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Real Estate News

October 1, 2012

Game-Changing “W Strategy” Workout Presented in New Case Study

A new Columbia CaseWorks case by Fred Knapp and Lynne B. Sagalyn, “Battling Over a New York Workout: The W Hotel Strategy” sets up this true David-and-Goliath story in which the most junior player in the highly leveraged capital stack ended up being made whole on its loan. The saga of the $232-million mortgage and mezzanine debt financing, now known as the “W Strategy,” is one that changed practice, becoming significant in the annals of Uniform Commercial Code foreclosures and bankruptcy transactions.


The New York City hotel market was fueled by soaring demand and limited supply in 2006 when the young, mid-sized private equity firm LEM Capital made its $20 million third mezzanine loan to Istithmar, a subsidy of Dubai World, for the purchase of the 270-room W Hotel in Union Square. Through 2007, the investment fared well, but the hotel market spiraled downward when the financial crisis hit in 2008. In 2009, Istithmar stopped paying its mezzanine lenders and the hotel’s ownership was suddenly in limbo.

As a relatively new investment manager, LEM could not afford to report a loss to its investors if it hoped to raise a third fund. The firm would need to be smart, tactical, and careful in order to put itself in the best position for a recovery, and yet it did not have the luxury of throwing good money after bad.

A new Columbia CaseWorks case by Fred Knapp ’12 and Lynne B. Sagalyn, “Battling Over a New York Workout: The W Hotel Strategy” sets up this true David-and-Goliath story in which the most junior player in the highly leveraged capital stack ended up being made whole on its loan. The saga of the $232-million mortgage and mezzanine debt financing, now known as the “W Strategy,” is one that changed practice, becoming significant in the annals of Uniform Commercial Code foreclosures and bankruptcy transactions.

The scenario is presented to students along with the capital stack at the time of loan origination, the Intercreditor Agreement, the Amended and Restated Mezzanine C Loan Agreement, and the Amended and Restated Mezzanine C Guaranty Agreement. Their assignment is to determine the best course for LEM to leverage the situation and gain control. To formulate a plan, students will have to understand how a UCC foreclosure works and find a way to use the Intercreditor Agreement for LEM to prevail.

Knapp graduated from Columbia Business School in 2012. Sagalyn is the Earle W. Kazis and Benjamin Schore Professor of Real Estate and director of the Paul Milstein Center for Real Estate and the MBA Real Estate Program. Columbia CaseWorks develops teaching cases and materials for use in Columbia Business School classrooms. All material is closely tied to and based on the research and expertise of Columbia’s world-class faculty. Columbia CaseWorks Cases are available to both Columbia Business School and outside faculty.