Hotel owners lose legal battle against short-term rental law

Federal court denies injunction
By David Jones | December 13, 2011 12:13PM

A Federal Appeals Court last week denied a request by two Upper West Side hotels to block a new law cracking down on short-term apartment rentals.

In February, the owners of the Hotel Alexander and Dexter House filed suit against former Attorney General Andrew Cuomo, claiming that the city’s new multiple dwelling law–which bans the practice of renting out units in apartment buildings and other multiple-dwelling properties for overnight stays — is unconstitutional. The owners said they had purchased their businesses– single-room occupancy hotels– based on the ability to rent units to tourists overnight. In May, a Manhattan District Court rejected their request for an injunction, but the hotel owners appealed.

The Hotel Alexander, located at 306 West 94th Street, is owned by an entity called Esplanade 94, while Dexter House, at 345 West 86th Street, is owned by Dexter Properties.

Last week, a three-judge panel ruled that Dexter and Esplanade failed to demonstrate that the crackdown would result in irreparable harm to their businesses.

“We are pleased with the decision,” said Marta Ross, assistant corporation counsel for the Bloomberg administration, which joined the case as a defendant. “This important law helps preserve affordable housing, ensures proper safety standards and protects the quality of life in the community.”

But Hotel Alexander officials said the new law is chasing tourists from Manhattan to the outer boroughs, because they have lost an affordable alternative to full-service hotels.

“Some of the people that own SROs are going to be hurting terribly,” said Alexander Scharf, managing member of Esplanade 94.

Scharf said he no longer offers overnight rates at the Hotel Alexander, a mix of 112 budget hotel units and 127 long-term rental units. He said he plans no further legal challenges, but does hope to lobby the city and state to set aside some units for short-term stays.

“These buildings cannot survive under the current business model,” Scharf told The Real Deal.

Dexter House has 270 total units, with 170 occupied by permanent residents and 100 budget hotel units, according to court documents.

The crackdown by the city had been in the works for several years, amid controversy over the proliferation of so-called “illegal hotels” during the boom and subsequent slowdown in the real estate market. Just last month, the owners of three Upper West Side properties — The Montroyal, the Pennington, and the Continental–agreed to pay $600,000 to settle charges that they illegally rented out units to short-term visitors. The hotels were sued in 2007 by the city, which alleged that their long-standing practices violated city zoning laws.

A spokesperson for Attorney General Eric Schneiderman, whose office defended against the suit in federal court, declined comment. Dexter House officials were not immediately available for comment.