Hope For Borrowers?
As the downturn continues the number of hotels in financial distress continues to increase with no end in sight as many properties struggle to make their monthly debt payments. With cheap capital nearly impossible to obtain by traditional means and many lenders now having little recourse after months of extending loans there is new legislation being proposed aimed at providing additional relief for borrowers.
The HOPE (Helping Open Properties Endeavor) Act of 2020 was recently introduced into Congress. Borrowers in the CMBS market, and other structured debt markets, have generally faced obstacles in obtaining relief from federal or state aid facilities during the pandemic. The HOPE Act is intended to provide additional relief to the commercial real estate market in the form of a preferred equity facility.
Michael Sonnabend, managing member, PMZ Realty Capital, LLC–a New York-based hotel financing firm which maintains a focus on debt and equity financing, note sales, joint ventures, recapitalization and real estate advisory services–noted with regards to the proposed legislation he thinks there is a “reasonable chance of something happening.”
Sonnabend further noted that the bill is intended to help hotels, as well as other commercial real estate facilities, which have seen their revenue decline significantly as a result of COVID-19. Because it would be sponsored by the government any preferred equity loan would have roughly a 3 percent interest rate as opposed to something in the mid-teens, which would be the terms in the current marketplace, according to Sonnabend.
“I think it would be really helpful. It’s not something that’s not available in the private sector, but obviously the cost of capital is a lot different. It’s a lot more palatable for the borrowers,” he said.
Much of the focus throughout the industry has been focused on CMBS loans with many hoteliers expressing frustration over what they see as a general lack of willingness to work with hoteliers, at least compared to some of the more traditional lenders and local banks. Sonnabend–who pointed out that banks were afforded some additional flexibility from regulators—offered his perspective.
“I think when things initially went sideways in March banks were much more proactive. A lot of banks went ahead and told their borrowers they would give three months of deferral, which was great and well needed. However, the three months has come and gone and a lot of the hotels are not yet back to where they should be. People have gone back to their banks to try and get more relief and it’s really been a different discussion,” he said.
Sonnabend further noted, “On the CMBS side you didn’t have that initial deferral because they operate under a different set of circumstances…The discussions are ongoing to get longer term relief, whatever that may be. It’s not the borrower’s fault that [the property] went into these problems but it’s not the lender’s fault as well. It has to be a negotiation where people are able to get something on both sides that works,” he said.
Sonnabend put the current economic downturn in context in comparison to past two downturns following 9/11 and the lending crisis in 2008 and did find some silver linings.
”It has a little bit of characteristics of each of those, but I think the unknown makes it more severe. While the economy was good there’s now a real hesitancy to travel. But I think that the positive is in the great financial crisis you had the economy really in a prolonged downturn, things were getting worse and worse and the banking industry was in shambles…We don’t have that issue now, there’s a good amount of capital looking to come back in the market, it’s just looking for a little bit of clarity,” he said, adding that the biggest challenge for lenders right now is pricing the assets.
In talking about the company’s prospects, Sonnabend noted that PMZ generally finances some 50 to 60 hotel assets in a given year and while he acknowledged this year will likely be less than that he remained bullish on the future. As an example, he noted the company is currently in the market with a portfolio of select-service assets in the Midwest.
“We’re always optimistic, we’ve been doing this a long time. The hotel business is always cyclical. We’ve gone through a variety of downturns and the market always come out the other side because at the end of day people in America like to travel…We are staying in touch with clients, and ultimately the capital providers, so we have a good handle on what’s going and when it’s going to be going on,” he said, later adding, “we’ve seen a little more activity [of late] on the financing side.”
Sonnabend further emphasized the company’s long-standing relationships and diverse services as being keys to sustained success. “There are lots of borrowers we’ve worked with for a long time. We were really able to serve as an advisor to them as opposed to the last couple of years where there’s a lot of capital in the market and a lot of people were just looking for someone to process a loan for them and were looking for the low-cost provider. That’s not really how we run our business throughout the years. We value our relationships and we think we bring a lot of value to the table. We have clients who certainly hire us to do something because they value our skill in getting it done,” he concluded.