The Bratton Team

Hotels have been hit the hardest during the pandemic and unless Congress steps in to provide aid to keep jobs afloat it may get much worse. The financial assistance and potential HOPE Act is needed in many states across the United States to save local jobs and small businesses. The tourism industry has declined by 80% over the last 5 months and travel restrictions and 14 day self quarantines have deterred travels across the country. With such a low demand for travel, many hotels are are unable to pay for mortgages and keep their commercial real estate properties afloat. As Lending restrictions also tighten many hotels look to Congress for a bailout.

The hotel industry is in dire straits.

A recent report issued by Trepp, a research group that tracks commercial mortgage-backed securities, concludes more than 23 percent of hotel properties are 30-plus days late in their mortgage payments as of last month – the highest percentage on record. For comparison purposes, only 1.3 percent of the CMBS loans were 30-plus days late at the end of 2019.

Trepp officials said about $20 billion in CMBS loans are delinquent as of July. Delinquent hotel loans during the Great Recession totaled $13.5 billion. That means delinquent loans are up some 48 percent from the fiscal abyss about 12 years ago.

On Aug. 18, about 4,000 hotel industry leaders urged Congress to help hotels avoid foreclosure and having to cut thousands of jobs. Some in the industry indicated that the government should start a similar program as the Paycheck Protection Program but dedicated to parties with commercial real estate loans.

I agree with the help aspect, but disagree with the PPP part.

We need an iteration of the Troubled Asset Relief Program (TARP) for the travel and leisure industries.

PPP’s equivalent government-financed business assistance program is the TARP, which was initially designed to bail out banks from going under, only to be followed by similar bailout programs for the auto industry, insurance industry and Freddie Mac and Fannie Mae.

Shall the Hotel Owners elect to give up equity and give government ownership?

Understandably, there will be questions about liquidity of TARP-like investments on hotels because unlike the big banks, most of the hotels are private enterprises.

How do you value these properties when making the loans?

There are plenty of valuation experts who help in hotel transactions. The federal agency in charge, say the Federal Trade Commission (since it already enforces antitrust rules in the real estate business), selects a list of valuation consultants that determines the value of these properties before fronting the money. The amount could be determined by the CMBS-backed loan payment schedule and worker wages.

Hotel owners who want to get in the program must abide by a new set of rules in return. They must agree to:

  • give equity ownership to the government that can be sold back to the owners or someone lease should the property change hands at a certain price not lower than the TARP money;
  • put a cap on what owners can draw in salary and other compensation; and
  • provide a detailed operational report on a monthly basis to the government to update the property’s valuation.

Having a TARP-like investment vehicle will offer the hotel, and perhaps other CRE projects, a way to avoid foreclosure by lenders. We do not want to have another 2009-like scenario when lenders were inundated with millions of homes on their books because people could not pay their monthly mortgages and simply walked away from the underwater assets. Hotel owners could soon be doing just that.

Owners in the travel and leisure space could balk at the idea of having different rules to receive government money, but they also should consider that unlike the government’s PPP or the Main Street Lending program, a finance program similar to TARP allows them to draw a much bigger amount to stabilize, restart and prosper as they look to the future. Similar to TARP, an establishment could draw, say, $50 million from the new program as long as it is willing to offer equity and follow the operational requirements of the agreement. Right now, hotels, resorts and vacation and leisure destinations need time to restructure their business. TARP 2 could help with that.