W hotel in Union Square files for bankruptcy before auction

By David Jones | March 23, 2010 06:42PM

The new owners of the W New York-Union Square hotel threw the troubled property into bankruptcy protection this afternoon, the day before senior lender DekaBank was scheduled to auction off a loan on the hotel.

LEM Mezzanine, a Philadelphia-based private equity fund, previously bought the 270-room property in December for $2 million, plus the assumption of $212 million in debt, in a so-called mezzanine foreclosure auction. LEM said the hotel remains “highly leveraged” following the December auction. The W, located at 201 Park Avenue South, was auctioned off after the Dubai financial crisis left Istithmar, the private equity arm of state-controlled Dubai World, scrambling to sell assets.

“Efforts to restructure the remaining mezzanine debt have not yet been completely successful,” LEM said in a statement. “Today’s filing was intended to provide additional time to complete that process, and emerge with a healthy balance sheet that allows the hotel to continue to thrive in a competitive marketplace.”

Under the chapter 11 bankruptcy filing in the U.S. Bankruptcy Court in Delaware, Hotels Union Square Mezz 1 LLC , which previously operated as Istithmar Hotels Union Square Mezz 1 LLC, said that Frankfurt-based DekaBank was the sole creditor, with $60 million owed.

By January, DekaBank, which held a $60 million mezzanine loan on the property, had decided to foreclose on its own loan instead of accepting a deal under the previous foreclosure auction. In most mezzanine foreclosures, the senior lenders work out deals with the buyer to restructure their debt and the subordinate lenders get wiped out.

The DekaBank auction was scheduled for tomorrow.

Lawyers for LEM were not immediately available for comment.

Isithmar originally bought the property in 2006 for a record $285 million, one of the highest prices ever paid for a New York hotel on a per-room basis.