Empire State Today

U.S. Rep. Van Taylor (R-Texas) said the nation’s hotel industry needs support in its time of need.

Hotels are among the hardest hit companies during the COVID-19 pandemic as tens of thousands of rooms remain vacant because of both the economic downturn and government orders restricting travel and business activity.

But even as their revenue slowed dramatically, many hotels were besieged by companies holding commercial mortgage-backed securities (CMBS) loans and seeking payment from cash-starved hotels. An estimated 4,500 hotels have CMBS debt.

CMBS loans are an affordable way for companies to obtain money for expansions and other projects. Hotels have increasingly used them, with research firm Trepp reporting the total amount of CMBS debt by American hotels to top $85 billion.

With unsold rooms and other revenue streams down to a drip, delinquency rate for the loans went from 2.3 percent in April to 7.2 percent in May, according to Trepp.

That’s problematic but even worse is CMBS loans are largely unregulated and borrowers can impose additional fees and high debt installment payments. If the hotel owners cannot meet the demands of the holders of the debt, they risk the loss of their properties.

CMBS debt is pooled and sold to investors on the secondary market. The original lender rarely is involved in servicing the debt, as CMBS.loans explains.

“Instead, they are generally serviced by a master servicer, a third-party company that handles payments and communicating with borrowers," the website notes. "However, if a CMBS loan goes into default, servicing will generally be switched to a special servicer, which will work to determine if the borrower can once again become current [generally through a debt workout or loan modification]. However, a traditional loan default is not the only event that can cause a loan to be sent to a special servicer — sometimes, simply losing a major tenant can cause a loan to be sent to special servicing.”

These special servicers reportedly have been difficult for hotel borrowers to deal with and they have been accused of imposing very high fees: Rialto, LNR, Trimont, Berkadia, Wells, Midland/PNC.

Taylor, a first-term congressman from Plano, said CMBS borrowers must work with these struggling companies until they get back on their feet.

“The inability of CMBS servicers to provide necessary flexibility to borrowers is greatly concerning as these properties employed millions of Americans who will not have jobs upon foreclosure,” said Taylor, who represents Texas’ Third Congressional District.

“However, servicers are bound to loan agreements which dictate interest and principal schedules, servicer fees, etc,” Taylor told Empire State Today. “Any solution to prevent foreclosures, and the inevitable loss of jobs, must work within the current framework of the loan agreements as they exist.”

Taylor is a member of the House Committee on Financial Services, in part because of his background. He earned a masters in business administration from the Harvard Business School but also because numerous financial services sector companies and employees are in Texas and his district.

He said the hotel industry plays a vital role in the nation’s economy. They paid $97 billion in salaries and wages in 2019, $186 million in local, state and federal taxes and contributed $660 billion to the gross national product while providing one in 25 American jobs.

That’s why it’s important to support the industry during this crisis, which it had no role in creating, he argues.

“These industries don't need a bailout but they do need flexibility and support to keep their doors open, provide millions of jobs in communities across the country, and drive their local economies,” Taylor said.