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The Lender, Dougherty Funding, Has Poor Prospects to Recoup the
 $56 million Owed on the  Ivy Hotel + Residence in
 Downtown Minneapolis

By Susan Feyder, Star Tribune, MinneapolisMcClatchy-Tribune Regional News

December 13, 2009 --The lender that wants to foreclose and sell the Ivy Hotel + Residence in downtown Minneapolis could have a rough time getting a good price for the property.

Like other segments of the commercial property market, hotels are drawing little interest from investors. Hotel valuations have fallen sharply all across the country. In the Twin Cities market, per-room values have dropped for the past three years and are now at their lowest levels since 2004, according to HVS International, a Mineola, N.Y., hotel consulting firm.

A dramatic example of the plunge in prices in hotel foreclosures came last week, when the chic W Hotel Union Square in New York City's Manhattan area sold for just $2 million (plus assumption of debt) at a foreclosure auction. Dubai World's private-equity unit had paid about $282 million for the hotel in 2006 but was forced to sell it because of the financial meltdown of the Dubai government-owned investment fund.

Dougherty Funding, seeking court permission to foreclose on the Ivy, hasn't said how soon it would try to sell the hotel and condominium project. But the immediate prospect of Dougherty recouping the $56 million is says it is owed -- including $30.8 million for the hotel -- is far from bright. This year, HVS predicted that prices on hotels won't begin rebounding until 2011, and won't return to their 2006 peak until 2014.

Jeff Wirth recently decided to gauge the market by putting his Grand Hotel in downtown Minneapolis up for sale, but said last week that he's had no offers.

Wirth, who has owned the property for about 11 years, said he doesn't have to sell the property.

Location is a plus

"We've found a lot of tire kickers but nothing beyond that," he said. "It's probably not the best time [to try to sell]."

HVS co-President Kirby Payne said last week that the Ivy could draw interest from either national or local investors. He called its location near the Minneapolis Convention Center a plus.

But Payne also said that the hotel's sale could be complicated, because it is combined with condos in buildings that are linked physically and share amenities.

"Investors are concerned about the residential market coming back," he said. Dougherty said in court filings that only 21 condo units have been sold; a foreclosure would affect 49 unsold units.

Part of exclusive chain

The hotel is part of Starwood Hotel and Resort's Luxury Collection, an exclusive chain that has just 18 hotels in North America. Payne said it's a strong brand, although a sale could be hindered if an investor were wary about assuming a long-term contract with a particular hotel company. "If someone likes other brands better or feels Starwood is not contributing, then it is hard to get out of," Payne said.

The tight credit market also continues to make hotel and other commercial real estate deals challenging. Payne said lenders now are requiring hotel buyers to contribute about 40 to 50 percent in equity, compared with about 15 to 25 percent a few years ago.

Susan Feyder --612-673-1723


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