In late 2018, the Fontainebleau Miami Beach completed a $1 billion mortgage refinancing. A year later, the iconic oceanfront resort, which has hosted everyone from Frank Sinatra to James Bond, refinanced again, this time for nearly $1.2 billion.
The back-to-back refinancings allowed the Fontainebleau's owner, Miami developer Jeffrey Soffer, to cash out nearly $200 million in equity from the property, according to investment ratings reports.
But they also left the company locked into a rigid repayment schedule, one that has become an albatross amid a COVID-19 pandemic that has triggered a deep downturn in global travel.
But taxpayers may come to the rescue. The Fontainebleau could qualify for up $97.5 million in public funding under a plan that owners of hotels, shopping malls and other commercial properties are lobbying for in Congress.
Hard-hit hotel companies are pushing especially hard for the legislation, which boosters have dubbed the "HOPE Act."
It "would be a huge help for us, and not just for us, but for other property owners that are in the same position that we are in," said Deric Eubanks, the chief financial officer of Ashford Hospitality Trust Inc., during the company's second-quarter earnings call last month.
Ashford, which owns 117 hotels around the country, including nearly a dozen in Florida, is carrying more than $4 billion of hotel-backed mortgages.
"I know property owners would be very appreciative of elected officials doing something to assist us, especially in the hospitality industry," Eubanks added.
But advocates for workers are pushing back. Rather than spending billions to help hotels and other property owners pay off their lenders, they say Congress should focus on combating the public-health pandemic and helping front-line employees, many of whom remain out of work, through aid such as continuing the $600-a-week boost to unemployment benefits and covering COBRA health insurance premiums for laid-off workers.
"They're trying to make this bill about mom-and-pop, small hotel owners. And there are some. But for the most part, these loans are held by large real-estate investors, several with billionaire owners, like the Fontainebleau," said Wendi Walsh, the secretary-treasurer of Unite Here Local 355, which represents roughly 1,000 workers at the Fontainebleau. "These are companies in some cases that have been really financially irresponsible that then are going to get a bailout."
A spokeswoman for the Fontainebleau declined to comment.
The issue involves a type of financing known as a commercial mortgage-backed security. That's when a bank lends money to a property owner, loans secured by hotels, shopping plazas, office towers and the like, and then packages those loans into bonds and sells them to investors.
The CMBS market is enormous. There are roughly $550 billion worth of CMBS loans — including about $85 billion backed by hotels.
A CMBS loan offers several advantages for borrowers. For instance, it is nonrecourse, meaning the bondholders can't come after the borrowers' other assets if it defaults on the mortgage.
The CMBS market also enables borrowers to take on more debt than a traditional bank loan, which is an especially appealing feature to owners who want to extract more cash from their properties.
In June 2018, for instance, Ashford Hospitality Trust was able to cash out $163.4 million in equity through a roughly $1 billion CMBS loan backed by 34 of its hotels, according to a ratings report. Two of those hotels are in Florida.
The same year, the owners of the Hilton Orlando, the 1,400-room hotel next to the Orange County Convention Center that is jointly owned by a private-equity firm, a real estate developer and a hotel company, cashed out $90.8 million in equity through a nearly $500 million CMBS loan, according to a ratings report.
A number other big Central Florida hotel owners have also taken advantage of the CMBS market. Tishman, the owner of the Walt Disney World Swan and Dolphin, took out a $447 million loan against the property. The private-equity owners of the Grande Lakes Orlando Resort, which includes luxury Ritz-Carlton and JW Marriott hotels, took out a $597 million CMBS loan against the property.
But CMBS loans come with a tradeoff. Because the loans ultimately get resold to investors, it is very difficult to renegotiate later if circumstances change. And the terms of the loans generally prohibit the borrowers from taking on any additional debt.
That inflexibility has made many CMBS loans into millstones during the economic collapse caused by the coronavirus. Nearly 10% of all CMBS loans have been moved into a process known as special servicing, a sign that the borrower is in danger of defaulting, according to Trepp, a real estate data analytics firm.
Hotels are struggling more than any other class of property. Trepp says nearly 25% of hotel-backed CMBS loans are now in special servicing. That's up from less than 2% in February.
The Fontainebleau's loan is one of the largest hotel-backed CMBS loans currently in special servicing, according to Trepp. The Grande Lakes Orlando Resort loan was also moved into special servicing at one point, though the owners recently negotiated relief agreements, according to Trepp.
There are many others. Real estate investment giant Colony Capital, which is carrying approximately $2.7 billion in hospitality debt, disclosed last week it is in default on a majority of its hotel-backed CMBS loans, though the company said in investor filings that it remains in "active negotiations with lenders and servicers."
Hoteliers caught with CMBS loans have been scrambling for help in Washington almost from the moment COVID-19 brought travel to a standstill. "We need the [Federal Reserve] and the Treasury to create a program that allows hotel owners to refinance most or all of our mortgage loans," Monty Bennett, the chairman of the Ashford hotel system, wrote in an April letter to U.S. Treasury Secretary Steve Mnuchin and others.
Bennett and Colony Capital Chairman and CEO Tom Barrack are both major donors to President Trump. Both companies have hired Washington lobbyists in recent months to press policymakers for help.
Other hotel lobbyists have been working furiously, too.
"If you go back three months ago, if we did a poll of members of Congress and asked them what does CMBS stand for, there would have been about three of the 535 members of Congress who knew what it stood for," Chip Rogers, the president and CEO of the American Hotel & Lodging Association, said on a podcast last month. "Today, that number is in the hundreds."
The lobbying blitz has led to the introduction in Congress of the "Helping Open Properties Endeavor Act" also known as the HOPE Act. The legislation, written in consultation with commercial real estate industry lobbyists, would offer emergency cash infusions to CMBS borrowers whose business has suddenly collapsed.
Borrowers could get up to 10% of their outstanding loan balance and use the money to continue making their mortgage payments. They would have up to 8 years to repay the Treasury. But if they are ultimately unable to repay, taxpayers would have no way to claw back any assets.
Hotels were also big users of the federal government's Paycheck Protection Program, which hotel lobbyists helped mold in the industry's favor. Wyndham Hotels & Resorts Inc., for instance, said 90% of its franchisees benefited from PPP loans.
But executives say the PPP loans were of limited help to hotels carrying big CMBS loans, because the PPP funds had to be spend mostly on employee wages in order to get the loans forgiven.
The HOPE Act's sponsors include a member from Florida: U.S. Rep. Al Lawson, D-Tallahassee, a former lobbyist who represents a district that stretches from state capital to Jacksonville.
Hotel lobbyists and other supporters say the legislation would ultimately save jobs, by helping owners stave off foreclosure. In a statement after the HOPE Act was introduced, the hotel lobbying association said "tens of thousands of employees" are at risk of permanent job loss if Congress doesn't act.
But others point out that a hotel in foreclosure isn't likely to close; it's just likely to change owners, as lenders take it back and then resell it to someone else.
In fact, some hotel companies are already preparing to buy. Jon Bortz, the chairman and CEO of Pebblebrook Hotel Trust, which owns nearly 60 hotels around the country, told analysts last month that his company could be in a good position to shop, in part because Bortz said Pebblebrook had already "moved away" from inflexible CMBS loans before COVID-19 struck.
"There will be significant opportunities over the next few years to acquire properties in distress due to a large number of cash-strapped and over-levered owners and many properties that will go back to lenders," Bortz said.
