The no-tell motels.

• Author: Mildenberg, David
• Position: Sam McMahon Jr.'s Florida Hotel Properties L.P. - Cover Story

What investors didn't know about Sam McMahon Jr.'s motel partnerships wound up hurting them.

Things got hot that day for Sam McMahon Jr., but it didn't have anything to do with the weather. It was Feb. 27, late winter, when the Charlotte motel mogul took the witness stand during a hearing in federal bankruptcy court. But those lawyers, the ones hired by his creditors, kept firing questions, stoking the furnace, raising the temperature:

Just how much did he know about the spending habits of Sam McMahon III, they demanded. And just what was he going to do about it?

Having to explain why the son who bore his name, who worked with him, had spent millions of dollars of other people's money -- and how he had gotten away with it for so long -- was too much. Which Sam McMahon Jr. would speak up: Sam the partner, to whom 400 investors had entrusted millions, or Sam the father, who entrusted to his son the fruits of a lifetime of work?

His voice cracking, he rushed from the courtroom, prompting a brief adjournment.

Sam McMahon Jr. had come a long way from the time he arrived in Charlotte more than 40 years ago, through a career in real-estate and motel development that made him a multimillionaire and earned his family a place among the Queen City's elite, to the ignominy of being hauled into court. Some people there that day recalled the time, less than three years earlier, when a group of Charlotte's most powerful citizens gathered to celebrate the $2.35 million he and his wife had donated to Queens College, his alma mater. It was the largest gift in the college's 125-year history.

"This is a gift which is stunning in its size," NationsBank CEO Hugh McColl Jr., a Queens trustee, had said. "He has made a lot of money, but he has shared his wealth every day of his life with other people."

In retrospect, his substantial wealth proved extremely fragile. And much of his sharing involved the businesses run by his children: Byron, Pamela and Sam III. There was little sharing with employees, many of whom complained continually about his refusing to spend money to maintain the motels on which the wealth was built.

Within months of the Queens donation, the McMahons' businesses started unraveling, a process that continues in bankruptcy court. Creditors and limited partners have lost more than $100 million, based on today's anemic motel values. The biggest losers are the major lenders: General Electric Credit Corp., Chrysler Financial Corp., several banks and the government's Resolution Trust Corp., which took over an insolvent Missouri thrift that had lent McMahon partnerships nearly $70 million. Were the RTC to sell its interest today, taxpayers would take at least a $30 million bath.

Most of the limited partners, who invested $50,000 to $100,000 in late 1986 and early 1987, have received distributions of less than $10,000. A partnership stake was valued at eight cents on the dollar last year, long before the true extent of the mismanagement became apparent.

This reversal of fortune could hardly have been more rapid. In 1982, McMahon (pronounced MACK-ma-hon) was a local real-estate investor. He owned six Days Inns within 45 miles of Charlotte. By 1989, he controlled more than 50 motels in at least eight states. Now he and his son both have been forced into involuntary bankruptcy. The partnerships are being reorganized or liquidated. With legal fees from 20-some law firms running into millions, the only ones making out are bankruptcy lawyers.

There's an obvious explanation for the McMahons' quick turn in fate: the hotel-industry depression, which started in mid-1989 and continues to the present, caused by a weak economy and massive overbuilding. McMahon and his son declined to be interviewed, but that's the reason they've repeatedly given when testifying in bankruptcy court. That's just part of the story, according to former employees and hotel-industry analysts. What happened, they say, was that a successful local businessman, abetted by banks, finance companies, S&Ls and investment bankers, got in way over his head. Then there was the boss' son, who lost interest in motel operations in favor of deal making, race cars and lavish living.

Financial reports sent to partners showed the 10 hotels that made up the McMahons' Florida Hotel Properties -- formed in late 1986 -- lost $7 million in 1987, $6 million in 1988 and $8 million in 1989. The 15 motels that formed Southeast Hotel Properties were losing millions more during the same period. But that didn't stop the McMahons from spending.

"That gift to Queens really made the managers upset," recalls Steve Byers, who ran an Atlanta motel for McMahon for three and a half years. Bob Dickerson, who managed the McMahons' Sugar Creek Road motel in Charlotte, adds, "I was with the company for seven years, and they never spent one dollar on renovations on my motel unless they absolutely had to do so."

It's not clear how many partners knew of Sam McMahon Jr.'s generosity because fewer than two dozen live in North Carolina and, according to a court listing, none in Charlotte. (One well-known Tar Heel investor was L. Glenn Orr Jr., CEO of Lumberton-based Southern National Corp. "I lost my money like everyone else," he said through a bank spokesman. "It was a personal investment.")

Associates of Sam McMahon Jr. say he didn't live extravagantly, spending his money on church work and Queens College. But his 34-year-old son -- "The Third," as he is known in Charlotte -- had expensive tastes in cars, clothes and restaurants. When visiting Atlanta, former employees say, he regularly entertained groups at 103 West, Bones and other top restaurants. In March 1991, $50,000 from the Florida...