Many CMBS borrowers, particularly hotel borrowers, are obtaining Payment Protection Program (PPP) loans. Borrowers should be aware that PPP loans violate CMBS Loan Agreements, and PPP loans should be disclosed and approved by the loan servicer.
CMBS borrowers are required at all times to be a Special Purpose Entity, which includes, without limitation, (1) the prohibition against incurring any indebtedness other than as set forth in Loan Agreement (essentially trade payables) and (2) the requirement that the borrower pay all of its own liabilities and expenses, including the salaries of its own employees, out of its own funds and assets. PPP loans violate these provisions.
Thankfully, loan servicers are approving CMBS borrowers obtaining PPP loans routinely. The approvals require copies of all the loan documents and representation that funds will be used as set forth in the provisions and guidelines of the CARES Act. In addition, the borrower shall use its best efforts to obtain 100% forgiveness of the PPP loan principal. When the borrower applies for loan forgiveness, the borrower agrees to provide lender a copy of all documentation and information submitted.