Hotel Los Gatos Financial Results Better Than Expected; Significant Hurdles Remain

Los Gatos Hotel Corporation, owner of the Hotel Los Gatos, a Joie de Vivre Hotel, and its primary secured creditor, GCCFC 2006-GG7 Los Gatos Lodging Limited Partnership, filed a joint status report detailing certain key issues in Los Gatos Hotel’s chapter 11 bankruptcy case.  Los Gatos Hotel Corp. voluntarily filed for chapter 11 protection on December 27, 2010 in the Northern District of California in the face of a pending courthouse auction.

The status report addresses three key motions which are scheduled to be heard by the bankruptcy court on Friday:

  • Los Gatos Hotel’s motion to use the secured creditor’s cash collateral
  • GCCFC’s motion for adequate protection
  • Los Gatos Hotel’s motion to assume an amended and restated management agreement with Folio Hospitality Management, Inc.
Since January 11th, Los Gatos Hotel has been operating under interim approval of its cash collateral motion and the secured creditor has consented to several extensions of the debtor’s cash collateral use.  The motion to assume the agreement with Folio Hospitality Management was filed on March 3, 2011, although initial court filings expressed the debtor’s intent to transfer management of the hotel property from Joie de Vivre Hospitality, Inc. to Folio and Preferred Hotel Group (collectively, referred to below as Folio).  However, Joie de Vivre continues to manage the property and the joint status report states that the secured creditor continues to have reservations about the transfer of management.

The status report, as well as a monthly operating report that was filed last week, provides insight into the financial performance of the hotel since its bankruptcy filing.  According to the monthly operating report, the hotel posted a small operating profit in January and increased its cash balance by over 50% between the petition date and January 31st.  Today’s status report puts those numbers into additional context, noting that the debtor both exceeded projected revenues and bettered its expense projections in January and February, despite those months historically being amongst the slowest months of the year.  From the petition date to February 27th, revenues had exceeded projections by approximately $12,000 and costs were lower than projections by almost $104,000.

Despite the hotel’s performance beating projections, the management of the hotel remains a potential obstacle to its reorganization.  As noted above, the debtor wants to shift management to Folio but the secured creditor has concerns.  In order to obtain the secured creditor’s consent, the debtor, Folio and the secured creditor are attempting to negotiate two agreements – an Assignment and Subordination of Management Agreement and a comfort letter.  The status report notes that it is unlikely that these agreements will be finalized by Friday’s hearing, but that Joie de Vivre has also informed the debtor that it wants a resolution of its management responsibilities by the end of this month.  Therefore, if the Folio/Preferred agreements cannot be finalized in time to transfer management by the end of this month, the management issues may be the subject of a court hearing later this month (the parties have requested a hearing the week of March 21st if an evidentiary hearing is necessary).

Access copies of the pleadings referenced in this posting from the following links: