07/17/15

Silicon Valley Business Journal
By Nathan Donato-Weinstein

http://www.bizjournals.com/sanjose/news/2015/07/17/hotel-los-gatos-bankruptcy-deal-in-works-to-sell.html
Delays and false starts may have been a good thing in the on-again, off-again sale of Hotel Los Gatos.

More than four years after the upscale 72-room hotel filed for bankruptcy, a buyer finally appears to be in sight — and at a higher price than previous deals that were ultimately scuttled.

The question now: Whether the property’s biggest lender will get on board with the deal, or push for what the debtor is calling “a fire sale.”

IHA Hotel Group, which also owns San Francisco’s King George Hotel, is in contract to buy the 72-room property for $29.5 million, according to court records filed this week. It would mark the third time the hotel has reached a purchase-and-sale agreement with IHA, but attorneys for the hotel said that environmental hurdles that killed previous sales are nearly cleared.

“The sale proceeds will be sufficient to pay all of the Debtor’s creditors in full, with interest,” attorneys for the Los Gatos Hotel Corp., wrote in a status conference statement on July 15, a day after going into contract with IHA.

The sale price of roughly $410,000 per room underscores the region’s red-hot hospitality market, where hotel properties are selling for record prices. The deal with IHA represents a $7 million increase compared to the last time the property was under contract in 2013, also to IHA. That deal was scuttled because of concerns over environmental contamination that chilled lenders.

“If you asked me two years ago, I would have said that’s crazy. Today it’s a reasonable price,” said Alan X. Reay of Atlas Hospitality, a consultancy. “Properties are selling for over $1 million a room and you’re in Los Gatos, which has huge barriers to entry.”

Still, it is unclear whether the hotel’s largest secured creditor — distressed debt manager LNR — will smile on the sale. Last month, LNR moved to force a foreclosure sale to be held within 30 days of a judge’s order, citing continued delays in previous disposition plans. LNR claims it is owed roughly $16.4 million, including $11.2 million in principal. (The total amount is in dispute because of a disagreement over default interest.)

“Noteholder is concerned that the Debtor’s equity holders may be delaying the sale process while lengthy environmental reviews are underway in order to maximize potential return on their equity interests, all while the Estate’s creditors continue to go unsatisfied,” LNR’s attorneys wrote. An attorney didn’t return a call.

Attorneys for debtor Los Gatos Hotel Corp., however, say that a foreclosure sale would likely lead to a much smaller sale price, which would be bad for creditors and equity holders alike. Distressed sales tend to fetch lower prices than traditional, negotiated sales that are widely marketed. In addition, LNR’s sale plan wouldn’t give extra time to let the hotel get final regulatory approval of its environmental remediation plan “even though the Debtor’s real estate broker has advised that final approval … would significantly increase the number of potential purchasers who may participate in the auction,” the hotel’s attorneys wrote.

In one possibility, an auction sale could land the property with LNR for a song. That would happen if no buyers bid more than LNR’s “credit bid” of its total claim of $16.4 million.

“Our plan will pay everyone in full and return some money to equity, whereas the creditor’s plan will put money in the creditor’s pocket and no one else’s,” said Jeffry Davis of Mintz Levin Cohn Ferris Glovsky and Popeo P.C., which is representing the debtors. LNR had not made any filings subsequent to the debtor’s disclosure of the IHA deal.

The full-service Hotel Los Gatos is among the best hotels in the West Valley, and is home to one of the region’s few Michelin-starred restaurants, Dio Deko, which is not part of the bankruptcy filing. A check of the hotel’s availability for August showed rooms ranging from $179 to $429, with rates increasing for extras like spa packages and wine tasting.

Real estate developers and brothers David and Alan Pinn, owners of Saratoga-based Pinn Bros. Fine Homes, own 50 a percent stake in the hotel. The other half is owned by trusts controlled by the members of the Ogilvie family. The late Diane Ogilvie, a well-known Los Gatos businesswoman who died just before the bankruptcy, is credited with the hotel’s genesis.

The hotel ran into trouble during the Great Recession, and the ownership filed for bankruptcy in 2011.

IHA is affiliated with San Francisco-based Greystone Hospitality, which has nine properties in its portfolio including the Inn at Union Square and Hotel Griffon, both in San Francisco.

The deal with IHA could still run into problems even if a judge approves it. While the sale is not contingent on environmental clearance, it is contingent on the buyer obtaining financing. And lenders could balk at funding a deal without an approved environmental remediation plan.

But in court documents, debtors’ attorneys state that they expect final approval of a “mitigation action plan” within days. The hotel is located on the site of a former dry cleaner, and polychlorinated biphenyls (PCBs) were later found there. A “pilot test” of remediation work reduced PCBs by 80 percent, and the Regional Water Quality Control Board has already approved a plan on an interim basis, attorneys said in court filings.

A court hearing that could set the path forward is scheduled for July 22.