Law360: NYC Zoning Rules Slow Rockefeller Center Hotel’s Course

Law360: NYC Zoning Rules Slow Rockefeller Center Hotel’s Course


August 16, 2023 08:19 PM


When real estate developer Aspen Hospitality announced its plans to open a 10-story hotel in Rockefeller Center, it became the first company to take on a hotel special permit process that the New York City Council introduced just as Mayor Bill de Blasio was leaving office in late 2021.


The 130-room Little Nell Hotel at 10 Rockefeller Plaza, if and when it’s converted from what is now floor after floor of vacant office space, will open in 2026 as a luxury boutique venue promising all the shine of its five-star sister hotel in Aspen, Colorado, a “ski-in/ski-out” resort owned by Chicago’s Crown family.


But the Crowns and their Rockefeller Center co-owner, developer Tishman Speyer, will first have to carve their way through the twists and turns of New York City’s zoning rules — made even more labyrinthine on Dec. 9, 2021, when the City Council adopted a text amendment affecting hotel construction in all five boroughs.


As of that date, hotel building projects are no longer permitted in New York on an “as-of-right” basis, a privilege hotels had enjoyed since 1916, when the city adopted the country’s first zoning resolution, according to the City Planning Commission.


As-of-right developments already comply with applicable zoning regulations and don’t require further action by the city, but decades of politics, planning reports and land use maps are now catching up with hotel construction.


“Anybody who wants to build a hotel in New York City is now required to get a City Planning Commission special permit, which is a process that takes up to a number of years,” said Barry Dinerstein, a planner at the Department of City Planning for 37 years who was responsible for hotel regulations and retired at the same time that de Blasio left office.


“It is complex to go through the process, and people have to understand that it is different now from how it was several years ago when hotels were as-of-right,” Dinerstein said. “Stakeholders who can review hotel projects include hotel worker unions, community groups, neighborhood associations and politicians. If it’s not skillfully handled, people who have invested a lot of money may not be able to build what they want to build.”


“As-Of-Right” Is No More


Yariv Ben-Ari, a partner at law firm Herrick Feinstein LLP, which is advising Aspen Hospitality on its Rockefeller Center project, said hotel developers in New York who previously assumed they had an as-of-right building with a specific time horizon for opening must adjust their thinking on what they can expect during the special permit process.


That new reality has slowed down the pipeline of hotel projects as the industry recovers from the COVID-19 pandemic, Ben-Ari said.


“Now it’s a two-year period where it’s a public process not in the developers’ control, and they have to factor that into the development costs, the timeline and the carry expenses of the project as they think through the development, which may be part of the reason why we’re not seeing new hotel development in New York City,” he said. “And this applies not only to new hotels, but also to hotels that have been shut down and want to bring the property back to life.”


New York City Planning Commission spokesperson Casey Berkovitz said that as of early August, the city’s primary land use agency has so far had pre-certification contact with only a handful of potential applicants, including the Little Nell Hotel.


“All of them are in draft or pre-certification stages and not guaranteed to move forward, and none have a specific timing for certification,” Berkovitz said. “Certification refers to the formal start of the public review process.”


With the City Council’s 2021 passage of the zoning text amendment requiring hotels to get a special permit, developers must now go through a rigorous public review process with the Planning Commission, the City Council and the mayor, according to Berkovitz. All three have veto power, he said.


During a hotel project’s certification process, the local community board, the borough president, the local council member and, eventually, the commission each have a legally prescribed length of time to review the application and weigh in. Applicant teams generally include owners, developers, construction companies, lawyers and lobbyists.


While the Little Nell Hotel has filed a pre-application statement, “from our perspective, it’s not a binding thing,” Berkovitz said. “It’s not until certification that it would be legally binding. No hotel applicant has certified their application yet, which is when the legally binding process would kick off.”


City Politics Hit Hotel Developers


Another Herrick Feinstein lawyer advising the Little Nell Hotel on the Rockefeller Center project, Mitchell A. Korbey, said hotels were unquestionably as-of-right in New York City until about 2019. During that time, de Blasio was entering the 2020 presidential race and seeking political support from interest groups, Korbey said.


“Up until a few years ago, hotels were as-of-right in New York. That is to say, you simply followed the building code, and you could put up a hotel in any commercial or manufacturing zone in the city,” Korbey said. “But beginning in the middle of the de Blasio administration, it became a ‘drip, drip, drip’ in making hotel construction more difficult and not as-of-right. Frankly, it was a lot of interest group politics.”


Korbey, who is chair of Herrick Feinstein’s land use and zoning group and a former director of the Department of City Planning’s Brooklyn office, said the “drip, drip, drip” began by prohibiting as-of-right hotels in manufacturing zones, “under the guise that manufacturing zones should be exclusive for manufacturers.”


“But limiting developments in manufacturing zones doesn’t bring manufacturing jobs back. It began there, and toward the end of the de Blasio administration, it ended up in not allowing hotels as-of-right anywhere in New York City,” Korbey said.


De Blasio kicked off his presidential campaign in May 2019 with the slogan, “It’s time we put working people first,” but he dropped out of the race in September of that year after he registered low numbers at the polls and failed to quality for a third round of primary debates.


Also in 2019, New York City’s tourism industry was booming, with numerous hotel projects in the pipeline and a record number of visitors generating $19.3 billion in tax revenues that year. Hotel room demand increased by 2.1% in 2019, while average daily room rates declined by 1.4%, according to a report released by the state’s Empire State Development Corp.


“Just before the pandemic, in 2019, we had 67 million tourists visiting New York City,” Korbey said. “We’re starting to get these tourists back, and they need a place to stay. At the end of the day, I believe the hotel special permit was a use of the zoning resolution that was inappropriate. Ultimately, we’re encouraged by the economic factor of having increased tourism.”


Hotel Union Throws Support Behind Special Permit


To be sure, the biggest hospitality union in New York — the Hotel and Gaming Trades Council, AFL-CIO — spoke out loudly in favor of the special permits when the pandemic decimated the city’s tourism industry and sparked massive layoffs in March 2020. The union claimed then that excessive room supply and reduced room rates meant even more hotel employees would be put out of work during the pandemic.


Rich Maroko, president of the Hotel and Gaming Trades Council, could not be reached for comment despite several attempts to reach him. But in a winter 2022 newsletter to union members, Maroko said the explosion of new hotel development in New York City over the last 17 years caused an oversupply of hotel rooms, “many poorly designed or in questionable locations,” and threatened hotel union members as well as communities where the development has occurred.


Maroko asserted that the enactment of the hotel special permit represents one of the union’s most important long-term goals to address what he called “the problem of unregulated hotel development in New York City.”


“In most cities and towns in this country, zoning laws require developers to obtain permits to build major construction projects like new hotels,” Maroko wrote in the newsletter. “There is a process that allows the community to voice its concerns about the project in public meetings and officials, who are accountable to the public, to decide whether or not to grant the permit.”


Saying real estate development in New York City is akin to “the Wild West” in many areas, Maroko wrote that the special permits will prevent developers from building unsustainable hotels without any input from New Yorkers.


He called the special permit victory “an unimaginably hard fight” because the union was up against “the richest and most influential special interest in New York City” — namely, the real estate industry.


“That’s now changed,” Maroko wrote. “On December 9, 2021, the New York City Council voted 46 to 1 to require special permits for new hotels city-wide and it became law.”


Eric Kober, a senior fellow at the Manhattan Institute conservative think tank, noted that when de Blasio left office on Dec. 30, 2021, he left behind a series of zoning amendments so that there is no longer any location in New York City where hotels can be built as-of-right, Kober said.


Kober, who retired in 2017 as director of housing, economic and infrastructure planning at the Department of City Planning, said the disappearance of as-of-right hotels can be attributed to “political payback” by de Blasio for political support from the Hotel and Gaming Trades Council.


The union’s political support stemmed from its concern that competition from newer, cheaper hotels threatens the union’s ability to provide higher wages and stronger benefits to member employees, according to Kober.


Union Demands May Push Up Room Rates


Kober also said the HTC supports the proposed Little Nell Hotel in the Rockefeller Center because the luxury development would likely generate high room rates and would be willing to adhere to a union contract. A quick check on Expedia for room rates at The Little Nell in downtown Aspen shows that the price per night is $1,688, or $1,991 per night including taxes and fees.


“It’s widely believed that the union is very influential with the City Council, and the City Council would turn down the Little Nell application unless there’s an agreement to allow the union to organize at that hotel,” Kober said.


He added that visitors to New York City can expect to see more hotels — whether they’re new or old — charging premium room rates to support union wages because the zoning amendment was intended to limit competition.


“If you own a lower-cost hotel, you can now charge more money because there will not be new competitors,” Kober said. “Meanwhile, limited-service hotels for tourists are being built in New Jersey and other locations outside of New York City, where there’s no union pressure. The kinds of places where most people stay cannot be constructed in New York.”


Vijay Dandapani, president and CEO of the Hotel Association of New York City, said Aspen Hospitality has already reached a neutrality agreement with the city’s Hotel and Gaming Trades Council, which will allow Little Nell Hotel employees in New York to choose whether to unionize while management remains neutral and respects their choice.

“The unions were strongly in support of the special permit process, there’s no doubt about it,” Dandapani said.

The hotel association lobbies for 300 New York hotels with a total of 80,000 rooms and approximately 50,000 employees. According to Dandapani, it was approached by Aspen Hospitality for advice on how to navigate the permit process.

He said the city’s special permit doesn’t require unionization of hotels, but he expects that companies and organizations will approach the union for neutrality as they go through the permitting process.

“A lot of hotels were built as-of-right, but as-of-right didn’t take into account neighborhoods that didn’t want a hotel,” Dandapani said, adding that the number of hotel rooms skyrocketed from the time of the 2007 financial crisis to just before COVID-19 hit. “New York City had more rooms than any other city.”


According to a New York Department of City Planning hotel market analysis, the number of hotels citywide jumped from 357 in 2007 to 632 in 2017, and room supply jumped from 73,692 in 2007 to 115,532 in 2017. Just over 80% of the rooms are in Manhattan.


Attorneys Watch Little Nell’s Progress


Lawyers practicing in New York’s hospitality space are keeping an eye on the hotel special permit process in these early days of the new rule.


None of Venable LLP real estate, land use and zoning attorney Hilary G. Atzrott Hamburg’s clients are currently going through the process. “But,” she said, “I do know that trade unions were excited about the special permit because it allows them to have a seat at the table and to leverage the political process.”


Any hotel that wants to open in New York City now has to show the project won’t impair future use or development of the surrounding area, according to Atzrott Hamburg. For the city to make that determination, she said, it requires applicants to conduct an environmental review and to go through a monthslong Uniform Land Use Review Procedure.


Also, Atzrott Hamburg said, some of her clients are seeking clarity as to what the new law says about hotels that were shut down during the pandemic and are now being brought back online.


For example, she said in a Venable publication about permit-related obstacles, existing hotels that are converted to other uses may convert back to a hotel use up to six years from the date of the special permit’s adoption without having to obtain the permit.


Since the Little Nell is the first hotel to go through the permitting process, Atzrott Hamburg has been monitoring the development. Once it’s filed with the City Planning Commission, the permit will become public record, but for now, new projects are at a standstill, she said.


“Nothing is proceeding because people want to see how the process works, and they don’t want to be the hotel of first impression,” Atzrott Hamburg said. “I do think that land use attorneys in general are really looking at how the Little Nell goes. We will look at how the [Uniform Land Use Review Procedure] goes, and we want to see the issues that come up at community board hearings and at the City Planning Commission hearings.”