Got $2 Million For a Manhattan Hotel?

The glitzy W Hotel in Manhattan was sold to the highest bidder in a foreclosure auction on Tuesday. The winning bid was $2 million. That's a far cry from the $282 million ($50 million in equity and $232 million in debt) that Dubai World's private-equity arm Istithmar World Capital ponied up in 2006 for the prestigious property. Oh sure, Dubai has some financial issues and many high profile real estate investors are losing properties left and right, so what's the big deal? Well, Istithmar World Capital has $20 billion in private equity investments, much of it spent in 2006-2007. As evidenced by the loss taken on the W, any or all of those investments can go to zero in a hurry. And you thought Nakheel was Dubai World's biggest problem...

The $232 million in debt on the W was divided into $115 million in senior debt, now in CMBS, and $117 million in mezzanine debt. The mezzanine debt defaulted in October and the most junior of the three mezzanine investors, LEM Mezzanine, pushed the property into foreclosure and won the auction with the $2 million bid. It is now LEM's responsibility to bring current any defaulted debt that is senior to it ($97 million of mezzanine debt senior to LEM's original $20 million piece) as well as keep the first mortgage current. Istithmar made a last ditch effort to keep the property by throwing out a $2.1 million bid contingent on not having to pay anything to bring the hotel's senior debt back to current status. That whole "we don't feel like keeping our debts current" thing might work in Dubai, but not in the US. Unless, of course, you are a systemically important financial institution and can get the Fed to bail you out.