The 270-room W Hotel in Union Square changed hands in December after the private equity division of Dubai World defaulted on a $117 million mezzanine loan. But the lender, LEM Mezzanine, could lose the hotel in the coming months as a result of its filing for bankruptcy protection earlier this year, the New York Times reported. Mezzanine loans, which are secured by stock or other ownership stakes in a company, became a popular form of secondary financing during the real estate boom, offering high returns to investors and high interest rates for borrowers. There is an estimated $100 billion in mezzanine loans outstanding across the country. But despite built-in risks, lenders say these loans are beginning to resurface. “It’s become something people want to do again,” said William Shanahan, a vice chairman at CB Richard Ellis who specializes in investment properties in New York. “I think it’s fair to say that right now the desire to place mezzanine debt outweighs the demand for it, but a lot of people are looking to put mezzanine loans on their properties.” Since mezzanine loans come second in priority to the first mortgage and are typically secured by stock in the company, many building owners who financed property at the height of the real estate bubble, including the proprietors of the W Hotel, were at the mercy of mezzanine lenders after the economy soured. [NYT]

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Istithmar World Capital, the investment arm of the Dubai government, has defaulted on its $300 million mortgage on the former Knickerbocker Hotel site in Times Square and turned the property over to its lender. Istithmar had been planning to convert the site’s 300,000-square-foot office building back into a high-end hotel, and now that Dubai is out of the picture, vulture investors are reportedly chomping at the bit to take the helm at a steep discount. The lender, Danske Bank A/S, hired Jones Lang LaSalle to market the property, and the brokerage’s Ben Singer said interest has been high. One such interested bidder is said to be Sitt Asset Management, which owned the building before Istithmar bought it in 2006. Istithmar had stopped renewing leases in the office building there, known as 1466 Broadway, and had also purchased an adjacent vacant lot for $76 million, as part of its hotel conversion plan. The building is now almost 50 percent vacant, according to research firm CoStar. Dan Fasulo, managing director for Real Capital Analytics, said the property would be best-used as a hotel. He said the first mortgage note is valued at $290 million, though the property could be worth less than that because it is in need of renovations. [WSJ]

At a time when Dubai World, the main investment arm of the powerful Gulf region city-state, and investments from Dubai and the Middle East are undergoing serious difficulties, it might come as a surprise to my readers that sovereign wealth fund managers are investing more in property and commodities to hedge against the risk of inflation caused by massive stimulus packages in the west, according to China Daily. David Smart, the London-based global head of sovereign and supra-national funds at Franklin Templeton Investments, said, “There is quite a lot of interest
in real estate and other long-term hedges against inflation,” according to the Chinese
newspaper. Smart’s team advises or manages around $40 billion from sovereign
funds and international organizations. [more]

To the investors hoping to score one of Dubai’s prized Manhattan properties as the beleaguered city-state struggles to climb out of its $59 billion debt hole, analysts are saying: not so fast. In order to sell any of its five Manhattan properties, Dubai World, the government’s holding company, would be taking a big hit, which might not be wise. The Knickerbocker Hotel building, which the company bought for $300 million in 2006, is half-empty and worth “nothing,” one source told the Post’s Steve Cuozzo. “They’re going to take a huge hit if they sell,” said Dan Fasulo, managing director at Real Capital Analytics. “They’re going to get wiped out.” Dubai World may also be underwater at 450 Lexington Avenue, where the company has a 99-year leasehold, purchased in 2006 for $600 million. Meanwhile, the W Hotel Union Square, bought for $285 million in 2005, was scheduled for a Dec. 8 foreclosure auction. [Post]