Inside the CARES Act: How its loans can help hoteliers
 
Inside the CARES Act: How its loans can help hoteliers
01 APRIL 2020 9:08 AM

A recent webinar hosted by the U.S. Travel Association explained the relief programs in the recently approved CARES Act and how it can help those in the travel industry, including hotel companies.

REPORT FROM THE U.S.—The newly enacted CARES Act provides a number of relief programs that can help owners and managers in the hotel industry, but with so much packed into the $2-trillion stimulus package, it’s not easy to navigate.

The U.S. Travel Association held a webinar explaining the different aspects of the stimulus package, looking at the programs offered, who in the travel industry is eligible for what and how they can apply for assistance.

“Ultimately, this is a really solid first step in helping our industry,” said Tori Barnes, EVP public affairs and policy at USTA during the webinar. “And the focus now needs to be on making sure that our agencies … will move quickly to get this money out the door and in the hands of our travel workers and businesses.”

Working through government processes like these aren’t easy and can be difficult to understand and inefficient, she said. However, many of these programs allow businesses to tap into their normal resources, such as banks, to optimize their loans.

Emergency stabilization fund
The CARES Act invested $454 billion into an emergency stabilization fund through the U.S. Department of Treasury, said Erik Hansen, VP of government relations at USTA. The Treasury will then provide that fund to the Federal Reserve to support facilities and programs for U.S. businesses, states and municipalities suffering from direct or indirect losses from the coronavirus (COVID-19) pandemic, he said.

Eligibility for this fund is broadly defined, meaning the CARES Act did not provide specific direction to the Treasury or Federal Reserve, giving both discretion in how they move forward.

“Really any U.S. business that has major operations here in the United States, is headquartered here in the United States, has most of their employees in the United States—they're going to be eligible potentially to receive assistance under this program,” he said. “One other important point is that this is really a pot of funding that's for any organization or business that has not received substantial relief or adequate relief elsewhere under the CARES Act.”

The assistance made available through this funding has to be provided across any industry on similar terms or broad swaths of the economy on similar terms. It can’t take a company-by-company or even an industry-sector-by-industry-sector approach because taking a broad-based application helps the Treasury and Federal Reserve reduce risk, he said.

Much of this financial assistance will come through the banks, credit unions and other financial institutions that businesses may already do business with, Hansen said. The Federal Reserve will likely establish programs or facilities to help loosen up credit in the marketplace so lenders can begin lending again and take higher risks in the loans they’re providing to customers.

The Treasury does have an option for direct loans to businesses, but those come with strings attached, he said. Companies that accept direct loans can’t repurchase their own equity, known as a stock buybacks, and they can’t pay dividends or make other capital distributions on common stock. That limitation runs through the duration of the loan and an additional 12 months after the loan is paid off.

The CARES Act also gives direction to encourage the Treasury secretary and Federal Reserve to create programs for small and midsize businesses, Hansen said. The Treasury has already announced it intends to create a major lending program, which is an opportunity for smaller and midsized-businesses that might fall through the cracks of the Small Business Authority program to receive some type of credit and liquidity assistance through financial institutions.

Another tool is a troubled debt restructuring program, in which there’s broad authority in there for existing financial institutions with outstanding loans to renegotiate the terms of the loans in a more lenient way.

SBA Coronavirus Economic Injury Disaster Loans
The CARES Act provides several programs through the SBA that each have their own benefits, requirements and restrictions, said Treon Glenn, senior director of government relations at USTA. The first line of defense would be to go through the SBA’s Coronavirus Economic Injury Disaster Loans program, which would be the main way most businesses receive assistance. The second line of defense would be the new Paycheck Protection Program that provides loans to a smaller pool of businesses and organizations with loan forgiveness if it’s used to retain employees.

There’s also help through the SBA Express Loan Program for miscellaneous expenses and a catch-all provision taking care of loan repayments on certain existing SBA loans and newly issued 7(a) loans, he said.

Businesses with 500 or fewer employees are eligible for the Economic Injury Disaster Loans, Glenn said. Businesses with more than 500 can potentially qualify if they meet SBA size standards based on annual revenue or number of employees.

“If you’re a hotel that made less than $35 million in gross revenue last year, you're eligible regardless of employee size,” he said. “You’re going to want to really focus in on that SBA size standard. And if for some reason that does not incorporate you, then the other sort of standard of 500 employees or less will be your metric.”

The loan amount is based off how much a business needs to cover ordinary expenses, but it’s capped at $2 million a loan, Glenn said. The interest rate is capped at 4%, but in the past, the SBA has set its interest rates for these types of loans below that. The length of the loan maxes out at 30 years, but it might be shorter depending on a company’s finances.

“The main benefit of this program is that it's available to a broad group of businesses and organizations and also can be used for a broad array of purposes,” he said, which is why it’s likely the first line of defense.

The loan can be used to pay for fixed debts, payroll, accounts payable and other expenses a business can’t pay because of COVID-19, he said.

This loan is also the quickest way to get cash because those who are eligible will receive a grant of $10,000 within three days of applying, he said. It’s treated as a cash advance of the loan, but applicants don’t have to pay it back even if they’re denied the loan as long as they meet the eligibility requirements. It’s also faster in that it allows applicants to go directly to the SBA instead of through a bank, he said.

SBA Paycheck Protection Program
The SBA interruption loans, known as the Paycheck Protection Program, helps smaller businesses cover payroll, Glenn said. Businesses with fewer than 500 employees are eligible, but for hotels, the SBA allows the company to have more than 500 employees as long as there are not more than 500 employees in any one location. The USTA is working with the SBA to get more clarity on issues on things like franchisors, he said.

Applicants can receive loans up to 2.5 times their average monthly costs of employee compensation up to $10 million, which includes compensation to independent contractors making less than $100,000 a year. Compensation is defined as wages and salary, healthcare benefits, retirement benefits, state and local payroll taxes, severance and other miscellaneous items.

As with the economic injury loan, the SBA caps interest rates at 4%, but that may be lower depending on the individual case and lender, he said. Unlike the economic injury loan, this loan must go through an authorized lender, such as a bank or credit union.

Borrowers under this program don’t have to pay loan fees, prove they can’t find credit elsewhere or provide collateral or a personal guarantee, Glenn said. The loans have no penalty on prepayment, and repayments are deferred for the first six months up to a year. The exact length depends on the lender and SBA regulations, he said.

Companies within the program can have a portion of their loan forgiven tax free if the money is used to cover eight weeks of payroll, rent, utilities or mortgage debt interest, he said. However, the amount of loan debt forgiveness will be reduced if a company reduces the number of its employees or wages during those eight weeks.

“The whole purpose of this program is to provide you with help to cover your payroll costs so that you can retain employees,” he said. “If you reduce your employees, then you will not be able to get loan forgiveness on certain amount.”

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