The entire world has been shaken up by the COVID-19 pandemic. As the number of worldwide cases approach 9 million and the number of deaths is closing in on 470,000, everyone around the globe is highly anxious for the day when life can just go back to normal. Likewise, the global economy has taken a huge hit over the past few months. In specific, the travel and hospitality industry has been decimated. Entering 2020, hospitality financing was business as usual. According to Taylor W. Grace, managing partner at MidCap Hotel Loans, “CMBS lending for hotels was extremely active, providing the best terms for acquisitions and refinances. The ability to finance PIPs and pull cash out of hotel assets also made CMBS a great financing option. For ground-up construction and value-add situations, debt via the SBA 504 program and from private equity bridge lenders was also readily available.
However, when COVID-19 hit, the entire landscape of the hospitality industry quickly changed. As this graph indicates, the leisure and hospitality industry has been impacted unlike any other industry. Many hotels have had to shut down and tons of employees have been let go or furloughed. Additionally, the American public seems very skeptical about the idea of traveling in the near term. The Harris Poll found, “only one in six (15%) Americans saying they’ll fly within a month after the government signals that COVID-19 is abating. Another 16 percent (31% combined) say they’ll fly within three months. Worryingly, only about half of Americans (49%) think they’ll be ready to fly at the six-month point.” With regards to the hospitality industry, the poll found that, “One fifth of Americans (21%) say they will stay in a hotel within a month of the curve flattening, twenty percent will stay in a hotel within three months and sixty percent of respondents will visit a hotel within 6 months.
This data is not promising for commercial real estate investors focusing on the hospitality industry. Hotel and motel loans have lost favor with many of the traditional lenders. Local banks and CMBS lenders simply don’t want to assume the risk of lending on a property that appears to have low income potential for months to come. In fact, last month the CMBS delinquency rate recorded its largest month over month increase in the least three years, adding to the hesitation to lend on properties not currently generating income. However, while hotel financing with traditional lenders may have come to a halt, there are still some potential options for those who need a hotel loan right now. There are still some private and hard money lenders willing to provide hotel financing for strong borrowers with discounted opportunities. Additionally, the SBA is still lending on hotels. There are many advantages of pursuing a hotel loan through the SBA. While rates will be slightly higher than with a conventional bank, the SBA will finance between 85-90% of the acquisition price and 100% of the property improvement cost for furniture, fixtures and equipment (FF+E). Further, the SBA will allow longer terms and amortizations of up to 25 years. One potential downside to the SBA program is that it will not provide financing in order to refinance a prior SBA hotel loan.