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Hotel Operators: Here’s How the Main Street Lending Program Can Help

Payroll Protection Program loans may not be sufficient to bail out cash-strapped hotel operators. The current limits hold that PPP loans will only fund payroll and other expenses for up to eight weeks (depending on the loan size), and only 25% of such PPP loan amounts may be used for non-payroll expenses, such as mortgage interest, ground rent, and utilities. 

Given the current state of travel, hotel operators may not be in a position to re-hire employees by June 30 and thus, a portion of hotel operator’s PPP loan proceeds likely will not be forgiven. Many hotel operators may face severe cash restraints. The new Main Street Lending Program could provide relief for hotel owners and operators.

The Main Street Lending Program (the Program) is separated into two distinct facilities – the Main Street New Loan Facility (MSNLF) and the Main Street Expanded Loan Facility (MSELF). Below are details on why the Program could be attractive to hotel owners, hotel operators, and their lenders.

If you are interested in learning more about the details of the Program, including restrictions on the MSNLF and MSELF loans, which include certifications as to the outsourcing of jobs, union contracts, and union neutrality, and executive compensation restrictions, click here.

Why is the Program beneficial for hotel owners?

The Program provides hotel owners and hotel operators the ability to either upsize an existing term loan (more information on this approach is detailed in the section below) or take out a new loan. In order to incentivize lenders to participate in this program, the government will take substantially all of the repayment risk by purchasing 95% of the loans at par value from the lender. In this environment, it would be very difficult for hotel owners/operators to upsize their existing loans or take new loans from traditional hotel lenders on attractive terms. However, the loan terms of both MSNFL loans and MSELF upsize tranches are very attractive since the interest rate is relatively low (the Adjustable-rate of Secured Overnight Financing Rate (SOFR) plus 2.5-4%) and both principal and interest will be deferred for one year, with a term of four years.

By incentivizing hotel lenders to allow hotel owners/operators to upsize their existing debt through the Main Street Expanded Loan Facility, the Program will enable hotel owners/operators to obtain much-needed liquidity and avoid possibly complicated inter-creditor issues and covenant restrictions since, in the MSELF, existing lenders are lending the additional funds and thereby consenting to this additional debt.

Another benefit of the Program is that hotel operators can participate in PPP loans and the loans offered under the Program. Note that borrowers are limited to participating in only one of the MSNLF, the MSELF, or the Primary Market Corporate Credit Facility.

Why is working with the hotel owner’s existing lender an added benefit of the Program?

A hotel owner/operator working with an existing lender to upsize their loan is beneficial because it provides an avenue in which the hotel owner/operator lessens the risk of violating certain SPE covenants in their existing loan (such violations would potentially trigger recourse liability for guarantors through the bad boy guaranty). By working with an existing hotel lender, getting consent from that existing lender for MSNLF and MSELF loans would likely be much more streamlined, since the debt appears to be on beneficial terms and the existing lender does not bear most of the risk on the increased debt.

Also, existing lenders are incentivized to make MSNLF and MSELF loans because the Program provides for lender fees associated with the loans and also provides liquidity to their hotel borrowers so that they can continue to run their hotels and pay their mortgage interest payments.

What expenses does the Program cover?

The loan must be a minimum of one million dollars. Hotel owners/operators can use these loan proceeds for paying payroll expenses, ground lease rents, real estate taxes, and utilities. Although the statutory language of the Program is not clear on whether using the loan proceeds for mortgage interest payments and scheduled prepayments of principal is allowed, we believe that it would be. Arent Fox will continue to monitor guidance that might clarify this issue. The loan proceeds cannot be used to refinance an existing loan or repay lines of credit.

Why are hotel operators/tenants eligible borrowers under the Program?

In order to be an eligible borrower under the MSNFL loans and MSELF loan programs, the borrower must have businesses of no more than 10,000 employees or up to $2.5 billion in 2019 annual revenues. Many hotel owners and hotel operators do not have direct employees and instead have a hotel manager employ the hotel employees and hotel operator is responsible under the hotel management agreement to reimburse hotel manager for such expenses. PPP loan regulations were not explicit on whether hotel operators could use the payroll expenses from hotel management companies on the PPP application. While it is not clear and while market participants have sought clarification from the SBA, we believe this approach should be permitted under the PPP. As the Main Street Lending Program is structured to determine program eligibility based either on employee count (up to 10,000) or 2019 revenues (up to $2.5 billion), and program funding is based on a multiple of EBITDA, we believe the Program avoids many of the complicated employee “counting” issues that have created challenges for hotels under the PPP program, which established funding levels based on payroll costs.

What is the difference between the Main Street New Loan Facility (MSNLF) and the Main Street Expanded Loan Facility (MSELF)?

MSNLF: provides funding for a new unsecured term loan that

  1. was originated on or after April 8, 2020,
  2. has a minimum loan amount of $1 million
  3. has a maximum loan amount that is the lesser of

a) $25 million, or (b) an amount when added to borrower’s existing outstanding undrawn debt does not exceed 4x 2019 EBITDA.

MSELF: provides funding for an upsized tranche of an existing term loan that

  1. was originated before April 8, 2020,
  2. has a minimum loan amount of $1 million
  3. has a maximum loan amount that is the lesser of $150 million dollars, (b) 30% of borrower’s existing outstanding undrawn debt, or (c) an amount when added to borrower’s outstanding undrawn debt does not exceed 6x 2019 EBITDA.
  4. If any collateral secures an upsized tranche (whether that collateral was pledged under the original terms of the underlying loan or at the time the loan was increased by the upsized tranche), the collateral will secure the participation on a pro-rata basis.

How to apply for the Program?

Details about the application process for the Program have not been released at this time. However, eligible lenders of the Program have been identified as US insured depository institutions, US bank holding companies, and US savings and loan holding companies.

While waiting for more guidance on the application process, it may be helpful for hotel operators to gather supporting documentation that substantiates why they need a Program loan.

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