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Barry Sternlicht Picks Off Citigroup's Caribbean Resort's $300 Million Mortgage at 65% Discount

Barry Sternlicht Picks Off Citigroup's Caribbean Resort's $300 Million Mortgage at 65% Discount

Flush with cash, it was an easy picking for New York City entrepreneur Barry Sternlicht.

His Starwood Capital Group is paying $105 million for a $300 million mortgage New York City-based Citigroup was carrying on the Viceroy Anguilla resort in the Caribbean.

The transaction was Citigroup's latest move to shed ailing assets, The Wall Street Journal reports.  The WSJ says the deal was confirmed by Hubert Hughes, Chief Minister in the tiny British territory of 14,000 residents.

According to the WSJ,  Citigroup in 2006 originated a big construction loan for a Viceroy resort described by Los Angeles-based developer Kor Hotel Group as "an exquisite rendition of the residential resort concept" on Anguilla.

Four years later, after construction delays and cost overruns, Citigroup is getting out of this corner of the Caribbean at a huge loss.

The deal is the latest example of a capitulation by a bank that has nursed a troubled real-estate project for years, the WSJ reports.

For most of the economic downturn, banks were unwilling to sell ailing assets for fear of the damage the losses would do to their balance sheets. But as the banking sector has stabilized, some are showing a willingness to dump bad loans.

Citigroup has been particularly active, according to the WSJ.

In February, KSL Capital Partners LLC paid Citigroup roughly $120 million for the $380 million mortgage on the 479-room La Costa Resort and Spa in Carlsbad, Calif.

Citigroup also is close after two rounds of bidding to selling a $340 million portfolio of loans backed by warehouses and manufacturing facilities to Oaktree Capital Management LP for $228 million, or about 67 cents on the dollar, according to people familiar with the matter.

The willingness of Citigroup and others to sell has been good news for Starwood and other firms, which have raised capital to take advantage of the mistakes of others, the WSJ reports.

Starwood, which has $14 billion of assets under management, last year also won the bidding war run by the Federal Deposit Insurance Corp. for the condominium assets of Corus Bank after the lender failed.

Buyers of distressed debt often maneuver to take ownership of the property backing it.

The first two phases of the 166-room Viceroy resort opened last year. The third phase is slated to open this year.

But it has been a slog for developers Kor and Lubert-Adler Real Estate Funds. When the resort's first phase opened in August 2009, the project was more than a year past its targeted opening date and 15% over budget, the developers acknowledged at the time.

Kor, now known as Viceroy Hotel Group, designed the Viceroy Anguilla as a posh resort on an island known as a quiet getaway for the wealthy.

Its decor and design were handled by Kelly Wearstler, the designer and former Playboy centerfold married to Viceroy Hotel Group Chief Executive Brad Korzen.

Actor Orlando Bloom and model Miranda Kerr recently spent part of their honeymoon at the resort.

Each of the resort's 166 villas and suites, some for sale and others used as hotel suites, has its own pool and patio overlooking Anguilla's eastern shore.

The property also offers an 8,000-square-foot spa, three common-area pools and five restaurants and lounges.

Nightly rates range from $500 to $900, and villa prices range from $1 million to $9 million.


Hubert Hughes

However, sales of resort villas have been challenging across the Caribbean since the recession, according to the WSJ. Representatives of Viceroy and Citigroup declined to comment on the pace of sales at the Anguilla property.

However, Hughes, the island's Chief Minister, told the WSJ, resort sales "are not doing too well."

The Viceroy's struggles have hurt Anguilla, which had anticipated reaping $15 million a year in tax revenue from the project but has received little of that, Hughes told the WSJ.

"The project is hugely important to the revenue base of the island and the employment situation," he said. "As Starwood comes in, we are hoping to get more revenue."

Starwood Capital isn't part of Starwood Hotels & Resorts Worldwide Inc. but they were both founded by Sternlicht.

The Viceroy isn't the first Anguillan resort to struggle. "American Idol" owner Robert Sillerman's Temenos resort has languished half-built since the project ran out of financing in 2008. Holders of the resort's $180 million mortgage put it in receivership in February.

The receiver overseeing Temenos now has three final bidders for the project: Dallas-based developer Cypress Equities, Conair Corp. owner Lee Rizzuto and an unidentified third bidder.

Rizzuto, who also owns the 99-room CuisinArt Resort & Spa on Anguilla, said his experience in operating the CuisinArt for 10 years would help in completing and operating Temenos, which was to include a 32-room hotel and 78 for-sale villas.

"Financially, I can handle it without [needing] bank financing," Rizzuto told the WSJ.

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