Hotels and major institutional investors are already eligible for an array of emergency government funding programs, from the small business-focused Paycheck Protection Program to the Federal Reserve’s multitrillion-dollar corporate bond-buying program. But a behind-the-scenes lobbying effort could persuade Congress to funnel even more money to these firms, with fewer strings attached.
At issue are specialty investments known as commercial mortgage-backed securities, or CMBS. Similar in design to the mortgage bonds that crashed the economy in 2008, CMBS pool real estate loans from businesses and then sell pieces of the deal to institutional investors.
As the coronavirus pandemic has crushed demand for hotel rooms, these loans now face a wave of defaults. Hotel owners like CMBS deals because they offer lower interest rates than other lending arrangements, but those cheaper rates come at a price. Most CMBS deals require stricter repayment terms with more limited flexibility than traditional bank loans. If a hotel gets into trouble on a CMBS loan, it’s designed to be very difficult to cut them a break.
Now hotel owners are loudly complaining that their payments are unaffordable. They include some of the most powerful voices in Washington: hedge funds, private equity firms and other major institutional investors.
Only a few months ago, almost no lawmaker on Capitol Hill knew what the acronym CMBS stood for, lobbyist William “Chip” Rogers, president of the American Hotel and Lodging Association, boasted in a podcast interview Wednesday. Today, dozens are pushing to bail them out.
“In fact, we have a letter that we created that well over 100 members of Congress signed to send to the Treasury ― Democrats and Republicans alike ― asking them to help solve this problem,” Rogers said in an interview with Rupesh Patel, a Florida hotel owner and industry analyst.
The thoroughly bipartisan letter, sent to Treasury Secretary Steve Mnuchin and Federal Reserve Chair Jerome Powell in June, warned that if the CMBS “crisis” goes unchecked, “it may lead to a wave of foreclosures, exacerbating the current downturn in the U.S. economy and ultimately result in permanent job loss in multiple industries and communities across the country.”
The letter did not specifically mention hotels but asked the Federal Reserve to create a “relief plan for these borrowers” on top of the relief plans that Congress has already created for businesses big and small.
To put it more precisely: Hotels and investors that agreed to a specific risky type of loan are now asking for a specific generous government rescue. And the lobbying organization may or may not have actually written the letter that purported to be from members of Congress.
Congress will likely pass one more major coronavirus relief package before going on its August recess. Senate Republicans plan to introduce their opening bid next week, just as eviction protections and expanded unemployment benefits from earlier coronavirus bills expire.
A spokeswoman for the letter’s lead Republican author, Rep. Van Taylor (Texas), said the congressman “absolutely” wrote the letter, not the hotel association, and that “hundreds” of his constituents had reached out to him on the issue. Securitized commercial loans are used for all manner of businesses, including multifamily housing, warehouses and shopping malls.
The letter’s lead Democrat, Rep. Denny Heck (Wash.), said he has focused on heading off another financial crisis since joining Congress in 2013.
“I’ve sent letters to the Fed and Treasury on both residential and commercial MBS asking what they can do to prevent a foreclosure wave because I don’t think widespread foreclosures are good for anyone,” Heck said in a statement. “That includes the hotel industry and its employees. On this aspect of the problem, I am working to bring labor and ownership together to find a solution that protects businesses, protects jobs and averts foreclosures.”
An AHLA spokesperson said Rogers simply misspoke about orchestrating the letter. The organization supported the missive, but it did not write it, the spokesperson added. Rogers had in mind the organization’s own letters to policymakers, she said, characterizing his remark as an “honest mistake.”
The hotel industry and its peers in commercial real estate have not been shy about their need for more help. Earlier this week, for instance, the AHLA and related trade groups directly asked the Senate Banking Committee for looser eligibility standards for the programs Congress created in March to help businesses weather the pandemic recession.
Lobbyists do frequently ghostwrite such letters for lawmakers in Washington and are commonly involved in drafting legislative language.
Contrary to the letter’s claim, bailing out commercial mortgage-backed securities wouldn’t benefit workers, according to Unite Here, a union that represents 300,000 hospitality employees and that has battled against the hotel industry over unionization efforts at various hotels.
In a letter to Congress of its own, the union said that its own analysis of the $14 billion’s worth of CMBS loans near default revealed that most of the money “was owed by large private equity companies, real estate investment trusts or other sophisticated real estate investors” ― the major institutions that owned the hotels.
One of the largest CMBS borrowers that would benefit from a bailout is Colony Capital, a private equity firm run by Thomas Barrack, chair of President Donald Trump’s inaugural committee, Unite Here said.
CMBS loans have defaulted en masse before. In the wake of the 2008 financial crisis, billions of dollars worth of CMBS collapsed. It was, of course, a disaster for major investors. But the results for workers were not terribly significant, Unite Here argued. New investors took over the hotels, which continued to operate without “loss of hotel jobs or loss of local tax revenue in our experience.”
Michael Greenberger, a University of Maryland law professor and expert on financial derivatives, assailed the letter as an example of undemocratic favoritism for large financial institutions.
“This is sort of special pleading for one group,” Greenberger said. “No doubt that group needs help, but as the days go on, everybody needs help.”
Hotels have received help from the program Congress created in response to the pandemic. The accommodation and food service industry, which includes hotels, got 8% of PPP loans, ranking fifth among all industries.
In the podcast interview this week, Rogers displayed little modesty about his lobbying prowess. He described how he made sure Congress allowed franchisees to qualify for payroll money even though their parent companies were too large to qualify. He also took credit for subsequent changes to the program’s deadlines and the amount of money recipients were required to spend on payroll.
“We were able to get the affiliation rules waived so that it applied to virtually every hotel in the country,” Rogers said. “Then we came back and got the PPP extensions. And then we came back and got the PPP flexibility that moved all those dates into the end of this year as opposed to June 30.”
The hotel industry may have supported those changes, but lawmakers were transparent about their desire for all manner of businesses to have more flexibility with the payroll funds, which had been authorized in an admittedly rushed manner.
One hotel owner who availed himself of PPP funds was Monty Bennett, a Trump campaign donor whose firm, the Ashford Group of Companies, runs 128 hotels that collectively received $58 million. His companies returned the money amid an outcry since the program was intended for small businesses rather than large publicly traded companies.
Bennett also happens to owe the largest amount of troubled CMBS, according to Unite Here. He said last month that the hotel industry “needs grants along the lines of what the airline industry has received.”
Correction: A previous version of this story stated incorrectly that Rep. Van Taylor’s office included child care facilities in its list of businesses that use securitized commercial loans. It did not.