Clift Hotel Emerges from Chapter 11 Reorganization

SAN FRANCISCO-The Morgans Hotel Group, formerly known as Ian Schrager Hotels, says it has ushered the Clift Hotel here through the Chapter 11 reorganization process. As part of the reorganization approved by the US Bankruptcy Court, MHG has sold the 373-room Union Square asset for $71 million, paid off creditors and inked a 99-year leaseback agreement with the new owner, affiliates of pension fund advisor Divco West Properties. New York-based MHG says the sale proceeds will allow it to obtain financing, “under attractive terms,” to make additional improvements to the property. However, MHG did not say what those sale proceeds would be, and representatives declined comment. As part of the reorganization, MHG was to use most of the $71 million to pay off an estimated $67 million in securitized debt on the property as well as trade creditors.”From our vantage point, this filing should have never occurred,” says MHG chief executive Ian Schrager in a prepared statement. “Although the Clift had financing in place to refinance 100% of its debt, we were not able to obtain agreement from all of the hotel’s many and diverse bondholders in a timely manner. Accordingly, in order to facilitate the refinancing, we had no choice but to take this action.” Schrager goes on to explain that while in out-of-court negotiations, 100% agreement is needed from debt holders; under Chapter 11, agreement is required by only two-thirds of the debt holders in amount owed and a majority in number. Built in 1915, the Clift is a 17-story, full-service luxury hotel located in the heart of Union Square, the city’s upscale shopping district. The property contains approximately 9,000 sf of meeting space, a fitness center, a business center, and the historic Redwood Room, which was once touted as “the best hotel bar in the country” by Conde Nast Traveler’s Gold List. Ian Schrager is the founder of New York’s legendary Studio 54 disco. Ian Schrager Hotels acquired the Clift in 1999 with an $80-million loan from DLJ Mortgage Capital Inc. subsidiary Column Financial. The loan included $25 million for renovations. Ian Schrager Hotels had been operating the property since Apollo Realty Advisors bought control of the property from Four Seasons in December 1996. The loan matured in July 2002. The MHG affiliate that owns the hotel, Clift Holdings, was given a one-year extension wherein it was expected to refinance the debt. A year later, when it hadn’t done so, GMAC, as special servicer, accelerated the loan to force the issue. Clift Holdings then filed for bankruptcy, prompting GMAC to engage Ackman-Ziff to sell the defaulted note out of the DLJ Trust. It was sold to Black Diamond Capital, a Connecticut-based hedge/opportunity fund.