New York Developers May Lose Two Manhattan Hotels After Foreclosure Ruling

New York developers Simon Elias and Izak Senbahar may lose two boutique hotels in midtown Manhattan after a state judge cleared an investor group to proceed with foreclosure on the properties.

Justice Joan Madden of state Supreme Court ruled Jan. 11 that the investors can foreclose on the Alex, a 205-room hotel on East 45th Street, and the 272-room Flatotel on West 52nd Street.

The investors’ group sued the developers in 2010, seeking to recover principal and interest on loan agreements related to the hotels that the group bought from Anglo Irish Bank Corp. (ANGL), which was nationalized in 2009 and is being wound down over a decade.

The developers defaulted on the loans, which were used to fund renovations for the Mark Hotel on Madison Avenue at 77th Street, in 2009. Anglo Irish then sold the loans in 2010 to the investor group, comprising the Rockpoint Group LLC, Atlas Capital Group LLC and the Procaccianti Group -- competitors of the developers that own and manage hotel and residential real estate in New York and elsewhere.

“We’re pleased by the decisions granting foreclosure on the Alex and the Flatotel,” Marc E. Kasowitz, an attorney representing the investors group, said in a telephone interview. “They are well-reasoned and correct.”

$320 Million Owed

The developers owe more than $320 million on the properties, including principal, interest and late fees, Kasowitz said. Kent Anker, a lawyer representing the developers, didn’t return a telephone message seeking comment on the ruling.

Elias and Senbahar borrowed $49 million from Anglo in 2004 to take out an existing loan on the Alex, an amount later increased to $75 million, Madden said in her ruling. In 2005, the developers and Anglo agreed to acquire the Mark and develop it into suites for $300 million, with Anglo committing $219 million for the project.

Anglo loaned the developers another $240 million in 2007 to finance the acquisition of the Flatotel, which had been in bankruptcy. The Irish bank provided more funds in 2007 and 2008 on the condition that they be used for construction at the Mark.

2008 Bridge Loan

The developers took out a one-year $10 million bridge loan on the Alex in May 2008, with the proceeds to be used to fund the Mark renovation on the understanding that the money wouldn’t be repaid until the Mark was complete and all its suites sold, Madden said in her ruling.

The developers invested another $14.7 million in the Mark above the project’s budget from August to December 2008. They were still short of funds “because of worsening market conditions and their internal estimates of remaining work and expenses,” Madden said in the ruling.

Anglo and the developers in November 2008 agreed to cancel the Flatotel renovations and temporarily relieve the bank’s obligation to fund them, with the developers taking out another $10 million bridge loan, this time on the Flatotel.

The developers then stopped making interest payments and reserving funds for real estate taxes on the Alex and the Flatotel with the knowledge of Anglo, to help fund the Mark construction and pay the hotels’ operating expenses, Madden wrote.

2009 Loans

The developers borrowed another $23.4 million in April 2009 from Anglo for Mark construction expenses, pledging their interests in the entities that owned the two boutique hotels. Three months later, they borrowed another $50 million.

The developers then began talks with Anglo in an attempt to extend the loan to finance continued marketing of the Mark suites, which if fully sold would allow the developers to negotiate financing, repay the bridge loans and renovate the Flatotel, Madden said in the ruling.

In May 2010, Elias was approached by a person named Steven Witkoff, who asked about the state of the Anglo refinancing, said he was a potential ally and partner, and promised to keep all information confidential, Madden wrote.

Elias met with Witkoff three times and “disclosed significant details” about the status of talks with Anglo, Madden said. Witkoff turned out to be a close friend of Jeffrey Goldberger, a principal of Atlas Capital, and Anglo sold the loans to the investors group, Madden said.

The developers sued Anglo Irish in December 2010, claiming more than $1 billion in damages for breach of contract and accusing the bank of reneging on a promise to extend the loans until the suites were sold.

The news was reported earlier by the Wall Street Journal.

The cases are RPAP Hotel Debt (Alex) LLC v. 205 East 45 LLC, 650963/2010, and RPAP Hotel Debt (Flatotel) LLC v. EALC LLC, 651154/2010, New York State Supreme Court, New York County (Manhattan).

To contact the reporter on this story: Chris Dolmetsch in New York at cdolmetsch@bloomberg.net.

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net.

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