The hotel boom is kicking up dust in court as well as in the streets of Manhattan.
Two of the city’s biggest hotel developers, former partners who have headed in different directions, have converged in New York State Supreme Court in an unusual lawsuit. A contractor for one hotel magnate claims his rival tried to poach a subcontractor and illegally lure the company away from its original project.
Developers John Lam and Sam Chang were once partners in the Orient Construction Group; Lam provided the financial backing for the investment group while Chang was the face, according to Lam. The two went separate ways in 2005, but each has gone on to add thousands of hotel rooms to the city during the current construction boom.
Chang has 5,900 hotel rooms in the pipeline (see The Real Deal’s December cover story, Checking in with Sam Chang), while Lam is also among the most active hotel developers with nearly 2,500 hotel rooms scheduled to enter the market.
In 2007, Lam’s Group is building 900 rooms in five projects, including a Four Points by Sheraton in Soho at 66 Charlton Street and a Fairfield Inn by Marriott with 154 rooms located off the Midtown Tunnel in Long Island City. In 2008, the hotel developer will add 500 rooms with two hotels — a Sheraton Hotel and an Aloft Hotel — on Duffield Street in downtown Brooklyn. Lam’s Group will build approximately 400 other hotel rooms next year as well. The developer also has the 650-room Gold Hotel Plaza in the Financial District in the works for early 2009.
In late November, Flintlock Construction Services, a general contractor construction company building Lam’s Four Points by Sheraton hotel at 326 West 40th Street, filed a lawsuit against Tritel Construction Group, a company owned by Chang.
Flintlock claimed Chang allegedly offered an exclusive deal to its subcontractor FSC Construction, which was working on Lam’s Four Points Hotel. If the firm walked away from Lam’s project and worked only on Chang’s hotels, it would get a bonus of $1.5 million and 15 percent of future profits.
Tritel allegedly threatened the construction company with a loss of work from Chang’s operations if it didn’t cease work on Flintlock projects — in legal terms, it’s an alleged tortuous interference with contract.
“We allege that we’re caught in the middle in what we call a business war between them,” said Larry Hollander of Hollander & Strauss, the lawyer for Flintlock.
Since the lawsuit was filed, Flintlock chose to terminate FSC from the Lam hotel development, though they would not say why. Hollander said Flintlock is proceeding with the lawsuit, though damages can not be determined until the building is complete.
According to Flintlock owner Andrew Weiss’s affidavit, “Flintlock is being ‘squeezed’ by defendants Tritel, Wu and Chang’s actions in apparent furtherance of their competitive war with Mr. Lam.” James Wu is Chang’s business partner.
According to Chang’s lawyer Adrian Zuckerman, there are no outstanding claims against Chang or his entities.
“If they were to do so, I don’t believe there is any merit to any claim against Mr. Chang or his companies,” Zuckerman said.
Lam and Chang continue to be amicable and still dine together on occasion. Lam says he’s not sure who to believe.
“I don’t [know] who is lying,” Lam said. “I’m not involved at all,” he said. “[Chang and I] still have a relationship. No hard feelings.”
Lam said he didn’t understand why Flintlock would file a lawsuit that would put the company two weeks behind schedule and at risk of paying contractually stipulated penalties to Lam. Flintlock has worked on a number of Lam’s hotel projects and is only one of several general contractors hired for hotel developments.
“I contracted Flintlock — it’s their job to deliver on time. They have to do what they have to do to keep my business,” Lam said. “I don’t care who they use as long as they follow my requirements to build my hotels.”
Lam admits his attention to detail — he won’t quite call it micromanagement — over the design of his hotels is one of the reasons he and Chang ended their partnership. The former financial investor in the fashion world is very hands-on in the design of his projects.
Chang and Lam both create franchise hotels, but the two hotel developers are after slightly different markets, even if their properties wind up nearly side by side, Lam said. Chang builds Holiday Inn, Wyndham Garden Inn and Comfort Inn hotels — small, economy projects. Lam builds more in the mid-range hotel market with Hilton Garden, W Hotel, Marriott and Sheraton projects, he said.
A stretch of West 40th Street between Eighth and Ninth avenues reflects the competitiveness between the two hoteliers. Two of Lam’s hotels — the Sheraton Four Points Hotel at 326 West 40th Street and a Fairfield Inn at 330 West 40th Street — were under construction in 2006 while Chang worked on six hotels on West 39th between Eighth and Ninth avenues, a block away (see One block, six hotels planned).
In addition to Lam’s plans to build at least seven hotels in the next two years, he has two residential projects in the pipeline. The projects are in Elmhurst — Woodhaven Towers will have 50 condo units, and Sunrise Towers will have nine townhouses and six condo units — and will be completed during the first quarter of 2007.
Lam also submitted a bid for the expansion of the hotel portion of the Jacob K. Javits Center — a 1.3-million-square-foot, mixed-used development with office and retail space and 1,500 hotel rooms. The winning bid will be announced this month.
Over the past two years, hotel room rates in New York City have increased substantially. Hotel rates increased 15 percent in 2006 and occupancy levels were at nearly 87 percent in the third quarter. High room rates and occupancy levels have encouraged hotel investment activity and pushed sale prices for hotels up to record levels.
“The market is big enough for everybody, especially in New York,” Lam said.
“There are a lot of hotels in the pipeline but the market is big enough to support everybody.”