Los Gatos hotel seized through swift foreclosure as market wobbles

LOS GATOS — The Toll House Hotel in Los Gatos was bought by a lodging group from Colorado through a swift foreclosure proceeding, evidence that the Bay Area hospitality sector continues to wobble.

The transaction suggests that the hotel is worth far less now than the price the seller paid in 2019, a review of Santa Clara County property documents shows.

Denver-based KSL Capital Partners, whose units include Peregrine Hospitality, took ownership of the hotel through a deed in lieu of foreclosure, which is a speedy process to enable a lender to take ownership of the property.

The unpaid debt was $30 million at the time of the foreclosure, according to documents filed on March 5 with the Santa Clara County Recorder’s Office.

The seller in the foreclosure proceeding was an affiliate of Rhode Island-based Procaccianti Cos. In 2019, the firm paid $43.5 million for the Toll House Hotel, county property documents show.

The foreclosure deed stated that KSL Capital’s affiliate paid no more than the $30 million in unpaid debt to obtain it.

This suggests that the hotel’s value fell by at least 31% since the prior purchase.

The slump in value hints that the property might suffer a decline in its assessed valuation, which has implications for local government agencies and the services they provide.

If real estate values falter in a community, the decline could imperil a crucial revenue stream from property taxes for cities, counties, regional agencies, and school districts.

Nearly every hotel market in the Bay Area, with the exception of the North Bay Wine Country and the getaway resorts along Monterey Bay and in Big Sur, is struggling.

The largest hotels in both San Jose and Oakland, as well as big hotels in San Francisco, have been foreclosed by their lenders.

The waves of failed loans and foreclosures have caused hotel values to plummet throughout the Bay Area, according to a recent report by Atlas Hospitality.

The slumping values also present opportunities for new owners who can control prized assets in excellent locations that are unlikely to encounter stiff competition. This may be the case with the recent hotel deal in Los Gatos.

“The Toll House Hotel is in a great location in a very desirable market,” said Alan Reay, president of Atlas Hospitality Group, which tracks the California lodging sector. “The Toll House Hotel is a trophy asset.”