New York City-based Angelo Gordon & Co. has acquired a leasehold interest in a shuttered assisted living facility in downtown Palo Alto with the intent of converting it into an 85-room boutique hotel.
The real estate fund manager paid $14.8 million, or just shy of $175,000 a room, for the former Casa Olga senior housing at 180 Hamilton Ave. The company estimates that its equity investment will total $16 million and that it will invest, all-in, $360,000 a room, according to company documents presented to the Nebraska Investment Council, which is placing money in the Angelo Gordon fund that acquired the building.
San Francisco hotel management company Joie de Vivre is expected to operate the hotel once it is completed.
The seller is a private company, which retains ownership of the land. The deal was done off-market.
Steven Pierce, the owner of Palo Alto’s Zane MacGregor & Co., a residential and commercial brokerage that that has offices around the corner from the site, predicted the plan would be successful.
“It’s a slam dunk,” he said.
Hospitality competition in downtown is not that intense, he said, so a new player should be able to thrive. The building itself is taller than what would be allowed today and is set back from the roadway, potentially creating a plaza or similar open space. A new building also has gone up across the street. Moreover, the building next door is a former Facebook Inc. office, lending the area a certain cachet.
“There is a lot of potential for a turnaround at that corner,” Pierce said.
Angelo Gordon declined comment.
Tom Fehrenbach, economic development manager for the city of Palo Alto, said the project’s proponents have submitted plans to the city, and in early January, the city’s Architectural Review Board is expected to evaluate the project.
Angelo Gordon projects a 25 percent gross internal rate of return on the purchase. The company believes it will achieve a 2.1 times return on equity, also on a gross basis, according to the records.
“Of all of the places in the San Francisco Bay Area, I think that Palo Alto is the best for a hotel redevelopment,” said Tom Callahan, co-president and chief executive officer of the Western region for Colliers PKF Consulting in San Francisco.
“You have a market that allows in a limited supply. There is tremendous demand led by Stanford University and the venture capital firms located along Sand Hill Road,” he said.
The transaction is one of 16 around the country and world where Angelo Gordon has acquired or is trying to acquire distressed properties or debt from owners and lenders on behalf of its latest opportunity fund, AG Realty Fund VIII, according to the Nebraska documents. The underlying properties are an eclectic mix, from six extended-stay hotels in Georgia and South Carolina, to a 298-unit housing development in Seoul, South Korea. The downtown Palo Alto corner is the only one in the Bay Area.
Angelo Gordon hopes to raise $1.25 billion in equity for the fund. The Nebraska Investment Council approved a $25 million commitment Nov. 21.
“The projected return for investors in the commingled fund is a 20 percent net IRR,” said Jeff States, state investment officer for Nebraska. There is a 9 percent compounded preferred return for limited partners, he said.
Angelo Gordon will consider commercial and residential properties for the fund. On debt deals, the goal is to gain control of the real estate. The overwhelming majority of acquisitions are to be of U.S. assets but the fund is allowed to invest up to 25 percent of its capital in Canada and the United Kingdom.