Lubert-Adler mezz fund sells troubled hotel to REIT

After being subject to one actual mezzanine foreclosure auction, threatened with two more and ultimately placed into bankruptcy protection, the W Hotel – Union Square will be sold to Host Hotels & Resorts.

The private equity mezzanine firm set up by Lubert-Adler Real Estate co-founder Ira Lubert has drawn a line under its investment in the troubled W Hotel – Union Square, by agreeing to sell the property to US REIT Host Hotels & Resorts.

LEM Mezzanine revealed it would sell the landmark Manhattan hotel to Host for an undisclosed sum after throwing the property into bankruptcy protection in March to stave off the threat of foreclosure from mezzanine lenders.

The W Hotel has experienced a tumultuous six months since LEM acquired the property in December following a mezzanine foreclosure auction.

According to a company statement and bankruptcy court filings, the hotel’s outstanding mezzanine holders, Dekabank and an entity known as Union Square Real Holding Corporation, will be repaid the face value of their investments, worth $98 million, with LEM set to receive current and future payments on its original $20 million mezzanine loan. The deal is expected to close by 15 September.

The W Hotel has experienced a tumultuous six months since LEM acquired the property in December following a mezzanine foreclosure auction.

LEM launched foreclosure proceedings after the original owner – Istithmar World, the private equity arm of Dubai World – failed to meet its debt repayments. Istithmar had bought the 270-room hotel in October 2006 for $285 million and financed it with a $115 million first mortgage, $117 million of mezzanine debt split into three tranches, and $53 million of equity.

LEM had originally acquired a $20 million slice of the mezzanine debt, with Dekabank and Sandelman Partners financing the two remaining tranches of $60 million and $37 million, respectively. Sandelman later sold its stake to Union Square.

By launching foreclosure proceedings, LEM was able to take over Istithmar's equity interests in the property paying just $2 million, and assuming $212 million in debt.

However, court documents show that LEM was immediately in default on the hotel’s mezzanine loan with no payments made since October 2009.

That prompted Dekabank and Union Square to launch separate mezzanine foreclosure proceedings against LEM, as both firms sought to take over the W Hotel.

On the afternoon of Dekabank’s planned foreclosure auction – 23 March, 2010 – LEM placed Hotels Union Square Mezz 1 LLC, which had borrowed $60 million from Dekabank and had an equity interest in the ownership of the W Hotel, into bankruptcy protection.

Two days later, LEM placed Hotels Union Square Mezz 2 LLC – which related to the $37 million Union Square mezzanine loan – into bankruptcy as well. The move was aimed at preventing any mezzanine foreclosure of the hotel “before a recapitalisation of the debt” could be agreed, court documents said.

In agreeing to take over the W Hotel, Host Hotels is also bringing some old players back to the table securing co-investment from the mezzanine lender, Union Square Real Holding Corporation. Host declined to comment further.

LEM said in a statement the deal was “accomplished through the cooperation of all of the parties” and would “result in the winding up of the bankruptcy cases relating to the W New York – Union Square”.