Nov. 20 (Bloomberg) -- Istithmar PJSC, the Dubai-based investment company, may lose control of the W New York Union Square hotel in Manhattan at a foreclosure auction next month by holders of the mezzanine debt on the property.

The Istithmar Hotels Union Square Mezz 2 LLC will be sold to the highest bidder on Dec. 8 in New York at the offices of Allen & Overy LLP, according to newspaper advertisements by the law firm.

Luxury hotels have been hurt by a decline in business and leisure travel during the recession. Room rates at the W New York Union Square, named by Conde Nast Traveler as one of the world’s top 500 hotels in 2005, are down by almost $100 a night, according to a report last month from credit-rating company Realpoint LLC.

“The winner of the auction may file to foreclose on the equity and wrest control of the property,” said Ben Thypin, senior market analyst at New York-based research firm Real Capital Analytics Inc.

Abdelaziz Al Mazam, a spokesman for Istithmar, said on Nov. 18: “As Istithmar World has demonstrated repeatedly throughout the financial crisis, we have stood by the investments in our portfolio. As signs have begun that the global economy is recovering, we expect to continue to do so with increased confidence.”

Loans

The W Union Square Hotel is collateral for a $115 million loan that was sent to a special servicer, according to the report from Horsham, Pennsylvania-based Realpoint LLC. Servicers are used when a loan is in or near default and needs to be reviewed or modified. The property also had $117 million in mezzanine debt, Realpoint said.

Istithmar is a unit of state-owned holding company Dubai World.

The average daily rate among hotel chains with the costliest rooms fell 17 percent to $240.93 in the nine months through September, according to Hendersonville, Tennessee-based Smith Travel Research. In New York, rates for all hotel types slid 25 percent to $201.03, a record drop among the top 25 U.S. markets.

Loans secured by more than 1,600 hotels with an outstanding balance of $25.8 billion were added to Realpoint’s watchlist for performance-related issues as of the end of October. Many had either defaulted or were at risk of doing so.

Mezzanine loans are intended to make up the gap between a first mortgage and the borrower’s equity. Unlike a mortgage, where the bank has a lien on the actual property, a mezzanine loan is secured by a pledge of equity ownership in the borrowing entity that bought the property.

Rates Drop

The drop in room rates has cut the W Union Square’s net cash flow, according to data compiled by Realpoint from the servicer. The value of the property, which was renovated in 2000 for about $75 million, is higher than the debt, Frank Innaurato, managing director of CMBS analytical services at Realpoint, said in October.

The hotel, which also features Rande Gerber’s Underbar, is operated by White Plains, New York-based Starwood Hotels & Resorts Worldwide Inc., the third-largest U.S. lodging company.

Starwood spokeswoman K.C. Kavanagh declined to comment on the auction.

To contact the reporter on this story: Nadja Brandt in Los Angeles at nbrandt@bloomberg.netdh.

Last Updated: November 20, 2009 12:15 EST