Hotel Finance Strategies in the Wake of COVID-19: Debt Restructuring; Utilizing PPP and Main Street Lending Program

Description

The economic fallout from the COVID-19 pandemic has raised many issues for real estate borrowers and lenders. Perhaps the most immediate impact has been in the shutdown of the hotel industry. Most hotel loans are or likely will be in default in the near term. There are alternatives to loan restructuring or foreclosure of distressed hotel properties; counsel needs to be well-versed on the options. Hotel owners and their counsel should also understand how to address covenant defaults related to COVID-19 and understand strategies to avoid triggering recourse to the loan sponsor.

Hotel loan workouts are more complex than other real estate workouts. The hotel management and franchise agreements may give control and exclusive rights to the operator and franchisor--with approval right to lenders and other interested parties. Licenses, permits, and contracts may be in the name of the manager--and steps must be taken (or side-stepped) in order to avoid or limit personal liability of the loan sponsor. Operating agreements, hotel franchise agreements, loan documents, and governmental requirements might be inconsistent, with competing interests of the parties. The dynamics of those arrangements (and more) must be considered in the context of a loan modification foreclosure, workout, or bankruptcy of the borrower--and the ultimate impact upon the sponsor.

The CARES Act provides potential financing alternatives that might enable hotel borrowers and lenders to avoid workout and foreclosure. Loans administered by the SBA, such as the PPP, offer a short-term funding solution to cover payroll, mortgage interest, and other costs, but available funds are limited and certain program requirements pose difficulties in the context of hotel owners and operators.

The Main Street Lending Program could provide more long-term relief. It provides hotel owners and hotel operators the ability to either upsize an existing term loan or take out a new loan, with the government taking substantially all of the repayment risk by purchasing 95% of the loan from the lender. The program might enable hotel owners/operators to obtain much needed liquidity and avoid possibly complicated intercreditor issues and covenant restrictions because existing lenders are providing the additional funds and thereby consenting to further debt, although many details of the how the program will function in practice remain to be seen.

Listen as our authoritative panel analyzes the financing options available to hotel borrowers during the business and travel shutdown.