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The U.S. hotel industry is financial turmoil and federal government programs designed to aid owners don’t go far enough, say industry advocates. SBA funding has its limits and the feds are offering no relief to CMBS debtors.
“Everyone in America is going to apply for this thing and the money’s definitely going to run out.” Mili Shah, Imperial Investments Group
As the COVID-19 national emergency and subsequent shutdown of American life approaches its fifth week, hotels and other small businesses have lined up to apply for federal financial relief programs.
In the past week, hundreds of thousands hotel owners have filed applications with their SBA-approved lenders for the $350 billion Paycheck Protection Program, which launched April 3 as part of the CARES Act, a $2.2 trillion economic stimulus package.
President Trump said on April 8 more than $70 billion in PPP aid had been processed. He promised another wave of relief as banks, including JP Morgan, reported they’ve reached their limit. The Trump administration has asked Congress to add $250 billion to the program.
When hotel owners and operators will see the first tranche of money is anyone’s guess. Both banks and small-business owners report being overwhelmed and frustrated with the filing process.
Experts said many are confused as SBA changed the rules for filing several times and some organizations added to the confusion by sending out obsolete forms in advance of the program launch.
The biggest problem is owners’ confusion over which forms the SBA will accept for its Paycheck Protection Program. Many business owners had filed forms a couple of days before the program’s April 3 launch.
“So on Friday, (SBA) released a new form, which was slightly revised,” Shah said. New questions significant to the hotel community dealt with common ownership of a business and if the business is a franchise.
The Paycheck Protection Program is meant to help small businesses, including hotels, retain or bring back laid-off employees. The process has been anything but organized as business owners and banks try to provide information they think the SBA will need to approve the requests.
The forms are to be sent to SBA-approved banks, which also have forms of their own for applicants to fill out. “I’ve talked to 10 different lenders, and everyone is asking for something different,” Shah said.
SBA has an electronic allocation system called Etran through which it transmits a promissory note to a lender. But on Monday, Shah said SBA had yet to notify banks.
What’s also gumming up the works, Shah said, is that businesses that typically do not qualify for SBA 7(a) loans are able to participate in the Paycheck Protection Program. These include non-profits, independent contractors and churches.
In the case of the hotel industry, many ownership groups create separate companies or limited liability companies for each property. In filing for PPP, each hotel must apply separately.
“Banks, as much as they want to be fair to all their customers, need to prioritize,” she said. “Everyone in America is going to apply for this thing and the money’s definitely going to run out.”
Besides the Paycheck Protection Program, SBA also launched its Economic Injury Disaster Loan scheme before the federal government enacted the $2.2 trillion CARES Act in response to the coronavirus crisis.
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Ryan Dumas is an associate at GRP Capital in Florida which helps finance hotel deals.
Like Shah, Dumas has heard from hotel owners who filed for SBA programs before April 3.
“It’s hard when you have finance companies going over these things, they’re trying to help out, but giving out too much information before the program’s finalized. It makes it more confusing for hoteliers.”
While the Paycheck Protection Program is still processing applications, even the Economic Injury Disaster Loan program form was changed and it is taking longer to process requests.
Business owners filing for PPP should file with an SBA-approved lender. The EIDL application can be filed directly with SBA.
LISTEN: Long Live Lodging’s March 25 multimedia report including Episode 258 of the Lodging Leaders podcast focuses on the SBA Economic Injury Disaster Loan program as well as other financial solutions hoteliers can pursue in seeking relief from their lenders.
Dumas advises hotel owners to make sure they have the right forms filled out correctly and provide the banks with the full package of information.
“If you send an application that’s been filled out incorrectly, two to three weeks will go by, and SBA won’t even update you,” Dumas said. “They’ll just say they’re working on it.”
Meanwhile, another group of hotel owners feels left out in the cold. These are investors holding billions of dollars in CMBS debt. Many debtors are in default with more expected as May and June mortgage payments come due with no financial intervention on the horizon.
U.S. Sens. Martha McSally, R-Ariz., and Cory Gardner, R-Colo., sent a letter to the Department of the Treasury, the Securities and Exchange Commission and the Federal Reserve asking for relief for CMBS debtors.
U.S. Sens. Martha McSally, R-Ariz., and Cory Gardner, R-Colo., sent this letter dated April 8 to the Department of the Treasury, the Securities and Exchange Commission and the Federal Reserve asking for “forbearance and other forms of debt relief” for hotel owners with CMBS loans.
The lending platform is a complicated web that grew popular over the past decade among hotel developers and investors seeking financing for their multi-million-dollar projects.
Trepp reports about 3,000 CMBS loans are backed by hotel assets in the U.S. with more than $86 billion in remaining debt.
All CMBS loans are managed by master servicers who collect the monthly mortgage payments. The four major servicers are Wells Fargo; Midland, a subsidiary of PNC Bank; KeyBank; and Berkadia Commercial Mortgage. There are also eight special servicers, which get involved if a loan gets into trouble.
Rushi Shah, principal and CEO at Mag Mile Capital in Chicago, said CMBS did not become an attractive financing alternative to hotel developers and investors until after the Great Recession. The securities packages had been around since the 1980s, but typically only large real estate developers used the program. Over the past five or six years, hotels as an asset class under CMBS evolved into 15 percent to 20 percent of CMBS pools.
Shah said once the national emergency was declared, the CMBS markets froze up and lenders stopped underwriting the loans. New deals and deals in progress were canceled by lenders as well as some investors. “The focus has shifted from new originations to damage control,” Shah said. “How can we protect what we have on the books?”
One investment and ownership group trying to figure out how to survive the economic crisis with CMBS debt is NewGen Worldwide.
Girish Patel is principal and managing director at NewGen Worldwide, said the cost to develop a premium-branded hotel has increased so significantly in the past few years that many investors had little options beyond CMBS loans.
Besides the mortgage debt, the CMBS loan payment includes reserve funds, money that’s held in escrow for anticipated expenses. The reserve fund is for property tax and insurance. It’s also for FF&E and PIPs.
The master servicer returns the unused reserves when the loan is satisfied. A debtor can request the cash reserves but it’s a long process and of little help to hoteliers in real-time economic distress.
Patel and others want the CMBS servicers to free up the cash reserves and apply the money to the monthly payment. What’s worse, if the CMBS servicer fears the borrower will default the cash is locked down.
NewGen surveyed about 100 hotel owners who are CMBS debtors. Most of the loans being carried by are less than $7 million, Patel said.
All but four of the respondents’ hotels are running at less than 20 percent occupancy.
Eighty of the respondents made their April 1 mortgage payment but only 20 intend to pay May’s installment.
A CMBS special servicer does not get involved in a distress situation until a payment is missed. This step usually means hotel owners see legal costs and other fees added to their debt.
WATCH: NewGen Advisory, a subsidiary of NewGen Worldwide, is sponsoring a webinar at 10 a.m. today on CMBS loans, including information gathered through a survey of hoteliers. The webinar will include a Q&A with CMBS experts. Click here to register.
Kyle Walker is a managing partner and CEO at NewGen Worldwide.
He sees big trouble ahead for CMBS debtors if the lending platform does not address the COVID-19 economic crisis and its impact on the CMBS market.
When the economy is healthy, CMBS loans are attractive. The 10-year terms are favorable to hotel investment, the interest rate is low and the loan is non-recourse, meaning the borrower is not personally liable for the debt.
“In a time of crisis you realize the downfalls of a CMBS note,” Walker said.
When doing business with a conventional bank, borrowers can talk to their lender when trouble arises. That’s not possible with a CMBS loan. The note is part of a bundle of commercial mortgage loans that are sold as bond offerings to life insurance companies, large REITs and pension funds. A trustee receives money from a master servicer, who the borrower pays. When business goes south, the master servicer hands the problem to a special servicer.
It’s a disjointed form of communication with a lot of legalities behind it. Just to open up a conversation with the special servicer triggers fees. “You might have to sign legal agreements that have a lot of nuance that can take away your rights,” Walker said.
“You reach out to your special servicer and say, ‘Hey COVID-19 is real, my occupancy is down, my RevPAR is down.’ Maybe you were considering shutting down your hotel, but they have provisions that say you can’t shut down your hotel. And you can’t get additional debt. So borrowers are asking themselves if they can apply for the additional SBA loans, without triggering some sort of bad boy clause that makes the CMBS loan a recourse loan.”
Walker urges hoteliers to get involved and let their voices be heard on the federal level.
The American Hotel & Lodging Association is active on Capitol Hill and as the letter from Sens. McSally and Gardner show, lawmakers are aware of the problem.
Associations might be lobbying for CMBS relief but it’s not guaranteed hotel owners will be part of any aid program, Walker said.
CMBS in the hotel industry are not rated as high as CMBS other asset classes. Current lobbying efforts by the Commercial Real Estate Finance Council and the Mortgage Bankers Association are primarily focused on high-ranking CMBS AAA bonds, not the AA or BBB ranks of CMBS bonds that represent much the hotel loans.
“The bail-out packages or the relief being talked about in Washington is not the same CMBS market that our hotel notes are in,” Walker said. “It’s important for the hotel industry right now to step up and not just allow CRE Finance Council and MBA to do the advocacy for us.”
NewGen Worldwide’s poll of owners of CMBS-financed hotels is continuing. To participate click here.
Many state and local governments are offering financial aid to small businesses during the coronavirus crisis. Here is a list of the programs in each state.
AT A GLANCE
Here are some updates regarding the impact the new-coronavirus outbreak in the U.S. Long Live Lodging will continue to update this article as well as other information as part of its Special Report on Coronavirus and the U.S. Hotel Industry.