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Istithmar loses control of New York hotel

LEM Mezzanine, a mezzanine fund affiliated with Lubert-Adler Real Estate, bought the W Union Square Hotel from the private equity arm of Dubai World in foreclosure for a reported $2m, plus the assumption of debt.

The private equity mezzanine firm set up by Lubert-Adler co-founder Ira Lubert has bought New York’s W Union Square Hotel in a foreclosure auction from the Dubai World subsidiary Istithmar.

LEM Mezzanine said in a statement the firm acquired the hotel through a foreclosure auction after a series of defaults by the borrower, Istithmar.

The Philadelphia-based firm reportedly paid just $2 million for the central New York City hotel, with the assumption of $212 million in debt.

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 Mezzanine

Istithmar, the private equity arm of Dubai World, paid an estimated $285 million for the hotel in October 2006, financed with a $115 million first mortgage and $117 million mezzanine loan, according to data provider Real Capital Analytics.

The first mortgage was securitised by LNR Partners and the mezzanine loan was provided by Column Financial, which was sold as three mezzanine tranches of $67 million; $30 million and $20 million to undisclosed buyers, RCA said.

LEM said today it acquired a mezzanine loan secured against the W hotel in March 2007 and started foreclosure proceedings this November following borrower defaults.

“Despite the recent downturn of the hotel industry, and the defaults that led to today’s foreclosure auction, we are optimistic about the future,” the firm said in the statement. “Our intention is to ensure that the hotel continues to be well run and is made ready to take full advantage of any future market recovery.”

According to a report in the Wall Street Journal, Istithmar made a last-ditch effort to keep hold of the hotel during the auction, bidding $2.1 million, subject to certain conditions. The report said LEM emerged as the winner after behind-closed door talks.

Dubai World has seeking to restructure $26 billion of debts owed by itself and its real estate subsidiaries Nakheel World and Limitless, admitting asset sales could be part of the process. Istithmar is not part of that process.

LEM established itself as a prominent player in the preferred equity financing of CMBS deals, according to fund documents published by Pennsylvania Public School Employees' Retirement System for the firm's 2006 vehicle, LEM Real Estate Mezzanine Fund II.

LEM's $150 million Fund I invested in 23 preferred equity transactions totaling $75.5 million, out of a total of 48 transactions involving 127 properties, the document said, with Fund II expected to follow a similiar strategy.

The firm also worked closely with Lubert-Adler Real Estate operating partners in the US to source investments for LEM funds, the fund documents added. LEM is managed day-to-day by Jay Eisner and Herb Miller, but with “advice and oversight” provided by Lubert and fellow Lubert-Adler co-founder Dean Adler, according to PSERS.