July 21, 2021 – Further to the Court’s June 15th bidding procedure order [Docket No. 250] and an auction held on July 20, 2021, the Debtor designated Carmel Partners Realty VII, LLC ("Carmel," a $1.45bn fund established in 2019) as the successful bidder for its D.C. hotel assets, with 2660 Woodley Road NW (DC) Owner, LLC as a back-up bidder [Docket No. 284]. A sale hearing is scheduled for July 22nd. The Carmel APA, memorializing the terms of a $152.25mn bid is filed at Docket No. 285. The bulk of the asset sale proceeds will be used to repay outstandings under a prepetition credit facility with Pacific Life ($130.5mn outstanding as at the Petition date).
Carmel Partners are San Francisco-based real estate investors that describes themselves as "multifamily real estate experts" which provides a decent indication of their plans for the former Washington D.C. convention hotel. D.C. is one of seven markets in which Carmel Partners operates and each of the D.C.-area investments/projects has involved residential assets.
The Debtor is the sole owner of a property formerly operated as the Washington Marriott Wardman Park Hotel, which has now been permanently closed.
The Marketing Process
The Debtors' motion notes, “While the marketing of the assets has been highly successful to date as described below, the Debtor has determined in its business judgment to move forward currently without a 'stalking horse' bidder for its assets. The Bid Procedures (as defined below) contemplate that a buyer will be identified at a later date, either at the auction contemplated by the Bid Procedures or, under appropriate circumstances and with sufficient notice, through the Debtor’s identification of a stalking horse purchaser (the 'Stalking Horse Purchaser').
Effective as of the Petition Date, the Debtor retained Eastdil Secured, L.L.C. (‘Eastdil’ or ‘Broker’) as their real estate broker to market the Property in accordance with the terms and conditions of the engagement agreement between the Debtor and Eastdil. The Debtor selected Eastdil as its real estate broker in this chapter 11 case based upon Eastdil’s excellent reputation for its real estate brokerage services. Eastdil is consistently recognized as the preeminent commercial property intermediary in the country, due to its extensive and unparalleled knowledge of the real estate industry and capital markets. Eastdil has completed over $495 billion in property sale transactions since 2009, among them many of the most landmark single asset and portfolio sales throughout all property types. On February 5, 2021, the Court entered an order approving the retention of Eastdil as of the Petition Date [Docket No. 105].
The marketing process is continuing, and the Debtors and their professionals continue to respond to due diligence requests and work with potential purchasers to refine and update the expressions of interest.
The Debtor will continue to market the Assets pending the outcome of the auction. In light of the extensive marketing process already undertaken, and the additional efforts that will be made during the proposed sale process, the timing of the sale proposed herein is reasonable under the circumstances to effectuate a sale of the Assets.
The Debtor believes that such marketing of the Assets over the period contemplated by the Bid Procedures, in addition to the marketing activities that have taken place to date, will result in the highest or best price for the assets and maximize value for all of the Debtor’s constituents.”
Events Leading to the Chapter 11 Filing
In a declaration in support of the Chapter 11 filing (the “Decker Declaration”), James D. Decker, the Debtor's sole and independent manager, detailed the events leading to Wardman’s Chapter 11 filing. The Decker Declaration provides: “Since 1998, and until immediately before the filing of this Chapter 11 Case, the Hotel was managed by Marriott Hotel Services, Inc. ('Marriott') pursuant to a long-term management agreement. Despite its history and prime location in our nation’s capital, the Hotel has struggled to remain profitable due to a number of factors, including consistent and growing competition in the greater Washington area, including competition generated by other Marriott properties, and Marriott’s failure to act as a reasonable and prudent operator of the Hotel. As a result, under Marriott's stewardship, the Hotel's net operating income dropped from $24.77 million in 2010 to $5.02 million in 2018, an 80% drop. Throughout this same period, the Hotel owners continued to make capital investments in the Hotel to improve the property and make up for the revenue shortfall.
This year, the Debtor’s financial condition has been exacerbated by the COVID-19 pandemic, which has resulted in a cessation of all revenues from Hotel operation. On March 25, 2020, Marriott closed the Hotel, furloughed most of its staff and issued notices under the WARN Act to substantially all employees. Despite the termination of operations and furlough of employees, the Hotel continued to lose approximately $1.5 million per month. At the same time revenues dried-up due to COVID-19, Marriott began to send repeated calls for working capital to the Debtor.
On March 16, 2020, with no warning, Marriott demanded that Owner fund $10 million in working capital pursuant to the hotel management agreement between the Debtor and Marriott. Further demands followed in the months after the shutdown. The Debtor rejected each of these demands, in part, because Marriott failed to demonstrate that these vast sums were reasonably necessary for the operation of a shuttered, inoperative Hotel. After months of unproductive negotiation, Marriott filed a complaint against the Debtor in Maryland state court alleging breach of contract. Marriott also sought an injunction to compel the Debtor to pay its pending demands for working capital. On December 8, 2020, the Maryland state court entered an order compelling the Debtor to pay money to Marriott upon Marriott's issuance of unilateral, future capital call notices.
In light of the injunction from the Maryland state court, and with no cash or available source of funding to pay ongoing capital calls, prior to the Petition Date the Debtor permanently closed the Hotel and terminated the hotel management agreement with Marriott."
As of the Petition date, the principal amount of the Debtor’s funded debt obligations totaled approximately $130 million under its Term Loan Credit Facility. On January 19, 2018, the Debtor obtained a loan from Pacific Life, in the principal sum One Hundred Twenty-Two Million Five Hundred Thousand and 00/100 Dollars ($122,500,000.00) (the “Prepetition Loan”). As of December 21, 2020, the Debtor was indebted to Pacific Life in respect of the Prepetition Loan in an aggregate principal amount, not less than $130,537,383 (collectively, together with accrued and unpaid interest, fees, expenses and disbursements, indemnification obligations and other charges, amounts and costs (the “Prepetition Loan Obligations”).
The Prepetition Loan was obtained in connection with a recapitalization through which a previously issued loan from Pacific Life (the “Old Loan”) was satisfied through (i) the proceeds of a new loan from Pacific Life (the Prepetition Loan), (ii) new equity from the prior owners of the Hotel and (iii) a conversion of a portion of the Old Loan (totaling $40 million) into equity in the Debtor, a newly-formed joint venture.
The Debtor’s main potential unsecured obligation is to its former Hotel manager, Marriott. That obligation is disputed, and the Debtor has asserted significant claims against Marriott in pending litigation. Pursuant to the terms of the HMA, all vendors and service suppliers for Hotel operations entered into contracts with Marriott. As a result, the Debtor has few (if any) direct obligations to satisfy the claims of Marriott’s creditors. As of November 30, 2020, the Debtor estimates the outstanding obligations to the Hotel vendors and other unsecured creditors at approximately $1.3 million, the vast majority of which are paid by, and the responsibility of, Marriott.
The Debtor's Petition lists PL Wardman Member, LLC as the direct owner of 100% of the Debtor's equity interest and Pacific Life Mutual Holding Co. as the indirect owner of 100% of the equity interest.
About the Debtors
According to the Decker Declaration, the Debtor is the sole owner of the real property located in Woodley Park, Washington, D.C. The property was formerly operated as the Washington Marriott Wardman Park Hotel (the “Hotel”), a convention hotel. The Debtor has now permanently closed the Hotel.
About Carmel Partners
Founded in 1996, Carmel Partners is one of the nation's leading specialists in real estate investment management, focusing on U.S. multifamily development and construction. Carmel seeks superior risk-adjusted returns across varying market cycles, executed through its vertically integrated platform in supply-constrained, high barrier-to-entry markets in the U.S. Since the firm's founding, Carmel has bought and renovated or developed, or is in the process of renovating or developing, more than 41,000 apartment units with an estimated value in excess of $12 billion. Headquartered in San Francisco, Carmel has offices in Los Angeles, New York, Seattle, Denver, and Washington, D.C.
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