How Sea Island Became a Paradise Lost

SOUTHERN HOSPITALITY

In 1937, Bill Jones III's grandfather, A.W. "Bill" Jones, inherited Sea Island, much of nearby St. Simons Island, and large tracts elsewhere in coastal Georgia from his cousin, Howard Coffin, who had been a top engineer for Oldsmobile and Hudson Motor Car.

Jones' resort grew slowly, subsisting mostly on cash flow from the Cloister Hotel and proceeds from occasional land sales. (Jones Sr. swore off debt, says Blaine Kelley Jr., an Atlanta developer who knew him.) Families from across the South would flock to Sea Island every summer, holing up in rental homes brokered by Sea Island Co. or in rooms at the Cloister, where the Joneses would roll in cots to accommodate the overflow. Through the mid-1980s, the Cloister's rooms didn't have TVs and the front desk didn't take credit cards. Parents dropped their kids off at the beach club, where they were watched over by some of the same people who had watched over the parents years earlier. Bill Jones Jr., an avid hunter and farmer, ran the company from 1966 to 1992; former employees say he fixed toilets himself.

Bill Jones III grew up helping his dad manage Sea Island. After graduating from Valdosta State College in 1981, he worked at various Florida beach resorts, where he saw firsthand how high-end places were operated. When Jones took over at Sea Island, he decided to go upscale, says Peter Capone, an architect who has implemented many of Jones' ideas over the years. Jones hoped Sea Island's beach and golf resort would attract the world's wealthy, who ultimately would buy vacation homes there. "The whole model was, 'This is a land company,' " Capone says.

The strategy worked, at first. Luxury beach properties in Sea Island's first gated community, Ocean Forest Golf Club, sold briskly in the 1990s. In 2001, Jones completed the $52 million Lodge and Retreat Golf Course on St. Simons Island, which earned raves in the travel press.

Meanwhile, Jones was becoming closer with Blanchard, a longtime family friend and Sea Island resident whose 4,200-square-foot home is now on the market for $7.2 million. The two shared passions for golf and hunting and an interest in servant leadership, a management philosophy based on the idea that corporate executives should emulate Jesus Christ as stewards of their workers and communities. In 2000, Blanchard, then 59, offered Jones a seat on Synovus' board, and Jones, then 42, reciprocated, offering Blanchard a seat on Sea Island Co.'s board.

Fresh off the success of the St. Simons Island project, Jones set out to remake the Cloister and develop Sea Island Co.'s most ambitious project to date: the 3,000-acre Frederica community at the north end of St. Simons Island, a wooded enclave with a 400-acre man-made lake, a PGA championship golf course, deepwater river frontage, and sites for 400 homes he hoped to sell for more than $1.5 million per lot.

Soon Jones and Blanchard drew up plans for what they initially expected would be about $350 million in loans. The deals apparently were approved with minimal board oversight. "I didn't know about the size of the loans when they were made," says C. Edward Floyd, a Florence (S.C.) surgeon who served on Synovus' board from 1995 until 2006 and was on its governance committee at the time the loans were made. Floyd, the only one of 18 current and former board members who agreed to talk to Bloomberg BusinessWeek, says that when the board did discuss the Sea Island loans, Jones would leave the room. The interlocking directorships of Blanchard and Jones were never mentioned, he says. "I know Jimmy Blanchard well," says Floyd, "and I can't imagine he would do anything unethical."

Richard E. Anthony, Synovus' current chairman and CEO, criticized the Sea Island loans during an April 2009 conference call with analysts, saying they were "a much higher exposure than we think is appropriate." But in a written statement to Bloomberg BusinessWeek, James D. Yancey, a Synovus director and former chairman who was the bank's president at the time of the Frederica loans' issuance, defended them. "The decision was based upon the economic environment at the time, an independent review of Sea Island's risk profile, our own risk management standards, and compliance with federal regulations," he wrote in an e-mail message to Bloomberg BusinessWeek. "Our lending relationship with the Sea Island Co. predated Jones' involvement as a member of the Synovus board." Hudgison, the Synovus spokesman, adds that the loans received an extra level of scrutiny because of Jones' status as a bank insider.
THE BEST OF EVERYTHING

When the Frederica project kicked off in 2003, Jones' confidence was running high. "Our vision is to be the finest resort company in the world," he told Cigar Aficionado in 2003. "We want to be No. 1 in everything." To sell multimillion-dollar home lots, Sea Island needed to lure a much wealthier clientele than the Southern families who'd vacationed there for decades. So Sea Island's $65 million spa included a soaring wood atrium, rivulets and koi ponds, 26 treatment rooms, carved mesquite furniture, organic food, and nutritional counseling. There were three squash courts and, when the spa opened in 2006, a resident squash pro who was among the top-ranked doubles players in the world.

Sea Island hosted the annual G8 Summit of world leaders in 2004, and properties were moving. Luxury condos above the Cloister's new beach club quickly sold out, nearly covering the cost of that 160,000-square-foot facility, Capone says. Lots at exclusive Frederica presold for $1.5 million and up in 2005 and 2006, according to Frederica property owners and former Sea Island executives. Buyers included former Senator Sam Nunn (D-Ga.), Siebel Systems (ORCL) founder Tom Siebel, and professional golfers Davis Love III and Zach Johnson. (Nunn did not return phone messages at his St. Simons Island home; the others declined to comment.) Jones was named "2004 Georgian of the Year" by Georgia Trend magazine.

In March 2006, Jones threw a black-tie gala to celebrate the reopening of the Cloister. As guests sipped cocktails in the main hall, the sunset glinted off the Black Banks River behind the hotel, filling the three-story colonnade with an orange glow. "It was breathtaking," recalls Pamela Hughes, the interior designer who spent three years filling the new resort with custom-made furniture from China, specially woven carpets from Turkey, draperies from English 18th century looms, and antique hardwoods from shipwrecks at the bottoms of North American rivers. "It was right out of The Great Gatsby," she says.

The good times didn't last. By 2007 the housing slump had hit Sea Island, and its traditional clientele quickly pulled back from paying the resort's higher prices for everything from room rates—which ran upward of $500 a night—to the golf courses' greens fees. To allay property owners' concerns, Blanchard, who had retired as CEO and chairman of Synovus but stayed on its board, reassured them at Sea Island Club's annual meeting that Synovus still had great confidence in Sea Island Co., its largest borrower. This even though Sea Island had already gone through about $100 million from Frederica lot sales and had to borrow more money, and turn some condos into time shares.

As Blanchard spoke, Sea Island's real estate office was keeping two sets of sales reports, according to two former real estate executives with the company. One set, for prospective property buyers and bankers who came in to tour the project, showed lots for sale and lots already sold. The other report, dubbed the quiet inventory, was for internal use only and showed a truer picture of Sea Island's health. Sea Island Co.'s corporate office had induced several people to upgrade their lots, say these former executives, who requested anonymity to protect their severance packages from Sea Island. But only the quiet inventory report showed the value of the property that Sea Island had taken back from the buyers in exchange for the upgraded lots, these people say. The reports shown to many outsiders were far rosier, say the executives. "As a matter of policy, Sea Island Co., as a private firm, does not discuss its business operations," spokeswoman Merry Tipton wrote in an e-mail to Bloomberg BusinessWeek. "However, if we are to take from your questions the inference that our company kept two sets of financial information regarding the sale of property, then we must respond by categorically denying such an inference."

Jones brought in cost-cutting managers to trim amenities such as full butler service for all Cloister rooms, in hopes of appealing to a broader swath of vacationers. "As they abandoned one demographic and tried to embrace another, they never gave either one enough time to adjust," says Jim Root, who, after four years of managing some of Sea Island's high-end amenities, left last year to run Glen Ivy Hot Springs Spa near Los Angeles. Jones recently told Sea Island Golf Club members that he's "trying to get back to our roots" and lower prices, one member says.

Now Jones is scrambling to keep Sea Island Co. afloat. To avert foreclosure on about $150 million in loans, he deeded the Frederica development and about 500 acres of land on St. Simons Island to creditors in November. He has also held talks with potential investors in the Cloister resort, including Herb Kohler Jr., the plumbing products magnate, who has visited Sea Island to see how the properties might fit with similar golf resorts that Kohler Co. operates in Wisconsin and Scotland. A spokeswoman for Kohler declined to comment.

The Sea Island debacle might have been prevented had Synovus' underwriters asked more questions before making the loan. But "handshake deals aren't unusual in the world of small-town banking, where the bank's CEO, the car dealer, and the furniture store owner all sit on the board," says Richard Hyatt, a Columbus (Ga.) journalist who has followed Blanchard for 30 years. "The question I would ask is, how appropriate was this in the arena they were playing in with Sea Island? Now I think we've seen the answer."

With Laurence Viele Davidson in Atlanta and David Mildenberg in Charlotte, N.C.

Waldman is a reporter for Bloomberg News.