Hospitality Investment Roundtable

March 31, 2020

Hospitality Investment RoundtableCo-Chairs

Michael MedzigianChairman & Managing Partner

Watermark Capital Partners

Raj ChandnaniChief Development OfficerWATG | Wimberly Interiors

American Hotel and Lodging AssociationUpdate

Brian CrawfordExecutive Vice President,

Government AffairsAHLA

Chip RogersPresident & CEO

AHLA

CARES Act

•$349 billion in small business loans;

•Expanded unemployment insurance, tax rebates and business tax provisions;

•Funding for hospitals, healthcare facilities and providers;

•Funding for impacted industries, including hotels.

COVID-19

Potential Phase 4

Legislation

➢ SBA funding➢ Payroll calculation adjustment➢ Indemnification language for

properties being utilized during COVID-19

➢ Limited Liability Language once health crisis passes

➢ Business Interruption Insurance Fund ➢ Pandemic Risk Insurance Program

➢ COVID-5: How to incentivize travel post health crisis

Hospitality Investment Roundtable

March 31, 2020

2020 Roadmap for Distressed Hospitality Assets:Navigating COVID-19 and the Aftermath in These Troubled Times

Rick S. KirkbrideGlobal Chair, Hospitality & Leisure Practice GroupPaul Hastings LLP

Required ClosuresNo Federal closure orders yet, but many closure orders have come at the state, city and county levels. • In most states (but not all), hotels are considered essential businesses and are allowed

allowed to operate, albeit, with some restrictions• Nevada’s order provides that hotels are essential, but that gaming is not• Miami’s order prohibits operation unless COVID-19 related. Even where permitted

to operate, however, workers are permitted only for continuity of operations only (i.e., receptions, cleaning staff, security etc.).

• In some states and counties, violations of these orders are considered criminal, and in others, authorities are simply inquiring as to employees’ compliance with shelter-in-place regulations.

• Employers should consider providing safe passage letters for employees whose attendance at the workplace is critical.

Closing the Hotel• Prior to closing a hotel or moving to skeleton staffing, Owners should consult

key agreements and discuss with counsel• Closure of a hotel is often not addressed in key documents

• Parties should review ground lease, joint venture, loan, management, franchise and other material agreements and determine if consent is required prior to closure of hotel

• Query if formal amendment to any key agreements is required by contract or if federal, state or local law requires closure notwithstanding any pre-existing contractual arrangements

• Management and franchise companies have provided forms of closure agreements

• As an alternative to closure of the hotel, Owners may determine to operate the hotel with a skeleton crew

• May avoid triggering defaults under key agreements but, as with closure, should be done in consultation with counterparties if at all possible

• Employees generally limited to those necessary to provide essential services

Closing the Hotel – Other Considerations

• Are you under contract to sell or buy pursuant to a purchase and sale agreement? • Will closure result in any default under a ground lease or other documents (i.e.,

condominium documents, rental management agreements, CC&Rs etc.)? • Consider prohibitions on distributions, as distributions of cash are often prohibited

during an Event of Default. • Is the property properly secured to avoid insurance issues and/or claims of waste or

gross negligence? • Review any applicable business interruption policies. Some may specifically exclude

virus-related losses. • Consider prioritizing ground rent, taxes and insurance. • Send force majeure notices only if required to preserve rights and do not send notices of

closure unless permitted or required by law (if applicable). • Assure your compliance, and manager’s compliance, with employment laws.

Families First Coronavirus Response Act (FFCRA)

Paid sick leave provisions of the FFCRA applies to employers with fewer than 500 employees• 80 hours of paid sick leave at the employee’s regular rate of pay where the employee is

unable to work because the employee is quarantined and/or is experiencing COVID-19 symptoms and seeking medical diagnosis.

• 80 hours of paid sick leave at 2/3 of the employee’s regular rate of pay because the employee is unable to work due to a need to care for an individual subject to quarantine, care for a child (under 18 years old) whose child care provider is unavailable due to COVID-19 or employees experiencing substantially similar conditions.

• Up to an additional 10 weeks of paid extended family and medical leave at 2/3 the employee’s regular rate where the employee has been employed for at least 30 calendar days and is unable to work due to a need to care for a child care provider is closed due to COVID-19

Emergency Family and Leave Medical Leave Expansion Act

Adds language to the FMLA to allow for child care-related leave due to the COVID-19 pandemic (generally applies to employers with 500 or more employees)• Covered leave is available to those with a “qualifying need related to a public health

emergency.” The recent amendments include within this definition, those employees who are unable to work because the employees’ child’s school or daycare has been closed due to a public health emergency. The coverage lasts at least 30 days.

o Eligible employees may receive up to 12 weeks of leave. The initial 10 days is unpaid, and after that, covered employers must pay no less than 2/3 the employee’s regular rate of pay.

• Covered employees are entitled to return to the same or reasonably equivalent position

WARN Act

Employees must generally be given 60 or more days’ notice if the WARN Act is triggered. If you decide to reduce headcount, the threshold question is whether the act applies:• Federally, only employers with more than 100 or more full-time employees are covered by federal

WARN act (this is different for mini-WARN Acts with respect to specific states). A full-time employee is someone who works more than 20 hours per week and has been employed for the last 6 of 12 months.

• Note that some state mini-WARN Acts have been suspended during the COVID-19 outbreak

• Employment Loss: means an employment termination for purposes other than cause, voluntary discharge or retirement, a reduction of 50% in working hours each month of any consecutive 6 monthperiod, or a layoff for at least 6 months.

• Unforeseen business circumstance exception – where a layoff is caused by something not reasonably foreseeable at the time the 60-day notice would have been required.

• The Federal WARN Act also provides exceptions for businesses seeking capital or experiencing natural disaster, either of which may apply under certain circumstances.

Guests with COVID-19

• Do NOT disclose the identity of the guest. However, an owner may refer to the room number in addressing treatment of the guest and special housekeeping concerns.

• Owners may force guests to vacate if, based on objective evidence, the guest will pose a direct threat to the health or safety of others in the workplace. Objective factors include: (i) duration of the risk; (ii) nature and severity of potential harm; (iii) likelihood that potential harm will occur; and (iv) imminence of potential harm.

• If the guest stays, request they do not leave their room, provide food in disposable containers and suspend housekeeping (although a system of exchanging linens should be developed).

• All employees should use personal protective equipment when in close contact with the guest (i.e., within 6 feet, or in the same room, as an infected person for a prolonged period of time).

Employees

• Employers should not require or institute testing for employees for COVID-19, unless directed to do so by health authorities.

• Employers may require an employee leave the workplace or disclose a COVID-19 diagnosis if the employer has a reasonable belief the employee’s ability to perform essential job functions will be impaired or the employee poses a direct threat to the health and safety of others.

• Employers cannot require an employee to quarantine, but can send them home from work and should advise employees of steps to take prior to non-essential business travel.

OSHA

The OSHA General Duty Clause requires hotel owners to furnish employees with a place employment free from recognized hazards likely to cause death or serious physical harm

Title I of CARES Act Appropriates $349 billion for businesses with fewer than 500 employees (per hotel)

• Entitles applicants to loan forgiveness, conditioned on the use of proceeds for eligible costs (payroll, employee benefits, salaries/compensation, mortgage obligations, rent, utilities and other debt obligations incurred prior to the covered period (February 15,2020 – June 30, 2020).

• The portion of the amount of the loan eligible for forgiveness will be reduced based on ratio of (i) the average number of full-time employees employed during the 8 weekperiod following loan funding, to (ii) the average number of full-time equivalent employees employed prior to the COVID-19 crisis.

• The principal amount may also be reduced by an amount equal to the sum of all reductions of more than 25% in salaries and wages for employees in the 8 week period following loan funding.

• Maximum Loan Amount – Lesser of $10M and 2.5x the average monthly payroll costs incurred by the applicant over the 1 year period before the loan is made.

Title I of CARES Act: Continued

• General Terms of SBA LoansThe Act provides that the general terms of such loans will be: (i) unsecured and not requirement of a guaranty; (ii) to the extent any portion remains outstanding following debt forgiveness, a maximum maturity of 10 years will apply; (iii) a maximum interest rate of 4%; and (iv) principal, interest and fee payments will be deferred for not less than 6 months and not more than 1 year.

• SBA Loan ForgivenessSBA loans may be forgiven based on (i) the use of the loan proceeds for certain eligible costs and (ii) subject to reductions based on reductions in payroll. Additionally the proceeds must be used within 8 weeks of funding to pay (1) payroll costs; (2) interest (and not principal) on pre-existing mortgage obligations; (3) rent; or (4) utility costs). Additional clarity on SBA loan forgiveness may come through subsequent regulations.

Title IV of CARES Act

• Available to businesses with 500 - 10,000 employees. o These loans are not to have an interest rate exceeding 2% and are subject to a

payment holiday for the first 6 months.

o Loan proceeds must be used to retain 90% of a recipient’s work force at full compensation through September 30, 2020.

o A recipient must intend to restore not less than 90% of the workforce that existed as of February 1, 2002 to full compensation and benefits no later than 4 months after the termination date of the public health emergency.

o A recipient must not outsource jobs or abrogate CBA’s for the term of the loan the 2 year period following full repayment. The recipient must also remain “neutral” in any union organizing activity during the term of the loan.

o Title IV loans will not be subject to loan forgiveness and borrowers may be required to provide collateral.

Tax Cuts under the CARES Act:provides almost $600 billion in tax cuts

• Employee Retention CreditThe Act provides refundable payroll tax credit against applicable employment taxes equal to 50% of qualified wages paid. Employers are eligible if (i) they had to fully or partially suspend operations in the first quarter of 2020, or (ii) the employer’s gross receipts for the 1st quarter of 2020 is less than 50% of its gross receipts for the same quarter in the prior tax year.

• Modifications of New Operating LossesNet operating losses incurred in 2018, 2019 and 2020 may be carried back 5 years and used to fully offset income for tax years up to December 31, 2020.

• Straddle Year TaxpayersIf a taxpayer’s tax year begins before January 1, 2018 and ends after December 31, 2017, that tax payer may elect to: (i) forgo any carryback of a loss incurred during the straddle year; (ii) reduce the period to which a loss attributable to that loss may be carried back; (iii) revoke any election made to forgo NOL carryback.

Force Majeure

These provisions excuse parties from nonperformance when an “act of God” makes performance impossible, impractical or illegal. Owners should review contracts for which they’d like to avoid performance to determine if the relevant force majeure provision encompasses COVID-19. • The party invoking force majeure in this environment would have to show that the

contractual force majeure provision encompasses the COVID-19 epidemic specifically (i.e., “pandemic”, “epidemic”, or “infectious disease”) or generally (i.e., events outside of a party’s reasonable control), that contract could not be performed because of COVID-19, that COVID-19 was outside of its control, and that it occurred without the asserting party’s fault/negligence.

• If force majeure does not apply, the party can seek to assert impossibility, impracticability or frustration of purpose. Availability of these defenses will vary by jurisdiction.

Force Majeure

• The mere occurrence of unfavorable economic conditions/market shifts will not qualify as force majeure or excuse performance. Nonetheless, there is some precedent for the proposition that a party’s continued performance can be excused as impracticable where there is a substantial difference in the expected versus actual cost of performance due to an extraordinary intervening event. Parties should examine their agreements to determine the potential for increased cost impact from COVID-19.

• Force majeure events, impracticability or anticipated delays in performance may trigger notice requirements under various agreements. Agreements should be reviewed for these.

• Looking forward, parties may wish to draft more expansive force majeure clauses to capture a wider array of circumstances that can arise from COVID-19. Parties may also desire more flexibility with termination provisions and pricing arrangements (i.e, variable pricing provisions in favor of fixed pricing).

Insurance • Business Interruption Policies: These policies cover possible lost profits, or at least allow

you to offset losses caused by a covered loss. However, it is arguable that such insurance is only available if your hotel is closed by the government or group cancellations are caused by attendees diagnosed by COVID-19. Ultimately, the courts will likely be the ones deciding the extent of insurer liability to hospitality providers in the wake of COVID-19.

• Pollution Liability Policies: These insure against first-party and third-party claims arising from bodily injury, property damage, defense, clean up and related costs due to a release of a pollutant. Importantly, these policies may come into play when considering the cost of decontamination of a project site if someone has tested positive for COVID-19.

• Commercial General Liability Policies: These insure against claims made against your business. However, most CGL policies issued after the SARS outbreak excludes losses incurred by viruses, bacteria or other micro-organisms that induce physical distress, illness or disease. Nonetheless, a thorough review of your coverage is warranted.

Hospitality Investment Roundtable

March 31, 2020

Hospitality Investment Roundtable

Jeffrey HorwitzPartnerProskauer

Overview – CARES Act Loan Programs for Small Businesses

• 7(a) Loans (Paycheck Protection Program)

‒ Maximum loan size is the lesser of (i) 2.5 times the average monthly payroll cost during the year prior to the loan

(plus the amount of any EIDL being refinanced under the program) and (ii) $10 million

‒ CARES Act provides alternate measurement periods for new and seasonal businesses.

‒ “Payroll costs” excludes individual employee compensation in excess of $100,000

‒ Extensive loan forgiveness

‒ SBA rules and procedures for applying expected in the coming days

• Economic Injury Disaster Loan (EIDL)

‒ $2,000,000 maximum loan size

‒ No loan forgiveness

‒ Streamlined application process now available on SBA website

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CARES Act – Expanded Eligibility for SBA Loans• CARES Act expands eligibility for the existing 7(a) loan program, which is the Small Business Administration’s (SBA)

primary program for providing financial assistance to small businesses

• Eligible Businesses – US entity with significant operations in and a majority of employees based in the US that meets

one of the following size standards:

‒ Business that, together with its affiliates, has not more than 500 employees;

‒ Business that meets existing SBA size standard for their industry (gross receipts of less than $35M for hotels,

$8M for restaurants); or

‒ Hotels and other hospitality businesses with not more than 500 employees per physical location

‒ Special accommodation for hospitality under CARES – waiver of affiliation rules and “per physical location”

test apply to “accommodation and food services” businesses (NAICS 72) and certain franchises

‒ Applies for 7(a) eligibility only (no waiver of affiliation rules or “per physical location” test for EIDLs

• “Employees” include those employed on a full-time, part-time or other basis (no hourly minimum)

• Ineligible Businesses – Gaming companies with 1/3 or more of annual gross income derived from gambling

operations and real estate investment firms holding property for investment purposes remain ineligible in SBA loan

programs

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7(a) Loans Terms (Paycheck Protection Program)• Loan Forgiveness: 7(a) loans will be forgiven up to the amount spent on payroll costs, covered utilities, interest

payments on mortgages in place prior to 2/15/20 and rent under leases in place before 2/15/20 made during the

eight-week “covered period” following loan origination; capped at principal amount of loan

‒ Eligible businesses with tipped employees may receive forgiveness for additional wages paid to those

employees.

‒ Loans forgiven will not give rise to cancellation of debt income for tax purposes (i.e., will be tax free)

• Reductions – Loan forgiveness amount will be lowered by reductions in the monthly average of full-time equivalent

employees and in situations where total salaries and wages of certain employees (earning less than $100,000 in

2019) fall by more than 25% from the applicable prior period (but can mitigate by rehiring employees and/or

restoring wages by June 30, 2020)

• Loan Terms

‒ Maximum interest rate of 4%

‒ Maturity up to 10 years from the date the applicant applies for loan forgiveness

‒ No loan fees

‒ Complete deferral of interest/principal payments for 6 months to a year

‒ No personal guaranties or collateral required

‒ Guaranteed 100% by federal government28

EIDL Loan Terms • Maximum Interest Rate: 3.75% for businesses (2.75% for non-profit organizations).

• Collateral/Guarantee:

‒ CARES Act removes any requirement that applicants supply personal guarantees for loans less than

$200k. Per the SBA’s online application for businesses owned by another entity, the owning entity is

required to provide a guarantee.

‒ Collateral may be required for EIDLs in excess of $25,000.

• EIDLs are not eligible for loan forgiveness

• EIDL applicants are entitled to a $10,000 “advance” within 3 days; there is no obligation to repay the advance,

even if the EIDL is subsequently denied (though it will offset permitted loan forgiveness for 7(a) loan recipients)

• Interplay with 7(a) Loans

‒ Obtaining an EIDL loan does not preclude you from applying for a 7(a) loan (and vice versa), though you

cannot apply for multiple SBA loans covering duplicative expenditures

‒ Borrower with an outstanding EIDL obtained after January 31, 2020 and before the date the new 7(a) loans

are available may (but is not required to) refinance the existing EIDL into a 7(a) loan (but EIDLs made after

the new 7(a) loans become available cannot be refinanced into 7(a) loans)

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Federal Reserve Loan Programs (Title IV of the CARES Act)

• CARES Act provides for up to $500 billion in funding for federal loan programs, including at least $454 billion of

funding for loans, loan guarantees and other investments in Federal Reserve programs for U.S. businesses that

have not otherwise received adequate economic relief in the form of loans and loan guarantees under the CARES

Act

• Federal Reserve is expected to leverage funding from the U.S. Treasury to implement the 4003(b)(4) Programs,

which would result in liquidity well in excess of the $454 billion allocated under the CARES Act

• Loan programs will be implemented through the Federal Reserve and will be subject to terms and conditions,

including covenants, representations and warranties, and other requirements (including audit requirements), as

determined by the U.S. Treasury

• CARES Act directs the Treasury Secretary to implement a specific loan program for eligible medium-sized

businesses (including nonprofits) with between 500 and 10,000 employees (the “Mid-Sized Business Program”)

• Program loans will be treated for tax purposes as debt issued at par, and stated interest on these loans would be

treated as qualified stated interest. As a result, loans issued or guaranteed under the program would not be

treated as issued with original issue discount for tax purposes, and cash basis taxpayers would not be permitted to

deduct interest on the loans until that interest is paid.

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Federal Reserve Loan Program Terms (Title IV of the CARES Act)

Although the detailed rules and regulations have not yet been announced, the CARES Act provides the following terms

and restrictions for the Title IV program loans:

• Interest rates determined by the U.S. Treasury based on the applicable risk and market rates comparable to rates

prior to the COVID-19 pandemic

• Maturity date no longer than 5 years

• No loan forgiveness

• Programs will be subject to applicable requirements under the Federal Reserve Act, including loan collateralization,

taxpayer protection and borrower solvency.

• Borrower will be prohibited from engaging in stock buybacks of nationally listed shares, unless contractually obligated

prior to CARES Act, or from paying dividends or making other capital distributions with respect to common stock,

until one year after the loan is no longer outstanding.

• Borrower will be also prohibited from increasing the compensation of any employee whose compensation exceeds

$425,000 or from offering them significant severance or termination benefits until one year after the termination of the

applicable loan or loan guaranty

• Borrower’s officers and employees whose total compensation exceeded $3 million in 2019 cannot receive

compensation greater than $3 million, plus 50% of the amount over $3 million that the individual received in 2019. It

is unclear how these compensation provisions will apply to newly hired employees who had no 2019 compensation

from the applicable borrower.

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Mid-Sized Business Program Requirements (Title IV of the

CARES Act)• Borrower must have between 500 and 10,000 employees. The CARES Act does not introduce any affiliation rules

with respect to the employee size test, but this is not necessarily determinative given the program has yet to be

established.

• Borrower has not otherwise received adequate economic relief in the form of loans or guarantees provided by the

CARES Act and the uncertainty of economic conditions makes the loan request necessary for ongoing operations.

• Borrower must be a United States business with significant operations in, and a majority of employees based in, the

United States.

• Annualized interest rate is capped at 2%

• No principal or interest payments required for the first six months.

• Funds will be used to retain 90% of workforce at full compensation and benefits through September 30, 2020.

• Borrower intends to restore 90% of workforce that existed as of February 1, 2020, and restore all compensation and

benefits no later than 4 months after termination date of public health emergency (as declared by the Secretary of

Health and Human Services).

• Borrower is not a debtor in an insolvency proceeding.

• Borrower will not pay dividends on common stock or repurchase equity securities listed on a national securities

exchange of borrower or any parent company while the loan is outstanding, unless contractually obligated prior to

enactment of the CARES Act.

• Borrower will not outsource or offshore jobs for the term of the loan and for two years after repayment.

• Borrower will not abrogate existing collective bargaining agreements for the term of the loan and for two years after

repayment, and will remain neutral in any union organizing effort for the term of the loan.32

Hospitality Investment Roundtable

March 31, 2020

Hospitality Investment Roundtable

Open Discussion and Q&A

Additional resources available at www.ahla.com/hir

Hospitality Investment RoundtableUpcoming Meetings

Spring RoundtableSpring 2021Faena Hotel Miami BeachMiami Beach, FL

Fall RoundtableSeptember 9-10, 2020Four Seasons One Dalton StreetBoston, MA