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1674-4 R. Donahue Peebles Forbes.com - Magazine Article Page 1 of 2 • Forbes ■com Entrepreneurs Making A Splash Tomas Kellner, 04.15.02 Race has never gotten in the way of success for hotel developer Don Peebles--until now. Its twin art deco towers rise 16 stories, glimmering white and yellow against a blue Florida sky and the emerald Atlantic surf. But when Miami Beach residents talk about the Royal Palm resort, a 422-room hotel that was slated to open late last month, they focus on a different color. The Royal Palm is known as "the black hotel." Miami Beach, as everyone knows, is a racially strafed city. Segregated until the mid-1960s, pocked by riots in the 1980s, boycotted in 1990 by would-be African-American tourists because it spurned Nelson Mandela (thanks to his support of Fidel Castro and Yasser Arafat), Miami Beach was hard-pressed to make amends. So in 1996 the city set aside a one-acre strip of public land,the site of a historic 1930s hotel, for a black developer. When R. Donahue Peebles won the contract in 1996 for the $10 million plot, everyone assumed he was getting a sweetheart deal. Hardly. Peebles agreed to pay $800,000 in annual rent and buy the land from the city by 2027—equivalent to a 25- year loan at 8%. Doubly galling is the fact that Miami Beach has a history of doling out subsidies to nonminority developers like Jonathan Tisch, whose Loews resort next door to the Royal Palm received a $60 million land-and- cash subsidy. But the"black hotel" label stuck—"To have the first African-American hotel in the country is very exciting news for all of us," beams Miami Beach Mayor David Dermer—and it drives Peebles crazy. "It's the city's marketing gimmick," he says. 'They needed someone like me so they could say, 'Look, things are better down here—we have Don Peebles!'" At 42, Peebles is the largest black hotel developer in the country. His flagship Peebles Atlantic Development Co. had operating income of$23 million (earnings before depreciation, interest and taxes) on $33 million in revenue last year. His slew of companies, held separately for tax purposes, controls more than a million square feet of hotels and offices in Washington, D.C. and Florida. He puts his net worth at$60 million. "I don't see any limitations on myself or my company," he says. But he still worries about being boxed in by the label. "What impact is it going to have on our ability to attract business?" Growing up in Washington, D.C., Peebles was nurtured by politics—and by his mom, who owned a small real estate business. In his teens he spent afternoons working as a page on Capitol Hill. After freshman year at Rutgers University he took a leave of absence to join his mother's business, never returning to school. He attached himself to the newly elected mayor of the city, Marion Barry, and got a seat on the real estate tax appeals board. "I wanted to play the game, and I wanted to play it right," he recalls. One year later 24-year-old Peebles was running the show, reviewing appeals of tax assessments on buildings such as the Hinckley Hilton and the Mayflower Hotel and handing back $45 million in tax breaks to Washington landlords.The job fetched only $15,000 a year, but it got him access to the inner circle of real estate power—and a lesson in how to conduct his affairs. "As a friend says: `To get something done in D.C. you have to be quiet, like a rat pissing in cotton,"' Peebles says. Which means, among other things, shifting focus as opportunities present themselves. He opened his own real estate tax appeal firm and counted among his clients companies controlled by billionaires Robert Bass and Richard Rainwater. "They never cared what color I was as long as we won and I saved them money," he says. But he was lithe enough to throw his lot elsewhere when clients started losing property to banks during the 1990- 91 recession. Peebles started advising the lenders and ultimately bought some of the repossessed buildings, using as little as 15% of his own cash as a down payment and borrowing the rest at sometimes favorable rates from bankers he'd befriended. One cozy deal backfired in 1995. Barry, newly reelected mayor after his release from a six-month prison term for http://www.forbes.com/forbes/2002/0415/235_print.html 4/10/2002 Forbes.com -Magazine Article Page 2 of 2 cocaine possession, had to move 700 city workers dislocated by the construction of the then-MCI Center. Peebles offered a 15-year, $48 million lease on two buildings, which would have netted him $20 million. But the deal was leaked to the media and Barry backed out after the D.C. financial board accused him of cronyism. !Furious, Peebles took his family on vacation to Miami Beach in late 1995. There he found out about the Royal Palm—a dilapidated 1930s-era hotel owned by the city—and never looked back. The hotel seemed a reasonable way to tap a potential tourist boom, and Peebles began schmoozing his way into the power elite, meeting lawyers, bankers, lobbyists and a would-be governor named Jeb Bush. At the same time he placed his bets carefully, zeroing in on site control. In January 1996 he approached the owner of the Sh t Hotel (adjacent to the Royal Palm) after he learned the city wanted to merge the two sites. Putting downonly $ 0,000., Peebles locked up the Shorecrest's plot by buying a 45-year leasehold for$4 v million. "I know a number of people who were bent out of shape about that,"says former Miami Beach Mayor Neisen Kasdin. "But it helped him to secure the project." But not control it. Construction didn't begin until 998.ikfter two of his partners dragged their feet, Peebles filed suit and scrambled for new backers. (The Miami-based Ocean Bank and Union Planters Bank loaned $40 million at 1% over prime.) Worse, the Royal Palm—a seven-story historical relic that Peebles agreed to restore—had to be condemned; the original builder had availed himself of free beach sand whose salt corroded the I-beams. That bloated the cost of the project from $64 million to $80 million and delayed completion for nearly a year. (Although he took control of the construction site on an as-is basis, Peebles blames the delay on the city and wants it to pick up some of the demolition tab.) Peebles hopes for a 70% occupancy rate this year—sufficient, he claims, to pull in operating income of$10 million on revenues of$30 million. Not enough for Peebles. He failed to get his hands on another minority set-aside: a property in Fort Lauderdale, zoned for a 500-room convention hotel. Peebles had teamed up with the Reverend Henry Lyons, the former president of the National Baptist Convention USA. But the deal cratered after the minister was convicted of racketeering and grand theft. Peebles is suing Broward County for $4.3 million worth of legal, lobbying and architect expenses. There have been triumphs—if symbolic and tinged with vindictiveness. In 1996 Peebles was the first black to join the 75-year-old Bath Club in Miami Beach, which once had Herbert Hoover for a member. He bought it two years later for$10 million, planning to raze part of it and build a $140 million condominium tower and private villas. When then-Mayor Kasdin opposed rezoning of the property for the high-rise, Peebles spent$50,000 of his own money, launching a direct mail and cable TV campaign against him, and raised an additional $70,000 for Kasdin's il political opponent. Kasdin won reelection, but Peebles got his new zoning. Says he: "I couldn't allow him to bully me." http://www.forbes.com/forbes/2002/0415/235_print.html 4/10/2002