04 October 2010

End Game for Developers

The Wall Street Journal
Aby Rosen Battles to Shore Up His Empire; Buyers Circle Joe Moinian's W Hotel

It's crunch time for Aby Rosen, the real estate developer known for blending his properties with his flashy style and world-class art collection.

Mr. Rosen is negotiating an end to his partnership in the Gramercy Park Hotel with hotelier Ian Schrager, who transformed the century-old hotel with a redesign that includes contemporary artworks by artists such as Andy Warhol and Damien Hirst. In his battle to hold onto the boutique hotel, Mr. Rosen also is buying back a $140 million loan on the building from Union Labor Life Insurance for about $90 million, people with knowledge of the situation say.

A few miles uptown, Mr. Rosen is at risk of losing the property at 66 East 55th Street that houses the Core Club, an exclusive social club whose initial members included Stephen Schwarzman, co-founder of the Blackstone Group and the late Bruce Wasserstein, former head of Lazard Ltd. An $18 million loan backed by some 27,439-square-foot retail condominium space at the building has been in default since early last year.

Now the lender has hired Mission Capital Advisors to sell the loan, according to people familiar with the matter. Bids are due on Oct. 26. Some prominent real-estate families have expressed interest in buying the debt with the intention of owning the property, the people said. Mr. Rosen declined to comment.

Like most developers who piled on easy credit during the boom years, Mr. Rosen has been scrambling to shore up his empire since the recession hit. These latest deals are a sign that these efforts by Mr. Rosen and others are moving into the end game.

Until recently, lenders generally have been reluctant to foreclose on property even after borrowers defaulted because values were scraping bottom and the lack of financing made it virtually impossible to sell. But now, a growing number of lenders holding debt on troubled projects are resorting to selling the debt to opportunistic investors.

Lenders are betting that now is the time to sell because values have rebounded some and demand is increasing from investors who amassed large war chests of capital to go after troubled real estate. "With property values stabilizing, lenders have become more willing to sell," says Will Sledge, a managing director at Mission Capital. "Buyers, feeling the wind is at their back, are now more willing to incrementally increase the amount they'll pay for soured loans as a new way to get distressed real estate."

So far this year, the New York-based loan-sale adviser had sold $3.4 billion of commercial property loans nationwide, compared to a total of $2.9 billion for all of last year.

In another example of aggressive investors looking to own property by snapping up debt, scores of hotel buyers and private-equity funds are circling the W Hotel and condo tower downtown currently owned by developer Joe Moinian, according to people familiar with the matter. The lender is marketing a $25 million junior loan on the property, also through Mission Capital, with bids due on Thursday. The sale of the debt would set the stage for a battle between Mr. Moinian and the potential buyer for control of the property.

A spokeswoman for Mr. Moinian declined to comment. The 56-year-old Iranian-born developer, who went on a buying spree during the boom years, also is fighting to fend off a foreclosure attempt aimed at an office tower near Columbus Circle by a venture led by Stephen Ross's Related Cos. and Deutsche Bank AG. The venture recently bought at close to full face value of the $250 million mortgage on the tower at 1775 Broadway and is now seeking to foreclose on the 700,000-square-foot building.

Developers such as Messrs. Moinian and Rosen can fend off these opportunistic investors by paying off or buying back debt. But often, that is a challenging task because capital still remains difficult to come by.

Mr. Rosen, the son of Holocaust survivors, founded his company, RFR Holding LLC, with his childhood friend Michael Fuchs in the wake of the last real-estate crash of the late 1980s. The company has since built up a vast portfolio consisting largely of prime assets such as the iconic Seagram Building and Lever House. His extensive art collection includes works by Andy Warhol, Keith Haring and Jeff Koons.

What makes Mr. Rosen stand out in the crowded Manhattan real-estate scene is his penchant for art and ability to weave his flashy style into his property holdings. At the members-only Core Club, which occupies the first five stories of the building at 66 E. 55th St., there is an art gallery, a Tom Colicchio restaurant, a fitness center, private concierges and meeting spaces.

Mr. Rosen teamed up with Mr. Schrager, his long-time friend and a co-founder of Studio 54, in acquiring the Gramercy Park Hotel in 2003. The 185-room hotel, which overlooks the private Gramercy Park, features an extensive collection of modern art and has won kudos for its design. But the ownership defaulted on the $140 million loan on the property this year.

Now Mr. Rosen is buying back the debt at a discount of about 35%. He's also close to buying out Mr. Schrager, who's focusing on creating new hotel brands.

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