The no-tell motels.

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

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 partnership was donated to Providence Day School, a Charlotte private school he attended and where he later served as a board member.

In October 1991, he directed the Florida partnership to spend $595,000 for an Agusta 109a helicopter, which he used to shuttle friends and business partners to see Team III, the NASCAR racing team on which he had spent $3 million during the previous three years. That same month, he agreed to pay $456,000 for a 40-foot Blue Bird Wanderlodge motor home for entertaining.

Cars obviously excited "The Third." He once told a small group of managers, Dickerson says, "that his goal in life was to drive a Porsche down Queens Road at 120 miles per hour. So help me, God, he said that."

As much as $9 million of partnership money may have been diverted for Sam McMahon III's personal pursuits, according to an investigation by court-appointed trustees Joe Grier, a Charlotte lawyer, and Edward Bowers, a Gastonia accountant. Sam McMahon Jr. has testified that he was unaware of most of the diversions, blaming his busy schedule, a cloudy memory and weak record-keeping. He was so trusting of his son, a family friend says, that when first told of the diversions late last year he called the accuser a liar. "It appears that Sam would do anything for his son," adds Jim Ruane, a court-appointed trustee.

It was that son, however, who has misrepresented his assets and been reluctant to turn over records about his business dealings, Grier says. Sam McMahon III's attorney, David Badger, says that there was no criminal intent: He expected an upturn in business to resolve any debts. "Sam III is a very optimistic person, just like his dad, and he figured he could sell the racing team someday for a large sum of money and then pay back his debts," Badger says.

In a court document filed in early 1992, the younger McMahon estimated Team III's value at more than $2 million. But less than $1 million was netted when several cars were sold and parts and equipment were auctioned off.

In examining Sam McMahon Jr.'s career, it appears that brand of optimism might, indeed, be a family trait. In other words, like father, like son.

He was the 21-year-old son of a farmer when he arrived in Charlotte in 1951 for a summer job between terms at the University of Arkansas. Sam McMahon Jr. never left, enrolling that fall at Queens, then a women's college that accepted off-campus male students. Aided by a Salvation Army scholarship, he graduated in 1954 with a business-administration degree and joined the N.G. Spier mortgage company. He struck out on his own in 1961.

Over the next decade, he placed mortgage loans with various investors while acquiring a stake in at least eight Charlotte office buildings. One larger venture was a partnership with Raleigh-based Durham Life Insurance Co., which planned an office tower on Woodlawn Road near Interstate 77. Before the project got started, he met Cecil Day, who was opening a motel chain priced below Holiday Inn but above mom-and-pop operations. In 1972, two years after Day founded Days Inns in Tybee Island, Ga., McMahon acquired franchises for motels in Charlotte on the Woodlawn Road property and in Statesville.

Despite the oil crisis that stalled travel in the mid-'70s, McMahon's business grew with the chain. Before the decade was out, he added two more motels in Charlotte and new inns in Concord, Gastonia and Salisbury. "Sam was very well-respected and known for being very vocal," says Burke Day, Cecil Day's son. "My father preferred those who would call a frog a frog, not a chicken. That's the way Sam was."

About the time he got his first franchise, McMahon brokered a transaction that had serious repercussions for him. On behalf of a partnership with Charlotte investors Peter J. Speckman and Raymond Brown, he agreed to pay $115,000 in 1972 for a tract that had been offered for $85,000. The sellers applied the $30,000 difference to a plot McMahon bought for himself in suburban Charlotte -- a side deal made without his partners' approval. Enraged when he learned of McMahon's action, Speckman -- now deceased -- reported the transaction to the North Carolina Real Estate Licensing Board, a former McMahon associate says.

In a 1977 ruling upheld by Superior Court in Wake County and the N.C. Court of Appeals in 1979, the board found McMahon guilty of "improper, fraudulent and dishonest dealing" and revoked his real-estate license.

By the late '70s, however, McMahon's focus had shifted to building a family-owned hotel business. His daughter, Pam, joined the family's Commercial Management Inc. as vice president in 1980 after graduating from Queens. Upon his graduation from Campbell University in 1981 with a business-administration degree, Sam McMahon III became president. (A younger son, Byron, also worked for the company off and on.)

Known as "Sambo" to some employees, Sam McMahon III had worked as a clerk and errand boy for the company since his early teens. Initially, several employees say, the younger McMahon displayed a keen interest in the motels, making regular visits. By the mid-'80s, he was communicating with motel managers almost exclusively by telephone. During periodic management meetings, he insisted that managers -- including those he'd known for years -- call him Mr. McMahon.

During the past five years, Dickerson says, he saw Sam McMahon III at the northeast Charlotte Days Inn only once, for five minutes. The same was true at the Atlanta hotel Byers managed for three and a half years: one five-minute visit. "They said they were too busy doing deals," says a former regional manager.

They were, in fact, spending much of their time making deals. In 1984, six years after Cecil Day's death at 42 from cancer, the elder McMahon led an effort by several franchisees to acquire the Atlanta-based chain from Day's estate. At the time, the chain had about 300 motels, including 140 company-owned inns. Their bid was bested by New York financier Henry Silverman, who paid $570 million, backed by junk bonds sold by Drexel Burnham Lambert.

Rubbing shoulders with financial heavyweights in the contest for Days Inns profoundly changed the McMahons, associates say. "They wanted to get in on the game that Henry Silverman was playing," the former regional manager says. "That's how we went from 20-some hotels to 54."

Silverman accelerated Days Inns' cautious expansion. He sold all but about 20 of the company's motels and started a franchising spree that tripled the chain to more than 900 inns by 1990. Among the participants in that expansion were the McMahons.

Commercial Management in 1984-85 acquired nine older Days Inns, most of them in Florida and Georgia. (Many of these motels were sold in 1990.)

To hit the big time, though, the McMahons needed leverage -- other peoples' money. Starting in 1986, they got it via Bear Stearns, a New York investment firm.

With the McMahons as general partners and property managers, Bear Stearns sold two separate partnerships: Florida Hotel Properties, made up of 10 Florida motels including the chain's largest -- a 470-room motel near Walt Disney World -- and Southeast Hotel Properties, made up of 15 motels, including four in North Carolina, three in suburban Atlanta, five in Florida and the others in Alabama, South Carolina and Virginia.

The Florida partnership was an immediate success, raising $33 million from 361 limited partners between December 1986 and February 1987. The investors were attracted by projected distributions of 10% to 15% annually and forecasts that the hotels would double or triple in value.

The investors would have to wait, but for those directly involved in the deal, the payoff was immediate. The McMahons had bought the 10 motels from Days Inns or other franchisees, then sold them to the partnership, netting the family $4.5 million. Moreover, there was an additional potential profit of $6.6 million for something called a "price adjustment holdback" -- a way of saying that they would make that much in the future if they met their obligations to the limited partners.

Bear Stearns received about 10% of the money raised, including a 7% commission and advisory fees. After other transaction fees were taken out, only 64% of the $33 million raised from investors -- $21 million -- went to buy the hotels.

But it wasn't just individual investors who shared the dream of getting rich off Florida tourists. Once it had raised the $33 million, the McMahon-led partnership secured mortgages of $65 million from General Electric Credit and $35 million from Chrysler Financial, plus $5 million from C&S National Bank of Atlanta. The partnership then paid $95 million to the 10 hotels' previous owners, including the McMahons.

In the spring of 1987, only months after completing the Florida deal, the McMahons came back to Bear Stearns to raise $37.5 million for the Southeast partnership. Again, it was instant gratification for the McMahons and their bankers -- and wait and hope for the limited partners. The family realized a $3 million profit on the sale of eight hotels to the partnership, plus the potential for an additional $3.75 million in the "price adjustment holdback." Bear Stearns got more than $4 million.

To finance the $87 million acquisition of the 15 hotels, the McMahons turned to Kansas City, Mo.-based Home Savings Association, which had lent money to some Texas hotels they had acquired separately. Kansas City developer Frank Morgan bought the thrift in 1985. Within three years, its commercial-loan portfolio had increased fivefold with loans throughout the nation. "Anybody who walked in seemed to get a loan," a Resolution Trust Corp. official says.

For making the $65 million loan in July 1987, Home Savings received a $1.3 million origination fee. Overall, the investors and S&L had put up $102.5 million for 15 hotels -- $6.8 million per inn, nearly $49,000 a room. In 1992, budget-priced hotels are selling for $5,000 to $30,000 a room, depending on location and performance, hotel brokers say. In 1988, another McMahon-run partnership borrowed $4.3 million from Metro North State, a Kansas City bank also owned by Morgan. That partnership, which owned a Days Inn in Williamsburg, Va., is also being reorganized in bankruptcy court.

Raising money proved much easier than meeting the motels' projections. From the start, estimates by Reznick Fedder & Silverman, a Bethesda, Md., accounting firm hired by the McMahons, proved wildly optimistic. Reznick Fedder concluded that the Southeast motels -- which had averaged 72% occupancy in 1986 -- would achieve 79%-81% occupancy over the next three years and be able to raise room rates by 8.5% in 1987 and 5% annually after that. That would have been a remarkable feat, former employees say, because nine of the 15 motels were at least 13 years old in 1987.

Instead of rising, occupancy fell to 62.5% in 1988 and 60% in 1989, while the average room rate steadied at about $37.50. In a May 1988 letter to limited partners, Sam McMahon Jr. reported that first-quarter revenues were 15% below budget; three months later, he disclosed that second-quarter revenues were 17% under budget.

In almost every market, too many hotel rooms had been built, sparking price wars. It would take at least two years "to overcome the oversupply of rooms and see any significant increase in occupancy," McMahon wrote investors in May 1990. In the Bear Stearns prospectus, Southeast Hotel Properties was expected to lose $1.5 million in 1988, then earn $876,304 in '89 and $2.4 million in '90. Instead, the partnership lost $6.8 million in 1988, $8.1 million in '89 and $9.9 million in 1990. The Florida partnership was no more viable, burdened by annual interest payments topping $10 million.

Augusta, Ga., apparel-store owner Bonnie Ruben says she didn't investigate the Southeast partnership closely after a Bear Stearns salesman called her in 1987. "The 15% return looked reasonable, and I thought it was a legitimate investment run by sophisticated operators," she recalls. "They had this glossy brochure that was touting Mr. McMahon as one of the largest and most successful operators of Days Inns. And I knew Bear Stearns."

Tired of waiting for a turnaround, several partners in August 1990 sued Bear Stearns and the McMahons in federal court in Illinois. "We believe the projections |in both partnerships~ were basically fraudulent," says Chicago lawyer Leigh Lasky, whose firm represents one-third of the partners. "We think that McMahon knew it and that Bear Stearns should have known it."

The McMahons' response was that the investors had been warned of the risks. The case, along with several suits filed by other partners, is pending.

With litigation mounting and the partnerships collapsing, the McMahons scrambled for a way out of the mess. Their answer in May 1991 was to form a company headed by Sam McMahon III, which would buy the Southeast partners' interests for $8,000 per unit -- about eight cents on the dollar. The deal depended on financing from an unidentified "European Pension Fund," according to a letter from Sam McMahon Jr. A month later, Bear Stearns confirmed that units priced at $100,000 in 1987 were now worth $8,000.

The plan enraged many partners. In June 1991, Bonnie Ruben and some other partners filed a class-action suit in Augusta against the partnership, McMahon and Bear Stearns, asking for their investment back. "I feel very strongly about people who defraud innocent investors," she says. Meanwhile, Southeast limited partner Eugene Sobel of Rockville, Md., was collecting approval from other investors to remove the elder McMahon as managing partner.

With partners on the warpath and efforts to restructure the debt failing, time was running short. But the McMahons weren't sharing news with their employees. Eighteen managers attended a meeting in May 1991, Byers recalls, "but the McMahons didn't even have the nerve to come over and tell us we were in a bad situation."

In July 1991, Sam McMahon Jr. filed a Chapter 11 reorganization petition for the Florida partnership in U.S. Bankruptcy Court in Charlotte, followed six weeks later by a filing for Southeast. The move bought the McMahons time, protecting them from creditors' claims. But it also opened the door to look into the McMahons' dealings.

What was revealed was a display of spending and intercompany dealing that may have surprised even Sam McMahon Jr. His son had used the partnerships as piggy banks, funneling $2.5 million in 1991 alone -- even after the bankruptcy filings -- for personal ventures. In addition to the racing team, helicopter, motor home and private-school donation, purchases included a $305,000 King Air B200 airplane and a $189,000 lot on Lake Norman. Further investigation showed that the partnerships may have been the source of financing for other private ventures.

"When they were making money, it worked out fine," says a lawyer involved in the case. "He'd see a boat and call his secretary to cover the check with funds from another account, figuring that he'd count it as a bonus at the end of the year. But then, suddenly, the money wasn't there."

It's not surprising that the money wasn't there given the way the younger McMahon treated the partnerships. Vending-machine revenue is typically included on a motel's income statement. But vending money from many partnership hotels went to a Florida-based company partly owned by Sam McMahon III, the trustees found.

Then there were the guest-services desks inside hotel lobbies, where salespeople sold time-sharing resort investments to tourists. According to Grier's investigation, the partnerships leased lobby space in six Florida hotels to Worldwide Innovations Inc. for $2,500 to $5,000 a month in 1989. Worldwide Innovations then sublet the space to Island One Inc. of Florida for $62,500 a month.

In a January deposition, the younger McMahon didn't mention Worldwide, though he described some of his dealings with its majority owner, Orlando restaurant owner Rosario Poma. Four months later, he revealed he had once owned a small stake in Worldwide. McMahon's 1989 federal tax return showed interest income of $5,281 from Worldwide, a court record shows.

Team III particularly bothered some employees because it did little or no motel promotion. Sam McMahon Jr. had used racing to promote his motels in the '70s, but he never got as involved as his son. "Team III was some ego thing that Sam III went off on," former motel manager Byers says.

For a fast tracker like the younger McMahon, however, NASCAR was a way to rub shoulders with the likes of Charlotteans Felix Sabates and Rick Hendrick, two successful race-team owners. After consulting with Sabates, he formed a team for the Busch Grand National tour in 1989. A McMahon-owned company later bought an airplane from Sabates' Top Sales Co.

The following year he moved up to the prestigious Winston Cup tour, buying a garage in Charlotte from Hendrick. Team III surprised NASCAR veterans by paying top dollar to hire well-known pros: crew chief Barry Dodson, engine builder Lou LaRosa and, in 1991, driver Kenny Wallace. At its peak, Team III employed 18. "Sam believed in doing things first class," Jim Ruane says. "He understood you need to have a program in place that gives comfort and confidence to the Fortune 500 people who want to be in racing."

While the partnerships had run aground, Team III looked like a winner in December 1991 when Ohio-based Royal Appliance Manufacturing Co. agreed to sponsor Team III to promote its Dirt Devil cleaners. Within weeks, Royal Appliance backed out. Within months, the team folded.

Where was Dad when this was going on? "The dynamics between the father and son makes this very complicated," Ruane notes.

Sam McMahon Jr. has denied that he knew the extent of his son's spending. As general partner, he is a party to lawsuits that accuse Sam McMahon III of diverting partnership money for personal use.

The elder McMahon may not have been paying attention. Years ago, he'd turned over day-to-day management duties to his son. He was board chairman in 1990-91 of Southern Baptist Theological Seminary, a prestigious school in Louisville. And he was an organizer of Charlotte's Park Meridian Bank, which opened in August 1991. When he quit as chairman in February, he owned nearly 5% of its shares, worth $210,000 earlier this year, according to court records. He owned $400,000-plus in other bank stock. (His son was an organizer of Bank of Mecklenburg.)

Former employees question whether the elder McMahon could have been oblivious to the large checks, some for hundreds of thousands of dollars, being sent out of partnership accounts. His office was next door to his son's. Shirley Brown, a regional manager responsible for some Florida hotels, had worked with Sam McMahon Jr. for 20-plus years and might have tipped him off, former employees say. But Brown herself is the source of controversy. Court records show that in February and March 1991 the partnerships paid her three checks totaling $106,734 -- when her annual salary was $55,000. Those were probably bonus payments for good work, Sam McMahon Jr. has testified.

As general partner, there's no doubt the elder McMahon was supposed to have known what was going on. "He should have been on top of the business, and he wasn't," a former regional manager says.

After a year in bankruptcy proceedings, the McMahons are scrambling to hold on. The Florida motels are gone: Nine were acquired by an Illinois-based company, while the motel near Walt Disney World was taken back by a Chrysler subsidiary. The Southeast partnership is now controlled by Sobel and other limited partners, who hope to recoup some of their $37 million investment over the next decade. Their fortune largely depends on bankruptcy Judge Marvin Wooten and the RTC's efforts to recover part of its $65 million exposure.

Creditors would like to gain control of the McMahons' personal assets. But doing so is difficult because of the complex array of companies and partnerships. Earlier this year, property-tax listings showed Sam III's assets included a '91 Ford Explorer, a '91 Porsche and three Charlotte houses with a combined tax value of nearly $900,000. Court records show that his other holdings included a condo in Banner Elk, a house in Windermere, Fla., plus property at Lake Norman.

In the 1987 Southeast prospectus, Sam McMahon Jr. estimated his net worth at $15 million. In a March bankruptcy court hearing, he said it was $253,000 -- not including his contingent liabilities of $83 million. His 4,888-square-foot home on an 8-acre lot on Carmel Road has a tax value of $597,330. Property records show he also owns an office and 2.88 acres, valued at $1.29 million, in a Charlotte industrial park.

McMahon retains the loyalty of many. Queens College won't turn its back on a man who has endowed five professorships. "Sam is a super citizen," President Billy Wireman says. "There are a lot of people who make a lot of money, but Sam has been charitable. He's continued to be a first-rate board member."

His gift to Queens is secured by an Indianapolis hotel that is "free and clear" of all of the McMahons' legal problems, Wireman adds. "Sam made sure of that. Our agreement is solid as a rock."