It took about two weeks for the $349 billion Paycheck Protection Program, a federal aid package aimed at shoring up small and medium-size businesses, to run out of money after it was launched on April 3. Now, the Senate has approved another $310 billion for the program.
The new Paycheck Protection Program will most likely face the same problem it had before: There isn’t enough money.
The new round of financing is part of a broader $484 billion package passed on Tuesday that also includes a host of measures: funding for small businesses ($50 billion to $60 billion for a separate Economic Injury Disaster Loan program), coronavirus testing ($25 billion) and funding for hospitals ($75 billion).
But the new Paycheck Protection Program will most likely face the same problem it had before: There isn’t enough money. At a burn rate that banking insiders estimate at $50 billion a day, the additional funds are expected to be exhausted within a week.
And then there’s the question of how quickly the funds reach the businesses. Only 20% of small businesses that applied for a loan in the first phase of the program had money deposited in their account as of April 17, according to the National Federation of Independent Business.
It leaves small and medium-size businesses, including those in the real estate sector, facing the reality that the program in the end may be a mixed blessing.
To be sure, industries that were severely hit by the economic shutdown, including hospitality and restaurants, intensively lobbied lawmakers to expand eligibility for the PPP. They argued that separate subsidiaries, which meet the 500 or fewer employee rule by location, should be eligible to apply as businesses even if they were part of a national or international chain.
And many of these businesses, including hotels running at historically low occupancies, have been taking advantage of the program. But in the way that the legislation is written, 75% of the stimulus funds must be spent on payroll if they are to be forgiven — a figure that doesn’t make much sense if you are a hotel that has ceased operations for the time being.
With considerable uncertainty about when the travel industry will recover, minimal to no revenue coming in and fixed expenditures not abating, hoteliers must decide whether the funds should be spent on payrolls or other acceptable expenditures under the guidance that, in the end, may not be forgivable — possibly deferring an even more painful reckoning in the future.
In a sign of the times, the lodging sector has seen $8.2 billion in debt transferred to special servicers so far in April, accounting for 87% of the commercial mortgage-backed services loans requiring workouts, according to Trepp LLC.
Aside from determining whether or not real estate companies are eligible for the funds, some companies may worry that in the rush to take the money meant for struggling small businesses, some real estate companies and their investors will be on the receiving end of public criticism or even legal liability.
Records now show that more than 70 publicly traded companies reported receiving money intended for small businesses through the program – not the kind of beneficiary that some argue that the program was targeted for. Companies must ask themselves if they risk tarnishing their brand.
To date, construction firms have made up a larger share of loans approved than any other industry (this information is as of April 16):
With the PPP program not likely to meet all of the needs of real estate companies, the upcoming Main Street Lending Program is viewed as another option for companies seeking liquidity.
Based on the initially announced terms, we likely do not view this as a viable alternative for real estate companies. Current terms stipulate that the loan cannot exceed four times the borrower’s 2019 EBITDA. Additionally, as most real estate organizations are set up as partnerships, the restriction of capital distributions may be unattainable for individual real estate owners to maintain their own liquidity and sustainability.
Last, the interest rate (SOFR plus 250-400 basis points) is difficult to swallow for many firms that may already be working off thin margins and existing debt secured by their real property. With the PPP lacking sufficient funding and the MSLP as an unrealistic option, real estate organizations will continue to struggle meeting their liquidity needs.
For more information on how the coronavirus is affecting midsize businesses, please visit the RSM Coronavirus Resource Center.