WTF Happened?

Fourteen months ago, the W Hotel was the hottest property in the city. Today it has filed for bankruptcy protection.

WASHED-OUT LIGHT STREAMS across the hard benches of the bankruptcy court on the 12th floor of the McCormack Federal Courthouse downtown. It’s a late-November morning, and the two sides in the W dispute are at a trial to decide whether Prudential can lift Sawyer’s bankruptcy protection and resume collecting on the $192.2 million loan it made to the company back in January 2008. Despite originally agreeing to pay off the loan in three years — that is, by this month — Sawyer has so far paid back less than 20 percent of the total.

The courtroom is a bifurcated illustration of slick New York versus traditional Boston: the Prudential side of the room teeming with full heads of hair and streamlined dark suits, and the Sawyer side with gray hair, balding pates, and notably less sartorial panache. The judge, Joan Feeney, seems squarely in the latter camp. Presiding over the courtroom with a short copper bob and glasses riding a pinched face, she is curt with Prudential’s lawyers, constantly interrupting their opening statement with comments and questions, but granting Sawyer’s lawyer Harry Murphy time for a leisurely opening. When Prudential’s lawyer John Daukas refers to the Ritz Millennium, the original name of the new Ritz-Carlton project in Downtown Crossing, she corrects him: “We call that the Ritz Avery Street.”

“I’m a local myself, too,” protests Daukas, risking a jokey tone. “I really have a Rhode Island accent. It’s kind of like a Boston accent, only not as pretty.”

“I think it’s more like a New York accent,” the judge says, with no trace of a smile.

After hours of exhaustive quibbling over whether the hotel and condos have retained their value (which they basically have), everyone turns to the biggest question of the day: whether Sawyer will be able to pay off Prudential in a reasonable time frame, based on condo sales and the hotel’s operating income. Prudential calls Derek Flanagan of Argus Management Corporation, whose job it is to advise Sawyer on the financials.

Despite the economy, Flanagan says, the W has outperformed its projections for occupancy rates of the hotel rooms — averaging 75 percent versus the 63 percent it expected. Flanagan adds that the hotel’s net income since the Chapter 11 filing is $900,000. But Prudential’s lawyer Emanuel Grillo quickly moves to blunt Flanagan’s rosy scenario, pointing out that his figures don’t include the $423,000 the company pays on real estate taxes from unsold condo units, nor the $886,000 in condo fees. “If you deduct out those numbers, it’s actually a negative $400,000 during that period, is it not?” asks Grillo. Flanagan dejectedly concedes the point.

In other words, the hotel would be making a profit, however modest, if it could just find a way to sell the residences. And though sales have picked up in the past few months, there’s an ugly bottom line: They still aren’t selling nearly enough to fight off a potential Prudential foreclosure attempt.