A Hotel is not “Single Asset Real Estate” and Therefore may Reorganize Under Subchapter V of Chapter 11 of the Bankruptcy Code

Patrick Canavan

St. John’s University School of Law

American Bankruptcy Institute Law Review Staff


         The Small Business Reorganization Act (“SBRA”), also commonly called Subchapter V, streamlines “the cumbersome and often expensive process of a typical Chapter 11 reorganization case” for a “small business.”[1]  The goal behind the legislation is to encourage reorganizations, which will generally result in creditors receiving a higher distribution and more small businesses surviving. [2]  Section 1182(1) of title 11 of the United States Code (the “Bankruptcy Code”) generally limits the availability of Subchapter V cases to small businesses that do not own a “single asset real estate” project.[3]

         In In re ENKOGS1, LLC, following the enactment of Subchapter V, ENKOGS1, an owner and operator of a seventy-nine-room hotel filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code.[4] State Bank of Texas, one of ENKOGS1’s creditors, filed a motion for determination arguing that the debtor was the owner of a single asset real estate project and therefore not eligible to be a debtor under Subchapter V.[5] In response, ENKOGS1 argued that they were not a single asset real estate project because they operated substantial business beyond housing guests.[6] For example, the hotel had a 24-hour reception desk, served complimentary breakfast, operated a swimming pool and fitness center, and provided room cleaning services among other amenities.[7]

            According to the Florida bankruptcy court, a hotel will rarely, if ever, be a “single asset real estate” case.[8] For a  property to be single asset real estate case, the Bankruptcy Code requires that  “(1) the debtor must have real property constituting a single property or project . . .,  (2) which generates substantially all of the gross income of the debtor, and (3) on which no substantial business is conducted other than the business of operating real property and activities incidental thereto.”[9] Here, the court reasoned that although the first two prongs were satisfied, the debtor operated substantial business on the site other than the business of operating the real property.[10] In particular, the hotel provided many services besides renting rooms.[11] Hotels in general have very short-term guests and there is no expectation that the guests will make minor repairs, which requires hotel management to repair and maintain each room.[12] Therefore, hotels retain a 24-hour staff, including housekeepers, receptionists, and maintenance to ensure that the hotel continues to function.[13] Further, a typical hotel offers complimentary breakfast, laundry services, and access to a swimming pool and fitness center, all of which differentiate a hotel from a typical “single asset real estate” entity.[14] The court elaborated that even in “economy” hotels that offer fewer amenities at no additional cost, the hotel services still require “more effort than companies managing vacant land or even an apartment complex.”[15] Therefore, a hotel is not a “single asset real estate” project under the Bankruptcy Code.[16]

            In reaching its conclusion, the court emphasized that the Bankruptcy Code does not require the debtor to earn extra income from the additional services, but only requires that the debtor engage in additional services other than overseeing real property.[17] Accordingly, given the nature of hotels, they will rarely, if ever, constitute a “single asset real estate” project and thus may reorganize under Subchapter V of Chapter 11 of the Bankruptcy Code.[18]

[1] In re ENKOGS1, LLC, 626 B.R. 860, 862 (Bankr. M.D. Fla. 2021).

[2] Id.

[3] Id.

[4] Id.

[5] Id. at 862.

[6] Id. at 863.

[7] Id.

[8] Id. at 864.

[9] Id. at 863.

[10] Id.

[11] Id. at 864.

[12] Id.

[13] Id.

[14] Id.

[15] Id.

[16] Id.at 865.

[17] Id. at 864–65.

[18] Id. at 864.