Use of Hotels and Other Real Estate Facilities for COVID-19 Response

In Short

The Situation: The COVID-19 pandemic has caused a severe shortage of hospital and other real estate facilities needed to address the current outbreak. This has placed pressure on government officials to quickly address the shortage.

The Result: In response, state and local governments are increasingly reaching out to owners and operators of various real estate facilities in order to utilize and repurpose such facilities for COVID-19 management and treatment efforts. For instance, governments are reserving (by lease and occasionally by purchase) and repurposing such hotels to house, for example, medical staff at nearby hospitals, quarantined individuals, homeless populations, and surplus hospital patients.

Looking Ahead: Owners, operators, and investors of real estate facilities should remain cognizant of several issues related to the potential repurposing of real estate facilities in response to the COVID-19 outbreak.

The Scenario at a Glance

To date, the government's real estate use and repurposing for COVID-19 management has focused, understandably, on hotels. As thousands of hotels across the United States find themselves revenue-strapped, this alternative use seems to be wholly reciprocated by the hospitality industry. In fact, the American Hotel and Lodging Association launched "Hotels for Hope," a national database in conjunction with the U.S. Department of Health and Human Services and the Army Corps of Engineers, that matches hotels with nearby health care facilities. As of March 25, 2020, this database included 8,500 hotel properties.

These efforts are largely undertaken at the state and local government level and, thus, require dynamic guidance based on each state or local approach, adding to the fluidity of issues for real estate owners, operators, and investors. Noteworthy examples of such state and local government real estate utilization and repurposing, to date, include:

  • In New York: The City of New York announced it is looking for thousands of temporary hospital sites. Governor Cuomo began converting the Javits Convention Center, as well as two state university campuses (e.g., dorm rooms) on Long Island and the Westchester Convention Center, in an attempt to add 29,000 additional hospital beds. Several hotels in the NYC area have already agreed to work with the city and state to use hotel rooms for "noncritical" patients and medical workers, though employee staffing of the hotels with such patients and workers remains unclear.
  • In California: The state utilized a hotel to house 26 people who tested positive for COVID-19 aboard the Grand Princess cruise ship and leased two additional hotels in the Oakland area for housing noncritical patients. California is also negotiating with roughly 900 hotels to acquire rooms for patients needing hospitalization and to house the homeless population. Distinct to California, the governor's executive order includes language permitting the state to "commandeer" private property deemed necessary, though such power appears yet to be exercised.
  • In Illinois: The city of Chicago announced it reserved more than 1,000 rooms in five hotels to isolate noncritical COVID-19 patients, permitting hotel and hospitality staff to continue to work at the hotels without "direct contact" with quarantined patients, who will be handled by the city's health department staff.

Real estate owners, operators, and investors should be cognizant of the multifaceted concerns related to government use and repurposing of real estate facilities for COVID-19 management and treatment efforts, as included in our nonexhaustive issues list:

Premises Liability

  • Arrangements for hotels to house ill patients, homeless persons, and even medical personnel add an entirely new dynamic to the concerns owners, operators, and investors face, including healthcare-related concerns, employment and employee liability (i.e., employee interaction with ill patients/guests), and premises liability.

Governmental Immunity

  • Whether these arrangements provide immunity from breach of contract and torts claims in favor of the applicable government agencies. This extends to whether these contracts include indemnification provisions for torts, as well as contractor and subcontractor immunity (e.g., if retrofitting a facility for a different purpose). Such governmental immunity will depend on various factors, including whether the government entity: (i) is federal, state, or municipal; (ii) waives its sovereign immunity; (iii) planned or implemented the policy that lead to harm; and (iv) required the task (i.e., ministerial/operational), or if the task was discretionary.

Financing and Loan Document Compliance

  • For example, lending documents often include provisional language to maintain a course of business without "material" changes. Will such governmental use or repurposing constitute a material change? This includes revolving line of credit agreements, which could impede much-needed revolving credit from being drawn on.

Public Health, Licensing, and Zoning

  • Many healthcare facilities or otherwise require specific licenses for operation. Will governmental use of private real estate facilities during the COVID-19 outbreak require similar licensing and, if not due to exclusions (e.g., executive orders that exclude certain licensing requirements for the duration of the order), how will such exclusions apply once the COVID-19 outbreak winds down?
  • Similarly, if a hotel or other real estate facility is repurposed, will there be immunities or waivers for zoning and permitting issued? State and local agency, ordinance, and board waivers may serve as a resolution to this issue, but issues remain as to the structuring and enforceability of such waivers.

Takings Issues

  • How these "repurposing" arrangements will address potential holdover tenancy following the conclusion of the COVID-19 outbreak where the occupants may be ill or homeless individuals? Again, will there be provisional language to protect an owner, operator, or investor from takings issues or otherwise?

Employment and Employee Liability

  • Questions arise regarding healthcare-related concerns for employees who may now engage with―even if on a very limited basis―COVID-19 patients or otherwise ill patients. This may include obligations of employer-employee rights, "hazard pay," or otherwise and even issues related to assumption of the risk, as related to personal injury and possible insurance claims.

Collective Bargaining Obligations

  • Hotel owner/operators who employ union-represented work forces are free to make a change in the scope and direction of the enterprise (such as temporarily repurposing it for COVID-19 reasons) because it concerns a matter at the core of the employer's entrepreneurial control of its business. The employer, however, would be obligated to bargain with the union(s) over the effects of its decision to repurpose the facility. It is likely that some of the work performed (an example being medical care) in the repurposed operation would be outside of the skill set of the regular bargaining unit(s), so there should not be an issue with having trained medical personnel performing work on the property. Traditional on-property work (for example, housekeeping, food service, and security) that is performed by the bargaining unit(s) likely could still be performed by bargaining unit employees under existing terms of collective bargaining agreements. Hotel owner/operators who employ union-represented work forces should be able to use existing contract terms to recall furloughed workers to active employment by most senior to least senior within job titles, and for purposes of scheduling, work assignments, premium pay, and other common terms and conditions of employment.

Other Miscellaneous Issues

  • Defense Production Act: At the federal level, the president recently invoked the Defense Production Act ("DPA"), which primarily relates to materials production in times of emergency (e.g., face masks, sanitizer, and ventilators). However, Title I's allocation power permits the president to "allocate materials, services, and facilities in such a manner, upon such conditions, and to such extent as he shall deem necessary or appropriate…." Since this power under the DPA could reach to include allocating real estate facilities, real estate owners, operators, and investors should be cognizant of its use in the coming weeks. 

Other Contract Clauses: Companies should review and analyze force majeure clauses or excusable delay clauses to assess their potential effects on enforceability for real estate facilities relying on such government contracts, should the need―and thus the government use―cease for such emergency housing and otherwise.

Three Key Takeaways

  1. As the management of COVID-19 demands additional hospital beds and other emergency facilities, state and local governments will likely continue engaging hotels and other real estate facilities, repurposing such real estate facilities for hospitals, housing, and quarantine purposes.
  2. Real estate owners, operators, and investors should remain cognizant of issues that surround each repurposing, ranging from governmental immunity and other contractual questions, to allocation of risks related to liability of premises, public health, and employment.
  3. Since these issues vary widely by state and municipality, real estate owners, operators, and investors should generally remain vigilant of the allocation of contractual risk in these arrangements, including collective bargaining obligations in the case of union-represented work forces.
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