311 | Shelters From the Norm: Hotels used for hospitals and housing face unexpected problems

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PAY TO STAY: Police in Fife, Washington, on Dec. 30 evict more than 40 people from the local Travelodge one week after Tacoma Housing Now, an advocate for homeless people, on Christmas Eve paid for one night’s stay for the group. Tacoma Housing Now claimed the state’s eviction moratorium prohibited motel owner Shawn Randhawa from forcing the non-paying guests to leave. Although the federal government said eviction bans do not apply to lodging, local authorities are hesitant to remove non-paying guests amid the coronavirus pandemic. It is just one of the financial challenges hotel and motel owners across the country are facing when providing shelter to vulnerable populations during the crisis.

In March 2020, when the coronavirus crisis was quickly unfolding across the U.S., Hotel Investment Group in San Diego, California, willingly turned over two of its independent hotels to public health agencies in need of facilities to care for COVID-19 in-patients.

Long Live Lodging reported on the development in Episode 257 when Darshan Patel, CEO of the family business, said his company as well as the state and local governments were still trying to figure out what it would take to temporarily convert a lodging asset into a health care facility. Patel is also an attorney and he wanted to draft an extensive agreement that would protect his company’s assets and business, but county officials deemed the situation urgent and instead offered a four-page lease that covered the basics.

Turns out, Patel was right to be concerned. Today, he’s working with San Diego and Santa Clara counties to negotiate reimbursement for wear and tear on the hotels.

Patel recalled the earlier decision to open his hotels to alternative uses as the counties were also trying to figure out the best way to manage the situation.

“Usually something like this would have to go through a full RFP and hotels would have to bid on it. But, obviously in the middle of the pandemic, we have the emergency. So a lot of hotel owners as well as the county got together and were able to reach a mutually beneficial agreement where hotel rooms and hotels in their entirety were given over to the county,” he said.

Though Hotel Investment Group first believed the hotels would be used to manage COVID and non-COVID patient overflows from local hospitals, local authorities also placed homeless people in the rooms in an effort to protect them from the virus and flatten the pandemic’s curve.

Most of the funding for the programs came from the federal government’s Coronavirus Aid, Relief and Economic Security Act. The agreement with the counties enabled Hotel Investment Group’s business to break even, Patel said.

But when 2020 ended, so did billions of dollars in CARES Act funding to support housing needs during the pandemic, including $4 billion to prevent homelessness and $100 billion to hospitals treating COVID-19 patients.

As leases end, hotel owners and operators are assessing the wear and tear on their assets and questioning who is going to pay to bring the property back to standard.

“Sometimes homeless don’t treat the property as well as they should. And so when the property was returned, it was returned in a lot worse condition than it was given,” Patel said. “We find ourselves now in a negotiation with the county to discuss what damage charges should be assessed.”

SHOT IN THE ARM: In February, Massachusetts reportedly designated the Doubletree by Hilton Boston North Shore as a vaccine site, with the capacity to handle up to 3,000 people a day. The American Hotel & Lodging Association in January launched the Hospitality for Hope initiative that notes hotels have meeting spaces and large parking lots that can help public health care agencies manage the vaccine process. The properties also adhere to CDC clean and safe standards. (Photo: WBZ-TV Twitter)

The properties that Hotel Investment Group leased to the counties were the Pacific Inn Hotel & Suites in San Diego and the Hotel Ereal in Santa Clara. Patel said the hotels are older assets and were approaching a renovation period before the pandemic struck so he is not totally bent out of shape about the damage and has confidence his company can work out a reimbursement agreement with the local governments.

“We went into this with our eyes wide open,” he said. “We knew something of this sort was going to occur. It still ends up becoming a win-win. We were able to get the revenues throughout 2020 when revenues were down for a lot of the market. And then on top of that the county’s going to pay for a good portion of the renovation that we were expecting to do anyway.”

While Hotel Investment Group sees a silver lining to its recovery challenge, many other owners across the country are faced with unexpected problems caused by the end of public funding programs but the continuation of government moratoriums on evictions.

Hotel owners have found themselves caught in limbo as states and local municipalities rule hotels and motels must adhere to the same anti-eviction mandates as residential landlords during the pandemic.

The Federal Register reported in September that hotels and motels are excluded from government-mandated eviction bans during the pandemic, but that is not stopping local authorities from enacting them.

This is causing emotional and financial distress for owners already trying to save their business from rack and ruin amid the coronavirus recession.

SHELTERS FROM THE NORM: The Essex Hotel in Chicago reopened in 2019 after undergoing renovation into a boutique property. The preserved vintage sign shown in this photo posted on Facebook is a throwback to its earlier days. After the coronavirus pandemic struck, the hotel served first responders and people at risk of homelessness. Episode 311 of Lodging Leaders podcast examines the challenges many owners and operators of hotels face after agreeing to open their properties for alternative uses such as health care sites and housing shelters.

Eviction Limbo

Co-founders of Reform Lodging, a hotel owners advocacy organization formed last year, have written a position paper outlining the problem and asking government leaders to step up and offer owners some form of relief, either by lifting the eviction moratorium for hotels or providing monetary aid.

Rich Gandhi of GHM Properties in Old Bridge, New Jersey, is chairman of Reform Lodging. He said he understands the reason for the eviction bans, but notes state and local governments lacked forethought when including hotels in the ruling. The eviction moratoriums regard guests as tenants, which ties owners’ hands in being able to charge for the stays or refuse to provide a room. Because the CARES Act funding has dried up, local governments are not reimbursing hotels for the costs. And, Gandhi noted, hotels continuing to pay expenses associated with the stay.

“You’re like, ‘Wait a minute. First of all, I was supposed to be collecting $100 a day. I’m not collecting that, but I’m now incurring in $80 to $90 per day in expenses,’” he said.

Gandhi said Reform Lodging is asking local and state governments to provide financial relief for hotels unable to collect payment from guests in need of shelter.

The hotels experiencing the eviction moratoriums are not extended-stay or all-suite properties, said Gandhi. These are branded transient hotels not suited for long-term stays.

Gandhi said guests get around the transient booking standards by going through OTAs and re-booking every two to three days. That’s fine if the guest can pay at the time of booking, but problems occur when the guest declares he or she cannot pay but has a right to remain because of the eviction moratorium.

Because the property is branded and an active business, the hotel’s costs mount no matter if the guest pays for the stay.

COSTS ADD UP: As an example of the costs hoteliers are facing amid local government eviction bans, Reform Lodging offered this calculation in its position paper it has sent to lawmakers in various states and posted on its website.

“According to our land-use and the transient hotel operating license, we actually are in violation of the township code at this moment because nobody is allowed to stay in the hotel past 30 days,” Gandhi said. “But because of this pandemic, attorneys are

twisting the law to their benefit. It was really meant to apply to apartment owners or multi-family owners. It is hurting hospitality businesses.”

According to franchising agreements, the brand licensee has to pay royalty and other fees on a rented room. The franchiser does not waive its fees if the guest does not pay.

“Now I’m paying franchise fees for something that I’m never going to collect,” Gandhi said.

In addition, the hotel pays local and state taxes based on occupancy. Again, this does not take into account that the guest did not pay. The owner must still remit an occupancy report and pay the tax.

“So you lose money every single step of the way,” Gandhi said.

Gandhi stands to lose a lot of money at his hotel where at least 15 rooms house non-paying guests. In one case, a resident became violent and damaged the lobby when the front desk refused to give him a roll of toilet paper because he was not a paying guest.

Eventually, police removed the man but Gandhi said in most cases local police will not assist in evicting a non-paying guest because of the moratorium and owners have no legal recourse.

A Reform Lodging member was so upset over the situation he went to New Jersey Gov. Phil Murphy’s office to call attention to the issue but was denied access.

Written Woes

That’s when Reform Lodging decided to pen a position paper to share with lawmakers in New Jersey and other states. Their hope is to call attention to the problem and enlist lawmakers’ help in solving it.

Sagar Shah of Yatra Capital Group and president of Reform Lodging said a new problem he’s facing at his hotel are long-term guests who get wise to the eviction ban and, although they can afford to pay the going rate, they’ve reduced the amount and challenge Shah to do anything about it.

He said it’s imperative that local and state governments step in to resolve the problem or hotels will be forced to close.

“If you’re going to have issues like this come up, but the folks who are in positions of power are not able to act upon it, then it’s up to us to bring it to light,” Shah said.

Other renters who have left hotel owners footing the bill are public health and nonprofit groups who initially paid to rent rooms for patient overflows from local hospitals or to shelter vulnerable populations. Now that the CARES Act funding has ended, the agencies have stopped paying. But because of the eviction bans, hotel owners cannot force the residents to leave.

Case in point is the Travelodge in Fife, Washington, where on Christmas Eve 43 clients of a homeless advocacy group moved into 16 rooms and refused to leave, claiming the eviction moratorium.

Tacoma Housing Now, the advocacy group, paid for the first night but then submitted a claim to the state and local governments demanding they pay for rooms.

Shawn Randhawa is owner and operator of the motel and said it is he who was being held hostage by the protestors.

Eventually, local officials found lodging elsewhere for the so-called guests and Randhawa got his hotel back.

Shah at Reform Lodging said the case shows how disjointed and confusing the eviction bans are across the country.

“The way each township and city handles it there’s such a stark difference,” he said. “It’s really a mixed bag on how they’re handling it.” Reform Lodging has heard from hoteliers in New Jersey, Illinois, Kentucky, Texas, Indiana, Ohio and Georgia facing the same problem.

Besides dealing with non-paying guests and broken agreements from nonprofit and public service agencies, owners and operators of hotels serving as health care facilities or housing shelters see challenges in property insurance agreements which were not meant to cover alternative uses.

Insurance Costs

Real Hospitality Group owns and operates its own hotels and it’s also a third-party manager. Some of its hotels in New York City and other highly populated areas are serving as health care facilities for non-COVID patients or people at risk of homelessness.

Ben Seidel, founder, president and CEO of Real Hospitality Group, said in December that his company had to work out the change-of-use issue with its property insurers.

“If I lease out the building to an entity, a non-profit a city or government organization, it changes the use of my building and my general liability costs skyrockets,” he said. Insurance riders that provide extra benefits at Seidels’ hotels under alternative uses range from $75,000 to $150,000 for six months.

The insurer look at the whole use of the building in these situations. But Seidel said if the programs that shelter homeless gave each guest a voucher per each stay it would not alter the use of the building. “It’s almost as if the insurance carriers can determine who is and who isn’t a guest,” he said. “And that borders on a moral issue. We lost that argument with our carrier.”

Though many owners may be willing offer their hotels for use during the coronavirus pandemic, Seidel learned because of property insurance use restrictions a hotel may not be able to participate in an agreement no matter how much an owner wants to help.

“In addition to the general liability riders, if you’re going to lease the building for a period of time and they take the whole building, then you get into indemnity clauses that public entities can’t sign. Then you get the insurance carrier and the mortgagee that wants to weigh in and say, ‘Without an indemnity clause, you can’t use the building for that purpose.’

“So we were unable to lease the building out, even though we had several requests and opportunities to do that, which would have created a fail safe for an owner to be able to pay the operating costs, mortgage taxes, and so on. I don’t know anybody in the markets that we play in that we’re able to do it. All those agreements had to be restructured to renting the building room by room.”

HOTELS CONVERT TO HOUSING: In the first installment of this series, Episode 310 of Lodging Leaders podcast covers what it takes for owners to sell their hotels to buyers seeking properties to convert to affordable housing.

Joseph Yi, chief financial officer and general counsel for Real Hospitality Group, said the property use and business insurance issues can hinder a hotel from extracting revenue amid the economic crisis.

“There’s a lot of read-the-fine-print issue here that as we were going to adjust on behalf of our clients and ownership, you’re trying to find revenue where really revenue has obviously declined,” Yi said.

“The market just completely shut down effectively for the first part of the onset of COVID and you’re kind of position yourself to get these short-term-demand businesses from government, medical and otherwise. And then you have these insurance issues.”

Because local governments moved so quickly at the start of the pandemic to find shelter for vulnerable populations and to provide a solution for hospital patient overflows, hotel owners and operators who agreed to participate did not realize their insurance carriers would prohibit such alternative-use agreements in the manner in which they were structured.

“It’s been an incredibly challenging year for the operator, including us, especially in big cities like New York, San Francisco, where those demands were offsetting some of the revenue loss we saw through the COVID,” Yi said.

VACCINE READY: The American Hotel & Lodging Association earlier this year let U.S. public health officials know many of its members’ hotels are able to handle the vaccine rollouts across the country. AHLA posted this chart on its website to explain how hotels can help as part of the association’s Hospitality for Hope initiative.

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