May 28, 2011--Marriott International Inc., the hotel chain operating the posh Waikiki Edition, said Friday it would vigorously defend an owner-initiated lawsuit accusing it of "gross mismanagement" of the asset.

Marriott and celebrated boutique hotel designer Ian Schrager were named as co-defendants in a lawsuit filed Thursday in the Supreme Court of New York. The suit, filed by the hotel's owner, M Waikiki LLC, seeks undisclosed monetary damages, court costs, restitution and a declaration that gives it impunity to terminate a 30-year management agreement with Marriott without liability.

"We are surprised and perplexed by this action and will defend it vigorously," said Thomas O. Marder, Marriott International spokesman.

M Waikiki LLC, a Hawaii company made up of 75 indirect investors, bought Yacht Harbor Tower in 2006 for $112 million and spent another $138 million transforming it into the Waikiki Edition. The hotel, which was to be the first of many "lifestyle hotels" to open under Marriott's Edition Hotels brand, has been featured on the popular TV show "Hawaii Five-0."

At the time of its opening last September, the 353-room, 18-story hotel received considerable press, in part because it represented Marriott's first foray into the boutique hotel market. Also getting attention was the seemingly unlikely partnership between Marriott, better known for its traditional hotel design and concepts, and the hip "hotel bad boy" Schrager, who had owned and operated Manhattan's famed celebrity hangout Studio 54 prior to a stint in prison for tax evasion.

"Across the spectrum, Edition has been one of the most positively received new Lifestyle hotel brands of the 21st century," Marder said. "Innumerable stories in major global media and customer reviews speak for themselves. Edition and specifically the Waikiki Edition have generated tremendous excitement, and both we and Ian Schrager are confident of the hotel's and Edition's success."

Still, the lawsuit alleges that Marriott and Schrager did not deliver on profitably assurances to Waikiki Edition owners and were responsible for cost overruns and net operating losses of $6 million.

The owners also allege in the suit that Schrager, who could not be reached for comment, failed to deliver support for the hotel's physical design and operational development.

Edward Bushor, a representative of the owner's managing member, eRealty Fund LLC, declined to comment on the suit. However, the suit quotes letters between him and Schrager.

In a 2008 letter to Schrager, Bushor requested a face-to-face meeting to express a "major concern" that "major concepts and themes of 'Ian' are just not felt in the designs." The suit also detailed a September 2009 letter from Bushor imploring Schrager to meet, saying that "if we do not meet next week and finalize all issues, the opening of the Edition Waikiki on our schedule will be jeopardized."

The suit alleges Schrager's "unavailability" was one of the reasons that the Waikiki Edition's opening took place in September, more than a year after its targeted July 2009 opening.

That ill-timed opening, which occurred during the midst of one of Waikiki's worst economic downturns, might have been one of the challenges faced by the luxury property, said Joseph Toy, president and chief executive of hotel consultancy Hospitality Advisors LLC.

"It's a nice product, but it's probably underserved in the market," Toy said. "Their grand opening came at a time when the market was soft and there was steep discounting throughout Hawaii's hotel industry."

Aside from the Trump International Hotel & Tower Waikiki, the niche Waikiki Edition is asking the highest rate for an off-beach property in Waikiki, he said.

According to the Waikiki Edition website, the hotel's standard nightly rate is $379, which is well above the advertised rates of its competitors.

"In a year or two there will be more high-end travelers coming to Hawaii," Toy said. "Now there are still a lot of deals to be had and value players coming into the market. Until we get higher occupancy on a more consistent basis, there won't be rate recovery."

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