The article explains how wealthy Trump donors like Tom Barrack (Colony Capital), Monty Bennett (Ashford Hospitality Trust), and Doug Manchester cannot make payments on their collective billions in hotel mortgage debt due to the pandemic. Behind the scenes, lobbyists representing the hotel and real estate industries have been waging an increasingly desperate campaign to rescue mostly well-heeled hotel owners that financed their hotel holdings via cheap but inflexible loans later packaged into commercial mortgage-backed securities (CMBS) and sold to institutional investors like insurance companies, pension funds and hedge funds.
There are a multitude of practical obstacles that have prevented a CMBS bailout from proceeding thus far: lack of clear Congressional authorization; restrictions that prohibit CMBS borrowers from taking on more debt; and Trump administration officials’ putative reluctance to be caught bailing out an industry closely tied to the President. Beyond the optics of a hotel debtor bailout, the NYT piece highlights many of the sound policy reasons why the federal government shouldn’t bail out hotel CMBS debt:
- Wealthy real estate investors would reap most of the benefits: As the Times notes, CMBS makes up a relatively small slice of the overall commercial real estate market, and a bailout of hotel debtors would primarily benefit wealthy investors who knowingly made high-risk bets.
- A bailout could expose taxpayers to losses: Some CMBS borrowers, including hotels and shopping malls, might be “zombies” that are not going to survive regardless of government help, and taxpayer money sent to prop them up would be wasted. This is bolstered by forecasts that the hotel market will not recover any time soon – perhaps not until 2023, according to a survey of hospitality executives conducted by McKinsey.
- CMBS borrowers knowingly took on risk and should bear the consequences: Ethan Penner, a creator of the CMBS market, has been making this argument and repeated it for the Times: “The idea of bailing out owners of real estate does not even make sense to me…What could make that rise to the top of anyone’s priority list when so many individual people are suffering and need help. These businesses should be allowed to fail.”
The most important reason not to bail out hotel CMBS, however, was found in a quote cited in the article from recent Congressional testimony given by Gwen Mills, the secretary-treasurer of UNITE HERE: rescuing investors who turned to Wall Street to finance hotel buying sprees will not save jobs. “Jobs are driven by occupancy, and only ending the pandemic can fix that,” Mills testified.