Hotel Los Gatos nears foreclosure
October 8th, 2010
The posh Hotel Los Gatos is headed into foreclosure, a victim of the economic tsunami that has hit the hospitality industry with a vengeance.
The boutique 72-room hotel that opened on Main Street has not made a payment on its $11.5 million loan since October 2009, according to Trepp LLC, a real estate research firm based in New York City.
Experts note that during economic downturns, high-end hotels suffer first because travelers on tight budgets opt for cheaper alternatives. Glimmers of a recovery are on the horizon as hospitality analysts believe the industry hit bottom during the summer.
But before hotels can emerge from the shadows, lodgings such as Hotel Los Gatos must tackle millions of dollars of debt on properties that were refinanced during the boom and have lost up to 40 percent of their value in the past two years.
Hotel Los Gatos, which was built by Pinn Bros. and opened with much fanfare in 2002, is only one of many struggling hotels around the Bay Area and across the country. According to Trepp, two other South Bay hotels also are in trouble: San Jose's Moorpark Hotel, also built by Pinn Bros., is in foreclosure and Residence Inn by Marriott in Milpitas is delinquent.
More than 19 percent of all hotels nationwide are delinquent on their loans, compared with almost 17 percent in California; 13 percent in San Francisco and
Oakland; and 10 percent in Silicon Valley.
When Hotel Los Gatos opened in November 2002, the industry was just emerging from its last downturn following the dot-com bust and 9/11 terrorist attacks. Longtime Los Gatos resident Diane Ogilvie was listed as the co-owner with San Jose-based Pinn Bros. Ogilvie was credited for persevering on the project that took more than 10 years and required assembling several parcels to create a 2-acre site along East Main Street across from Los Gatos High School.
The hotel, which features Spa Elia and the restaurant Dio Deka, was billed as an exotic retreat away from the hustle and bustle of Silicon Valley. According to records, the hotel changed hands in 2006 and the new owner's address is the same as Pinn Bros., 1475 Saratoga Ave. in San Jose.
No one at Pinn returned calls for comment. Pinn, a 37-year-old San Jose company, has faced financial struggles in its home-building business as well. It was one of the home builders hardest hit by hundreds of thousands of dollars in mechanics liens filed by subcontractors in 2008 for unpaid bills.
Occupancy drops
The hotel's trouble began as early as January 2009 when it reported decreasing occupancy. Trepp reported that occupancy at the property, which thrives on weekend leisure business, had fallen due to the economic downturn.
Paul Mancuso, vice president at Trepp, said the situation became dire in April, when the special servicer assigned to handle the loan, LNR Partners LLC, said, "Based on discussions with the borrower, it is unlikely any reasonable re-structure of the loan can be achieved. Lender is moving forward with the foreclosure process at this time."
Mancuso said the lender for the loan, which originated in February 2006 and matures in March 2011, was Greenwich Capital Commercial Funding Corp., which has been acquired by RBS, the Royal Bank of Scotland.
In July, LNR, which is based in Miami Beach, Fla., changed its outlook, and said it was talking to the borrower about "forebearance," which would require the hotel to contribute equity in return for a deal that would reduce the interest rate to 3.5 percent.
"If no agreement is reached, lenders will take title to the asset through foreclosure sale," said the servicer.
LNR did not return calls by deadline as to whether a deal was reached, but Mancuso said it didn't look likely.
"Looking at the property financials, I'm not sure that the owner can contribute new equity," Mancuso said. "It looks like the property is so underwater from a debt service perspective, their occupancy is 41 percent, which is well below the average in area. The numbers are bad and they don't lie."
The operator of the hotel, Joie de Vivre, would not comment on the situation.
"I don't have any information to share with you right now," said Kristina Hjelsand, senior public relations manager for the San Francisco-based Joie de Vivre. "I will let you know if that changes."
Town surprised
Los Gatos Town Mayor Diane McNutt said she knew nothing of the possible foreclosure and so could not comment, but she described the hotel as exquisite.
"I hear anecdotally that the hotel has had really high occupancy rates for the last few months," McNutt said. "I met with the new general manager, Alan Goldschneider, in August. He told me the hotel was sold out that night, and had been sold out all week."
Goldschneider also did not returns calls seeking comment.
Thomas Callahan, CEO of West Colliers PKF Consulting, concurred with McNutt and called the hotel a well-run, attractive property. Unfortunately, he said, between 2004 and 2007, hotel owners, like homeowners, refinanced their properties because capital was cheap and returns were favorable.
"It all looked good when the economy was strong, but in late ‘08 and ‘09, the hotel industry took a big hit," Callahan said. "Most banks don't want to own a hotel, but they have to protect the investors."
Typically, lenders will try to restructure a loan, but if the numbers are so poor, then they foreclose and take title.
Whether Hotel Los Gatos can hang on until 2011, when its operators predict an improvement in the financial picture, is unclear. But industry analysts believe the worst is behind the beleaguered industry.
"We're starting to show signs now that we hit the bottom of the trough and are beginning a recovery," said Bob Eaton, executive managing director for Colliers International Hotels. "What we don't know is whether the recovery will come in dribs and drabs or be a nice big pop."
Katherine Conrad
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