Along with all the other industries around the world, the U.S. hotel industry has been blindsided by the COVID-19 pandemic. Instantly, hotel owners have found themselves with empty hotels and depleted cash reserves, wondering how they will be able to make their monthly mortgage payments and payroll—things hardly ever considered to be a problem in the expansionary period leading up to COVID-19.
Due to the recent unprecedented sharp interest rate cuts by the Federal Reserve, the prime rate is now set at 3.25 percent, setting the table for many financing strategic options for hotel owners to consider. Debt refinancing, mortgage loan modifications, liquidation of assets, the Small Business Administration and Chapter 11 reorganization will become new buzzwords in the hotel industry.
Below are listed eight strategic hotel financing options that hotel owners might want to consider during these days of economic distress.
1. Ask your lender to modify your loan terms and defer payments.
During this difficult period of time I highly recommend honest, polite, direct, frequent and professional communication with all your stakeholders. This includes your lender or loan servicer along with your corporate business attorney and certified public accountant, as well as your hotel franchise company and any third-party management company. It is always best to keep a friendly and professional relationship with them all.
When you approach them, you should convey your willingness to be flexible. For example, if they ask you to make some concessions, such as implementing specific cost-cutting measures, you should consider them. If you are experiencing a severe financial hardship, then you should consider picking up the phone and drafting a letter to request your existing lender or loan servicer significantly modify their loan terms to be more favorable for you and to reflect the new business realities of today and to also defer their monthly loan payments for six months. When a lender allows a deferment, this means they will add the skipped mortgage payments to the back end of the loan to be paid at the end of the loan term.
To the hotel owners who currently have a U.S. Small Business Administration loan, you should pay special attention to the following paragraphs:
On March 10, the SBA sent Information Notice # 5000-20004 effective immediately to all SBA 7(a) lenders, 504 program certified development companies and microloan intermediaries to remind them of their unilateral authority to provide temporary relief in the form of deferred payments to existing borrowers. While the SBA did not specifically reference the COVID-19 pandemic, it is inferred that the SBA is issuing this reminder at this time in light of the current situation.
For 7(a) business loans, the notice states:
In accordance with SOP 50 57 2 and 13 C.F.R § 120.530, Lenders may assist borrowers experiencing temporary cash flow issues by deferring payments for a stated period of time.
1. For a loan not sold on secondary market: Lenders may grant a deferment of up to six consecutive months.
2. For a loan sold on secondary market: As outlined in the Secondary Participation Guaranty Agreement (SBA Form 1086), lenders may grant a one-time unilateral deferment of up to 90 days without requiring prior investor consent. The lender notifies the investor through the fiscal transfer agent ([email protected]) of the unilateral deferment and reports the affected loan on SBA Form 1502. Lenders may make additional loan deferments only with prior investor consent.
For 504 business loans:
In accordance with SOP 50 55 and 13 C.F.R. § 120.530, certified development companies may assist borrowers experiencing temporary cash flow issues by deferring payments for a stated period of time.
The amount deferred should not exceed six cumulative monthly payments or 20 percent of the original loan amount, whichever is less. Unless SBA has purchased the debenture, the CDC must notify the central servicing agent of any deferment in order to avoid acceleration of the note and the need to purchase the debenture.
In accordance with SOP 52 00 B, intermediaries may provide a deferment on a loan made to a small business to ensure full repayment of the microloan.
Microloan intermediaries may make deferments for up to six months. No deferment may cause the life of the microloan to extend beyond the maximum six-year maturity.
2. Apply for a SBA Economic Injury Disaster Loan
SBA loan programs will play a key role in providing small-business owners financing options during the COVID-19 economic downturn and during the recovery.
If your hotel is located in an eligible area, you should consider applying for an SBA Economic Injury Disaster Loan, which can offer up to $2 million in cash assistance at a 3.25 percent interest rate and can provide vital financial support to you to help alleviate the temporary loss of revenue you are experiencing.
Additionally, each state usually has its own version of a disaster relief funding program. For example, here in Florida, we have the Florida Small Business Emergency Bridge Loan Program, through which many of my clients have already applied for assistance.
3. Refinance and Consolidate your Existing Debt
You might consider refinancing the existing debt on your hotel at a higher loan-to-value ratio and with a much lower interest rate and get “cash out” (harvest your equity) and redeploy that cash equity as needed. There are many standard loan programs available that can achieve this objective. Many owners have typically refinanced their hotels after several years of paying down debt to harvest their cash equity so they can purchase or develop more hotels.
In the case of COVID-19, owners can use this “refi with cash out” strategic financing option to produce working capital to fund operations during this lean period and get a much lower interest rate. A refinance is a good opportunity for a debt consolidation in which all of a hotel owner’s different debt obligations are paid off and consolidated and afterwards a hotel owner will have just one monthly loan payment with a much better interest rate.
You could consider the SBA 7a and 504 loan programs for this purpose. Because lenders that hold the loans they make on their balance sheets are scared stiff of making loans to the hotel industry during this pandemic, most lenders have now implemented an indefinite lending freeze on the hotel industry. As a result, the SBA and SBA’s federal government-backed lenders will play a major role in the rescue of the hotel industry.
For example, the SBA 504 Program can be used to refinance the primary mortgage on a hotel as well as other subordinate loans secured by that asset and to also pay business operating expenses. This loan program creates a good opportunity for hotel owners to refinance their hotel, get cash out to pay for operating expenses and lock in a low fixed interest rate. It also decreases the lending risk exposure of their lending bank because the federal government is sharing a lot of the risk when that bank makes SBA loans.
4. Seek Loans
Hotel owners can seek a business line of credit, working capital loan, bridge loan, credit card merchant cash advance, a loan from their retirement account or a second mortgage. These are all valid loan types for hotel owners to consider as needed. I know a company that is making loans using a second, third or fourth position security interest (even using already mortgaged residential property as collateral), but they are a little on the expensive side. There are many different lending program options mentioned here that you might consider. Some are very expensive. You along with your attorney and certified public accountant should thoroughly research and quantify all costs and payback terms associated with these loans before you agree to accept any one of them.
5. Bring in a Partner
Immediate family members, friends, relatives, people you know from your place of worship, chamber of commerce, hotel associations, hotel franchise companies, third-party management companies and even your business competitors are all good candidates to be considered to become your new partner. Your new partner or partners will be given a percentage of ownership commensurate with their cash investment or a negotiated amount. Each partner’s attorneys can work together to draw up the appropriate paperwork to create your new partnership. Be sure to ask your attorney and CPA whether a buy-sell agreement or a tag along-drag along agreement would be beneficial.
6. Sell Your Hotel
When hotel owners sell their hotels it frees up all cash equity from that asset to be used in any way they desire. Selling a hotel is always the ultimate financial liquidity event for that asset. However, it usually takes a year or more to properly market that hotel property and find a buyer who is willing to pay the right price unless the hotel owner already knows the buyer.
7. File for a Chapter 11 Reorganization
To most hotel owners this is the worst-case scenario, but it is not the end of the world. It is a new beginning. If lenders do not cooperate with your request for a sizable loan modification and/or deferral of payments, then you have the constitutional right to file for a Chapter 11 reorganization/restructuring of debt and protection from creditors under the U.S. Bankruptcy Code. This will thwart a bank foreclosure. I have seen this strategy employed to produce favorable results for hotel owners. Yes, this will bruise your ego, but it will save your asset. Plus, I assure you that these days hotel owners will not be sitting alone in the courthouse. It will be packed. Debtor in possession financing will need to be approved by the bankruptcy court and obtained. There are costs associated with a Chapter 11 reorganization including legal and accounting fees to name just a few.
8. Historic Low Interest Rates Mean Opportunity for New Projects
Many experts believe this difficult COVID-19 event will be over in five to six months. So, if hotel owners feel comfortable riding out this storm with their on-hand cash reserves, believe in the “long view” approach to investing and have excess cash available to deploy, now is a great time to finance the development of a new hotel or to acquire an existing one. Interest rates will not stay this low forever. I suspect that not too many hotel owners will pursue this rosy option at this time and I will be pleasantly surprised when I receive that phone call.
Harry G. Spirides is a former owner and operator of a 205-room, full-service resort hotel for more than 20 years. Today, he is president of Spirides Hospitality Finance Co.