Even venerable real estate companies have deals they’d rather forget about.
For Midtown-based Meadow Partners, the purchase of the Gregory Hotel is one.
The developer bought the Garment District property, then known as Hotel 35 Herald Square, for nearly $50 million in 2014 and invested about $10 million in renovations. In April 2021, a year after the city was shut down by Covid, the hotel’s lender, AllianceBernstein, launched a foreclosure.
After another year, investors Denis Xhari and Vlash Pepa bought the hotel, at 42 West 35th Street, in a foreclosure sale for $32.8 million, barely half of what Meadow Partners had invested in the property.
Unfortunately for Meadow Partners, the foreclosure sale was not the end.
A fund of related companies is now suing the company for breaching its security on a $15 million mezzanine loan. Related is seeking $8 million from Meadow for unpaid loan payments, according to the lawsuit in the New York Supreme Court. PincusCo first reported the suit.
The lawsuit offers more than just a window into Meadow’s failed deal. This reflects the sad state of the New York hotel market and serves as a reminder that a completed foreclosure does not prevent lenders from pursuing their debts.
In 2017, a fund of related companies provided the mezzanine loan. The financing agreement required Meadow Partners to “unconditionally and irrevocably” guarantee payment of debt service and carrying costs. That same year, Meadow Partners refinanced the property with a $31 million senior mortgage from AllianceBernstein.
The problems started around July 2019. That’s when Meadow defaulted on debt service, according to Related. Things got worse the following year when the pandemic cut off the flow of tourists and business travelers to the city. Meadow defaulted on its senior loan in April 2020 and failed to repay the mezzanine loan by its December 2020 maturity date.
The hotel also had internal problems. Employees stopped being paid, and a battle ensued between Meadow and the hotel manager, Highgate Hotels, over who should sign the checks. Highgate alleged Meadow refused to fund the operating fund used to pay employees. The workers were only paid after their union, the New York Hotel Trades Council, intervened.
Often, a mezzanine lender can recover the debt of a distressed project by initiating a UCC foreclosure, which can allow it to essentially take control of the property while continuing to pay the senior debt.
But that didn’t happen at the Gregory. In April 2021, the lead lender, AllianceBernstein, filed a notice of foreclosure. Five months later, the court issued a foreclosure judgment.
That loan was sold in February to Josh Zamir and Daniel Ghadamian’s Capstone Equities, which completed the foreclosure sale to Xhari and Pepa.
The New York hotel market has yet to recover from the pandemic. According to the Hotel & Lodging Association, business travel — on which New York City hotels depend — isn’t expected to return to normal until 2024.
Notably, in March, hotel company MCR agreed to buy one of the city’s largest hotels — the 1,780-key Sheraton New York Times Square — for $356 million. That’s less than half the price it sold for in 2006.
Meadow Partners, founded by Jeffrey Kaplan in 2009, has been among the most active New York buyers of late. In late 2021, he bought an office building in Chelsea from Columbia Property Trust for around $170 million and an office condominium in Midtown in SL Green for $117 million.
Meadow Partners did not return a request for comment. Lawyers for the companies related in the lawsuit also did not return a request for comment.