COVID-19 Capital Stack Warning

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COVID-19 Capital Stack Warning

Hotel borrowers should assess risk of crisis funding, experts say

Dave Shah grew up in his family’s hotel and watched his parents and other hoteliers struggle to stay in business after the 2008 financial crash that caused the Great Recession.

Shah founded Pineapple Capital Group five years ago to help hotels and other small business owners buy, sell and borrow. He thinks the economic situation for hoteliers during the COVID-19 crisis is growing worse than that time.

As hotels hang on to business by a thread and a prayer, other properties are forced to close for lack of business.

LISTEN: Listen to Lodging Leaders podcast Episode 258 as Dave Shah of Pineapple Capital Group and Paul Darrow of PHD Financial tell what the SBA disaster funding program and other forms of financial assistance mean to hotel owners struggling during the COVID-19 crisis.

The Small Business Administration last week launched its disaster loan program. Private lenders and banks are also reportedly working with hotel owners who need a break on mortgage payments.

But an emergency loan is not a smart move for every hotelier.

The danger in such desperate times, say Shah and other experts, is that owners may find themselves in worse financial straits after the crisis has passed.

It’s wise to talk to lenders before making any decisions.

For now SBA is focused on helping business owners meet the cost of doing business during the COVID-19 crisis.

The U.S. Travel Association and Tourism Economics predict the number of international visits to the U.S. in 2020 will decline by one quarter compared to 2019. For information about the impact of COVID-19 on the hotel industry, read U.S. Travel Association’s recent analysis.

The SBA program is called the Economic Injury Disaster Loan Assistance Program.

In no case does the SBA finance business loans. Instead, it guarantees or backs loans made through conventional lenders such as banks. If a borrower defaults on an SBA-guaranteed business mortgage, the agency will pay the bank 75 percent of the remaining debt. The program is self-funded through fees exacted on borrowers and banks.

The terms of SBA’s COVID-19 emergency loans right now are no different than its regular loan program. The interest rate is 3.75 percent for small businesses, the same it has been for its 7 (a) and 504 loan-guarantee programs. SBA guidance on the program can be found here.

“The whole purpose of this economic disaster loan program was to say OK the SBA is now being backed by the government more than ever to say you may utilize these funds at a very low cost of capital to go ahead and payoff some of your fixed fees and payroll to make sure your employees don’t lose their jobs. That’s the whole purpose of that loan program,” Shah said.

But he urges caution. The program is not for every hotel business.

“If your hotel is being heavily impacted then certainly you should utilize those funds and hopefully be able to maintain the core of your business, which is your employees,” he said.

Before the coronavirus crisis, the U.S. labor pool was shallow. Hotels were having trouble recruiting employees. If the economy returns to a healthy level, the hotel industry will face the same problem. “You never want to lose good people,” Shah said.

LISTEN: Episode 255 of Lodging Leaders podcast features advice on how to manage your hotel’s workforce during the COVID-19 crisis.

The SBA funding also will help hotels pay for operating costs, including utilities and vendor contracts.

Added Burden

Hotel owners with low mortgage debt and therefore high leverage might benefit from the program while owners with high mortgage debt need to think about the extra financial burden they might take on.

“At the end of the day, it’s still a loan,” Shah said.  “So you’re taking on more debt and putting that debt on top of debt that’s already there.”

Paul Darrow is founder of PHD Financial, an advisory firm in West Palm Beach, Florida, that helps hotels and other small businesses navigate financial challenges with franchisers, banks and other lenders.

The coronavirus pandemic and resulting slowdown in business is “causing a major, major issue for small businesses we deal with because nobody has the cash reserves” to weather the crisis through, he said.

Hotel employees are going elsewhere, especially as major retailers such as Walmart and Amazon are hiring tens of thousands people during the crisis. The reality is many of those former hotel employees may not come back.  “This is an issue that needs to be dealt with on all levels,” Darrow said.

Restructuring Alternative

To create a cash reserve, Darrow recommends hotel owners restructure their current mortgages, including SBA-guaranteed loans, with their original lenders.

Filing for a restructure will enable the debtor to stop paying the mortgage until a new lending agreement is in place.

Restructuring is not the same as refinancing, Darrow noted.

Refinancing is a whole new loan and the process requires fees and an injection of equity.

Restructuring requires no fees. The process takes existing debt and extends the term, thereby lowering the monthly payment. In some cases, Darrow said, a 10-year extension on a mortgage can cut monthly payments in half.

Restructuring SBA-guaranteed loans work the same way; the lender strips away fees and extends the term.

In most cases, a hotel owner has financed the business with a conventional mortgage and an SBA-backed loan in a second or third position.

“What we see as a general rule of thumb is properties are generally worth what their conventional mortgage is,” Darrow said. “The SBA portion is what we call naked debt because there’s no collateral behind it.” In restructuring, the SBA-guaranteed loan “gets wiped out completely” and “gives a lot of relief” to the debtor.

Darrow also notes the Fed rescue is different than in 2008 and 2009 because banks today are awash in cash. They also have not met their FDIC-imposed limits on lending to hotels and other commercial real estate assets.

Proposals in Mix

SBA is considering changes to its conventional loan-guarantee program. U.S. Sen. Marco Rubio of Florida has proposed an increase the SBA-guarantee threshold from 75 percent to 90 percent for a portion of 7(a) loans and a waiver of the upfront guarantee fee as well as the annual fee borrowers pay on outstanding loans.

While Congress continued on Monday to debate a nearly $2 trillion financial bailout, the Central Bank and the Trump Administration made moves of its own.

On Monday, the Federal Reserve said it would buy government debt and begin lending to businesses of all sizes.

The day before, President Trump and Republican Senators proposed sending $500 billion to the U.S. Treasury that would do the same thing as the Federal Reserve program. That proposal was still being debated Tuesday in the House.

Interest Rate Cut

On March 15, two days after President Trump declared COVID-19 a national emergency, the Federal Reserve slashed interest rates to zero. It was its most dramatic step since the 2008 financial crisis.

But hotel borrowers will not see zero interest on their loans.

“One thing I want to clarify,” Shah said, “is a lot of hoteliers and borrowers are confused. When the Fed drops the rate, a lot of borrowers come back and say, ‘I want that rate.’ That’s not how it works.

“When the Fed drops the rate, that’s the rate that’s being distributed from the Fed to the financial institutions, local banks and SBA banks to run their day-to-day operations. It’s when conventional non-recourse or SBA lenders turn around and then use that Fed money in their accounts to lend out to borrowers.”

When the Fed cuts rates, other rates such as LIBOR or the Wall Street Journal prime rate will eventually drop. But the decrease is limited. Currently, LIBOR and WSJ Prime are at 3.25 percent.

In normal circumstances, Shah said, “when the Fed drops the rate, that’s the best time for a cash-heavy investor to use his own equity and borrow at a lower cost of capital.”

“But we’re in a situation where it’s a Catch-22,” he said.

The SBA emergency lending program is pumping money into distressed businesses in states and municipalities under states of emergency and that program’s rate may eventually reflect the Fed move.

“Even though you read about all this money … that money does not apply to the guy who wants to buy a Quality Inn down the road,” Shah said. “It does not apply to the guy who wants to refinance his La Quinta.

“It’s a whole different ballgame. Though you have all this money coming in to the banks, there are no regulations connected to the influx and no guidance in place that says how the Average Joe can utilize those funds.”

Darrow also notes the Fed rescue is different than in 2008 and 2009 because banks today are awash in cash. They also have not met their FDIC-imposed limits on lending to hotels and other commercial real estate assets.


Here are some updates regarding the impact the new coronavirus outbreak in the U.S. Long Live Lodging will continue to update this chart as well as other information as part of its Special Report on Coronavirus and the U.S. Hotel Industry.

  • China’s National Health Commissionsaid on Tuesday movement and travel restrictions in Hubei Province are being relaxed. Hubei Province will restore travel across its border, but travelers are required to carry a “digital health certificate” issued by the provincial government. Travel restrictions for Wuhan will be relaxed on April 8.
  • Hyatt Hotels Corp. on Tuesday said it was furloughing two-thirds of its corporate employees April 1 through May 31. Remaining employees will see a pay reduction. CEO Mark Hoplamazian and Chairman Tom Pritzker will not take salaries during the two-month period. Other senior executives will reduce their pay by half. The money saved will go toward an employee-help fund. Hyatt will continue to fund its employee health insurance program.
  • Hilton on Monday announced a program that connects furloughed workers to temporary jobs with Amazon, Walmart, CVS, Walgreens and grocery chains.
  • The U.S. Senate on Tuesday was making progress toward an economic stimulus package, now estimated at $2 trillion. Officials expected the deal to pass on Tuesday.
  • Another proposal by Speaker of the House Nancy Pelosicalled the Take Responsibility for Workers and Families Act would free up $2.5 trillion in economic support. It is unclear if the Senate version of the bill includes any of the House measure’s provisions.
  • The US Army Corps of Engineers recently announced plans to convert hotels, university dormitories and other buildings into hospitalsto manage the anticipated overflow of COVID-19 patients from health care facilities. States will identify sites and lease them to the Army Corp of Engineers, which will convert the rooms. FEMA and the Department of Health and Human Services will provide supplies. The program is underway in New York. The Department of Defense plans to extend it to at least 18 states in the coming weeks. States will also be permitted to implement the program on their own by following the Army Corps of Engineers’ plan.


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