NEW YORK CITY-The Carlton Group Ltd.’s chairman Howard Michaels revealed that Carlton Strategic Ventures, the principal investment and merchant banking group of the Carlton Group, has acquired a $214-million participation in the M7 mezzanine loan tranche on the Extended Stay Hotels portfolio. The M7 loan tranche is a senior mezzanine level tranche with more than $1 billion of subordinate debt and borrower equity.

The M7 mezzanine loan is part of a $7.4-billion financing provided by Wachovia Bank, Bank of America, Merrill Lynch, and Bear Stearns to fund the acquisition of Extended Stay Hotels Inc. by the Lightstone Group in June 2007. The primary collateral underlying the loan is a portfolio of 664 extended stay hotel properties, as well as a pledge of all cash flow from 17 ground leased properties, which comprise approximately 75,683 hotel rooms in the US and Canada.

Michaels tells that “certain sellers are getting more realistic about pricing. Also, aside from the obvious credit issues, the recent increase in Libor is causing a lot more stress,” he says. “We are not afraid of the real estate so we price the loan as if we ultimately had to take over the collateral.”

Michaels explains that “we liked the pricing and the cash on cash return,” noting that the firm is hopeful that management will do what’s necessary to keep property performance strong.

Certain of the investors that hold mezzanine tranche positions in ESH include Fortress Investment Group, SL Green Realty Corp., Square Mile Capital Management, Archon Group, Ashford Hospitality Trust, and numerous other highly-regarded financial institutions and investors.

CSV acquires discounted performing loan positions on all commercial real estate asset types. Over the past nine months, CSV has acquired more than $500 million of discounted performing loan assets, consisting of first mortgages, B-notes and mezzanine loans. CSV is especially aggressive on loans secured by office and hospitality assets.

Michaels says that “we are opportunistic investors and we are willing to make smart risk adjusted investments.” He notes that the company does prefer investing in first mortgages, but will consider mezzanine loans if priced appropriately.”

He tells that as far as equity sitting on the sidelines, “certainly most investors are waiting to see a stabilization effect from the government passage of TARP, however there is a lot going on now; tightening of credit, increase of interest rates, concerns about recession and economic performance. … I think the good old days are over for now, but there is capital for appropriately priced transactions. We are investing but carefully.”

In addition and separate from the foregoing loan acquisitions, CSV Capital has a $400-million principal lending joint venture with a major insurance company to originate mezzanine and preferred equity investments up to 85% of the capital structure on cash-flowing assets. This vehicle is also actively pursuing the acquisition of high quality, performing, discounted loan assets, which are available in the secondary market. has learned that CSV’s previously reported $500-million JV with Prudential to “take advantage of the current credit dislocation and achieve above average returns for itself by acquiring existing performing real estate assets at a discount,” is in fact the same JV above, with leverage.

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