By
Jim
Butler & Guy
Maisnik
of the Global Hospitality
Group®,
Author of www.HotelLawBlog.com
August 26, 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 mnagement, 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
________________________
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.
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