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Richard Born On Bankrupting Hotels

We’ve been suggesting for a while that BD’s strategy is to bankrupt the hotel so that they can buy it cheap.  How else to explain their slashing of rates, warehousing of rooms, doubling of staff and otherwise mismanaging the hotel. In an interview for The New York Sun Richard Born comes clean on his strategy:

"I probably get a call every day from someone asking if I want to joint venture or invest in their new hotel project. When I discuss the perils of new development at this time most people laugh and suggest that I just want to discourage others from building so I can monopolize that market myself. My response is simply that I would rather purchase new hotels from the banks in three years at 50% discount, than invest at full price today."

He goes into some rigamarole about declining occupany rates and the like which I don’t have the patience to attempt to decipher at this moment, but according to Born, the bottom line is:

"…That would surely be enough to effectively bankrupt every newly built hotel and any existing hotel carrying a large debt burden."  — Ed Hamilton

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22 responses to “Richard Born On Bankrupting Hotels”

  1. LP Avatar
    LP

    That does seem to be the plan. To hell with humanity in the quest for greater profit and control. Looks like the minority heirs have been duped.

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  2. The Ghosts of Chelsea Past Avatar
    The Ghosts of Chelsea Past

    Soulless, soulless…

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  3. Silkie Avatar
    Silkie

    Thank you Ed for this most important information.

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  4. Avatar
    Anonymous

    The Chelsea is not a newly built hotel, and I cant see it carrying a large debt burden. As far as doubling staff, the hotel was horribly understaffed for many years. Now it seems to be adequately staffed, with seemingly nice people I might add. I fail to see how this contributes to Ed’s conspiracy theory of BD trying to “bankrupt” The Chelsea.

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  5. Dan Avatar
    Dan

    Nothing new at all. This is how American business has always been conducted. The Chelsea, which I love, just managed to stay under the radar for many years. Where have you guys been?

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  6. Natalie Avatar
    Natalie

    I just read your book, Legends of the Chelsea Hotel. Is it still worth renting a room at the hotel or have things changed so much that it simply feels like a Sofitel?

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  7. Miss H Avatar
    Miss H

    Yes, thanks for digging this up.

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  8. wage slave Avatar
    wage slave

    The Chelsea Hotel has hardly been under the radar ever in its history. It was saved, or preserved if you will, because of the Bards and their residents.
    Mr. Born’s M.O., and mission in life seem clear.
    I for one never felt the hotel was understaffed during the Bard years. It is definitely overstaffed now, crowded in fact. Professionally nice people (and they are not all nice) do not compare to the staff the Bards hired. Every one was and is an individual with distinct character and personality, like the residents are, and the hotel itself, past tense. Josephine anyone?

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  9. FTOT Avatar
    FTOT

    The Chelsea might well have a huge debt burden after BD is finished with it.

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  10. In the Trenches Avatar
    In the Trenches

    As a long-term resident, the truth of the matter is that all appearances on the ground suggest that Ed is correct — the hotel staff has doubled (with zero improvement in services), increasing number of rooms remain unrented (some for 7 plus months now) and the rude, harassing and not least of all NEGLECTFUL viewpoint of the new management (especially that idiot Glennon) show clear signs that BD has zero interest in anything except hurting the Chelsea’s bottom line while allowing the building to deteriorate. Say what you will about the Bards, but they worked around the clock to maximize profit. What’s happening now is both a pity and a case study of hotel management as masturbatory existentialism.

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  11. In the Trenches Avatar
    In the Trenches

    PS – As for “carrying a large debt burden”, look for one of BD’s imminent moves to be the procuring of a large mortgage on the place. And in this credit market the terms will be punitive. Let’s not be naive here, Ed’s point of view is spot-on.

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  12. LP Avatar
    LP

    Well, it’s a very very small consolation but there’ll be another book in it: How Richard Born, Marlene Krauss and David Elder killed the Chelsea Hotel. Maybe the fact that Ed’s on to them will prevent it. Born seems pretty ruthless however.

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  13. Avatar
    Anonymous

    BD is just management, not ownership, they don’t have the ability to put debt on The Chelsea. More so, they are paid a percentage of the bottom line so it would be against their interest to try and lower profits. Further more, I doubt the Bards or any of the other shareholders will starve with out their income from The Chelsea. So as long as the tenants pay their rent (eeehhm) that should be enough to cover taxes and maintenance (I doubt there is even a mortgage on the property, and if so it is probably not large) The shareholders would not need to sell BD a ownership interest. They are not dependant on transient business to hold on to the building.

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  14. wage slave Avatar
    wage slave

    Do you think the two heirs are in on it, Krauss and Elder?

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  15. In the Trenches Avatar
    In the Trenches

    No Name, your position is totally naive. Do you think Richard Born and Ira Drukier are doing this crappy gig for the pennies on the dollar they make here? These guys BUY buildings, not manage them. This is the ONLY property they merely manage (as is evidenced by their complete cluelessness in how to run and keep up the place). They’re clearly selling Krauss and Elder some bill of goods. The position is obvious — hurt the cash flow of the building enough so that the Bards will ultimately say Uncle due to lack of cash. Krauss and Elder are no doubt supplementing their lack of income through salaries, as is BD. No doubt David Bernstein is making a handsome salary for his three hours a week there. A mortgage will just increase the pressure and BD will invariably convince Krauss and Elder to take one on. It’s really incredible to me that at this point in the ball game someone with good intentions and knowledge of the situation could possibly think otherwise. Get real.

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  16. no name Avatar
    no name

    in the trenches – i agree that BD’s long term plan is to try to own the building, my point was simply that they can not force this. that even if they stop taking transient guests and bringing in new permanent tenants the current ownership still is not forced to sell. as you know eviction process takes years, so until they get enough tenants out that the remaining tenant’s rent doesnt cover expenses, ownership doesnt have to sell. oh and then there is always the commercial rent (i’m sure starr lounge pays a pretty penny, even if el quotie’s lease is WAY under market)
    on a side note, does anyone know the breakdown of ownership? what percentage the bards, krauss’, elder’s and if there are any other families, each own? most the comments on this blog name the bards as majority shareholders, but from what i can tell, when stanley’s father bought the building with mr krauss and mr. elder Sr. there was a forth family and each had 25%.

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  17. Old & Crabby Avatar
    Old & Crabby

    Where do you suppose the money for the estimated $50 – 60 million in renovations will come from? Out of the shareholder’s pockets? I don’t think so. Someone will have to take out a loan. How will they secure the loan? 2 + 2

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  18. rez Avatar
    rez

    As someone with a little experience of commercial world, this is how it might work (not predicting it will, however):
    1. Minority shareholders, advised by BD, decide to renovate the hotel and turn it into a luxurious hotel.
    2. Renovations cost say $40 million (conservative @ $4 million per floor, bearing in mind legal costs, compliance costs, standard of upgrade etc)
    3. A loan of $40 million is taken out. The lender is… BD (or somebody procured by BD)
    4. Lender secures the loan by a taking charge on the Chelsea. (This could only happen with Bard agreement, I suspect, or in the event of non-agreement by court order.)
    5. Lender charges interest of say 8%, ie 320,000 p.a.
    6. Either because the day to day profits of the hotel fall and/or because the hotel’s income essentially freezes up due to the hotel being shut down for years of renovation/litigation and/or because of disputes between the shareholders, the hotel cannot pay the interest as it falls due. Hotel is therefore insolvent.
    7. Lender enforces its charge by selling it to BD (which, when it secured business for the lender, agreed a first option to buy); or if lender is BD, by offering to buy the (very cheap) hotel.
    8. The Bards, having no alternative, forced to accept the offer.
    Question: why would the minority shareholders want to embark on such a scheme? Answer: because either (1) the renovation works and the hotel makes more money; or (2) it fails and they get to realize the capital value of the hotel by selling it over the Bards’ wishes. They may not make a fortune–BD would be getting a great deal–but at least they’d be getting more than they’re getting now.

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  19. LP Avatar
    LP

    I don’t know what the original ownership scheme was, but IIRC The Bard’s had a controlling interest (57%), Marlene had 27 percent and elder around 16 percent. The Bards of course, also managed the place, in crazy New York, through different eras. What a job that was, that behemoth with its unrivaled roster of residents and guests. They were particularly suited to it but it was hard work like the heirs and BD have never known. Have any of them ever had to worry about paying their rent? It’s obscene what they did to Stanley and his family and to the hotel. They never showed the least bit of affection for the hotel before any of this happened. It wouldn’t surprise me if the heirs are in on it.
    It might be they wish to get a big lump sum out of it, and BD forcing bankruptcy could bring that lump sum under the right conditions.

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  20. and then... Avatar
    and then…

    rez, that sounds about right, except some of your numbers are a bit off. The fed just lowered interest rates to 3% last week. The spread on a loan (the banks up charge for making the loan, how they make their profit assuming they don’t foreclose) would be huge because of the credit crunch, but because of the underlying fundamentals the rate probably wouldn’t be higher that 6.5% to 7%. Also, it would cost a lot less then $40mil. Figure about $150/square foot, $200 max. I don’t know exactly how big the building is but I’m sure a kind soul will have that info up here by days end. That price would include all new infustructer su
    On the other hand, how much do the tenants pay each month? i have read many times that your rents, for the most part, are not cheep. Krauss and her gang can get a loan based only on that cash flow, which is not interrupted by construction and not effected by BD’s actions or in actions

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  21. rez Avatar
    rez

    interesting, and then…, in particular your costs per sq ft. Does $200 p sq ft include treating the lead paint that’s everywhere; costs of re-housing tenants during renovation; costs of litigating against rent-stabilized/contractually protected tenants to move them out to enable renovation to take place? I have a feeling that the particular circumstances at the hotel would test the usual costs model. But I take the point.
    Square footage? I’m guessing 30 sizeable rooms per floor at an average 200 sq ft per room, ie around 6,000 sq ft per floor; @ 200 p.sq. ft, this means that the renovations would be around $1.2 million per floor, i.e., $12 million total. Add 20% in case of underestimate, you come to $13.6 million. That still sounds very cheap to me.
    As regards lending terms, my point is that BD/BD’s associate would be delighted to make the loan without strict regard to the hotel cashflow: the whole idea would be for the loan to run into trouble so as to enable the lender/chargee to in effect take over the hotel.

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  22. just me Avatar
    just me

    BD and the minority shareholders just look creepier and creepier.

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