On March 27 and April 24, President Donald Trump signed the Coronavirus Aid, Relief and Economic Security, or CARES, Act, and the Paycheck Protection Program and Health Care Enhancement Act,[1] respectively, together providing roughly $2.5 trillion in relief for eligible businesses and governmental bodies affected by the COVID-19 pandemic, with specific provisions focused on the hospitality space.

The CARES Act is comprised of multiple programs for very different kinds and sizes of businesses. To date, all programs envision loans and loan guaranties provided by the U.S. federal government to eligible businesses.

While there are numerous programs addressing different industries and sectors of the market, this article focuses on the $659 billion Paycheck Protection Program, or PPP, and the three Main Street Lending Programs that would, with the benefit of leverage from the Federal Reserve, provide $600 billion for acquisition of participation interests of 85% to 95% in loans made to eligible borrowers. These Main Street Lending Programs are not yet operational.

There has been much written about the PPP as well as about the term sheets concerning the Main Street Lending Program. The purpose of this article is to highlight some issues that are particularly relevant to the hospitality industry.

Paycheck Protection Program

Eligible borrowers under the PPP are businesses with 500 or fewer employees (or in certain industries a higher number of employees) or other businesses that qualify under certain financial criteria. In order to make sure that the loans only go to small businesses, the size test (regardless of the metrics used) aggregates the numbers of employees (or financial metrics) of the borrower with those of its affiliates.

The hospitality industry — companies under an North American Industry Classification System code starting with 72 or recognized as being in the franchise space — won a great exception in the form of a 500-employees exemption per property (and no need to aggregate with affiliates), but there are still a number of aspects of the PPP that limit its effectiveness for the industry.

Who Files?

The unique structure of management agreements where the employees are employed by the manager but the economic burden is the responsibility of the owner has created some confusion over the party that should be filing for the loans. Most industry players have taken the position that the correct filing party should be the owner and it appears that most of the loans have been approved and disbursed that way.

Coverage for Fixed Costs

The PPP provides the borrower with an amount equal to 2.5 times its payroll and the funds received by the borrower may be used to cover the borrower’s payroll and some other operating costs. However, 75% of the loan proceeds have to be applied to payroll costs — a definition that includes, in addition to cash compensation, certain benefits, allowance for dismissal or separation, and the state or local taxes assessed on compensation of employees.

And PPP rules limit the maximum reimbursement for the cash component of each employee’s salary to a prorated portion of $100,000 per annum. Therefore, borrowers can apply no more than 25% of the loan proceeds to fixed costs such as interest (but not principal) on mortgages or rent, and cannot apply any proceeds to the principal of any loans (including the mortgage), all of which are very significant obligations.

Existing Loans

Most hotel properties carry significant debt, and most property loan documents require the consent of the existing lenders to obtain additional loans. Most lenders will not agree to add additional debt service to the capital stack, even if this comes at a very low interest rate.

Thus, for many properties the PPP loans are only relevant if all or most of the PPP loan is actually forgiven, creating risk for borrowers.

Forgiveness Issues

In order to receive full forgiveness, borrower needs to spend the full loan proceeds during the eight-week period after receiving the loan, as long as at least 75% of the loan proceeds are spent on payroll costs. Full forgiveness is also contingent on returning to precrisis full- time equivalent and salary levels.

This is problematic for businesses that are completely shut down and may not be legally allowed to reopen until after the eight-week forgiveness period is over. If such businesses rehire employees, they face the real possibility of paying for employees that cannot work and then having no funds to pay them after the money from the PPP loans is spent.

Among the many provisions of the CARES Act is one that increases unemployment insurance benefits by $600 per week. This is a sizable increase that makes it difficult for hotels, restaurants and other businesses to rehire employees, as many of their former or potential new employees would be making more in unemployment benefits than what they would make if they came back to work.

To address this issue, a recent change in guidance by the Small Business Administration clarified that if a business made a good faith offer to rehire an employee at his/her pretermination salary and the employee refused the offer, the employee would be excluded from the forgiveness calculation.

Necessity Certification

The PPP application requires the applicant to certify that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant.” There have been many questions about this certification and recent guidance by the SBA has provided the following changes/clarifications:

While the CARES Act waives the “credit elsewhere” requirement, borrowers (whether private or publicly traded) must nonetheless carefully review and make the necessity certification in good faith. In so doing, borrowers must take into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business. The SBA has indicated that it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith.

Hedge funds and private equity firms are ineligible to receive PPP loans as they are “engaged in investment or speculation,” though portfolio companies of private equity funds may still be eligible if they meet applicable size standards after application of the affiliation rules and can make (after careful consideration) the necessity certification.

There will be a maximum cap of $20 million on the total amount of PPP loans that a single corporate group can receive. Businesses are part of a single corporate group if they are “majority owned, directly or indirectly, by a common parent.”

This rule applies to all loans not fully disbursed as of April 30 (and to the undisbursed portion of any partially disbursed loans). For purposes of this new provision, businesses “are subject to this limitation even if the businesses are eligible for the waiver-of-affiliation provision under the CARES Act or are otherwise not considered to be affiliates under SBA’s affiliation rules.”

The necessity certification and the above changes and clarifications create some significant issues for hospitality industry companies seeking to access PPP loans. The key issues are as follows:

This guidance creates significant uncertainty as to whether a borrower can make this certification when it may have access to other sources of liquidity (e.g., cash reserves, other investments or assets, access to undrawn lines of credit or other debt). It is not clear what constitutes liquidity or when the use of such liquidity would be significantly detrimental.

How does a borrower having an owner or owners with significant capital factor into its evaluation of other sources of liquidity, and therefore necessity for a PPP loan? Such lack of clarity around owner capital and liquidity is particularly relevant for private equity portfolio companies, where sponsors may have complicated ownership structures that involve layers of debt and equity financing. While the affiliation rules had made most potential PE-backed borrowers from other industries ineligible for PPP loans anyway, that was not the case for hospitality businesses with North American Industry Classification System 72 codes or that are franchises.

The single corporate group $20 million cap significantly alters the utility of the PPP for hospitality businesses. Previously each hotel or restaurant in a single corporate group would individually be eligible for a PPP loan up to $10 million each with no aggregate cap, but now such groups are collectively limited to $20 million.

Given the specific guidance concerning public companies, real estate investment trusts are hard pressed to make the necessity certification. In addition, most REITs are organized in corporate structures and would be subject to the $20 million cap.

The lack of clarity around whether, for purposes of the $20 million cap, ownership will be strictly based on equity interest or if a control element is contemplated (or will be later introduced) is problematic for funds that invest in North American Industry Classification System 72 companies. A control test could result in such companies with a common general partner (that has a minority equity interest) being deemed part of a single corporate group and subject to the $20 million cap even when the affiliation waivers would have otherwise made such companies eligible for independent PPP loans (up to the individual per-property $10 million cap with no aggregate cap).

Main Street Lending Programs

In order to qualify, borrowers under the Main Street Lending Programs must have 15,000 or fewer employees, or 2019 annual revenues of $5 billion or less. While these tests would generally make the Main Street Lending Program easier to access for businesses that are not eligible for PPP loans, there are a number of features of this program that limit its availability to some hospitality industry participants.

The SBA affiliation rules applicable to PPP loans also apply to the Main Street Lending Programs, but it appears that the exceptions, including the exceptions that benefit the hospitality industry under the PPP program, do not apply. This means that large companies or companies owned by private equity or other groups that are invested in and control a large number of businesses may not be eligible.

The maximum loan size is limited to an amount that, together with existing outstanding and undrawn available debt, would not exceed four or six times adjusted earnings before interest, taxes, depreciation and amortization of the borrower, depending on the applicable facility. Given the high leverage that is typical for businesses in the hospitality and broader real estate industries, this significantly limits the utility of this program to such industries.

A borrower under the Main Street Lending Programs must agree not to repurchase its or its parent’s stock or issue dividends for so long as the loan is outstanding and for 12 months thereafter. The Federal Reserve recently revised the terms of the program to clarify that an S corporation or other tax pass-through entity may make distributions to the extent reasonably required to cover its owners’ tax obligations in respect of the entity’s earnings.

It is unclear whether this revision was intended to apply to REITs or other pass-through tax conduit structures that are required to distribute most of their income (and not merely owners’ tax obligations) as dividends. As many real estate companies are structured as pass-through entities, this could pose a significant problem.

The Main Street Lending Programs loans are not forgivable, and have a four-year maturity. It is likely that existing lender consent would be required to incur, service and repay the new program loans, particularly if they mature inside any existing facilities with a tenor longer than four years.

This is even more difficult given that borrowers are required to agree that they will not repay principal or interest on any other outstanding loans unless they are mandatory and due, meaning that the Main Street Lending Programs’ loans could be granted an effective priority for repayment over any existing loans in the event of any voluntary repayment, including in connection with a sale or refinancing.

Eligibility of foreign-owned U.S. businesses to the Main Street Lending Programs remains unclear. The guidance provided in the published FAQs limits foreign ownership of jointventures to 49%, but does not define what constitutes a joint venture, and does not expressly impose any such limitation on other types of businesses.

Under SBA rules, specifically Title 13 of the Code of Federal Regulations Section 121.103(h)— which is not one of the SBA rules cited in the relevant FAQ, a “joint venture” is defined as an association with limited purpose, engaging in no more than three business ventures over a two-year period.

It is not clear whether the FAQ’s reference to joint ventures is intended to follow the SBA definition, or why the Main Street Lending Programs would exclude limited purpose entities but not exclude more permanent structures that are majority-owned, or wholly owned, by non-U.S. persons. Further guidance is needed on this topic to determine whether foreign- owned U.S. businesses are eligible under the Main Street Lending Programs.


While the CARES Act has provided some attractive financing programs, they are all new and pose some significant commercial and legal risks for potential lenders. This is an evolving situation and despite the difficult times and need for liquidity, borrowers should approach these loans with diligence and evaluate their options.

Reproduced with permission. Originally published May 6, 2020, “What Hospitality Cos. Should Know About Virus Relief Funds,” Law360


[1] https://www.congress.gov/bill/116th-congress/house-bill/266/text.

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 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.