When mezzanine loans were first introduced in the eighties they galvanized transactions in all industries and, before long, were a frequent component of hotel loans. While they offer a high return they expectedly are high risk instruments. The acute fall in RevPar across the country has pitched a series of "mezz" loan transactions over the brink with Dubai World's ownership of the W Hotel in Union Square, New York being the most prominent and recent casualty. The hotel is now owned by LEM Mezzanine of PA with the assumption of $212m in debt. Real Capital Analytics, however, estimates the hotel value at around $137m, an astonishing loss of nearly 55% in value in 3 years. Dubai World's problems extend to another trophy property, Miami's famed Fontainbleu hotel where the primary loan has not been serviced since August of this year.
Going back some years, a mezz deal that defaulted even in the boom times of 2006 is Chicago's 437 room Hotel 71. The Wall Street Journal reports that several years later, the hotel recently sold for $37m wiping out an astonishingly large amount (approximately $91m) in debt. Other prominent hotel assets in mezz trouble include the Gansevoort South which the Miami Herald reports is a Miami Beach hotel popular with stars (and) now destined to be sold at a foreclosure auction. Credit Suisse announced on Wednesday morning an auction for the ownership
stake used to secure an $89 million mezzanine loan on the 334-room
oceanfront hotel. The Mondrian in Scottsdale, Arizona is facing a similar situation. Additionally, Fitch, the rating agency, has a slew of downgrades using their "base case stress scenario" of mezz debt relating to hotels including a 424 room full-service hotel located in Boston, MA; a portfolio of 12 full-service hotels located in Puerto Rico, Florida, California, New York, and Jamaica and a 72-room boutique hotel located in the
Times Square area of New York City.
The good news for consumers in most in most cases is that these hotels were renovated and significantly (eg. Fontainbleu) upgraded in the recent past and present are usually represent a great value due to the drop in pricing power of hoteliers. Should the crisis persist, that aspect can quickly be reversed as, anyone in the business knows, the high traffic (at low rates) causes wear and tear with without a concomitant rise in cap-ex funding.