On April 24, 2020, President Trump signed legislation amending the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) to increase funding for the Paycheck Protection Program (PPP) by $320 billion and the Emergency Injury Disaster Loan (EIDL) program by $60 billion. Although this increased funding will provide support to the hospitality industry, additional measures will be required to address the tremendous economic damage the novel coronavirus (COVID-19) pandemic is inflicting on America's hotels, restaurants, and other hospitality businesses.
Hospitality Industry Facing Unique Challenges
On April 27, 2020, the American Hotel & Lodging Association (AHLA) sent a letter to congressional leaders requesting certain clarifications and enhancements to the CARES Act and the PPP, and noting that nearly 4 million hotel employees have been furloughed and that the industry is expected to lose nearly 50% of its total revenue in 2020, a loss that could exceed $112 billion. A recent survey conducted by the Independent Restaurant Coalition and the James Beard Foundation found that nearly 80% of independent restaurant owners do not believe the stimulus provided under the CARES Act will be sufficient to save more than 500,000 independent restaurants, employing 11 million people, from closing permanently. Also, recent guidance from the Treasury Department and SBA limiting the ability of public companies and other companies with adequate sources of liquidity to utilize PPP funds could prevent many hotel, restaurant, and other hospitality businesses from accessing the PPP. Please find more information regarding this here.
Congressional leaders and the Trump administration already are in discussions regarding the next round of stimulus legislation, although Senate Majority Leader Mitch McConnell stated that the Senate will not move on any new legislation until it is back in session on May 4, 2020. Senator McConnell and other Republicans have expressed concern about the mounting federal debt, and the Trump administration has indicated that this next round will be the final round of stimulus legislation. Measures to be debated in this next round likely will include assistance to state and local governments, rental assistance, infrastructure funding, a payroll tax cut, and assistance to specific industries.
Additional Measures to Support the Hospitality Industry
The hospitality industry and its representatives, including the U.S. Travel Association, the AHLA, and the International Franchise Association, have identified several areas in which additional support, through new legislation or clarifications and enhancements to the CARES Act, is required for hospitality businesses. This support includes:
- Providing additional funding for loans and grants under the PPP or other programs targeting the hospitality industry;
- Extending loan and grant support through the end of 2020 to address the longer-term economic recovery needs of hospitality businesses;
- Expanding maximum loan amounts to cover operating expenses in addition to payroll and providing greater flexibility on loan forgiveness;
- Expanding eligible businesses to account for the unique challenges of third-party management company structures, the franchise sector, and other hospitality-related industries; and
- Expanding relief under the EIDL programs and providing targeted relief to the hospitality industry under the CARES Act's Stabilization Exchange Fund and the Federal Reserve's Main Street Lending Program.
Additional Funding. Although the Trump administration has indicated it expects the additional $320 billion added to the PPP to be sufficient to support the needs of small businesses, banking industry sources have indicated that most of this additional funding will be quickly allocated to existing loan applications being processed, and the hospitality industry is recommending an additional $300 billion to fund the program through the end of 2020 to account for the longer-term economic recovery restaurants, hotels, and other hospitality-related businesses will require. The hospitality industry also is proposing that small businesses receiving PPP loans be permitted to apply for up to two additional PPP loans to the extent they can show proceeds from the previous loan(s) have been expended.
Extension of PPP Covered Period and Loan Term. The covered period for the PPP ends on June 30, 2020, but public health restrictions may require many hospitality-related businesses to remain closed or subject to reduced operations during most of this covered period or even beyond the June 30, 2020 expiration date. As a result, it would not make economic sense for many of these businesses to rehire employees to normal levels during this initial covered period. Proposals to address this concern include:
- expanding the covered period under the PPP to December 31, 2020;
- amending the covered period under the loan forgiveness section of the PPP to be defined as the time period between the loan origination date and the later of the re-hire date or December 31, 2020; and
- increasing the term of loans under the PPP to at least four years to account for the longer recovery period hospitality businesses will need to aggregate sufficient profits to pay back the PPP loans.
Expand PPP Loans to Cover Payroll and Non-Payroll Expenses. The PPP currently determines the amount of the loan available to a small business based on 2.5 times the average monthly payroll for 2019, but this may be inadequate to help many hospitality and travel-related businesses that have had to close or significantly limit their operations and as a result are unable to cover nonpayroll expenses. Also, the calculation of the loan amount based solely on payroll expenses is inadequate for many hotel owners because the non-payroll expenses, such as debt service and real estate taxes, for the average hotel typically exceed the payroll expenses. Proposals to address these concerns include:
- expanding the calculation of the maximum loan amount under the PPP to include both payroll and non-payroll expenses and to increase the multiplier for the average operating expenses; and
- expanding eligible expenses under the PPP to include initial franchise fees and royalties paid by a franchisee to a franchisor.
Provide Greater Flexibility on Loan Forgiveness. Currently, the PPP determines the amount of loan forgiveness under the program based on maintaining or rehiring employees at normal levels and, pursuant to guidance issued by the U.S. Treasury Department and the SBA, requires that 75% of the loan proceeds be spent on payroll costs in order to qualify for forgiveness. These requirements limit the practical value of the PPP for hospitality businesses that have had to close or significantly reduce their operations during the PPP covered period. As the AHLA noted in its April 27, 2020 letter, local hotel owners require support not just to assist in retaining employees, but also to avoid defaulting on their mortgages or becoming insolvent. Proposals for addressing these concerns include:
- reducing the payroll threshold from 75% to 50% to provide small businesses that are closed or have few customers compared to 2019 with greater flexibility to use PPP loan proceeds on rent, utilities, and debt obligations and to permit full loan forgiveness for amounts used to cover eligible non-payroll expenses, and
- providing greater flexibility on the timing of PPP loan disbursement and forgiveness to coincide with the reopening and recovery for businesses.
Clarifying Access to PPP for Third-Party Management Companies. The hotel industry and other hospitality-related businesses utilize a unique management structure in which the property owner contracts with a third-party management company to operate the property and hire the property employees. Access to the PPP may not be available for these ownership structures because the property owner, although responsible for funding the employee payroll and other expenses, is not the legal employer, and the third-party management company may exceed the PPP's 500-employee limit on a consolidated basis. As a result, the hospitality industry is seeking clarification that the property owner will be able to access the PPP to cover the employees in this type of management company structure, even though the employees are employed by the management company, as long as the 500-employee limit at the property level is satisfied.
Providing Greater Flexibility for the Franchising Sector. The CARES Act sought to expand PPP eligibility for franchise businesses by waiving SBA affiliation rules for franchises listed in the SBA's franchise directory, and the SBA has issued regulatory guidance providing greater flexibility for franchised brands to get listed on the franchise directory for purposes of the PPP, but the franchise sector is seeking additional action to maximize eligibility for franchisees and franchisors. Requested changes include:
- permitting franchisor or franchisee businesses that meet the definition of a business format franchise under the Federal Trade Commission rules to be eligible for a PPP loan as long any single location has fewer than 500 employees per location;
- permitting any franchisor with a franchise system registered in the SBA's franchise registry to be eligible for a PPP loan;
- allowing any "business concern" that is registered in the SBA's franchise registry to be eligible for a covered loan without regard to the number of employees;
- clarifying that "business concerns" operating as a franchise are eligible for covered loans regardless of the number of affiliated entities they have, even if traditional SBA lending rules would disqualify the business concern; and
- providing that a NAICS 72 business (accommodation and food service) that employs its employees throughout multiple locations is not limited to a $10 million loan cap for all employees at all locations.
Expand Multiple Locations Exemption. The CARES Act permits businesses in the lodging and restaurant industries with operations at more than one physical location to participate in the PPP as long as they have 500 or fewer employees at each location. Because the pandemic is inflicting tremendous economic damage on hospitality-related businesses beyond the lodging and restaurant industries, such as entertainment, salons, gyms and health clubs, and janitorial services, there are proposals to expand the multiple locations exemption to these other industries.
Economic Injury Disaster Loans (EIDL) and Emergency Grants. With the most recent increase in funding, the CARES Act has expanded the SBA's EIDL loan program by $60 billion to provide loans of up to $2 million to eligible small businesses impacted by the COVID-19 crisis and authorized the SBA to make emergency EIDL advances of up to $10,000 to certain eligible small businesses within 3 days after submission of the application. The CARES Act also has provided $20 billion in funding for EIDL grants. Additional actions the hospitality has proposed to enhance these programs include:
- allowing small businesses to take a second EIDL loan if the first loan is not sufficient to meet ordinary expenses and expanding the cap on the second loan to $10 million, with an emergency cash advance of up to $500,000;
- waiving requirements for personal guarantees and collateral; and
- waiving affiliation rules to match the waivers for PPP loans.
Exchange Stabilization Fund. Title IV of the CARES Act authorizes up to $454 billion for loans and loan guarantees for certain eligible businesses that have incurred direct or incremental losses as a result of the pandemic. These loans, which impose certain restrictions on the borrower, such as prohibitions on dividends and stock buybacks, while the loans are outstanding, are available to larger companies that cannot take advantage of other loans available under the CARES Act, but there are concerns this program does not provide sufficient support and incentives necessary for hospitality-related businesses to participate. Proposals to bolster this program include:
- permitting mid- and large-size businesses to obtain up to 3 months of loan forgiveness for employee retention and other basic expenses; and
- allowing the Treasury Department to make direct loans to travel-related businesses that have been severely impacted by the crisis, similar to the direct lending programs for the airlines and aviation businesses under the CARES Act.
Main Street Lending Program. The Board of Governors of the Federal Reserve System recently announced a $600 billion Main Street Lending program for businesses with up to 10,000 employees and $2.5 billion in revenue. This program is available to borrowers that have received a PPP loan and establishes facilities for new loans from $1 million to $25 million and expanded loans from $1 million to $150 million. Hotel and lodging assets have approximately $86 billion in commercial mortgage-backed securities (CMBS) debt, and to provide relief for these properties, the industry is requesting a CMBS relief fund under the Main Street Lending program to help borrowers pay CMBS debt against a hotel or lodging asset. The requested fund would:
- include up to $10 billion to cover one year's full payments against the total $86 billion CMBS debt for the industry;
- provide non-recourse loans at a 2% rate for borrowers that have been current on their payments for CMBS debt against a hotel or lodging asset and not in default as of February 1, 2020;
- permit borrowers to use funds for payment of CMBS debt service payments and required tax and insurance payments; and
- include loan terms with a 10-year amortization schedule and allow loan payoffs to begin five years after the final loan disbursement is made, with interest accruing until payments begin.
Venable will continue to monitor legislative, regulatory, and other government action to support our hospitality clients in dealing with the COVID-19 crisis, and we are available to offer guidance and support as we collectively navigate these challenging times.