The owner and operator of a 79-room hotel is not a single asset real estate debtor and is therefore entitled to reorganize as a small business debtor under Subchapter V of chapter 11, according to Bankruptcy Judge Karen S. Jennemann of Orlando, Fla.

The debtor’s principal secured creditor filed a motion for a declaration that the debtor owned single asset real estate and was therefore ineligible for reorganization under Subchapter V. The outcome was especially important, because the lender held both secured and unsecured claims since the property was worth less than the debt.

If it were to remain in Subchapter V, the debtor could confirm a plan without making a new value contribution because the absolute priority rule does not apply to unsecured creditors of a small business debtor. Section 1191(b) and (c).

Judge Jennemann stated the conclusion up front in her April 20 opinion. She said that “hotels generally, and this hotel in particular, do not constitute single asset real estate projects.” She therefore concluded that “this Debtor is eligible to file this Subchapter V Chapter 11 case.”

Why, you ask?

Judge Jennemann explained that a hotel is different from an apartment project. A hotel, she said, provides “additional value or activities (other than property management) that would remove it from categorization as a ‘single asset real estate’ project.”

The outcome turned on two provisions in the definitions laid down in Section 101. First, Section 101(51D)(A) provides that a small business debtor may not be “a person whose primary activity is the business of owning single asset real estate.”

In Section 101(51B), single asset real estate is defined to be “real property constituting a single property or project, other than residential real property with fewer than 4 residential units, which generates substantially all of the gross income of a debtor who is not a family farmer and on which no substantial business is being conducted by a debtor other than the business of operating the real property and activities incidental thereto.”

Judge Jennemann distilled the three elements of single asset real estate based on Fifth Circuit precedent. They are (1) the ownership of real property constituting a single property or project, (2) which generates substantially all of the debtor’s gross income, and (3) on which no substantial business is conducted aside from operating the real property and activities incidental thereto. Ad Hoc Group of Timber Noteholders v. Pacific Lumber Co. (In re Scotia Pac. Co.), 508 F.3d 214, 220 (5th Cir. 2007).

Judge Jennemann laid out the hotel owner’s activities other than ownership of the property. The debtor had 15 employees, cleaned rooms every day, served breakfast, maintained a swimming pool, and provided laundry, internet and phone services.

The additional operations and services, Judge Jennemann said, “constitute something more than ‘operating the real property and activities incidental hereto.’” Hotels “provide many services besides just renting rooms.”

Given the additional activities, Judge Jennemann said that courts “rarely find” that hotels are single asset real estate like vacant land and apartment buildings. A hotel requires more staff and constant maintenance as compared to an apartment building, where tenants sign a one-year lease “and require little additional assistance.” A hotel demands that the debtor provide “substantially more day-to-day activities than operating an apartment building.”

The creditor contended that the extra services didn’t count because they generated no additional income. Judge Jennemann disagreed. The additional services, she said, “require[] the debtor to do something other than merely rent hotel rooms.”

Judge Jennemann conceded there are “a few cases” holding that hotels are single asset real estate. She said they either reached their conclusions “without analysis,” or the debtor conceded it was single asset real estate.

Judge Jennemann ruled that the debtor was entitled to proceed under Subchapter V.