Bankruptcy Lawyer Scott Markowitz Of Tarter Krinsky & Drogin To Discuss Hotel Trends At July 25 Bisnow Event

As tourists and business travelers return to New York City, hotel occupancy in the Big Apple is beginning to approach pre-pandemic levels at some properties.

This is encouraging news for attendees of Bisnow’s New York Hotel and Hospitality Conference on July 25. At the event at the New York Marriott Marquis, panels of experts will discuss trends in New York City hotel development and investment, and share ways to elevate the guest experience. 

Speakers will include Scott Markowitz, a partner and co-chair of the bankruptcy and corporate restructuring practice for Tarter Krinsky & Drogin.

Markowitz has decades of experience in bankruptcy law and clients who are members of the local hospitality industry. Bisnow recently spoke with him to learn what he is seeing in the hospitality sector.

Markowitz noted that one major difference from the industry’s pre-pandemic days is that tens of thousands of displaced migrants are finding temporary shelter in some of the city’s hotels. 

Bisnow: What trends are you seeing in the New York City hotel industry?

Markowitz: Things are getting better post-pandemic, especially for the higher-end hotels. Their occupancy rates have recovered quicker than many people in the industry had predicted during the height of Covid, when many hotels in New York City were closed, and not necessarily mandatorily closed, but because it cost more money to stay open than it did to close. But things have definitely improved since then.

As far as buying and selling hotels, I don't think there's a ton of activity right now on the sales market. Also, financing costs have risen, making it difficult to take out loans that have matured or are maturing, and causing some distress for owners. 

But one trend that is a little surprising is that some of the midlevel or lower-midlevel hotels have started taking in migrants. New York City has a right-to-shelter law and the mayor has basically welcomed many of the migrants that states like Texas and Florida have been sending here. There is still a fair amount of migrants arriving and that has created a bit of a crisis here.

Bisnow: How are NYC hotels responding to this influx?

Markowitz: Some hotel owners have opted to enter into contracts with either certain city agencies or, like in a case I was involved in recently, through New York City Health and Hospitals Corp., which is a large quasi-governmental agency that runs some major hospitals.

One of my clients, a 492-room hotel, is filled with migrant women and children. NYC Hospitals pays for all the rooms.

Bisnow: Aside from humanitarian reasons, why are certain hotel properties entering these contracts?

Markowitz: For some of those middle- or lower-middle-level hotels, it's arguably more profitable for the owner than operating as a hotel right now, averaging it out over the year. Certainly there are months — January, February and March — that are always a struggle for the city’s hotel owners because occupancy rates are lower.

There potentially could be issues with damage to the room and to a hotel’s reputation. But I think many of the hotel owners that have entered into these contracts think it makes sense to do it for a variety of reasons. These are 12- or 15-month contracts and there’s no guarantee that they will be renewed. With one client, a Holiday Inn, the goal is to transition back to regular hotel operation when the contract ends.

Bisnow: What advice would you have for a hotel operator who is thinking of entering into one of these contracts?

Markowitz: You want to have an experienced lawyer who can negotiate certain provisions in the contract that would be favorable to an owner. For example, the contract we entered into for our client that owns the Holiday Inn Financial District has a very harsh penalty if the migrants don't leave when they're required to leave.

The contract requires the hotel to clean the rooms several times a week, and you can use that to monitor the rooms and make claims if there is damage beyond ordinary wear and tear. There's a process where you can make a request to the city and get reimbursed for that damage. 

In general, you want to be vigilant and take every step you can to minimize damage to the rooms and common areas. Avoid things like hot plates, for example, which are a potential fire hazard. 

Of course, with the sheer number of migrants coming into the city, the hotel options are limited because not every owner wants to assume the risk. As a result, the city has been looking at other options beyond hotels, like using empty Class-B and C office buildings.

Bisnow: What other trends are you seeing with bankruptcy law and the city’s hospitality sector?

Markowitz: Since the Fed began raising interest rates so drastically in 2022, refinancing has gotten much more expensive, which can make a huge difference for the monthly payments on a large loan. 

One of the trends that I'm seeing in the bankruptcy world is called the cram-up, which is basically trying to preserve loans that are favorable. Lenders obviously want to get out of loans if you're in default, and they can try to foreclose or they can accelerate absent bankruptcy. 

Let's say you had a $100M loan and the lender accelerated it, you would need to come up with $100M. Right now, it's very hard to find that money and even if you're able to replace that $100M loan with a new loan, you're going to go from 5% to 7% or 7.5%, which the property may not be able to service. 

As a result, we're seeing more real estate-related bankruptcy filings to try to deal with some defaulted mortgage loans.

Visit here to register for Bisnow’s New York Hotel and Hospitality Conference.

This article was produced in collaboration between Tarter Krinsky & Drogin LLP and Studio B. Bisnow news staff was not involved in the production of this content.

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