Fairmont San Jose owners seek favorable financing, improved management, new brand through bankruptcy
SAN JOSE — Once it emerges from bankruptcy, downtown San Jose’s iconic Fairmont Hotel could help fuel a rebound in the city’s urban core as the region’s economy seeks to convalesce from the coronavirus.
The 805-room Fairmont San Jose filed for bankruptcy on March 5 and closed its doors the same day, an abrupt shutdown that displaced guests, including the Vegas Golden Knights ice hockey team, which was playing the San Jose Sharks in an NHL game.
“The Fairmont definitely can be successful in the future, once it has restructured its finances,” said Alan Reay, president of Irvine-based Atlas Hospitality Group, which tracks the lodging industry in California.
The owners of the Fairmont San Jose hotel listed debts of at least $100 million and as much as $500 million as well as hundreds of creditors in the Chap. 11 bankruptcy filing to reorganize the hotel’s debts.
“The fact that no one is talking about liquidation and that this is a reorganization says something about their confidence in the longer-term prospects for the downtown,” San Jose Mayor Sam Liccardo said in an interview.
The hotel’s principal owner, San Ramon-based Eagle Canyon Capital, headed by Sam Hirbod, seeks wide-ranging changes for the Fairmont to:
— Transition to a new hotel brand after rejecting the existing hotel management agreement
— Solicit proposals from suitable hotel brands that are willing to provide substantial financing.
— Extend the maturity date on the mortgage loan for the hotel.
“The Fairmont is a key icon in downtown San Jose,” said Nanci Klein, city director of economic development. “It is one of the city’s largest hotels and it helps us attract blocks of rooms for events at the convention center and sports.”
The hotel expects to re-open within 60 to 90 days once its financial reorganization is complete.
“We look forward to welcoming convention, business, and leisure travelers back to the Fairmont after it restructures its debt and people start booking hotel rooms again,” said Scott Knies, executive director of the San Jose Downtown Association.
The Fairmont San Jose recently was revamped with a makeover of its lobby and bar slated to usher in a new bar, lounge, and dining experience at the hotel. The renovation cost $10 million.
Among the largest unsecured debts owed by the Fairmont Hotel, according to U.S. Bankruptcy Court records: $3.48 million owed to Accor, a France-based firm that owns and manages hotels, resorts, and vacation properties; $2.28 million owed to the Sunnyvale office of Otis Elevator; $1.06 million owed to the city of San Jose; $995,100 owed to PG&E.
Other debts, however, such as what might be owned in connection with the hotel property’s mortgage, weren’t listed.
In 2018, a Hirbod-led affiliate paid $223.5 million for the hotel. At the time of the purchase, the buying group obtained a $173.5 million loan from NS Income Opportunity REIT, county property records show.
In March 2020, that loan was assigned to a new lender, CLNC Mortgage Sub-REIT, which is controlled by Colony Credit Real Estate. Colony Credit provides financing and debt for an array of commercial real estate properties.
The Fairmont lost at least $18 million in 2020 and is projected to lose at least $20 million in 2021, the hotel’s owners said.
These losses are just one reminder of how the economic woes unleashed by the coronavirus have eviscerated the travel, hotel, and convention sectors.
In Silicon Valley and the Bay Area, numerous hotels and restaurants have suspended their operations, and some businesses have closed their doors for good.
More hotels around the country and the state could file for bankruptcy or stumble into default on their mortgages. Reay believes lenders could become more impatient.
“Banks and lenders really have a follow-the-herd mentality,” Reay said. “Now if some lenders are going after borrowers, you’ll start to see more dominoes start to fall.”
Despite these difficulties and uncertainties, Reay believes the Fairmont could be part of an economic resurgence in San Jose and the downtown in particular.
“San Jose is going to come back,” Reay said. “The convention business is going to come back.”