Judge Rules New York Foreclosure Ban Doesn’t Apply To Mezzanine Loans
A New York judge is allowing a mezzanine lender to foreclosure on interest it owns on a city hotel project, illustrating how mezzanine loans will be dealt with under the state's foreclosure ban.
Henry Silverman’s 54 Madison Partners has been trying to hold a foreclosure auction on the equity interest it has in the hotel development at 12 East 48th St., The Real Deal reported, but it had been stymied by developer Hidrock Properties.
In a lawsuit filed last month, Hidrock had claimed 54 Madison was attempting to leverage the crisis in order to maneuver to take over the project, which is set to be a Hilton Grand Vacation Hotel. Specifically, Hidrock said Silverman's firm was trying to run an in-person auction that no one would want to attend because of the health risks.
The sale was stopped through a temporary restraining order, but New York County Supreme Court Judge Frank Nervo vacated that order Monday, The Real Deal reports. Nervo's ruling effectively states that New York’s ban on foreclosures in the midst of the pandemic does not apply to mezzanine loans.
There had been questions swirling around whether or not Gov. Andrew Cuomo’s ban would apply to mezzanine foreclosures — but this ruling, as well as updated advice from the government, clarifies that it won't.
Mezzanine loans have been a popular method of financing to help projects continue, and they are a favored vehicle for alternative debt funds like 54 Madison, which tend to lend money to projects they are comfortable taking over themselves.
54 Madison, which recently loaned Hidrock an additional $7M in the form of junior mezzanine debt, had argued that Hidrock mismanaged the project before this crisis, and has been using the virus fallout as a distraction to its delays and blown-out timelines. The lender argued that it had widely advertised the auction to an array of developers and institutions.
Designed by Handel Architects, the hotel is slated to feature 161 rooms. Hidrock filed plans to build it in 2016, having paid $47M for the site and the one next to it two years earlier.
Hotels are facing a particularly challenging road to recovery as the country's recession takes hold. While some have booking windows already open, it is impossible to predict how the situation may unfold and when tourists may return. Many expect thousands of the hotel rooms that have been in the planning stages will not come to fruition, marking a reset for a significantly oversupplied hotel market.