Los Gatos office-retail portfolio heads to auction

The owner of two office and retail buildings in Los Gatos is in danger of losing both to an auction sale, having fallen behind on repaying a $20.5 million loan on the properties.

Beacon Default Management is holding a public auction on Dec. 28 to sell a single-story office at 143 and 151 East Main Street in the city’s central business district and a two-story retail building half a mile away in downtown, at 2 North Santa Cruz Avenue. Proceeds from the sale will go toward paying off nearly $26 million in unpaid principal balance, interest and default interest that a limited liability company managed by real estate executive Kenneth Koch owes to lender W Financial, which supplied Koch with the $20.5 million loan, according to public records.

Prospective buyers would bid on a lien and not on the properties themselves, whose assessed value totals nearly $23 million, according to public records and a notice of trustee’s sale filed with Santa Clara County Clerk-Recorder’s Office on Dec. 1. The auction’s highest bidder may not have outright ownership of the properties, as it may need to pay off all liens senior to the one being auctioned before it can receive clear title to the buildings, the notice states. Loan records indicate that W Financial’s loan doubles as the first priority lien against the properties.

The Koch-managed LLC paid $29.5 million to acquire both buildings, which combined contain nearly 14,000 square feet, in two separate transactions from 2020-2021, according to public records. That works out to about $2,170 a square foot for a pair of 73- and 90-year-old retail and office structures, a steep price to pay on a per-square-foot basis relative to a couple of other retail trades in Silicon Valley this year.

The East Main Street structure is occupied by a cafe and espresso bar, a family physician’s office and a furniture design store, while the North Santa Cruz Avenue site is leased to an accounting firm, according to Google search results. A pair of investment groups run by the same family list a second-floor suite at 2 North Santa Cruz as their primary office address on their respective websites, although it’s unclear if both, one, or neither firms occupy that space or use it solely as a mailing address.

The buildings’ average in-place rents and occupancy rates aren’t publicly available. Neither W Financial nor Koch responded to emails and a LinkedIn message seeking comment. The latter’s primary phone number and email address aren’t listed online.

The Los Gatos buildings are slated to be auctioned off a week after another of Koch’s Silicon Valley properties — a vacant, nearly 12,000-square-foot office building in San Jose — is scheduled for auction. Koch has failed to repay a nearly $6.5 million loan from Socrota REIT, which has enlisted Mortgage Lender Services to auction off the two-story property at the Santa Clara County Superior Courthouse on Dec. 21, according to public records.

The impending auctions could be a sign of things to come in Silicon Valley over the next year as owners of commercial properties find it difficult to refinance loans coming due because of high-interest rates. In some cases, the dominoes have already started to fall: A lender seized control of an unfinished shopping center in San Jose earlier this year, and a pair of hotel sites totaling more than 250 completed and planned rooms in North San Jose defaulted on their mortgages last month.

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