Anatomy of the Deal

Rising from the ashes of bankruptcy,the restoration of the Book Cadillac Hotel proved to be one of the most complicated redevelopment efforts in the nation. It included 22 levels of financing, a clouded title, political theatrics inside the governor’s office, creative equity, and the fulfillment of one man’s dream.
10185
The Ferchill Group
Business: Real-estate development and management
Executive: John Ferchill, Chairman and CEO
Headquarters: Cleveland
Employees: 50
Revenue: $200 million (2007) Photograph by Glenn Triest

Despite being accused of throwing Gov. Jennifer Granholm under the bus, investing $8 million of his own money before renovation crews ever set foot in the Book Cadillac Hotel, and losing another $9 million in financing days before the closing only to replace it less than 24 hours later, John Ferchill still bristles at the one-sentence letter he received from the National Trust for Historic Places disapproving part of the tax credits needed for the nearly $190-million restoration effort — one of the largest projects of its kind ever attempted.

Ferchill, 65, a stylish, shoot-from-the-hip developer from Cleveland who’s tackled some of the most complicated historic renovation projects in the Midwest, couldn’t believe his eyes. “I called up our historic architects and said, ‘Did you guys see this letter?’ They said, ‘Oh, we’re on it.’ And I said, ‘Do you know what this means?’ ‘Yeah, we understand.’” But Ferchill, chairman and CEO of The Ferchill Group, didn’t sense the architects had grasped the full ramifications of the letter. “What this means is that all the money that you see related around the historics — the conservation easement, the tax credits — it’s a number that’s about $50 million — it’s gone.”

Welcome to the dramatic ups and downs of one of the nation’s most complicated renovation projects. The transaction, which had as many moving parts as the Dream Cruise, might as well have been scripted as a Hitchcock thriller — it was that diabolical. “We’ve done a lot of complicated projects over the years modernizing a 300-year-old city,” says George W. Jackson Jr., president and CEO of the Detroit Economic Growth Corp., a quasi-public development agency that held title to the Book Cadillac. “We bought up the three cement companies on the river and created the River Walk, we spurred the redevelopment and construction of dozens of buildings downtown, brought in scores of new businesses and residents, the casinos are nearly completed, and yet the Book was this albatross around our neck. It was a glorious link to our past, and some would say an unrealized symbol of our future.”

Late in Detroit Mayor Dennis Archer’s second term, in 2001, the Book Cadillac was considered a dangerous eyesore, but was owned by a group of private investors. The city wanted to see it renovated, if possible, even if the private investors who owned the structure had declared bankruptcy. “We forced the Book out of bankruptcy, and eventually got control of the property. It was a long, and complicated, process,” says Brian Holdwick, vice president of Detroit Economic Growth Corp. “That, to me, was a crucial turning point in saving the building.”

As the disposition of the Book Cadillac was being deliberated in bankruptcy court, city officials began reviewing national developers that had the skill set to renovate the structure. During the same period, the city asked Ferchill to examine a set of initial engineering studies that determined the Book should be leveled. “I looked at the report and immediately — and quite frankly — I spotted the flaws,” Ferchill recalls. After touring the dilapidated interior, which appeared to have been struck by a Category 4 hurricane, Ferchill advised the city to call another engineering firm to survey the wreck. The second report proved more promising than the first, but enough time had passed that Ferchill was dealing with the administration of Mayor Kwame Kilpatrick, who took office in 2002. What’s more, city officials were impressed enough with a historic restoration firm in Texas that they proceeded to negotiate a development agreement.

“I always assumed it would be us,” Ferchill says. “I never said so. I never agreed to it. I never spoke it. And, honest to God, one day I pick up the newspaper and I read [the city] had selected another developer. So I call up George, and I could tell he was concerned that I would be upset. And I said, ‘George, don’t worry about it.’ And he says, ‘What do you mean?’ And I said, ‘I think you’ll be calling me back in the future.’”

At the time, Jackson had his hands full on a number of fronts. It had already taken him a few months to convince a skeptical mayor and City Council that the Book could be restored. Soon after Kilpatrick took office, he declared that all “the old dinosaur buildings” should be demolished. Jackson met him halfway. But the decision put him in the crosshairs of a very active collection of preservationists who believed every downtown structure should be restored or mothballed until such time a development plan could be stitched together. “I was fighting a two-front war with limited supplies — meaning money,” Jackson says.

Already, the preservationists had used public demonstrations, legal filings, and an aggressive public-relations campaign (which the media was all-too-willing to cover) to persuade the city to redevelop such structures as the once-glorious Hudson’s building, the Statler-Hilton Hotel, and some of the dozens of structures that were razed to make way for Comerica Park and Ford Field.

“We had lost a few battles and had won a few battles, but we drew a line in the sand when it came to the Book Cadillac,” says Francis Grunow, a member of the Friends of the Book Cadillac and the former executive director of Preservation Wayne, a Detroit nonprofit that promotes historic restoration. “We had worked every channel we could think of to save the Book,” he says, “and we were ecstatic when the city had finally found a developer to take it on.”

But Grunow and the city could never have predicted what happened next. The city had selected Historic Hospitality (a division of Kimberly-Clark, the consumer products giant that operates a historic-redevelopment division) to transform the Book Cadillac into a 400-room hotel with dozens of  condos, banquet areas, storefronts, and unique restaurants.

Suddenly, it seemed as if the clock had rolled back to 1924, when Frank, Herbert, and J.B. Book opened the new hotel on what was the site of the Cadillac Hotel. The brothers, successful real-estate developers who were riding the wave of untold money rolling into the city on the strength of the auto industry, wanted to convert Washington Boulevard into a bustling thoroughfare akin to New York’s Fifth Avenue.

Games People Play
Photograph by Glenn Triest

The enterprising trio had already built the nearby Book Building — an elaborate commercial structure with a facade adorned, in part, with several nude female statues that peer across the boulevard (but not directly) at St. Aloysius Church, at that time the seat of the Archdiocese of Detroit. It seems the brothers had gotten into a land dispute with the Catholic Church, and as a fond remembrance of their differences, ordered up the statues.

Despite the disagreement, the brothers proved to have excellent taste. They hired one of the foremost architects of the day, Louis Kamper, to design the 33-story Book Cadillac in an Italian Renaissance design with elaborate Venetian overtones. So meticulous was the planning that the Book family specified that on opening night they would dine in the Venetian dining room at the exact spot where they had a private table in the former Cadillac Hotel.

The Book Cadillac, the tallest hotel in the world when it opened, was an instant success. It feted presidents from Truman to Nixon, movie stars like Errol Flynn and Spencer Tracy, as well as the New York Yankees, Dr. Martin Luther King, Elvis Presley, the Beatles, and numerous other luminaries. The hotel was also the setting for movies, courted foreign royalty and politicians, and every manner of business tycoon and executive. And for 60 years, it was routinely listed among the finest hotels in America.

But as the domestic auto industry began to wane from the 1973-74 oil embargo, the Book Cadillac and downtown Detroit suffered immensely. Mix in the 1967 race riots and mortgage redlining, which helped drive thousands of residents and businesses to the suburbs, and it’s easy to see why the hotel was closed in 1984.

Like many downtown structures, it rotted from the top down, as thieves steadfastly and meticulously pulled off sections of the roof, including the copper terraces that help crown the building. Eventually, water seeped — and then poured — in, creating a moonscape terrain of rotting plaster and disfigured laths. “It looked like the Titanic had been raised from the ocean floor,” says Rob Davies, vice president of Bayview Electric Co. in Detroit. “We brought in temporary power and services, and then did the low voltage and inside work. It was a bit more complicated than your average building, because there were so many floors.”

The enormous challenge and cost of the renovation, however, proved too daunting for Historic Hospitality. Although the company eventually walked away from the project, Jackson made sure that work crews cleared each floor to its steel columns. “We needed to clean out the hotel if it was going to be redeveloped,” he says, “and I wasn’t going to wait on the lawyers to conclude the development deal. We took a big chance, because you don’t clean a building like that with chump change. But … things didn’t look good when [Historic Hospitality] walked away.”

During the nearly two years Historic Hospitality was involved in the project, Ferchill says he paid only mild attention. “We really didn’t keep track of it, but I knew things were going back and forth,” he says. “And then one day George calls and he says, ‘John, are you still interested in the Book?’ And I said, ‘Yeah, I think I am, George. I think it would actually work.’ So he said, ‘You want to take a look at it?’ And I said, ‘Sure. I only need one thing: A piece of paper with the budget. I want to know what the sources are, what income the [past team] had in the deal. And then what the costs are.”

After reviewing the financial package, Ferchill determined there was a $20-million gap. So he called Jackson back and told him he could make up the difference. Not many people, Jackson included, knew where Ferchill would find the money. To solve the problem, Ferchill followed the financial dealings of media mogul Ted Turner, who for years has placed conservation easements on land he owned in the American West. By promising to never develop the land and signing off on the easements, he was able to take a sizable tax deduction.

“We took that charitable deduction to an art form,” Ferchill says. He ordered up construction drawings, which determined that up to 1 million square feet of additional space could be constructed on top of the Book Cadillac. “I’ll make the numbers simple,” Ferchill says. “It ends up that we can generate a $101-million charitable deduction, so we took that and sold it to National City for 28 cents on the dollar, and that’s how we came up with a $28-million conservation easement in the deal, and how we solved — really, more than solved — the $20-million gap.”

The other challenge was that the Internal Revenue Service was scrutinizing such projects more closely, says David Strauss, a senior partner with Baker Hostetler, a Cleveland law firm that worked on the Book Cadillac deal. “At the time, there was quite a bit of scrutiny across the country as it related to these types of deals,” he says. “But the government also understands that without these various forms of subsidies for historic restoration projects, they would never happen.”

As it turns out, stitching together the financial package proved harder than solving a jigsaw puzzle in zero gravity. While Ferchill and his team were working the channels with various secondary lenders, he assumed one or several large financial institutions would step in and finance the first mortgage. After all, he’d sent out 60 separate financial packages to various institutions that, under normal circumstances, would serve as the primary lender and broker various parts of the financial package as needed. As it turns out, every lender took a pass on Ferchill’s proposal, including all the banks in Michigan. “The general response from the banks was that we would do this deal, if only it wasn’t in downtown Detroit,” Ferchill says. “We even had a Cleveland bank that was going to do it, but the Detroit people they were hooked up to killed it. It was like no one wanted to put 10 cents in Detroit because its image was so bad.”

Games People Play
Photograph by Glenn Triest

National City Corp. officials say they would’ve taken on more financing for the project beyond purchasing the $28-million conservation easement, but Ferchill was reluctant to lean too hard on a relationship that stretched back more than 30 years. “There were a lot of naysayers about the Book Cadillac because people thought it couldn’t be done,” says David Boyle, president and CEO of National City in Michigan and northwestern Ohio. “Plus, it was one of the most complex financial deals in the nation. There were 22 entities involved in financing [and guaranties], and stitching them together wasn’t easy.”

So for the first time in Ferchill’s career, he hired a mortgage broker. “In the world that we were dealing with at that minute (early 2005), we needed less than 50-percent occupancy in the hotel to pay that first mortgage,” he says. “So we didn’t think the first mortgage would be an issue — until it became an issue.” After hiring New York-based Meridian Mortgage, Ferchill was led to iStar Financial, also in New York, which he describes as “the king of brutal loans.” What does that mean? “These guys do really difficult deals; complicated, complex deals,” he says. “And they charge for it. They’re a highly successful public company, but their first venture, their first loyalty, was to iStar. So we’re going to live with a difficult [$44-million] mortgage for the first five years.”

If only that were the end. While some of the financing was already in place when Ferchill took on the project, including money from the city, the Michigan State Housing Development Authority, various unions, and other sources, there was a mad scramble when a small-business tax-credit program that would have provided $8.5 million to the project was set to expire at the end of 2007.

“We planned to sell the tax credits to [a Michigan-based corporation],” Ferchill says, “but they put a condition in there that said if this program isn’t running when you draw down the money — which would’ve been in 2008 — we can’t support the project. So in a three-week period, we got a bill passed through the House and the Senate exempting the Book Cadillac from the legislation. And after a bunch of negotiations, the governor signed the bill.”

A short time later, Ferchill received a phone call from a reporter with The Wall Street Journal who was inquiring about the Book Cadillac. “The reporter says he would like to come in and interview me because he’d heard I had threatened to throw the governor under the bus. And I said that’s not true. I threatened the governor’s chief of staff to throw the governor under the bus — that’s a very fine distinction. What happened was everyone in the Legislature, including the Republicans, wanted to take credit for the bill. We had heard the governor was going to veto it because she didn’t want to give the Republicans credit, and that’s when I told her chief of staff I was going to throw her under the bus if she vetoed it.”

Next up was the hotel deal. It may have been the easiest problem to solve. “We had heard that the Westin Hotel (that opened in 2002) at Detroit Metropolitan Airport was doing very well, so we quickly knocked that off our list,” Ferchill says. The result: The 455-room Westin Book Cadillac Detroit, scheduled to open Oct. 1, will include near-replicas of the Venetian, Crystal, and Italian Garden ballrooms, the return of the legendary Motor Bar, and multiple dining rooms along with an upscale restaurant called Roast to be operated by celebrity chef Michael Symon. And, in a bid to lure weekend travelers, the hotel will offer a luxury spa, swimming pool, and other amenities.

In addition, the project offers 64 upscale condominiums on the upper floors, priced from $280,000 to $1.4 million. More than two-thirds of the residences have been sold, and all of the condo owners can enjoy the hotel services, including 24-hour concierge, laundry and dry cleaning, a business center, and other amenities.

Finally, with all the various funding mechanisms lined up, Ferchill ordered his team to set a closing date (which took three days and included more than 35 attorneys). “Every one of these lending sources has a law firm,” Ferchill says, “and keeping them together was like herding cats. So we get to the point where we got everybody on the bus, so now we can start driving the bus. So I said to my guys, ‘Set the [closing] date, boys. Set the date. We’re going to set a date, and we’re going to make everyone meet that goddam date.’”

But a week before the closing, another problem emerged. While on vacation with his family in Naples, Fla., Chris Ferchill, vice president of development for The Ferchill Group, overheard a cell-phone conversation his father was having. One of the Book Cadillac lenders was pulling out. Just like that, $9 million in financing had evaporated.

“I immediately [became] nervous,” Chris says. “[My father] hangs up the phone and looks at me and I say, ‘Did what I think just happened happen?’”     Indeed it had. But Ferchill told his son not to worry. “He never breaks a sweat,” Chris says. “[He] doesn’t even acknowledge the fact that something bad just happened. [Meanwhile] I’m … thinking to myself, we got some problems here.”

But by the very next day, Ferchill found a replacement lender from the City of Detroit’s General Retirement System.

The following week, during the closing, John Ferchill was true to form. “Nothing ever bothers me in terms of, OK, where’s the next fight? … So after we get everything signed, I said, ‘Chris, were you afraid we were going to lose this deal?’”

Chris quickly corrected him. “No, your question was, ‘Are you worried about losing your inheritance?’ And I said, ‘I wasn’t worried about the inheritance, I was worried about losing my job.’”

Still, there was one more hurdle to clear. After Ferchill received the one-page letter from the National Trust stating that it wasn’t approving some of the tax credits (which, all told, accounted for $50 million in related financing), he learned the decision had been based on a Detroit News article describing the demolition of a neighboring historic building that occupied land needed for a parking deck to service the Book Cadillac. Since the city owned the structure — the so-called 150 W. Michigan building that once housed the planning and development department — and was involved in financing the Book Cadillac, part of the tax credits were disallowed. The reason? National Trust regulations don’t look kindly on developers and their investors who tear down historically significant buildings.

“Like all regulations, there’s a lot of interpretation,” Ferchill says, “so at the end of the day [the National Trust] sticks to their guns. [And] my architects are deathly afraid of me talking to the historic people in Washington, D.C.” A short while later, after Ferchill finally tracked down a contact, he picked up the phone and explained his position: “Look, I don’t agree with what you’re doing, and I frankly don’t understand it at all, but I need you to schedule the appeal hearing.”

There was a long pause before the National Trust official asked why he wanted an appeal. “Well, when we lose $50 million in this deal, the city will want to know why,” Ferchill said. “And I won’t be able to explain it to them, so I want to have the mayor there, and I assume some members of the City Council and the state Legislature will be there, and I know the governor will want to come, plus we have all the legislators in Washington.” The official dutifully took down all of Ferchill’s information and politely thanked him.

“Well, the next day I get another one-sentence letter saying the tax credits were approved,” Ferchill says. “So that worked out pretty well.”

Facebook Comments