Hotel Financing and the SNDA
By Nelson Migdal Shareholder & Co-Chair Hospitality Practice, Greenberg Traurig LLP | October 28, 2008
The SNDA or Subordination, Non-Disturbance and Attornment Agreement is a common and familiar document in the financing arena. Even with some of the more interesting transaction structures in the REIT environment with operating leases and a careful segregation of the ownership of the real estate from the operation of the hotel, there will be an instrument intended to govern how the hotel owner, hotel manager and owner's lender will behave in the event of the hotel owner's default under its loan instruments with the lender.
It is not just about Foreclosure. The form of the SNDA is often the first battleground. In the negotiation of the hotel management agreement, the owner and manager will often pre-negotiate the form of the SNDA and attach it as an exhibit to the hotel management agreement. The nationally recognized brands or "flags" will have well developed and tested SNDA forms that will be modified, if at all, only after considerable dialogue between the hotel owner and the hotel manager. Similarly, the lending community will have its battle tested forms of SNDA. These may be exhibits to the loan application, and frequently overlooked at that stage of the relationship of the lender and the hotel owner, and later exhibits to the loan documents. Woe unto the less than careful hotel owner that finds itself with one required form of SNDA as an exhibit to the hotel management agreement and a second required form of SNDA as an exhibit to the loan documents.
The various forms of SNDA seen in the market place provide insight into the objectives and philosophy of some lenders. For example, some SNDA forms recite that they are to provide for the continued management of the hotel pursuant to the hotel management agreement. Compare that to the forms that recite that the lender has required the execution and delivery of the SNDA to govern should the lender foreclose the lien of the security instrument or otherwise succeed to the rights of the hotel owner. The objective always remains to have a clear and concise expression of the respective rights and obligations of the parties that will spring into action in the event of an owner loan default and the exercise by the lender of its rights and remedies under the loan documents.
Most SNDA forms include language that permits the hotel owner and hotel manager to behave under the hotel management agreement without regard to the SNDA so long as there is no event of default under the loan documents. As true as that may be, the SNDA is usually accompanied by a collateral assignment to the lender of the hotel owner's rights under the hotel management agreement and both the collateral assignment of the hotel management agreement and the SNDA are immediately effective upon the loan closing. The result is that the hotel management agreement is immediately subordinate to the rights of the lender, and this may give the lender certain rights immediately upon default, which is long before the foreclosure.
What is Subordinated? Because the SNDA and collateral assignment are immediately effective, it is important to understand what has been subordinated and what has not been subordinated to the lender. The strongest position for the lender is to have all of the right, title and interest of the manager under the hotel management agreement, and all rights of the hotel manager relating to the use of funds in the various hotel accounts subject to the SNDA. In this configuration, as soon as the lender begins to exercise its rights and remedies under the loan documents, it can insert itself into the hotel manager's operations of the hotel as to such matters as the disbursement of funds from FF&E reserve accounts and even operating accounts. Admittedly, a reasonable and experienced lender with an understanding of the hospitality industry is not likely to undermine hotel operations that are in accordance with the hotel management agreement and the approved annual budget, and intended to preserve the value of the asset as a going concern, including its position in the market place and overall value. If the objective of the lender is to regain possession and control of the hotel in order to sell it at foreclosure, any action which would diminish the value of the hotel would be counter-intuitive and illogical. Nevertheless, it has been know to occur, and when lenders insert themselves into hotel operations post-default but pre-foreclosure, it tends to make the job of the hotel manager that much more difficult.
Compare this to other situations where the SNDA either does not cover the hotel accounts or provides a series of carve-outs to permit the hotel manager to continue to operate the hotel in accordance with the terms and conditions of the hotel management agreement. The lender is still present and interested, but the level of scrutiny of the hotel manager is directed primarily to assessing conduct against the standards set forth in the hotel management agreement, which most lenders now underwrite and approve prior to closing in any event, instead of undertaking a de novo examination into the conduct of the hotel manager. In the best of circumstances for the hotel manager, there is a recognition by the lender that there can be a time gap of many months, even years, between the acceleration of the indebtedness under the note and the foreclosure sale, and during that period of time, the hotel manager must continue to operate the hotel in accordance with the hotel management agreement.