Tips for communicating COVID-19 challenges to lenders
Tips for communicating COVID-19 challenges to lenders
23 MARCH 2020 8:11 AM

With tough times ahead for the hotel industry amid the coronavirus outbreak, Peter Berk, president of PMZ Realty Capital’s hotel finance group, shared tips for owners on how to communicate with lenders.

REPORT FROM THE U.S.—The hotel industry has hit a rough patch with the current COVID-19 outbreak, which is why it’s important for owners to inform their lenders about their property’s situation.

On a recent webinar hosted by the Asian American Hotel Owners Association, Peter Berk, president of PMZ Realty Capital’s hotel finance group, said owners need to communicate as much as possible with their lenders through their attorney, usually in the form of a letter.

Here are the six things the letter should address.

  1. Share the property’s location and unique ID number.
  2. Explain the owner’s history of good payment.
  3. Tell them about the hotel’s GSS and quality scores.
  4. List out the demand drivers in the hotel’s market.
  5. Explain the ranking in STR’s STAR report. (STR is the parent company of Hotel News Now.) 
  6. Tell the lender what’s happening at the hotel.

“Obviously the hotel business is hurting, occupancy is down. It's nobody's fault from the hotels,” Berk said. “We had a black swan here in the form of a pandemic, something nobody could have forecast. But nonetheless, hotels reprice themselves every night, and we have to sell our rooms every night. And so we’re the first impacted, which is painful, but remember, we’re also the first to come out of it. So as soon as travel starts again, things tend to turn around pretty quickly.”

Lenders might already know about the hotel because information is sent to them annually or semiannually, but it’s important to “pump it up” in a letter so they know owners, their property and their situation, he said.

Owners should let the lender know how their property was performing before the COVID-19 outbreak and how it’s doing now as well as include the steps they’ve taken, such as reducing labor and cutting the number of breakfast options available to guests, he said.

Writing a letter lets the lender know the owner is doing their best, but is “expecting trouble ahead” and “might need help down the road,” he added.

Waiting on lenders
While it’s important to start a dialogue with lenders, it’s too early to know how lenders are going to respond to the COVID-19 situation, Berk said.

“We're going to have to wait to see how this plays out over the next couple of weeks, when the lenders actually come to a decision,” he said.

From Berk’s experience working with lenders in 2008 and 2011, he said owners saw more success with lenders if they presented a two-way street. Don’t just look for something from the lender, but offer them something, he said.

“In other words, (don’t go to the lender and say,) ‘Hey, I can't pay anymore. What can you do for me?’” Berk said. “It was always a much better discussion, and the results were always much better, if you went to the lender and said, ‘Hey, I can't pay anymore. But look, this is what I want to do. I can switch to recourse. I love this property, I'm not going to give it up. I want to invest it, pay down my loan by $250,000 if you have the ability to do that.’”

Navigating the COVID-19 outbreak
During a Q&A portion of the webinar, an attendee asked if they should foreclose and get a servicer to renegotiate their loan terms. Berk said he would not recommend this.

“I would recommend communicating with your servicer,” he said. “Going into default is never a good thing. I would communicate with your lender (through an attorney) exactly what’s happening and not try and play hardball.”

When asked if owners can take advantage of the Fed cutting interbank interest rates to almost zero, Berk said there will be opportunities, but not just yet.

“The Fed cutting rates will be like a rocket fuel to our business, and you will definitely be able to take advantage with low rates,” he said. “However, right now, as we're sitting here on Wednesday, 18 March, most lenders are nervous about lending into the sector, just because there's uncertainty and lenders don't like uncertainty. They don't know if this virus situation is going to last 30 days, 60 days, and if they knew that certainty … they can underwrite around that.”

Things that would make the situation less uncertain might be a leveling off of COVID-19 cases in the U.S., like what’s being seen in China, or a new antiviral is released for the virus, he said. Owners will know there’s less uncertainty when the stock markets start to level off and recover losses, he said.

“But once we start to see one of those elements, I think lenders will start to lend again,” he said. “And then … the fact that the Fed lowered interfund rates to almost zero will absolutely take effect.

“My crystal ball says that when lending starts up, rates are going to be in the 3%-3.5% range. And we have to wait for that to happen. And for that to happen, we have to wait for lenders to get some comfort that we're beyond the current situation.”

Looking into his crystal ball again, Berk gave his take on when things will start to normalize.

“The drumbeat of bad news is going to get worse, consistently worse and consecutively worse over the next four to five weeks just because we have more testing,” he said. “I don't think the actual sickness is any worse, but the fact that we're testing more, every week is going to be 2,000 cases, then 10,000 cases, then 50,000. It’s going to sound like it's getting worse because we have a lot more testing capacity. That’s going to keep people socially isolated up until Memorial Day. I think it's going to level off after then.”

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