Contract analysis

I. Executive Summary This memorandum analyzes the insurance requirements set forth in the draft Loan Agreement and Mortgage circulated by Whitford Baines & Driscoll LLP ("WBD"), lender's counsel (Philip Tarrant Corporation, Partner, and Catherine Yee, Senior Associate), on December 19, 2022, on behalf of Pinnacle Atlantic Capital, LLC ("PAC" or the "Lender"), in connection with the proposed $160,000,000 first mortgag

II. Property Overview The following summarizes the key characteristics of the Property that are relevant to the insurance analysis. These characteristics inform the scope and type of coverages required, the applicable regulatory framework, and the risk profile relevant to underwriting and premium calculations. Key Physical Characteristics: • 342 guest rooms and suites across multiple low-rise and mid-rise buildings •

III. Summary of Lender's Insurance Requirements The Lender's insurance requirements are set forth primarily in Article IX of the draft Loan Agreement and Section 4.04 of the draft Mortgage, Assignment of Leases and Rents, Security Agreement and Fixture Filing (the "Mortgage"), each prepared by WBD and circulated to our firm on December 19, 2022. The requirements are generally consistent with what we would expect for

I. Terrorism and TRIA Coverage • Coverage Type: Terrorism risk insurance pursuant to the Terrorism Risk Insurance Act of 2002, as reauthorized ("TRIA"), or equivalent coverage. • Scope: The policy must cover both "certified" acts of terrorism (as defined under TRIA) and "non-certified" acts of terrorism. This dual coverage requirement is important, as many standard TRIA endorsements cover only certified acts. • Cover

IV. Summary of VHG's Existing Insurance Program VHG's existing insurance program for the Coral Palms Grand Resort & Spa is brokered by Castlegate Risk Advisors LLC, a full-service commercial insurance brokerage firm located at 701 Brickell Avenue, Suite 1400, Miami, Florida 33131. VHG's primary contact at Castlegate is Monica Iglesias, Senior Vice President, who has managed VHG's hospitality insurance program for the

I. Existing Terrorism / TRIA Coverage • Coverage: TRIA coverage is in place as part of the property policy • Scope: Covers certified acts of terrorism. Coverage for non-certified acts of terrorism must be confirmed. • Compliance Status: The TRIA endorsement is in place, but we must confirm whether the policy extends to non-certified acts of terrorism. PAC requires coverage for both certified and non-certified acts. I

V. Gap Analysis — Summary Matrix The following matrix provides a summary comparison of PAC's insurance requirements against VHG's existing coverage program for each coverage line. Items identified as gaps requiring action are highlighted. As indicated in the matrix above, there are five primary coverage gaps requiring immediate attention (business interruption period, CGL limits, liquor liability limits, environmenta

VI. Mortgagee and Additional Insured Requirements A. Mortgagee / Loss Payee Clause PAC must be named as mortgagee and loss payee under a standard (New York-style) mortgagee clause on all property, windstorm, flood, and business interruption policies. The standard mortgagee clause provides the Lender with independent policy rights that survive the Borrower's default or policy violation, and is a fundamental requiremen

VII. Florida-Specific and Monroe County Regulatory Considerations The Property's location in Key Largo, Monroe County, Florida, implicates several state-specific and county-specific regulatory considerations that bear directly on VHG's ability to comply with PAC's insurance requirements. These considerations also inform the negotiation strategy with PAC/WBD, as certain of the Lender's requirements—while appropriate i

VIII. Identified Gaps and Recommended Actions A. Critical Gaps Requiring Immediate Action Based on our comparative analysis of PAC's insurance requirements and VHG's existing coverage program, we have identified the following five critical gaps that must be addressed prior to closing. For each gap, we provide our recommended course of action, including both compliance and negotiation strategies.

1. Business Interruption Coverage Period PAC requires business interruption coverage for not less than 18 months of projected gross revenue, plus a 180-day extended period of indemnity beyond the restoration period. VHG's existing coverage provides only 12 months of projected gross revenue. The 6-month shortfall represents a significant gap. Discussion: The 18-month requirement is above market standard for stabilized

2. General Liability Limits PAC requires CGL coverage with limits of $10,000,000 per occurrence and $25,000,000 aggregate. VHG's existing program provides $5,000,000 per occurrence and $10,000,000 aggregate, inclusive of umbrella/excess coverage. The shortfall is $5,000,000 per occurrence and $15,000,000 aggregate. Discussion: The $10,000,000/$25,000,000 requirement is above the typical range for a single-property ho

3. Liquor Liability PAC requires separate liquor liability coverage (or an endorsement to the CGL) with a minimum limit of $5,000,000 per occurrence. VHG's existing liquor liability coverage has a limit of $2,000,000 per occurrence, resulting in a $3,000,000 shortfall. Discussion: The $5,000,000 liquor liability requirement is reasonable given the scope of the Property's food and beverage operations, which include th

4. Environmental / Pollution Liability PAC requires environmental/pollution legal liability coverage with limits of $5,000,000 per occurrence / $5,000,000 aggregate on a claims-made basis, with a retroactive date no later than the Loan origination date. VHG does not currently maintain any environmental/pollution liability policy for the Property. This represents the most significant new coverage requirement arising f

5. Excess Flood Coverage The current excess flood coverage provided by Bayfront Specialty Insurance Corp. must be confirmed as to limits and deductible. PAC requires total flood coverage (NFIP plus excess) equal to the lesser of the full replacement cost of improvements and the greater of the maximum available coverage and the outstanding Loan balance ($160,000,000), with a maximum deductible of $100,000 per occurren

1. Add Mortgagee / Loss Payee Clause: Endorse all property, windstorm, flood, and business interruption policies to add Pinnacle Atlantic Capital, LLC, its successors and/or assigns, as mortgagee and loss payee under a standard (New York-style) mortgagee clause, at the notice address set forth in Section VI.A above.

2. Add Additional Insured: Endorse all liability policies (CGL, umbrella/excess, liquor liability, automobile liability, and marina operators liability/P&I) to add Pinnacle Atlantic Capital, LLC as additional insured, with coverage primary and non-contributory as to PAC's interest.

3. Waiver of Subrogation Endorsements: Obtain waiver of subrogation endorsements in favor of PAC on all property policies (including windstorm and flood), the workers' compensation and employer's liability policy, and the equipment breakdown policy.

4. Notice of Cancellation / Non-Renewal / Material Change Endorsements: Endorse all policies to provide for 30 days' prior written notice (10 days for non-payment of premium) of cancellation, non-renewal, or material change directly to PAC at the notice address set forth in Section VI.A above. Confirm that Southland Mutual and Bayfront Specialty are willing to provide such endorsements on their respective policies.

5. Remove Existing Mortgagee Clause: Upon closing and payoff of the existing Tidewater National Bank, N.A. mortgage, remove Tidewater as mortgagee and loss payee from all applicable policies. Coordinate with Alan Prescott, Senior Vice President – Commercial Real Estate, Tidewater National Bank, N.A., 600 Waterside Drive, Norfolk, Virginia 23510, to confirm payoff and authorize release.

6. Confirm Non-Certified Terrorism Coverage: Confirm whether VHG's existing TRIA endorsement covers non-certified acts of terrorism. If not, procure a standalone terrorism policy or endorsement that covers both certified and non-certified acts at the full replacement cost of the improvements.

7. Confirm Marina Operators Liability: Confirm the current scope and limits of marina operators legal liability and P&I coverage for the 42-slip marina. If the current limit is below $5,000,000 per occurrence, or if the scope does not include damage to vessels in care, custody, or control and wreck removal, increase or supplement the coverage as necessary.

8. Confirm Windstorm Sub-Limit: Confirm that the named storm sub-limit under the windstorm policy or endorsement equals or exceeds $160,000,000. C. Negotiation Points with PAC/WBD We recommend including the following items in the Issues Memorandum for loan document negotiation with WBD. Each item represents an area where PAC's draft insurance requirements exceed market standard or where modification would be appropri

1. Business Interruption Period. Argue for a reduction from 18 months to 12 months of projected gross revenue as the market standard for stabilized, full-service hospitality assets. The 180-day extended period of indemnity should be accepted as reasonable. Supporting data: review of comparable recent hospitality loan closings showing 12-month standard; potential citation to industry publications and Mortgage Bankers

2. CGL Aggregate Limit. Argue for a reduction of the aggregate limit from $25,000,000 to $20,000,000, or alternatively to $15,000,000, as sufficient for a single-property loan. The $10,000,000 per occurrence limit may be more difficult to negotiate downward given the Property's complex amenity profile, but a reduction to $5,000,000 per occurrence with a $20,000,000 aggregate would be a preferable outcome.

3. Pollution Liability Form. Confirm with PAC/WBD that a claims-made form is acceptable for the environmental/pollution legal liability policy (as opposed to occurrence form). This should not be controversial, as claims-made is the industry standard for environmental liability. Discuss the retroactive date requirement and confirm that a retroactive date equal to the Loan closing date is acceptable.

4. Deductible Thresholds. VHG's existing deductibles are generally at or below PAC's maximum thresholds. No negotiation appears necessary on this point, with the possible exception of the flood deductible, which may need to be discussed if the current excess flood deductible exceeds $100,000.

5. Builder's Risk Trigger Threshold. The $500,000 trigger is low for a property of this size and type. Routine capital expenditure projects, periodic furniture replacement programs, and minor renovations at a 342-room luxury resort could readily exceed $500,000. We recommend negotiating this threshold upward to $1,000,000, or alternatively to $1,500,000, to avoid triggering the builder's risk requirement for ordinary

IX. Estimated Costs of Compliance The following table summarizes the estimated incremental annual premium costs associated with the coverage modifications and new placements required to achieve full compliance with PAC's insurance requirements. These estimates are preliminary and based on general market data for comparable Florida Keys hospitality properties. Actual quotes from Castlegate Risk Advisors and the applic