Mr. Brewer III

Hospitality Law

Two Dark Horses Have Emerged In the Coming Competition Between Multi-family Apartments and Extended-

By William A. Brewer III, Co-Founding & Co-Managing Partner, Bickel & Brewer

In One Corner: Extended-stay Hotels Are All Grown Up, Attracting the Business Traveler and Becoming Upscale Alternative Accommodations

Modest Beginnings

Extended-stay hotels have come a long way. In the eighties, these alternative economy accommodations catered to families and budget travelers in off-the-beaten-track locales. From the start, Extended-stay hotels became popular by providing travelers with a home-away-from-home experience. Amenities like kitchenettes and laundry facilities at discounted rates allowed travelers to save on food and other expenses during their extended stay. This feature, as well as increased quality and emerging upscale property offerings, have made Extended-stay hotels as popular as ever, even in a challenging economy. In fact, while amenities vary depending on the property, this rapidly growing segment of the lodging industry still shows no sign of slowing down.

Gaining Popularity and Attracting the Business Traveler

In 2007, nearly three-quarters of all hotel guests were away from home on business. Extended-stay hotels are attracting these business travelers, with Extended-stay hotel guests increasing rapidly, especially among mid-price and upscale properties in targeted markets with strong Extended-stay demand. Cities with a significant transient element account for the highest number of Extended-stay hotel rooms with Atlanta leading the U.S. Extended-stay market followed by Houston and Washington, D.C.

This guest segment sees a home-away-from-home experience as a welcome change to the standard business hotel. The increase in popularity has resulted in improvements in quality and amenities. Many budget hotel chains have entered the Extended-stay arena. Choice Hotels International, franchisors for name brands like Comfort Inn and Quality Inn, have opened Extended-stay properties. In addition, the more upscale element hotels, Westin's newly unveiled eco-conscious chain, are ensconced in the suburbs of several busy business hubs where demand for Extended-stay hotels have grown in recent years.

Lux Alternative Accommodations

Extended-stay has steadily been going upscale to accommodate business travelers in and around urban areas. Korman Communities, a Philadelphia developer with decades of real estate investment experience, brought the Extended-stay hotel model to urban areas. Forty years in the making, Korman has perfected the concept of short-term, furnished apartments in multi-family residential settings by creating a hip and upscale version with AKA, an Extended-stay hotel with amenities like flat-screen televisions and stainless steel appliances. With nine locations in Manhattan, Philadelphia and Washington, D.C., AKA is competing with luxury hotels for business and pleasure travelers alike serving as a home-away-from-home for CEOs, movie stars on location and upwardly mobile urbanites undergoing apartment renovations, marital discord, or both.

"Short-term" residential may make a lot of sense to potential renters or buyers right now - and this is the niche where Extended-stay properties may continue to perform well. Faced with gloomy housing and rental markets, Extended-stay may offer both the investor and the consumer a trendy, upscale alternative. Successful upscale Extended-stay hotels have been holding their own as demand has remained steady for the past several years. While economy and mid-scale sectors of the Extended-stay hotel business have seen a slowdown in 2008 due to increased supply and drop in demand, it is a niche market that still continues to grow. The upscale Extended-stay sector seems poised to best weather the economic storm with mid-year numbers for 2008 that were seven percent higher than the previous year.

In the Other Corner: MFAs Promise Cash-Flow and Attractive Returns on Investment to Landlords who are Becoming More and More Amenable to Short-Term Leases

Opting for MFAs

MFAs generally encompass any building with five or more rental units. For the purposes of a major investor, however, interest would be in properties with a greater number of units for a greater return on investment. Traditionally, MFAs have been considered a good investment long term. The current economic climate has precipitated a slow-down in this sector due to a number of factors, including market uncertainty and lack of financing. Renters, too, have become more cautious and savvy, foregoing renovations on their rental units that result in higher rent in favor of a better value, at least for the time being.

Short-Term Leases: Blurring the Lines to Maintain High Occupancy Rates

In the current climate, MFAs may afford the investor a greater return on their investment as compared to the failing housing market. MFA's in many markets are offering short-term leases of three to six months instead of traditional yearly rental leases. These shorter lease terms provide consumers with greater flexibility and allow MFA owners to maintain high occupancy rates. With more and more renters on the horizon due to foreclosures and house values that have not yet found a bottom, investment opportunities abound for those in the market. Shorter lease terms put MFA's in direct competition with Extended-stay hotels for consumer dollars.

Recently the New York State Appellate Division, First Department denied New York City's request for a preliminary injunction forcing Single Residence Occupancy hotels (commonly known as SRO's) to stop renting apartments for the short-term to tourists visiting New York City. Demonstrating that the convergence of long-term and short-term housing is not necessarily new, the Appellate Division noted that the New York SRO's had been periodically renting SRO apartments - considered permanent residence apartments under local zoning - since the 1940's. Notwithstanding that this practice is decades old, today, New York City may be attempting to draw a distinction where, tomorrow, there may be no difference.

Legal Issues at the Convergence of Long-Term Stays and Short-Term Leases

The convergence of long-term stays and short-term leasing creates interesting legal issues as hoteliers and landlords blur the lines between traditional hotel stays and leases of rental property. A few examples (using New York and Texas law as points of reference) include:

Taxes: the Hotel Tax

The varying taxes in different jurisdictions may yield disparate-and surprising-results for consumers. For example, a hotel guest may not need to pay a hotel tax for long-term stay, but a renter in an MFA may be required to pay a hotel tax if his lease term is too short.

In New York, a hotel guest is charged a tax for his stay in a New York hotel: the Hotel Room Occupancy Tax (HROT). Exceptions to this HROT were created to protect low-income hotel guests and "permanent residents" of low-end and welfare hotels. Accordingly, a hotel guest need not pay the HROT if the guest stays in the hotel for more the 180 days (roughly six months). The types of facilities subject to the HROT include "an apartment hotel, motel, boardinghouse, bed-and-breakfast, bungalow, or club, whether or not meals are served". Thus, if a particular MFA is determined to be an apartment hotel, a short term lease, for example a 3 month or 90-day lease, may require payment of the HROT, while 180 days in either an MFA or an Extended-stay hotel would require no such payment.

In Texas, a hotel guest is charged a Hotel Occupancy Tax (HOT). Texas has a state hotel tax of 6 percent and additionally, cities and some counties can each levy local hotel taxes at varying rates of up to 7 percent. For tax purposes, a hotel is considered to be any building in which members of the public rent sleeping accommodations for $15.00 or more per day. Local hotel taxes apply to sleeping rooms costing $2.00 or more per day. The HOT covers hotels, motels, and bed and breakfasts, as well as condominiums, apartments, and houses rented for less than 30 consecutive days. A permanent resident, a guest who occupies a room for at least 30 consecutive days, is exempt from paying state and local hotel taxes.

Rights of a hotelier to remove guest versus right of a landlord to evict

In general, a landlord will have a more difficult time removing an unwanted tenant than a hotelier may have in expelling an unwanted guest. Generally, a hotelier may reserve the right to expel a guest under certain circumstances or at will-not so with a landlord.

Under New York landlord tenant law, a landlord must prepare a petition requesting a court hearing, which must be served on the tenant and filed with the court.

To file an eviction in Texas, the landlord is required by law to give the tenant written notice to vacate the premises. Unless otherwise stated in the lease, the landlord must wait three days after delivering the notice or eviction before filing a lawsuit in Justice Court. The suit must be filed in the county and precinct where the property is located.

Liability in regard to common and public areas

In general, both landlords and hoteliers may be liable for dangerous conditions. But, today, the differences in the level of duty of care and how a duty of care is imposed may differ.

The duty of a hotel to provide safe premises is based on the common law duty owed to business and social invitees of an establishment. Under common law, hotels must exercise reasonable care for the safety of their guests. If the risk of harm or damage was foreseeable, and the hotel failed to exercise reasonable care to either eliminate the risk or warn guests of its existence, the hotel may be liable for any resulting harm or damage caused by its negligence. Also, depending on the jurisdiction, building code and state, city or town laws may impose duties upon a hotelier.

A landlord may be held to some of the same common law requirements, but because the tenant's relationship with a landlord is different from the relationship between an "invitee" hotel guest and a hotelier, different jurisdictions may place different standards or duties of care upon the landlord than those placed upon the hotelier. Importantly, a landlord will also be held to the additional requirements based upon building codes; city or town ordinances; and, importantly, a jurisdiction's landlord/tenant laws. Accordingly, while duties may be similar, the source of liability for landlords may be from altogether different laws designed to protect tenants who, traditionally, may not have been given the same standard of care afforded "invitee" guests.

As the lines between landlord and hotelier blur in the future, the standards and duties each owes to tenants or guests may blur as well.

What the Future May Bring: Greater Regulation

Given the current financial crisis, one thing is clear: greater government regulation across all sectors is likely to occur. This regulation may provide some bright lines differentiating Extended-stay hotels and short-term leases in MFAs. As demonstrated above, some jurisdictions may already have existing laws that may provide some guideposts to owners, operators and consumers. As this market niche matures, however, owners, operators and consumers should investigate the different rules and laws in each jurisdiction where Extended-stay hotels or MFAs offering short-term leases operate.

Bickel & Brewer partner Luke McGrath contributed to this article.

William A. Brewer III is co-founding and co-managing partner of Bickel & Brewer, with offices in Dallas and New York. Under Mr. Brewer's direction, Bickel & Brewer has become renowned for its innovative handling of disputes within the hospitality industry. For the past decade, Bickel & Brewer has represented hotel franchisors, management companies, owners, developers and investors in the highest profile litigation in the hospitality industry. He is a member of various philanthropic organizations, including the New York City Partnership and the Board of Trustees of Albany Law School. Mr. Brewer III can be contacted at 214-653-4811 or wab@bickelbrewer.com Extended Bio...

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