As Migrant Crisis Spirals, A 1,300-Room Hotel Serving As A Shelter Is Fighting Off Foreclosure

A block away from Times Square, the fifth-largest hotel in New York City has been operating as a migrant shelter since October, home to more than 1,000 of the city’s newest arrivals. But a lender on the 1,331-key Row NYC hotel is fighting to foreclose on the property, claiming it never approved the contract, leaving a critical piece of infrastructure of the city's migrant crisis hanging in the balance.

The Row's owners have been in default since the early days of the pandemic, landing the hotel at the center of a foreclosure suit launched in September. Then, just one month into foreclosure proceedings, the hotel's owners entered into a shelter contract with the city, and they haven't attempted to pay down Row NYC’s debts, according to court filings.

Demand for hotels in NYC has been climbing steadily for the past two years, but financial recovery has been smoother for some hotels than others. Now, with debt costs rising, lenders are pursuing foreclosure options on some properties — and throwing into question the stability of the city's reliance on hotels to help house an unprecedented number of vulnerable individuals.

For hotels that are still working to recover from damage caused by the pandemic three years after it began, signing a contract with city government agencies to act as migrant shelters might seem like a lifeline. But even in times of distress, lenders and special servicers aren’t necessarily on board with city contracts as a revenue source.

“It's really coming down to, is the lender getting paid fairly?” said Jay Morrow, managing director of Hodges Ward Elliott’s New York Hospitality Investment Advisory practice. “And then, how does it affect value on the back end?”

Mayor Eric Adams has said the city is buckling under the financial strain of providing shelter for newly arrived migrants, which he said this spring will reach as high as $4B over the next two years. To date, the mayor’s office says more than 93,000 asylum seekers have entered NYC’s intake system since last spring, Gothamist reported.

Under former Mayor Bill de Blasio, the city’s Department of Homeless Services used between 7,500 and 11,750 commercial hotel rooms, City Limits previously reported. Using the hotels to house migrants is different, Morrow said, because of the volume, the length of time that NYC could remain in this situation, and the increased demand that it places on the hotel sector.

“Per the city, 10,000 of 124,000 rooms — that's across all boroughs — are occupied, so it is helping,” he said. “It really gets into the underwriting of the city and underlying bonds when you take it a layer deeper, as far as what the city is obligated to pay.”

A Tale Of Two Shelters

The Roosevelt Hotel, the city’s intake center for newly arrived migrants and one of the largest hotels operating as a shelter, has drawn attention as the crisis spilled onto the streets, with migrants waiting overnight on the sidewalk for days on end as they seek shelter.

While the immediate focus has been on the migrants’ safety, questions remain as to whether struggling hotels are in good enough financial standing to serve the city’s pressing humanitarian needs.

Row NYC, surrounded by other hotels, gift stores and fast-food joints, is just four blocks from the Roosevelt. The hotel had been treading water for some time, following a proposed 2019 sale that was foiled by the pandemic’s effects on prices. By May 2020, the owner of the ground under the hotel, David Werner, had started missing debt payments, while the entities that lease the building and operate the hotel had also allegedly failed to pay Werner, The Real Deal previously reported.

Wells Fargo, acting as trustee for the CMBS loan into which the Row's debt was bundled, sued to foreclose in September. But in October, the 27-story hotel signed a six-month contract with New York City Health and Hospitals Corp. to serve as a migrant shelter, allowing the hotel to close to the public.

The contract covered 900 of Row NYC’s 1,331 rooms at $190 a night — lower than the nightly $400 prices that the hotel previously asked for, but generating $171K on a daily basis or $5.1M over a 30-day period. The hotel is no longer catering to the public, with its website saying, “Row NYC Hotel is closed until further notice.”

In a November affidavit, lawyers for Wells Fargo alleged that the contract with the city came as a surprise. They weren’t seeking to end the contract, they said in the legal document, but to stop the hotel owners from “withholding critical financial information and entering into agreements that impact the value of the property without Lender’s knowledge.”

New York City Health and Hospitals Corp. and the Mayor’s Office didn't respond to requests for comment from Bisnow. Lawyers for the entities that own Row NYC — the Rockpoint Group, Highgate Hotels and several LLCs named in the lawsuit — didn't respond to requests for comment.

Special servicer LNR Partners is driving the foreclosure suit against Row NYC, but declined to comment to Bisnow. Wells Fargo also declined to comment.

A Case-By-Case Calculation

Data from NYC & Co., the city's official tourism marketing branch, indicate healthy levels of tourism into New York. Visitors are predicted to be just 3 million shy of 2019 levels in 2023, and expected to surpass 2019 levels next year.

Still, some hotels continue to struggle.

Last month, the owner of the Mondrian Park Avenue hotel handed the keys to the property over to its lender. The Margaritaville Resort Times Square was put into bankruptcy as its owners fight off foreclosure, the former Ritz-Carlton in Lower Manhattan was placed into bankruptcy in November, and the Williamsburg Hotel was sold out of bankruptcy in April.

The Holiday Inn in the Financial District, which had been struggling since mid-2020, signed on as a migrant shelter in January this year. 

Securing contracts with the city may make sense for hotels that haven’t seen tourists return in the same numbers, LW Hospitality Advisors co-founder, President and CEO Daniel Lesser told Bisnow. But with the hotel sector returning to full capacity, he is unsure how many more hotels may be interested in pursuing opportunities with the city.

“Obviously, there has been a compelling story from an economic perspective for select assets to take this business,” he said. “At this juncture, I don't see a whole lot more availability of hotels looking for this kind of business, because the market is back very strong.”

Whether or not contracts with the city make sense for each hotel asset depends on variables including location, Morrow said. Lenders on Times Square hotels may feel they could get more bang for their buck operating as hotels than shelters, whereas those in the outer boroughs may operate in a much smaller range of prices. 

“You're taking the elasticity out of the model and the pricing dynamic that you typically have in a hotel,” he said. “We'll see how sustainable it is.”

Another variable is often potential damage to the hotel, affecting both renovation costs and potential sale prices.

In early January this year, one employee told the New York Post that migrants were “causing chaos” at the Row NYC. The same employee spoke to ABC7’s Eyewitness News, with a second employee confirming that some of the migrants were using hot plates to cook in their rooms and damaging the hotel in the process. 

Security appears to have tightened at the hotel since January. Anyone entering or exiting has to display a plastic ID with a QR code on a lanyard, with medical services company DocGo staffing the doors and the lobby. Two Ecuadorian migrants who have been staying at the hotel with their families for the past eight months — and who declined to be identified out of safety concerns — said the quality of the living conditions inside vary.

Damage to a hotel asset from a city contract isn’t necessarily a problem, Morrow said. Hotels operate on seven-year renovation cycles, where they need to do partial renovations after seven years and full renovations after 14. If a hotel is already approaching those deadlines, its owners may feel that the extra costs incurred by the need for additional repairs after serving as a shelter are minimal, he said. 

Lenders May Have The Final Say

Throughout the foreclosure lawsuit that is still active, the Row NYC has remained operational as a migrant shelter. The city signed a 12-month renewal with Row NYC in March, with the option to give a 30-day termination notice.

“Our view is that long-term, these contracts with the city are going to be stickier than people think,” Morrow said, anticipating that the city could see a continued need to shelter migrants for as long as three or four more years. “When you have that longer-term outlook, as an investor, we're just trying to figure out underlying fundamentals.”

Other experts view the undefined length of the crisis as less favorable for lenders.

“It could last three years, it could last 10 years — I don't know. Nobody knows,” Lesser said. “But there's risk associated with not knowing how long it's going to last.”

A judge was due to rule on the initial September case filed by Wells Fargo in early July, but no ruling has appeared. The most recent information, Bisnow found, was in a Securities and Exchange Commission filing for the CMBS trust from June 12, which said that the hotel hadn’t passed on any cash flow to lenders since April 2020. Lenders would continue to pursue foreclosure, placing the hotel into receivership or a settlement involving selling the hotel, the filing said.

The long-term effects on NYC’s hotel market are visible on the horizon, Morrow and Lesser both said. The city’s special permit process for new hotels, along with current financing conditions, means that no new hotels have begun construction for the past 14 months.

The return of tourists, in addition to the crackdown on Airbnb and the demand for space from city contracts is further compressing the market.

“The market is back really strong right now. Demand is strong, room rates are strong. There's been a bit of a compression effect because of hotels that have focused on housing, homeless and migrants, it's reduced the inventory,” Lesser said. “I really don't see a whole lot more of this happening.”