Judge Halts Foreclosure Auction On One Of New York's Most Expensive Hotels
A New York state judge granted the owner of The Mark, one of Manhattan's ritziest hotels, an injunction against its mezzanine lender, ruling it tried to improperly initiate a foreclosure auction in a bid to take ownership of the hotel.
Alexico Group has owned The Mark since 2006 but took out a $35M mezzanine loan on the property, which was recently acquired by California-based Ohana Real Estate Investors.
The hotel closed temporarily in March due to the coronavirus pandemic. Alexico Group missed its mortgage payments in April and May, and Ohana and senior lender Wells Fargo issued notices of default in the following weeks. Soon after, Ohana moved to initiate a UCC foreclosure sale, which was scheduled for June 24. In court filings, Alexico called the maneuver a "predatory attempt to capitalize on the COVID-19 pandemic."
Alexico sued to block the foreclosure sale on June 6, and one day before the sale was supposed to take place, New York State Supreme Court Justice Andrea Masley issued a preliminary injunction, blocking the sale for at least 30 days.
The Mark, located at 25 East 77th St., is home to New York City’s most expensive hotel room, a $75K-a-night penthouse that Meghan Markle, The Duchess of Sussex, used for her baby shower. The hotel is a popular haunt of celebrities who attend The Met Gala a few blocks north.
In her June 23 ruling, Masley ruled that Ohana attempted to make a foreclosure auction noncompetitive, forcing the West Coast hotel owner to restart the process and cast a far broader net for potential buyers.
“Expanding the time to market the collateral and make a market for this unique hotel property is an elegant solution,” Masley wrote in her order.
Among the ways Ohana tried to restrict possible buyers at the auction was requiring a 10% down payment and the other 90% within 24 hours, according to court filings. It also restricted possible buyers from contacting Alexico, forbid Alexico from bidding, and ensured that, of the 36 days between when the foreclosure sale was announced and when it was scheduled to be held, 27 fell under New York City's stay-at-home order.
Alexico owner Izak Senbahar said in a partially redacted sworn affidavit that The Mark had been hit hard by the pandemic, like many hotels, and that he and Ohana executives had verbally negotiated a mortgage forbearance, on which the lender later reneged.
Alexico's attorney, Milbank partner Daniel Perry, argued in a virtual hearing June 18 that Ohana had acted in bad faith by using a missed payment during a pandemic to try to take over the famed hotel.
Alexico called the sale "rigged," a term Masley quoted in her reasoning for ruling in Alexico's favor. It also claimed that it found out about the scheduled auction from an online listing rather than its lender.
“A friend basically called [Senbahar] up and said, ‘JLL is auctioning your hotel,’” Perry said during oral arguments, according to the official court transcript.
This kind of action is an aberration in the pandemic hotel market, where many properties are in distress as a result of the shutdown, Perry said, but few lenders are forcing properties into foreclosure already.
“They are the only lender that we're aware of that has taken this stab [at] a property that was performing and fully healthy before COVID hit,” Perry said. “There are a lot of hotels. Most complex commercial property had this structure with a mortgage loan and a mezzanine piece behind it. Ohana is [alone in] doing this.”
New York Gov. Andrew Cuomo made most mortgage foreclosures during the pandemic illegal, but the CMBS loan at issue was structured with the posh hotel put up as collateral for the $35M nonrecourse loan backed by a single-purpose LLC, rather than structured as a traditional loan.
Ohana's attorney, Dentons partner Charles Dorkey, argued that the investor was simply exercising its right to foreclose on the loan with the borrower in default in order to protect its interest. Ohana paid Wells Fargo $2.2M in cure payments to ensure the senior lender was receiving payments while The Mark was closed.
Ohana's attorneys argued it only acted to protect its investment and that Alexico was the exception.
“The real outlier is [Perry's] client, who refused to agree to a forbearance agreement or have one [on] terms we would find acceptable,” Dorkey said. “That's why you don't see other UCC sales, because there are other forbearance agreements.”
After the foreclosure sale was announced, 115 interested parties virtually toured the property, according to the sworn affidavit of JLL Managing Director Brett Rosenberg, who marketed the sale for Ohana. But, Dorkey said in a filing, only two met the financial requirement to bid.
Masley ultimately ruled that Ohana acted to chill the bidding process and enjoined Ohana from conducting the June 24 sale on the grounds that it was not “commercially reasonable." Ohana had failed to make the sale accessible to the public, she ruled, citing the lack of additional bidders as evidence.
The preliminary injunction stayed any sale for 30 days, despite Alexico asking for a 90-day delay to give the market more time to build for the property. Ohana must give Alexico at least 24 hours' notice before it initiates another sale proceeding, and it must make sure the market can reasonably tour the property while complying with safety guidelines.
Alexico Group and Perry declined to comment for this story. Neither Ohana nor Dorkey returned Bisnow’s requests for comment.
The case was originally assigned to New York Supreme Court Justice Andrew Borrok, who recused himself June 17, the day before oral arguments, without providing a reason. He granted Alexico Group an initial temporary restraining order the day prior to his recusal, which prevented Ohana from moving forward on the auction, according to court documents. Masley upheld the order.
Before becoming a judge in January 2015, Borrok made millions as a real estate investor and was a Long Island socialite. It is unclear whether he had a relationship with either party.