Discussions are in final stages to land new funding but bumpy road looms

By George Avalos | gavalos@bayareanewsgroup.com | Bay Area News Group

UPDATED: October 20, 2024 at 7:36 a.m.

SAN JOSE — The owner of a big San Jose hotel has crafted a plan to land a crucial round of financing for the lodging tower — even as the current lender threatens to foreclose on a delinquent loan for the iconic property.

The financing maneuvers involve the highrise Signia by Hilton San Jose, a 541-room hotel at 170 South Market Street in downtown San Jose.

Sam Hirbod, principal owner of the hotel property in the city’s trendy and hip SoFA district, has been working for months to cobble together permanent funding on attractive terms for the hotel.

The current lender, BrightSpire Capital, has provided the hotel with a financing package that as of July 2024 totaled about $165.3 million.

In a move that could trigger a foreclosure of the hotel’s loan, BrightSpire has filed a notice of default and has scheduled an auction on the property.

Hirbod in recent days thought he had secured a new financing deal. Hirbod added that the terms were so onerous that both his ownership group and Hilton decided to walk away from the replacement deal.

Now, a new deal with top-notch undisclosed lenders has materialized, according to Hirbod.

“We have four lenders that are looking to provide the financing and at better terms,” Hirbod said. “Hilton has agreed to step up and support these efforts.”

If BrightSpire attempts to foreclose its loan and seize the hotel, Hirbod said he is determined to ward off such a gambit by the current lender. The foreclosure auction could occur in November, public records show.

“We will never allow the foreclosure sale to happen,” Hirbod said. “We would file a forced Chapter 11 and reorganize the hotel’s finances.”

In Chapter 11 bankruptcy proceedings, creditors such as lenders frequently are able to recoup only a fraction of what they are owed.

“We will use every means necessary, including bankruptcy, to protect the hotel, the employees, the brand and the enormous equity we have in there,” Hirbod said.

A widening number of California hotels have begun to encounter tough times in the wake of wide-ranging business shutdowns to combat the coronavirus that also chased away hotel guests and discouraged travel worldwide and in the Bay Area.

“We are seeing a lot of distress in larger full-service hotels in markets like San Jose, San Francisco, and Oakland,” said Alan Reay, president of Irvine-based Atlas Hospitality Group, which tracks the California lodging market. “These hotels depend heavily on commercial business and meetings and conventions.”

The feeble office markets in big cities in California and nationwide are also a factor behind the difficulties for major hotels.

“The big spike we have seen in office vacancies in these downtown markets” has hurt hotels in downtown areas, Reay said.

If a bankruptcy filing transpires for the downtown San Jose hotel, it would mark the second Chapter 11 reorganization case for the lodging since the outbreak of the coronavirus.

“The decline in hotel values has made financing extremely difficult,” Reay said.

In 2021, the hotel, then operating under a Fairmont banner, went into bankruptcy and closed its doors for about a year.

This time, the downtown San Jose hotel, one of the Bay Area’s largest, will keep its doors open and remain in operation, Hirbod vowed.

“We are crushing it,” Hirbod said. “We had 73% occupancy in September and we will be at or above 70% occupancy in October.”

Hirbod said the ownership group he heads has spent $74 million on renovations, revamps and upgrades of the hotel since buying the property for $223.5 million in 2018.

When the hotel was bought in 2018, it was a two-tower lodging complex that totaled 805 rooms.

In November 2023, Hirbod’s ownership group sold the 246-room southern tower to Mill Valley-based real estate firm Throckmorton Partners, which then renovated that tower to convert it to student housing for San Jose State University.

The Hirbod group sold the southern tower for $73.1 million and used virtually all of the proceeds to pay down a big chunk of the BrightSpire loan.

Now that the hotel is performing well, Hirbod believes BrightSpire is orchestrating an effort to seize ownership of the property.

“We are dealing with a lender that sees how much success we are having,” Hirbod said. “We are their largest loan and they want to own the asset because they know how much more it will be worth.”

The hotel is deemed to be a crucial piston for downtown San Jose’s economic engine.

In past years, the San Jose Convention Center steered 80% of the hotel’s group business to the Signia lodging property. That’s changed dramatically.

“Now we get less than 8% of our group business from the convention center,” Hirbod said. “We are a self-contained asset.”

HIrbod believes the turnaround for the hotel began in earnest in March of this year, when the renovations were completed.

“The hotel is cash flow positive now and it is ramping up,” HIrbod said. “Our momentum is incredible as we head into 2025.”

Although the replacement financing hasn’t been fully completed — which means the specter of a foreclosure attempt still looms — Hirbod is confident the latest funding package with the four financiers will be finalized.

“The hotel is going to stay open no matter what,” Hirbod said. “We are so committed to this hotel and we are very excited about its future.”

A foreclosure or bankruptcy could deal a fresh blow to downtown San Jose, which is struggling to rebound from its coronavirus-induced maladies.

“Downtown San Jose does not need to have the Signia hotel taken back by the lender or go into bankruptcy,” said Bob Staedler, principal executive with Silicon Valley Synergy, a land-use consultancy. “The narrative of downtown is that it is coming back and has a huge upside. There will be a lot of eyes on this hotel and the confidence lenders will have on future projects.”