The Ritz-Carlton on Peachtree Street in downtown Atlanta offers well-appointed suites with skyline views, chic amenities and a cocktail bar that offers 17 Juleps. Before the Coronavirus pandemic Forcing the hotel to close, a standard room could cost between $ 440 and $ 650 a night.
To offset the financial impact of the virus, the hotel requested a potentially forgivable loan through the federal government’s Paycheck Protection Program (P3), which was billed as a lifeline for small independent businesses. . Although it is neither small nor independent, the Atlanta Ritz-Carlton received more than $ 3 million from the program, according to the Securities and Exchange Commission. The company that owns the property, a real estate investment trust (REIT) called Ashford Hospitality Trust, also owns 116 other hotels that have applied for loans under the same program. So far, filings show Ashford Hospitality Trust has received a total of $ 38 million. And the company that oversees Ashford Hospitality Trust – Ashford Inc. – has also applied for loans through PPP. He received over $ 13 million.
Established by the $ 2.2 trillion CARES Act, the PPP aimed to relieve a wide range of businesses with 500 or fewer employees, and relaxes that size restriction for applicants in the hotel and restaurant industries. Many say these terms and conditions have allowed much of the $ 349 billion already allocated under the program to end up in the coffers of large companies with access to other financial support. But another vague stipulation – which applicants certify in good faith that “the current economic uncertainty makes the loan necessary to support your current operations” – could mean that some beneficiaries will have a calculation day.
The devil in the lack of details
The Trump administration has touted the PPP as a success for small businesses.
“The vast majority of these loans – 74% of them – were less than $ 150,000, demonstrating the accessibility of this program even to the smallest businesses,” Treasury Secretary Steven Mnuchin said in a joint statement. with the Small Business Administration.
This statistic does not tell the whole story. Large publicly traded companies can be made up of a handful of smaller entities. In some cases, these assets can benefit from PPP loans. And because the entity is smaller, and the maximum size of a PPP loan is based on monthly payroll expenses, the total is lower. But they can add up quickly. For example, Ashford Hospitality requested 13 loans for less than $ 150,000 from LLCs related to its various properties.
Additionally, the Small Business Administration typically does not lend money to “passive businesses” or businesses that profit from leasing (as REITs do) or other investments instead of selling a product or business. service. The SBA, however, makes a narrow exception for certain passive businesses that lease to qualifying small businesses.
In the case of PPP, pressure groups pushed the Treasury Department and the SBA to confirm that REITs are eligible for loans, but uncertainty has opened the door to both trusts and their holdings. And, unlike other aid outlets established by the CARES Act, PPP funding comes with fewer conditions.
“We believe the PPP will be of interest to our REIT clients as it should be a resource for tenants and borrowers to secure financing specifically designed to be used to pay rent and debt service,” the firm said. of attorneys Clifford Chance in a statement. “In addition, REITs may wish to use PPP funding for their own payroll costs. Although the amount of a loan, under the PPP, is limited to $ 10 million, the PPP does not subject program borrowers to the restrictions on dividends, offsets and share buybacks that will apply. recipients of funding under Federal Reserve programs.
What is clear is that while hotels under the umbrella of Ashford Inc. have received PPP loans, the company has also applied for loans on behalf of 10 of its LLCs that are not directly related to these properties. . LLCs include hotel management and consultancy services, real estate consultancy services, software company and a number of entities without clearly defined business functions.
Ashford Inc. claims to have carefully managed its applications to avoid “double dipping”. But it is still in violation of the goal of PPP, according to Dennis Kelleher, chairman and CEO of Better Markets, a nonprofit founded in the aftermath of the 2008 financial crisis that promotes stricter regulation in Wall Street.
“Taxpayer money is not going to already wealthy private equity sponsors, hedge fund titans and REIT managers with Park Avenue penthouses and Greenwich, Connecticut, mansions,” Kelleher said. “There is no similarity between them and the suffering of small businesses on Main Street. It is not about comparing apples to apples. It is to compare an apple to an elephant. “
But in the case of REITs, it was desperation – not greed – that drove them to get PPP loans, said Chip Rogers, CEO and president of the American Hotels & Lodging Association, a business group in the United States. hotel industry.
“Everyone is in survival mode right now,” Rogers said. “They are doing all they can to stay afloat.”
Rogers also argued that the size and type of business receiving the loan ultimately makes no substantial difference.
“Resources are used to do one of two things: pay employees or keep businesses afloat so that employees have jobs at the end of the day,” Rogers said.
What happens next?
When Congress approved an additional $ 310 billion in financing for the P3, the SBA issued updated guidance stating that borrowers should assess “their ability to access other sources of liquidity,” adding: “It is It is unlikely that a public enterprise with substantial market value and access to capital markets will be able to obtain the required certification. “
Kelleher agrees. “I find it hard to believe that an actual financial analysis of these companies can truly satisfy a certification of necessity,” he said.
Yet Ashford Inc. insists that P3 loans were a last resort.
“Although our companies are publicly traded, they do not have access to this volume of emergency capital market funding that we believe we need during this crisis due to their relatively small market capitalization,” said Ashford Inc. in a statement to ABC News.
The company also noted that many other hotel owners, as well as other state-owned companies and private equity groups, have requested help through PPPs.
The SBA has now explicitly banned private equity firms from participating in the program.
ABC News has contacted more than a dozen publicly traded REITs to find out if they or any of their holdings have applied for PPP loans. Although some companies own hotels that have received loans under the program, only one REIT responded to ABC’s request – Chatham Lodging Trust. The company confirmed that it had applied for loans for all of its 40 properties, but that the money would not cover any of the operating costs associated with the REIT itself.
Last month, before the PPP was created, Chatham Lodging Trust detailed other measures it was taking to mitigate the effects of the COVID-19 pandemic in a statement to its investors, noting that it would save about $ 64 million on on an annual basis by suspending dividends and taking other steps to increase its liquidity position to approximately $ 55 million.
The SBA allows borrowers to return without penalty funds that may not have been “needed” to support their businesses by May 7. Mnuchin also announced on Tuesday that the government would audit any company that takes out a loan of more than $ 2 million before it can be canceled.
Juleanna Glover, public affairs adviser to companies and board member of the Biden Policy Institute, said the audit may just be one of the questions companies will face.
“This will be one of the most watched programs in the coming months as it is so ripe for exploitation,” Glover said. “It will be federal prosecutions, it will be congressional investigations and it will be national and local media.”
But Kelleher says the delay in monitoring will continue to put the intended recipients of PPP loans at risk, regardless of how many times congressional funding resumes.
“It will always be limited,” Kelleher said. “As a result, every dollar pocketed by an undeserving financier is literally taken out of the pocket of the small Main Street business in need.”
After the public backlash, a number of large companies that received PPP loans said they would return the funds. According to the analysis of FactSquared data, 251 SOEs have been approved for loans under the program; 15 announced that they would return the money. Ashford Inc. is not one of them. The company said in a statement, “We plan to keep all funds received under the PPP … any funds for which we are found to be ineligible will be returned in accordance with the program requirements.”
But for now, Ashford Inc. and its affiliates are seeking more government stimulus money. Its latest SEC filings show loan applications over $ 50 million.