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January 22, 2023 – Privately held AD1 Urban Palm Bay, LLC and 12 affiliate debtors* ("AD1 Urban" or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the District of Delaware, lead case number 23-10074 (Judge Karen B. Owens). The Debtors, managers/franchisees of hotel properties in Florida, are represented by Ian J. Bambrick of Faegre Drinker Biddle & Reath LLP. Further board-authorized engagements include (i) real estate investment banking firm RobertDouglas and (ii) Stretto as claims agent.
*The Debtors are affiliates of Florida-based AD1 Global which describes itself as follows: "Since 2011, AD1 Global has offered tailor-made property level management services to discerning hospitality clients throughout Florida and the East Coast. Led by a seasoned, award-winning team, AD1 Global expertly manages nearly 4,300 guestrooms for seven prestigious brand partners [@28 hotels]." AD1 Global is affiliated with ADËLON Capital ($750.0mn in investments) with which it shares a largely overlapping executive team, portfolio…as well as an address. In short, ADËLON Capital raises the capital for a hotel group and AD1 Global manages the hotels, generally as a franchisee of hotel group (including, Hyatt, Hilton, Holiday Inn and Doubletree)
CFO Alex Fridzon (also on the AD1 Global and ADËLON Capital executive teams, as are his brother Arie (Chief Investment Officer) and the Debtors' CEO Daniel Berman) is designated as the "sole officer of the Company on all aspects of the Chapter 11 Cases."
The Debtors’ lead petition notes between 1 and 50 creditors; estimated assets between $150.0mn and $50.0mn; and estimated liabilities between $10.0mn and $50.0mn. Documents filed with the Court list the Debtors’ three largest unsecured creditors as (i) IHG ($710k trade claim), (ii) Hyatt Corporation ($194k trade claim) and (iii) CBC Hospitality ($161k trade claim).
Goals of the Chapter 11 Filings
According to the Fridzon Declaration (defined below), "In November 2022, the Borrowers engaged RobertDouglas, an investment banking firm specializing in hotel properties, to investigate the Borrowers’ options to raise equity capital, refinance or sell the Properties in a manner that maximized value for all stakeholders. The Borrowers have engaged in a diligence process with at least one potential equity investor and believe that it has the ability to complete a process, during the pendency of the Chapter 11 Cases, to raise significant capital in an equity recapitalization which will allow Borrowers to cure all monetary defaults, if any, to post sufficient reserves to guarantee future performance of all loan obligations and to reinstate its Prepetition Loans.
With the benefit of the automatic stay and an exclusive period to propose a restructuring or reorganization, Borrowers also intend to investigate their options to refinance the current loans with terms that may provide more value to existing stakeholders compared to an equity recapitalization that will dilute the interests of current stakeholders.
Borrowers are confident that the Properties will provide sufficient cash flows to pay all operating costs and administrative expenses during the pendency of these Chapter 11 Cases and that through an equity capital raise, refinancing and/or sale of the Properties, they will be able to satisfy creditors in full and maximize the interests of all stakeholders."
Events Leading to the Chapter 11 Filing
In a declaration in support of the Chapter 11 filing (the “Fridzon Declaration”), Alex Fridzon, the chief operating officer and partner of AD1 Global Hotels, LLC (“AD1 Global”), an indirect owner of each of the Debtors, detailed the events leading to AD1's Chapter 11 filing. The Fridzon Declaration provides: “Although hotel revenues stabilize over time and experience predictable cash flows with normal seasonal variation, at all relevant times from the inception of the Prepetition Loan, the Properties have been in various states of development and capital improvement.
In light of the developmental nature of these Properties, as well as the uncertainty of the recovery in the hospitality market following the COVID pandemic, the Loan Agreement contains various covenants relating to, among other things, (i) the completion date for certain CAPEX projects; (ii) the maintenance of cash reserves for future capital expenditures; and (iii) the maintenance of significant cash reserves to pay monthly debt service payments to Lender in the event of short falls in operational cash flows.
During the 2022 calendar year, the Borrowers experienced several significant setbacks that impacted operating cash flows, including (i) the unprecedented rise in interest rates, which considerably increased the debt service on the Prepetition Loan, (ii) a significant inflation increase for goods and services, (iii) construction delays outside of the Borrowers’ Control, and the impact of Hurricane Nicole on the Rushhh Tapestry (Daytona Beach).
Beginning in September 2022, the Lender began being inconsistent on providing access to cash for certain necessary expenses, which created a strain on the Debtors’ operations. By October 2022, the interest reserve account ('IR Account') established to cover operating cash flow shortfalls was depleted and the Borrowers’ operating cash flows were insufficient to pay all of the Borrowers’ operating expenses and the monthly debt service due under the Loan Agreement. As a result of the above-described events, on November 2, 2022, Lender declared that certain events of default had occurred under the Loan Documents and were continuing (the 'Notice of Default').
In connection therewith, the Lender exercised its rights under certain Deposit Account Control Agreements ('DACAs'), and the Debtors became unable to utilize the funds received into their Customer Deposit Accounts without explicit approval from the Lender. In addition, the Lender began to accrue interest on the outstanding principal balance of the Prepetition Loan at the default rate starting November 1, 2022.
On November 14, 2022, Borrowers, Lender, and Mr. Berman executed an agreement (the 'Pre-Negotiation Agreement'), pursuant to which the parties thereto made certain acknowledgements, including that as of such date the outstanding principal amount of the Prepetition Loan, including all accrued and unpaid interest, was $164,977,611.06 and that certain events of default under the Loan Documents had occurred and were continuing, and to set forth certain procedures for on-going negotiations.
On November 23, 2022, Lender sent Borrowers a letter attaching a proposal dated November 17, 2022, laying out a list of requirements that it sought in exchange for entering into a modification of the Prepetition Loan. The Lender offered a short term forbearance through January 31, 2023 provided that the Borrowers (a) immediately retain Fulcrum Hospitality, a third-party hotel asset management firm, (b) fund $15,000,000 to the Prepetition Loan’s IR Account on or before January 31, 2023, (c) purchase an interest rate cap no later than December 15, 2022 and (d) agree to a 'deed-in-a-box' structure by December 15, 2022 whereby the deeds to the Properties (the 'Deeds') would be transferred to a title company selected by Lender and placed in escrow. In the event that the Borrowers failed to perform any of the foregoing before January 31, 2023, the Deeds would immediately transfer to Lender (collectively, the 'Forbearance Proposal').
The Forbearance Proposal was later modified by that certain Modification Letter, dated December 15, 2022 (the 'Modification Letter'), between Lender, Borrowers and Mr. Berman. The Modification Letter extended the timeline for certain of the requirements of the Forbearance Proposal until January 9, 2023. On and after January 16, 2023, the Lender failed to provide the Borrowers any access to Lender-controlled cash to fund operating expenses or otherwise despite Borrowers request that, among other things, funds were needed to pay sales and use taxes and labor-related expenses and provided no meaningful response as to whether they would ultimately release the needed funds.
The Debtors sought to work consensually with the Lender in good faith, including providing a $1,500,000 payment on short notice to the IR Account during their negotiations. However, the Lender’s requirements were unreasonable, their deadlines unrealistic, and the Lender was uncooperative when Robert Douglas and the Borrowers identified a potential source of new equity that would have addressed the Lender’s issues. All the while, the Debtors’ limited access to their cash assets put a significant strain on the operation of the Properties and the Debtors’ business. The Lender’s delays, refusals, and non-responsiveness to the Debtors’ requests to release the Debtors’ funds resulted in 'slow-pays' and 'no-pays' of certain of the Debtors’ vendors, including those vendors that provide staff for the Properties.
Despite having significant funds in their Bank Accounts, the Debtors’ inability to access their cash to fund operations, including payment of staff and contract labor, left them with no other option than filing for chapter 11 protection on the Petition Date. Any further delay could have resulted in significant disruption to their day-to-day operations and destruction of the goingconcern value of the Debtors’ portfolio of Properties.”
The Debtors’ operations are funded primarily though customer receipts generated by the Properties for room rentals, event space rentals and through on-site amenities such as restaurants, room service and spas.
AD1 LBV1, LLC; AD1 Celebration Hotels, LLC; AD1 Daytona Hotels, LLC; AD1 PB Airport Hotels, LLC; AD1 SW Property Holdings, LLC; AD1 Urban Palm Pay Place, LLC; and AD1 Urban Palm Bay, LLC (collectively, the “Borrowers”) are parties to that certain Loan Agreement dated as of December 10, 2021 by and between the Borrowers and HPS Investment Partners, LLC, as lender (the “Lender”). As of the Petition Date, the outstanding principal amount under and in connection with the Loan Documents is approximately $165,000,000, plus accrued and accruing interest, charges, fees, costs and expenses (including attorneys’ fees and legal expenses) plus any and all other amounts required to be paid under and in connection with the Loan Documents.
About the Debtors
According to the Debtors: “The Debtors own and operate eight (8), either newly constructed or renovated, hotels throughout Florida that are under the 'flags' of the IHG, Marriot, Hilton and Hyatt brands (collectively, the 'Properties')."
Corporate Structure Chart
See Exhibit A of Declaration [Docket No. 16] for six separate organizational charts.
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