New York’s Hotel Chelsea, the bohemian enclave that has hosted Bob Dylan, Arthur Miller and William S. Burroughs over the years, is becoming a money pit for Wall Street.
The redevelopment of the iconic property on Manhattan’s West 23rd Street is running at least a year behind schedule, is over budget and has been the source of disagreements between its owners over how to position the hotel and how much to spend on upgrades.
The owners include William Ackman, founder and CEO of Pershing Square Capital Management LP; Leucadia National Chairman Joseph Steinberg; and real-estate investment firm Wheelock Street Capital, which joined forces in 2013 to take control of the property, according to people familiar with the matter.
The group already has spent about $185 million to acquire, renovate and begin converting the 19th-century building, which fell into disrepair decades ago, into a deluxe hotel with about 120 rooms and suites, these people said.
But the conversion isn’t going as smoothly as planned. The hotel, closed since 2011, isn’t expected to open before 2017, while the owners spend millions of dollars a month on renovations, interest payments and other costs, these people said. The cash drain has prompted the owners to hire broker Eastdil Secured to help refinance their debt, borrow more money and bring in another equity partner, these people said.
Another complication peculiar to the Hotel Chelsea: its strong-willed tenants, many of whom live in rent-stabilized apartments going for much less than the prevailing market rate and have resisted earlier efforts to modernize. The building has 58 apartments.
Hotel Chelsea is a reminder that even sophisticated investors can underestimate a project’s expense and complexity when it involves longtime tenants, older buildings and extensive work.
“That combination makes for a project that is more expensive than the typical renovation, and perhaps more than they may have first realized,” said Sean Hennessey, CEO of Lodging Advisors, a hotel consulting firm.
