Related sues Meadow after foreclosure on Garment District hotel

Pain from failed deal for the Gregory did not end with its sale

Related's Stephen Ross, the Gregory Hotel at 42 West 35th Street and Meadow Partners’ Jeffrey Kaplan (Getty, Google Maps, Meadow Partners)
Related's Stephen Ross, the Gregory Hotel at 42 West 35th Street and Meadow Partners’ Jeffrey Kaplan (Getty, Google Maps, Meadow Partners)

Even venerable real estate firms have deals they would rather forget.

For Midtown-based Meadow Partners, the purchase of the Gregory Hotel is one.

The developer bought the Garment District establishment, then known as Hotel 35 Herald Square, for nearly $50 million in 2014 and invested about $10 million in renovations. In April 2021, a year after Covid shut down the city, the hotel’s lender, AllianceBernstein, initiated a foreclosure.

After another year, investors Denis Xhari and Vlash Pepa bought the hotel, at 42 West 35th Street, in a foreclosure sale for $32.8 million — barely half of what Meadow Partners had invested in the property.

Unfortunately for Meadow Partners, the foreclosure sale was not the end of it.

A Related Companies fund is now suing the firm for breaching its guarantee on a $15 million mezzanine loan. Related is seeking $8 million from Meadow for unpaid loan payments, according to the lawsuit in New York Supreme Court. PincusCo first reported the suit.

The lawsuit provides more than just a window to Meadow’s failed deal. It reflects the sorry state of New York’s hotel market and is a reminder that a completed foreclosure does not stop lenders from pursuing debts.

In 2017, a Related Companies fund provided the mezzanine loan. The financing agreement required Meadow Partners to “unconditionally and irrevocably” guarantee payment on the debt service and carry costs. That same year, Meadow Partners refinanced the property with a $31 million senior mortgage from AllianceBernstein.

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Trouble started around July 2019. That’s when Meadow first defaulted on its debt service, Related alleges. Things got worse the next year when the pandemic cut off the flow of tourists and business travelers to the city. Meadow defaulted on its senior loan in April 2020 and failed to repay the mezzanine loan by its December 2020 maturity date.

The hotel had internal issues, too. Employees stopped getting paid and a battle ensued between Meadow and the hotel manager, Highgate Hotels, over who should write the checks. Highgate alleged that Meadow refused to fund the operating fund used to pay employees. Workers only got paid after their union, the New York Hotel Trades Council, stepped in.

Often, a mezzanine lender can recoup debt from a troubled project by initiating a UCC foreclosure, which can allow it to essentially take control of the property while still paying the senior debt.

But that did not happen at the Gregory. In April 2021, the senior lender, AllianceBernstein, filed a foreclosure notice. Five months later, the court issued a judgment of foreclosure.

That loan was sold in February to Josh Zamir’s and Daniel Ghadamian’s Capstone Equities, which completed the foreclosure sale to Xhari and Pepa.

New York’s hotel market has yet to recover from the pandemic. Business travel — on which hotels in New York rely — isn’t expected to return to normal until 2024, according to the Hotel & Lodging Association.

Notably, in March, hotel company MCR agreed to buy one of the city’s largest hotels — the 1,780-key Sheraton New York Times Square — for $356 million. That’s less than half the price it sold for in 2006.

Meadow Partners, founded by Jeffrey Kaplan in 2009, has been among the more active New York buyers lately. In late 2021, it bought a Chelsea office building from Columbia Property Trust for about $170 million and a Midtown office condominium from SL Green for $117 million.

Meadow Partners did not return a request to comment. Related Companies’ attorneys in the lawsuit also did not return a request for comment.