Z Capital battles for Lehman property after successful bid

Earlier this summer, PEI reported that Chicago-based Z Capital was named as the top bidder in a bankruptcy-related auction for one of the remaining parts of the Lehman portfolio: Canyon Ranch in Miami, Florida. The property, a combination luxury hotel/condo that went into foreclosure in 2009, is part of what used to be the Lehman Brothers portfolio because the now-defunct bank held the note on the project. Despite operating at a loss every year since its inception, Canyon Ranch is still one of the premier properties in Miami’s high-priced real estate market.

In August, Illinois-based Z Capital was deemed the successful bidder in the bankruptcy auction process, with an offer of just under $25 million. However, it wasn’t officially recognised until more than 48 hours after the debtors “closed the record” on auction proceedings. And during that time, Lehman negotiated a separate deal with 6801 Collins, an entity backed by the homeowners’ associations in the condo towers – despite the latter dropping out of the auction when the bidding got to $19 million. (In fact, 6801 Collins wasn’t even in the top five highest bids.)

What happened next will be of interest to any GP looking to buy up assets in bankruptcy. The Canyon Ranch deal comes with baked-in homeowner litigation, relating to the terms of the condo agreements and promises made by the original owners. And the lead players for 6801 Collins are themselves owners: Scott Prince of Apollo Commercial Real Estate Finance, an indirect subsidiary of Apollo Global Management, and Steven Roth, the founder of Vornado Realty Trust, one of the largest real estate companies in the US.

Even though the auction process had come to an end, Prince and Roth had been working behind the scenes on a potential restructuring plan for the property (albeit one that still came in well below Z Capital’s offer).

Meanwhile, Z Capital was moving ahead with the sale process, creating a binding agreement to reboot the property as a new luxury hotel. The firm plans to create a joint venture with Adrian Zecha, founder of Amanresorts and GHM, and Jonathan Breene, developer and creator of The Setai in South Beach to launch a new luxury hotel group with Canyon Ranch as its flagship. According to court filings, the property will be upgraded to meet the standards of other Amanresorts, which are considered in some quarters to be among the best in the world.

Z Capital has also brought on William McBeath as managing director and operating partner. Prior to joining Z, McBeath was the president and chief operating officer for CityCenter, a hotel group including ARIA Resort & Casino, Vdara Hotel & Spa, Crystals and Mandarin Oriental, Las Vegas. Hotels and condos represent a prominent vertical for the firm, which already maintains a portfolio of luxury properties throughout the US.

After announcing this plan via court filings, Z then returned to court a few weeks later with a new motion, after it became clear that 6801 was still negotiating behind the scenes with Lehman for a new deal. It has asked the court to decide whether the process can be re-opened, and also for time to improve its bid if changes to the sale happen going forward. Sources familiar with the matter say that Z is keeping its options open, including upping its bid price – which is already more than 25 percent higher than that of 6801 – and dropping its ‘favorable resolution’ requirement.

If the restructuring plan goes forward, or the bid process is re-opened, legal sources note this could be a significant case in terms of bankruptcy precedent. Additional status meetings and a potential hearing were slated for late October. ?