Lone Star chosen to rescue failed REIT - sources

TOKYO, April 6 (Reuters) - U.S. investment fund Lone Star [LS.UL] has outbid Goldman Sachs and others to win the right to rescue Japan's first failed Japanese real estate investment trust, two people with direct knowledge of the deal said.

New City Residence Investment Corp, which filed for court protection from creditors in October with 112 billion yen ($1 billion) in debt, has been looking for an investor so it can stay in business.

It was Japan's first real estate investment trust to fail in a falling property market amid Japan's worst recession since World War Two.

Lone Star was among four final bidders that included Goldman Sachs Group Inc (GS.N), the state-owned Development Bank of Japan and Oaktree Capital Management, sources have told Reuters. [ID:nT51492]

Development Bank of Japan teamed up with Daiwa House Industry Co (1925.T) after Mitsubishi Corp (8058.T) dropped out, one source said.

Genkai Capital Management Co, a real estate fund based in Fukuoka in southern Japan was also in the alliance, he said.

Daiwa Securities SMBC Principal Investments, an investment arm of Daiwa Securities Group (8601.T), was also in the final round, sources said.

Nikko Citigroup Ltd, Citigroup Inc's (C.N) Japanese investment banking unit, arranged the sale, which is subject to approval by the holders of debt and equity in the REIT.

New City Residence owns apartment buildings in Ginza, Harajuku and other up-market areas of Tokyo. The trust was unable to raise funds to repay its debts and finance the purchase of new assets to sustain growth. ($1=100.77 Yen) (Reporting by Junko Fujita and Taro Fuse; Editing by Rodney Joyce)