Bay Area Hotel Distress Bleeds Into Los Gatos

There doesn’t appear to be an end in sight for the financial distress that has plagued Bay Area hotels over the past year.

Denver-based KSL Capital Partners, acting through an affiliate, purchased the Toll House Hotel in Los Gatos through a deed-in-lieu of foreclosure, the Mercury News reported. An affiliate of Rhode Island-based Procaccianti Companies unloaded the lodging property at 140 South Santa Cruz Avenue for an undisclosed price seven years after acquiring it in 2019 for $43.5 million.

The unpaid debt tied to the Toll House was $30 million at the time of foreclosure proceeding, according to Santa Clara County Recorder’s Office documents cited by the Mercury News. The KSL Capital affiliate did not pay more than the $30 million debt to take over the property, per the foreclosure deed. By that calculation, the hotel’s value fell by at least 31 percent since its previous sale.

Over the past year, lenders have been foreclosing on hotels in San Francisco, other South Bay cities like San Jose and East Bay enclaves like Oakland as owners default on loans tied to their properties. As a result, hotel values across the Bay Area have been spiraling, the Mercury News reported.

Two of San Francisco’s biggest hotels, the Hilton Union Square and Parc 55, sold to Newbond Holdings and Conversant Capital last fall for $408 million, Connect CRE reported. That transaction marked a significant drop in value from a nearly $1.6 billion appraised value a decade ago. The sale came after Hilton Worldwide Holdings affiliate Park Hotels & Resorts defaulted on its $725 million mortgage on the properties in 2023.

Nearby, San Jose saw a handful of lender seizures last year. In May, BrightSpire Capital took over the 541-room Signia by Hilton in a foreclosure valuing the property at $80 million. The following month in San Jose, a two-hotel complex consisting of a Motel 6 and a Super 8 by Wyndham fell into default on a $21.7 million loan from Choice Hotels International.

Hotel sales in California fell 7.4 percent in the first half of last year from the same period the year prior, according to Atlas Hospitality Group data. In the Bay Area, the largest hotel sales in Alameda County and Santa Clara County in the first half of the year were foreclosure sales with the Oakland Marriott City Center in Oakland and Signia by Hilton in San Jose.

The most notable hotel sale in Los Gatos in recent months was the purchase of Los Gatos Lodge by SummerHill Homes last October for $78.4 million. SummerHill’s plans include demolishing the 128-room lodge and converting the 8.8-acre site into a 155-unit residential community with 28 three-story attached buildings.— Chris Malone Méndez