves bought partnership shares. J.W. "Bill" Marriott Jr., chairman of Marriott International, invested a total of $500,000, says a spokeswoman, and President William Shaw also invested. "They wouldn't have done that if they didn't believe in" the partnerships, she says. Neither executive would discuss the issue.
The partnerships remain central to Marriott growth strategies. They are an exclusive source of hotels for Host Marriott, which for several years has been buying up the partnerships or their hotels.
Host Marriott officials say they have paid attractive prices for some of these properties. Christopher Nassetta, chief operating officer, said in an interview a year ago that the company had been paying about 7.2 times the hotels' cash flow, compared with roughly 8.5 times cash flow paid by competitors for comparable purchases.