KSL Capital Partners has acquired $380 million of debt it owes against the La Costa Resort & Spa in Carlsbad, Calif., for about $120 million.

 

The $147 million first mortgage, provided by Citigroup, and $233 million of mezzanine debt matured earlier this month.

 

It was provided in 2007 to a venture of KSL Capital and Whitehall Real Estate Fund, which bought the San Diego-area hotel for roughly $400 million from a venture of Kohlberg Kravis Roberts & Co. and CNL Hotels & Resorts. KSL Capital's management affiliate has since been operating the property, which sits on 400 acres at 2100 Costa Del Mar Road off the El Camino Real Highway. The property has 479 rooms and access to 187 condo-hotel villas that are separately owned, but often are rented by the hotel.

 

The 68 percent discount for the debt is in line with how much hotel property values in California have dropped since 2007. Values across the state have fallen 60 to 80 percent over the past three years, with the biggest drops felt by resort properties, according to Atlas Hospitality Group, an Irvine, Calif., brokerage and research firm.

 

Net operating income at the property last year fell 33 percent to $10 million and is down at least 50 percent from 2007.

 

"Hotel owners and debt holders are coming to realize that assets have fallen steeply and are adjusting their prices accordingly," said Alan X. Reay, head of Atlas Hospitality. "Most hotel owners would want to buy back the debt on their properties, but very few have the financial wherewithal to do that."

 

KSL Capital, a hotel investor and property manager with offices in Denver and Purchase, N.Y., is believed to have acquired the La Costa resort's debt on behalf of an investment fund it manages.

 

Two former executives of the KSL Recreation operations of Kohlberg Kravis & Roberts launched KSL Capital in 2006 after raising $1 billion of equity for a fund that seeded the new company.

 

CNL Hotels acquired KSL Recreation in 2004 for $2.4 billion in a deal that included the stake in La Costa that it later sold to KSL Capital and Whitehall.

 

Whether Whitehall has co-invested with KSL Capital to buy the debt could not be determined. KSL Capital did not comment on the deal in time for this story.

 

Despite the steep discount, selling the La Costa debt helps Citi avoid a potentially long and complicated process of foreclosing and marketing the asset for sale. For example, the 238-room Wyndham Hotel Orange County in Costa Mesa, Calif., sold for $21 million to Rosanna Inc. in December, seven months after the property' previous owner, the Makarechian family, defaulted on a $31 million mortgage. That debt was securitized through Greenwich Capital Commercial Funding, 2006-FL4.

 

And last June Citigroup foreclosed on a $70 million loan against the 400-unit St. Regis Monarch Beach in Dana Point, Calif., but did not sell the resort hotel until five months later. A venture of the Makarechians and Farallon Capital Management had defaulted on that property's debt.