The recently proposed "Safe Hotels Act” may be lingering in legislative limbo, but it is already affecting the financial viability and operational costs for existing hotels and impacting risk for and development of future projects in New York City.
Background
On July 18, New York City Councilwoman Julie Menin (D-District 5) proposed Int. No. 991, legislation that calls for the city’s nearly 700 hotels to be licensed by the Department of Consumer and Worker Protection (DCWP). According to the New York City Council, the bill would require hotels to obtain a license in order to operate their business in the city. In addition, large hotels would be required to maintain continuous front-desk coverage and have at least one security guard, and all hotels would be required to maintain the cleanliness of each guestroom. Hotels would be required to directly employ all core and critical employees.
Following considerable industry pushback, on July 28, Councilwoman Menin agreed to delay a planned July 30 hearing on the bill to “allow for more time for feedback prior to taking the next step in the legislative process.” Menin said she wanted to use the time to “work with my partners in government, labor and industry stakeholders” on the bill. While the bill was revised, uncertainty remains—and it’s costly.
NYC at a Standstill?
“There are so many profitability pressures on owners in the market in New York—certainly general inflation, the cost of doing business, the labor-related costs. This proposal, which would require staffing requirements, new mandates and restrict flexibility to use subcontractors, would only make matters worse,” said American Hotel & Lodging Association Interim President and CEO Kevin Carey. “The bill, which we see as truly flawed and ill-conceived and created without any input from the industry or consultation, would really do grave damage to the hotel industry, to New York City's tourism economy and the city's own fiscal condition, on top of the challenging operating environment that hotels are facing in New York right now.”
Jeffrey A. Horwitz, senior partner at Proskauer Rose LLP, said he is fielding calls from people “at all levels of the capital stack,” all asking the same question: “What do I do?” Though investors take risks for a living, the current uncertainty “has paralyzed capital in existing deals” and “is making investors question whether New York City is investable, which is not good for anyone,” he said.
According to Carey, hotels in New York City already must both obtain and maintain close to 20 different permits to operate in the city, so the claim that the industry is unregulated “just does not hold water.” If this is a simple licensing bill, he asserts, “why do you have … provisions around restrictions on operating flexibility, utilizing subcontractors, restricting the ability of REITs to operate in New York City, imposing … staffing requirements? If it's just a licensing bill, then all those other items are completely unrelated and should be stripped out.”
To the point of the bill’s moniker—the Safe Hotels Act—Councilwoman Menin, through her director of communications, Mercedes Anderson, said, "Cities all across the country successfully license hotels. New York City has seen 39 murders and over 14,000 criminal complaints to the NYPD regarding hotels.…this is a public safety and worker protection bill which seeks to protect workers, consumers and the community."
Neither the Councilwoman nor her spokeswoman specified a timeframe for the given statistics.
Regarding safety in the hotel industry, Carey said that in 2023, the city's 3-1-1 complaint line saw 315 complaints that were linked to a hotel-related matter on a foundation or a baseline of 36.2 million room nights. The hotel industry is “hugely committed” to the safety and security of its guests and its workers and has a long history of advancing initiatives like No Room for Trafficking, Safe Stay, health and safety, and the Five-Star Promise of providing training and panic buttons to its employees, he emphasized. Carey’s recommendation is first, “do no harm” and engage the industry in discussions to address issues of concern before moving forward with legislation.
Regulating the Wrong Thing
“The proposed bill could have significant financial implications and operational costs for existing hotels in New York City,” noted Kevin Davis, CEO, JLL’s Hotels & Hospitality Americas. “The requirement for hotels to obtain a license, which needs to be renewed every two years, introduces operational uncertainty. Unlike typical licensing requirements tied to code compliance, the New York City legislation gives the Department of Consumer and Worker Protection Commissioner discretion to revoke a license based on ‘service disruption’ criteria outlined in the bill's ‘Seven Deadly Sins’ provisions. This strict standard creates potential challenges as unexpected service disruptions or third-party tenant issues could lead to license revocation, affecting a hotel's financial viability and operating costs."
Hotels’ financial viability is a key issue at stake. Passing of the bill will cause operational costs and labor costs to increase, the bill's opponents argue, which would in turn drive room rates up. Whether the market will bear those room rates is another question entirely.
“Folks are getting confused between room rates and profits; just because room rates increase does not mean that the hotels are profitable, if labor, insurance, tax and interest costs also have increased, for example,” Horwitz said.
He also cited the example of a “service disruption” in the bill. If, because of that service disruption, a hotel loses its license to operate, “that is not something that lenders, that borrowers, that investors are going to live with,” he said. “How do you make an insurance claim if you weren't licensed to own the hotel? How does the city decide those kinds of things?”
Through the bill’s proposal, legislators “created a lot of uncertainty that we can't resolve for people right now,” he added. In his view, legislators should narrow the bill to simply regulating the conduct of whomever is managing the employees—not the superstructure on top. Deciding how capital is formed and structured to own hotels will do very little to accomplish that—while creating tremendous damage, he continued.
The legislation is “directed at the wrong thing. If there's behavior you want to regulate, then regulate the behavior, rather than the capital structure,” Horwitz said. The business of hotels is a “very sophisticated, complicated structure on top of the operation.”
“Lenders are already risk-averse and hesitant to invest in situations where the collateral for their loan may not be legally allowed to operate,” Davis said. “The presence of subjective renewal standards and the potential for sudden hotel closures due to a loss of license creates uncertainty for lenders....the bill's provisions, which may result in potential license revocation and operational challenges, could dampen hotel lending activity in New York City and deter developers from pursuing new hotel projects."
Carey noted that there is potential purchase value transaction in excess of a billion dollars that is on hold. “Lenders won't underwrite the deals and won't allow them to go forward, because the licensing scheme is so vague and ill-defined, there's not an assurance of an ongoing operating ability, and properties that are talking about refinancing or otherwise are operating under this cloud,” he said.
“So the transaction environment and market in New York has come to a stop. Essentially, the emergency brake has been pulled. And that's not only creating uncertainty, but [it is] also suppressing interest in the market from a transaction standpoint.”
“It's frozen a lot of people in place. A lot of deals are just hanging,” Horwitz said. “I can't tell [investors] it's not going to happen. I've been doing this for a very long time, and I've never had this kind of massive uncertainty in a place like New York.”