A management fee subordination agreement is a legal document that regulates the relationship between a borrower and a lender. It is particularly useful in situations where a borrower has hired a third-party manager to oversee their income-generating properties. The agreement allows the lender to have a senior claim over the management fees in the event of a default by the borrower.
In this article, we will explore the details of a management fee subordination agreement, its benefits, and why it is important for both borrowers and lenders.
What is a Management Fee Subordination Agreement?
A management fee subordination agreement is a legal document that specifies the priority of claims in the event of a default by the borrower. It establishes the priority of claims between the lender and the borrower`s third-party management company who collects management fees on behalf of the borrower.
A subordination agreement ensures that in the event of foreclosure, the lender has the right to collect the management fees before the management company that would otherwise have priority. The agreement also ensures that the borrower continues to pay the management fee to the management company through the course of a loan, while the lender is guaranteed seniority over the fee.
Why is a Management Fee Subordination Agreement Important?
A management fee subordination agreement is an essential tool for both lenders and borrowers. For lenders, these agreements provide an added layer of security, as they allow the lender to receive payment of management fees before the management company, which could otherwise have priority.
For borrowers, the agreement ensures that the management company will continue to receive their management fee as specified in their contract, while ensuring that the loan obligation is satisfied. It can also improve the chances of securing financing for income-generating properties as the lender`s risk is reduced.
Benefits of a Management Fee Subordination Agreement
1. Provides added security for the lender: It ensures that the lender receives payment of management fees before the management company, which could otherwise have priority.
2. Protects the borrower`s relationship with their management company: As the borrower`s management company is guaranteed to receive payment of their management fee, it ensures that the borrower can maintain their relationship with the management company.
3. Increases chances of securing financing: With a management fee subordination agreement, the lender`s risk is reduced, making it easier for borrowers to obtain financing for income-generating properties.
Conclusion
A management fee subordination agreement is an essential tool that can provide added security for lenders and protect the borrower`s relationship with their management company. This legal document ensures that in the event of a default, the lender is guaranteed seniority over management fees before the management company. It is important for both lenders and borrowers to have this agreement in place as it can increase the chances of securing financing for income-generating properties.