Feb. 19, 2010--In a move that may stave off foreclosure for the La Costa Resort and Spa, a private equity fund has purchased $380 million in debt on the property at a steep discount from the lender.

KSL Capital Partners, which invests in leisure properties, has acquired the loan for a sum in the low $100 million range, said Alan Reay of Atlas Hospitality Group, which tracks hotel industry transactions. A report in Commercial Real Estate Direct, an industry online news service, said the purchase price was estimated to be $120 million.

Representatives of KSL Capital and KSL Resorts in Carlsbad, which manages the 479-room hotel, could not be reached for comment.

The willingness of the lender, Citigroup, to accept the discounted price reflects the dramatic plunge in hotel values over the last two years, estimated to be between 50 percent and 80 percent for California hotels, Reay said.

Hardest hit in the lodging industry has been the resort hotels. Just last year, the St. Regis Monarch Beach in Dana Point fell into foreclosure.

"For lenders, it is extremely tough for them to foreclose on a resort hotel," Reay said. "It's just bad, bad public relations, and you affect the business because people don't want to book meetings and weddings at a hotel that's in foreclosure. So a lot of lenders, especially on resort hotels, are opting to sell the loan at a discount rather than go through a foreclosure.

"It just damages the future business, and if you're the lender and you're going to own the hotel you'll be damaging yourself."

In 2001, the resort was acquired by the former KSL Recreation Corp. for $120 million, significantly less than the $250 million that former owner La Costa Corp., a subsidiary of Sports Shinko of Japan, paid in 1987.

KSL Capital Partners, which has no ownership interest in La Costa, was formed in 2005 by Eric Resnick and Michael S. Shannon, who was a founding principal of KSL Recreation Corp. in 1992. The primary owner of La Costa today is Goldman Sachs affiliate Whitehall Street Global Real Estate Limited Partnership, which took over the property in 2007.

The discounted loan purchase is emblematic of what is increasingly happening in a struggling industry saddled with high debt and depressed values. Hotel broker Bob Kaplan said he recently brokered a sale of the Wyndham Orange County, which sold for half its original purchase price and for $10 million less than the $31 million mortgage, which the owner had defaulted on. The owner, he said, showed up at the courthouse steps seeking to repurchase the debt at a discount.

"The (La Costa) lender's motivation is they made a business decision that it's only worth $120 million, so let's get out of Dodge and go on with business," said Bob Kaplan of PKF Consulting. "It's just an economic decision. I think the stigma of being in foreclosure is a small factor. They've done the analysis to determine that was their best choice to get out and minimize their losses."

Lori Weisberg: (619) 293-2251; [email protected]

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