Dogged By 'Mistakes,' $1.2M Fine, Lawsuits And A Short Seller, Hotel Chain Shakes Up Leadership

A Miami-based hotel operator was fined $1.2M by New York City last week for illegally operating short-term rentals in New York City for more than three years, but its potential troubles are far from over.

LuxUrban Hotels, which bills itself as an "asset-light" hotel chain because it master leases hotel buildings rather than buying them, has been hit with several lawsuits from landlords and vendors alleging it skipped out on bills. It is also the subject of a short-seller report that takes aim at the publicly traded firm's financial statements. 

Bisnow also found two instances of the company announcing it has signed deals to take over hotels, reporting the leases in filings with the Securities and Exchange Commission but then later admitting the deals were never finalized. 

LuxUrban announced last week, a day after the $1.2M fine was announced, that founder Brian Ferdinand would be stepping back from his role as co-CEO of the firm. 

Ferdinand told Bisnow in an email that relinquishing his co-CEO title — he had been sole CEO until November — was part of a long-term plan to hand over the reins of the company to co-CEO Shanoop Kothari, who is also acting chief financial officer.

The announcement of the CEO transition was made in the same filing as a disclosure that its board would shrink by two members after one director resigned Feb. 28 and another died March 1. Another board member, longtime company executive Jimmie Chatmon, resigned last month, although he still works for LuxUrban.

LuxUrban says it has more than 2,000 hotel rooms under lease across 18 properties, significant growth since going public 18 months ago with only a few hundred rooms in its portfolio. It has aggressive growth plans, estimating it could be operating as many as 12,000 rooms by the end of this year, according to a January investor presentation.

But short seller Bleecker Street Capital's report in January, titled "The Bed Sheets Should Be Made Out Of Red Flags," raised questions about aspects of the company's financial reporting and highlighted a string of lawsuits that had been filed against the company. 

LuxUrban's stock closed trading Tuesday at $2.16 a share, down more than 50% since Bleecker Street published its report.

"I see a company that seems to be not paying its vendors, suppliers, elevator repair people, its own employees, the rent," Chris Drose, the founder of Bleecker Street Capital and the author of the report, told Bisnow in an interview. "That catches up to you just as a business ... I don't see it being run in the way that you would want an upstart new hotel chain to be running."

The company faces multiple threats of class-action litigation following the release of the short-seller report, with most cases focusing on the most explosive claim — that LuxUrban had announced a lease for a major Manhattan hotel when no deal was final.

Another deal the company announced 10 months ago and listed in multiple LuxUrban regulatory filings as "under lease" has fallen through, Bisnow has learned. While Ferdinand claimed to Bisnow that the two deals were reported as "pending," there is no indication in the filing that the deals weren't final. 

Reporting two properties as under lease in SEC filings before the deals closed raises questions, Cornell University Nolan School of Hotel Administration assistant professor of accounting Michael Paz told Bisnow. 

Although they would have increased LuxUrban’s portfolio by less than 10%, they were used to signal growth for the company that may not be accurate, he said.

"To have them listed in this statement and have it not be true is a problem," he said. "It could be viewed as misleading to say it’s under lease when it's not. The SEC might go so far as to require a restatement, or something like that, if it's deemed to be material."

The company's executives have sought to reassure its investors that its legal entanglements are behind them and the result of past missteps they won't repeat. It hired a new chief operating officer last week, Robert Arigo, who has decades of hotel industry experience. It is searching for a CFO with a similar resume.

"We've made mistakes. I've been the first to admit that. We'll continue to make mistakes, but I really don't care," Kothari said on a Feb. 6 call with investors responding to a question about the short-seller report. "I'm not a seller of the stock, I can't. We're going to execute, and look, it's a potential opportunity to accumulate more, right? I mean, I'm not recommending 'do it.' Do what you think is right."

False Starts

LuxUrban announced Nov. 30 that it leased The Royalton, a 168-room hotel at 44 W. 44th St. in in Midtown Manhattan. The press release stated it signed a 25-year master lease agreement to operate and rebrand the Gilded Age-era hotel as The Royalton by LuxUrban, Trademark Collection by Wyndham. The firm listed it in a Securities and Exchange Commission filing as "under lease." 

In its report, Bleecker Street claimed it called the building's owner and confirmed the lease for the hotel hadn't been signed. LuxUrban publicly denied the claim in a Jan. 17 press release, claiming The Royalton by LuxUrban, Trademark Collection by Wyndham "is scheduled to begin welcoming guests on or before January 30, 2024."

But when that date came, LuxUrban filed a report to the SEC that admitted the deal for The Royalton had collapsed.

"The Company is withdrawing its prior statements regarding the Royalton," reads the filing, signed by Ferdinand. "The parties began working toward a transaction in early fall 2023. The Company believed based on correspondence received that the material terms of the transaction was agreed to. In addition, there was a commitment by a qualified banking institution to fund the letter of credit required under the proposed lease in a form agreeable by the landlord; however, a complete set of definitive agreements relating to the lease were not, and will not be, entered into by the Company."

Despite the official statement to the SEC stating the deal was off, Ferdinand maintained in an email to Bisnow last week that the Royalton deal is still on the table. 

"We addressed and had an executed lease," Ferdinand wrote. "We are still proceeding with this property it got delayed on their end."

An official with The Royalton's owner, MCR Hotels, declined to comment.

That isn't the only deal LuxUrban appears to have reported as completed before it was actually final. 

The company also said in its two most recent quarterly filings that it had the 179-room Trinity Hotel in Los Angeles "under lease," a deal that was announced in May. The Chetrit Group owns that hotel and denies it has a deal with LuxUrban.

"The deal did not go through," Michael Chetrit told Bisnow in an email.

Ferdinand told Bisnow that LuxUrban "fully executed a lease," but claimed Chetrit didn't update the building at 741 Eighth Ave. to make the changes necessary for operating the hotel.

"We even wired them money which we have not gotten returned," Ferdinand wrote. 

Ferdinand forwarded Bisnow an email, dated Oct. 2, from one of the company's attorneys, containing a draft letter to Chetrit outlining the lack of repairs at the building and demanding repayment.

In that letter, LuxUrban attorneys wrote, "As a result, we will not be executing the proposed lease and will not be taking possession of the Premises."

In the company's third-quarter earnings report, filed to the SEC on Nov. 8, more than a month after that letter was dated, LuxUrban still classified the Trinity as "under lease, not operating." 

"We call this 'pending' does not contribute to revenue and is not operating," Ferdinand wrote in a follow-up email to Bisnow. 

Eva Maria Steiner, a professor of real estate at Pennsylvania State University’s Smeal College of Business, said the Royalton announcement was a "red flag" and potentially signaled a legitimate concern about LuxUrban. When told that LuxUrban also announced the Trinity deal as done when it had never closed, Steiner said she had never heard of a company announcing a deal before it had closed.

"I wouldn't have a good impression of a company like that," she said. "It makes me wonder why they would try and convey a certain thing when it's really not true."

A Million-Dollar Penalty And Lawsuits Piling Up

LuxUrban was born as short-term rental business CorpHousing Group in 2017 before rebranding and debuting as a publicly traded company in September 2022. 

At the time of its $13M IPO, the company was beset with lawsuits over unpaid rent in dozens of apartments that it had leased everywhere from New York City and Boston to Seattle and Miami, customer complaints about a pattern of being charged for rooms they never got to stay in and monthslong chases for refunds, and tens of thousands of dollars owed in unpaid wages to employees, Bisnow previously reported.

During that period, it also was operating illegal short-term rentals in New York, which landed the company in the crosshairs of the Mayor’s Office of Special Enforcement, which enforces its short-term housing law that bars apartments from being rented out for fewer than 30 days at a time.

LuxUrban agreed to pay a $1.2M fine, according to a voluntary stipulation filed by the OSE last week. The company admitted to offering more than 4,300 illegal short-term stays within 67 units across 29 buildings, generating $3.9M in revenue.

The fine isn't expected to take a huge chunk out of its business, as it will be paid in twice-yearly installments until November 2026. The company disclosed the penalty in an SEC filing, attributing the illegal activity to its subtenants and "squatters" that it had difficulty ejecting during the pandemic.

"As you can see in the disclosure this NYC [fine] was not new, heavily disclosed, and was from CorpHousing Group business from 2019-2022," Ferdinand wrote in an email. "We had accounted for this and was a very favorable outcome."

But its legal entanglements don't end there.

Owners of hotels in Los Angeles, New Orleans and Miami have filed lawsuits against LuxUrban within the past six months, each accusing the company of skipping out on rent on the buildings it leases and operates as boutique, budget-friendly hotels.

The company has also been sued by a laundry service, elevator contractor, security company and hotel unions, all of whom claim LuxUrban accepted services worth tens or hundreds of thousands of dollars and didn't pay. 

A Bisnow review of court filings in states where LuxUrban operates found half a dozen suits filed during the course of 2023 for various forms of nonpayment, from failures to pay rent to a lack of payment to vendors for services already completed. 

In September, LuxUrban was sued in New Orleans by the owner of the Lafayette Hotel at 600 St. Charles Ave., who claimed it breached its lease by not producing an occupational license or certificate of insurance. Lafayette Hotel Investors, run by Michael Valentino, whose family has owned a collection of historic hotels in the French Quarter for 60 years through an entity now named Valentino New Orleans Hotels, is seeking roughly $126K under a $500-per-day penalty for overdue payments in its contract with LuxUrban. Valentino declined to comment.

When asked to comment on the suit, Ferdinand said, "The hurricane insurance was an issue at Lafayette as we never operated in N.O."

At the O Hotel at 819 S. Flower St. in LA, owner Michael Rahimi is suing LuxUrban for $1M, accusing it of being late to pay security deposits and rent, failing to provide proof that it had taken out an insurance policy for the hotel, not paying the hotel’s utility bills or employees and misrepresenting its experience in the hotel industry.

"Plaintiff discovered Defendants' multiple misrepresentations and complete lack of operational experience, or even basic competence to operate a business and timely pay its bills,” the complaint reads. “Defendants never once paid the half-rent owed from them on time."

Rahimi didn’t respond to requests for comment. Ferdinand said four of the five claims in the suit had been dismissed. 

LuxUrban didn’t pay security services provider Watch Guard 24/7 at The Herald by LuxUrban in Midtown Manhattan from May through August of 2023, according to a lawsuit filed in New York state court. Watch Guard 24/7 is seeking almost $75K in overdue bills, plus interest.

Lift Elevator LLC sued LuxUrban in October for $53K for unpaid labor, services and materials in the same 17-story building.

In December, furnishings provider Complete Textiles sued LuxUrban in Miami for falling behind on its bills. In January, New Jersey-based laundry service Ritz Hotel Services filed suit for almost $221K for failure to pay for its services in three Manhattan hotels since May 2023.

Many of the lawsuits LuxUrban is facing were cited in Bleecker Street's report. On the investor call, Ferdinand acknowledged the company has had cash flow issues but said they are in the past. After ending Q2 with a $2.4M working capital deficit, according to regulatory filings, it had over $6.5M of working capital at the end of September. 

"Our focus is on protecting the equity. It always has been," he said on the presentation Feb. 6. "When you look at the bumps and bruises, a $30K lawsuit from a vendor, I mean, that's all a result of growing a business 370% with very limited working capital."

Executives have also touted the company's partnership with Wyndham Hotels & Resorts, which lends its branding and booking network to LuxUrban Hotels. A Wyndham representative didn't respond to a list of detailed questions.

Ferdinand and Kothari told investors the company is frequently asked about its lack of hotel experience. Its recent executive shakeup is designed to assuage those concerns.

Arigo, who has worked at M&R Hotel Management, Hersha Hospitality Management and Highgate Hotels, takes over as the new COO March 15. The company also named to its board Elan Blutinger, a hotel technology executive who formerly served on the board of Great Wolf Resorts. 

"Our hotels are run by hotel professionals," said Kothari, whose previous job was as COO and CFO of NuZee, a coffee co-packing company. "From a senior management level, we have limited experience. But we've got good experience overall in business."

Bianca Barragán and Mark F. Bonner contributed reporting for this article.