LEM acquires W Union Square for $2 million at mezz auction

Equity fund also assumes $212 million in debt
By David Jones | December 08, 2009 02:23PM

LEM Mezzanine, a Philadelphia-based private equity fund, acquired Istithmar’s former W New York – Union Square hotel for $2 million, plus the assumption of $212 million in debt, in a foreclosure auction held in Manhattan this morning, marking the first major asset to be sold since the November debt crisis emerged in Dubai.

LEM bagged the troubled property at 201 Park Avenue South after a brief bidding war in which Istithmar officials tried to buy the 270-room hotel on the condition that they not have to assume the hotel’s October and November debt payments.

Sources at the auction told The Real Deal that the hotel would continue to operate under the W brand, while LEM would make an undisclosed amount of capital improvements and position the hotel for an eventual recovery of the New York economy.

“Despite the recent downturn of the hotel industry, and the defaults that led to today’s foreclosure auction, we are optimistic about the future,” LEM’s affiliate company said in a statement.

Istithmar, the private equity arm of state-controlled Dubai World, acquired the W Union Square in 2006 for $285 million, one of the highest prices ever paid for a New York hotel, on a per-room basis.

According to data from Manhattan-based research firm Real Capital Analytics, the W Union Square acquisition was financed with a $115 million mortgage loan and a securitized $117 million mezzanine loan from Column Financial, the commercial real estate arm of Credit Suisse First Boston.

In an Oct. 28 report, Realpoint said that the property’s $115 million mortgage loan was transferred to LNR Partners, a Miami-based special servicer, and was placed on Realpoint’s watch list.

LNR issued a default notice Nov. 16 and told Starwood to place all funds after operating expenses into a lender-controlled lockbox, Fasulo said.

In addition to the $2 million for the hotel itself, LEM assumed $212 million in debt including the $115 mortgage note, the $60 million A note, the $37 million B note, plus the costs of capital improvements and undetermined amount of defaulted debt from the last two months, according to sources familiar with the deal.

Under today’s mezzanine foreclosure auction, the $20 million C note, held by LEM, was the actual debt being auctioned off, according to Allen & Overy, who oversaw today’s sale.

Ray Cirz, chief executive of appraisal firm Integra Realty Resources, noted that average Manhattan hotel rates are down 25 percent from a year ago to below $300 per night, a level not seen since 2004. Occupancy rates have also fallen to about 75 percent, a level not seen since 2004.