A THG client and lauded community philanthropist is the owner of a 95-room, full-service hotel located in downtown Los Angeles. When COVID-19 hit in March of this year, occupancy was decimated, dropping from 90% occupancy to 15% occupancy in less than 30 days. Faced with significant cash flow deficits, the Owner was forced to shutter the hotel and close a very popular on-site restaurant.
IT TAKES A VILLAGE
The Hotel Owner, a prominent businessman with a long history of successfully owning and managing hotel and resort properties, recognized COVID-19 as an unprecedented, exogenous event. With a stellar track record of consistent and on-time mortgage payments on all outstanding loans, the Owner had never needed to negotiate with a Master or Special Servicer. His 40+ years of experience compelled him to seek bench strength in order to effectively deal with his pending distressed CMBS loan.
George Smith Partners, a leading national real estate capital advisory firm based in Los Angeles referred us to the Owner. GSP's Hospitality Team specializes in hotel and resort investment sales and financing in North America.
Rather than choose between using his long-term real estate attorney or hiring a CMBS Loan Restructuring Firm like The Henley Group, he hired BOTH. The collaboration proved quite fruitful in resolving the legal and financial challenges that mounted over the next 6 months.
As one of the early round COVID-19 forbearance requests, the Lender was extremely cautious in granting relief terms. One of the Lender's primary concerns was "giving away too much too soon." Translation: if by some miracle a vaccine was developed quickly and proven effective in preventing further spread of COVID-19 cases, then guests would resume hotel stays and the longer term relief provided by the Lenders would not have been necessitated. This belief persisted throughout the process.
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THG TIP: The "giving away the store" mentality is pervasive among Lenders and a detriment to obtaining longer term forbearance for many property owners. Owners should negotiate extension options into their loan modifications whenever possible.
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RELIEF FOR BOUTIQUE HOTEL
After multiple months of negotiations with the Master Servicer and several threats by the Lender to move the loan to Special Servicing, a deal was struck by the parties.
- The Lender consented to the Payroll Protection Plan (PPP) so the Owner could obtain the funds needed to maintain critical employees at the hotel and to pay key operating expenses.
- The Lender consented to the closing of the hotel and accepted a federally funded Emergency Occupancy Agreement that allowed the homeless (non-COVID-19) to take shelter at the Property.
- The Borrower was allowed to access 4 months of the FFE reserve to make monthly P & I loan payments. The Lender waived 6 months of FFE deposits and extended the payback period 9 months.
WHAT WE LEARNED Servicers may or may not require Personal Guarantees on borrowed FFE monies. The repayment terms of borrowed FFE reserves can be negotiated along with the postponement of funding new reserves, however the length of forbearance is limited under Master Servicing agreements. Transferring to Special Servicing provides more optionality, but comes at a cost.
