18 August 2011
Hotel Lenders: What should every hotel lender consider in the SNDA before making a hotel loan? Here’s what to look for.
In today’s blog, my partner Guy Maisnik discusses the importance of something most lenders do not seem to adequately understand (until it is too late) and which often ensnares the lender when the loan gets in trouble – the Subordination, Non-Disturbance and Attornment Agreement or “SNDA“.
If you would like a refresher as to why hotel lending is different from other kinds of real estate lending, you may want to refer to (see, Why hotel lending is different and 8 pitfalls of hotel lending and how to avoid them).
Please see the links at the end of this article for other articles in the “What every hotel lender needs to know” series.
What every hotel lender needs to know about SNDAs
(Subordination, Non-Disturbance and Attornment Agreements)
by
Guy Maisnik | Hotel Lending Lawyer, JMBM Global Hospitality Group®
Recently one of my partners asked me to review an SNDA signed by a reputable real estate lender. This time, the lender really stepped in the goo. The lender had agreed to ensure that the brand’s management rights under its hotel management agreement would be protected even if the hotel were sold to a third party who over-bid the lender’s credit bid at a foreclosure sale. Of course, this continuing obligation was not spelled out in such a forthright manner. But that is exactly the result when you string together various provisions of the SNDA (the brand’s form) together with the terms of the hotel management agreement (also the brand’s form).
In other words, despite the opening paragraphs that provide the lender’s lien is senior to the management agreement, foreclosure will not cut off the hotel management agreement as it does with most junior encumbrances. Unfortunately, this lender will soon be writing a large check to the hotel’s operator, and the hotel’s value is severely reduced. In fact, in this case, it appears that the property would sell for double its likely sale price if it were “unencumbered” by the long-term management agreement.
This was not the first time, nor will it be the last, an unwitting real estate lender mistakenly treated a hotel loan like a real estate loan. This particular lender has a long history of real estate lending, and has even made some high-end hotels loans. But it is clear that the lender and its legal counsel are not sufficiently knowledgeable about hotel lending. They do not understand how the SNDA and hotel management agreement work together, nor do they really understand how the hotel operates. In this case, what they didn’t know cost them a bundle.
Fortunately, hotel lenders can avoid such expensive blunders.
What the SNDA does
The SNDA is frequently used when someone other than the owner is occupying or using the real property secured by the lender’s loan. In the hotel industry, this involves the hotel owner, the hotel operator and the hotel lender.
When a hotel lender grants “non-disturbance” rights to a hotel operator, the lender is agreeing that if the lender ever seeks a receiver or acquires control over or title to the property by foreclosure, deed-in-lieu of foreclosure or otherwise, it will recognize and accept in its entirety the hotel management agreement in the same manner as if it were the hotel owner. Often, the hotel lender feels compelled to accept the SNDA and to grant non-disturbance to a hotel operator — otherwise the hotel owner will seek financing from another lender. Therein, the foible lies. Once the hotel lender agrees to be bound by and to honor the hotel management agreement (including the SNDA), many terms of the loan documents are modified to the severe detriment of the hotel lender.
Prudent lender precautions
A prudent hotel lender will take precautions to ensure that the hotel documents provide the lender with certain necessary protections, such as the following:
- Subject to the covenant of non-disturbance, the hotel management agreement will be subject and subordinate to the lender’s rights under the loan documents.
- Where the hotel operator or lender has a termination right on foreclosure, the hotel operator will cooperate with the hotel lender in the transition of management, including back office systems, marketing, employees, licenses and credit card processing, as applicable.
- The hotel lender will not be saddled with the owner’s obligation for unpaid management fees to the hotel operator.
- The hotel lender will have the right to approve changes in the hotel management documents and operations.
- The hotel operator will not exercise its remedies upon owner’s default until the hotel lender has had sufficient time to transfer the title to the hotel to a buyer, or at least will provide the lender with the ability to cure (as a last resort).
There is a tension between a branded hotel operator’s concerns over maintaining the quality of its brand in the face of an owner default and the hotel lender being able to transfer the hotel without incurring significant costs in the process. It’s not that the hotel lender believes the brand has any particular intrinsic value in these cases. After all, if the hotel is in default, it’s usually because the hotel is not cash flowing well enough to support the brand, which can be unattractive to a prospective buyer. The flipside is, if the branded hotel operator terminates its management agreement, the hotel lender may end up bearing the expense of de-branding the hotel, which can be quite costly. It’s a balancing test, and each circumstance must be judged on its own merits.
If a hotel lender is forced to recognize the hotel management agreement post foreclosure, the rights and remedies of the lender and hotel operator become quite complex. The hotel lender that ignores the complex elements of the hotel management agreement up front may find a rude awakening when it comes into title.
Hotel lending lawyer series – What every hotel lender needs to know
There are a lot of hotel-specific issues that hotel loan documents have to deal with. This series is designed to provide the essentials:
What every hotel lender needs to know about HMAs and hotel franchise agreements
What every hotel lender needs to know about SNDAs
What every hotel lender needs to know about cash controls
What every hotel lender needs to know about hotel due diligence
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Guy Maisnik is a hotel lawyer with nearly three decades in commercial real estate transactions. He is a partner and Vice Chair of JMBM’s Global Hospitality Group®, a member of the JMBM Chinese Investment Group® and a partner in the JMBM’s real estate department. Guy advises clients on hotel transactions, representing lenders, opportunity funds, banks, special servicers, owners, REITs and developers in hotel transactions, including senior and mezzanine financing, workout and debt restructure, strategic portfolio acquisitions, co-lender, participation and securitization arrangements, joint ventures, management agreements, buying, selling and ground leasing of hotels, complex mixed used resort development, fractional and timeshare. For troubled hotels, Guy develops and executes strategies for CMBS and whole loans, and REOs. He also assists investors with recapitalization of distressed borrowers and purchases of troubled assets. Guy has assisted major lenders in revising and structuring their hotel lending programs and documentation, including their hotel construction lending. Guy’s practice is both domestic and foreign; he has advised on hotel and real estate matters throughout the United States, Canada, Mexico, South America, Middle East, Caribbean, Western and Eastern Europe, Asia and Scandinavia. For more information, please contact Guy Maisnik at 310.201.3588 or mgm@jmbm.com.
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This is Jim Butler, author of www.HotelLawBlog.com and hotel lawyer, signing off. We’ve done more than $87 billion of hotel transactions and have developed innovative solutions to unlock value from hotels. Who’s your hotel lawyer?
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Our Perspective. We represent hotel lenders, owners and investors. We have helped our clients find business and legal solutions for more than $125 billion of hotel transactions, involving more than 4,700 properties all over the world. For more information, please contact Jim Butler at jbutler@jmbm.com or +1 (310) 201-3526.
Jim Butler is a founding partner of JMBM, and Chairman of its Global Hospitality Group® and Chinese Investment Group®. Jim is one of the top hospitality attorneys in the world. GOOGLE “hotel lawyer” and you will see why.
Jim and his team are more than “just” great hotel lawyers. They are also hospitality consultants and business advisors. They are deal makers. They can help find the right operator or capital provider. They know who to call and how to reach them.