Highest and best use - Hotels?
By Vijay Dandapani
Tuesday, 29th May 2007
New York's robust hotel environment has led scores if not hundreds of landlords of both raw land and buildings to seek alternative uses for their holdings.

Although there has been a moderate slippage in occupancy, revpar for the Big Apple continues to violate the laws of physics. And as a result, more often than not, the decision over the last two years has been resoundingly in favor of hotels.

While hotels, may indeed be the best use, it is unclear that the trend can withstand considerable additions to inventory in the pipeline particularly in the select service segment.

Trophy properties such as the Plaza Hotel that reduced their hotel room count in favor of residential condominiums continue to see those actions rewarded (The New York Observer reports on an apartment at the famed hotel being sold for a record $50 million!).

A principal reason for the spate of upper class hotels that fell under the wrecking ball 3 years ago coming to an end is clearly the high room rates. That seems to have spurred new projects from heretofore non-hotel owners looking to cash in on the lodging dollar with little regard for the industry's volatility. Many new owners of hostelry are looking at hotels not as operators but as investors albeit at a somewhat active level and are looking to do more joint ventures than long ground leases as was the case in the 70s and 80s.

Nevertheless, a few are going the traditional route of arms length leases, wanting no part of "messy" hotel operations along with its mercurial revenue flows. However, a lease is not a 100% guarantee of insulation from the adverse effects of an economic downturn should a lessee default as a consequences.

New York with its famously debtor friendly Southern District bankruptcy court and odd provisions like the Yellowstone injunction that allows a tenant to continue to operate an asset while the "core" dispute is resolved can prove to be a minefield for the uninitiated.

Only an actual downturn, whenever it occurs, will present owners and operators with a full range of issues but the importance of good legal and operational advise for both parties cannot be overstated.

Vijay is Chief Operating Officer and part-founder of Apple Core Hotels- a chain of 5 midtown Manhattan hotels offering value and comfort in the heart of the city.Member of the board of Directors - Hotel Association of New York.

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