The second round of Paycheck Protection Program loans, or PPP, being distributed by the Small Business Administration provides increased forgiveness for hotels, as well as new guidance hoteliers should be mindful of.

On Dec. 21, Congress passed the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act to provide $325 billion in additional assistance through the SBA to eligible businesses, including hotels, that are struggling to recover from the impact of the COVID-19 pandemic.

The SBA announced on Jan. 8 it would open First Draw PPP Loans on Jan. 11 and Second Draw PPP Loans on Jan. 13. According to the SBA, businesses that are approved for First Draw PPP Loans can use them “to help fund payroll costs, including benefits."

"Funds can also be used to pay for mortgage interest, rent, utilities, worker protection costs related to COVID-19, uninsured property damage costs caused by looting or vandalism during 2020, and certain supplier costs and expenses for operations,” the SBA announced.

Borrowers must apply for a First Draw PPP Loan no later than March 31. Existing borrowers who did not receive loan forgiveness by Dec. 27 can reapply for a First Draw Loan or request to modify their First Draw PPP Loan amount, the SBA states.

Alex Cohen, CEO at Liberty SBF, a small business commercial real estate lender based in Los Angeles, said one of the biggest enhancements this round, specific to hotels, is the increased relief.

Hotels, which fall under the NAICS Sector 72 class code, are eligible for additional proceeds relative to the general population of borrowers.

Eric Guerrero, managing director and head of HVS Global Hospitality Services’ brokerage and advisory division, said the maximum loan amount that hotels could draw in the first round was 2.5 times monthly payroll up to $2 million. In this round, hotels are eligible for 3.5 times monthly payroll up to $2 million.

“In the first round … everyone was eligible for the same amount. In this round, [the bill] created a specific basket for some of the industries that have been hit most by COVID — restaurants, hospitality, anything with an NAICS code starting 72,” Cohen said. “Hotels fall into [that and] are eligible for the additional dollars.”

Guerrero said the increase gives hoteliers a little bit more of a cushion.

Another key aspect of the updated guidance this round is if hoteliers took a first round draw, which most did, they are required to show at least a 25% decrease in quarterly revenues at any point in 2020 compared to 2019 of the second draw, he said.

“We’re finding that most hotels qualify for it. It’s very few hotels we see that didn’t experience at least a 25% drop,” Cohen added.

Cohen said a lender will need personal documentation from any owner that owns 20% or more of the business. Hotels also must bring employees back on payroll, which was a requirement in the last round.

For this round, Guerrero said it should be much easier for hoteliers to find a lender. Part of the issue last round was that unless a bank had an SBA lending department, its loan officers and production staff did not know how to properly process an SBA loan.

“[The loan is] very specific, and if you don’t do it the correct way, it gets kicked back and you have to make sure all the t's are crossed, all the i's are dotted. Some of the lenders that didn’t have SBA lending departments did not know how to do it,” he said. “That was a big problem last year.”

But that was changed, so now most lenders, such as community lenders and conventional mortgage lenders, can process PPP loans. He said even companies like PayPal have been approved to offer loans.

Cohen said some traditional banking lenders are hesitant to come back into the hotel lending space.

“It may make sense for hotels now to think about some of the non-bank lending options,” he said. “My guess is that the most receptive lender for the hotel and hospitality industry is going to be the non-bank lender.”

He said some borrowers in the hotel space who have commercial mortgage-backed securities loans are looking to refinance out of it and tap into one of the two SBA programs outside of PPP — the 504 and 7a, which Liberty SBF is active in financing hotels through.

Maria D’Alessandro, executive vice president and chief financial officer at Hospitality Ventures Management Group, said in an email interview that owners in her company’s portfolio all applied with the same lender from which they received the first PPP loan.

“In fact, most of the banks asked, ‘Did you receive the first PPP loan with us?’ If the answer is ‘No,’ they replied, ‘Sorry, we are only providing loans to those that received the first round,'” she said.

Overall, the process has varied from the small community banks, which are paper-based — using a manually completed application and sending that on with the supporting documents via email — to the large, national banks that are entirely automated with “exceptionally long online applications and uploading documentation,” she said.

The approval process has mirrored the application process, she added. The smaller local and regional banks are more inclined to directly reach out to owners and ask for clarification or additional support. The larger banks are reviewing through automation and rejecting applications without providing explanation of the rejection.

“As a result, the round two funding received by our owners so far has only been from the locally based or regional banks,” she said.

Compared to the last round, banks this time are performing more thorough review of documentation. HVMG in the last round was able to provide just the payroll file to its owners for many of the lenders. Now, lenders are asking for more payroll support, such as the W-3, 940/941, tax returns and 401K contribution support.

D’Alessandro said it’s also striking that the requirements are not only different from lender to lender but even within the same lending institutions.

“One of our owners has applied for multiple loans with a large regional bank, and each application was returned asking for different types of support for the payroll,” she said.

In 2020, most of HVMG’s hotels achieved some form of forbearance from its lenders, which allowed the hotels it manages to use the PPP loans for payroll.

“However, this is very unlikely to continue in 2021. Therefore, in cases where the hotels are big-box convention hotels, it will continue to be difficult to cover debt and payroll for any extended time with PPP proceeds,” she said. “The select-service and drive-to markets will be in a better position to rely on these funds to get through the first half of 2021.”

Angela Harrington, who owns two independent hotels in Iowa — The Highlander Hotel and Hotel Grinnell — said in an email interview she has a close relationship with her lender, and they communicate daily and weekly as her loan has been held up "due to problems on the new origination platform."

She is three weeks in on waiting to hear about approval.

"[It's] a 'we're in this together' kind of relationship," she said.

While her lender has been helpful, she said PPP does not address the fundamentals of how a hotel works.

"It doesn't account for businesses like hotels that aren't running at a 25% decrease but a 75% decrease like mine," she added. "There is no calculation in the application that gives more consideration to businesses where the pandemic caused exponentially more harm."

She said it would be more beneficial if the relief calculation accounted for drops in sales and continued issues with overhead.

If there wasn't a pandemic, Harrington would have had $4 million in sales in the past 12 months between her two properties, she said. Instead, she achieved $500,000. Her first PPP loan and Economic Injury Disaster Loans so far amounted to about $400,000.

"Thank goodness for my bank, as they did $700,000 in forbearance for my mortgages. So that all totals $1.6 million. If you take $400,000 out for potential profit, I am short $2 million between the two to just to meet operating expenses," she said.

It's not easy to save money when there are no guests, she said. Insurance, utilities, technology and communication aren't variable expenses.

"Even if PPP comes through this second time, we don't know what the next few months hold. A year ago, we thought in six to eight weeks this would be OK, and here we are 48 weeks in. The first round of PPP was designed to last two months — not 12 months. The first guidance was use it or lose it in eight weeks. Then, that was changed to 24 weeks, but the dollar amount didn't change. The physical asset of a hotel drives intense overhead," she said. "We can't pivot like other industries as the overhead doesn't go away with no customers."

While Harrington is grateful for any relief, she said the new cushion is not enough for hotels to survive and thrive.

"We're working our butts off now to stay top of mind and put things in place for when people do feel safe and start to travel more come second/third quarter, which will hopefully elevate that organic growth," she said. "I really think we are going to see recovery start in May."