WORLD PROPERTY CHANNEL ®

(NEW YORK, NY) -- Dubai World's first high-profile asset loss since announcing its billion-dollar financial woes in November came yesterday (Dec. 8) at a foreclosure auction at a lawyer's office in Manhattan.

Dubai World lost the 270-room W Hotel Union Square Manhattan after defaulting on a $117 million loan in October.  The United Arab Emirate developer had plowed a total $286 million into the trendy property since acquiring it in 2006.

W Hotel Union Square Manhattan

The winning bid was $2 million - but it came only after a challenging round of bidding.

Realpoint LLC, a Philadelphia, PA-based credit-rating company, estimates the hotel's current market value is  $137.5 million.

At one point, the bidding scene was akin to a television drama, according to The Wall Street Journal.

Istithmar World Capital, the equity arm of Dubai World, couldn't outbid Herbert Miller, co-founder of Philadelphia, PA-based LEM Mezzanine, a private-equity fund affiliated with the 12-year-old property-investment firm Lubert-Adler Partners.

Miller started the bidding with the minimum bid of $100,000, according to the WSJ.

Harvey Strickon, a Paul, Hastings, Janofsky & Walker LLP lawyer representing Istithmar, followed with a bid of $200,000.

After several more rounds of bidding,  Strickon bid $2.1 million in a last-ditch effort to save the hotel for Dubai World.

However,  the WSJ reports there was one condition attached to the offer:  Strickon said the bid would depend on Istithmar's ability to get assurances it wouldn't have to pay anything to bring the hotel's debts back to current status.

The auctioneer then called a break, with both parties going into a closed-door meeting. No agreement was reached.

Kevin O'Shea

The WSJ reports that when the auction resumed, Kevin O'Shea, a partner at law firm Allen & Overy LLP representing LEM, rejected the Istithmar lawyer's suggestion that the private-equity arm shouldn't be required to cure any default on the senior debt.

Shea argued that curing the debt could be required only by an agreement between creditors. He said LEM has no authority to change the terms.

A few minutes after another meeting, this time involving Istithmar representatives and the private-equity arm's lawyer, the auctioneer declared LEM the winner, with a bid of $2 million.

LEM could have bid as much as its debt holding of $20 million without putting in any actual cash, according to the WSJ

LEM will now have to "cure," or bring current, any defaulted loans that are in line ahead of its debt.

 The two other pieces of mezzanine debt, totaling $97 million, are held by DekaBank Group of Germany and Sandleman Partners, a New York hedge fund. LEM also needs to keep the first mortgage current after taking over the property.

In a statement, LEM said that "despite the recent downturn of the hotel industry, and the defaults that led to today's foreclosure auction, we are optimistic about the future."

Istithmar spent about $50 million in cash and borrowed $232 million to buy a 90% stake in the trophy hotel in October 2006.

In June, Istithmar bought the remaining stake from UBS AG for about $4 million, or about two-thirds of its original value, according to a person familiar with the matter.

UBS acquired the stake in 2007 from Island Capital Group, a New York real-estate firm founded by Andrew Farkas, a longtime outside adviser to Istithmar.

LEM is the most junior creditor among three investors that bought the $117 million in mezzanine debt.

The WSJ states the auction was a sign of how far Dubai World has fallen since it plowed nearly $20 billion into investments all over the world, much of it spent near the market's peak in 2006 and 2007.

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