Item 1.01 Entry into a Material Definitive Agreement.
On June 4, 2021, Sotherly Hotels Inc., a Maryland corporation (the “Company”), Sotherly Hotels LP, a Delaware limited partnership of which the Company is the sole general partner (the “Operating Partnership”), and MHI Hospitality TRS, LLC, a Delaware limited liability company and indirect wholly-owned subsidiary of the Operating Partnership (the “TRS” and, together with the Company and the Operating Partnership and their respective subsidiaries, “we”, “our” and “us”) entered into a Second Amendment (the “Second Amendment”) to the Master Agreement (the “Master Agreement”) with Our Town Hospitality LLC, a Virginia limited liability company (“Our Town”), and Newport Hospitality Group, Inc., a Virginia corporation (“Newport”) relating to the payment of management fees by us to Our Town and which also includes as an exhibit a Second Amended and Restated Limited Liability Company Agreement of Our Town (the “A&R Operating Agreement”). Also on June 4, 2021, the TRS and Our Town entered into an Amendment No. 2 (the “Credit Amendment”) to the Credit Agreement that was originally entered into by and between TRS and Our Town in connection with the Master Agreement (as amended, the “Credit Agreement”).
Pursuant to the Master Agreement, the Company previously agreed to provide Our Town with initial working capital of up to $1.0 million as an advance on the management fees that we would owe to Our Town under the individual hotel management agreements. The Master Amendment modifies the terms of those working capital and management fee advances in the following manner: (i) prior to January 1, 2021, the management fee advances, net of advance offsets, totaled $549,900.34; (ii) on January 1, 2021, Our Town received an advance of $299,900.34 pursuant to the Credit Agreement in partial satisfaction of the balance of the management fee advances; (iii) the remaining $250,000.00 balance in management fee advances shall be paid to Our Town in satisfaction of the minimum guaranteed incentive management fee for the calendar year 2021 otherwise payable to Our Town; and (iv) the management fee advances shall be deemed to be satisfied in full on December 31, 2021.
The Master Amendment also modifies aspects of the Master Agreement to reflect the agreement of the parties to amend and restate the Our Town Limited Liability Company Agreement and includes the A&R Operating Agreement as an exhibit. The A&R Operating Agreement sets the governance structure for Our Town, which includes the Company’s right to nominate two members of the board of directors of Our Town. The Company’s two nominees were Andrew Sims, the Chairman of the Company, and David Folsom, the President and Chief Executive Officer of the Company, both of whom also serve on the board of the Company and own membership interests in Our Town. The A&R Operating Agreement also reflects capital contributions by Messrs. Sims and Folsom. Following those capital contributions Mr. Folsom, directly or indirectly, will own 1.4% of the outstanding membership interests in Our Town and Mr. Sims, directly or indirectly, will own 48.5% of the outstanding membership interests in Our Town. Upon the satisfaction of certain conditions by Our Town, Mr. Folsom and Mr. Sims will be required to make an additional capital contribution to Our Town, which would result in them owning 1.5% and 51.3%, respectively, of the outstanding membership interests in Our Town. The Company’s audit committee considered and approved the Second Amendment, including the A&R Operating Agreement and the associated changes to ownership interests of Our Town by Messrs. Sims and Folsom resulting from their respective personal investments in Our Town and the related party aspects of their relationships with Our Town arising from such investments and service on Our Town’s board of directors.
Our Town and the Company previously entered into the Credit Agreement effective January 1, 2020, pursuant to which the Company agreed to make a working capital line of credit of up to $500,000 available to Our Town, as amended on February 26, 2020 to increase working capital line of credit to up to $850,000 available to Our Town. Under the Credit Agreement Our Town had the right draw against the facility from time to time prior to the maturity date. The facility was to be payable in full on January 1, 2021. Interest accrues on the outstanding balance at 3.5% per annum and is payable quarterly in arrears. We have a right of offset against management fees and other amounts owed to Our Town under the individual hotel management agreements in the event of a default under the Credit Agreement. The Credit Amendment modifies the Credit Agreement such that: (i) the maximum amount of credit available is capped at $894,900.34; (ii) the amount of advances, as of June 4, 2021, is stated at $894,900.34; (iii) no additional advances are allowed; (iv) principal payments are set in the amount of $100,000 on each of December 31, 2021, December 31, 2022, December 31, 2023, December 31, 2024, and December 31, 2025; (v) the maturity date is extended to December 31, 2026; and (vi) the aggregate unpaid principal amount and any other obligation are payable at maturity. An affiliate of Mr. Sims entered into a conditional financing commitment with Our Town to provide funding to permit repayment of the loan in the event the principal balance of the loan made to Our Town under the Credit Agreement has not been repaid prior to maturity and Sotherly declines to extend the maturity date. The Company’s audit committee considered and approved the Credit Amendment and the terms thereof, and the related party aspects of the relationship with Our Town.