Bisnow – A small, relatively unknown company has been quietly taking over struggling hotels across the country in recent months, hoping to build an empire from the rubble of the pandemic.
LuxUrban Hotels Inc. has snapped up more than 1,000 rooms this year alone, signing long-term leases with hotel owners grateful for a reliable stream of income in trying times.
But the Miami-based company, eager to capitalize on market distress, has serious questions of its own to address, including dozens of customers waiting months for promised refunds, employees suing for unpaid wages, a CEO who has been fined by the Securities and Exchange Commission, and an executive team with little hotel experience.
The company spent the first four years of its existence as short-term rental provider CorpHousing Group, changing its name to LuxUrban Hotels earlier this month. The collapse of its short-term rental business when the pandemic hit has left financial scars that still haven’t healed.
But LuxUrban executives say its legal and operational troubles have been resolved and that its new business model is sound. Real estate experts likened LuxUrban’s strategy to that of WeWork, the mercurial coworking firm that signed long-term leases at office buildings around the world in a relentless search for growth, only to be nearly crushed under the weight of its obligations. WeWork has lost $12B since 2019.
LuxUrban Hotels went public in August, raising $13.5M in an initial public offering to fund its hospitality ambitions. Its stock has lost more than half its value since.
The financial statements it released as part of the IPO reveal a company that has been functioning on a razor’s edge. It was operating at a stockholder deficit of nearly $9.5M and had just $556 in cash on hand at the end of the second quarter, according to an investor prospectus.
But LuxUrban also reported a nearly $2.2M profit in the first half, and its executives say their version of lease arbitrage is sustainable because of the deals’ underlying economics. It is targeting “dislocated” hotels in competitive markets that have been abandoned by some of the world’s best-known operators.
“If you look at where our model really is transitioning to, our comparables really are Marriott, Hyatt and Hilton,” LuxUrban President and Chief Operating Officer David Gurfein said during an October investor presentation. “We’re becoming hoteliers, and we are taking over properties that they walked out of.”
Bisnow spoke to multiple current and former LuxUrban employees, five customers, and several real estate and hospitality experts for this story. The company’s chairman and CEO, Brian Ferdinand, along with Gurfein and Chief Financial Officer Shanoop Kothari, sat down for a 90-minute interview, during which they acknowledged some missteps while laying out their vision for a hotel chain that can compete with giants.
“This is a once-in-a-lifetime opportunity, in my mind,” Kothari said. “There will be ups and downs. We’ll make mistakes. You know, we’re figuring out how to take this on in really, really large scale.”
Ferdinand said the company has already spent more than 70% of the money it raised in the IPO but that its financials are far healthier today than its earnings statements indicate. Last week, it released new guidance projecting revenue of between $42M and $46M for the full year 2022 and between $100M and $110M in 2023.
“If we were to strip it out, you would see what we see,” Ferdinand said. “All those negative hits, as we clear that out and go into next year, the model is very clear.”
‘The Building Didn’t Even Exist On Google Maps’
When Kristin Larsen, a registered nurse from Oregon, wanted to watch her sister run in the Boston Marathon last October, she rented an apartment on Booking.com listed by Prime Boston Corporate Apartments, an affiliate of CorpHousing Group.
Larsen booked the apartment in April 2021 and prepaid the full amount — but didn’t receive an address. The day before her flight, a CHG employee called her: There had been a permitting issue in the unit, and she and her family would have to be put up in three rooms at the Hilton Boston Back Bay, for which CHG would foot the bill.
She gave the hotel her card as collateral, and 30 days after her stay, the Hilton charged her $6K. It took weeks of calling the hotel, Hilton’s corporate office and her credit card company to get the charge reversed, Larsen said. No one at LuxUrban ever returned her calls to help with the refund, she said.
“I want to trust that when I book something, it’s safe,” Larsen told Bisnow. “I’m a really skeptical person now, with hotels and booking engines in general.”
The Hilton Boston Back Bay and Booking.com didn’t respond to multiple requests for comment. Devin Sullivan, a spokesperson for LuxUrban, told Bisnow in an email that “under our agreement with Hilton, she should not have been charged and it was reversed.”
Current and former employees, who asked to remain anonymous for fear of retribution, told Bisnow the company knew it didn’t have a property in place weeks before the Boston Marathon last year. Nevertheless, CHG accepted roughly 180 bookings, relocating guests as they were arriving instead of informing them ahead of time, the employees said. LuxUrban didn’t respond when asked about the larger mix-up.
Larsen’s experience is echoed in dozens of complaints about LuxUrban and its affiliates — including its former SoBeNY brand — on social media and with the Better Business Bureau. Bisnow spoke to five LuxUrban customers who had issues with their reservations, and all said when they called the company’s corporate line, no one ever picked up.
Multiple LuxUrban employees said the company’s phone number goes straight to a voicemail service. Team members have been instructed to respond to refund requests by assuring customers the refund was on its way, but not to provide a specific timeline.
“It felt like our job wasn’t customer service,” one former employee said. “Our job was to buy time for refunds.”
When the family of cybersecurity analyst Frank McGovern’s partner planned to visit the couple in Chicago last year, they booked an apartment with SoBeNY in the South Loop for $1,600 and paid upfront. Just before the trip, the family realized they hadn’t been sent confirmation of where they would be staying.
“We started researching the hotel,” McGovern told Bisnow. “The building didn’t even exist on Google Maps.”
McGovern said after multiple messages to SoBeNY’s voicemail went unreturned, he researched the company and started thinking maybe it was all fake. Then he got in contact with the CorpHousing Group’s general counsel, Lane Ferdinand, the CEO’s father.
McGovern said he was told by Lane Ferdinand that CHG never had any units in Chicago. Brian Ferdinand told Bisnow the company did have a lease signed for units in a South Loop building, but the rentals never opened because they couldn’t get the proper permits.
“Even once I found out it was real, I was like, this still seems like such a scam to me,” McGovern said. “I really think they lie and they say that it’s just miscommunication.”
Ferdinand said the repeated incidents of last-minute cancellations were because of a technological issue with the syncing of the company’s booking calendar with online travel agencies. He said it affected 401 customers who booked during a 72-hour period, and the glitch was fixed.
“It’s done,” Ferdinand said in the interview. “It’s over with.”
But a current employee said LuxUrban was still experiencing cancellation problems as recently as mid-October. The company learned that a deal fell through on a hotel at 741 Eighth Ave. in Manhattan, the employee said, but LuxUrban had advertised the property via online travel agencies before the deal was complete.
The property, BeHome Powered by LuxUrban, has one review on Expedia dated Oct. 17, 2022.
“This property does not exist. I was forced to find a hotel once I arrived,” the review reads. “Waiting to hear back from Expedia on a refund for this fraudulent hotel. It literally does not exist. At the location of the hotel is a buffet style restaurant. The property phone number is an international number that no one answers. THIS IS FRAUDULENT. DO NOT SELECT THIS HOTEL.”
Ferdinand said LuxUrban has an active deal on the property, but its start date has been pushed back by the owner due to ongoing litigation with the existing tenant. He added that LuxUrban is “no longer selling [rooms] till we have the possession date.”
Ferdinand and Gurfein told Bisnow that experiences like Larsen’s, McGovern’s and those detailed in negative online reviews are a loud minority and that positive reviews far outweigh negative ones.
LuxUrban uses Trustpilot, an artificial intelligence tool that verifies customer reviews. But according to an email obtained by Bisnow, TrustPilot has flagged LuxUrban for review under suspicion that it is writing or procuring fake reviews.
Trustpilot confirmed to Bisnow that it sent a formal notice to CorpHousing Group on Oct. 5 for breaching its platform guidelines after the AI software deleted 33 reviews it flagged as fake — roughly 25% of those left for SoBeNY properties.
A spokesperson for Trustpilot said the company will continue to monitor activity on the SoBeNY page but that the new brand, LuxUrban, didn’t yet have a profile on its platform. In an email to Bisnow, Ferdinand said no fake reviews existed.
Despite customers’ stories of ignored messages and wild-goose chases for refunds, LuxUrban touts its customer service model in the first paragraph of its investor prospectus.
“Guests at our properties are provided Heroic Service™ under our consumer brands,” the prospectus reads. “Our Heroic Service™ provides guests a hassle-free experience which exceeds their expectations with ‘Heroes’ who respond to any issue in a timely, thoughtful, and thorough manner.”
Empowering workers, even junior ones, to act with authority allows any of the company’s employees to save the day, Gurfein said in the interview. The retired U.S. Marine Corps lieutenant colonel, who goes by “Bull,” runs day-to-day operations at the company, Ferdinand said.
But current and former full-time employees of LuxUrban told Bisnow it was hard to buy into that corporate ethos while the frequency and amount they were getting paid was inconsistent.
Pay is supposed to arrive every two weeks, per their employment contracts; instead, multiple employees said they have been paid inconsistent amounts at seemingly random times, even after the IPO.
“For a long time, I was a hostage to the debts that they had,” one employee said. “There was this big connotation of, ‘If you leave, you may not get what you’re owed without having an attorney.’”
LuxUrban’s executives promised the workers back pay once the IPO happened, multiple employees said. Five employees have sued LuxUrban in recent months over unpaid wages, a lawyer for the plaintiffs told Bisnow.
Kothari, the CFO, said the fact that the business experienced such distress during the pandemic and only faced five employee lawsuits was “remarkable,” comparing it to his previous experience working at a large software firm that had “multiple lawsuits at all times” from employees.
Ferdinand said that he believed all five cases had been settled; however, at the time of the interview, just two had settled and three were still litigating, said Scott Behren, the attorney representing the employees. Behren told Bisnow he has been engaged by a sixth LuxUrban employee and expects to file another unpaid-wages suit in the coming days.
One current staffer told Bisnow it felt “terrible” to show up at work knowing they wouldn’t get paid.
“And then to be running what feels like an online scam?” they said. “Even worse.”
‘Working Capital Challenges’
Ferdinand founded CorpHousing Group in 2017 as a short-term rental provider, leasing units in apartment buildings to rent to individuals as well as businesses using them as corporate housing.
It started leasing up units in Nashville, Tennessee, and quickly grew its portfolio across the country. In a 2019 email interview, Ferdinand told Bisnow the launch in Nashville happened “before we trained our ground support and operational teams.”
By that time, CHG also had units in its hometown of Miami, as well as Columbus, Ohio; Washington, D.C.; Denver; and Seattle.
“I believe that corporate short-term rentals are one of the most impactful CRE trends that are here to stay,” Ferdinand said in the 2019 interview.
Less than a year later, the corporate housing industry took a haymaker in the form of the pandemic. Business dried up nearly overnight, but initially, Ferdinand saw it as an opportunity to turbocharge growth.
He told the Los Angeles Business Journal in May 2020 that the company was set to expand into Los Angeles, and the publication reported that CHG planned to add $1B worth of inventory over the next 12 to 18 months. Ferdinand said he expected the corporate and short-term rental business to rebound faster than hotels.
CHG’s planned LA growth never happened. The company lost over $4M in 2020, according to its investor prospectus. Halfway through 2021 — a year in which the company lost another $2.2M — it made the decision to wind down its short-term rental business. But rather than fold, like competitors Domio and Stay Alfred did in 2020, or file for bankruptcy, Ferdinand and his executive team decided to pivot.
CHG started exiting leases tied to its SoBeNY brand or letting them expire. The move to wind down the brand caused hundreds of unexpected cancellations for guests who had prepaid and booked stays at SoBeNY properties, Ferdinand said. But he viewed it as a painful, necessary step to take on the company’s new path: a publicly traded hotel operator.
“When you’re able to look at the economics of what we’re doing and the relationships that we’ve been able to develop and the scope of the opportunity, it’s hard not to get excited,” Ferdinand said. “Unless you’re inside looking out, it’s hard to see that. But what we see is a major, major opportunity.”
CorpHousing Group officially went public on the Nasdaq Stock Market on Aug. 16 amid a brutal year for IPOs and the stock market in general.
The company sold nearly 3.4 million shares to investors at $4 each in the IPO, raising $11.4M after expenses, according to its investor prospectus.
Shares in the company are trading 53% below their debut price — $1.74 at the close of trading Friday. By comparison, the Nasdaq composite has fallen by roughly 13% over the same time frame.
Experts who examined the company’s financial statements in interviews with Bisnow pointed to a number of concerns investors might have about the company’s long-term viability. Its $4.6M being held by a third-party processor struck Cornell University Nolan School of Hotel Administration assistant professor of accounting Michael Paz as an unusually high number relative to the size of the company.
“Some proportion of that could be the processor is requiring a higher proportion of allowance on their end because there have been chargeback problems,” Paz said.
When LuxUrban’s chargeback ratio — the proportion of refunds it has to issue out of its total sales — went above the industry average, the company’s credit card payment processor put it on a “100% reserve” policy, essentially holding all of its cash so that it could process refunds, Ferdinand said.
“They can unilaterally hold your money,” Ferdinand said. “That’s created challenges around refunds.”
Ferdinand added that LuxUrban is “fighting” with the processor to release those funds, and in its updated guidance issued Nov. 8, LuxUrban announced it had engaged a new credit card processor that it expects to be operational around Nov. 30.
Ferdinand said last month that 30% of the refunds it owes customers have yet to be issued because of the cash being held by the company’s payment processor. In its new earnings guidance, it said it expects $5.5M in retained funds — up $900K from the amount retained on June 30 — to be released in the next 12 months.
“Working capital is always a factor with a growing company,” Kothari, the CFO, said in the interview. “Going public has significantly helped that, but we still do have some working capital challenges that, you know, Brian and I spend probably a third of our day every day working through to get there.”
WeWork, But For Hotels’
The master lease agreements that LuxUrban is signing with hotels is unusual in the U.S., experts told Bisnow. In these deals, hotel operators, rather than owners, bear the risk that comes with peaks and troughs of travel demand.
Hotel owners looking for income on buildings abandoned by operators might be willing to accept low rents via a master lease agreement for the sake of predictability, said Eva Maria Steiner, associate professor of real estate at Penn State University’s Smeal College of Business.
“They don’t need to compete with the best hotels out there; they just need to do well enough to cover those deeply discounted leases and leave them with a profit,” she said.
LuxUrban has signed 15-year master leases to take over the 217-room former W New York Downtown, the 167-key hotel that was formerly the Marriott Herald Square and the 68-key Variety Hotel in Miami Beach. The prospectus said the company plans to expand internationally before the end of the year and is evaluating Paris and London for locations.
Steiner said the biggest problem with the business model is the same that affected the planet’s most infamous lease arbitrage business.
“This model is similar to WeWork, but for hotels,” Steiner said. “The fundamental problem here is that you have a long-term fixed liability if you’re WeWork — that’s your rental payments — but you have short-term, very volatile income — that’s your short-term rental payments.”
As of June 30, LuxUrban reported it had future minimum payments under noncancelable operating leases totaling over $120.7M. It was running a stockholder deficit of over $9.4M, a figure that stood out to Steven Shapiro, the director of American University’s hospitality and tourism law program.
“The liabilities are in excess of the assets,” Shapiro said. “The term ‘underwater’ would be appropriate. At some point, it’s not sustainable.”
Several obstacles stand in LuxUrban’s way: the oversupply of hotels in New York City — the market where it is most concentrated — volatile occupancy levels and daily rates, wage inflation and a possible recession in 2023.
“I guess the only way that this works is if they’re somehow using distressed properties to undercut hotel prices?” Cornell’s Paz said. “I don’t see exactly how that would be achieved. And then the margins on that would be fairly thin, and there would be the usual risk of low occupancy for their leased units.”
LuxUrban executives say the company has factored some flexibility into its leases: For roughly 85% of its new properties, the firm can break its lease agreements after 12 or 24 months.
“If we’re not performing, the owner doesn’t want us to stay,” Ferdinand said. “And if we’re not performing, we need to be able to unwind.”
Ferdinand acknowledged that the lease arbitrage business is difficult to make work but said the deals LuxUrban has struck on struggling hotels are what differentiate it. He also said the company should be viewed differently than WeWork because of LuxUrban’s management team’s experience and the distress in the hotel sector.
“When you do look at WeWork, you know, you see a lot of self-dealing, you see a lot of impropriety, you see a lot of craziness, right?” Ferdinand said.
When asked who at the company has experience in the hotel business, Ferdinand pointed to Gurfein, who he said was “a high-ranking person” at Las Vegas hotel The Palazzo at The Venetian Resort. Gurfein worked at The Palazzo from January 2008 to February 2009 as the hotel’s vice president of casino marketing, according to his LinkedIn profile.
Gurfein’s professional experience doesn’t include any other hospitality sector roles. He spent five years as president of a health and wellness company, had a failed run for Congress as a Republican out of Long Island in 2016 and has served since 2018 as the CEO of United American Patriots, a nonprofit that helps veterans appeal their war crime convictions.
Gurfein’s nephew, Jon, serves as LuxUrban’s vice president of service support and runs the team in charge of giving customers refunds, Gurfein said.
On Nov. 7, two weeks after Bisnow asked LuxUrban Hotels’ executive team about its hospitality experience, the company announced that operations of its NYC properties will be managed by Rebel Hospitality, a specialized hotel operator.
Two of Bisnow’s sources within LuxUrban said it has laid off several senior employees in the last week, including David Gurfein. Ferdinand and a spokesperson didn’t respond when asked on Friday to confirm whether Gurfein still worked at LuxUrban.
A Cloud Of Litigation
LuxUrban isn’t the only company Ferdinand has led that has gone public. Before founding the STR-turned-hotel company, Ferdinand was CEO and vice chairman of the board at Liquid Holdings Group Inc., which was founded in January 2012 and went public the following July.
Liquid sold software to the securities and hedge fund industry, charging users per trade, even though most brokers provide traders with software for free, Bloomberg Businessweek reported.
By 2015, the company — which never made a profit — filed for bankruptcy and faced a federal class-action lawsuit. Allegations against it included undisclosed insider transactions, inflated customer counts, self-dealing and artificially inflating the stock price. Liquid’s bankruptcy trustee agreed to pay shareholders $4M in a settlement.
Ferdinand was named personally in the suit, although he said he was dismissed from the case before the settlement. LuxUrban’s investor prospectus discloses both Liquid’s bankruptcy and a $115K fine Ferdinand paid to the SEC in April 2020 as part of a settlement agreement, in which he admitted no wrongdoing.
Adam Apton, one of the lawyers for the class-action plaintiffs and a partner in Levi & Korsinsky who specializes in securities law, told Bisnow that Liquid “was a fraud. I don’t think there’s any question about it.”
Ferdinand’s current venture has also faced litigation. Including the five employment lawsuits, Bisnow found 11 suits naming CorpHousing Group as a defendant filed since October 2019 in Florida, New York and Pennsylvania. More than half are related to the firm not paying money it allegedly owes. Six of these cases have been settled, dismissed or withdrawn, four remain active and one may be approaching a settlement. A Bisnow analysis of the suits found that LuxUrban has been sued for a total of more than $2M.
Ferdinand said much of the litigation resulted from winding down the short-term rental business and said the “noise” it caused “is in our financials.”
Those financials reveal that Ferdinand controls 63.5% of LuxUrban and that he is one of the company’s biggest lenders. Ferdinand personally loaned the company $750K in June to help launch two hotels, including The Astor in Manhattan. An entity he controls, SuperLuxMia LLC, provided the company more than $1.5M across five loans.
A company controlled by Ferdinand’s wife, Andrea, purchased $2M of LuxUrban’s senior debt in October 2021. Lane Ferdinand served as pro bono general counsel for the company and loaned it $670K, according to the S-1 SEC filing.
The Romanello Family Trust, an entity for which Andrea Ferdinand serves as the trustee, loaned the company $300K last year. Her father is Patrick Romanello, who served 10 years in prison for conspiracy in the murder of a New York City official as part of the Bonanno crime family. That loan has been fully repaid, according to the prospectus.
The majority of those loans were converted into equity when the company went public, but LuxUrban repaid $300K to SuperLuxMia ahead of a May 2023 loan maturity date and $600K to Andrea Ferdinand’s company ahead of an April maturity date.
LuxUrban also paid SuperLuxMia more than $1.4M in consulting fees between 2019 and 2021, during which Ferdinand wasn’t collecting a salary.
“I invested upwards towards $7.5M, maybe even $10M into this business to bring it through Covid,” Ferdinand said in the interview. “I continue to invest in the business.”
In the weeks since Bisnow first contacted the company’s executives, it has changed its name and partnered with a new third-party hotel management firm. Tuesday will be LuxUrban’s second earnings call since going public, a chance for Ferdinand to give an update on the company’s turnaround.
But employees who say they have been stiffed on pay and customers who had trips ruined because of the abrupt cancellation question whether LuxUrban’s behavior will change.
“I almost feel like they don’t care,” said McGovern, the customer who tried to book in Chicago. “Some people probably spend $800 and try calling an answering service, no one responds and they probably just give up. Maybe that’s what they hope happens, and then make enough money off doing that.”