Hotels in large chains will get small business loans

Marriott International Inc. and Hilton Worldwide Holdings Inc. are two of the biggest businesses in the world.

But thousands of Marriott, Hilton and other big-brand hotels are expected to qualify in the coming days and weeks for loans meant for small businesses, thanks to a provision the hotel industry lobbied into the $2.2 trillion relief package that Congress passed last week in hopes of keeping the economy from completely caving in during the global coronavirus pandemic.

The mammoth emergency-aid package includes $350 billion in forgivable loans for small businesses, which the federal government generally defines as companies with no more than 500 employees. But an exception added to the bill at the request of the American Hotel & Lodging Association would essentially allow in

dividual hotels and restaurants to be treated as separate small businesses — even if they are part of much larger chains.

The hotel lobby says the change reflects the reality of the modern hotel business. While most U.S. hotels are affiliated with a major brand, very few actually belong to the company whose name is on the building. The vast majority of hotels are instead owned by a sprawling network of real-estate investors and franchisees — most of whom are small- and midsized businesses suddenly struggling to make payroll and pay mortgages while their buildings sit empty amid nationwide social distancing and quarantining meant to slow the spread of COVID-19.

Some of the big chain companies — such as Wyndham Hotels & Resorts Inc., whose 20 brands include La Quinta, Ramada and Super 8 — say they will not seek direct government loans themselves from a $500 billion pot of money that Congress set up specifically to help large employers like American Airlines Inc. and the Boeing Co.

But they are now helping their franchisees and owners pursue help from the $350 billion pot of small-business loans.

“We are encouraging these owners to take advantage of the loans offered by the government and have been offering guidance on what they should consider,” said Hilton spokesman Nigel Glennie. “In this context, it is important to note that Hilton has not been seeking direct financial assistance from the United States government.”

Still, experts say driving uptake on the taxpayer-financed loans — and helping as many individual properties stay solvent as possible — is important for the big chains, who make much of their money from royalties and other fees paid by the owners across their networks.

“It’s like a chain that’s tied together,” said Cathy Enz, a professor of strategy and business economics in Cornell University’s School of Hotel Administration. “If you break one of the links, the chain itself becomes weakened.”

One reason the world’s largest hotel companies have grown so large and profitable over the past two decades or so is that they have shed almost all of their real estate holdings and turned themselves into companies focused solely on hotel management and marketing.

Altogether, the five biggest hotel companies — Marriott, Hilton, Wyndham, Choice Hotels International Inc. and InterContinental Hotels Group Plc — have nearly 36,000 hotels in their systems, according to regulatory filings. Yet they own or lease less than one-half of 1% of of them.

Nearly 90% are owned by franchisees who either run the properties themselves or hire intermediary management companies. The remainder are managed directly by the chain companies through long-term agreements with owners.

Analysts say the approach — which hotel executives call an “asset-light” strategy — should help the big chains endure the economic halt caused by the coronavirus. That’s because, for the vast majority of the hotels in their

systems, they are not the ones directly responsible for all the fixed costs that come with owning a building.

Most of that risk is instead being borne by the thousands of smaller hotel owners who collectively are carrying most of the lodging industry’s more than $300 billion in debt — and many of whom are now confronting occupancy rates in the single-digits or teens, if they are open at all.

The losses could be severe: Mortgage-data firm Trepp projects that the default rate across the lodging industry could reach nearly 10% next year — and that nearly onethird of hotel mortgages could default over the next five years.

The big chains say they are taking steps to help their owners.

For example, a spokeswoman for Choice, whose brands include Quality Inn, Clarion and EconoLodge, said the company has reduced and suspended a variety of fees it charges franchisees, including reputation-management fees, guest-relations handling fees, and fees charged on pastdue balances since March 1.

Still, the industry says that, for many hotels, survival without government help is impossible right now.

That’s where the new small-business lending program comes in. Companies can use the low-interest, lowfee loans — which will be for an amount company’s average payroll costs over two-and-ahalf months, up to $10 million — to cover expenses like wages, utilities, rent and mortgage interest over the next three months.

Importantly, the loans can become grants — but the amount the federal government will forgive will depend upon how many workers the business rehires by June 30.

There are about 54,000 hotels across the United States, according to the American Hotel & Lodging Association — and 33,000 of them have fewer than 500 workers each. But many of those 33,000 hotels are owned by businesses that own more than one property, and that would have been ineligible for the smallbusiness loans if the industry hadn’t lobbied in an exception for hotels and restaurants.

Executives say those loans will help — but also that they won’t be enough by themselves to keep the industry on life support during the coronavirus pandemic.

In the coming weeks, industry lobbyists plan to press Congress to increase the loan amounts — they initially asked for four times a hotel’s monthly operating costs, rather than two-and-a-half times its monthly payroll costs — and for more generous loan-forgiveness terms.

Lawmakers need to do more to help businesses pay costs beyond payroll in order to sustain them during the downturn, said Ray Martz, the chief financial officer of Pebblebrook Hotel Trust, which owns 56 hotels around the country, including in Miami, Naples and Key West.

Pebblebrook was generating $1 million a day in cash flow before the coronavirus pandemic exploded, Martz said. The company is now losing $1 million a day, he said.

“It’s great to take care of the employees,” Martz said. “But if the business isn’t there to open up, they won’t be able to rehire all these people.”