Oct. 30 (Bloomberg) -- Debt backed by the W New York Union Square hotel in Manhattan, named by Conde Nast Traveler as one of the world’s top 500 hotels in 2005, may be at risk of going into default after the travel slump forced it to cut room rates.

The $115 million loan backed by the property, a landmark Beaux Arts tower at Park Avenue South and 17th Street, has a moderate risk of default “given the asset’s weak financial performance and declining hotel fundamentals nationally,” credit rating firm Realpoint LLC said in a report on Oct. 28.

A drop in business and leisure travel caused by the recession has hurt luxury hotels, especially in New York. The average daily rate among chains with the costliest rooms dropped 17 percent to $240.93 in the nine months through September, according to Hendersonville, Tennessee-based Smith Travel Research. In New York, rates for hotel types slid 25 percent to $201.03, a record drop among the top 25 U.S. markets.

The borrowers of the loan backed by the W New York Union Square are up to date with their payments and the value of the property, which was renovated in 2000 for about $75 million, is higher than the debt, said Frank Innaurato, managing director of CMBS analytical services at Horsham, Pennsylvania-based Realpoint. The loan matures in October 2011.

The W New York Union Square is operated by White Plains, New York-based Starwood Hotels & Resorts Worldwide Inc., the third-largest U.S. lodging company. The hotel is owned by 50 Union Square Hospitality LLC, a venture of developer Nakheel PJSC and private equity firm Istithmar World PJSC, said K.C. Kavanagh, a Starwood spokeswoman. Nakheel and Istithmar are part of Dubai World, a state-run holding company.

Watchlist

Sana Maadad, a Dubai-based spokeswoman for Dubai World, didn’t respond for comment when contacted by telephone and e- mail yesterday. Calls to the mobile phones of two Nakheel spokespeople weren’t answered today, a weekend in the United Arab Emirates. A phone message left on the office voicemail of 50 Union Square Hospitality LLC wasn’t immediately returned.

The loan has been placed on Realpoint’s watchlist and a special servicer, LNR Partners Inc., has been appointed, Innaurato said. Servicers are used when a loan is in or near default and needs to be reviewed or modified, according to Innaurato.

Loans secured by more than 1,600 hotels with an outstanding balance of $25.8 billion have been added to the Realpoint list for performance related issues through October. Many have either defaulted or are at risk of doing so.

The W New York Union Square’s room rates are down by almost $100 a night, according to Realpoint. While that has increased the occupancy rate, it has cut the hotel’s net cash flow, according to data compiled by Realpoint from the servicer. The Expedia.com travel booking service rates the hotel 4 stars and currently offers rates there as low as $269 a night.

Falling Cash Flow

For the six months through June 2009, the hotel’s debt coverage ratio was 1.08, net cash flow was $8 million and occupancy was 93 percent, Realpoint said. In the 12 months through December 2008, the debt coverage ratio was 1.98, net cash flow was $14.8 million and occupancy 74 percent. In June 2008, the hotel’s average daily rate was $469.46 and revenue per available room was $413.78.

In addition to the $115 million loan, the property had $117 million in mezzanine debt, Realpoint said.

The W New York Union Square is close to Greenwich Village, SoHo, the Flatiron district, Gramercy Park and midtown Manhattan. Its lobby, called the Living Room, has 16-foot arched windows overlooking the nearby park.

Rooms are furnished with overstuffed velvet armchairs and guests are provided with soft terry robes and custom pillow-top mattresses layered with a featherbed and a down duvet, according to the hotel’s Web site. The property also offers dog walking and grooming services.

The hotel, which also features Rande Gerber’s Underbar, was formerly the home of the Guardian Life insurance company.

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

Last Updated: October 30, 2009 12:13 EDT