Dubai World's Istithmar unit lost control of the W New York Union Square hotel in a foreclosure auction Tuesday 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 Istithmar bought in 2006 for $285 million. LEM bid $2 million for the debt.
"We are pleased to have completed this step to assume ownership of the W New York Union Square," the acquirers said. "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."
Dubai World, an investment company owned by the Dubai government, is seeking a "standstill" agreement with lenders as it attempts to restructure $26 billion of debt.
Istithmar shelled out $665 million for two New York hotels, the W Union Square and the Mandarin Oriental, whose sale prices each broke a local record of $1 million per guest room, according to Real Capital Analytics Inc.
The mezzanine debt on the W New York was divided into three parts with LEM holding one portion, according to Ben Thypin, senior market analyst at Real Capital, a New York 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 $115 million backed by the hotel and "essentially switch places with Istithmar," Thypin said.
LEM, of Philadelphia, is a series of private-equity funds with $450 million 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," Thypin said after the auction. "They may be more willing to recapitalize 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 the credit rating company Realpoint LLC.