Bowery micro-hotel facing foreclosure files for bankruptcy

David Paz had dreams of turning a Lower East Side flophouse into a chic, budget-friendly hotel. Now he is just trying to keep the property out of its lenders’ hands.

Paz’s company put the former Ace hotel at 225 Bowery into bankruptcy protection last week as the establishment stares down foreclosure and a $10 million judgment. The bankruptcy temporarily stops the foreclosure.

Paz’s company, Omnia Group, has had problems with its lender, Bank Hapoalim, and partner, Northwind Group, but its bankruptcy filing blames Ace.

“In light of Ace Management’s extremely litigious behavior seemingly aimed at destroying value for all stakeholders other than itself, the debtor has been forced to seek relief in the bankruptcy court,” wrote Nat Wasserstein, the debtor’s restructuring officer.

Omnia Group bought the 10-story building between Stanton and Rivington streets in 2014 for $30.5 million. It teamed up with Ace to convert the property into a 200-room micro-hotel. Five years later, Omnia borrowed $80 million from Bank Hapoalim against the hotel, then known as the Sister City hotel. It opened that year.

But the pandemic left the hotel in a dire position. Lacking tourists and business travelers, Paz repositioned the hotel as a homeless shelter.

About a year later, Omnia started listing the hotel’s rooms through Airbnb, but Ace claimed that violated their management agreement. Bank Hapoalim, meanwhile, alleged that Omnia was behind on loan payments.

The dispute with Ace eventually went to arbitration, which resulted in a $10.4 million judgment last year against the hotel owners, who were also ordered to stop using trademarks associated with the Ace brand.

Omnia also had issues with its partner, New York City-based alternative lender Northwind Group, which alleged that Paz and his company “improperly extracted preferred equity distributions from the asset, starving it of the cash required to pay its debt service.”

But the new bankruptcy filing alleged that Ace essentially engaged in a scorched-earth litigation campaign that forced the property into bankruptcy. The debtor’s restructuring officer claims the hotel was successfully operating as an Airbnb site, bringing in about $13.3 million between August 2021 and December 2022.

The officer, Wasserstein, alleges Ace cut off that revenue stream, which it described as its lifeline. Ace further asserted it has priority over the lender to get paid back. The debtor representative said this argument is “causing additional and unnecessary litigation” and an “upheaval and gridlock to the debtor’s efforts to operate and manage the hotel.”

Since the litigation began last year, some new elements have emerged.

Bank Hapoalim recently said in a filing that it reached a deal to sell its loan, allowing another lender to foreclose on the property.

Then, this month, Sortis Holdings agreed to buy the Ace brand and hotel management company for $85 million, according to the Wall Street Journal.

Ace Hotel’s attorney did not return a request for comment.