Urgent Letter
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April 27, 2020 The Honorable Nancy Pelosi The Honorable Kevin McCarthy Speaker of the House Republican Leader U.S. House of Representatives U.S. House of Representatives Washington, DC 20510 Washington, DC 20510 The Honorable Mitch McConnell The Honorable Chuck Schumer Majority Leader Democratic Leader U.S. Senate U.S. Senate Washington, DC 20510 Washington, DC 20510 Dear Speaker Pelosi, Leader McConnell, Leader Schumer & Leader McCarthy: On behalf of the American Hotel & Lodging Association (AHLA) and the undersigned hoteliers and hotel employees from all 50 states, we thank you for your steadfast leadership in guiding our nation through this unprecedented health and economic crisis. The economic impact of the COVID-19 health crisis on the hotel industry is estimated to be nine times greater than the September 11th terrorist attacks. According to Oxford Economics, nearly 4 million hotel employees have been furloughed and the industry is expected to lose nearly fifty percent of its total revenue in 2020 – which could exceed $112 Billion. From the beginning of this health and economic crisis, we have been focused on two main objectives: first, supporting and retaining hotel employees as demand has diminished; and second, saving the U.S. network of local hotels, the majority of which are small businesses. The hotel industry relies on a dedicated and talented hospitality workforce and is hopeful that we can restart the economy so that we can restore these critical jobs. However, if hotels across this country are insolvent and default on their loan obligations, then we will not be successful in retaining hotel employees. Hotel employees and local hotel owners have been negatively impacted by the COVID-19 pandemic through no fault of their own. Both need additional assistance to make it through this crisis. That is why we strongly support the historic Coronavirus Aid, Relief, and Economic Security (CARES) Act and laud the policy goals contained in the Paycheck Protection Program (PPP) which is designed to benefit our impacted employees and keep them tied to their employer. The CARES Act is a shining example of bi-partisan leadership to address one of the greatest challenges our nation has ever faced. It is also playing a vital role preventing significant and long-lasting economic damage for tens of millions of Americans. The scope of the legislation and the speed in which you acted is providing a lifeline to thousands of small businesses including those in the hospitality industry. Legislation this large and complex often needs tweaks and other technical corrections. As Congress considers additional legislation to address the economic fallout due to COVID-19, we urge you to consider the following technical corrections and critical enhancements which are necessary to aid the hotel and lodging industry through this incredibly challenging period. I. Technical Corrections to Administrative Guidance for PPP Loans Under the CARES Act 1. Provide Additional Flexibility for use of PPP Funds Given the Impact of Extended Social Distancing and Shelter in Place Orders. a) AHLA requests greater flexibility in the requirements that certain percentages of PPP loan proceeds be used for Payroll Costs within the 8-week covered period. b) Rationale: Current federal, state, and local government orders make travel and tourism largely impossible for non-essential purposes, decimating hotel demand and revenues. Support is needed not just to assist employees, but also to ensure local hotel owners do not default on their mortgage or become insolvent. The CARES Act does not specify a mandatory allocation of funds among the four allowable uses of PPP loans (i.e., payroll, mortgage or rent payment, and utility payments). However, the Interim Final Rule released by the SBA on April 2, 2020 requires that 75% of PPP proceeds be utilized for payroll. We strongly support the policy objective behind this rule. As a practical matter, however, payroll does not represent 75% of a hotelier’s monthly expenses, and the remaining 25% does not leave enough margin for owners to also be able to pay their mortgage, utilities, rent and other time-sensitive loan obligations. Retaining and rehiring employees remains hotel owners’ top priority, but that is only possible if they can retain their physical asset. The 75% rule therefore arbitrarily caps the overall utility of these loans and may not sufficiently assist a hotelier facing insolvency as other obligations come due. AHLA recommends reducing the payroll threshold to 50% which will allow similar overall levels of support to go to our employees while also better assuring the long-term viability of the hotel as a place of employment. 2. Clarify that in the hotel and lodging industry, the eligible borrower for a PPP loan is the business entity ultimately responsible for employee payroll, benefits, and insurance expenses. a) AHLA seeks affirmation that the eligible borrower on a PPP loan is the entity ultimately responsible for the provision of employee payroll, benefit, and insurance expenses – which in the case of the hospitality industry is the hotel owner or Tax REIT Subsidiary (TRS) b) Rationale: The hotel industry utilizes a unique ownership and management structure. In a typical arrangement, a property owner contracts with a third-party management company to operate a hotel property, including hiring property employees. The property owner – or TRS - who leases the property from the property owner - remains legally responsible, via the management contract, for reimbursing the third-party management company for all operating expenses, including employee payroll, benefit, and insurance. PPP loans are intended to provide a bridge for critical operating expenses, including payroll expenses. In the example provided above, the eligible PPP borrower would be the property owner or TRS, even though employees are employed by the management company. 3. Amend the two-year term on SBA loans. a) AHLA proposes to increase the term of the loan to at least four years. b) Rationale: Full recovery for the lodging industry following both the September 11, 2001 terrorist attacks and the 2008 recession took more than two full years. Given the far greater impact of the COVID-19 health crisis, full recovery is not expected until 2022. It will take hotel owners more than two years to aggregate sufficient profits to pay back the PPP loans. Thus, most hoteliers will not have the ability to begin repayment of additional debt incurred because of this crisis until 2023 at the earliest. II. Critical Enhancements to the CARES Act Supported by the Hotel Industry 1. Increase the Maximum Loan amount to Cover Payroll and Debt Service. a) AHLA proposes amending the maximum loan amount to eight (8) months of Allowable Uses as defined in the CARES Act. Attached to this letter is an economic analysis which highlights why the current funding formula is insufficient for the hotel industry given a hotel’s typical cost structure and the expected travel recovery timeline. b) Rationale: The maximum loan under the PPP, defined as 250% of average monthly Payroll Costs for the prior calendar year, is insufficient for the hotel industry. Limiting the loan amount to 250% of payroll provides limited funds for the servicing of debt, taxes, insurance, and utilities necessary to keep a hotel in business. We therefore recommend an eligibility formula that looks beyond payroll costs, even while maintaining the overall $10 million cap on PPP loans. While maintenance of payroll will be the first priority, failure to also assist with other obligations may result in shuttered hotels and an even bleaker employment picture longer-term. 2. Provide Flexibility to Utilize PPP Proceeds Over the Entirety of the Covered Period. a) AHLA proposes amending the “covered period” found in section 1106 “Loan Forgiveness” to be defined as the time period between the loan origination date and the re-hire date or December 31, whichever is later. b) Rationale: Unless PPP funds can be spent over the full course of the crisis until demand returns, employers will be left with no revenue to maintain payroll after that 8-week period. Consequently, many employees who have been brought back on payroll through the PPP loan will not be maintained. Further, based on the current trajectory of the COVID-19 health crisis, mandating payroll usage on the heels of the loan origination will likely force some employers to furlough employees after that 8-week period. By providing employers flexibility to utilize PPP payroll funds over a longer time period, many employees will be retained through the most severe period of revenue loss and return to full time employment once demand returns. 3. Extend the Covered Period beyond June 30, 2020. a) AHLA proposes amending the date to December 31, 2020. b) Rationale: Many hotels have been forced to close by local and federal government mandates and executive action. If not directly ordered to close, business and leisure travel is almost nonexistent due to shelter in place requirements, including some states which have orders in place until June. Hotels are not likely to resume normal operations until much later this summer at the earliest. Additionally, many banks and financial institutions remain unable to accept PPP applications and/or process loans. Again, on behalf of our nation’s domestic lodging industry and our more than 8 million employees across the country, we thank you for your leadership during this unprecedented time and for your consideration of these technical