By
Jim
Butler & Guy
Maisnik
of the Global Hospitality
Group®,
Author of www.HotelLawBlog.com
August 30, 2011
Hotel
Lenders: Will you control the revenues of your hotel after foreclosure?
Are you
sure? What could go wrong? A lot can go
wrong with lender expectations in a hotel loan unless the hotel loan
documents
are prepared by knowledgeable hotel lending lawyers.
In
today's blog post, Guy Maisnik highlights the importance of the hotel
lender
keeping control over revenues post foreclosure, and explains why it
doesn't
always happen.
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 hotel cash
controls
by
Guy Maisnik |
Hotel Lending Lawyer, JMBM Global
Hospitality Group®
In a
post-foreclosure scenario, the hotel lender has to take over the hotel
and make
certain it controls all hotel revenues. There are two major impediments
to this
goal that must be addressed on the front end, when the loan is made:
- If the hotel lender agreed to give non-disturbance rights
to the hotel operator (typically with a Subordination, Non-Disturbance
and Attornment Agreement or SNDA), it will find the hotel operator
controls all hotel revenues, and will have priority over all such
funds.
- The hotel loan may not encumber or may not adequately cover
all the hotel property, and as a result, the hotel lender cannot obtain
control over all revenues.
For
example, rights to the liquor licenses and attendant fixtures and
equipment may
belong to a third party. In this case, the foreclosing lender may have
to
purchase the rights to use these. Or, the hotel owner may have pre-sold
many
rooms at a deep discount. Or, much of the personal property may be
owned by a
third party and leased to the hotel owner or an affiliate of the hotel
owner.
Or, the hotel owner may have accrued significant trade payables, and
the foreclosing
hotel lender as a practical matter will have to cover those payables
lest it
lose an important vendor.
Lenders
want to control the cash
Lenders
typically demand that hotel revenues first be applied to debt service
before
the payment on any other expense. However, in reality, unless the
lender is
willing to permit the hotel to close, basic operating costs must be
covered or
the hotel will quickly lose value. So, most hotel lenders bite the
bullet and
permit (if not require) normal operating costs to be paid ahead of debt
service.
However,
in exchange for agreeing to cover operating costs, experienced hotel
lenders
will require that operating costs be covered according to an agreed
upon
schedule, budget and waterfall approved by the hotel lender. Further,
experienced hotel lenders understand how to arrange this process, even
under
adverse conditions.
Of
"cash traps" and more
Experienced
hotel lenders understand how critical it is that the lender controls
hotel cash
revenue. One of the primary methods of accomplishing such control is
through
the use of a deposit account control agreement under Article 9 of the
Uniform
Commercial Code. One common method for a lender to obtain control of
cash flow
is for the lender to require the borrower (i.e. the hotel owner) to
enter into
a so-called "control agreement" (often called a "deposit account
control agreement") with the depository bank. These arrangements are
also
known as "cash control", "cash trap" and "cash management"
agreements. But whatever they are called, the depository bank and the
borrower
agree that the depository bank will take direction from the hotel
lender under
the specified conditions.
Another
problem with SNDAs
Another
article in this "What every hotel lender needs to know" series
focused on Subordination, Non-Disturbance and Attornment Agreement or
SNDA. The
primary focus of attention there was the confounding effect that SNDAs
have on
the lender's ability to foreclose out hotel management agreements and
the
hidden liabilities assumed by lenders on foreclosure, deed-in-lieu of
foreclosure and the exercise of other similar remedies.
Unfortunately
for the lender, in the typical hotel managed by a major brand, the
operator
will control the cash flow under the hotel management agreement. And
the
typical branded operator's SNDA provides that the hotel lender will not
disturb
the branded operators' rights under its hotel management agreement. As
a
consequence, the lender may be unable to obtain control from the hotel
operator
of the hotel's cash flow, even upon a borrower default.
Without
experience as to how to address this circumstance before the loan is
made, the
lender will likely have no practical ability to control hotel operator
expenses, and stem the bleeding. Potentially worse, the hotel lender
may not
have a perfected security interest in the cash deposit account if the
hotel
manager is able to interfere with the hotel lender's instructions
directing
disposition of the funds in the deposit account. Without a perfected
security
interest, competing creditors may be on equal footing with the hotel
lender as
to rights to the deposit account funds. Hotel lenders and their legal
counsel
need to coordinate their efforts to avoid this outcome.
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
________________________
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 [email protected].
________________________
This
is Jim Butler, author of www.HotelLawBlog.com
and hotel lawyer, signing off. We've done more than $60 billion of
hotel
transactions and have developed innovative solutions to unlock value
from
hotels. Who's your hotel lawyer?
________________________
Our
Perspective. We
represent hotel lenders,
owners and investors. We have helped our clients find business and
legal
solutions for more than $60 billion of hotel transactions, involving
more than
1,300 properties all over the world. For more information, please
contact Jim
Butler at [email protected]
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.
JMBM’s
Global Hospitality Group®
The
hotel lawyers in the Global Hospitality Group® of
Jeffer Mangels Butler & Mitchell (JMBM) comprise the premier
hospitality
practice in a full-service law firm and are the authors of the Hotel Law Blog. We
represent hotel owners, developers, investors and lenders and have
helped our
clients find business and legal solutions for more than $60 billion of
hotel
transactions, involving more than 1,000 properties worldwide. For more
information
about the Global Hospitality Group®, go to www.HotelLawBlog.com.
For more information about full range of legal services provided by
JMBM, go to www.JMBM.com.
|