On July 18, 2024, members of the New York City Council introduced legislation that calls for the city’s nearly 700 hotels to be licensed by the Department of Consumer and Worker Protection (DCWP). Additionally, the bill prohibits hotel owners from contracting with third parties for services such as housekeeping.
Supporters argue that this approach provides an additional layer of accountability and ensures that hotel owners are held to high standards when it comes to providing essential services and amenities for their guests.
However, while the bill sponsors’ goals are laudable—protecting the safety and well-being of guests—there are concerns that the bill’s provisions introduce significant operational uncertainty and threaten to shut down hotel lending and investment activity in the New York City market, which is the world’s biggest and most liquid hotel market.
One key provision of the bill is the requirement for all hotels to obtain a license to operate, which must be renewed every two years. Licensing requirements for operating hotels do exist in several jurisdictions, but the standards for obtaining or renewing a license are typically tied to code compliance, and approvals are primarily administrative. In contrast, the New York City legislation provides the DWCP Commissioner with the discretion to revoke a license based on the violation of any one of seven “service disruption” criteria outlined in the bill, also known as the bill’s “Seven Deadly Sins” provisions.
For instance, if an advertised amenity such as a pool, spa, shuttle service, internet access, or food and beverage offerings are unavailable for 24 to 48 hours or more, a hotel license can be revoked. Of course, every owner is incentivized to offer advertised amenities, but ‘life happens’ and sometimes it is impossible to restore service within that given timeframe. Imagine the scenario where a hotel owner that leases a food and beverage outlet to a third-party operator (this type of leasing is allowed under the bill), and that operator unexpectedly vacates the space. It’s impossible to re-tenant a restaurant space in 48 hours, so that owner has committed one of the seven deadly sins and could have their license revoked.
In a similar vein, a license can be denied or revoked if there is construction noise that disturbs a guest, with the exception of emergency issues. Fortunately, the New York City hotel market typically runs at high occupancy rates, but this also means hotels endure a lot of wear and tear. As a result, routine maintenance and periodic construction activity are necessary to ensure the hotel remains in good condition, which of course could disturb guests. Moreover, branded hotels undergoing scheduled Property Improvement Plans (PIPs) are particularly at risk of violating this provision.
Another provision allows license revocation if there is a labor action at an adjacent hotel. The obvious concern is that one hotel owner cannot control the actions of an adjacent hotel owner. Therefore, to have one owner’s license threatened because of their neighbor’s action is highly disconcerting. Moreover, labor activity has no bearing on the purported guest safety and well-being objectives set forth in the bill.
These examples show how the bill’s “Seven Deadly Sins” may be violated in the normal course of business or in situations out of an owner’s control, thereby threatening license revocation. This uncertainty will absolutely dampen hotel lending activity in New York City. Lenders are risk averse and are hesitant lending into situations where it’s possible that the income generating collateral for their loan may not be legally allowed to operate. During the pandemic we saw first-hand the impact of sudden hotel closures on the lending market, with hotel loan default rates spiking significantly because owners were unable to pay debt service. The memories of COVID-19 are fresh in the minds of lenders, so legislation that could result in sudden hotel closures due to a loss of a license is a material risk that many lenders simply will not take.
While the legislation has admirable goals, concerns persist regarding the subjective nature of renewal standards and the potential challenges faced by hotel owners and operators. The hotel industry strives to always provide an elevated guest experience, but anything that puts at the risk the availability of new capital would make it far more difficult to meet those lofty standards.