A 521-room oceanfront hotel in Keauhou on the Big Island has a new owner after a lengthy sale effort by a lender that took the property back at foreclosure in January 2010.

An investment firm affiliated with a New York hedge fund paid $26.2 million for the Sheraton Keauhou Bay Resort and Spa, which is on land leased from Kamehameha Schools, according to public records and broker Jones Lang LaSalle Hotels.

The deal is expected to lead to a significant renovation of the hotel on 22 acres just south of Kailua-Kona, and retention of its roughly 200 employees under a Sheraton franchise.

Keith Vieira, senior vice president of operations in Hawaii for Starwood Hotels and Resorts, which owns the Sheraton brand, said Starwood and the hotel’s new owner are negotiating an operating agreement anticipated to produce a seamless transition. "We are working on an agreement with them right now," he said.

The buyer is Kona Surf Partners LLC, which according to business records has a New York mailing address in care of Avenue Capital Management II L.P., the adviser of hedge funds run by billionaire Marc Lasry.

New ownership gives the hotel an opportunity to improve its position in a tourism market that is presently recovering but has been unkind to past owners.

A prior repositioning attempt began in 2002 when California investment firm Arlen Capital LLC and New York real estate investment and development company Brickman Associates bought the hotel out of foreclosure from struggling Tokyo-based owner Otaka Inc., which had closed the hotel then known as the Kona Surf Resort & Country Club in 2000.

The Arlen-Brickman joint venture spent $70 million on a renovation and reopened the property in 2004 as the Sheraton Keauhou.

But in January 2009 with the economy in the dumps, Bank of America, representing investors that owned the mortgage on the hotel, sued to foreclose. The lender claimed the Arlen-Brickman venture defaulted on a nearly $60 million mortgage balance.

Through Bank of America and mortgage servicer TriMont Real Estate Advisors, the mortgage holders assumed ownership of the hotel in January 2010 after an auction at which no one bid close to the $60 million debt.

TriMont immediately retained brokerage firm Jones Lang LaSalle Hotels to market the Sheraton Keauhou for sale.

Jones Lang LaSalle Hotels at the time touted the potential for converting the hotel’s 205-room Hilo Wing to 68 time-share units as a major opportunity to increase revenue and occupancy.

Vieira said the time-share conversion plan is not being pursued by the new owner.

John Strauss, a managing director for Jones Lang LaSalle Hotels, said the price paid by the Sheraton Keauhou’s buyer along with a recovering tourism market make the hotel a good acquisition.

"Despite a period of significant market decline on the Big Island, the market has begun to rebound as demand from both group and leisure travelers begin to return to the Hawaiian Islands," he said.