Millennium Partners avoided foreclosure on its Four Seasons Hotel in San Francisco with the help of a capital infusion from Westbrook Partners and a restructuring of the hotel's debt by the special servicer for the mortgage. The two companies, both based in New York City, are now joint venture partners in the hotel, with Westbrook taking a two-thirds ownership and Millennium Partners remaining as a one-third owner as well as asset manager for the property. Industry sources say that the JV has already paid down $35 million of the $90 million that Millennium owed on the hotel.
The 277-room Four Seasons had been subject to foreclosure since purposely defaulting on its two-year old, $90-million CMBS loan earlier this year, with hope of renegotiating the debt with the special servicer, LNR Property Corp. A GlobeSt.com report at the time said that the hotel, once valued at $135 million, was worth less than was owed on it.
The restructuring of the Four Seasons loan has broader implications for the hotel market and troubled CMBS loans in general, says Alan Reay, founder and president of Atlas Hospitality Group in Irvine, CA. "What this is telling us is that investors are willing to value these deals on pretty rosy projections," he says.
The deal illustrates that, "There is money out there and buyers are willing to pay a premium, based on to day's values," he adds. The deal also marks one of the very few hotel CMBS loans to be restructured after going into default, Reay points out.
Until recently, about the only way that CMBS borrowers could get special servicers to negotiate with them was to stop payment, as Millennium did, Reay explains. In May 2009, Millennium Partners "strategically withheld payment of debt service," the company said, in order to prod the debt holders into restructuring discussions. Reay says that since then, the rules of the game have changed. "Now, in order to get into special servicing, you can send them a letter saying that you plan to go into default, which will start your discussions on renegotiating the loan," he says.
Christopher M. Jeffries, Millennium Partners' founding principal, said in a release that "Being able to restructure the debt on a luxury hotel property in the current economic climate is a rare and significant accomplishment."
Millennium's negotiations with the special servicer pertained only to the debt on the Four Seasons Hotel San Francisco, which is owned independently of other Millennium properties. Millennium founding principal Phillip Aarons pointed out that the company's request for restructuring "was consistent with similar actions being taken by hotel owners nationwide in response to economic conditions." Reay of Atlas Hospitality Group points out that CMBS hotel loans in default-as well as CMBS loans on other product types-raise the question of what will happen to the special servicers themselves. As noted in this month's issue of DAI, LNR is facing its own distress and its fate remains to be seen.
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