HVS, the only global consulting firm focused exclusively on the hospitality industry, forecasts the expected pattern of decline, and the subsequent recovery, in the market value of hotels in the United States under “best case,” “most likely case,” and “worst case” scenarios.
While this forecast of decline in market value will have a significant and undesirable impact on the equity capital stack, the more immediate and serious problem for many hotels will be the insufficient level a net operating income available to pay debt service over the next one to two years as the hotel effectively works to restart business in a post-COVID-19 world. This situation will pose serious challenges to lenders which, in turn, may further threaten the short- to mid-term survival of the equity capital stack.
However, there is a managed solution for injecting new cash into the hotel operation without the source of the cash seeking to extract major considerations from the equity stack, or seriously threatening the position of the senior lender. Currently, 36 states and the District of Columbia (D.C.) have passed laws enabling CPACE programs; twenty (20) of these states and D.C. have active CPACE programs. At the writing of this article, eight (8) of these states had accepted “look-back” program modifications, as described below, with up to a total of eighteen (18) states considering the look-back modifications on a case-by-case basis.
While CPACE programs have historically been utilized as part of the capital stack in new construction, the look-back program modifications allow CPACE providers to obtain these program funds for newly constructed hotels that have been open for a 24-month, and sometimes a 36-month, period. Typically, approximately 25% of the total dollar amount of expended hard and soft costs can be obtained in CPACE funding. Note that this funding is centered on expended costs, and not market value, another key to a creative recovery plan solution.