Macklowe in deal to regain Drake Hotel site

Macklowe Properties and its new partner, real estate fund manager CIM Group, have signed a deal to purchase debt in order to take control of the site of the former Drake Hotel, a person familiar with the deal said on Tuesday.

The deal, which calls for Macklowe to buy back the debt at a discount with the help of CIM, is signed but has not yet closed, the source said. A deal would help founder Harry Macklowe salvage his investment of more than US$220 million in the property.

Macklowe Properties defaulted upon the loans of several properties, including the Drake site at Park Avenue and 56th Street, when credit began to dry up in late 2007.

Mr Macklowe, one of New York’s most well known developers, became symbolic of the recent US commercial real estate bust when he was forced to sell the General Motors Building after defaulting on US$7 billion in debt that he used to buy seven office buildings in 2007.

Macklowe Properties spent more than US$600 million – including US$418 million for the 2006 purchase – in mortgage and other debt to buy and demolish the Drake Hotel. He planned to build a hotel-condominium project on the Drake site and a neighbouring property, according to court papers.

Deutsche Bank AG originated the senior mortgage on the Drake property, sliced it up and sold off the pieces to investors including iStar Financial Inc, Sorin Capital Management, Highland Capital Management and several other lenders, the source said. The mortgages also included about US$40 million in accrued interest, another source said.

However, in 2008 Deutsche Bank, acting as the agent for the lenders, initiated foreclosure on the sites. By that time, the unpaid principal on the mortgages was US$483 million, according to court documents. Each debt slice carries different risks and the lenders now can be paid anywhere from more than 90 per cent to nothing, the sources said.

Since 2006, Mr Macklowe has repaid about US$150 million of junior debt, making his personal investment in the deal more than US$220 million.

A representative of Macklowe Properties was not available for comment on Tuesday. A spokesman for CIM Group declined to comment.

Source: Business Times, 7 Jan 2010