Providing insight on the hospitality sector's varying debtsolutions in relation to the current, on-going crisis, Alan Cohen,chair of Akerman LLP's real estate finance practice and co-officemanaging partner of the firm's New York office, recently connectedwith GlobeSt.com to answer a few questions regarding paymentoptions within the hotel landscape.

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Are lenders permitting deferred payments from certainhotel borrowers in order to withstand the crisis and generateincome to pay debt service?

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We are all well-aware that the current slowdown is vastlydifferent from that related to the Great Recession. Uponthe onset of the COVID-19 pandemic, almost overnight, peopleisolated themselves in their homes, travel and tourism ceasedstaying at hotels became a non-viable option.

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Many major urban hotels' average daily occupancy dropped intosingle-digits and, as a result, many were forced to close;excluding those that were able to serve medical personnel and otherfirst responders. Subsequently, cashflow ceased and operators andowners were unable to pay debt service and operating expenseswithout coming out of pocket.

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Considering the flood of defaulting hotel loans in mid-March,servicers had to quickly engage with borrowers to provide temporarysolutions in order for borrowers and operators to get through thecashflow crisis.

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Uncertain of how long the pandemic would last, many lenders andservicers, including CMBS servicers, responded by utilizing cashreserves built into loans to cover debt service payments as well asother operating expenses, in order to keep the loans fromdefaulting and/or deferring a portion of the monthly debt serviceor converting to interest only for a period.

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For instance, if the loan had FF&E, seasonality, PIP orCAPEX reserves, the servicers might permit the borrowers to dipinto these reserves for a portion of the requiredpayments. Servicers have also triggered the cashmanagement provisions of loans to secure and control cashflow andpayments. Most of the initial accommodations or deferrals coveredthree month periods in order to keep the loans performing, althoughin some instances, depending on the type of hotel, servicersgranted six month accommodations, rendering three month solutionsinadequate. Such lengthier accommodations were permitted forhospitality classes including resorts, big box urban hotels andcomparable hotel types, where cashflow would likely be severelydiminished over longer periods of time.

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That being said, some lenders and servicers are unwilling toabsorb the pain and provide borrowers with a "free ride" to getthrough the crisis. Therefore, many servicers requireborrowers' sponsors to share the burden by covering at least 50% ofthe operating shortfalls to meet debt service and other expenses byway of capital contributions. The logic being: if a sponsor is notwilling to go out of pocket to keep the hotel viable, then whyshould the lender agree to accommodations? Consequently,some of the less capitalized sponsors are "giving the keys" back tothe lenders.

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As the cashflow crisis commenced in mid-March, the three monthsolution period ended in June and the six month solutions will endin September. At the end of these periods, borrowers andservicers will further examine the quality of the assets todetermine which assets should receive longer-term solutions fordebt servicers and covering operating shortfalls. Presumably, uponthese decisions, lenders and servicers will impose added,unrelenting burdens on borrowers; at which point, many borrowersmay abandon their assets.

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Are some hotels better-positioned than others? Whatfactors come in to play?

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Of course, a borrower or operator's ability and willingness towork with loan servicers in order to make it through this crisis isdependent on a number of factors, including the type of hotel,geography, level of management and sponsor capitalization.Borrowers with outdated hotels, 'big box' urban hotels or hotelslocated in overbuilt markets might be less willing or unable tocontribute large amounts of capital in order to cover operatingshortfalls; even when subsidized by servicer deferrals andaccessing existing cash reserves.

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The same holds true for sponsors who are notwell-capitalized. It comes down to a sponsor's businessdecision as to the hotel's prospects and whether it makes sense toinvest good money.

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Large, branded chains with professional management will usuallyhave access to capital in this regard; but again, it's a businessdecision as to whether it makes economic sense to support the hotelor simply give the keys back to lenders.

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Updated hotels situated in busy, business corridors may be morewilling to cover operating shortfalls in order to make it throughthe crisis. However, even these sponsors will needassistance from lenders and servicers.

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What are loan servicers taking into account as theygenerate strategies to provide hotels with breathingroom?

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In addition to the previously mentioned, various factors,servicers will, of course, revise their original underwriting forthese loans and stress many of the initialassumptions. Factors such as the type and classificationof the hospitality asset (e.g., full or limited service, hotelquality, standalone or brand, management quality and thesponsorship's capitalization) will play a major role into theextent and willingness with which servicers will enter intolonger-term accommodations.

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An additional factor that servicers have recently articulated iswhether a borrower has recently cashed-out proceeds from an assetand to what extent they have done so. If a cash-out has recentlyoccurred, a servicer may require the sponsor to inject a portion ofthose proceeds to cover shortfalls.

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The general consensus within the market is that the hotelindustry may not return to pre-COVID occupancy levels until 2022 or2023. Accordingly, only those sponsors who have qualityhotel assets, access to capital and sound business plans will beable and willing to commit the capital necessary – when combinedwith lender modifications and flexibility – to cover shortfallsduring such an extended period.

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Optimistically assuming that the pandemic will cease in thecoming six to nine months, the industry remains hopeful that peoplewill begin to travel again for business and/or pleasure, andtherefore, tourism will rebound and destination resorts will reopenand thrive once again. That said, servicers would be willing to beton well-capitalized sponsors with quality hotels in sound marketsthat are able to cover shortfalls. In order to satisfyservicers' current underwriting concerns for such assets, sponsorswould need to provide convincing, updated business plans,exhibiting sustainable strategies to endure the extendedslowdown.

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Given the increasing number of hotel loans in or around default,it behooves lenders and servicers to find and achieve acceptable,long-term solutions for hotel borrowers. However, considering thevarious factors presented above, servicers should not hesitate toreclaim assets for which recovery prospects are uncertain ordoubtful.

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Alan Cohen Headshot AkermanLLP's Alan Cohen

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Ingrid Tunberg

Ingrid Tunberg sits on the editorial team as a coordinator and reporter for Real Estate Forum and GlobeSt.com. She is responsible for writing stories, assisting with industry awards and marketing nomination events. Previously, Ingrid worked as a copywriter across various industries throughout New York City and Chicago.