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Coronavirus: Important Issues For Hospitality Industry Owners, Operators And Lenders – Real Estate and Construction – United States

Introduction

The coronavirus pandemic is affecting every corner of commerce
as consumers cancel their travel plans and start to limit their
day-to-day activities. With the US hotel industry facing group
business cancellation rates of 40 percent in the next 90 to 120
days,1 the hospitality industry is at
the forefront of the pandemic’s economic effects. As the US
federal government starts enacting measures to mitigate the
pandemic’s economic impact, we highlight important issues under
discussion that may affect the hospitality industry in the short-
and medium-term.

Active and Recent Changes

Federal Disaster Declaration: On
Friday, March 13, President Trump declared a federal state of
emergency under the Stafford Act and the National Emergencies Act,
opening a range of policy responses that include federal aid to
individuals as well as to state and local governments. The
administration is now able to utilize a roughly $40 billion fund
for this response, providing federal matching funds to state and
local emergency efforts.

Sick/Family Leave: The second stimulus
package includes two different provisions addressing paid benefits
to employees affected by the coronavirus. The first creates a new
emergency paid sick leave benefit, which requires employers with
fewer than 500 employees to provide up to two weeks’ paid leave
for coronavirus-related reasons, including: (1) self-quarantine;
(2) obtaining medical care if an employee is experiencing symptoms;
(3) complying with a recommendation that the employee’s
physical presence on the job would risk exposing coronavirus to
others; (4) caring for a sick family member who may have been
exposed or exhibits symptoms; and (5) caring for a child whose
school or child-care facility has been closed or whose childcare
provider is unavailable.

The family and medical leave provision amends the existing
Family Medical Leave Act (FMLA) to provide up to 12 weeks of
job-protected leave for the following coronavirus related reasons:
(1) to follow a requirement or recommendation to quarantine because
of exposure to or symptoms of coronavirus; (2) to care for a family
member who may have been exposed to the coronavirus or exhibits
coronavirus symptoms; or (3) to care for a child younger than 18
whose school is closed or whose child-care provider is unavailable.
The family and sick leave is unpaid for the first 14 days.
Employers must allow the employee to substitute paid time off, but
may not require the employee to do so. Following the 14-day period,
workers would receive a benefit from their employers that is at
least two-thirds of their normal pay rate. The Department of Labor
is authorized to issue regulations to (1) exclude certain
health-care providers and emergency responders from paid leave
benefits and (2) exempt small businesses with fewer than 50
employees from the paid leave requirements.

Employers can receive a refundable tax credit for a portion of
the expenses related to these provisions. Both provisions apply
only to private-sector employers—and are set to expire at the
end of 2020.

The second stimulus package, which the House passed early on the
morning of March 14, includes paid sick and family leave
provisions.2 The House also passed a
technical corrections bill on March 16 to address a few drafting
errors that negatively affect small businesses.3 The Senate will
consider the Families First Coronavirus Response Act early this
week. Since the bill passed the House with strong bipartisan
support,4 after President Trump tweeted
his support for it late Friday night, we expect a strong bipartisan
vote in the Senate. However, there are concerns that the exemption
for companies with more than 500 employees would still leave
millions of workers without emergency paid sick and family leave.
President Trump has also said that he could consider expanding
these provisions in future coronavirus relief bills.

Payroll Tax: President Trump is
calling for an immediate suspension of the payroll tax, which would
be an extremely expensive part of any stimulus package.
Congressional reaction to the proposal from both political parties
was largely negative last week, though on Monday the US Chamber of
Commerce strongly backed the idea as a top policy change to help
the recovery. Given the opposition in Congress, we believe various
administration officials are trying to determine if there are
administrative powers the president can invoke to suspend a portion
of the payroll tax for an extended period of time.

Small Business Administration Disaster
Loans: The Trump Administration announced last week
that Small Business Administration disaster loans are available to
eligible businesses to weather coronavirus impact. Economic injury
disaster loans are available to small businesses that suffered
“substantial economic injury” as a direct result of a
declared disaster.5 For SBA purposes, hotels are
considered small businesses if they have under $35 million in
annual receipts.6 Economic injury disaster loans
can provide working capital until normal operations resume.
President Trump also called on Congress to approve an additional
$50 billion in SBA lending authority, which we expect Congress to
consider in a future stimulus package. The Senate Small Business
Committee is also working on ways to streamline the SBA’s
disaster loan process.

Federal Reserve Actions: On Sunday,
March 15, the Fed announced it would cut interest rates to
zero—following on a prior emergency cut earlier this
month—in a dramatic intervention to protect the economy. The
central bank has also increased support to overnight lending
markets to ensure liquidity in the banking system, and has now
announced it will be buying at least $700 billion in government and
mortgage-related bonds, in a restart of the financial crisis-era
program of “quantitative easing.” These steps suggest the
Fed may turn to other emergency lending facilities and tools it
used to provide liquidity during the 2007–2009 financial
crisis. Congress may also expand the central bank’s authority
in a future stimulus package. For example, on March 15, Treasury
Secretary Mnuchin suggested he may ask Congress to reinstate
certain emergency lending powers that Treasury and the Fed had
prior to the enactment of Dodd-Frank, though it remains to be seen
whether Congressional support for such authority will
materialize.

On March 15, several of the nation’s largest banks announced
a freeze on buybacks of their own shares through the end of the
second quarter, in order to free up capital to deploy elsewhere to
help the economy. The move was voluntary by the banks but had been
encouraged by lawmakers including Sen. Sherrod Brown (D-OH), who is
the ranking Democrat on the Senate Banking Committee.

Changes on the Horizon

We think financial regulators are likely to take additional
actions to mitigate the pandemic’s impact on the hospitality
industry. Last week, senators from states that rely heavily on
tourism and business travel urged the Federal Reserve, the
Comptroller of the Currency, the Federal Deposit Insurance
Corporation, the National Credit Union Administration and the
Conference of State Bank Supervisors to enact guidance to help the
hospitality industry weather the ongoing coronavirus health
crisis.7 The recommendations include
enabling loan work-outs and allowing borrowers to defer payments
without penalties, make interest-only payments, and refinance
without fees. We would expect financial regulators to enact some
combination of these recommendations in the near future.

In addition to financial regulators taking steps to help market
liquidity and the administration taking executive action, we expect
Congress to continue working to mitigate the pandemic’s
economic impact. The first stimulus package focused on funding for
disaster relief, and the second package focused on funding for
workers and families directly affected by the virus. We anticipate
the third package will be even larger, with a broader focus on
helping various sectors of the economy recover from the effects of
the virus, while also addressing additional remaining issues for
families and individuals directly affected by the virus. It is
possible that the third package will be the largest in scope and
impact since Congress passed the $700 billion Emergency Economic
Stabilization Act in October 2008 to deal with the global financial
meltdown.

While we expect individual representatives and senators to offer
a myriad of bills aimed at various recovery elements, we see the
third comprehensive coronavirus package as the most likely place
for the hospitality industry to secure specific financial
assistance from the government for its unprecedented losses. While
it is too early to tell what specific provisions may be included,
we expect further consideration of a payroll tax cut and
potentially a fix for the so-called “retail glitch,”
which precludes taxpayers from taking advantage of the 2017 Tax
Cuts and Jobs Act 100 percent bonus depreciation provision for
interior improvements. There are also preliminary discussions of
broader investments in the economy, such as infrastructure
investments.

Footnotes

1 See Knowland Insights: Coronavirus
Pandemic—Hotel Group Impact and Actions (March 12,
2020).

2 The Families First Coronavirus Response Act (HR 6201). HR 6201 passed the House on a vote
of 363–40. All 40 “No” votes were Republicans. A
usually high number of Representatives—26—did not vote
on the bill, and this group includes several members of Congress
who are already quarantined.

3 H. Res. 904 passed out of the House by
unanimous consent.

4 363–40 in the House. All 40 “No” votes
were Republicans. An usually high number of
Representatives—26—did not vote on the bill, and this
group includes several members of Congress who are already
quarantined.

5 See 13 CFR 123.300.

6 See 13 CFR 121.201.

7 See Van Hollen, Cardin, Warner, Kaine Urge Financial
Regulators to Take Measures to Protect Hospitality and Tourism
Industry Workers During Coronavirus Outbreak (March 13,
2020).

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