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September 22, 2020 – Herald Hotel Associates, L.P. (dba "The Martinique New York on Broadway, Curio Collection by Hilton,“ Herald” or the “Debtor”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the Southern District of New York, lead case number 20-12266. The Debtor, one of New York City's oldest hotels and currently associated with the Hilton Group, is represented by Scott S. Markowitz of Tarter Krinsky & Drogin LLP.
The Debtor is owned by property developer Harold Thurman.
The Debtor's Petition notes between 100 and 200 creditors; estimated assets between $100.0mn and $500.0mn; and estimated liabilities between $10.0mn and $50.0mn. Documents filed with the Court list the Debtors’ three largest unsecured creditors as (i) Seasons Affiliates LLC ($1.6mn disputed rent claim), (ii) Lodging Solutions, LLC ($59k trade claim) and (iii) Design Communications, Inc ($52k trade claim). Although not listed, the Debtor also has a $3.9mn PPP loan which it "expects…will be forgiven."
Goals of the Chapter 11 Filings
The Thurman Declaration (defined below) provides: "The Debtor intends to commence this chapter 11 case in order to attempt to preserve a going concern value in these extraordinary challenging times for New York City hotels in view of the COVID-19 pandemic. Recently, the iconic New York Hilton in Time Square announced it was closing permanently. According to industry statistics, hotel occupancy in Manhattan was approximately 35% in August. Hotel occupancy in Manhattan was 93% in August 2019. The Debtor intends to utilize the tools contained in the Bankruptcy Code to obtain needed relief from certain provisions of the CBA, mitigate union severance obligations, restructure the Lease, and reach an agreement for a modification of the Hotel’s mortgage held by JPMorgan Chase Bank, N.A."
See the New York Times September 21st piece for more background on New York City hotels in the age of COVID-19. See also the NYT for more background on the Debtor's colorful history, including its late 20th century stint as a "notorious welfare hotel".
Events Leading to the Chapter 11 Filing
In a declaration in support of the Chapter 11 filing (the “Thurman Declaration”), Brad Thurman, the Debtor's Vice President (and son of owner/property developer Harold Thurman), detailed the events leading to Herald’s Chapter 11 filing. Thurman notes that the even prior to COVID-19, the Debtor was in a precarious financial position; with a decade long glut in hotel room supply placing downward pressure on pricing and profitability and a recent shift of franchisors (from Radisson to Hilton) which necessitated renovations and significant borrowing. The Thurman Declaration provides: "Since the recession of year 2008/2009 there has been a major increase in hotel room supply in Manhattan. This has negatively affected the Hotel’s profitability. Growth of hotel average room rates has been stagnant for approximately ten (10) years–only returning to 2008 levels in 2019 thus room rate increases were falling behind normal inflation during that period.
The prior franchisor, Radisson, provided less than 15% of room revenue to the Hotel even though the Hotel was the only Radisson in Manhattan. The Debtor’s management elected to separate from Radisson and associate with Hilton which is generally considered a higher level flag in the hotel industry. In order to enter into a franchise relationship with Hilton, the Hotel was required to comply with Hilton’s Property Improvement Plan (PIP) and to comply with Local Law #11 façade repairs. The Debtor’s owners funded these upgrades which are not yet completed. The total renovation costs between 2015 and 2019 were approximately $35 million. Commencing in January 2020, the Hotel borrowed $12,250,000 from the Debtor’s equity interest owners in order to fund additional renovations and cover operating losses.
In December 2018, the Hotel commenced operations as the Hilton Curio but because of the ongoing renovations, the Hotel could only have a 'soft opening' as a Hilton. The Debtor intends to maintain and comply with its franchise agreement with Hilton.
In March 2020, the Hotel was within six to eight (6 to 8) months from the completion of the renovations. Unfortunately, the COVID-19 pandemic caused the New York City government to stop ‘non-essential’ construction during COVID-19, thus halting the Hotel’s renovation project. In June, the City lifted the ban on non-essential construction and the Hotel recommenced the renovations.
The Debtor has attempted to reach an agreement with the Landlord under the Lease to reflect the current economic reality in view of theCOVID-19 pandemic. Although the Debtor was able to reach an agreement for a short-term deferral of rent, the Debtor has been unable to reach an agreement for a longer term modification of the Lease. On September 16, 2020, the Landlord served a notice of default upon the Debtor and has threatened to terminate the Lease.”
On the subject of the lease, the Thurman Declaration continues: "The Debtor is not the fee owner of the land underneath the Hotel but is a party to a ground lease executed in 1989 for a term of 99 years (the ‘Lease’). The Debtor believes the Lease is more in the nature of a joint venture, financing device, disguised sale and/or other arrangement rather than a true lease for the purposes of the Bankruptcy Code. The Debtor will attempt to resolve disputes with the Landlord (defined below) regarding the Lease. Absent a resolution, the Debtor intends to commence an adversary proceeding seeking to obtain a ruling from this Court declaring the Lease is not a true lease within the meaning of section 365(d)(4) of the Bankruptcy Code."
COVID-19 has also given rise to a potential union dispute as to an existing CBA. The Thurman Declaration continues: "Recently, an arbitrator under the industry wide CBA issued a decision clarifying the industry’s obligations for severance as a result of the Covid-19 pandemic. The arbitrator ruled all union hotels which have been closed since the beginning of the pandemic in mid March are obligated to start making certain structured severance payments to union employees commencing October 1, 2020. As a result thereof, and with a full reservation of rights, pursuant to Article 52 of the CBA, the Hotel’s Covid Closure has likely triggered severance to the Hotel’s union employees which the Debtor estimates to be approximately $3.5 million."
The Debtor operates the Hotel which is a full-service hotel located on 32nd and Broadway in Manhattan. Thurman Associates, LLC is the ninety nine percent (99%) owner of the Hotel. 1260 Herald Square, LLC is the general partner and owns the other one percent (1%).
The Hotel is one of the oldest hotels in Manhattan, originally opening in 1899, and has gone through many iterations during this span of 121 years. The Hotel now features 531 rooms, a restaurant featuring a wine bar, 7,798 square feet of meeting space plus 1,155 square feet of pre-function space, a fitness center, a business center, and a concierge desk.
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