Big-Name Hotels Go Empty and Smaller Owners Are Hurt

It all began to collapse for Vinay Patel a few week in the past.

The occupancy charges on the 9 motels he owns within the Northern Virginia space plummeted from about 50 % to solely a handful of rooms every evening due to the coronavirus pandemic. He scrambled to chop prices. Floors have been shut down. Bar and sizzling meals service was stopped. A laundry dryer was turned off. And he began to put off workers.

“It’s just gut-wrenching,” Mr. Patel mentioned, including that he was making an attempt to retain staff who didn’t have a working partner or a second earnings.

Among Mr. Patel’s chief worries is debt — the mortgages he holds on the Hampton Inn and Aloft by Marriott and different motels he owns.

“I’ve reached out to my lenders saying, ‘We have to work through this together,’” Mr. Patel mentioned.

Early Wednesday, lawmakers in Washington reached an settlement for a $2 trillion stimulus package deal that will be the most important in U.S. historical past. The lodge trade, which has been hit notably arduous, had requested for a $150 billion bailout. As many as 4 million lodge staff — housekeepers, upkeep staff, desk clerks and others — have been laid off or will probably be let go in coming weeks, based on the American Hotel and Lodging Association.

Much of the priority within the trade is on the roughly $350 billion in mortgages, development loans and business and industrial loans taken out on motels and held by banks, insurance coverage firms and buyers.

The bulk of that debt wasn’t borrowed by the large chains, like Marriott International and Hilton Hotels & Resorts. Rather, it belongs to people like Mr. Patel — who has taken out mortgages on every of the motels owns — buyers and even publicly traded actual property funds. In 2018, about 93 % of the almost 33,000 motels within the United States in 2018 have been franchised, based on the market analysis agency Frandata.

And these homeowners say they need assistance too.

“I don’t think there is a proper definition or understanding of what will go to us and what goes to the big brands,” mentioned Buggsi Patel, who has been within the lodge enterprise for 32 years and owns two dozen motels in Oregon, Washington State and Idaho. He mentioned he had mortgages on all of his motels and final week let go 65 % of his staff. “It’s one thing to help out Hilton and IHG, but what are they going to do for us?”

Chip Rogers, the president and chief govt officer of the American Hotel & Lodging Association, mentioned it was lobbying to ensure all motels have entry to lending, pointing to a change from the Small Business Administration that would supply reduction for motels that make use of fewer than 500 folks per location.

“The points we’ve been trying to make all along, what we’ve been advocating for, is getting money into the hands of small business owners to make sure that their employees are paid and to make sure they can service their debt so that when this passes, there are jobs for those employees to come back to,” Mr. Rogers mentioned.

The franchise mannequin in motels dates to the 1950s, when the Howard Johnson chain franchised a motor lodge in Georgia. It grew in reputation throughout the financial downturn of the 1990s when giant lodge manufacturers, which had put mountains of debt on their steadiness sheets to assemble motels, have been hit arduous.

Over the previous 20 years, many giant lodge manufacturers like Marriott and Hilton have moved to a so-called “asset light” mannequin, wherein they don’t take out mortgages to construct motels. Instead, the danger is held by people or funding funds that borrow the cash.

Marriott, for instance, owned or leased simply 28 properties within the United States that operated below model names together with Marriott, Sheraton, Westin, Residence Inn and Fairfield, on the finish of final 12 months. Nearly four,500 motels working below these varied model names have been owned by franchisees.

The lodge homeowners pay the mum or dad manufacturers a proportion of their complete revenues, in addition to reservation system charges and group loyalty charges. Franchisees say the assorted charges can complete as a lot as 20 % of their complete revenues.

Conversations have began between the mum or dad manufacturers and the lodge homeowners about lowering or deferring a number of the charges. Best Western, as an example, cut many of the various fees by half last week.

Heetesh Patel, who owns four hotels across Tennessee, Texas and Florida, said he asked for a deferral of fees after he lost $1 million worth of reservations in five days. (The three Patels are not related.)

“I’ve been in the business for 20 years and my family, for 40 years, and we are stunned at how fast and how hard this has hit,” said Mr. Patel, who said he has cancellations for June. “I’m speaking to a number of operators around the country and many are saying they cannot pay their mortgage this month, not the principal and the interest.”

Buggsi Patel said that in early conversations with the banks that have lent him money, there have been discussions about deferring payments or paying interest only on the loans for a period of time. Banks should have a fair amount of flexibility as commercial mortgages for lodging currently make up about 7 percent of their total loans, well behind multifamily residential or office buildings totals, said Russell Hughes, a vice president of banking at data firm Trepp.

But Mr. Patel said he was more concerned about the portion of his mortgages, about 20 percent, that are tied up in commercial mortgage-backed securities.

A popular instrument before the financial crisis of 2008, these securities have made a comeback in recent years as banks use them to remove loans from their own balance sheet by bundling them into a pool of other loans, which are then issued as a bond to investors.

These securities tend to have less flexibility when it comes to deferring or restructuring payments.

Vinay Patel is not just worried about his nine hotels that are still open, he’s also worried about the four hotels he has under construction. He had planned to open an 80-room Comfort Inn late this summer and a Tru by Hilton in December.

Thanks to low interest rates and high demand among travelers, construction of hotels has been running strong. This year, more than 1,100 hotels are expected to open, according to analysts at Lodging Econometrics.

Mr. Patel estimates it costs about $150,000 per room to construct a hotel, though it can differ somewhat depending on location. So a typical 100-room hotel would cost a developer about $15 million. The owner usually puts down 30 percent cash and borrows the remaining 70 percent, he said.

“It’s the most I’ve ever had under construction at a time. And the problem with a construction site is that you just can’t stop. You have to finish building the hotel,” he said. “We were riding high for the last seven or eight years. And yes, people thought something could happen, but nothing of this magnitude.”

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