Hotel Financing News
CARES Act Paycheck Protection Program (PPP)
Prioritized Paycheck Protection Program Act (P4)
July 27, 2020
SBA issues a simpler version of the PPP forgiveness application form 3508S. However, in spite of the expectation to receive automatic forgiveness for the loans up to $50,000, this application offers a simpler version of the application and nothing else. The expiration date for the form is 10/31/2020 indicating that there is exception for new developments in October. Many hoteliers are just waiting to see what happens after the election knowing that they have 10 months after the covered period of 8 or 24 weeks to submit their application.
July 27, 2020
Senator Marco Rubio along with Senator Susan Collins introduced Senate Bill S 4321 that would include:
- Creation of a 20 year SBA 7a loan program for the seasonal businesses (such as hotels) with the loan amount at 2 times the annual revenue of the business fixed at 1% rate and amortized for 20 years. This would be a very helpful loan for the hotels who would need larger loan amounts to last through the pandemic
- Second round of PPP loan for businesses with a revenue decline of 50% or more in the first or second quarter of this year compared to the same quarter last year. This is probably the most relevant part of this bill for the hotels that have experienced a significant drop in occupancy and revenue in the 2nd quarter of 2020
- Simplification of the PPP forgiveness application for loans under $150,000
July 2, 2020
- P4 is going through the Senate and will probably be approved in the Senate within the coming month as Senate will start working on it when returning from the recess in two weeks. It If approved, it will then go to the House for approval and will end up at the President’s desk for the signing into law. It will give the hoteliers who have exhausted their PPP loan but are still experiencing 50% or more drop in the hotel’s revenue compared to 2019 to get a second round of PPP. This bill if enacted will greatly help the the hoteliers who may want to keep track of this bill by going to S.4014 bill or a similar bill in the house H.R. 7241
- The Senate and the House approved a five week extension for the submission of PPP loans to August 8th. This bill will be signed into law by the President shortly.
- A new bill is introduced to grant forgiveness to all the PPP loans under the $150,000. Hoteliers may want to follow this S.4117 bill
June 17, 2020
The SBA released the latest forgiveness flexibility rules
May 22, 2020
SBA released the Interim Final Rule on PPP Loan Forgiveness
Three important notes:
- For the forgiveness calculation, employers will have to report any employee’s refusal to return to work to the state unemployment agency within 30 days of rejection.
- Payroll costs incurred at the end of the 8-week period but not paid until the first payroll issued outside the 8-week period count as payroll costs when calculating forgiveness.
- owner-employees hoteliers can count retirement plan expenses and health plan expenses in their payroll costs, but all of these items in total are limited to the lesser of the 2019 amounts incurred or $100,000.
May 15, 2020
SBA released the PPP forgiveness application and includes instructions for qualifying and applying for the forgiveness.
May 3, 2020
Question: Will a borrower’s PPP loan forgiveness amount (pursuant to section 1106 of the CARES Act and SBA’s implementing rules and guidance) be reduced if the borrower laid off an employee, offered to rehire the same employee, but the employee declined the offer?
Answer: No. As an exercise of the Administrator’s and the Secretary’s authority under Section 1106(d)(6) of the CARES Act to prescribe regulations granting de minimis exemptions from the Act’s limits on loan forgiveness, SBA and Treasury intend to issue an interim final rule excluding laid-off employees whom the borrower offered to rehire (for the same salary/wages and same number of hours) from the CARES Act’s loan forgiveness reduction calculation. The interim final rule will specify that, to qualify for this exception, the borrower must have made a good faith, written offer of rehire, and the employee’s rejection of that offer must be documented by the borrower. Employees and employers should be aware that employees who reject offers of re-employment may forfeit eligibility for continued unemployment compensation. (refer to PPP loan Question and Answers as of May 3, 2020)
April 30, 2020
Question: Section 1102 of the CARES Act provides that PPP loans are available only to applicants that were “in operation on February 15, 2020.” Is a business that was in operation on February 15, 2020 but had a change in ownership after February 15, 2020 eligible for a PPP loan?
Answer: Yes. As long as the business was in operation on February 15, 2020, if it meets the other eligibility criteria, the business is eligible to apply for a PPP loan regardless of the change in ownership. In addition, where there is a change in ownership effectuated through a purchase of substantially all assets of a business that was in operation on February 15, the business acquiring the assets will be eligible to apply for a PPP loan even if the change in ownership results in the assignment of a new tax ID number and even if the acquiring business was not in operation until after February 15, 2020. If the acquiring business has maintained the operations of the pre-sale business, the acquiring business may rely on the historic payroll costs and headcount of the pre-sale business for the purposes of its PPP application, except where the pre-sale business had applied for and received a PPP loan. The Administrator, in consultation with the Secretary, has determined that the requirement that a business “was in operation on February 15, 2020” should be applied based on the economic realities of the business’s operations. (refer to PPP loan Question and Answers as of May 3, 2020)
April 29, 2020
SBA started authorization of the 2nd round of PPP loans on Monday April 27th. The lenders who have fully processed the PPP loan applications enter selected data on the SBA online authorization page called ETRAN and obtain an authorization number. Having this number, the lender can go ahead and fund the loan. On 27th when ETRAN opened at about 10:30 EDT, the ETRAN system crashed many times and limited number of loans were authorized but on Tuesday many loans went through and got authorized. The expectation is that this 2nd round of funds will run out at the latest by Friday this week. A few minutes ago, Treasury announced that lenders with up to 1 Billion in assets will be allowed to submit PPP loan authorization requests through the ETRAN from 4pm to 11:59 pm EDT exclusing larger lenders from using the system in this timeframe.
The most frequent questions from our clients is centered around the forgiveness rules. It is prudent that any borrower consult with the borrower’s lender on the guidelines to make certain the requirements are met. To assist you, we have formulated questions and answers below to give you a basis in your conversation with your lenders and you need to validate these answers with your lender.
Question 1: How can I receive forgiveness?
Answer: The rule is that the lender will examine your use of funds within an 8-week period starting the day the loan funded and wired to your account. At the end of this period, you will have spend portion of the loan on payroll and portion of it on qualified non-payroll expanses including utilities, interest expense, and rent. The rule to remember is this:
“The qualified non-payroll expenses cannot exceed 25% of the forgivness amount”
Lets do some examples to demonstrate:
Example 1: Using all your funds in 8 weeks:
Your loan amount: 100,000
You spend 75,000 on payroll and 25,000 on qualified non-payroll in the 8 weeks starting the day you got funded. The entire 100,000 will be forgiven
Example 2: Using part of the funds in 8 weeks- Higher amount spent non-payroll:
Your loan amount: 100,000
You spend 60,000 on payroll and 40,000 on qualified non-payroll in the 8 weeks starting the day you got funded. 80,000 will be forgiven since 60,000 divided by 75% is 80,000 and 25% of 80,000 is 20,000 which is less than the 40,000 you spent on non-payroll)
Example 3: Using part of the funds in 8 weeks- Lower amount spent on non-payroll:
Your loan amount: 100,000
You spent 60,000 on payroll but only 10,000 on qualified non-payroll in the 8 weeks starting the day you got funded. 70,000 will be forgiven since 60,000 divided by 75% is 80,000 where 25% of 80,000 is 20,000 and you only used 10,000 on non-payroll in this 8 weeks
Example 4: Using part of the funds in 8 weeks- Lower payroll and lower non-payroll:
Your loan amount: 100,000
You spent 42,000 on payroll and 10,000 on qualified non-payroll in the 8 weeks starting the day you got funded. 52,000 will be forgiven since 42,000 divided by 75% is 56,000 where 25% of 56,000 is 14,000 but you only used 10,000 on non-payroll in this 8 weeks
Question 2: How long do I have to re-hire employees?
Answer: You have until June 30, 2020 to hire employees back to benefit from the forgiveness. Keep in mind, you will be examined for the 8-week period starting the day you got funded for the forgiveness qualification.
Question 3: Is head count or payroll amuont used for determining the forgiveness?
Answer: You need to bring your head count of full time employees to the level of pre-Corona levels. You also cannot reduce the employees’ pay level by more than 25% of the pre-Corona level. In case any of these happen, the forgiveness will be reduced. You have until June 30th to bring both levels of head count and pay level to the pre-Corona levels. How the 8-week examination period works with the June 30th is something your lender need to explain and plan for you.
Question 4: The employees I laid off are not returning as they are enjoying higher unemployement benefits than what they get paid by working. Can I hire others employees instead?
Answer: Yes as long as you are paying the same rate as you were paying for the exact position pre-Cornoa
Question 5: When do I start the foregiveness request?
Answer: Probably around week 7 but your lender has to work with you on the timing and the documentation and has to give you clear instructions on the guidelines immediatley since your 8-week period starts from the day you get funded.
Again, make certain you contact your lender and clear all these and any additional questions you have with them. Try not to commingle funds and keep clear accounting of the use of funds. Do not use these funds for general business use or personal purposes. The PPP loan can only be used for payroll and for qualified non-payroll expenses including utilities, interest paid on your mortgage (not principal), and rent.
Currently we have no further information on Mainstreet loans and when EIDL loan applications resume again. Many lenders we contacted have dedicated all resources to PPP loans and have not received any instructions on the Main Street loans either.
April 13, 2020
We have gone through the first week of the PPP loan processing which started with a disaster last Monday the 6th when the e-Tran, the SBA online system for the lenders to enter loan information and to obtain loan authorization/loan number crashed multiple times, sent multiple emails to lenders to re-login, and caused the service providers to mark the lender emails as spam. Allegedly Wells Fargo capped at its maximum allocation for these loans by Monday afternoon and stopped accepting new applications.
A major issue everyone is facing is that due to the low profitability of the PPP loans and the surge of the applications, the banks are only handling their own customers and many are only taking application for the hotel(s) they financed. The hoteliers with multiple hotels/affiliates are then scrambling around trying to find a bank to take these orphan applications. The worst case I encountered were the hoteliers who were having relationship with only one small local non-participating bank and had no lender to turn to for their PPP loan. These hoteliers can submit to any lender but with lower priority as non-customer.
I have not yet heard from a client who has received the EIDL funds or the 10K emergency grant. I just got an email from the SBA as follows:
To ensure that the greatest number of applicants can receive assistance during this challenging time, the amount of your Advance will be determined by the number of your pre-disaster (i.e., as of January 31, 2020) employees. The Advance will provide $1,000 per employee up to a maximum of $10,000.
On the PPP loans, I have only one client who has already received funds last week. If you get fully funded by either of these programs specially the 10K emergency fund, drop a reply to this email and we can prepare a statistics report for everyone’s benefit
These are things to keep in mind for the coming few weeks:
- If you are having an existing SBA loan and your lender has not contacted you for the 6-month free loan payments (Debt Relief Program), you should proactively call your lender asap. I have sent email on behalf of many of my clients and the majority are now on the program whose payments are being paid as a grant starting April until September.
- If you don’t have an SBA loan, FDIC has encouraged the lenders to accommodate the borrowers and so make sure you contact your lender for a deferment. I have emailed the lenders on behalf of many of my clients and the majority have received deferments of 3 or 6 months. Only one lender declined to offer deferment stating that the year to date income of the hotel had not dropped any and decided to examine April’s revenue before offering deferment. Another lender offered interest only payments which is of no help. This may take more pressure on the bank.
- It is believed that just under 200 billion of the PPP fund has been processed already and the 300 billon will run out by the middle of this week. However, a new 250 billion fund is being finalized by the congress and hopefully approved sometime this week offering a chance to those hoteliers who missed the first 300 billion fund. These links are two important informative documents on this program:
- As part of the CARES Act a new 600 billion loan program called Main Street Loan Facility is being implemented through the Federal Reserve Bank by setting up a special purpose vehicle (called SPV). This will be a minimum of 1 million loan with full personal guarantee and a four year term and can be obtained from any federally insured lender. I have contacted a few lenders but there is either no knowledge of this program or minimal information from the news media. I am sure in the coming week or two we will receive more details on this program.
April 2, 2020 pm
This afternoon SBA increased the interest rate on PPP loans from 1/2 percent to 1% after reducing it from 4% to 1/2% yesterday. This action was taken after SBA faced strong discontent from the lenders nationwide. In general, the cost of the funds for a standard smaller bank is about 2.5%. The major few large banks in the country have lower cost of funds of probably quarter of a percent and will still be slightly profitable at 1%. After the announcement of the rate of 1/2 percent yesterday, a number of lenders decided not to participate in the program and others are pondering over it. Generally, many lenders have decided to provide the service to their customers as courtesy and accommodation knowing they probably will be in the reds with this program.
April 2, 2020 10 am
I just received an email from one of my SBA 7a lenders that they received instructions for the Debt Relief Program (DRP) and will be contacting their SBA 7a borrowers soon to inform them of the program. This program waives 6 months of principal and interest payment on your SBA loan starting the April payment until September of 2020. You will not repay this amount in the future and it is a grant rather than a deferral. If you already got a deferral, then your 6 months will start after your deferral period. I am sure if you have an SBA loan, your lender will call you for the DRP but to make sure, it is safe if you contact your SBA lender and inqire since your April payment may be coming up soon. I checked with a few SBA 504 lenders but they had not received guidance on the program yet. I believe that your debenture loan servicer however may be getting ready to offer the DRP (this is your 2nd loan servicer).On the PPP loans, the news today (and we indeed get contradicting news daily) is that the rate has dropped from previously stated 4% to half percent (0.5%) for 2 years instead of previously stated 10 years. This is going to dramatically drop the profitablity of the loan for the lenders and so I have noticed that some SBA lenders are not participating or are still pondering on it. Due to the low revenue that this program generates for the lenders and to avoid sharing a portion of the revenue with any brokers, most lenders have given priority to their own existing clients. If you are contacted with your own bank to process your PPP loan, it is indeed ok to move ahead and work with your own bank.
March 27, 2020
Today the CARES Act of 2 trillion dollars was signed into law of which nearly 350 billion is allocated to an SBA program called Paycheck Protection Plan (PPP). I see so much inaccurate predictions on this program and have been hesitant to send updates as the bill was continuously changing but I believe it is time to start a sequence of informative emails on this subject. Please note that the PPP will be converted by the SBA into a rules book in the next 2 to 3 weeks where every question will be answered but for now the following is the information I have gathered around the PPP loans so far and I will put more detail around the program in the next 3 weeks.
- The Loan will be Issued by about 700 approved lenders as opposed to EIDL loans that are processed by the SBA directly. I had asked many of my clients to directly apply for the EIDL program without help from Scientific Capital (SC). However, for the PPP loans, SC will be able to prepare a package and to apply for your PPP loan. Many lending firms are decieving people by directing them onto an application page for the PPP loans. Beware that SBA has not even written the rules and no lender is processing these loans. You will recieve another email from SC the moment applications are accepted by the approved lenders for the PPP loans
- This loan cannot be used for purchase of a hotel, to buy out partners, to perform a PIP, or to refinance a hotel
- To receive these loans, your hotel must have been in operation prior to Feb 15, 2020
- The loan is Non-recourse and requires no collateral (no lien on your hotel)
- The term is 10 fully amortized years at maximum of 4% interest rate with no prepayment penalty
- The SBA fees including the gurantee fee is waived
- The loan amount is determined by the 12-month average of your payroll multiplied by 2.5 not to exceed 10 million (I am looking forward more detail on determining the size of the loans from the SBA in the next couple of weeks)
- The loan can be used to pay expenses including qualified payroll, utilities, mortgage interests, etc. (and I am looking forward more details on what other expenses may be included)
- There is a loan forgiveness clause where if the hotelier has maintained the same number of employees compared to the same period last year or if the hotelier rehires the employees laid off due to the pandemic, the hotelier will be qualified for foregeiveness of all or part of the loan. (I will get more information on this subject in the next couple of weeks)
- The loan may be used to pay principal, interest, and other fees of pre-existing SBA loans (both 7a and 504) for 6 months
- A hotelier cannot apply for both EIDL and PPP for the same PURPOSE (double dip). If a hotelier applied for EIDL for say paying mortgage interest for 3 months, the hotelier cannot apply for PPP for the same purpose. I then caution you that if you apply for both programs, apply for different purposes to avoid being disqualified for PPP loans (which may be considered as advantageous due to their non-recourse no-collateral features of it, not to mention the forgiveness clause)
One thing that is part of this CARES Act is waiving of the penalthy for withdrawing from the 401K of up to $100,000, albeit the taxes still apply. However, I found something more interesting where the CARES Act is also allowing the loans against the 401K to increase to 100K as opposed to previous 50K limit. I generally notice that very few hoteliers have 401K and as such this feature may not help them. However, many of my clients syndicate their hotel purchases with friends and family who are passive investors, are not hoteliers, and have 401K accounts. If during these tough times, those syndication partners need to contribute cash to help survive the hotel, the loan from the 401K may be a viable option. You may contact your CPA regarding this option.