BY Hotel SPE-3 LLC, et al. - Chapter 11 Case Summary

Business Description

The Debtors own and operate two hotel properties located at 1101 South Wabash Avenue and 1100 South Michigan Avenue in Chicago. The properties include two separate hotel facilities: a Hilton property and a Best Western property (collectively, the "Hotel Businesses").

• Wabash 11th, LLC, 1101 Wabash Development LLC, and Pacific Tai, LLC own both properties.
• The combined properties total 514 rooms.

The Hotel Businesses are labor- and service-intensive operations. Notably, the Hotel Businesses are currently non-union, maintained through management's efforts to compensate and recognize employee contributions to the operation's success.

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Corporate History

Su-Mei Yen, the Debtors' Managing Member, was born, raised, and educated in Taiwan, where she received a degree in accounting from Soochow University in Taipei. She arrived in the United States in 1972 and has been in the hospitality industry in the Chicago area since the late 1970s, compiling a long-standing record of success.

• Yen has an industry reputation for reviving hotels that others have written off as in terminal decline.
• In 1992, she purchased the shuttered Whitehall Hotel located at 105 E. Delaware Place in downtown Chicago, which has been thriving under her leadership since then.

In over 40 years in the hotel industry, Yen has never had to sell a hotel. During the pandemic, many hotels in Chicago closed for a period of time, but the Debtors' properties never closed for one day to ensure staff remained employed.

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Operations Overview

Cash Management and Bank Accounts

The Debtors' Cash Collateral is comprised of five Bank Accounts in total, including three Operating Accounts and two lockbox accounts.

• Operating Accounts: One Operating Account with Huntington National Bank (Acct. No. ending 2220) and two Operating Accounts with International Bank of Chicago (Acct. Nos. ending 2828 and 2801).
• Lockbox Accounts: Two lockbox accounts with Key Bank (Acct. Nos. ending 7999 and 8539), with account ending in 8539 being a CMA lockbox.

These accounts capture substantially all hotel operating receipts, including room revenue, food and beverage, and ancillary receipts, and therefore constitute or contain Cash Collateral of the Senior Creditors. The Debtors intend to continue utilizing the existing Bank Accounts with customary chapter 11 controls to segregate, account for, and report on Cash Collateral usage.

Cash is required on a continuous basis to fund payroll and associated taxes; utilities and essential property-level services; franchise-related obligations; insurance and property taxes; routine repairs and maintenance; and the professional and administrative costs of these chapter 11 cases.

Workforce and Payroll

The Debtors currently employ 106 employees who are invaluable to the Debtors' business and essential to the Debtors' ability to continue business operations. In the ordinary course of business, the Debtors incur payroll and compensation obligations for their workforce and provide other benefits to employees for the performance of services, with all benefits and obligations being customary within the Debtors' industry.

• The Debtors' payroll obligations to employees, including salaries and wages, are paid bi-weekly on Fridays via direct deposit and paper checks.
• The Debtors' bi-weekly gross payroll is $295,000.

For each pay period, the Debtors deduct amounts directly from employees' pay, including garnishments, child support, service charges, pre- and after-tax deductions pursuant to employee benefit plans such as health care benefits, insurance premiums, and 401k contributions, and other amounts allowed by law.

• In connection with paying wages to employees, the Debtors are legally required to withhold wage amounts related to federal, state, and local taxes, social security and Medicare taxes, and remit such amounts to taxing authorities.
• Additionally, the Debtors make payments from their own funds to pay state and federal unemployment insurance, employment training taxes, and state disability insurance contributions.

Paid Time Off

The Debtors offer employees paid time off in the form of sick and vacation pay.

• Full-time employees become eligible for paid sick leave after twenty-nine days of continuous service. Part-time employees accrue one hour of sick leave for every thirty-five hours worked, with eligible employees entitled to forty hours of sick leave per calendar year.
• Eligible employees become eligible for paid leave following eighty-nine days of continuous service. Full-time employees accrue forty hours of paid leave, and part-time employees accrue one hour of paid leave for every thirty-five hours worked up to the maximum of the applicable law per calendar year.
• Subject to applicable law, eligible employees are entitled to cash payment for accrued but unused paid leave upon termination.
• Employees are entitled to carry over accrued but unused sick leave from year to year up to a maximum of eighty hours.

Employee Benefits

The Debtors implement various benefit plans and policies for employees, including prescription and medical benefits, dental care, vision care, basic life and accidental death and dismemberment insurance, retirement savings 401(k) plan, and a health savings account plan.

• The Debtors deduct specified amounts from participating employees' wages regarding these employee benefits plans.
• All employee benefits are provided subject to employees satisfying certain requirements, and employee contributions are collected through payroll deductions from participating employees.

Workers' Compensation and Insurance

The Debtors are required to maintain workers' compensation insurance programs to provide their employees with workers' compensation insurance coverage for claims arising from or related to their employment with Debtors.

• The Debtors maintain a workers' compensation policy with Travelers with an annual net cost of $337,311 paid annually and subject to an employer deductible of $1,000 for each accident.

In the ordinary course of business, the Debtors are the beneficiaries of certain insurance policies that provide coverage for property, general commercial liability, directors' and officers' liability, automobile, and workers' compensation liability.

• The Debtors pay premiums and other required obligations, such as broker fees, to maintain the policies, and believe they are currently on payment of all insurance obligations.
• The Debtors finance premium payments for one insurance policy pursuant to a premium financing agreement with a premium financing company.
  • The premium financing agreement requires the Debtors to pay $38,371.35 monthly installments, with the aggregate annual premium being $484,815.18, an interest rate of 6.15%, and a down payment of $148,158.80.
  • $230,227.92 remains outstanding under the premium financing agreement and will come due postpetition in the ordinary course of business.
• The insurance policies are essential to the ongoing operation of the Debtors' business, with most of the policies renewed annually and paid monthly.

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Prepetition Obligations

In August 2019, the Debtors borrowed a mortgage loan in the principal amount of $146,737,500 from Delphi CRE Funding LLC. The loan is secured by both hotel properties.

• Agent may have a security interest in one or more of the Debtors' Bank Accounts and, prior to the Petition Date, may have possessed rights of setoff with respect thereto.

Payroll and Employee Obligations

• As of the Petition Date, the Debtors owe $295,000 of accrued unpaid employee compensation obligations, with no employee owed more than $17,150 (i.e., the priority wage cap).
• As of the Petition Date, the Debtors have withheld all legally required amounts for remittance to third-party recipients.
• Because PTO is accrued and used by employees on a continuous basis, it is difficult to precisely calculate the cost of accrued PTO as of the Petition Date. However, the Debtors estimate the value of such PTO is $310,000.

Insurance Obligations

• As of the Petition Date, the Debtors are current on their premium financing obligations.
• As of the Petition Date, the Debtors estimate that $230,227.92 remains outstanding on insurance policies financed through their premium financing company, and $716,787.87 of direct payments to carriers or brokers, on an installment basis, remain outstanding.
• Although the Debtors are current on their insurance obligations, out of an abundance of caution, they seek authority to pay any prepetition obligations owed on the insurance policies in the ordinary course of business to ensure uninterrupted coverage.

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Events Leading to Bankruptcy

Pandemic Impact and Ramp-Up Period

Hotel properties such as the Hotel Businesses typically have a "ramp-up" period ranging from six months to eighteen months. The Hotel Businesses were in this ramp-up period when the COVID-19 pandemic first began, approximately six months after opening.

• This timing impacted occupancies and rates, and therefore net operating income.
• As such, the Hotel Businesses required substantial additional operating funds during this period, which were provided through other hotel operations and personal resources to keep the properties open and operating.
• During the beginning of the COVID-19 pandemic, market occupancy in Chicago was only 24%, with 17,000 hotel rooms temporarily closed because of catastrophic drops in demand due to COVID-19.

Loan Modifications and Escalating Interest Rates

Six months after the onset of the pandemic, the Debtors' senior lenders required revised terms as a condition of a forbearance agreement, including annual LIBOR rate and spread increases, additional fees, and partial loan paydown requirements. The Debtors subsequently ceased monthly interest payments.

• The Debtors have been servicing the loan by raising personal funds and from proceeds from their other facilities.
• The interest rate the Debtors are currently paying is more than 8%, which the Debtors assert is not sustainable.

The Debtors sought modifications to loan terms during the force majeure conditions. The resulting modifications included increases in interest rates, spread, penalties, and fees, which the Debtors contend substantially increased the financial burden on the properties.

Failed Negotiations with Senior Lenders

In June 2024, prior to the Debtors ceasing monthly interest payments, the senior lenders presented an extension offer that the Debtors considered unfavorable. The Debtors assert that they have since attempted to engage with the senior creditors to reach a resolution, but that the senior creditors have declined to participate in further negotiations.

Receivership Concerns and Potential Value Impact

The Debtors contend that the senior lenders' request for appointment of a receiver would be value-destructive to the Hotel Businesses. The Debtors identify the following potential consequences:

• A management transition would likely result in increased operating costs, particularly if the receiver engaged third-party management companies as contemplated in the senior lenders' proposed order.
• The Best Western property currently benefits from a grandfathered franchise fee structure. A change in management could cause the property to revert to the current franchise fee scale, resulting in higher affiliation costs.
• A receivership could trigger franchisor-imposed property improvement programs ("PIP"), estimated at a minimum of $15,000 per room, representing approximately $7,500,000 in additional capital expenditures.
• Existing PIP requirements currently being phased in or grandfathered under current management could be accelerated under new ownership, requiring substantial capital investment.
• The 514-room property is identified as a prime target for union organizing, and a change in management would almost immediately invite pressure for a union operating agreement.

The Debtors further note that the senior lenders' proposed management company does not currently operate in the Chicago market and would likely incur transition-related costs including temporary staffing and transportation. The Debtors also assert that a management change could result in employee turnover, declining service levels, and increased hiring and training costs, with potential long-term reputational effects.

Chapter 11 Filing

The Debtors attribute their decision to seek Chapter 11 protection to the breakdown in negotiations with the senior lenders. The Debtors filed for Chapter 11 protection on March 8, 2026, in the U.S. Bankruptcy Court for the District of Delaware.

DIP Financing (Per Doc 7)

To fund operations and administrative costs during the chapter 11 cases, the Debtors have secured a $1,000,000 single-draw junior secured debtor-in-possession credit facility (the "DIP Facility") from SBY DeKalb Inn, LTD, an Illinois company, pursuant to section 364(c)(3) of the Bankruptcy Code.

• The DIP Facility bears interest at a fixed rate of 10% per annum, with monthly payments of $50,000, and matures on the earlier of May 31, 2027, confirmation of a chapter 11 plan, consummation of a sale of substantially all assets, conversion or dismissal of the cases, or an event of default.
• The DIP Facility is secured by junior liens on both hotel properties — the Hilton Property at 1101 South Wabash Avenue and the Best Western Property at 1100 South Michigan Avenue — expressly subordinate to the existing senior secured obligations.
• Proceeds are to be used for ordinary course operating expenses, payroll and tax obligations, property maintenance, insurance premiums, and costs of administering the chapter 11 cases.
• The Debtors reserve the right, but not the obligation, to seek conversion of any remaining DIP obligations to equity upon emergence from chapter 11, subject to Bankruptcy Court approval.
• No third-party lenders were prepared to offer debtor-in-possession financing on a junior basis to the existing senior obligations, and the DIP Facility represents the only available postpetition financing option.