As of Friday, March 27th, the US Senate and the House have approved the Coronavirus Aid, Relief, and Economic Security (CARES) Act (H.R. 748). The bill, which remains subject to signature by President Trump, would provide significant financial relief for eligible businesses affected by the COVID-19 pandemic, including those in the hospitality space. The President is expected to sign the bill into law imminently.

Highlighted below are key provisions of the bill relevant to hotel and other hospitality businesses, though the legislation covers a much broader array of programs designed to alleviate the effects of this pandemic.

We note that in addition to understanding the details of the new legislation (not all of which are described below), one must review any potential consents or other actions required by existing documentation and in particular, any existing loan documentation.

SBA 7(a) Loans (Paycheck Protection Program)

The CARES Act expands the Small Business Administration’s (SBA) existing 7(a) loan program to help eligible businesses pay rent, mortgage payments, payroll (including paid sick or medical leave), health benefits, insurance premiums and certain other operational costs.  Loan amounts may be forgiven under the expanded program subject to certain conditions (as further described below).

SBA Loan Terms and Size – The bill will allow the SBA, either directly or in cooperation with the private sector, to provide federally-backed “7(a) loans” to eligible businesses of up to 2.5 times their average monthly payroll cost, with a maximum loan size of $10,000,000.  The interest rate for the new 7(a) loans cannot exceed 4% and no collateral or personal guarantees will be required.  The government will guarantee 100% of all 7(a) loans through the end of 2020, following which the guarantee percentages will return to 75% for loans above $150,000 and 85% for loans of $150,000 or less.  All loan fees will be waived with no penalties for prepayment through the end of the year and loan recipients will receive complete deferment of all principal and interest payments for six months to one year.

SBA Loan Eligibility –  Under the existing SBA regulations, business eligibility for 7(a) loans is limited by size standards based on either number of employees or average annual gross receipts.  The expanded SBA program covers businesses with fewer than 500 employees (including those employed full-time, part-time or on other basis), unless the SBA size standard for the covered industry allows more than 500 employees.  While the existing SBA regime provides that employees of affiliates are counted in determining number of employees, as applied to hotels and other hospitality businesses, the CARES Act provides that (i) a business will be eligible if it employs fewer than 500 employees per physical location so long as it is assigned to the “accommodation and food services” sector (with a North American Industry Classification System code beginning with 72); and (ii) the affiliation rules are waived with respect to any business with a North American Industry Classification System code beginning with 72 and any franchise business assigned a franchise identifier code by the administration.  Thus, as long as they are owned by separate entities, separate properties with less than 500 employees are eligible for SBA loans.  Note that under the existing (pre CARES Act) real estate investment firms holding property for investment purposes and gaming companies with one-third or more of their annual gross income derived from gambling operations are ineligible for SBA loans, it is not clear if that applies under the expanded rules.

Loan Forgiveness – 7(a) loan recipients under the bill will be entitled to loan forgiveness in an amount equal to the sum of all payroll costs, interest payments on any covered mortgage, payments on any covered rent obligations and any covered utility payment, in each case, for the covered eight-week period after origination of the loan.  Upon forgiveness, the SBA will remit to the applicable lender within 90 days the amount forgiven plus accrued interest through the date of payment.  In addition, businesses with tipped employees can get debt forgiveness on any additional wages paid to those employees between March 1, 2020 and June 30, 2020.  Loan forgiveness amounts will be reduced by a percentage corresponding to any full-time employee reductions during the covered period and the amount of any salary or wage reductions of greater than 25% for certain employees (with an exception for employees re-hired or whose salary or wages are restored by June 30, 2020).  Any loan amounts forgiven under the program would not result in cancellation of indebtedness income for tax purposes. 

Additional Market Loan Program (Coronavirus Economic Stabilization Act of 2020)

While the Paycheck Protection Program summarized above is the primary loan program for small businesses with less than 500 employees, the Coronavirus Economic Stabilization Act of 2020 under the CARES Act would provide the largest potential impact with up to $454 billion available to provide liquidity to covered businesses, including in the hospitality sector (an additional $46 billion are earmarked for specific industries).  The program would provide $454 billion in financing to banks and other lenders that make direct loans or guaranties to certain eligible businesses on market terms.

Eligible borrowers must agree to cap all employee compensation (including salary, stock, and bonuses) for a period ending one year after the loan is repaid. During such period, officers or employees whose annual 2019 compensation exceeded:

  • $425,000, cannot receive (i) compensation in excess of their 2019 compensation in any consecutive 12 month-period or (ii) severance pay or other benefits upon termination of more than twice their 2019 compensation; and
  • $3 million, cannot receive total compensation in excess of (i) $3 million plus (ii) 50% of the excess over $3 million.

Borrowers under this program may not pay dividends or other capital distributions and may not  repurchase listed stock of the borrower or any parent company while a loan is outstanding and for 12 months thereafter, except (with respect to repurchases) as required by contracts in effect on the date of the enactment of the CARES Act;

As part of this program, the US government will endeavor to implement a loan program for mid-sized businesses with between 500 and 10,000 employees.  Applicable terms for the mid-sized business loan program include complete deferral of all principal and interest payments for at least six months and an annual interest rate capped at 2%.

Loan Eligibility – Eligible mid-sized business loan recipients will be required to certify that:

  • Loan support is necessary to support ongoing operations because of current conditions;
  • Funds will be used to retain at least 90% of workforce, at full compensation and benefits, until 9/30/20;
  • Recipient intends to restore not less than 90% of workforce that existed before 2/1/20, and to restore all compensation and benefits to workers no later than four months after the declared COVID-19 public health emergency is over;
  • Recipient is a US entity with significant US operations;
  • Recipient is not in bankruptcy;
  • Recipient will not pay dividends or other capital distributions and will not repurchase listed stock of recipient or any parent company while a loan is outstanding, except as required by contract as in effect on the date of the enactment of the CARES Act;
  • Recipient will not outsource or offshore jobs for two years after loan repayment;
  • Recipient will remain neutral in any union organizing effort during term of loan; and
  • Recipient will not abrogate their collective bargaining agreements for the term of the loan and 2 years following loan repayment.

 Tax Provisions

50% Employee Retention Credit for Employers Closed Due to COVID-19 – The CARES Act would provide eligible employers with a refundable payroll tax credit equal to 50% of certain “qualified wages” (including certain health plan expenses) paid to its employees beginning March 13, 2020 through December 31, 2020 if the employer is engaged in an active trade or business in 2020 and the wages are paid:

  • While operation of that trade or business is fully or partially suspended due to a governmental order related to COVID-19; or
  • During the period beginning in the first quarter in which gross receipts for that trade or business are less than 50% of gross receipts for the same calendar quarter of 2019 and ending at the end of the first subsequent quarter in which gross receipts are more than 80% for the same calendar quarter of 2019.

The credit is capped at $5,000 (50% of the first $10,000 of qualified wages) per employee for all calendar quarters.  The employee retention credit is available for employers with more than 500 employees, but for employers with more than 100 employees, the credit is available only with respect to wages paid to an employee that is not providing services due to COVID-19-related circumstances and will not be available to employers who have had indebtedness forgiven under SBA 7(a) loans (described above).

Payroll Tax Payment Extensions – The CARES Act would postpone the deadline for payment of the employer portion of the 6.2% employer share of the Social Security tax (but not the 1.45% employer share of the Medicare tax) from the date of the bill’s enactment through the end of 2020.  The deferred amounts would be payable over the following two years, with 50% payable by December 31, 2021 and the remaining 50% by December 31, 2022.

Immediate Expensing of Costs Associated With Improving Qualified Improvement Property – The CARES Act would permit businesses to expense certain costs for improvements to “qualified improvement property,” correcting existing provisions of the Tax Cuts and Jobs Act (TCJA) that prevented businesses from expensing these costs and required them to be depreciated over the 39-year life of the building.  Qualified improvement property is any improvement to the interior of a nonresidential building that is placed in service after the building is first placed in service.  Qualified improvement property does not include improvements that are attributable to the enlargement of the building, elevators or escalators, or the internal structural framework of the building.  This change would be retroactive to the 2017 enactment of the TCJA, which means that companies could amend prior years’ returns and expense capex expenditures that are qualified improvement property.

Note: The above summary was prepared prior to the House vote on the CARES Act and does not reflect any changes to H.R. 748 if any were made in connection therewith.

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Proskauer’s cross-disciplinary, cross-jurisdictional Coronavirus Response Team is focused on supporting and addressing client concerns. Visit our Coronavirus Resource Center for guidance on risk management measures, practical steps businesses can take and resources to help manage ongoing operations.

Photo of Jeffrey A. Horwitz Jeffrey A. Horwitz

Jeffrey A. Horwitz is a partner in Proskauer’s Corporate Department where he co-heads our Private Equity Real Estate practice and runs our internationally recognized Hospitality, Gaming & Leisure Group. He also has served as co-head of Mergers & Acquisitions and as a member

Jeffrey A. Horwitz is a partner in Proskauer’s Corporate Department where he co-heads our Private Equity Real Estate practice and runs our internationally recognized Hospitality, Gaming & Leisure Group. He also has served as co-head of Mergers & Acquisitions and as a member of our Executive Committee. Jeff is a general corporate and securities lawyer with broad-based experience in mergers and acquisitions, cross-border transactions, and long-term joint ventures. He is regularly engaged to advise boards, management teams and investors on strategic matters, from litigation to personnel to transactions. Jeff is also the head of the Firm’s cross-disciplinary, cross-jurisdictional Coronavirus Taskforce helping to shape the guidance and next steps for clients impacted by the pandemic.

Jeff counsels clients on the full range of their activities, from seed capital to public offerings, acquisitions and operational matters, often acting as outside general counsel. He represents major financial institutions, sovereign wealth funds, private equity and family offices in sophisticated financial and other transactions. He represented Merrill Lynch Global Private Equity in connection with its equity participation in the $33 billion acquisition of HCA in what was then the largest LBO ever. He has handled deals aggregating nearly $200 billion in value, including tender offers, “going-private” transactions, IPOs, restructuring and structured finance transactions, and mergers and acquisitions in industries as diverse as biotechnology and aerospace, retail and cable television, and education and scrap metal. He regularly handles transactions outside the U.S., including Europe, the Middle East, Asia, Latin America, Australia, South Africa and India.

Leading our Private Equity Real Estate group, he works with a team of 75 lawyers from across the firm advising on complex transactions and disputes relating to real estate, and particularly hotels. Jeff has handled virtually every type of matter, and has worked with virtually every major player in these industries, including transactions for nearly 3,500 hotels comprising more than 275,000 rooms and involving more than $12 billion. His experience, both in and outside the U.S., extends to hotel and casino development and construction; portfolio and single-property acquisitions; sales and restructurings; financings; management; marketing; reservations systems; litigation counseling and strategic planning; and ancillary services. This breadth of work is key to executing complex and sophisticated transactions, such as the $2.9 billion acquisition of Fairmont Raffles by AccorHotels and its investments in Huazhu, Banyan Tree Hotels & Resorts, Brazil Hotel Group, sbe Entertainment and 21c Museum hotels, among others.

As a senior member of our Entertainment Group, Jeff represents The Broadway League (the national trade association for Broadway theatre), the Tony Awards®, and various other joint venture events and producers. In the media industry, Jeff has advised on the acquisition and sale of television, radio, newspaper and magazine properties, and the acquisition and sale of advertising, promotion and marketing agencies, and related joint ventures. He also advises rights holders, including our long-time clients The Leonard Bernstein Office and The Balanchine Trust. He leads our team representing TSG Entertainment in film-slate financing deals.

Jeff also frequently represents start-up and development-stage companies, as well as established “traditional” businesses, in online, Internet-related or technology businesses. He has handled organizational and structuring matters, venture capital and other equity placements, restructurings (from “down” rounds to recapitalizations to M&A solutions). He has both company-side and investor experience.

As a frequent speaker at real estate and hospitality events, Jeff regularly presents about hotel management agreements at The Hotel School at Cornell’s SC Johnson College of Business, NYU’s Jonathan M. Tisch Center of Hospitality, and on M&A and investment matters at lodging investment conferences around the world, including the NYU Hospitality Industry Investment Conference in New York, Americas Lodging Investment Summit in Los Angeles, the International Hotel Investment Forum in Berlin and the Hotel Investment Conference Asia-Pacific in Hong Kong.

Jeff is a member of the American Hotel & Lodging Association (AHLA) Hospitality Investment Roundtable, ULI (and its Hotel Development Council) and the Advisory Board of the Cornell Center for Real Estate and Finance and has served as a member of the Editorial Board of the Cornell Hotel and Restaurant Administration Quarterly and a member of the Advisory Board of the Cornell Center for Hospitality Research. He is a director of The New York Hospitality Council, Inc., a not-for-profit forum for hospitality industry leaders, and is a member of the Real Estate Capital Policy Advisory Committee of The Real Estate Roundtable. He also has served as a director of the America-Israel Chamber of Commerce, and as a member of the French-American Chamber of Commerce in the U.S. and the American Society of Corporate Secretaries. He was the Chairman of the Board of Labyrinth Theater Company and a director of The Jewish Community Center in Manhattan for more than 15 years, a member of the Executive Committee of the Lawyers’ Division of UJA-Federation for more than five years and an officer of the Henry Kaufmann Foundation for more than a dozen years. He currently serves as Chairman of the Board of The American Playwriting Foundation and Building for the Arts and is a member of the Board of Directors of StreetSquash and The George Balanchine Foundation. He also served as a Vice Chair of the Associates’ Campaign for The Legal Aid Society.

Jeff has been with the firm for his entire career and lives in Manhattan and Connecticut.

Photo of Yuval Tal Yuval Tal

Yuval Tal is a partner in our Corporate Department where he co-heads our internationally recognized Hospitality, Gaming & Leisure Group. He also heads our Hong Kong and Beijing offices. He is a general corporate and securities lawyer with diverse experience in cross-border mergers…

Yuval Tal is a partner in our Corporate Department where he co-heads our internationally recognized Hospitality, Gaming & Leisure Group. He also heads our Hong Kong and Beijing offices. He is a general corporate and securities lawyer with diverse experience in cross-border mergers & acquisitions (public and private, debt and equity), long-term joint ventures, private equity real estate and corporate and real estate finance. He advises clients on the full range of their activities including any form of financing, operational matters and commercial transactions. He advises sponsors and funds on the structuring, execution, entering into, restructuring and exiting of investments. Yuval is co-chair of Proskauer’s CARES Act Team and a part of the Firm’s cross-disciplinary, cross-jurisdictional Coronavirus Taskforce helping to shape the guidance and next steps for clients impacted by the pandemic.

Yuval has decades of experience representing clients on complex, first in kind transactions.  Yuval’s strength is providing original, workable and practical solutions that get the deal done. Qualified in New York, Hong Kong and Israel, Yuval has negotiated transactions in six continents and has particular experience representing Asian clients and clients based outside of Asia in inbound and outbound transactions. Yuval has worked in various industries including real estate, hospitality, entertainment, sports, financial services, technology and life sciences.

As an international M&A lawyer, Yuval has many years of experience dealing with complicated, non-customary transactions involving parties from different countries, cultures and legal systems.  He has represented private equity, family offices, corporations and individuals in structuring, restructuring, managing and disposing of investments in Asia, Europe and the United States.  He is typically called upon to strategize and structure complex transactions that do not follow a prescribed form or pattern. Yuval’s experience enables him to forsee future issues and clients have commented on his “ability to think seven moves ahead of the competition”. Yuval is also well known for his ability to broker deals between opposing parties in order to get the deal done, irrespective of the legal, business or practical obstacles. His efforts have earned him recognition by Legal 500Chambers Asia Pacific and IFLR1000, where clients have referred to his “ability to play the honest broker to all parties involved, and to bridge the different cultures, legal systems and language barriers and to continually solve the unsolvable, is what allowed us to get this difficult deal done” and another stated “he was completely invested in the deal in a way lawyers seldom are, and his creativity and efforts allowed us to bridge considerable gaps between the parties and find common ground”.

As co-head of our Hospitality, Gaming & Leisure Group, Yuval has worked on virtually any kind of transaction, including mixed-use development and construction, acquisition and sale, restructuring and public offerings of real estate, hotel and casino companies. He has completed numerous high profile transactions involving the buying, selling and combining Asian and Western based hotel operating companies, including AccorHotels’ [EPA:AC]  US$2.9 billion acquisition of Fairmont, Raffles and Swissôtel brands, its acquisition of Tribe, Australia’s first integrated modular hotel brand, Accor’s long-term alliance with Huazhu Hotels Group (also known as China Lodging Group [Nasdaq: HTHT]) and its strategic partnership with Singapore-based Banyan Tree Holdings [SGX:B58]. He also advised Formosa International Hotels’ sale and resulting joint venture with Intercontinental Hotels Group with respect to the Regent brand.  His real estate and hospitality work has included transactions for properties from China to India to the United States to Australia. He also has many years of experience with hotel licensing, franchising and management.

Yuval’s broader Private Equity Real Estate experience includes working on The Recording Academy’s (The Grammys) deal to develop Grammy Museums in China, a public/private deal to finance an office building in Delhi, India; the acquisition of hotels in Bangkok by a large Japanese institutional investor and a joint venture between a Hong Kong developer and an Asian based private equity fund for the acquisition and redevelopment of a property in Kowloon into a mixed use property including co-living and co-working properties.

Yuval is a member of the Steering Committee of the Asian Hospitality Development Council of the Urban Land Institute (ULI) and has recently been appointed to the Law 360 2020 Hospitality Editorial Board. He is a regular speaker at real estate and hospitality related conferences such as the Hotel Investment Conference Asia-Pacific in Hong Kong.

Prior to rejoining Proskauer in 1999, Yuval practiced law in Israel, representing Israeli clients in transactions in Europe and the United States and European and U.S.-based clients in transactions in Israel. He handled transactions for major publicly traded Israeli companies such as Clal (Israel) Ltd., LifeWatch, Kitan Consolidated Ltd., Orckit Communications Ltd., ECI Telecom Ltd., Scitex Corporation Ltd. and Tecnomatix Technologies Ltd. Since joining Proskauer, Yuval has continued to represent Israeli clients on a wide range of corporate and securities matters.

Photo of Lara Miller Lara Miller

Lara Miller is an associate in the Corporate Department and a member of the Private Equity and Mergers & Acquisitions Groups. Lara focuses her practice on domestic and cross-border buyouts, mergers and acquisitions, divestitures, joint ventures, recapitalizations, growth equity investing and portfolio company…

Lara Miller is an associate in the Corporate Department and a member of the Private Equity and Mergers & Acquisitions Groups. Lara focuses her practice on domestic and cross-border buyouts, mergers and acquisitions, divestitures, joint ventures, recapitalizations, growth equity investing and portfolio company governance and related matters. In addition, Lara has represented clients across a variety of industries, including consumer products, financial services, health care, hospitality, real estate and media and technology.