Hotel loans are necessary for many purposes, including acquisitions, renovations, and refinancing. In many cases, hotel lenders will need to review hotel management agreements before granting loans. What many hotel owners don’t realize is that hotel management agreements (HMAs) are critical for any type of financing deal. Unless your hotel is owner operated, you need to know how HMAs impact financing for your hotel.
How Do Hotel Management Agreements Affect Hotel Loans
First, let’s define what a hotel management agreement is. Hotel management agreements are contracts between the hotel property owner and the management company who will operate the hotel. They are generally long-term contracts and outline many things. For instance, HMAs usually detail management fees, operator responsibilities, and performance standards. Hotel managers run the day-to-day operations of the hotel. They also manage expenses, cash flow, and other key financial tasks. As such, HMAs have a direct impact on the value and success of a hotel.
Since HMAs affect the value of the collateral property, in many cases these contracts affect approval and terms for hotel loans. Therefore, in many cases hotel lending professionals want to read and approve of HMAs before agreeing to provide financing. Existing hotel management agreements can make or break a loan deal because they significantly impact the risk to lenders. It’s important to keep this in mind as you negotiate HMAs. If possible, it may make sense to ask our lenders about requirements before negotiating an HMA contract.
What to Consider about Hotel Management Agreements and SNDAs
When negotiating hotel management agreements, it’s important to consider how these contracts can affect the success and value of your hotel property. For instance, performance standards are often a major concern. These clauses in the contract typically provide terms for terminating the contract in case the property isn’t as profitable or successful as it should be. This is one way to help protect not only your interests, but also help lenders feel more comfortable at providing hotel financing for your venture.
In addition, typically if you need hotel loans and are working with a hotel management company, you will need a subordination, non-disturbance, and attornment agreement (SNDA). This is an agreement between the hotel owner, hotel management company, and hotel lending company to help manage risks for each party. There are typically three elements to these agreements to help owners, managers, and lenders. Subordination generally means that the manager agrees to subordinate many of the rights under the HMA to the lender’s lien. Non-disturbance means the lender will not interfere with the management company unless they fail to uphold the conditions of the HMA. Attornment means that the manager agrees that the lender is the successor of the hotel owner in case of loan default. As you can see, these agreements can be valuable for managers, owners, and lenders, which is why they are often required by hotel lenders.
Understanding the role of HMAs and SNDAs can help hotel owners be prepared for loan approval processes. Direct hotel lenders can also help you determine which documents and agreements you need when you need hotel loans. Our professionals are here to offer support whenever you need hotel financing guidance.
Stonehill – Specializing in Hotel Financing Nationwide
We are a direct hotel lender with years of experience providing financing to the hospitality industry. Our team at Stonehill offers creative financing solutions for everything from hotel construction loans to recapitalizations. Contact us now to discuss your hospitality financing options with our experts.