WEST HOLLYWOOD, Calif. — Nick Jones, the founder of Soho House, a chain of members-only clubs that includes an outpost here, knows about exclusivity. Last winter, after he found the New York Soho House too crowded, he cut several hundred members from the rolls, sacrificing revenue to maintain the cachet his company depends on.

But now Mr. Jones finds himself at a crossroads. At the same time that he is striving to keep his clubs exclusive, he is spending more than $100 million to expand the chain, which he started in 1995 in London. That means reaching a larger audience without diluting the Soho House name.

Nowhere is the contradiction more evident than in Miami Beach, where the Soho Beach House — a private club grafted on to a hotel — will open next month, with 50 guest rooms and six suites.

Mr. Jones described the hotel as “really a private club with bedrooms.” He added that, by Miami Beach standards, having just 50 rooms makes it “minute.” At that size, he said, “we’ll be able to control everyone going through the door.”

Mr. Jones’s company agreed to operate the Beach House, on an oceanfront site immediately south of the vast Fontainebleau hotel, more than four years ago. The complex, then controlled by the New York developer Ryder Properties, was going to include 60 condominiums as well as the club and the hotel.

But Mr. Jones was worried that the condominiums would not leave enough space in the building for the kinds of amenities Soho House members expect.

So after selling 80 percent of his company in 2008 to Richard Caring, the British fashion mogul, Mr. Jones bought out Ryder Properties. Then he canceled the condo portion of the project, and gave about a dozen buyers their deposits back, with interest.

His goal was to increase control over the property, even if that meant investing far more of his company’s money than under the original plan. “I had plenty of chances to get out of the deal,” Mr. Jones said. “I didn’t want to.”

Once he was calling the shots, Mr. Jones sent the project’s architect, Allan T. Shulman, back to the drawing board, asking him to expand the club and hotel into spaces once reserved for condos.

“We needed the space to put in the Soho House features,” Mr. Shulman said. In the redesign, he said, he added a spa (under the Cowshed brand, also part of Soho House UK) and a rooftop pool, as well as what Mr. Shulman called “an elaborate and discreet series of spaces” for eating, drinking and socializing. Soho Beach House encompasses the former Sovereign Hotel, a landmark 1940s Art Deco building, and a new 15-story tower.

Though the facade and lobby of the Sovereign have been restored, the other interiors are entirely new. The original Sovereign had about 100 guest rooms, Mr. Shulman said; Soho Beach House, with twice the square footage, has only half that many. (The largest rooms are 1,500 square feet)

The décor will include about 140 artworks, many contributed — that is, bartered — by Soho House members “as part of a food and drink program,” Mr. Jones said.

As building plans took shape, Tim Geary, the director of membership and marketing for Soho House North America, began identifying potential members for the club. At first, he said, the rolls will be limited to 750. “We prefer to omit a few of the most obvious candidates at the beginning than to have a list that is all-encompassing,” he said.

But no matter how short the list, nonmembers will have access to all the club facilities if they stay in the hotel. And they will enter through the main entrance, in the Sovereign Hotel building at 4385 Collins Avenue.

At several Soho House properties in Britain, the ground-floor restaurants are open to the public, but only club members can go upstairs, Mr. Jones said. That arrangement, he said, works well. But in Miami, he said, “it’s going to be slightly challenging, because it’s not as simple as upstairs and downstairs.”

Mr. Jones, 46, spoke over lunch at the West Hollywood Soho House, where he appeared to know many of the 1,000 or so members by name.

That club opened in March on the top two floors of an office building on Sunset Boulevard. It has already attracted members of Hollywood’s old and new guards, including Dustin Hoffman, who hosted a screening of “The Graduate,” and Zac Efron, who came by to watch the N.C.A.A. basketball finals. But there are no public facilities at all, which means it is easy to control who comes and goes.

At the Soho Beach House, the price of admission will not be membership, but about $575, the lowest rate for rooms facing the Intracoastal Waterway. (Oceanfront rooms will be more.)

Mr. Jones said that he does not plan to turn anyone away but that he hopes people who book the rooms will be members — or people who could pass for members. At another of his properties, Babington House, an inn in Somerset, England, he said, “sometimes people arrive, and it’s so obviously not for them. If they want to move to another hotel, we totally understand.”

Mr. Jones founded the original Soho House over a London restaurant in 1995. It quickly became an art and entertainment industry hangout — Damien Hirst was an original member, Mr. Jones said — and led to the New York club, in the meatpacking district, in 2003. The clubs, including a Berlin outpost that also opened this year, have a total of about 22,000 members. A spokesman for Soho House said the company’s revenue was $94 million in 2009.

In 2008, Mr. Caring made a huge investment in Soho House, buying out 28 limited partners, including David Bowie, for £105 million, about $161 million today. That left Mr. Jones with a 20 percent stake and the means to expand.

When Mr. Caring bought into the company, the Miami project was already under way. But construction was taking longer than Mr. Jones had hoped, which had the benefit of letting him change course.

Ryder Properties had bought the Sovereign Hotel for $25 million in 2005. Soho House paid $13 million for a portion of the property, while arranging to lease the rest from W. P. Carey, a New York lender, according to Guy Williams, chief financial officer at Soho House. Altogether, the company is spending about $100 million on the Miami project, some from a £50 million credit line at HBOS.

Mr. Jones brought in the interior designer Martin Brudnizki, whose projects in New York include the restaurant Le Caprice, owned by Mr. Caring. For Soho Beach House, Mr. Brudnizki is looking to Miami in the 1940s as well as Latin America for influences. (Mr. Geary, the membership director, said many of the new members will be from Latin American countries.) He was asked to avoid any ostentation that might seem off-putting to potential members. “The shiny thing doesn’t do it for locals,” Mr. Geary said.

Half a century ago, he said, people tried to sneak into the elaborate pool area of the Fontainebleau from the modest Sovereign Hotel next door. Now, he predicted, they will go the other way — using the Fontainebleau to try to sneak into the Soho Beach House.

Had construction gone faster, the club might have opened in late 2008, as the economy was crashing. Now, Mr. Jones said, there is a chance the worst is over. “The great thing about Miami,” he said, “is it takes so long to build down there, the recession will have come and gone.”

[nytimes.com]

Even multi-billionaires like Ty Warner are not immune to the latest economic conditions. Mr. Warner, who made his fortune manufacturing Beanie Babies, owns the Four Seasons Hotel New York—but maybe not for much longer.

He is in negotiations to sell the posh property to a group of investors, according to several news reports.

The 368-room hotel, where room rates start at around $1,000, has been hit hard by the downturn in business and international travel to the city. Like all luxury hotels, its occupancy rate has been well below the city average of about 80%.

But more importantly, Mr. Warner has fallen behind on his debt payments. He was unable to make a payment on Jan. 9, according to sources familiar with the situation.

According to Real Estate Alert, the property has $185.6 million in mortgage debt. But the property is tied to a larger debt package that includes three other hotels, and the Four Seasons New York being used as collateral for the larger loan, according to the trade publication’s Web site.

Hotel experts are surprised that Mr. Warner would try to sell the midtown jewel in this depressed real estate market. Given Mr. Warner’s vast wealth, “You’d think he could ride through this downturn,” said Sean Hennessy, chief executive of Lodging Investment Advisors.

Even so, they say the mogul would rather sell the property than bring in other investors. “I think he has a relatively unique style, so he would probably sell it outright and be done with it or keep it himself and finance it himself,” Mr. Hennessy said.

The company did not return calls for comment.

[crainsnewyork.com]

The condo in Rancho Palos Verdes, Calif., has three bedrooms, three bathrooms and sweeping ocean views. It can be yours for just under $2.6 million.

There’s one catch: If you buy it, you will be able to use it for only 60 days a year and no more than 29 days in a row.

The California Coastal Commission, an agency founded in 1972, wants to ensure public access to the state’s 1,100 miles of shoreline. So when Lowe Enterprises requested permission to build 50 condominiums, which the company calls casitas, in an oceanfront resort called Terranea in this lush section of southwest Los Angeles County, the commission demanded restrictions. The idea was to keep owners from monopolizing access to the ocean.

According to Peter M. Douglas, executive director of the commission, developers determined that condominiums would be more profitable than hotels. But because the commission’s goal is to maximize public access, it imposed restrictions meant to make the condominiums available to the public as rentals.

Developers agreed to the restrictions. But that was during a bull market. Now, Mr. Douglas said, developers say that building condos with the restrictions “turned out to be more trouble than it’s worth.”

At Terranea, the initial offering of units sold out practically overnight in 2006, according to Maureen Megowan, a real estate agent in neighboring Palos Verdes Estates.

But “sold out,” in this case, means that buyers signed contracts intending to buy. When it was time to close, in mid-2009, the purchasers couldn’t get financing. Matt Walker, a senior vice president of Lowe, would not say how many units have closed, only that “the financing market has changed.”

Terranea’s troubles may not bode well for the Trump SoHo, a 391-unit hotel and condominium building in Manhattan that is expected to open in April. There, owners will be allowed to use their units no more than 120 days a year and no more than 29 consecutive days in any 36-day period.

Rodrigo Niño, the president of Prodigy Network, which is marketing units at the Trump SoHo, said the use restrictions “shouldn’t be a problem because the buyers are from overseas anyway” and will use condos as second or third residences. The units are not time shares; they are being sold outright, at prices that start at about $1.2 million for a studio. But they may feel like time shares to buyers, who, after paying those prices, will be told they have to vacate after just under a month. A renter could move in for the rest of the year.

At the Trump SoHo, the occupancy limits are the result of a zoning dispute. The building is in a manufacturing zone, a designation that allows construction of hotels, but not permanent residences. After the local community board voted against the project, the Bloomberg administration negotiated an agreement to allow the condos, so long as there were residency restrictions that would help create a hotel-like environment.

The restrictions may be one reason the units failed to sell during an initial offering in 2007. The owners hope the opening of the hotel will revive interest in the building, according to Eve McGrath, a vice president at Rubenstein Public Relations, which represents the project.

Condos built within hotels are nothing new. But in a typical “condotel” owners can use their units freely; some units even become primary residences. An owner who isn’t in residence can choose to put the unit in a rental pool to bring in income or can keep it empty.

At Terranea and Trump SoHo, buyers don’t have the second option. They are required to allow the hotel to rent their units when they’re not in residence (though the owners do get a portion of the rent). The requirements are enforceable, said Eric Glazer, a Florida attorney who often represents condo buyers.

Experts pointed to half a dozen other condo developments around the country with use restrictions. The Suites at Beaver Creek Lodge, near Vail, Colo., requires owners to make their units available for rental 300 days a year.

And at the 35-unit Beach Village, on the grounds of the Hotel del Coronado near San Diego, owners are limited to no more than 90 days of occupancy each year (and no more than 25 in any 50-day period). As at Terranea, the restrictions were negotiated with the California Coastal Commission.

When units at Beach Village went on the market several years ago, they sold out despite the restrictions. Most of the buyers, according to Ruth Ann Fischer, a real estate agent with an office in the Hotel del Coronado, live elsewhere and use their condos for vacations.

Ms. Fischer said the occupancy limits were strictly enforced. “We’ve turned owners away,” she said. “They’ve called to make reservations, and they couldn’t because they’ve exceeded their time frame.”

The upside to the use restrictions is that condo owners can earn rental income. At Terranea, units are available for up to $1,650 a night. The developer retains 50 percent of the rent and pays the rest (less a housekeeping fee) to the owner. That could mean income of as much as $700 a night.

But the carrying costs on the unit — including real estate taxes but not including the mortgage or other costs of ownership — are more than $65,000 a year, according to Ms. Megowan, who with her husband, Bruce, a real estate broker, prepared a detailed analysis of the figures. According to the Megowans, a unit would have to be rented almost 100 nights a year to cover the carrying costs. And that might be difficult at a time when Los Angeles hotels are in a slump. (Average occupancy in 2009 was 64.3 percent, down 9.6 percent from 2008, according to Smith Travel Research.) “There is essentially no return on your money for a long time,” Ms. Megowan said.

Mr. Walker of Lowe Enterprises said in an e-mail message that the company would not comment on financial matters.

Terranea is having other problems. Lowe has defaulted on several loans, which has made banks unwilling to lend to buyers of individual units. But the occupancy restrictions won’t make selling the units any easier.

Ms. Megowan said the three-bedroom unit she listed for $2.6 million was not attracting much interest.

Lowe “may have done the right thing for the top of the market,” she said, “but at this point it’s not working.”

[nytimes.com]

Lenders have filed to foreclose on the Four Seasons Resort and Club Dallas at Las Colinas, a 400-acre hotel, spa and golf club in Irving.

The more than 400-room hotel is one of the state’s top-rated accommodations and hosts the annual HP Byron Nelson Championship golf tournament.

U.S. Bank NA is seeking repayment of a $183 million loan on the property and has scheduled a forced sale on Feb. 2, according to legal filings.

The foreclosure posting is the largest in North Texas in more than 20 years.

“I don’t think we’ve seen one this large in the business cycle,” said George Roddy, CEO of Addison-based Foreclosure Listing Service. “That’s a very big complex.”

The California-based owners of the Four Seasons Resort have been in a dispute with the project’s lenders since last fall.

In November, a lawyer for Los Angeles-based BentleyForbes said the borrowers had missed a scheduled debt payment and were negotiating with the mortgage holders. He said the lenders were taking tactical moves to “get their attention.”

The Four Seasons has been on watch lists of major properties with troubled debt for several months while negotiations with the lenders were continuing.

The hotel owner said Wednesday that the foreclosure posting was not unexpected.

“BentleyForbes remains in proactive discussions with its lenders at the Four Seasons Dallas and is committed to working out a successful financial structure recognizing the interests of all vested entities that will bridge the challenges of the current situation,” spokesman Chris Egger said.

“BentleyForbes has demonstrated its good faith and continued commitment to the Four Seasons Resort & Club Dallas at Las Colinas through $60 million of improvements during the past two years, improvements that reflect a significant contribution of capital and vision to the long-term success of the property.”

BentleyForbes has owned the Irving resort complex since 2006. Four Seasons operates the facility with a long-term contract.

“We do not expect any change in our day-to-day operations or services,” Las Colinas Four Seasons general manager Michael Newcombe said Wednesday. “This request for [debt] restructuring is consistent with similar actions being taken by many hotel owners nationally and internationally in response to global economic conditions. We are not unique in this regard.”

George Conant, tournament chairman for the 2010 HP Byron Nelson Championship, said the golf tournament will not be affected.

“We are pleased with the improvements that have been made to the property in recent years to enhance the golf and fan experience at the tournament, and we look forward to another fantastic championship this May,” he said.

The hotel complex is by far the largest such property to wind up on North Texas foreclosure lists in recent years.

In 2001, lenders foreclosed on the 286-room Westin Beechwood hotel in North Fort Worth, but the debt on that property was only $53.5 million.

Last year more than 2,400 commercial properties, including hotels, were posted for foreclosure in the Dallas-Fort Worth area, according to Foreclosure Listing Service.

Commercial foreclosure filings were up 27 percent in 2009.

Staff writer Bill Nichols contributed to this report.

By STEVE BROWN for The Dallas Morning News

[dallasnews.com]

Private-equity firm CIM Group has teamed up with New York developer Harry Macklowe to help him regain control of what is regarded as one of the most valuable vacant lots in the world, according to people familiar with the matter. The site of the old Drake Hotel, in Midtown Manhattan at Park Avenue and 56th Street, has been under the cloud of foreclosure for the past few months after the collapse of Mr. Macklowe’s empire.

In the other opportunistic move, private-equity giant Blackstone Group LP is making a grab for Highland Hospitality Corp., a real-estate investment trusts that owns 27 hotels. Highland has been struggling to restructure its $1.7 billion debt load amid the worst downturn for the hotel industry in decades.

Both Blackstone and the partnership of CIM and Mr. Macklowe are using a strategy that is expected to become increasingly popular this year: going after distressed commercial-property assets by buying debt or paying off creditors at a steep discount.

In the case of the Drake site, the partnership has signed a deal to pay off about 10 creditors that hold the $510 million loan the developer took out primarily to acquire the site. The creditors are getting paid as much as 90 cents on the dollar and as little as zero, the people with the knowledge of the matter said.

Deutsche Bank AG, which made the loan, sliced it into four tranches and then syndicated it to the investors. IStar Financial Inc. and Sorin Capital Management hold the senior-most slices of the debt and Realty Finance Corp., owns the junior-most piece. Representatives of Macklowe, CIM and the creditors declined to comment.

Meantime, Blackstone is aiming to control the restructuring Highland by buying a chunk of so-called mezzanine debt with a face value of about $320 million from Wachovia Corp. That piece of debt, in a key position between the equity and the first mortgage debt backed by the hotels, gives Blackstone a significant say in how any restructuring unfolds, people familiar with the matter said.

Blackstone also purchased the debt at a significant discount to its face value, according to a people familiar with the matter. Representatives at Blackstone and Wachovia declined comment.

Blackstone itself is trying to restructure the $20 billion in debt it took on when it bought hotel chain Hilton Worldwide Inc. in 2007 at the market peak.

The deals come as pressure builds in the commercial real-estate market with landlords struggling with rising vacancies, falling rents and heavy debt loads. According to Real Capital Analytics, a New York real-estate research firm, more than $160 billion of commercial properties in the U.S. are now in default, foreclosure or bankruptcy.

During most of 2009, opportunistic investors accumulated cash to go after distressed assets but there was very little deal activity primarily because lenders were unwilling to unload debt at distressed prices. But this year, more lenders are expected to take hits as the financing drought continues and rents and occupancy rates keep falling.

The amount of debt available for sale is skyrocketing. Many banks remain reluctant to sell at prices investors are demanding. But the government and servicers responsible for handling defaulted commercial mortgages that were packaged into bonds, known as commercial mortgage-backed securities, or CMBS, are emerging as big sellers.

Currently, the Federal Deposit Insurance Corp. has about $30 billion in real-estate debt that had been held by the scores of banks that have failed since the economic downturn, according to the agency. CMBS servicers also are emerging as sellers because, unlike banks, they have limited flexibility to extend or restructure troubled loans. Carlton Group, a loan-sale adviser in New York, is currently marketing $307 million CMBS loans in one of the largest sales by a nongovernmental agency.

Private-equity funds, sovereign-wealth funds and other investors have accumulated billions of dollars in the hope of taking advantage of the carnage in the same way that investors did during the last real-estate downturn.

“This is the first inning in a nine-inning game,” said Keith Barket, head of the real-estate business at Angelo, Gordon & Co., a New York-based private-equity firm specializing in distressed investments. “It is going to take three to five years for the ownership of overleveraged properties to change hands to buyers with new equity.” Since last summer, Mr. Barket’s team has closed about a dozen transactions, totaling $500 million, where it acquired properties for about half of what they traded for two years ago.

Risks remain. The hotel industry continues to struggle although some analysts believe that a slight recovery may start later this year. Blackstone’s effort to control Highland, by buying mezzanine debt, hinges on its expectation that the chain is still worth more than its $900 million in senior debt. If that calculation is wrong, Highland’s senior creditors will likely wind up controlling the properties. The Highland portfolio, made up mostly of upscale hotels, includes the Hilton Boston Back Bay, the Renaissance Nashville and a Ritz-Carlton in downtown Atlanta.

If the Drake deal closes in two weeks as expected, CIM and Mr. Macklowe will own what may be the world’s most valuable rubble-strewn lot, once the site of the Drake Hotel, which was built in 1926.

Mr. Macklowe bought and then demolished the hotel in 2007, intending to build a major office tower atop a base of high-end stores.

By LINGLING WEI, KRIS HUDSON AND CHRISTINA S.N. LEWIS for the Wall St Journal

[wsj.com]

Kohler recently refurbished Riverbend, an estate home constructed in 1923 by Herb’s ancestor Walter J. Kohler, then Governor of Wisconsin and President of Kohler Co. It was considered one of the 40 great mansions of North America. In 2001, Kohler Co. refurbished the estate and re-opened it with 31 rooms and its own spa as an exclusive private membership club.

Hamilton Hall was originally opened as the Grand Hotel in 1895 to capitalize on the rapid expansion of St Andrews as a popular tourist destination for golf and sea bathing. Founder Thomas Hamilton is said to have commissioned the construction immediately after his application for membership had been rejected by the Royal and Ancient Golf Club. In an attempt to draw attention away from the Royal & Ancient, Hamilton constructed the much larger and more extravagant building adjacent to it.

During World War II, the hotel was requisitioned by the armed forces and never reopened as a hotel. Shortly after the end of the War, the hotel was acquired by the University of St Andrews and was opened as a hall of residence in 1949 under the name Hamilton Hall. In 2005, the University announced that it had sold the Hall as the result of an unsolicited bid and consequently the university session 2005-06 would be the last year Hamilton Hall would be open as a hall of residence. The building is one of the most famous in St Andrews as it was featured in the film Chariots of Fire and in global television coverage of the many golf tournaments played on the Old Course.

“We are honored to own such an iconic building in the home of golf. We are excited about the development opportunities for Hamilton Hall, and appreciate both the support and enthusiasm the local community has for the property,” said Kohler. “We look forward to gathering input from the townspeople and the Fife Council as to what the name of the building should be along with its future use.

Kohler Co. intends to conduct a “public consultation process” over the next few months toward creating a unique and economically viable product that will enhance St Andrews offering as the world’s premier golf destination. Herb Kohler suggested that “individuals who may one day occupy Hamilton Hall would be afforded a number of hospitality amenities including public and private dining at the Old Course Hotel, concierge and valet service, Kohler Waters Spa membership and Duke’s Golf Club membership, as well as a week at our very special private club called Riverbend in Kohler, Wisconsin U.S.A.”

“Our priority is to complete the preservation of Hamilton Hall and return it to a viable and prominent position in St Andrews for generations to come,” Kohler continued. “Our company has long demonstrated the passion and ability it takes to restore historic buildings back to great distinction.”

www.destinationkohler.com

[fractionallife.com]

LEM bagged the troubled property at 201 Park Avenue South after a brief bidding war in which Istithmar officials tried to buy the 270-room hotel on the condition that they not have to assume the hotel’s October and November debt payments.

Sources at the auction told The Real Deal that the hotel would continue to operate under the W brand, while LEM would make an undisclosed amount of capital improvements and position the hotel for an eventual recovery of the New York economy.

“Despite the recent downturn of the hotel industry, and the defaults that led to today’s foreclosure auction, we are optimistic about the future,” LEM’s affiliate company said in a statement.

Istithmar, the private equity arm of state-controlled Dubai World, acquired the W Union Square in 2006 for $285 million, one of the highest prices ever paid for a New York hotel, on a per-room basis.

According to data from Manhattan-based research firm Real Capital Analytics, the W Union Square acquisition was financed with a $115 million mortgage loan and a securitized $117 million mezzanine loan from Column Financial, the commercial real estate arm of Credit Suisse First Boston.

In an Oct. 28 report, Realpoint said that the property’s $115 million mortgage loan was transferred to LNR Partners, a Miami-based special servicer, and was placed on Realpoint’s watch list.

LNR issued a default notice Nov. 16 and told Starwood to place all funds after operating expenses into a lender-controlled lockbox, Fasulo said.

In addition to the $2 million for the hotel itself, LEM assumed $212 million in debt including the $115 mortgage note, the $60 million A note, the $37 million B note, plus the costs of capital improvements and undetermined amount of defaulted debt from the last two months, according to sources familiar with the deal.

Under today’s mezzanine foreclosure auction, the $20 million C note, held by LEM, was the actual debt being auctioned off, according to Allen & Overy, who oversaw today’s sale.

Ray Cirz, chief executive of appraisal firm Integra Realty Resources, noted that average Manhattan hotel rates are down 25 percent from a year ago to below $300 per night, a level not seen since 2004. Occupancy rates have also fallen to about 75 percent, a level not seen since 2004.

By David Jones for The Real Deal

[therealdeal.com]

He once declared after an ill-fated bet on US Airways that he would resist any further urges to invest in airlines. But he ventured anyway into a high-end business that is an airline competitor of sorts — NetJets.

Right about now, he may wish that he had simply bought more of the railways he has accumulated over the years.

At NetJets, the returns have been disappointing — and lately the losses severe. Through his investment company, Berkshire Hathaway, he bought the private jet travel business, which caters to the affluent, for $725 million in 1998. Even though Berkshire does not provide detailed results for this small piece of its empire, insiders confirm that Mr. Buffett has yet to recover his investment.

With problems mounting at the unit — heavy losses and allegations of business improprieties — Mr. Buffett dispatched David L. Sokol to straighten out NetJets in July.

Mr. Sokol’s effort to turn the company around is being watched closely, in part because it provides a glimpse into the management style of a man considered a possible heir apparent to Mr. Buffett at Berkshire.

Mr. Sokol, who previously ran a utility company, has his work cut out for him. NetJets is a luxury business, but its revenue is shrinking, its management is in upheaval and its problems include accusations of improper workplace behavior.

While some former NetJets executives describe his management approach as overly aggressive, Mr. Sokol counters that he merely has “high expectations” for planning and execution and conveys them to employees.

Mr. Sokol describes his mission succinctly. “We are instilling a culture of cost discipline and planning.” In an e-mail message to the staff, he wrote that he had never seen a company of NetJets’ size that operated “without an integrated business plan” and with a budget that was “often ignored.”

Within a week of his arrival in July, Richard T. Santulli, the founder and chief executive of NetJets, resigned. According to several people close to the company, Mr. Santulli was unhappy that a Berkshire executive was brought in to provide oversight.

Mr. Santulli, who declined to comment for this article, is widely considered a visionary for creating a time-share business model for air travel, and a number of current and former executives fondly describe how he treated employees as family, perhaps a shortcoming when the business turned sour and cuts were called for. Initially, Mr. Sokol, 53, had been looking into allegations of excess spending and a consultant who was paid by both NetJets and a supplier. Those issues had been described in several letters to Berkshire from company employees, although the company has not identified the writers.

In a recent phone interview, Mr. Sokol said he had “documented the issues and gotten them fixed.”

After Mr. Santulli resigned, Mr. Sokol became chairman and chief executive, this time with a mandate to rein in costs. That decision was interpreted as a strong Buffett endorsement of Mr. Sokol, who he had no previous experience in airlines or luxury goods.

At MidAmerican Energy Holdings Company, Mr. Sokol turned a small energy company into a leading utility company supplying electricity and natural gas. From his post at the utility, now a subsidiary of Berkshire Hathaway, which acquired the company in 2000, he notably supported the idea of lowering greenhouse gas emissions but rejected a complicated cap and trade system to achieve the goal. The Iowa company, where he still serves as chairman, posted $13.9 billion in revenue last year.

“If there is something prized at Berkshire, it is the ability to commit capital,” said Thomas A. Russo, a partner at Gardner Russo & Gardner, whose clients own Berkshire Hathaway stock. “Mr. Sokol has over the years committed substantial amounts of capital both within the U.S. and overseas, and the returns on those investments have been strong.”

But if Mr. Sokol is to succeed at NetJets, a company a fraction the size of MidAmerican, he needs to lower its costs while maintaining a luxury image.

Delivering a pleasant experience is crucial to the company’s marketing efforts. None other than Mr. Buffett has said so. A NetJets user, he has posed with his pal Bill Gates in NetJets ads and endorsed private jet travel as a life enhancer. By owning stakes in jets that they share with other owners, customers get private flights for far less than the cost of owning their own plane.

The recession has taken a toll on the business, though. NetJets lost $531 million in the first nine months of 2009, and revenue fell 42 percent from a year earlier, to $2 billion. And that was not its first loss. Although NetJets had pretax profits between 2006 and 2008 of more than $550 million, according to one person knowledgeable about the company who spoke only under condition of anonymity, its record has been spotty.

“I call it the Scooby-Doo profitability rationale,” said Robert Aboulafia, an aviation consultant with the Teal Group, a consulting firm. “They were always close to achieving profitability, but there was always one thing that stood in the way, and it was usually related to expansion.”

As sales fell off in 2008 and 2009, Mr. Santulli had begun selling some planes, but he resisted more drastic steps. To avoid layoffs, he favored voluntary measures like asking pilots to forgo holiday pay and to take additional time off. His reluctance to take more aggressive action may have been part of his downfall, Brian Foley, an aviation consultant, suggested.

Could NetJets have been tougher on costs earlier? “Sure they could,” said a former company executive because he did not want to speak publicly about NetJets after leaving. “But clients know that customer service really matters. Without it, air travel is just a commodity product and you can’t compete.”

Mr. Sokol is cutting more deeply. He has begun a program to reduce NetJet’s 7,800-employee work force by up to 11 percent, including 495 of its 3,100 pilots, and has accelerated plans to sell as many as 10 percent of the company’s 800 planes. Some of the high-end perks, including an annual poker tournament in Las Vegas and Loro Piana sweaters for jet owners, are going away, too. Over all, he expects to take $200 million, or 22 percent, out of the company’s operating costs.

Some former executives have complained about his management methods. A onetime NetJets executive, echoing the views of several others, said that Mr. Sokol was intimidating and put people on the defensive. “When he first came in, he got on the phone with a group of us and said: ‘I expect complete candor. I am taking notes and I expect full disclosure’ “ or their jobs could be at stake, this person recalled.

Mr. Sokol said he simply read from a script and did not make threats. He recalled the script thusly: “If you answer deceptively, that will not be looked upon favorably by the board.”

One thing that has changed is the top management, with some bumpy transitions.

Soon after Mr. Santulli left, Mr. Sokol promoted Ben Murray, who had overseen executive charters. Just weeks later, Mr. Murray was demoted to head of global asset management, where he oversaw the buying and selling of aircraft. Mr. Sokol said that Mr. Murray requested the change to “deal with family issues.” Mr. Murray declined to comment.

Meanwhile, Jim Jacobs, who had been Mr. Santulli’s No. 2, was made an adviser. The transition, according to Mr. Sokol, was part of a longstanding plan by Mr. Jacobs to leave the company at the end of January. Mr. Jacobs, too, declined to comment.

Then in October, the European chairman, Mark Booth, and that unit’s chief executive, Bill Kelly, abruptly resigned. Both of those men also declined to comment for this article, but several people close to the men said they were frustrated at being treated the same as their United States counterparts, even though the overseas business had been profitable for several years. They cited an e-mail message to the entire management team describing cost-control measures, in which Mr. Sokol wrote that any attempt to circumvent them would be dealt with “harshly and swiftly.”

The company had operated on some false assumptions, Mr. Sokol said in a recent interview. “I think there was a view that you could make a good return given who your customers were,” he said. Mr. Foley, the aviation consultant, estimates that NetJets’ customers, fractional jet owners, spend an average of $250,000 a year.

But Mr. Sokol says “there was not as much pricing power as one would have thought.” Though NetJets dominates the field with about 70 percent of the market, rivals like Flight Options provide intense price competition.

Now Mr. Sokol must prove that he can make the business hum without damaging one of the best-known luxury brands in travel. With the cost cuts, he expects the company to be profitable next year, but gone are the suites at the Ohio State University football games and North Face jackets for employees.

Mr. Sokol “had to do something dramatic,” said Bruce C. Greenwald, a professor at Columbia University Business School. “But changing a culture is very difficult, and it is not therefore clear that things will work.”

By GERALDINE FABRIKANT for The New York Times

[nytimes.com]

In U.S. Bankruptcy Court in Miami, a subsidiary of Mr. Icahn’s firm, Icahn Enterprises LP, outbid Penn National $155 million to $145 million to become what is known as the “stalking horse” bidder, setting the base price for auction. The Icahn bid includes about $50 million for debtor-in-possession financing that would be paid back to the company if it is outbid in an auction expected early next year.

Construction was halted on the 4,000-room Fontainebleau after it fell into bankruptcy last June. Many in Las Vegas see the partly finished skyscraper as a potent symbol of the city’s decline during the downturn.

Mr. Icahn said in an interview that if he ends up owning the Fontainebleau he may partner with another company to complete construction. He is likely to move slowly on restarting the work, he said.

Penn National last week offered $50 million for the project, plus $51.5 million for debtor-in-possession financing to fund the project’s costs until a sale occurs.

That was just a tiny portion of the more than $2 billion that backers of developer Jeffrey Soffer have already poured into the project’s construction.

Penn National estimates it will take an additional $1.46 billion to complete the project.

Penn National Chief Operating Officer Timothy Wilmott said the company decided to stop bidding at $145 million because it doesn’t believe the casino-hotel is worth more than the cost to finish the project given that gambling and hotel revenues in Las Vegas have fallen amid the downturn.

“One of the concerns we have is that the value of this property is really the value to complete the asset, and every dollar you spend up front now the customer never sees,” Mr. Wilmott said. “That’s a concern of ours that has caused us to pause.”

Mr. Wilmott said Penn National may still bid on the project once it goes up for auction, adding that he first heard of Mr. Icahn’s interest in the Fontainebleau over the weekend.

Mr. Icahn in recent years acquired three Las Vegas properties out of bankruptcy, including the Stratosphere hotel and tower in 1998. He sold all three casinos in 2007, plus another in nearby Laughlin, Nev., for $1.3 billion to Goldman Sachs Group Inc.

By ALEXANDRA BERZON for Wall Street Journal

[wsj.com]