Along with all the other industries around the world, the U.S. hotel industry has been blindsided by the COVID-19 pandemic. Instantly, hotel owners have found themselves with empty hotels and depleted cash reserves, wondering how they will be able to make their monthly mortgage payments and payroll—things hardly ever considered to be a problem in the expansionary period leading up to COVID-19.
Due to the recent unprecedented sharp interest rate cuts by the Federal Reserve, the prime rate is now set at 3.25 percent, setting the table for many financing strategic options for hotel owners to consider. Debt refinancing, mortgage loan modifications, liquidation of assets, the Small Business Administration and Chapter 11 reorganization will become new buzzwords in the hotel industry.
Below are listed eight strategic hotel financing options that hotel owners might want to consider during these days of economic distress.
1. Ask your lender to modify your financing loan terms and defer payments.
During this difficult period of time I highly recommend honest, polite, direct, frequent and professional communication with all your stakeholders. This includes your lender or loan servicer along with your corporate business attorney and certified public accountant, as well as your hotel franchise company and any third-party management company. It is always best to keep a friendly and professional relationship with them all.
When you approach them, you should convey your willingness to be flexible. For example, if they ask you to make some concessions, such as implementing specific cost-cutting measures, you should consider them. If you are experiencing a severe financial hardship, then you should consider picking up the phone and drafting a letter to request your existing lender or loan servicer significantly modify their loan terms to be more favorable for you and to reflect the new business realities of today and to also defer their monthly loan payments for six months. When a lender allows a deferment, this means they will add the skipped mortgage payments to the back end of the loan to be paid at the end of the loan term.
To the hotel owners who currently have a U.S. Small Business Administration loan, you should pay special attention to the following paragraphs:
On March 10, the SBA sent Information Notice # 5000-20004 effective immediately to all SBA 7(a) lenders, 504 program certified development companies and microloan intermediaries to remind them of their unilateral authority to provide temporary relief in the form of deferred payments to existing borrowers. While the SBA did not specifically reference the COVID-19 pandemic, it is inferred that the SBA is issuing this reminder at this time in light of the current situation.