- Benefit Street Partners is attempting to selling $80 million of distressed debt it holds against the Williamsburg Hotel in Brooklyn.
- The sales effort is one of the first signs that lenders of souring hotel property debt could seek to part with troubled loans, handing them off, potentially at a discount, to opportunistic buyers.
- Hotel occupancy and room rates have fallen precipitously amid the coronavirus pandemic, which has virtually shut off tourism and business travel, throwing the hospitality industry into a sharp downturn.
- “There will be more distress situations,” said Jonathan Mechanic, chairman of law firm Fried Frank’s real estate practice. “I’m representing people who have raised distressed opportunity funds who are just waiting to see opportunities where someone is selling a loan at less than its face value.”
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The owner of nearly $80 million of debt tied to a struggling Brooklyn hotel has begun marketing the loans for sale in one of the first signs that lenders may seek to cut their exposure to the hospitality industry as it’s battered by the coronavirus pandemic.
Benefit Street Partners has hired the real-estate services firm Newmark Knight Frank to sell the two mortgage loans, according to marketing materials viewed by Business Insider. The debts together total $79 million and are held against the Williamsburg Hotel, a recently-built 147-room property along Wythe Avenue in trendy Williamsburg.
The hotel, known for a rooftop bar that mimics the shape of a traditional New York City water tower, was built by Brooklyn developer Toby Moskovits, who has been locked in a court battle for months with Benefit Street Partners over control of the property. Benefit Street Partners is a $26 billion debt-focused asset management firm that was acquired last year by the large investment fund firm Franklin Templeton.
Moskovits’s real estate firm, Heritage Equity Partners, finished building the Williamsburg Hotel in 2017 but had struggled to find refinancing last year as the city’s hotel market has been flooded with new supply in recent years, pushing down occupancy and room prices.
The property fell into default last summer when the two loans reached maturity and Moskovits was unable to find a new lender. Benefit Street Partners subsequently sued Heritage Equity Partners and Moskovits in state court to foreclose on the property.
In recent months, it was placed into receivership, a third-party manager sometimes called in to operate a property while such foreclosure battles are decided.
The marketing of the loans suggests the company may no longer be eager to take ownership of the property as the coronavirus has decimated revenues – and likely property values, as well – in the hospitality sector.
“If you’re the lender, why would you want to take a hotel back and incur all the carrying costs while the property is making no revenue,” said Woody Heller, a vice chairman at the real estate services firm Savills who co-heads the firm’s capital markets group. “No lender wants title right now. They want to sell their note and avoid foreclosure.”
Benefit Street Partners did not respond to a request for comment nor did Moskovits.
The city’s hotel sector has cratered as the coronavirus pandemic has brought tourism and business travel to a virtual halt.
Occupancy rates fell to 18.3% the week of March 29 and last week improved only modestly to a still-dismal 24.8%, declines of 79.1% and 71.7% respectively compared to the same weeks last year, according to the hotel data tracking firm STR. Manhattan’s average occupancy rate generally hovers well over 80%.
“We have seen are unprecedented decline in occupancy and revenue per available room for the last five weeks and we expect that those declines will continue,” said Jan Freitag, a senior lodging analyst at STR.
The hotel industry has been one of the hardest hit segments of the economy and real estate experts expect more loans tied to hotel properties to sour in the coming weeks and months. The downturn could prompt a growing number of lenders to sell debt tied to distressed assets at steep discounts to opportunistic buyers who could seek to seize properties through foreclosures or negotiated takeovers.
The financial data tracking firm Preqin stated there was $127.9 billion of real estate opportunistic funds globally in April, down from $132.5 billion at the end of 2019 – a decline that shows buyers of assets in need of a turnaround have been active in the first quarter of the year as the coronavirus crisis began to take hold.
Real estate distressed capital also declined slightly in the same period, from $10.3 billion to $10.2 billion, suggesting that investors in troubled real estate situations were active as well.
“There will be more distress situations,” said Jonathan Mechanic, the chairman of law firm Fried Frank’s real estate practice. “I’m representing people who have raised distressed opportunity funds who are just waiting to see opportunities where someone is selling a loan at less than its face value.”
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