ORLANDO, Fla. – Hotel owner and developer Danny Gaekwad survived steep drops in business after the 9/11 attacks and the recession of the late 2000s, but nothing prepared him for the revenue tailspin that followed lockdowns and travel restrictions in March to stop the spread of the new coronavirus.
At one hotel, a Holiday Inn in Ocala, Florida’s horse country, revenue last April was $38,000, a drop of almost 90% from the previous April. His problems were compounded by the type of loan he took out for the hotel — a $13 million loan that was bought by Wall Street investors.
Commercial mortgage-backed securities loans like the one Gaekwad has for the Holiday Inn are packaged in a trust. Investors then purchase bonds from the trust using properties like a hotel as collateral. The loans are attractive to borrowers because they typically offer lower rates and longer terms. About 20% of hotels across the U.S. use these loans and they represent close to a third of all debt in the hotel industry, according to the American Hotel and Lodging Association.
Unlike banks, which have been more flexible in renegotiating loan terms to help them through the tough times, hotel owners like Gaekwad say it has been much more difficult to get any forbearance from representatives of bondholders, and they worry that their businesses may not survive because of the lack of relief.
At the end of April, only 15% of CMBS borrowers have received relief compared to 80% of bank borrowers, according to a member survey by the American Hotel and Lodging Association. For one thing, the rules that govern the trusts that hold the CMBS loans typically put strict limitations on any loan modifications.
Additionally, representatives of the bondholders often charge expensive fees to negotiate with the borrowers. They also have their own real estate portfolios and don’t mind acquiring new ones, so there’s less incentive to negotiate with borrowers compared to banks, which don’t want to be in the real estate business should a loan go bad, experts say.
“This is the Big Bad Wolf. You have no idea what devastation CMBS loans will have on us,” Gaekwad told Vice President Mike Pence last month during a forum on Florida’s tourism industry in Orlando. “If you don’t put it in a cage, it will finish us.”
Other types of commercial properties such as retail, industrial and office also use CMBS loans but none have seen delinquency rates rise the way the lodging sector has. In May, the lodging delinquency rate rose to 19%, up from 2.7% in the previous month, according to real estate data-provider Trepp, LLC.