A Tale of Two Ground Leases: The Shoreham Hotel’s Rocky Road Isn’t Over Yet

Here is where things get trickier: Lot 17’s ground lease has a 29-year term remaining, while lot 19’s ground lease has a 79-year term left. And, according to several sources, lot 17’s owner—the estate of Joseph Wohl— has indicated that it doesn’t plan to modify or extend the terms of any of its New York City ground leases. Officials at Joseph P. Day did not return requests for comment.

The reason for the nonrenewal, sources said, is that the executors of Joseph Wohl’s estate plan instead to take the real estate back when the ground leases expire on their New York properties. “From what we understand, they are taking this position on every ground lease they own,” one source said. “Their modus operandi is to not to renew or extend their ground leases but instead to let them run out and eventually take the real estate back. It’s really a smart business plan, if you think about it.” 

For now, the mismatched ground leases have the potential to cause some issues for the asset. A future buyer may think twice in acquiring the asset when only 29 years remain on one of its ground leases, and moreover, “Any future lender on the property will be at risk of financing a whole hotel now then having only half a hotel as collateral in the future,” said another source familiar with the asset.

Not so, said one attorney who declined to be identified. “It still may still work as a hotel, for a savvy investor. Twenty-nine years is a long time. They would just need to make those years work somehow, in terms of revenues, and view it as a short-term investment.”

The Shoreham Hotel’s loan accounted for 6.2 percent of the Credit Suisse-sponsored CSMC 2007-C1 CMBS transaction, and the CMBS trust was the beneficiary of the foreclosure sale in May. It was securitized in 2007 with a balance of $35 million. The loan was transferred over to special servicer C-III Asset Management in September 2014 after the “nonpayment of operating expenses and monetary default for non-payment of the July 2014 and subsequent loan payments,” according to servicing commentary from Trepp.

As previously reported by Commercial Observer, Steven Vazquez, a managing director at C-III Capital Partners affiliate NAI Global, has been identified as the broker who will market the property for sale. But that can’t happen, sources familiar with the transaction told CO, until the problem with the ground leases is resolved. Vasquez did not respond to a request for comment on the matter, and officials at C-III Capital Partners declined to comment.

One CMBS bondholder, who declined to be named, said that maximizing recovery for the CMBS trust could be tough: “The bond is going to take a bigger loss than initially thought, and the appraisal may not have taken into account the ground lease mismatch, which has really impaired the value.”

The bondholder continued to say that he sees two ways of resolving the loan: Either an agreement is made with the Wohl estate or a redevelopment plan is drawn up. “The Shoreham Hotel doesn’t work well as a hotel right now. It’s cost-prohibitive to operate. There could be a situation instead where the two fee owners are cut in for ownership in a redevelopment of the property.”

Ground leases aside, “If you just look at the performance history, the hotel hasn’t done that well,” said Mike Brotschol, a director at KBRA’s KCP surveillance unit. “It saw a 31 percent decline in revenues between 2007 and 2010, which perhaps wasn’t atypical—given the economy—but we’ve seen a resurgence in hotel occupancy, ADR and cash flows along with strong value appreciation since then and the Shoreham hasn’t been part of that group.”

“It seems more of a fit as a micro-hotel,” said Michael Ellis, an associate at KBRA. “The rooms are fairly small, as is the dining and bar area, which is part of the reason why the food and beverage income isn’t too significant—even though it’s a full-service hotel. Room revenues account for 93 percent of its total revenues, which is a more substantial than we would expect to see for a full service hotel.”

In 2007, “It was appraised at issuance for $414,000 a key,” Ellis continued. “The location is great, but given the room setup and the dining and lobby set up, it never lived up to that potential. The most recent appraisal is $147,000 per key, or $25.5 million, as of October 2016.”

Even if the ground lease issue can be resolved and the Shoreham Hotel is marketed for sale, market conditions in NYC aren’t optimal right now.

Brotschol and Ellis noted that they have seen transaction volumes dip in the hotel sector. There were roughly $4.8 billion in lodging transactions in 2015—skewed slightly by Anbang’s $1.95 billion acquisition of the Waldorf Astoria—and only $2 billion in 2016. Similarly, 2017 is off to a slow start, analysts said, with a decent amount of hotels up for sale that are simply taking longer to sell.

“The Park Lane hotel is for sale, three blocks north of The Shoreham, as is The Quin, two blocks north,” Brotschol said. “A lot of the assets that are on the market are more desirable than The Shoreham. If foreign investors are coming in to acquire U.S. real estate they want a more high-profile asset, and I don’t think the Shoreham fits that bill.”

Given the complexities around the ground leases and the potential need to separate the real estate, redevelopment may be the best bet, especially given market conditions.

“I think it’s certainly possible,” Brotschol said. “Our research does indicate that hotels have a better chance of selling, or at a higher price, when they are marketed as a development or conversion opportunity. We’ve talked with mortgage brokers, and they say that in a lot of cases hotels are no longer the highest and best use.”

But, for now, the Shoreham Hotel is temporarily stuck between a lot and a hard place.