Real Estate Forum

SNDAs Making It Harder

should raise significant SNDA issues with the operator
and/or the lender before its escrow deposit becomes
non-refundable.

Proactive Purchaser. The lender and operator have competing demands. In particular, the operator wants security of tenure following a loan default and flexibility to operate the hotel in a distressed situation without undue lender interference, and the lender wants maximum flexibility to direct hotel cash flow and operations in a distressed or default scenario. These competing demands can spark heated debate on various issues. A purchaser should, therefore, discuss SNDA requirements with its lender during the term sheet stage for the financing and broach potential sticking points with the operator as early as possible. Ultimately, the purchaser is well advised to actually bring together the lender and hotel operator early in the transaction.

Control Over Cash. In the current cycle, many lenders have been frustrated by an inability to control hotel cash flow or even implement operating expense reductions in a default scenario. Accordingly, a lender making a new loan likely will seek control of the hotel’s bank accounts following a loan default and demand greater control over capital and other expenditures. The operator probably will resist these demands as the current cycle has reinforced its need to control hotel cash to ensure continued operations that meet its brand standards. The purchaser also should resist these lender requests as they will limit the purchaser’s rights vis-à-vis the operator and may reduce its ability to work out compromises with the operator when there are cash shortfalls.

Lender/Operator Relationship. Operators sometimes
have found themselves without a line of communication
to the lender and excluded from workout discussions
between the lender and owner that resulted in deals
affecting hotel operations. To address these concerns, an
operator may seek a clear right to communicate directly
with the lender and a reciprocal commitment from the
lender to communicate with the operator in a default
scenario. Similarly, the operator may
require that the SNDA authorize it to
follow the lender’s instructions in the
event of either an absentee owner or
conflicting instructions from the owner and
lender. A purchaser must carefully negotiate
the scope of the operator’s rights to
communicate with the lender and to follow
the lender’s instructions because both may
provide the lender with greater control at
the expense of the purchaser.

Purchaser in the Middle

The ongoing stress in the hotel operating environment has resulted in renewed and intense interest in the terms of SNDAs for management agreements. This reality ensures that SNDAs will be hotly negotiated, and the various stakeholders should not rely on prior notions of “industry standard” terms. The potential purchaser of a distressed hotel – as the potential borrower under the loan and the potential owner under the hotel management agreement – must mediate the lender’s and hotel operator’s competing demands, ensure the SNDA negotiations commence early in the deal process, and remain actively involved the negotiations. ■