More Bad News For Dubai As Istithmar Loses Foreclosure Auction For Union Square W Hotel

The WSJ reporting that Istithmar, the investment arm of Dubai's royal family, has lost the foreclosure auction for the Union Square W Hotel, which as we pointed out a month ago was the most likely next CRE casualty. The winner: mezzanine specialist LEM Capital. We wish them all the best. Presumably this means the bottle service at the Underbar has all but dried up. Do you see what happens Larry when the bouncer doesn't rotate the B&T crowd to keep the banker-folk happy? And this happening even with all-time record bonuses? Travesty.

In more serious news, and as we speculated this weekend, look for the Mandarin Oriental Columbus Circle hotel to be the next foreclosure property, which just so happens is another Istithmar property, as is Times Square Six.

Some more on the crumbling hotel CRE situation from the WSJ:

Dubai World's private-equity arm Istithmar made a last ditch effort to keep control of the W Hotel Union Square in Manhattan in a foreclosure auction on Tuesday but ended up losing the property that it acquired in a top-of-the-market investment.

The 270-room hotel was acquired by LEM Mezzanine, a private-equity fund affiliated with Lubert-Adler Real Estate Funds, which holds the junior-most portion of $117 million in so-called mezzanine debt, or the part that fills the gap between the first mortgage and a borrower's equity.

At the auction held at the New York office of law firm Allen & Overy, which represents LEM, the fund initially was bidding $2 million for the debt, while Istithmar was bidding $2.1 million subject to certain conditions. But after behind-closed-door talks, LEM emerged as the winner.

The 21-story, full-service hotel is suffering from reduced business and leisure travel amid a weak economy. In September, the $115 million first mortgage, which was packaged and sold as commercial-mortgage-backed securities, or CMBS, was transferred to a "special servicer" in charge of handling troubled loans due to imminent default. Istithmar at the time blamed the declining hotel market in New York, which caused room rates to fall almost $100.

Realpoint, a credit-rating agency, estimates that the hotel is now worth $137.5 million, even less than the first mortgage.

In addition to the W Hotel, Istithmar also owns Mandarin Oriental in Manhattan. The hotel was valued at $340 million when Istithmar bought a 73% stake in 2007. Since then, with occupancy rates falling, its annual cash flow plunged to $3.6 million from about $21 million, according to Realpoint. Now the hotel is worth $123 million, also less than its outstanding debt.

The foreclosure comes as Dubai World, the government-owned fund, is struggling with a mammoth debt load. As a result of its debt crisis, Dubai World is expected to sell some non-core assets including Central Park South landmark the Jumeirah Essex House, and the Knickerbocker Hotel in Times Square as it asked for a six-month freeze of its debt.