Anglo Irish Bank is to face High Court proceedings over its handling of the purchase of two hotels in New York

UP TO 20 investors in a consortium set up by Anglo Irish Bank’s private banking arm to purchase and refurbish two hotels in Manhattan, New York, are due to take a High Court action against the bank in Dublin next week.

The investors, part of what is thought to be a consortium of up to 50 people – although the names and number of investors cannot be established by those planning the legal action – each has advanced $1 million towards the purchase of the hotels. They were then to leverage funds to the total value of the purchase price of $151.2 million, and a further $24.8 million to finance the renovation of the hotels.

Sitting tenants cost a further $1.5 million to buy out. Up to $10.5 million was allocated for acquisition costs, and $7.9 million for management fees and interest costs for years one and two of the investment.

The two hotels concerned are the art deco Beekman Tower Hotel – a landmark on the Lower East Side of Manhattan with 172 bedrooms close to the United Nations – and the Eastgate Tower Hotel, a 187-room hotel in the exclusive Murray Hill neighbourhood, close to Grand Central Station.

Both hotels are operating as "transient" hotels, with guests staying for one or more nights, as distinct from "residential" hotels, which have permanent residents. However, neither appears to have regular zoning as transient hotels, as expert New York law firm, Kramer Lavin Naftelis and Frankel, has confirmed in a letter seen by The Irish Times. "The owners thereof are at risk of significant criminal and severe penalties, penalties which could include court-ordered closures of these hotels," the firm writes.

Anglo has maintained that it did not know of this zoning problem at the time the project was pitched to the Irish investors in a glamorous prospectus.

But other documents reveal that the bank had been appraised of the situation by its general partner in the project, a New York-based accountant and hotelier, who was managing the project at that time and still does.

That was in September 2006, and now, three years later, no on-site work on either hotel has taken place. There have been reports by architects, quantity surveyors, interior designers, etc. But instead of on-site work beginning within about a year of the deal being put together, no progress has been made, according to one of a number of investors to whom The Irish Timeshas spoken.

Meanwhile, the cost of renovating the two buildings, originally estimated at $24.8 million, has escalated to between $94 million and $100 million. The additional cost of the purchase and renovation to the investors has been raised through Anglo. The rates of interest set out in the prospectus were at the time 5.23 per cent, plus a margin of 2.25 per cent over the cost of funds.

While the prospectus stated that “an interest rate capping strategy may be put in place to manage the risk of any increase in interest rates”, the bank opted instead for a loan “swap”. One investor claims that the cap would have cost only $800,000 compared with the $7.2 million the swap cost to the end of October 2009.

The 20-odd investors will claim, when papers are lodged with the High Court in the coming days, breach of contract and make other serious allegations against Anglo, with which many of the investors also have outstanding loans.

Mediation between Anglo and the investors now planning legal action earlier this year in Dublin was, one man says, “a joke” and there were complaints of a meeting where car-park gates were closed and lists of names of investor attendees went missing.

The investors planning litigation say they still do not know how many people are in the consortium, that they do not have contact details for them and that the bank has refused to provide these details. They also claim that the bank’s New York-based general partner on the project has been unable, as they are, to get a full list of investors even though it is a legal requirement in New York to maintain such a list.

One investor says that Anglo refused a “recission” procedure where the bank would put matters back to where they stood before they invested. And while at one stage another bank was willing to put up the additional costs of the purchase and refurbishment, Anglo did not agree to this for three months, by which time the property market in Manhattan had “imploded”. “The general partner had got loan approval (from another bank). This would have produced a 50 per cent internal return on our equity investment,” the investor claims.

Anglo refused to comment yesterday. It is understood that the bank is disputing these claims, including the number of investors who are taking the court action. The cost of renovation is central to the delay, according to sources.

An independent company, Interstate Hotels and Resorts Inc, has been appointed to look at the old and present costs of renovation and to make an alternative proposal.