CARES Act and Coronavirus Relief Tips for Hotel Franchisees

In March, hotel occupancies plummeted as the coronavirus swept the nation. Hotel franchisees found themselves caught square in the pandemic’s undercurrent. Fortunately, the federal government enacted the CARES Act to provide substantial small business relief. For hotel franchisees, the most important relief in the CARES Act comes in the form of loans that convert to grants if certain conditions are met.

On March 30, 2020, President Trump signed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) into law. The CARES Act is aimed at providing financial relief to Americans and their businesses in response to the coronavirus’ economic fallout. The measure provides aid to individuals and loan assistance to distressed industries. Relevant to hotel franchisees, the Act provides operating expense support for small businesses.

One of the core pieces of the CARES Act is the provision of $349 billion for small businesses. The earmark is available to small businesses via federally-backed SBA loans (called the Paycheck Protection Program). Congress has designed the program to make funds available quickly through approved banks and nonbank lenders.

Here are some useful tips hotel franchisees should keep in mind about the CARES Act and other general coronavirus considerations:

Use furloughs instead of layoffs

With the passage of the CARES Act, the federal government is offering small business owners loans that can be converted to grants. The earmarked $349 billion can be used to cover qualified payroll costs, rent, utilities, and interest on the debt. To obtain a loan, a qualifying small business should submit an application through an SBA- and Treasury- approved bank, credit union, or nonbank lender.

To be eligible for the conversion, staff must be retained long term. For franchisees carrying multiple hotels, the small business relief is likely available hotel-by-hotel. Portfolio franchisees can also access the special loan programs being offered through the Federal Reserve. Again, these franchisees must retain employees to convert low-interest loans to grants. With larger companies, the loans also come with restrictions on stock buybacks and executive compensation.

Hotel franchisees should investigate the legal liability of furloughs and layoffs. Either may require the hotel owner give certain notice prior to furloughing or laying off staff under federal and state laws.

Review your franchise agreement and discuss options with your franchisor

Hotel owners should review their franchise agreements and discuss potential options with their franchisors. Many franchisors have implemented financial relief programs. These include a temporary waiver of certain fees and charges. Hotel franchisors have also offered relief in the form of released operating and physical requirements. This includes allowing for reduced operations or even closures (check your brand’s website for guidance).

You should also work with a franchise advisory counsel if one exists. There is strength in numbers, especially in these uncertain times. A network-wide negotiation for agreement term adjustments can be a very useful lifeline.

Review and Negotiate Loan Agreements

Now is the time to review your loan agreements and guaranties, and discuss your situation with lenders. The hotel lending community, including CMBS lenders, are putting forbearance and relief programs in place. Some lenders are waiving financial covenants in the short term. Understanding the scope of those programs and the short and long term implications is important.

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Check your business interruption policy

Many hotel franchisee’s property insurance policies include coverage for both property damage and the resulting lost profits.  Lost profits usually cover loss resulting from:  

• Damage to a hotel franchisee’s property (business interruption). 
• Damage to a hotel franchisee’s customer or supplier’s property (contingent business interruption).  
•  Government action like evacuation orders (order of civil authority).
• Damage to properties that attract customers to the hotel franchisee’s business (leader property).  

It’s important you check what your property insurance policy covers, keep proper records, and timely notify your provider. For more information on franchisee insurance and business interruption, click here.

Confirm compliance with local and state orders

Lastly, federal, state, and local governments continue to evolve their coronavirus response efforts. Make sure you are in compliance with all orders on the movement of non-essential employees and social distancing. Some areas also require hotel franchisees to report infections.