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July 15, 2020  

Theater District Hotel Seen Headed to Lender

The troubled Manhattan hotel once billed as the “Lullaby of Broadway” is nearing its final stanza.

Following a series of missed debt and ground-rent payments, market pros believe the 1,331-room hotel known as The Row, formerly the Milford Plaza, is destined to end up in the hands of the special servicer for the securitized mortgage on the underlying land.

The hotel’s owner, a partnership between Rockpoint Group and Highgate Hotels, hasn’t made a loan payment in more than two years. Its lender, Colony Credit Real Estate, was sweeping cashflow and paying the ground rent — until the coronavirus caused the hotel to shutter. Colony then wrote the loan down to zero and ceased making rent payments.

That positions the landowner, a joint venture led by New York investor David Werner, to seize the hotel — but, in turn, it has stopped making payments on $274.9 million of securitized debt backed by the ground. That loan, held by two commercial MBS trusts, entered special servicing last month after the April and May payments were missed. The borrower has requested relief due to the pandemic, according to servicer notes.

The Werner joint venture’s plans couldn’t be learned. Potentially, it could work out a deal with the lender, which presumably would require injecting fresh capital to bring the loan current and restart the hotel’s operations. But market pros believe it’s more likely that the special servicer will take over both the land and the hotel on behalf of the CMBS bondholders.

That would conclude a long, winding course for the property. It’s one of a number of troubled hotels on ground leases in New York that are struggling with low occupancy due to the pandemic, leaving them unable to cover both debt service and ground rent payments.

The 28-story hotel, at 700 Eighth Avenue, dates to 1928. It was dubbed Milford Plaza in the 1980s by its then-owner, the Milstein family. For years, it was popular with tourists visiting Manhattan’s Theater District, drawn by television commercials featuring the “Lullaby of Broadway” song.

The hotel was closed for renovations when the Great Recession hit, and the Milsteins didn’t reopen it. In 2010, Boston-based Rockpoint and Highgate of New York paid $250 million for the building and ground. The partnership then carved the property into three components — the hotel, its retail space and the underlying land — and reaped a windfall by selling two of them.

In 2013, Werner and Los Angeles County Employees teamed up to buy the ground for a whopping $325 million, financed with the securitized debt. A year later, Thor Equities paid $65 million for the 26,000-square-foot retail condominium, consisting of a food court and several stores.

Rockpoint and Highgate obtained a $255 million mortgage in 2013 from NorthStar, a New York REIT. The partnership used the funds to complete a sweeping $160 million renovation of the hotel, which was rebranded as The Row. But it ran into stiff competition, as a glut of new supply weighed down room rates in the New York market for several years. Meanwhile, NorthStar was acquired by Colony Credit in 2017.

Efforts to sell the hotel failed, and the Rockpoint joint venture stopped making payments on the mortgage in March 2018. Colony instituted a cashflow sweep and kept up with the ground-rent payments for two years. In January, the mortgage REIT attempted to sell the defaulted debt package, which then totaled $315.2 million, but to no avail.

The hotel closed again when the pandemic struck, amid travel restrictions, social distancing measures and the shutdown of Broadway theaters. In April, Colony said in a filing, it took a “discounted payoff” and discharged the mortgage. It’s unclear what, if anything, it recovered from the hotel’s owners or reserve accounts.

Around the same time, Colony halted ground-rent payments. Ground leases carry strict provisions, and an owner can typically take over a property in a matter of days when rent payments are missed. But when those payments stopped, the Werner joint venture also ceased its interest-only payments on the securitized debt and requested relief.

The land itself was appraised at $386 million when the loan was originated in January 2013. For the year ended June 30, 2019, it generated $17.5 million of net cash flow, well over the amount required for its debt payments.