I first made my case to the city in October 1975, and it was direct. The Commodore was losing money and deteriorating fast. The Grand Central neighborhood was turning into a slum. The Hyatt hotel chain was ready to come to New York, but there was no way we could afford to put up millions to build a new hotel unless the city gave me some relief on property taxes.
The city’s economic development people agreed to structure a program in which we’d effectively be partners. The city would give me a total abatement of property taxes for forty years. In return, I would pay the city a yearly fee, and a share of any profits the hotel made. The mechanism was fairly complicated. First, I would buy the Commodore from the Penn Central for $10 million, $6 million of which would immediately go to the city to pay off the back taxes. Then I would sell the hotel to the city for one dollar and they would lease it back to me for ninety-nine years. My rent, paid in lieu of all property taxes, would begin at $250,000 a year and rise by the fortieth year to $2.7 million. Also, I would pay the city a percentage of the profits. At the end, I’d be paying the equivalent of full property taxes based on the hotel’s assessed value as of the time we were making our deal.
The whole arrangement was subject to approval by the city’s Board of Estimate, which met to consider it for the first time in late December 1975. A week before the meeting, I went to Victor Palmieri and explained that if he wanted the city to take our abatement seriously, we had better make it clear that the Commodore was in deep trouble and that it might not survive much longer. He agreed with me. On December 12, Palmieri announced that the Penn Central had lost another $1.2 million on the Commodore during 1975, was anticipating worse losses for 1976, and as a result intended to close the hotel permanently no later than June 30, 1976.
Two days later, there was another significant announcement, which I hadn’t anticipated. Portman Associates, a company that had spent the past two years trying to get financing for a huge new hotel across town in Times Square, revealed that it was scrapping the project because it had been unable to get bank support. In a way, that was bad for me, because I needed all the evidence I could get that investing in New York made sense. On the other hand, in dealing with the city, I could point to the Portman fiasco as clear proof that the only chance I had to get financing was if they gave me my tax abatement.
Early in 1976, the Board of Estimate decided to switch the structure of the tax-abatement program. Instead of my selling the hotel to the city and then leasing it back, I would do the whole deal through the state’s Urban Development Corporation. The reasons were technical, but actually the change was advantageous to me. Unlike the city, the UDC has the power of condemnation, meaning the statutory right to evict quickly and efficiently—something that a private developer can spend months or even years trying to do.
By April, however, the Board of Estimate still hadn’t considered my tax abatement, and opposition to it had begun to intensify. The loudest chorus came from other hotel owners. Albert Formicola, head of the city’s Hotel Association, argued that the tax abatement would give me an unfair advantage competing against the other hotel owners in the city who paid Ml property taxes. The head of the Hilton, Alphonse Salamone, said he could understand a ten-year tax abatement, but that everyone ought to compete as equals after that. Even Harry Helmsley, who was more successful and less envious than most of my competitors, said he thought the deal was a little excessive. Just before the Board of Estimate vote, three city councilmen held a news conference in front of the Commodore to denounce the deal. I didn’t take it personally. They were politicians. They sensed an issue that might play with the voters and the press, so they jumped on the bandwagon.
I worried about the growing opposition, but publicly my posture was to take the offensive and concede nothing to my critics. When a reporter later asked me why I got a forty-year tax abatement, I answered, “Because I didn’t ask for fifty.”
The basic case against us was that the city was giving me too rich a deal. The length of the tax abatement was only part of it. In addition, critics said, there shouldn’t be a cap on the profits I shared with the city. Also, if my maximum rent was going to be equivalent to the full property-tax assessment as of 1974, then that number should at least be adjustable, so that it could take into account the possibility that real estate values—and assessments—might rise over the years.
If I’d been the city official in charge of negotiating with me, I might have made those same arguments. But while other hotel owners were great at carping, not one of them made an alternative offer for the Commodore. Admittedly, most everyone assumed I had an exclusive option on the property—and it helped that the city didn’t dispute that. Several months earlier, a city official had requested that I send along a copy of my option agreement with the Penn Central. I did—but it was signed only by me, and not the railroad, because I had yet to put down my $250,000. No one even noticed that until almost two years later, when a reporter doing a story on the deal called the city and asked to see the original agreement.
Two weeks before the Board of Estimate was scheduled for the third time to vote on my plan, an alternative offer finally was made for the Commodore. It came from a company that owned a bunch of low-rent hotels in bad neighborhoods. If the city could get title to the Commodore, these people said, they’d be willing to buy it, put up a couple of million dollars toward a renovation, share all profits with the city, and forgo a cap. Because it was a half-baked offer from a questionable group, I think it actually helped my case. The last thing the Commodore needed was a second-rate renovation by a third-rate hotel operator.
The clincher, I’m convinced, came from Palmieri and Penn Central. The one thing that nobody wanted was to see the Commodore shut down and boarded up. On May 12, Palmieri announced that the Penn Central was going to close the Commodore permanently in six days—exactly one day before the Board of Estimate had scheduled, for the fourth time, a vote on my tax abatement. Immediately, the critics called the announcement a pressure tactic. I can’t say I was unhappy about the timing, but the fact was that the Penn Central had revealed six months earlier its plans to close the hotel by summer. In the meantime, occupancy had dropped from 46 percent the previous year to 33 percent. Moreover, losses for the full year of operation in 1976 were projected at $4.6 million.
On May 19, all the local papers carried front-page stories about the last tenants moving out of the Commodore, the hundreds of employees who were now looking for work, and the dread that local shopowners were feeling in anticipation of a boarded-up hotel. The stories certainly didn’t hurt me. On May 20, the Board of Estimate voted unanimously—8 to 0—to give me the full tax-abatement program I’d sought. Over the course of the forty years, that abatement will save me tens of millions of dollars. The battle was more than worth it.
Whatever my critics may have felt, a New York Times editorial ten days later made my case better than I could have. “The alternative,” said the editorial, “is the Commodore boarded up and in tax arrears. Beyond the tax loss, this would be a visual wound and a serious depressant for one of the city’s prime areas.”
But incredibly, getting the tax abatement still didn’t convince the banks we had a viable enterprise. When you look back, it seems almost hard to believe that the banks could doubt our numbers. What it shows you is how bad things were. In 1974, the Commodore was charging an average of $20.80 a night for a room, and as long as occupancy remained above 40 percent, the hotel nearly broke even. In our entirely new hotel, we projected charging an average of $48 a night for our rooms, with an average occupancy rate of 60 percent. Those were hardly great numbers, but the banks insisted we were being too optimistic. As it turned out, by the time we opened our doors in September 1980, the city had turned around, and we were able to charge $115 for a single room, with an average occupancy of more than 80 percent. By July 1987, we’d raised the room rate to $175, and now we average almost 90 percent occupancy.
In the end, we got our financing from two institutio
ns. The first was Equitable Life Assurance Society, which, in addition to its other businesses, owns a lot of real estate. George Peacock, the head of Equitable Real Estate, agreed to put up $35 million for the Grand Hyatt, primarily because he and his people thought it would be good for the city. The other institution was the Bowery Savings Bank, which happened to have its headquarters right across the street from the Commodore and agreed to lend $45 million. Their motivation was practical: they didn’t want to see their own neighborhood go to hell.
I could have saved millions and millions of dollars just by refurbishing the old Commodore rather than creating a brand-new building. Indeed, almost everyone fought against my spending the extra money on a major renovation. From the day we went public with our plans to cover the Commodore’s brick façade with an entirely new curtain wall of highly reflective glass, critics and preservationists were furious. They were outraged that I wasn’t making some attempt to fit in with the architecture in the rest of the neighborhood—the classical look of Grand Central Station and the ornamented limestone-and-brick office buildings up and down the block.
In my view, staying with that look would have been suicide. I said to these critics, “Hey, fellas, do me a favor and don’t tell me about these great monuments, because the Chrysler Building is in foreclosure, the neighborhood is a disaster, and it’s obvious something’s not working. If you think I’m going to leave the façade of the old Commodore the way it is, you’re crazy. There’s no way.”
It’s strange how things can turn around. Many of the same critics and preservationists who hated the original concept of my building now love it. What they discovered is that by choosing this highly reflective glass, I’ve created four walls of mirrors. Now when you go across 42nd Street or go over the Park Avenue ramp and look up at the Grand Hyatt, you see the reflection of Grand Central Terminal, the Chrysler Building, and all the other landmarks, which otherwise you might not have noticed at all.
The other new element that had a dramatic effect was the lobby. Most hotel lobbies in New York are dull and unexciting. I was determined to make ours an event, a place people wanted to visit. We chose a luxurious brown paradisio marble for the floors. We used beautiful brass for the railing and columns. We built a 170-foot glass-enclosed restaurant pitched out over 42nd Street, which no one had ever done before. I’m convinced that if I’d left the Commodore the way it was—old and dull and nondescript—it would have had absolutely no impact, and it wouldn’t be doing the business it is doing today.
The Grand Hyatt opened in September 1980, and it was a hit from the first day. Gross operating profits now exceed $30 million a year. Hyatt’s job was to manage the hotel, so my role was essentially over. But the fact is I still had a 50 percent interest, and I’m not exactly the hands-off type. That caused some problems at the start. I would send over one of my executives, or more often my wife, just to see how things were going, and Hyatt wasn’t happy about that. One day I got a call from the head of all the Hyatt Hotels, Patrick Foley, and he said, “Donald, we have a problem. The manager of the hotel is going nuts, because your wife comes by, and she’ll see dust in the corner of the lobby and call over a porter to clean it up. Or she’ll see a doorman in a uniform that’s not pressed, and she’ll tell him to get it cleaned. Unfortunately, my manager happens to be a guy who has a problem with women to start off with. But in his defense, he’s running a hotel with 1,500 employees, and there’s got to be a chain of command or else a business like this just doesn’t work.”
So I said to Pat, “I understand what you’re saying, and I agree with you that it’s a real problem, but as long as I own fifty percent of the building, I’m not going to walk in and make believe everything’s fine if it isn’t.” Pat suggested we meet the following week. I wanted to work this out because I like Pat, and I respect him, and I think he is an extraordinary executive. Pat has one of those great Irish personalities. He’ll walk through the Hyatt Regency in Washington, D.C., or West Palm Beach, Florida, and he’ll know everyone’s name, he’ll remember their families, he’ll kiss the chef, tell the porter he’s doing a great job, say hello to the lifeguard and the maids. By the time he leaves an hour later, everyone feels uplifted, like they’re ten feet tall.
So I met with Pat, and he said, “I’ve decided what to do. I’m going to change managers. I’m going to put in one of my best guys. He’s Eastern European, like your wife. He’s also very flexible, and they’ll get along great. That way, she can come in and talk to anyone she wants, and everyone will be happy.”
Sure enough, Pat made the switch, and then his new manager did something brilliant. He began to bombard us with trivia. He’d call up several times a week, and he’d say, “Donald, we want your approval to change the wallpaper on the fourteenth floor” or “We want to introduce a new menu in one of the restaurants” or “We are thinking of switching to a new laundry service.” They’d also invite us to all of their management meetings. The guy went so far out of his way to solicit our opinions and involve us in the hotel that finally I said, “Leave me alone, do whatever you want, just don’t bother me.” What he did was the perfect ploy, because he got what he wanted not by fighting but by being positive and friendly and solicitous.
As successful as our partnership has turned out to be, there was one small clause in the deal that I think may be even more valuable than my half-ownership of the Grand Hyatt. It’s something called an exclusive covenant, and its effect is to permanently prohibit Hyatt from building competing hotels in the five boroughs of New York without my permission.
I first tried to get the covenant from Jay Pritzker at the time we made our deal, but he refused. Jay is a smart guy, and he wasn’t about to foreclose the future expansion of his hotel chain in one of the biggest cities in the world. We finally got to the closing, and just before we all sat down, I was alone with an executive from the bank. I pointed out that this was a rather big and risky investment the bank was making, and that one way to further protect the loan might be to insist on a restrictive covenant, so that Hyatt couldn’t throw up a second hotel two years later, right down the street. The banker saw the implications immediately. He stormed into the room where the Hyatt people were sitting, and he said, “Hey, fellas, we’re putting up tens of millions of dollars, which is a lot of money, and we’re not going to make this loan unless we get a covenant from Hyatt saying you won’t open up any other hotels in New York.”
I was taking a chance, because right then and there the whole financing could have fallen through. But what I had going for me was that Jay Pritzker wasn’t at the closing. The executive representing Hyatt tried to reach Jay, but it turned out he was off in Nepal, mountain climbing, and he couldn’t be reached. Meanwhile, the bank gave Hyatt one hour to make a decision, or that was the end of the financing. While we were waiting, I wrote up a covenant myself. In effect, it said that Hyatt can’t open any competing hotels in the New York area, including the two airports. The only exception is the right to build one small luxury hotel—which I don’t believe would be economically feasible anyway. And before the hour was up they agreed to sign the document I’d written.
I now have in my will a clause describing the importance of that restrictive covenant, just on the chance that one of my heirs happens not to be that sharp. What I don’t want, after I’m gone, is for some nice, smooth person from Hyatt to come to one of my heirs and say, “Listen, you wouldn’t mind if we threw up a little noncompetitive hotel at Kennedy Airport, would you?” The simple fact is that Hyatt would love to build more hotels. By retaining the right to say yes or no, I own something very valuable.
I’ve already seen the proof. A. N. Pritzker, a wonderful man who was the patriarch of his family and who died recently, used to call me frequently when he came to New York. A.N. and his son Jay were very different men. What they had in common was brilliance, but where Jay keeps very much to himself, A.N. was extremely effusive and outgoing, almost a teddy bear. They were a perfect combination. A.N. built t
he foundation of the company from nothing, and he got the banks to back him not because he had great assets but because they loved him. Now the company has a huge base, and Jay, who is a much cooler personality, doesn’t need the banks to love him. He can be very tough and they still want to do business with him.
Anyway, A.N. would come to New York, and he’d call and he’d say “Hi ya, Don, I’m here visiting, and I’d love to stop over and just say hello to you for a couple of seconds.” And I’d say, “A.N., I know what you’re doing. You want to build a hotel someplace in New York, don’t you?” And he’d say, “I’d love you to let us do that, Don, because it’s not going to hurt you, and it’s good for us, and it’s good for everyone.” And when A.N. would do that, I’d find some way of changing the subject, because I liked him so much that I never had the heart to say no to him directly.
There are very few people I feel that way about. A.N. died in 1986, and I happened to have an extremely important business meeting in my office on the day of his funeral in Chicago. It was a deal I very much wanted to make, and I’d been planning it for months, and people were flying in from all over to be there. But I canceled the meeting in order to go to Chicago, and as it turned out, I was never able to make that particular deal. I have no regrets. There are some people in your life you just want to pay your respects to, no matter what it involves. And in the end, I think one reason my partnership with Hyatt has remained so strong—beside the fact that the hotel has been so successful—is that I always felt such affection for A. N. Pritzker.
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