Dubai World's troubled private-equity arm Istithmar lost the W New York Union Square hotel in a foreclosure auction.

The 270-room hotel, which Istithmar bought for $285 million at the height of the market, was acquired by LEM Mezzanine, a Philadelphia-based private-equity fund.

LEM holds the junior-most portion of $117 million in so-called mezzanine debt, which fills the gap between the first mortgage and a borrower's equity.

LEM bid $2 million to take over Istithmar's debt. LEM also bought out other holders of the debt and assumed control of the entire loan. LEM will now take over mortgage payments on the $115 million backed by the hotel.

"We are pleased to have completed this step to assume ownership of the W New York Union Square," LEM said in a statement today. "Despite the recent downturn of the hotel industry, and the defaults that led to today's foreclosure auction, we are optimistic about the future. Our intention is to ensure a seamless transition of ownership."

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