The hotel loan default rate for CMBS (Collateralized Mortgage Backed Securities) loans was 1 to 2% in 2019 and early 2020 through March. In April, the CMBS hotel loan delinquency shot up to one in five. Fully 19.9% of hotels defaulted on their loan payment just two weeks after Stay at Home went into effect.
For May, the question is not how many hotel owners will default. The question is how many hotel owners will make May loan payments. Will 20% or 40% or 60% make the May loan payment? We know it will be less than 80%.
The PPP loan program does little to help hotel owners. The PPP is great for some companies but does very little for industries where revenues have dissipated to almost zero. Hotels occupancy rates are 10%, give or take.
Most businesses have a profit margin of 5 to 20%. Imagine if 90% of the revenue for any business operation went away for an undetermined period of time. The concept is unprecedented. It has never been modeled. It has never occurred. There are no existing frameworks for analyzing the problem.
Business Owners in Impossible Position
Without know how long the closings will last and how long recovery will take, it is not possible to make an informed decision.
Can I Survive?
Once revenue drop by 90%, the cash in the business is depleted in weeks or a month. The entity can’t fund the loses from operations. How long will owners fund deficits for hotels? How many owners are able to fund the deficits for 3, 6, 12, 18 months? How many will cut their losses early given the uncertainty and not deplete personal savings only to still lose the business.
Losing the business after depleting all personal savings, home equity and retirement savings is the worst cases. Tens of millions of business owners are making the following calculation:
Should I convert personal assets to cash and fund business for X months? Will the economy have recovered sufficiently for my business after X months? Am I better off walking away and retaining personal savings and assets?
TREPP reported the following: “For lodging loans – in March 2020 – the percentage of loans categorized as “late but within grace period” or “late beyond grace period” was about 1.5%. In April, that percentage is now 19.9%.
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