Proposed New York City Legislation Could Negatively Impact the Hotel Industry

New York City's hotels are a critically important component of the city's tourism and business industries. However, on July 18, 2024, 26 members of the New York City Council introduced Int. 991-2024 (Int. 991) without meeting with hotel owners and operators or making any attempt to understand the cost and complexity of owning, operating or financing hotels in the nation's largest city. On Aug. 5, 2024, Int. 991 was modified and the number of sponsors increased to 30, which would be more than enough to enact the proposed legislation into law.

The stated purpose of Int. 991 would "require hotels to obtain a license in order to operate their business in the City. … Hotels would be required to maintain continuous front desk coverage and large hotels [more than 100 guest rooms] would be required to have continuous coverage by having at least one security guard. All hotels would be required to maintain the cleanliness of each guest room. The licensee would be required to directly employ their core employees, subject to enumerated exceptions." Although this seems like an innocent addition, the 11-page bill could negatively impact an industry still recovering, as approximately one-third of the hotels permanently closed following the COVID-19 pandemic, with many still being used as migrant shelters today.

A Closer Look at Int. 991

Limits on Using Vendors for Staffing

Section 20-565.7 Int. 991 stipulates that a hotel owner must directly employ all "core" employees. Contracting to any third parties for core employees, including staffing agencies or other contractors or subcontractors, is not permitted except that a hotel owner may retain a single management company to manage all hotel operations on the hotel owner's behalf, as long as the hotel owner is the sole employer or joint employer of all core employees. This provision means that hotel owners and operators cannot use third-party vendors to perform "core" jobs regardless of whether to increase efficiency, reduce costs or for services that require specialization that may be cost-efficient to be performed by a third party. Moreover, many, if not most, of the hotels are not operated by the owners but by management or operating companies or lessees under long-term agreements subject to licensing agreements with the brands under whose names they operate. In many instances, the City Council's mandate would be contrary to these complex branding agreements, which took months to negotiate and have been in place for years.

The term "core employee" means "any employee whose job classification is related to housekeeping, front desk, front service, or engineering at a hotel. Such classifications include, but are not limited to, room attendants, house persons, bell or door staff, and engineers and maintenance employees." As a result, low-skilled and entry-level jobs must be performed by employees of the hotel owner, rather than being employees of service providers or independent contractors that provide employment to individuals who do not want full-time employment (e.g., students, parents juggling several jobs or people looking for additional income).

Licensing Procedures

Section 20-565.1 provides that it shall be unlawful for any person to operate a hotel without a valid license for such hotel. All licenses issued pursuant to this subchapter shall be valid for no more than two years and expire on the date the commissioner prescribes by rule. The license can be issued only to an applicant who is the owner of the hotel to be licensed or who will be the hotel owner upon grant of the license. A hotel license shall not be assignable and shall be valid only for the person to whom it was issued and for the operation of a hotel in the place designated therein and shall at all times be conspicuously displayed at the place for which it is issued. A licensee who has submitted the application forms and fees required to renew a license pursuant to this subchapter shall be permitted to operate a hotel until a determination has been received from the commissioner. Failure by the commissioner to make a determination prior to the expiration date of an applicant's license shall not be cause to cease operation of a hotel.

The requirement for a license that is not automatically extended would place the survival of properties worth hundreds of millions of dollars under the control of the City Commissioner rather than hotel owners or operators who are much more familiar with the demands of an extremely complex business in which there are few long-term leases and guest rooms have to be filled every night. There are no objective standards for granting, withholding or not extending a license, which would instead be left to the discretion of the commissioner, and powerful unions are likely to lobby the commissioner on this front. Regardless of which agency is involved, agencies are skilled with making certain their regulations are enforced, not with making subjective decisions about individual, distinct businesses within a highly challenging industry.

Moreover, the mandate that all hotels have licenses based on rules established by the commissioner will expose hotels to the demands of an endless group of third parties, placing the commissioner and other city officials in the position of making decisions regarding an important segment of the economy to satisfy the demands of constituents having nothing to do with the efficient operation of the hotels. Every hotel in New York City could potentially lose its license as a result of complaints that may not relate to the operation of a hotel. The hotel industry – one of the most important job creators and revenue producers in New York City – could be held hostage to extortionate demands of third parties.

Front Desk Security

Section 20-565.4 states that "Each hotel must maintain continuous coverage of a front desk and the front desk staff must confirm the identity of each guest upon the guest checking in." No thought is given to modern-day check-ins, as guests do not wait in line. In addition, each large hotel must maintain continuous coverage of at least one security guard on premises while any guest room in such hotel is occupied.

Rulemaking

Section 20-565.14 states, "The commissioner shall promulgate such rules as the commissioner deems necessary to effectuate the provisions of this subchapter." This provision allows the commissioner or any other designated individual to make it impossible to operate their hotels and promotes the commissioner as an overseer of hotels in New York City.

Limits on Change in Control or Branding

Int. 991 also precludes any "change in controlling interest or identity (i.e., any sale, assignment, transfer, contribution or disposition of a controlling interest including consolidations, merger or reorganization of the hotel employers or any person who controls the hotel or any other event, including a purchase, sale or lease termination of a management contract or lease)." Therefore, no transfer of the ownership or change in the operation of a hotel can be made without the approval of the city and likely the union. This would give the commissioner (and, therefore, the unions) control over the sale of all the hotels in New York City, which would significantly reduce the value of the hotels and reduce the likelihood that any lender will provide financing for the construction and operation of the hotel.

Additional Considerations

New York City's tourism industry bolstered the state and city economy in 2023, generating approximately $74 billion in economic impact, with more than $48 billion coming from direct spending. This activity supported more than 380,000 leisure and hospitality jobs – roughly 9 percent of the city's workforce – and thousands of small and minority-owned businesses across all five boroughs. Tax revenue, which totaled more than $6 billion generated by visitor spending, benefited each New York City household approximately $2,000 in 2023. Many in the industry are wondering about the timing and what the public policy reasoning could be behind this potential new control over the hotel industry,

Indeed, considering the importance of the hospitality industry to New York's economy, one has to wonder why the City Council has targeted the hotel industry on a regular basis. For example, during the COVID-19 pandemic, the hotels had virtually no occupancy, having gone from being 80 percent occupied on March 12, 2020, to less than 5 percent. A few days later, the City Council nevertheless passed legislation mandating that hotels could not close permanently without paying their employees highly inflated severance packages that would make it impossible for hotel owners to avoid a bankruptcy filing. No other industry was placed in this situation.

Then, notwithstanding the fact that aged hotels cannot be inexpensively rehabilitated and also that New York has a huge shortage of housing, owners of hotels could not convert their hotels into multifamily housing without complying with the Hotel Conversion Law, which was meant to enable the conversion of underutilized hotel space into permanent housing. However, in order to obtain the benefit of the Hotel Conversion Law, if the hotel's employees were represented by a collective bargaining agreement prior to the proposed conversion, the collective bargaining representative must be notified and agree with the property owner to undertake the specific conversion.

Additionally, in 2021, the City Council enacted the Citywide Hotels Text Amendment to New York's Zoning Resolution, which mandated that new hotels could not be built without a special permit and was understood to mean that new hotels had to be unionized.

Many stakeholders believe that Int. 991, if enacted, will cause a fundamental change in the hospitality industry, reduce New York City and the state's revenue from the hotels and result in fewer employees working for the hotels. The takeaway in the industry: This legislation would benefit no one if the commissioner and unions are given control over one of New York's critical industries.

Editor's Note: The author has represented developers and lenders and advised the owners of some of the most prestigious and significant hotels in New York City on development, finance and other aspects of their operations. He also worked at several hotels while in college.

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