As we navigate through this unprecedented time, we would like to share the following updates.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law, making it the largest economic bill in U.S. History. In total, the law will provide federal relief to business, organizations, governments and individuals totaling approximately $2 trillion. We reviewed the law in detail and consulted with our counsel, lenders, tax advisors and partners. In particular, the law includes $349 billion in small business loans under the Paycheck Protection Program (PPP). Importantly, these loans may be forgiven if borrowers maintain their payrolls during the crisis and spend the funds on eligible costs within a certain time period. The maximum loan amount is 2.5 times the borrower’s average monthly salaries, as defined. For all impacted properties, we have applied for this loan and are awaiting lender / SBA approval.
In addition to the PPP loan, we’ve considered other governmental programs including the SBA’s Economic Injury Disaster Loans (EIDL). Under this program, businesses can borrow up to $2 million to provide working capital for expenses such as debt service, payroll and various operating costs. At this point, we’ve decided not to move forward with this loan until we formalize ongoing lender negotiations.
Constant Reforecasting, Drastically Cutting Expenses, Hotel Close Analysis
We are constantly working with our management companies in reforecasting cash flow scenarios based on new data / metrics. In conjunction with our forecasting, we have scaled back operating expenses to the bare minimum. Various upside and downside models have been calculated. Our objective is to maintain liquidity and ensure debt compliance and project viability. Additionally, we’ve considered the cost / benefit of closing hotels completely if not already mandated by the county. For our Hyatt Houston hotels, we’ve considered combining both hotels to save on operating costs while tracking revenues separately (TBD). All nonessential capex projects have been postponed.
Lender Communication / Debt Compliance
We are in constant communication with our lenders negotiating workout plans, including the following:
- Debt service deferrals/forbearance
- Approval to waive future FF&E deposits and to utilize existing balances to fund operating costs
- Early executions of loan extensions
- Drawing on unused loan proceeds to fund operating costs (projects coming out of construction)
Our construction projects are on schedule. We’re constantly in touch with our joint venture partners and lenders to ensure timely receipt of capital and loan proceeds as we proceed with construction. Our contractors are committed in moving forward with construction unless a state mandate is ordered ceasing all construction activity. Furthermore, our contractors have implemented procedures to protect workers from transmitting / exposing others on site.
We are also managing our preopening budgets accordingly. Our ramp up time has been scaled back thus decreasing certain preopening activities/costs.
We are tracking tenant AR daily (office and multifamily). We’ve been in communication with our tenants encouraging them to apply for government assistance (PPP loan, EIDL loan, payroll tax credits). In particular, PPP loan proceeds can be used to pay for rent and is considered an eligible expense when calculating their loan forgiveness amount. We must be creative in our “Covid-19” rent collection and lease negotiation efforts. For instance, we must only accept workout arrangements with truly impacted tenants, assuming they have a feasible forecast in making future rent payments. At our multifamily complex, we implemented an “early bird” special giving tenants an incentive to pay early in return for entering them in gift card drawings. For qualified multifamily tenants, we’re also requiring tenants to extend their lease term by 6 – 12 months in return for a workout arrangement.
Income Tax Changes
We analyzed the new tax law changes resulting from the CARES Act, noting the following:
- Temporarily lifts the cap on excess business loss limitations ($500k couple / $250k individual)
- Increases the limitation on deductible business interest from 30% to 50% of earnings for 2019 and 2020
- Allows 5 year carryback of net operating losses for non-REIT business for 2018, 2019 and 2020
- Allow 100% bonus depreciation for “qualified improvement property” fixing an error from the 2017 Tax Cut Law
All pertinent changes have been or will be considered by our tax CPAs. Please share these bullets with your personal tax accountants as numbers 1 and 3 are implemented at the individual level.
We are constantly monitoring the financial and real estate markets, government mandates, medical updates and investment opportunities, and adapting accordingly. These are uncertain times, but we have a handful of tools to combat this, and a strong team in place. In the next day, Leigh Ferrara, VP of Asset Management, will be sending you specific project updates on your respective investment. In addition, I’ve attached a commercial real estate article written by Wells Fargo regarding their economic outlook. Please reach out if you have any questions. We are committed to protecting your investment dollars and making decisions to optimize your returns. Thank you for your loyalty, trust and confidence in our Songy Highroads team.
Songy Highroads Team