Dubai's Istithmar loses ownership of NY hotel

Dubai World’s Istithmar unit lost control of the W New York Union Square hotel in a foreclosure auction after investing in the property near the top of the real estate market.

LEM, an affiliate of Lubert-Adler Real Estate Funds, won an auction for the mezzanine debt on the luxury Manhattan hotel, which was purchased by Istithmar in 2006 for $285 million. LEM bid $2m for the debt.

“We are pleased to have completed this step to assume ownership of the W New York Union Square,” the acquirers said in a statement on Tuesday. “Despite the recent downturn of the hotel industry, and the defaults that led to today’s foreclosure auction, we are optimistic about the future. Our intention is to ensure a seamless transition of ownership.”

State-owned Dubai World is seeking a “standstill” agreement with lenders as it attempts to restructure $26 billion of debt. Istithmar shelled out $665m for two New York hotels, the W Union Square and the Mandarin Oriental, whose sale prices each broke a local record of $1m per guest room, according to Real Capital Analytics Inc.

The mezzanine debt on the W New York, named by Conde Nast Traveler as one of the world’s top 500 hotels in 2005, was divided into three parts with LEM holding one portion, according to Ben Thypin, senior market analyst at Real Capital, a New York- based research firm.

LEM bought out the other holders of the debt and assumed control of the entire loan, he said. LEM will now take over mortgage payments on the $115m backed by the hotel and “essentially switch places with Istithmar,” Thypin said.

LEM Mezzanine, based in Philadelphia, is a series of private equity funds with $450m of equity, according to its Web site.

“LEM has very little equity in the deal, so essentially the property is just moving into different hands,” said Thypin, after the auction. “They may be more willing to recapitalise it or somehow improve operations but it’s not moving out of trouble. The hotel still has to improve its performance.”

Luxury hotels have been hurt by a decline in business and leisure travel during the recession. A drop in room rates at the W Union Square has cut its net cash flow, according to data compiled by credit-rating company Realpoint LLC.

Lenders have poured more than $100bn into Dubai, at least $34bn of which went to Dubai World, according the Moody’s Investors Service. Dubai World said on November 30 said it is considering selling off assets as part of a restructuring.

“As Istithmar World has demonstrated repeatedly throughout the financial crisis, we have stood by the investments in our portfolio,” Istithmar spokesman Abdelaziz Al Mazam said on November 18 in response to questions about debt on the W Union Square. “As signs have begun that the global economy is recovering, we expect to continue to do so with increased confidence.”

The results were announced at the auction in Manhattan.