It took E.C. and his team a full week to pack up the collection as Walter watched from his wheelchair, issuing instructions and snapping at them whenever some task seemed at risk of being performed incorrectly. Every evening, E.C. and Walter would have dinner at the Watergate Hotel, along with Walter’s nurse and a neighbor in the Watergate, Alice Deangelo, Walter’s longtime friend and confidante.
When the seventh-floor apartment was finally empty, E.C. looked around. It was larger than he originally thought, now that it was no longer the home of nearly four decades of voracious collecting. Walter appeared to be relieved. In his declining health, maintaining the collection had become a burden.
On Friday afternoon, at the end of a long week, two large trucks pulled out of the garage underneath the Watergate and headed north to New Haven, Connecticut. The collection of Walter Pforzheimer was on its way to a new home.
NIKKO SECURITIES, WHICH HAD HELPED FINANCE Trusthouse Forte’s purchase of the Watergate Hotel in 1989, emerged from the Granada takeover battle as the new owner of the hotel in 1996. Just two years later, however, buffeted by a weak economy in Japan, Nikko decided it was time to sell the Watergate Hotel and hired Blackstone Real Estate Advisors in New York to find a buyer. Blackstone reviewed the hotel’s financial performance and concluded the local market was solid and the Watergate was simply not getting its fair share. Blackstone purchased the hotel for its own portfolio—paying $39 million, or more than $168,000 per room—and announced Swissotel, a hotel management company in which Blackstone was also an investor, would operate the property under a new name: Swissotel Washington—the Watergate.
In a press release, Swissotel described its new role as manager of the “prestigious landmark” as a “major step” in the company’s efforts to expand in key business centers around the world. Blackstone and Swissotel also announced plans to give the property an $11 million “makeover” as part of a strategy to revamp not just the thirty-one-year-old building, but its clientele. “We’re going to depend a little less on transient volume business and more on the upscale individual travelers,” said the hotel’s new general manager, Alfred Matter.
Blackstone and Swissotel invested a total of $13 million in renovations, but the Watergate now faced serious competition from new luxury hotels, including the renovated Willard Hotel on Pennsylvania Avenue and new hotels in the West End neighborhood, near Georgetown. In total, more than two thousand new hotel rooms came on the market in the District between 1999 and 2003. The Watergate was now considered too far from downtown Washington for business visitors and not convenient to the city’s major tourist attractions. Business at the Watergate Hotel dropped 30 percent between 1999 and 2003. After four years of disappointing results, Swissotel walked away.
Blackstone brought in Eastdil Realty to manage the hotel and find a buyer. “We’re very encouraged,” said Larry Wolfe, an executive with Eastdil. “It’s a world-famous complex. Everyone knows the Watergate name.” Wolfe soon found a buyer and in May 2003, Blackstone released the name of the next owner of the Watergate Hotel: Monument Realty, one of the most prominent developers in the Washington region.
Michael Darby, Monument’s forty-three-year-old president, was fit and trim, with a shaved head and intense blue eyes. More than twenty years earlier, as an engineering student at the University of Melbourne, he took “a practical year” and found a job with a Washington, DC, construction company. He fell in love with Washington—he thought the city was comfortable to live in and clearly on the verge of a construction boom—and decided to come back after graduation. He answered a classified ad in the Washington Post for an “assistant project manager” with the Oliver Carr Company. Darby was one of two hundred candidates for the position and the only applicant who didn’t blink during the interview when informed the project was renovating and expanding the Willard, one of the most famous hotels in America. “You were the most confident,” the hiring manager told him. Darby had just gotten off the plane and had never heard of the Willard. “Maybe I got the job falsely,” he quipped years later.
Darby cofounded Monument Realty in 1998 and, with Lehman Brothers as an equity partner, developed 2.7 million square feet of offices and apartments throughout the region. “We were prolific,” Darby recalled. “It seemed like everything we touched turned to gold.”
Eastdil presented the Watergate Hotel to Darby and his team for consideration. As a hotel, Darby thought the location was “a little problematic.” The hotel was “off the beaten track” and the entrance to the hotel from Virginia Avenue was “hidden” and “kind of strange.” Although each suite had water views, the rooms were “a little big” and had not been renovated for a very long time. There wasn’t a ballroom. The number of meeting rooms was insufficient for a hotel of its size. “It seemed like a very good buy,” he said—as an apartment building, or perhaps as a mixed-use building, with a boutique hotel on the lower floors and residences above. There were already three apartment buildings in the complex, with “high-profile owners.”
Darby announced plans to spend $70 million to buy the hotel and convert its suites to 150 luxury condominiums. He promised a new restaurant, a renovated fitness center and another 150 parking spaces. Efficiency apartments would sell for $600,000, three-bedroom apartments for more than $2 million. “It’s a terrific address already,” said Darby. “We hope to benefit from that with a very high-end product that is some of the best real estate in Washington.” The purchase from Blackstone, however, was contingent upon modifications to the original Planned Unit Development permit for the site, allowing Darby to convert the hotel to apartments.
Darby brought in a team of architects to study the Watergate Hotel and draw up plans for converting it to residences. According to Frank Durkin, a longtime architect at the firm Hickock Cole, if Darby had described his vision to them before purchasing the building, they would have responded simply, “You’re crazy.”
“Washington has this thing about buildings that aren’t ‘explainable,’” Darby said years later. “Washington’s not a great city for doing very different things, which is a shame.” Because of the District’s height limits on all buildings, developers were restricted to rectangular structures with traditional designs and very little open space. The Watergate was “a very unusual building in Washington, with its curves and everything,” but seemed to Darby “a little bit dated.” He only got comfortable with the building’s design when he did some research and unearthed Luigi Moretti’s description of the exteriors of the buildings as representing “notes on a sheet of music.” Darby stood on one of the balconies on the hotel’s upper floor and looked around him. None of the balustrades lined up. It’s all moving and flowing, he thought to himself—like music.
If the Watergate’s form was outstanding, however, its function left much to be desired.
Over time, renovations to the building had focused only on aesthetics and failed to address deeper problems. The original single-pane windows were prone to leaks and needed to be replaced with modern, double-pane windows. The garage was falling apart in places, with exposed rebar in some areas. The contract with Washington Gas, which owned and operated on-site the plant to heat and cool each of the Watergate’s buildings, was costly to keep and, with its cancellation penalty, expensive to terminate. The hotel’s health club and indoor saltwater pool needed an overhaul. The subterranean former home of Jean-Louis at the Watergate was cramped and dark. “It was the smallest kitchen I had ever seen in my life,” Darby said later. “I don’t know how he did it.”
The building was heated and cooled through a three-pipe mechanical system—“the worst type of system you can have for a hotel,” Darby explained. There were separate pipes into the building for hot and cold air, but only one pipe going out. That meant a guest in one room could not have the air-conditioning on while a guest in another room wanted heat. The entire building had to be heated or cooled at the same time. This was especially problematic in late spring and early fall, when Washington c
ould be cold one day, and hot and humid the next. On top of that, the original copper pipes were “decrepit” and leaky. Fixing the problem required taking out the entire heating and cooling system and starting over. Within each unit, hot and cold air flowed through fan-coil units under windows. “It eliminated the need for ducts,” Durkin observed, “which was fine in a hotel room. But not so fine in a luxury condominium.”
Load-bearing columns throughout the building were sixteen feet apart, which provided fine dimensions for hotel rooms, but was “lousy” for apartments—bedrooms that were too big and living rooms that were too small. Because apartments on upper floors were larger than the ones on lower floors, kitchens would be in different places on different floors. That meant kitchen exhaust from a lower floor would have to come up through an upstairs neighbor’s living room or bedroom. Every floor in the Watergate Hotel was different, which meant balconies were located off living rooms in some apartments, but not in others. Balcony floors were raised slightly, which meant residents had to step up when they went outside, which created “tripping issues” to be addressed. At one end of the building, the balconies sagged.
The biggest problem, Darby and his architects agreed, was ceiling heights. Measured from “slab to slab”—from concrete floor to concrete ceiling—the floors were only eight feet apart. Ideally, there would be another two feet of space in which to place electrical, plumbing and other systems.
As Durkin conducted his own research on the building and read more about Luigi Moretti, he came to appreciate the care with which Moretti had designed the building to take advantage of its location. Light streamed into every apartment. Every apartment had a view of the water.
Despite its flaws, the Watergate was unique and Darby had buyers who wanted to live there. He built a sales center on the sixth floor to give prospective buyers a feel for what the building would soon become. All ducts for heating, cooling, electrical and plumbing were kept to the interior walls or to the sides of the rooms, opening up the views, which he planned to enhance with new floor-to-ceiling windows.
“It was the Watergate name and the water views were right there,” Darby recalled years later. New, modern apartments would “set the stage” for a new era at the Watergate, raising property values in the other three Watergate apartment buildings.
“We thought everyone would be happy,” he said.
MICHAEL DARBY AND BILL STEIN, A MANAGER FROM BLACKSTONE’S New York office, met privately with five members of the Watergate East co-op board, including Lewis Herring, the president. Stein and Darby explained they had discovered that seventy-five underground parking spaces and common areas, including the lower levels containing the Watergate fitness center and the former location of Jean-Louis Palladin’s restaurant, were in fact owned by Watergate East and leased to the hotel at very favorable terms—$1 per month over sixty years. It was originally some sort of accounting device, likely concocted by Giuseppe Cecchi or Nicolas Salgo in the 1960s, that essentially provided a subsidy from Watergate East, the first building in the complex, to the hotel. The leases would expire in twenty-five years and Lehman Brothers, Darby’s equity partner in the hotel, was insisting the hotel own the parking spaces outright, and therefore be in a position to sell them as deeded parking to purchasers of new apartments, or renegotiate the leases to new terms of ninety-nine years. It was the first time anyone on the Watergate East board had heard about the leases. If their predecessors on the board had known anything about the matter, they had not passed the information along. Darby and Stein put an offer of $900,000 on the table. The board asked Bill Wolf, a lawyer who lived in Watergate East with his wife, Audrey, a literary agent, to represent the association in the negotiations with Darby and Monument Realty.
Darby’s offer set in motion a chain of events that would divide parts of the Watergate community into warring factions for the next five years.
IN LATE MAY, THE WASHINGTON POST REPORTED ON DARBY’S plans to close the hotel and reopen the building as condominiums. The sluggish economy, and the sharp decline in travel following the September 11, 2001, attacks, had hit all local hotels very hard. The Watergate, because of its location—“blocks from the core of downtown and not near a Metro station,” the Post reported—drove Blackstone and Monument to conclude the hotel had more value as condominiums than as a hotel.
As soon as the threat of conversion appeared in print, several parts of the Watergate community rose in opposition. Barbara Spillinger, a Watergate West resident, said she and her neighbors feared the condos could become housing for nearby George Washington University students. The developer could sell condominiums to anyone, and owners could resell their apartments at any time. A cooperative apartment, however, can require every owner to be approved by the board of directors, which can consider financial and other factors in making their decisions. “Co-ops give us more control over who buys,” Spillinger said. Ron Cocome, president of the Foggy Bottom Association and a resident of the Watergate, opposed converting the hotels to condos, but if Darby reopened the hotel as a cooperative—mirroring the ownership structure in each of the three residential buildings in the Watergate complex—that might be acceptable.
On June 2, 2003, the Washington Post ran a letter from Peter Ehrenhaft with the headline WARY AT THE WATERGATE. Ehrenhaft, a Watergate West resident, was a former partner with Fried, Frank, Harris, Shriver & Kampelman, the first tenant in the Watergate 600 office building. He argued for retaining the hotel, blaming the drop-off in business not on the hotel’s location, but on “shortsighted” managers who had driven away Jean-Louis Palladin; a revolving door of owners who had failed to invest in the hotel, including its health club, which had become a “run-down relic”; and “an attitude of separation and aloofness from the Watergate community and the neighborhood.” If each of these issues was addressed, he suggested, the hotel could thrive once again.
Darby reached out to the boards of each of the three Watergate apartment buildings to present his plans and, he hoped, gain their endorsements. Watergate South, the building farthest from the hotel, supported the proposal without much prodding. Dorothy Miller, president of the Watergate West co-op board, described the initial discussions with Darby as “constructive,” but said several issues needed to be addressed, including an ongoing shortage of parking at Watergate West, which might be exacerbated by conversion of the hotel to residences; chimneys and other rooftop structures Darby proposed for the new penthouses, which might spoil views from the upper floors of Watergate West; and his plans to place surface parking outside the lobby, which was inconsistent with the original design of Luigi Moretti, who placed all Watergate parking belowground.
To address at least one of the initial objections some Watergate residents were raising, Darby agreed the new residences in the hotel would be cooperative apartments, not condominiums. Local real estate experts, however, questioned the timing, noting that another 8,300 new condos were expected to be built in the District over the next two years. Darby waived away any concerns. “There haven’t been many high-end residential units,” he said.
That left the issue of the parking spaces and the common areas. According to Darby, the Watergate East board had not set aside sufficient reserves “for many, many years.” The building was in constant need of repairs and improvements, and was looking “run-down.” The residents were older—he thought the average age must be close to seventy—and therefore possibly reluctant to set aside an appropriate level of reserves “because they didn’t expect to be there much longer.” This worked to his advantage, he thought. The owners might look at the sale of the parking spaces as a way to build up the building’s reserve funds, painlessly.
In September 2003, Darby agreed to pay $4.25 million for the parking spaces and common areas, totaling 46,000 square feet. But when Wolf presented the deal to the board, they voted six to five against approving the transaction. He was stunned.
Some members of the board did not want any part of Watergate East to be sold to
Monument Realty, fearing a sale would simply clear a path for Darby to close the Watergate Hotel. “Looking back,” said Audrey Wolf, who later followed her husband on the Watergate East board, “I don’t remember why they wanted so fiercely for the hotel to remain, but they did.” Others thought the issue was too important to decide without a vote of the owners. As a compromise, the board voted to bring the issue to the entire membership of Watergate East in January and sent a letter to the District Zoning Commission, going on record as opposed to the conversion of the hotel to apartments until a full vote of the residents could be conducted.
On January 22, by a vote of 54 to 46 percent, a majority of the Watergate East co-op shareholders voted to approve the sale. The vote was measured in shares, allocated based on the square footage of apartments, with 33,428 votes for the sale and 28,535 votes against. Measured by the number of apartments, however, 100 owners voted in favor of the sale, but 101 voted against it.
On January 29, at 6:30 P.M., the District Zoning Commission took up the petition from Blackstone Real Estate Advisors to modify the original permits for the Watergate in order to replace the hotel with another apartment building. The first witness was Benjamin Kass, a lawyer for Watergate East, who dropped a bombshell: He revealed that four dissenting board members had just filed suit in the Delaware Court of Chancery challenging the January 22 vote. Kass explained that the Watergate East board, by a vote of six to five, had determined that 75 percent of the membership was required to approve the sale of the parking spaces and common areas—a threshold had not been met at the vote on January 22. Members of the board supporting the sale, however, had taken the position that approval only required a majority of those present or by proxy. Until the question was resolved by the Court of Chancery, Kass said, it was impossible to say whether Watergate East supported converting the Watergate Hotel into apartments.
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