The developer of a troubled Midtown Manhattan hotel is up against the ropes.
A New York State Judge this week appointed a receiver for the Distrikt Hotel, signaling the commencement of foreclosure proceedings.
The 32-story, 155-key hotel at 342 West 40th Street, between Eighth and Ninth avenues, operates as the Tapestry Collection by Hilton. It closed its doors at the start of the pandemic and has remained shuttered even as many of the city’s hotels have reopened.
The hotel’s developer, an entity called 342 Property LLC, has defaulted on its obligations and Judge Andrew Borrok ruled this week that appointing a receiver is the “appropriate thing to do at this point.” Three individuals are named alongside 342 Property in court filings: Scott Schroeder, Victor Afonso and Kevin Fee. The three are connected with Greenway Holdings, according to press reports.
“Taxes are not being paid, the ground lease is not being funded, the franchise agreement is in default,” an attorney for U.S. Bank, the CMBS lender, said in court proceedings, according to a transcript.
The court appointed Stephen Ellman, at Zeichner Ellman & Krause, to serve as receiver for the property.
The Distrikt Hotel’s troubles long predated the pandemic. Shortly after its 2010 opening, 342 Property sued its lenders after they refused to grant an extension on its mortgage loan — purportedly because it failed to maintain the requisite debt service coverage ratio, which gauges a company’s available cash flow to pay principal and interest payments on its debt.
Stifled by heavy competition, the Distrikt Hotel’s coverage ratio fell throughout 2019, and when the pandemic reared its head in early 2020, the $34.8 million CMBS loan secured by the property was sent to a special servicer, Rialto Capital Advisors, the Commercial Observer reported.
The outstanding balance on the CMBS loan is $33.7 million as of Aug. 12, according to DBRS Morningstar. The $40 million loan was originated by Bank of America in 2012.
“The Loan is in monetary default and Special Servicer is pursuing a foreclosure strategy,” DBRS Morningstar said.
To make matters worse, Axonic Credit Opportunities Master Fund, which made a $16 million mezzanine loan on the Distrikt Hotel, sent a notice to 342 Property on Thursday alleging “misconduct and waste” in their handling of U.S. Bank’s complaint, and alleging breach of contract for acquiescing to the appointment of a receiver.
The lawyer representing 342 Property declined to comment.
A receiver’s first duty is to preserve the value of the property, and they are answerable to the court rather than the property’s owner or lender, according to Andrew Herz, a partner at Patterson, Belknap, Webb & Tyler.
In most cases, the lender steps forward and provides the funds the receiver may use to preserve and protect the property, which could include reopening it, Herz said. Those funds get added to the mortgage debt, and can later be recovered from the borrower.
“Foreclosures in New York do not move quickly,” Herz said. “They can last three to four years. Somebody’s got to pay the real estate taxes, somebody has to maintain insurance, somebody has to exterminate the property — even if it’s vacant.”