1021-00001 · Verimark Hospitality Group · Engagement & Preliminary

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PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT

CALDERWOOD & HARKNESS LLP One Liberty Plaza, 52nd Floor New York, New York 10006

INTERNAL MEMORANDUM

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I. Executive Summary

The purpose of this memorandum is to analyze the key U.S. federal income tax considerations arising from Verimark Hospitality Group Inc.'s ("VHG" or the "Company") proposed refinancing of its existing $625,000,000 Senior Secured Term Loan B facility (the "Existing TLB"), for which Greystone Federal Credit Corp. serves as administrative agent (CUSIP 92347LAA0; originally closed February 14, 2020), with a new $700,000,000 Senior Secured Term Loan B facility (the "New TLB"), for which Crescent Harbor Bank, N.A. will serve as administrative agent (CUSIP 92347LAB8). The refinancing is expected to close in a simultaneous sign-and-close transaction in July 2022.

This memorandum addresses four principal U.S. federal income tax topics:

1. Original Issue discount. Whether and to what extent the New TLB gives rise to original issue discount ("OID") under Internal Revenue Code ("IRC" or the "Code") Sections 1271 through 1275, and the tax treatment of such OID for VHG as issuer.

2. Applicable High Yield discount Obligation. Whether the New TLB constitutes an "applicable high yield discount obligation" ("AHYDO") within the meaning of IRC Section 163(i), which would result in deferral or disallowance of a portion of the issuer's interest deductions.

3. Deductibility of the Prepayment Premium. The deductibility of the $3,125,000 prepayment premium that VHG will pay to retire the Existing TLB, including the timing and character of such deduction.

4. Treatment of Unamortized Costs. The proper treatment of unamortized debt issuance costs and any remaining unamortized OID from the 2020 Greystone financing upon its retirement.

Summary of Conclusions. Based on our analysis, the proposed refinancing is generally tax-efficient for VHG. The New TLB is not expected to constitute an AHYDO. The $7,000,000 of OID on the New TLB falls below the de minimis threshold under Treasury Regulation Section 1.1273-1(d) and therefore need not be accrued currently by VHG, although the Company may elect ratably accrual for book-tax conformity purposes. The $3,125,000 prepayment premium paid to retire the Existing TLB should be fully deductible as interest expense in the Company's taxable year ending December 31, 2022. Unamortized debt issuance costs from the 2020 Greystone financing require bifurcated treatment: because the refinancing is properly characterized as a full retirement of the Existing TLB and issuance of a new debt instrument (rather than a modification of existing debt), unamortized costs from the Existing TLB should be written off as an accelerated deduction in 2022, while new issuance costs are capitalized and amortized over the seven-year term of the New TLB.

VHG is a publicly traded C corporation listed on the New York Stock Exchange under the ticker symbol "VMRK." For fiscal year 2021, VHG reported revenue of approximately $1.42 billion and Adjusted EBITDA of approximately $341 million, as reflected in its audited financial statements prepared by Clearmont & Wharton LLP (Ronald Ashby, Engagement Partner). Our analysis is framed in the context of a corporate borrower subject to the 21% U.S. federal corporate income tax rate under IRC Section 11(b), as amended by the Tax Cuts and Jobs Act of 2017.

In preparing this memorandum, we have relied on financial data provided by VHG management and its independent auditor, Clearmont & Wharton LLP. We have also reviewed the draft credit agreement for the New TLB, the existing Greystone credit agreement, the draft payoff letter, and the confidential flex letter provided by Crescent Harbor Bank, N.A.

This memorandum addresses only U.S. federal income tax considerations. State and local tax considerations, which may be significant given VHG's operations across multiple jurisdictions, are not addressed herein except to the extent noted briefly in Section VIII below. We recommend that VHG's internal tax department and Clearmont & Wharton LLP undertake a separate review of state and local tax implications.

II. Background and Transaction Overview

A. Existing Capital Structure

VHG's existing capital structure, as relevant to this analysis, consists of the following principal funded-debt obligations:

Existing $625,000,000 Senior Secured Term Loan B. The Existing TLB was originated on February 14, 2020, with Greystone Federal Credit Corp. serving as administrative agent on behalf of a syndicate of institutional lenders. The facility bears interest at LIBOR plus 425 basis points and has a stated maturity date of February 14, 2027 (seven-year original tenor). The Existing TLB requires quarterly amortization of 1.00% per annum of the original principal amount. As of the anticipated payoff date of July 21, 2022, the outstanding principal balance is approximately $621,875,000, reflecting approximately $3,125,000 in scheduled amortization payments since origination ($625,000,000 original principal less $3,125,000 in cumulative quarterly amortization). The Existing TLB is secured by substantially all assets of VHG and its domestic subsidiaries and is guaranteed by VHG's material domestic subsidiaries.

$400,000,000 Senior Secured Revolving Credit Facility. VHG maintains a $400,000,000 senior secured revolving credit facility with Crescent Harbor Bank, N.A. as administrative agent. As of the date of this memorandum, the revolving facility is undrawn and is expected to remain undrawn at the closing of the refinancing. The revolving facility is not being refinanced in connection with this transaction.

$245,000,000 Senior Unsecured Notes Due 2028. VHG has outstanding $245,000,000 in aggregate principal amount of senior unsecured notes due 2028, for which Atlantic Standard Trust Company serves as indenture trustee. These notes are not affected by the proposed refinancing.

VHG's total pre-refinancing funded debt is therefore approximately $1.27 billion (comprising the $621,875,000 outstanding under the Existing TLB, the $400,000,000 revolving facility commitment (undrawn), and the $245,000,000 senior unsecured notes). VHG maintains credit ratings of BB- from Kellaway Ratings Group and Ba3 from Pinnacle Credit Services, reflecting the Company's non-investment-grade but stable credit profile consistent with its position in the hospitality sector.

B. Proposed New Facility

The proposed New TLB has the following material terms, as set forth in the draft credit agreement and the commitment letter dated March 29, 2022:

Principal Amount: $700,000,000.

Administrative Agent, Collateral Agent, Lead Arranger, and Bookrunner: Crescent Harbor Bank, N.A.

Pricing: Interest accrues at Adjusted Term SOFR (one-month) plus 375 basis points, subject to a SOFR floor of 0.50%. The transition from LIBOR-based pricing on the Existing TLB to SOFR-based pricing on the New TLB reflects the broader market transition away from LIBOR benchmarks. At current market rates, one-month Term SOFR is approximately 2.29%, resulting in an initial all-in interest rate of approximately 6.14% (inclusive of the 10 basis point SOFR credit spread adjustment applicable under the draft credit agreement).

Original Issue discount: The New TLB will be issued at 99.00% of par value, representing a 1.00% discount to face amount. The dollar amount of OID is $7,000,000 ($700,000,000 × 1.00%), resulting in net funding proceeds to VHG of $693,000,000.

Maturity: July 21, 2029, representing a seven-year tenor from the anticipated closing date of July 21, 2022.

Amortization: The New TLB requires quarterly amortization of 1.00% per annum of the original principal amount, payable in equal quarterly installments of $1,750,000 each. Over the full seven-year term (28 quarterly payments), total scheduled amortization will aggregate $49,000,000, resulting in a balloon payment at maturity of approximately $651,000,000 ($700,000,000 less $49,000,000).

Use of Proceeds: The proceeds of the New TLB will be applied to (i) refinance the Existing TLB in full, including payment of the prepayment premium and all accrued interest, and (ii) fund up to approximately $75,000,000 in incremental proceeds available for permitted acquisitions and general corporate purposes. The incremental proceeds (representing the excess of the $700,000,000 new borrowing over the approximately $628 million required to retire the Existing TLB, net of transaction costs) provide VHG with additional balance sheet flexibility.

Transaction Fees and Costs: The following fees and expenses are anticipated in connection with the New TLB:

• Arrangement fee payable to Crescent Harbor Bank, N.A.: 0.50% of committed amount, or $3,500,000;

• Advisory fee payable to Meridian Strauss Advisory LLC (financial advisor to VHG): 0.20% of committed amount, or $1,400,000;

• Legal and closing costs (including fees of Calderwood & Harkness LLP, counsel to VHG, and Whitfield Gage & Partridge LLP, counsel to the administrative agent): estimated at approximately $3,200,000.

Total estimated transaction costs are approximately $8,100,000, exclusive of the OID.

C. Payoff of Existing Facility

The retirement of the Existing TLB will require payment of the following amounts to Greystone Federal Credit Corp. (as administrative agent for the benefit of the existing lender syndicate):

Upon receipt of the payoff amount, Greystone Federal Credit Corp. will deliver a payoff letter confirming the full and final discharge of all obligations under the existing credit agreement, the release of all liens securing the Existing TLB, and the termination of all guarantees provided in connection therewith. The existing credit agreement will be terminated in its entirety.

III. Original Issue discount — New $700,000,000 Term Loan B

A. OID Determination Under IRC Sections 1271–1275

1. General Principles

Under IRC Section 1273(a)(1), original issue discount arises when a debt instrument is issued for a price below its "stated redemption price at maturity" ("SRPM"). OID is defined as the excess of the SRPM over the "issue price" of the debt instrument. For purposes of this analysis, the SRPM is the sum of all payments provided by the debt instrument other than "qualified stated interest" — i.e., stated interest that is unconditionally payable in cash or property (other than debt instruments of the issuer) at least annually at a single fixed rate or a qualified floating rate. See IRC § 1273(a)(2); Treas. Reg. § 1.1273-1(b).

The issue price of a debt instrument issued for money is the amount paid for the instrument, reduced by any amounts that are treated as payments for property or services other than the lending of money. See IRC § 1273(b)(2); Treas. Reg. § 1.1273-2.

2. Application to the New TLB

The New TLB is being issued at 99.00% of par value, resulting in an issue price of $693,000,000 ($700,000,000 × 99.00%). The stated principal amount of the New TLB is $700,000,000. Interest on the New TLB accrues at Adjusted Term SOFR plus 375 basis points and is payable quarterly in cash. Because the interest payments constitute qualified stated interest (they are unconditionally payable in cash at least annually at a qualified floating rate), they are excluded from the SRPM calculation.

The quarterly amortization payments of $1,750,000 each constitute scheduled returns of principal. These principal payments reduce the amount payable at maturity and, consequently, reduce the SRPM. The aggregate of all principal payments over the seven-year term includes $49,000,000 in quarterly amortization and a balloon payment of $651,000,000 at maturity. For OID computation purposes, the SRPM equals the total of all non-interest payments due under the instrument — that is, $700,000,000 (comprising $49,000,000 in amortization plus $651,000,000 at maturity).

Accordingly, OID on the New TLB equals:

SRPM ($700,000,000) − Issue Price ($693,000,000) = $7,000,000

3. De Minimis OID Analysis

Treasury Regulation Section 1.1273-1(d) provides that OID is treated as "de minimis" if it is less than the product of 0.25% of the SRPM multiplied by the number of complete years from the issue date to maturity. The purpose of the de minimis rule is to relieve issuers and holders of the administrative burden of accruing immaterial amounts of discount over the life of a debt instrument.

For the New TLB, the de minimis threshold is computed as follows:

0.25% × $700,000,000 × 7 years = $12,250,000

Because the $7,000,000 of OID on the New TLB is less than the $12,250,000 de minimis threshold, the OID is classified as de minimis OID for U.S. federal income tax purposes.

4. Consequences of De Minimis Characterization

The de minimis classification has the following principal consequences for VHG as the issuer of the New TLB:

No current accrual obligation. Because the OID is de minimis, VHG is not required to accrue OID as a deduction on a current basis under IRC Section 163(e). Instead, the de minimis OID is treated essentially as a capital expenditure and would be deductible only upon retirement or repayment of the debt instrument. See Treas. Reg. § 1.1273-1(d)(4).

Lender treatment. Notwithstanding the issuer's de minimis treatment, lenders who acquire the New TLB at the discounted issue price may still be required to include de minimis OID in income as principal payments are received, on a pro rata basis. See Treas. Reg. § 1.1273-1(d)(2) and (3). This lender-side treatment does not affect VHG's deduction.

Elective accrual. Despite the de minimis status, VHG may elect to accrue the $7,000,000 of OID ratably over the seven-year term of the New TLB using the constant yield method prescribed under Treas. Reg. § 1.1272-1. Such an election would yield an annual deduction of approximately $1,000,000 and would promote alignment between VHG's financial accounting treatment (under ASC 470-20 and ASC 835-30) and its tax reporting. We recommend that VHG discuss the merits of this election with Clearmont & Wharton LLP (Ronald Ashby, Engagement Partner) to determine whether book-tax conformity is desirable given VHG's overall tax planning objectives.

5. Characterization of Arrangement Fee and Lender Fees

The $3,500,000 arrangement fee payable to Crescent Harbor Bank, N.A. and any upfront lender fees embedded in the pricing of the New TLB require careful characterization. Under Treasury Regulation Section 1.1273-2(g), fees paid to a lender in connection with the issuance of a debt instrument may reduce the issue price of the instrument (thereby increasing OID) if they are properly viewed as a reduction in the proceeds received by the borrower. Conversely, fees paid to third-party service providers (such as legal counsel, financial advisors, and rating agencies) are treated as debt issuance costs, which are capitalized and amortized under Treasury Regulation Section 1.446-5 and IRC Section 163.

The distinction turns on whether the fee represents a charge for lending capital (in which case it adjusts the issue price) or a charge for services rendered in connection with the financing (in which case it is a debt issuance cost). The 0.25% upfront fee embedded in the 1.00% OID is already reflected in the issue price of $693,000,000 and has been accounted for in our OID analysis above. The separate $3,500,000 arrangement fee payable to Crescent Harbor, however, is denominated as compensation for structuring, arranging, and bookrunning services — functions distinct from the lending of capital. Accordingly, we believe the arrangement fee is more properly characterized as a debt issuance cost rather than additional OID.

We note, however, that the IRS could take the position that some portion of the arrangement fee effectively reduces the issue price and therefore constitutes additional OID. Even if the full $3,500,000 were recharacterized as OID, total OID would increase to $10,500,000, which would still fall below the de minimis threshold of $12,250,000. The AHYDO analysis in Section IV below would likewise be unaffected.

Recommendation: Treat the $7,000,000 OID as de minimis OID under Treasury Regulation Section 1.1273-1(d). Treat the $3,500,000 arrangement fee paid to Crescent Harbor as a debt issuance cost capitalizable and amortizable over the seven-year term of the New TLB, using the straight-line method (or, if VHG elects for book-tax conformity, the effective interest method, consistent with the guidance in Revenue Procedure 2019-43). Coordinate with Clearmont & Wharton LLP on the appropriate method.

B. Tax Treatment of Debt Issuance Costs (New Facility)

Under IRC Section 163 and Treasury Regulation Section 1.446-5, debt issuance costs — that is, costs incurred by the borrower in connection with the borrowing of money — must be capitalized and amortized over the term of the debt instrument to which they relate. Debt issuance costs are distinguished from OID in that they represent payments to third parties for services rendered in connection with the financing, rather than a discount on the instrument itself.

The estimated debt issuance costs for the New TLB are as follows:

These costs will be amortized over the term of the New TLB, commencing on the closing date (expected July 21, 2022) and ending on the stated maturity date (July 21, 2029) — a period of seven years. Using the straight-line method, the annual deduction for amortized debt issuance costs is approximately:

$8,100,000 ÷ 7 years ≈ $1,157,143 per year

For VHG's first taxable year in which the New TLB is outstanding (calendar year 2022), the deduction would be prorated from the closing date through December 31, 2022 — approximately 5.3 months, or approximately $512,857.

We note that under current law, amortized debt issuance costs are treated as "business interest expense" for purposes of the Section 163(j) business interest expense limitation. As discussed in Section VII below, VHG's aggregate business interest expense is well within its Section 163(j) limitation, and no disallowance of debt issuance cost amortization is anticipated.

IV. Applicable High Yield discount Obligation (AHYDO) Analysis

A. Overview of AHYDO Rules — IRC Section 163(i) and Section 163(e)(5)

The AHYDO provisions of the Code were enacted to limit the tax benefits of deeply discounted, high-yield debt instruments used in leveraged buyouts and other highly leveraged transactions. Under IRC Section 163(i)(1), a debt instrument is classified as an AHYDO if it satisfies three cumulative tests:

1. Maturity Test. The instrument has a maturity date more than five years from the date of issuance.

2. Yield Test. The instrument has a yield to maturity ("YTM") that equals or exceeds the sum of the applicable federal rate ("AFR") in effect for the calendar month in which the instrument is issued, plus five percentage points.

3. Significant OID Test. The instrument has "significant original issue discount," meaning the aggregate amount of OID that would accrue on the instrument through the end of the accrual period ending after the date five years from the issue date exceeds the sum of (a) the aggregate amount of interest to be paid on the instrument during the first five accrual periods, plus (b) the product of the issue price and the instrument's yield to maturity.

If an instrument is classified as an AHYDO, the consequences to the issuer are severe. Under IRC Section 163(e)(5)(A), the issuer's deduction for the "disqualified portion" of the OID is permanently disallowed — the disqualified portion is treated as a stock dividend rather than interest for tax purposes. The remaining OID is deductible only when paid. These consequences can significantly increase the after-tax cost of the debt.

Given the importance of avoiding AHYDO classification, we analyze each of the three tests below as applied to the New TLB.

B. Application to the New $700,000,000 TLB

Test 1 — Maturity Greater Than 5 Years

The New TLB has a stated maturity date of July 21, 2029, which is seven years from the anticipated closing and issue date of July 21, 2022. Because the maturity exceeds five years, Test 1 is satisfied.

This result is typical for leveraged term loans, which customarily carry maturities of five to seven years. The maturity test alone does not trigger AHYDO classification; both remaining tests must also be met.

Test 2 — Yield to Maturity ≥ AFR + 5 Percentage Points

The yield test requires a comparison of the instrument's YTM (computed taking into account the issue price, all scheduled payments of principal and interest, and the OID) to the sum of the AFR plus five percentage points.

Yield to Maturity of the New TLB. The all-in interest rate at signing is approximately 6.14%, comprising one-month Term SOFR of 2.29%, the 10 basis point SOFR credit spread adjustment, and the 375 basis point applicable margin. For AHYDO purposes, however, the YTM must be computed using the issue price of $693,000,000 (rather than par) and all scheduled payments of principal and interest. Incorporating the $7,000,000 of OID over the seven-year term, the estimated YTM of the New TLB is approximately 6.30% on a semi-annual bond-equivalent basis. This YTM reflects the combined effect of the coupon interest, the 1.00% OID amortized to maturity, and the quarterly principal amortization schedule.

Applicable Federal Rate. For instruments issued in July 2022, the AFR for long-term instruments (i.e., instruments with a term greater than nine years; for instruments with shorter terms, mid-term AFR applies, but the long-term AFR is typically used as a conservative benchmark in AHYDO analyses) with semi-annual compounding was approximately 3.22%, based on prevailing Treasury rates and IRS published guidance. The AFR plus five percentage points is therefore:

3.22% + 5.00% = 8.22%

Because the estimated YTM of 6.30% is well below the 8.22% threshold, Test 2 is NOT satisfied. The New TLB's yield does not equal or exceed the AFR plus five percentage points. There is a margin of approximately 192 basis points between the estimated YTM and the AHYDO trigger level.

Test 3 — Significant OID

Because the AHYDO tests are cumulative — all three must be met for AHYDO classification to apply — and Test 2 has not been satisfied, it is not strictly necessary to analyze Test 3. However, for completeness and to provide comfort to the deal team, we note the following:

The $7,000,000 of OID on the New TLB is de minimis, as demonstrated in Section III.A above. Moreover, the quarterly amortization payments of $1,750,000 ensure that principal is being returned to lenders on an ongoing basis, which reduces the accumulation of accrued but unpaid amounts through the five-year test date. The significant OID test would not be met even if Test 2 had been satisfied.

Conclusion. The New TLB does not constitute an AHYDO. Because the three AHYDO tests are cumulative and Test 2 is clearly not met, AHYDO classification does not apply to the New TLB. Consequently, no deferral of VHG's OID deductions and no recharacterization of any portion of OID as a non-deductible dividend equivalent will result from the issuance of the New TLB.

C. Sensitivity Analysis

We have considered whether changes to the pricing of the New TLB pursuant to the confidential flex provisions in the syndication flex letter between Crescent Harbor Bank, N.A. and VHG could alter the AHYDO analysis. The flex letter permits the lead arranger to adjust the applicable margin, the OID, and the SOFR floor within specified parameters to facilitate successful syndication of the New TLB.

For AHYDO classification to be triggered, the flex adjustments would need to increase the YTM of the New TLB from approximately 6.30% to at least 8.22% — an increase of nearly 192 basis points. Based on our review of the flex letter, the maximum contemplated upward adjustments to margin and OID would increase the all-in yield by no more than approximately 75 basis points in the aggregate, which would result in a YTM of approximately 7.05% — still well below the 8.22% AHYDO threshold. We therefore do not anticipate that the exercise of flex provisions would cause the New TLB to be classified as an AHYDO.

Recommendation: If flex is exercised and the pricing of the New TLB changes materially before closing, the AHYDO analysis should be re-run using the final pricing terms and the AFR in effect for the month of closing. We will address this in the supplemental tax opinion memorandum that we expect to deliver closer to the closing date.

V. Deductibility of the $3,125,000 Prepayment Premium on the Existing Greystone Facility

A. Character of the Prepayment Premium

In connection with the retirement of the Existing TLB, VHG will pay a prepayment premium of $3,125,000 to Greystone Federal Credit Corp. (as administrative agent for the existing lender syndicate). The premium is calculated as 0.50% of the $625,000,000 original principal amount of the Existing TLB, as provided in Section 2.06(c) of the existing Greystone credit agreement.

The proper characterization of the prepayment premium is relevant to both its deductibility and its treatment under the Section 163(j) business interest expense limitation. Under well-established principles of federal income tax law, a premium paid by a borrower to retire debt prior to its scheduled maturity is generally treated as additional interest expense — that is, as compensation to the lender for the loss of the expected yield stream resulting from early termination.

Treasury Regulation Section 1.163-7(c) provides that a repurchase premium paid by an issuer to reacquire its own debt instrument is deductible as interest expense under IRC Section 163(a), to the extent the premium does not exceed the amount of OID remaining unaccrued on the retired instrument. To the extent the premium exceeds unaccrued OID, the excess may be deductible as a loss on the retirement of indebtedness under IRC Section 165, or as an ordinary and necessary business expense under IRC Section 162. See also Coltec Industries, Inc. v. United States, 454 F.3d 1340 (Fed. Cir. 2006) (discussing treatment of debt retirement costs).

The $3,125,000 prepayment premium is modest in relation to the outstanding principal of the Existing TLB (representing only 0.50% of the original face amount). The premium is contractually designated as a "make-whole" payment compensating lenders for the early termination of their investment, and it functions economically as a substitute for the interest income that the Greystone lenders would have received had the Existing TLB remained outstanding through its scheduled maturity. Accordingly, the premium is most appropriately characterized as additional interest expense, deductible under IRC Section 163(a).

B. Timing of Deduction

The prepayment premium will become due and payable on the payoff date, which is expected to be July 21, 2022. VHG is a calendar-year taxpayer that reports its income and deductions on the accrual method of accounting. Under the accrual method, the prepayment premium will be deductible in the taxable year in which the liability becomes fixed and determinable — that is, the taxable year ending December 31, 2022, assuming the refinancing closes as currently scheduled.

The accrued and unpaid interest on the Existing TLB through the payoff date (estimated at approximately $2,916,667) is separately deductible as ordinary interest expense in the same taxable year. Taken together, VHG's deductible charges associated with the retirement of the Existing TLB in 2022 will include:

• Prepayment premium: $3,125,000

• Accrued and unpaid interest: approximately $2,916,667

• Unamortized debt issuance costs (discussed in Section VI below): approximately $4,583,333

• Total retirement-related deductions: approximately $10,625,000

C. Section 163(j) Interaction

To the extent the prepayment premium is characterized as interest expense, it is subject to the business interest expense limitation under IRC Section 163(j). As enacted by the Tax Cuts and Jobs Act of 2017 and as in effect for taxable years beginning after December 31, 2021, Section 163(j)(1) limits a taxpayer's deduction for business interest expense to the sum of (a) business interest income, (b) 30% of adjusted taxable income ("ATI"), and (c) floor plan financing interest (not applicable to VHG).

Given VHG's FY2021 Adjusted EBITDA of approximately $341 million, the Company's Section 163(j) limitation is substantial. Even treating the full $3,125,000 prepayment premium as business interest expense subject to the limitation, VHG's aggregate interest expense for 2022 (as detailed further in Section VII below) is well within the 30% of ATI cap. No disallowance or limitation of the prepayment premium deduction under Section 163(j) is anticipated.

VI. Treatment of Unamortized Debt Issuance Costs and OID from the 2020 Greystone Financing

A. Existing Unamortized Costs

The Existing TLB was originated on February 14, 2020. In connection with that origination, VHG incurred debt issuance costs that were required to be capitalized and amortized over the seven-year term of the facility (February 14, 2020 through February 14, 2027, or approximately 84 months). Based on typical transaction costs for a leveraged term loan facility of this size, we estimate that original debt issuance costs were in the range of $6,000,000 to $8,000,000. For purposes of this analysis, we use a midpoint estimate of $7,000,000, subject to confirmation of the actual amount with Clearmont & Wharton LLP based on VHG's books and records.

As of the anticipated payoff date of July 21, 2022, approximately 29 months of the 84-month original amortization period will have elapsed (February 14, 2020 through July 21, 2022). Approximately 55 months of amortization period remains. The estimated unamortized balance of the original debt issuance costs is therefore:

$7,000,000 × (55 months remaining ÷ 84 months total) ≈ $4,583,333 (illustrative)

If the Existing TLB was issued with OID (which we have not been able to confirm from the documents currently available), any remaining unamortized OID from the 2020 issuance must also be addressed. The treatment of unamortized OID on retirement of the Existing TLB would parallel the treatment of unamortized debt issuance costs, as discussed below.

B. Retirement vs. Modification Analysis Under Treasury Regulation Section 1.1001-3

A critical threshold question in determining the tax treatment of unamortized costs is whether the proposed refinancing constitutes a "significant modification" of the Existing TLB (resulting in a deemed exchange of the old instrument for a new instrument under Treas. Reg. § 1.1001-3) or a straightforward retirement and new issuance. The distinction is important because:

• If the refinancing is treated as a modification (deemed exchange), unamortized costs from the Existing TLB may need to be carried over to the new instrument and amortized over the remaining term of the modified debt, rather than written off immediately.

• If the refinancing is treated as a retirement and new issuance, unamortized costs from the Existing TLB are written off as an accelerated deduction in the year of retirement, and new issuance costs are separately capitalized and amortized.

Under Treasury Regulation Section 1.1001-3, a "modification" of a debt instrument means any alteration, including any deletion or addition, of a legal right or obligation of the issuer or a holder, whether the alteration is evidenced by an express agreement, a course of performance, or otherwise. A modification is "significant" if, based on all facts and circumstances, the legal rights and obligations under the modified instrument differ materially from the legal rights and obligations under the unmodified instrument. Specific safe harbors and bright-line tests apply for certain types of changes (e.g., changes in yield, changes in timing of payments, changes in obligor).

In the present case, however, the modification analysis under Regulation Section 1.1001-3 is not applicable for the following reasons:

• Different obligees. The Existing TLB is held by the Greystone lender syndicate, with Greystone Federal Credit Corp. as administrative agent. The New TLB will be held by a new syndicate arranged by Crescent Harbor Bank, N.A. The lender groups are not the same.

• Different administrative agent. Greystone Federal Credit Corp. serves as administrative agent for the Existing TLB; Crescent Harbor Bank, N.A. will serve as administrative agent for the New TLB.

• Different principal amount. The outstanding principal of the Existing TLB at payoff is approximately $621,875,000; the New TLB has a principal amount of $700,000,000. The change in principal amount is material.

• Different benchmark rate. The Existing TLB bears interest at LIBOR + 425 bps; the New TLB bears interest at Adjusted Term SOFR + 375 bps. Although this change partially reflects the LIBOR-to-SOFR transition, it also involves a meaningful change in the applicable margin.

• Full payoff and discharge. The transaction is mechanically structured as a full payoff of the Existing TLB and termination of the existing Greystone credit agreement, followed by the issuance of a new credit facility under an entirely separate credit agreement. There is no amendment of the existing credit agreement; the existing agreement is being terminated, and all obligations thereunder are being discharged in full.

Conclusion. The proposed refinancing is properly characterized as a retirement of the Existing TLB and issuance of a new debt instrument under the Crescent Harbor facility. This is not an amendment or modification of existing debt. The Treasury Regulation Section 1.1001-3 modification analysis does not apply because the existing debt is being repaid in full and terminated — not modified. See Treas. Reg. § 1.1001-3(c)(1)(i) (providing that the regulation applies to alterations of existing debt instruments, not to the retirement and issuance of different instruments).

C. Tax Treatment Upon Retirement

Because the refinancing constitutes a retirement of the Existing TLB, VHG may deduct the remaining unamortized debt issuance costs in the year of retirement. Under Treasury Regulation Section 1.446-5(b), when a debt instrument is retired prior to its stated maturity, any unamortized debt issuance costs allocable to the retired instrument are deductible in the taxable year of retirement. See also IRC Section 165(a) (providing for the deduction of losses sustained during the taxable year, including losses on the retirement of debt).

Similarly, if the Existing TLB was issued with OID, any unamortized OID that VHG has not yet accrued as a deduction under IRC Section 163(e) would be deductible upon retirement of the instrument. The write-off of such unamortized OID accelerates a deduction that would otherwise have been taken ratably over the remaining life of the instrument.

The write-off of unamortized costs upon retirement provides VHG with an accelerated tax deduction in the 2022 taxable year, which is favorable from a cash-tax perspective. Using our illustrative estimate of approximately $4,583,333 in unamortized debt issuance costs, the estimated federal tax benefit of the accelerated deduction is:

$4,583,333 × 21% federal corporate tax rate ≈ $962,500 in tax savings

This tax benefit is realized in the 2022 taxable year, rather than being spread over the remaining approximately 55 months (4.6 years) of the Existing TLB's original term. The present value benefit of accelerating this deduction is meaningful, though the precise calculation depends on VHG's discount rate and tax position in future years.

D. Coordination with New Facility Costs

It is important to emphasize that the unamortized debt issuance costs from the Existing TLB and the new debt issuance costs associated with the New TLB must be tracked independently. Because the refinancing constitutes a full retirement and new issuance — not a modification — there is no basis for "rolling over" or tacking the unamortized costs from the Greystone facility into the new Crescent Harbor facility. VHG should not carry forward any portion of the old issuance costs to the new facility.

The two sets of costs are summarized as follows:

VHG's accounting department should establish separate amortization schedules for the new facility costs and should ensure that the write-off of old facility costs is properly reflected in the Company's FY2022 tax return.

VII. Interest Expense Deductibility — Section 163(j) Overview

IRC Section 163(j), as amended by the Tax Cuts and Jobs Act of 2017, imposes a limitation on the deduction of "business interest expense" for taxable years beginning after December 31, 2017. Under Section 163(j)(1), a taxpayer's deduction for business interest expense in any taxable year is limited to the sum of:

(a) the taxpayer's business interest income for the year;

(b) 30% of the taxpayer's adjusted taxable income ("ATI") for the year; and

For taxable years beginning after December 31, 2021, ATI is computed without adding back deductions for depreciation, amortization, or depletion — a change from the more generous EBITDA-based computation that applied for taxable years beginning before January 1, 2022. However, for purposes of this preliminary analysis, we use FY2021 Adjusted EBITDA as an approximate proxy for ATI, recognizing that the actual ATI computation for FY2022 will require adjustment for depreciation and amortization.

For VHG's taxable year ending December 31, 2022, estimated total business interest expense (including amounts treated as interest for Section 163(j) purposes) is as follows:

VHG's Section 163(j) limitation, using FY2021 Adjusted EBITDA as a proxy for ATI, is:

30% × $341,000,000 = $102,300,000

Because VHG's estimated total business interest expense of approximately $59.8 million is well below the $102.3 million Section 163(j) cap, no disallowance of business interest expense is anticipated for FY2022. VHG has substantial headroom under the limitation — approximately $42.5 million — which provides a significant buffer even if actual interest rates, outstanding balances, or other variables differ from the estimates set forth above.

We note that the Section 163(j) limitation must be computed on a consolidated group basis if VHG files a consolidated federal income tax return with its subsidiaries. We assume for purposes of this analysis that VHG is the common parent of a consolidated group that files a single consolidated return. The estimated figures above reflect VHG's consolidated interest expense and consolidated ATI.

Recommendation: VHG should include the items discussed in this memorandum — including the prepayment premium, the unamortized cost write-off, OID amortization (if elected), and new debt issuance cost amortization — in its annual Section 163(j) computation worksheet prepared in connection with the filing of its FY2022 federal income tax return.

VIII. State and Local Tax Considerations (Brief Note)

This memorandum addresses only U.S. federal income tax considerations. We note, however, that VHG operates hotel properties in 18 states across the United States, and state income and franchise tax treatment of the items discussed herein — including OID accrual, prepayment premium deductions, debt issuance cost amortization, and business interest expense limitations — may vary from federal treatment in material respects.

The following state-level considerations are flagged for further analysis:

Florida. VHG is headquartered in Boca Raton, Florida. Florida imposes a corporate income tax at a rate of 5.5% (with a 3.535% surtax applicable for certain taxable years). Florida generally conforms to the federal Internal Revenue Code for purposes of computing Florida taxable income, beginning with federal taxable income as the starting point. The treatment of the items discussed herein should generally conform to federal treatment for Florida corporate income tax purposes, but this should be verified with respect to the specific items at issue, including in particular the accelerated write-off of unamortized debt issuance costs and the treatment of the prepayment premium.

Delaware. VHG is incorporated in Delaware. Delaware does not impose a corporate income tax on income earned outside of Delaware. VHG does not appear to have substantial Delaware-source income. Delaware franchise tax (based on authorized shares or assumed par value capital) is not affected by the refinancing.

Other states. The 18 states in which VHG operates may have varying conformity rules, apportionment methodologies, and business interest expense limitation regimes (some states have decoupled from IRC Section 163(j)). A state-by-state review is beyond the scope of this memorandum.

Recommendation: VHG's internal tax department and Clearmont & Wharton LLP should undertake a separate review of state and local tax implications of the refinancing, with particular attention to (i) states that have decoupled from Section 163(j), (ii) states with different conformity dates that may not incorporate recent federal law changes, and (iii) the treatment of the accelerated deduction of unamortized debt issuance costs in states with different cost-recovery rules.

IX. Recommendations and Action Items

Based on the analysis set forth in this memorandum, we recommend the following action items in connection with the proposed refinancing:

1. OID Treatment. Confirm the $7,000,000 of OID on the New TLB as de minimis under Treasury Regulation Section 1.1273-1(d). VHG may nonetheless elect to accrue the OID ratably over the seven-year term for book-tax conformity purposes. This election should be coordinated with Clearmont & Wharton LLP (Ronald Ashby, Engagement Partner) and VHG's internal accounting team.

2. AHYDO Classification. The New TLB does not constitute an AHYDO based on current pricing terms and the anticipated AFR for July 2022. If syndication flex is exercised and the pricing of the New TLB changes materially before closing, the AHYDO analysis should be re-run using the revised terms. Leonard Cross will update the AHYDO analysis in the supplemental tax opinion memorandum to be prepared in connection with closing.

3. Prepayment Premium. VHG should deduct the $3,125,000 prepayment premium as interest expense in its taxable year ending December 31, 2022. The characterization of the premium as interest expense should be confirmed with VHG's Treasurer (Glenn Fischbach) and Chief Financial Officer (Renata Haines) to ensure consistent treatment for financial reporting and tax purposes.

4. Unamortized Issuance Costs. VHG should write off the remaining unamortized debt issuance costs from the 2020 Greystone financing as an accelerated deduction in FY2022. The exact unamortized balance should be confirmed with Clearmont & Wharton LLP based on VHG's books and records. If any unamortized OID from the 2020 financing exists, it should be written off on the same basis.

5. New Facility Costs. Capitalize approximately $8,100,000 in new debt issuance costs and amortize over the seven-year term of the New TLB (July 21, 2022 through July 21, 2029). Establish a separate amortization schedule for these costs, independent of any costs associated with the Existing TLB.

6. Section 163(j) Computation. No limitation on business interest expense deductions is anticipated for FY2022. VHG should include all interest-related items from the refinancing (prepayment premium, unamortized cost write-off, OID amortization if elected, and new debt issuance cost amortization) in its annual Section 163(j) computation worksheet.

7. State and Local Taxes. Flag the refinancing transaction for VHG's internal tax team and Clearmont & Wharton LLP for a multi-state review of state and local tax implications, with particular attention to conformity issues and states that have decoupled from IRC Section 163(j).

8. Subsequent Memorandum. Leonard Cross will prepare a more detailed tax opinion memorandum closer to closing (targeted for the first week of July 2022) to confirm the conclusions set forth herein based on final deal terms, the actual AFR in effect at the time of issuance, and any changes resulting from the syndication process.

X. Assumptions and Qualifications

This memorandum is subject to the following assumptions and qualifications:

1. Legal Authority. The analysis set forth herein is based on the Internal Revenue Code of 1986, as amended, the Treasury Regulations promulgated thereunder, and judicial and administrative interpretations thereof, all as in effect as of the date of this memorandum (April 18, 2022). Changes in applicable law, regulations, or interpretive authority subsequent to the date hereof could alter the conclusions expressed in this memorandum.

2. Financial Data. The financial data and projections relied upon in this memorandum have been sourced from VHG management and Clearmont & Wharton LLP, including VHG's audited financial statements for the fiscal year ended December 31, 2021. We have not independently verified the accuracy or completeness of such data.

3. Transaction Structure. Our analysis assumes that the refinancing will close as currently structured — that is, as a simultaneous sign-and-close transaction in which VHG borrows $700,000,000 under the New TLB, uses a portion of the proceeds to retire the Existing TLB in full, and retains the balance for permitted acquisitions and general corporate purposes. If the material terms of the transaction change (including, without limitation, the principal amount, the pricing, the maturity, the amortization schedule, or the identity of the counterparties), the conclusions set forth herein should be revisited.

4. Attorney Work Product / Privilege. This memorandum constitutes attorney work product prepared in anticipation of providing legal advice to VHG and is protected by the attorney work product doctrine and the attorney-client privilege. This memorandum is privileged and confidential and is not intended as tax advice to any party other than VHG. No third party should rely upon the analysis or conclusions set forth herein without the express written consent of Calderwood & Harkness LLP.

5. Scope Limitations. This memorandum addresses only U.S. federal income tax considerations. The analysis does not address:

(a) state and local income, franchise, or other tax considerations (except to the limited extent noted in Section VIII above);

(b) potential employment tax or excise tax implications;

(c) withholding tax obligations with respect to payments of interest or principal to foreign lenders participating in the syndication of the New TLB (including under IRC Sections 1441, 1442, and 1471–1474 (FATCA));

(d) any non-U.S. tax consequences; or

(e) alternative minimum tax considerations (noting that the corporate AMT was repealed by the Tax Cuts and Jobs Act of 2017, but may be reinstated or modified by future legislation, including the Inflation Reduction Act currently under consideration in Congress).

6. No Guarantee of Outcome. The conclusions expressed in this memorandum represent our best professional judgment based on the facts, assumptions, and authorities described herein. We cannot guarantee that the Internal Revenue Service will agree with the positions described or that a court would sustain such positions if challenged.

Prepared by: Leonard Cross, Specialist Partner, Tax Calderwood & Harkness LLP One Liberty Plaza, 52nd Floor New York, New York 10006 Direct: (212) 555-8140 lcross@calderwoodharkness.com

Billing Rate: $1,550/hr

Distribution: This memorandum is distributed on a limited and confidential basis to the following individuals only:

• Ian Blackwood, Partner, Banking & Finance, Calderwood & Harkness LLP

• Sophie Tremblay, Associate, Banking & Finance, Calderwood & Harkness LLP

• Priya Narayanan, General Counsel, Verimark Hospitality Group Inc. (upon partner approval)

• Glenn Fischbach, Treasurer, Verimark Hospitality Group Inc. (upon partner approval)

• Renata Haines, Chief Financial Officer, Verimark Hospitality Group Inc. (upon partner approval)

cc: Engagement File 1016-00009

— END OF MEMORANDUM —

Date:	April 18, 2022
To:	Ian Blackwood, Partner, Banking & Finance

Sophie Tremblay, Associate, Banking & Finance

From:	Leonard Cross, Specialist Partner, Tax
Re:	U.S. Federal Income Tax Considerations — Verimark Hospitality Group Inc. $700,000,000 Term Loan B Refinancing
Engagement No.:	1016-00009
Client:	Verimark Hospitality Group Inc. (NYSE: VMRK), a Delaware corporation; 8200 West Palmetto Park Road, Suite 1500, Boca Raton, FL 33433; EIN: 82-3741956
Component	Amount
Outstanding principal	$621,875,000
Accrued and unpaid interest (estimated through July 21, 2022)	$2,916,667
Prepayment premium (0.50% × $625,000,000 original principal)	$3,125,000
Total estimated payoff	$627,916,667
Cost Component	Payee	Estimated Amount
Arrangement fee	Crescent Harbor Bank, N.A.	$3,500,000
Advisory fee	Meridian Strauss Advisory LLC	$1,400,000
Legal and closing costs	Calderwood & Harkness LLP; Whitfield Gage & Partridge LLP; other	$3,200,000
Total estimated capitalizable debt issuance costs	$8,100,000
Item	Treatment	Timing
Unamortized issuance costs from Existing TLB (est. ~$4,583,333)	Deducted in full upon retirement	FY2022 (year of payoff)
New issuance costs for New TLB (est. ~$8,100,000)	Capitalized and amortized over 7-year term	July 21, 2022 – July 21, 2029
Component	Estimated Amount
Interest on Existing TLB (Jan. 1 – July 21, 2022; ~6.5 months at LIBOR + 425 bps on ~$622M)	$18,300,000
Prepayment premium on Existing TLB (to extent treated as interest)	$3,125,000
Interest on New TLB (July 21 – Dec. 31, 2022; ~5.3 months at ~6.14% on $700M)	$19,100,000
Interest on $245M senior unsecured notes (full year, ~6% coupon)	$14,700,000
Unamortized issuance cost write-off (to extent treated as interest expense)	$4,583,333
Total estimated 2022 business interest expense	$59,808,333

PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT
CALDERWOOD & HARKNESS LLP One Liberty Plaza, 52nd Floor New York, New York 10006
INTERNAL MEMORANDUM
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I. Executive Summary
The purpose of this memorandum is to analyze the key U.S. federal income tax considerations arising from Verimark Hospitality Group Inc.'s ("VHG" or the "Company") proposed refinancing of its existing $625,000,000 Senior Secured Term Loan B facility (the "Existing TLB"), for which Greystone Federal Credit Corp. serves as administrative agent (CUSIP 92347LAA0; originally closed February 14, 2020), with a new $700,000,000 Senior Secured Term Loan B facility (the "New TLB"), for which Crescent Harbor Bank, N.A. will serve as administrative agent (CUSIP 92347LAB8). The refinancing is expected to close in a simultaneous sign-and-close transaction in July 2022.
This memorandum addresses four principal U.S. federal income tax topics:
1.  Original Issue discount. Whether and to what extent the New TLB gives rise to original issue discount ("OID") under Internal Revenue Code ("IRC" or the "Code") Sections 1271 through 1275, and the tax treatment of such OID for VHG as issuer.
2.  Applicable High Yield discount Obligation. Whether the New TLB constitutes an "applicable high yield discount obligation" ("AHYDO") within the meaning of IRC Section 163(i), which would result in deferral or disallowance of a portion of the issuer's interest deductions.
3.  Deductibility of the Prepayment Premium. The deductibility of the $3,125,000 prepayment premium that VHG will pay to retire the Existing TLB, including the timing and character of such deduction.
4.  Treatment of Unamortized Costs. The proper treatment of unamortized debt issuance costs and any remaining unamortized OID from the 2020 Greystone financing upon its retirement.
Summary of Conclusions. Based on our analysis, the proposed refinancing is generally tax-efficient for VHG. The New TLB is not expected to constitute an AHYDO. The $7,000,000 of OID on the New TLB falls below the de minimis threshold under Treasury Regulation Section 1.1273-1(d) and therefore need not be accrued currently by VHG, although the Company may elect ratably accrual for book-tax conformity purposes. The $3,125,000 prepayment premium paid to retire the Existing TLB should be fully deductible as interest expense in the Company's taxable year ending December 31, 2022. Unamortized debt issuance costs from the 2020 Greystone financing require bifurcated treatment: because the refinancing is properly characterized as a full retirement of the Existing TLB and issuance of a new debt instrument (rather than a modification of existing debt), unamortized costs from the Existing TLB should be written off as an accelerated deduction in 2022, while new issuance costs are capitalized and amortized over the seven-year term of the New TLB.
VHG is a publicly traded C corporation listed on the New York Stock Exchange under the ticker symbol "VMRK." For fiscal year 2021, VHG reported revenue of approximately $1.42 billion and Adjusted EBITDA of approximately $341 million, as reflected in its audited financial statements prepared by Clearmont & Wharton LLP (Ronald Ashby, Engagement Partner). Our analysis is framed in the context of a corporate borrower subject to the 21% U.S. federal corporate income tax rate under IRC Section 11(b), as amended by the Tax Cuts and Jobs Act of 2017.
In preparing this memorandum, we have relied on financial data provided by VHG management and its independent auditor, Clearmont & Wharton LLP. We have also reviewed the draft credit agreement for the New TLB, the existing Greystone credit agreement, the draft payoff letter, and the confidential flex letter provided by Crescent Harbor Bank, N.A.
This memorandum addresses only U.S. federal income tax considerations. State and local tax considerations, which may be significant given VHG's operations across multiple jurisdictions, are not addressed herein except to the extent noted briefly in Section VIII below. We recommend that VHG's internal tax department and Clearmont & Wharton LLP undertake a separate review of state and local tax implications.
II. Background and Transaction Overview
A. Existing Capital Structure
VHG's existing capital structure, as relevant to this analysis, consists of the following principal funded-debt obligations:
Existing $625,000,000 Senior Secured Term Loan B. The Existing TLB was originated on February 14, 2020, with Greystone Federal Credit Corp. serving as administrative agent on behalf of a syndicate of institutional lenders. The facility bears interest at LIBOR plus 425 basis points and has a stated maturity date of February 14, 2027 (seven-year original tenor). The Existing TLB requires quarterly amortization of 1.00% per annum of the original principal amount. As of the anticipated payoff date of July 21, 2022, the outstanding principal balance is approximately $621,875,000, reflecting approximately $3,125,000 in scheduled amortization payments since origination ($625,000,000 original principal less $3,125,000 in cumulative quarterly amortization). The Existing TLB is secured by substantially all assets of VHG and its domestic subsidiaries and is guaranteed by VHG's material domestic subsidiaries.
$400,000,000 Senior Secured Revolving Credit Facility. VHG maintains a $400,000,000 senior secured revolving credit facility with Crescent Harbor Bank, N.A. as administrative agent. As of the date of this memorandum, the revolving facility is undrawn and is expected to remain undrawn at the closing of the refinancing. The revolving facility is not being refinanced in connection with this transaction.
$245,000,000 Senior Unsecured Notes Due 2028. VHG has outstanding $245,000,000 in aggregate principal amount of senior unsecured notes due 2028, for which Atlantic Standard Trust Company serves as indenture trustee. These notes are not affected by the proposed refinancing.
VHG's total pre-refinancing funded debt is therefore approximately $1.27 billion (comprising the $621,875,000 outstanding under the Existing TLB, the $400,000,000 revolving facility commitment (undrawn), and the $245,000,000 senior unsecured notes). VHG maintains credit ratings of BB- from Kellaway Ratings Group and Ba3 from Pinnacle Credit Services, reflecting the Company's non-investment-grade but stable credit profile consistent with its position in the hospitality sector.
B. Proposed New Facility
The proposed New TLB has the following material terms, as set forth in the draft credit agreement and the commitment letter dated March 29, 2022:
Principal Amount: $700,000,000.
Administrative Agent, Collateral Agent, Lead Arranger, and Bookrunner: Crescent Harbor Bank, N.A.
Pricing: Interest accrues at Adjusted Term SOFR (one-month) plus 375 basis points, subject to a SOFR floor of 0.50%. The transition from LIBOR-based pricing on the Existing TLB to SOFR-based pricing on the New TLB reflects the broader market transition away from LIBOR benchmarks. At current market rates, one-month Term SOFR is approximately 2.29%, resulting in an initial all-in interest rate of approximately 6.14% (inclusive of the 10 basis point SOFR credit spread adjustment applicable under the draft credit agreement).
Original Issue discount: The New TLB will be issued at 99.00% of par value, representing a 1.00% discount to face amount. The dollar amount of OID is $7,000,000 ($700,000,000 × 1.00%), resulting in net funding proceeds to VHG of $693,000,000.
Maturity: July 21, 2029, representing a seven-year tenor from the anticipated closing date of July 21, 2022.
Amortization: The New TLB requires quarterly amortization of 1.00% per annum of the original principal amount, payable in equal quarterly installments of $1,750,000 each. Over the full seven-year term (28 quarterly payments), total scheduled amortization will aggregate $49,000,000, resulting in a balloon payment at maturity of approximately $651,000,000 ($700,000,000 less $49,000,000).
Use of Proceeds: The proceeds of the New TLB will be applied to (i) refinance the Existing TLB in full, including payment of the prepayment premium and all accrued interest, and (ii) fund up to approximately $75,000,000 in incremental proceeds available for permitted acquisitions and general corporate purposes. The incremental proceeds (representing the excess of the $700,000,000 new borrowing over the approximately $628 million required to retire the Existing TLB, net of transaction costs) provide VHG with additional balance sheet flexibility.
Transaction Fees and Costs: The following fees and expenses are anticipated in connection with the New TLB:
•  Arrangement fee payable to Crescent Harbor Bank, N.A.: 0.50% of committed amount, or $3,500,000;
•  Advisory fee payable to Meridian Strauss Advisory LLC (financial advisor to VHG): 0.20% of committed amount, or $1,400,000;
•  Legal and closing costs (including fees of Calderwood & Harkness LLP, counsel to VHG, and Whitfield Gage & Partridge LLP, counsel to the administrative agent): estimated at approximately $3,200,000.
Total estimated transaction costs are approximately $8,100,000, exclusive of the OID.
C. Payoff of Existing Facility
The retirement of the Existing TLB will require payment of the following amounts to Greystone Federal Credit Corp. (as administrative agent for the benefit of the existing lender syndicate):
Upon receipt of the payoff amount, Greystone Federal Credit Corp. will deliver a payoff letter confirming the full and final discharge of all obligations under the existing credit agreement, the release of all liens securing the Existing TLB, and the termination of all guarantees provided in connection therewith. The existing credit agreement will be terminated in its entirety.
III. Original Issue discount — New $700,000,000 Term Loan B
A. OID Determination Under IRC Sections 1271–1275
1. General Principles
Under IRC Section 1273(a)(1), original issue discount arises when a debt instrument is issued for a price below its "stated redemption price at maturity" ("SRPM"). OID is defined as the excess of the SRPM over the "issue price" of the debt instrument. For purposes of this analysis, the SRPM is the sum of all payments provided by the debt instrument other than "qualified stated interest" — i.e., stated interest that is unconditionally payable in cash or property (other than debt instruments of the issuer) at least annually at a single fixed rate or a qualified floating rate. See IRC § 1273(a)(2); Treas. Reg. § 1.1273-1(b).
The issue price of a debt instrument issued for money is the amount paid for the instrument, reduced by any amounts that are treated as payments for property or services other than the lending of money. See IRC § 1273(b)(2); Treas. Reg. § 1.1273-2.
2. Application to the New TLB
The New TLB is being issued at 99.00% of par value, resulting in an issue price of $693,000,000 ($700,000,000 × 99.00%). The stated principal amount of the New TLB is $700,000,000. Interest on the New TLB accrues at Adjusted Term SOFR plus 375 basis points and is payable quarterly in cash. Because the interest payments constitute qualified stated interest (they are unconditionally payable in cash at least annually at a qualified floating rate), they are excluded from the SRPM calculation.
The quarterly amortization payments of $1,750,000 each constitute scheduled returns of principal. These principal payments reduce the amount payable at maturity and, consequently, reduce the SRPM. The aggregate of all principal payments over the seven-year term includes $49,000,000 in quarterly amortization and a balloon payment of $651,000,000 at maturity. For OID computation purposes, the SRPM equals the total of all non-interest payments due under the instrument — that is, $700,000,000 (comprising $49,000,000 in amortization plus $651,000,000 at maturity).
Accordingly, OID on the New TLB equals:
SRPM ($700,000,000) − Issue Price ($693,000,000) = $7,000,000
3. De Minimis OID Analysis
Treasury Regulation Section 1.1273-1(d) provides that OID is treated as "de minimis" if it is less than the product of 0.25% of the SRPM multiplied by the number of complete years from the issue date to maturity. The purpose of the de minimis rule is to relieve issuers and holders of the administrative burden of accruing immaterial amounts of discount over the life of a debt instrument.
For the New TLB, the de minimis threshold is computed as follows:
0.25% × $700,000,000 × 7 years = $12,250,000
Because the $7,000,000 of OID on the New TLB is less than the $12,250,000 de minimis threshold, the OID is classified as de minimis OID for U.S. federal income tax purposes.
4. Consequences of De Minimis Characterization
The de minimis classification has the following principal consequences for VHG as the issuer of the New TLB:
No current accrual obligation. Because the OID is de minimis, VHG is not required to accrue OID as a deduction on a current basis under IRC Section 163(e). Instead, the de minimis OID is treated essentially as a capital expenditure and would be deductible only upon retirement or repayment of the debt instrument. See Treas. Reg. § 1.1273-1(d)(4).
Lender treatment. Notwithstanding the issuer's de minimis treatment, lenders who acquire the New TLB at the discounted issue price may still be required to include de minimis OID in income as principal payments are received, on a pro rata basis. See Treas. Reg. § 1.1273-1(d)(2) and (3). This lender-side treatment does not affect VHG's deduction.
Elective accrual. Despite the de minimis status, VHG may elect to accrue the $7,000,000 of OID ratably over the seven-year term of the New TLB using the constant yield method prescribed under Treas. Reg. § 1.1272-1. Such an election would yield an annual deduction of approximately $1,000,000 and would promote alignment between VHG's financial accounting treatment (under ASC 470-20 and ASC 835-30) and its tax reporting. We recommend that VHG discuss the merits of this election with Clearmont & Wharton LLP (Ronald Ashby, Engagement Partner) to determine whether book-tax conformity is desirable given VHG's overall tax planning objectives.
5. Characterization of Arrangement Fee and Lender Fees
The $3,500,000 arrangement fee payable to Crescent Harbor Bank, N.A. and any upfront lender fees embedded in the pricing of the New TLB require careful characterization. Under Treasury Regulation Section 1.1273-2(g), fees paid to a lender in connection with the issuance of a debt instrument may reduce the issue price of the instrument (thereby increasing OID) if they are properly viewed as a reduction in the proceeds received by the borrower. Conversely, fees paid to third-party service providers (such as legal counsel, financial advisors, and rating agencies) are treated as debt issuance costs, which are capitalized and amortized under Treasury Regulation Section 1.446-5 and IRC Section 163.
The distinction turns on whether the fee represents a charge for lending capital (in which case it adjusts the issue price) or a charge for services rendered in connection with the financing (in which case it is a debt issuance cost). The 0.25% upfront fee embedded in the 1.00% OID is already reflected in the issue price of $693,000,000 and has been accounted for in our OID analysis above. The separate $3,500,000 arrangement fee payable to Crescent Harbor, however, is denominated as compensation for structuring, arranging, and bookrunning services — functions distinct from the lending of capital. Accordingly, we believe the arrangement fee is more properly characterized as a debt issuance cost rather than additional OID.
We note, however, that the IRS could take the position that some portion of the arrangement fee effectively reduces the issue price and therefore constitutes additional OID. Even if the full $3,500,000 were recharacterized as OID, total OID would increase to $10,500,000, which would still fall below the de minimis threshold of $12,250,000. The AHYDO analysis in Section IV below would likewise be unaffected.
Recommendation: Treat the $7,000,000 OID as de minimis OID under Treasury Regulation Section 1.1273-1(d). Treat the $3,500,000 arrangement fee paid to Crescent Harbor as a debt issuance cost capitalizable and amortizable over the seven-year term of the New TLB, using the straight-line method (or, if VHG elects for book-tax conformity, the effective interest method, consistent with the guidance in Revenue Procedure 2019-43). Coordinate with Clearmont & Wharton LLP on the appropriate method.
B. Tax Treatment of Debt Issuance Costs (New Facility)
Under IRC Section 163 and Treasury Regulation Section 1.446-5, debt issuance costs — that is, costs incurred by the borrower in connection with the borrowing of money — must be capitalized and amortized over the term of the debt instrument to which they relate. Debt issuance costs are distinguished from OID in that they represent payments to third parties for services rendered in connection with the financing, rather than a discount on the instrument itself.
The estimated debt issuance costs for the New TLB are as follows:
These costs will be amortized over the term of the New TLB, commencing on the closing date (expected July 21, 2022) and ending on the stated maturity date (July 21, 2029) — a period of seven years. Using the straight-line method, the annual deduction for amortized debt issuance costs is approximately:
$8,100,000 ÷ 7 years ≈ $1,157,143 per year
For VHG's first taxable year in which the New TLB is outstanding (calendar year 2022), the deduction would be prorated from the closing date through December 31, 2022 — approximately 5.3 months, or approximately $512,857.
We note that under current law, amortized debt issuance costs are treated as "business interest expense" for purposes of the Section 163(j) business interest expense limitation. As discussed in Section VII below, VHG's aggregate business interest expense is well within its Section 163(j) limitation, and no disallowance of debt issuance cost amortization is anticipated.
IV. Applicable High Yield discount Obligation (AHYDO) Analysis
A. Overview of AHYDO Rules — IRC Section 163(i) and Section 163(e)(5)
The AHYDO provisions of the Code were enacted to limit the tax benefits of deeply discounted, high-yield debt instruments used in leveraged buyouts and other highly leveraged transactions. Under IRC Section 163(i)(1), a debt instrument is classified as an AHYDO if it satisfies three cumulative tests:
1.  Maturity Test. The instrument has a maturity date more than five years from the date of issuance.
2.  Yield Test. The instrument has a yield to maturity ("YTM") that equals or exceeds the sum of the applicable federal rate ("AFR") in effect for the calendar month in which the instrument is issued, plus five percentage points.
3.  Significant OID Test. The instrument has "significant original issue discount," meaning the aggregate amount of OID that would accrue on the instrument through the end of the accrual period ending after the date five years from the issue date exceeds the sum of (a) the aggregate amount of interest to be paid on the instrument during the first five accrual periods, plus (b) the product of the issue price and the instrument's yield to maturity.
If an instrument is classified as an AHYDO, the consequences to the issuer are severe. Under IRC Section 163(e)(5)(A), the issuer's deduction for the "disqualified portion" of the OID is permanently disallowed — the disqualified portion is treated as a stock dividend rather than interest for tax purposes. The remaining OID is deductible only when paid. These consequences can significantly increase the after-tax cost of the debt.
Given the importance of avoiding AHYDO classification, we analyze each of the three tests below as applied to the New TLB.
B. Application to the New $700,000,000 TLB
Test 1 — Maturity Greater Than 5 Years
The New TLB has a stated maturity date of July 21, 2029, which is seven years from the anticipated closing and issue date of July 21, 2022. Because the maturity exceeds five years, Test 1 is satisfied.
This result is typical for leveraged term loans, which customarily carry maturities of five to seven years. The maturity test alone does not trigger AHYDO classification; both remaining tests must also be met.
Test 2 — Yield to Maturity ≥ AFR + 5 Percentage Points
The yield test requires a comparison of the instrument's YTM (computed taking into account the issue price, all scheduled payments of principal and interest, and the OID) to the sum of the AFR plus five percentage points.
Yield to Maturity of the New TLB. The all-in interest rate at signing is approximately 6.14%, comprising one-month Term SOFR of 2.29%, the 10 basis point SOFR credit spread adjustment, and the 375 basis point applicable margin. For AHYDO purposes, however, the YTM must be computed using the issue price of $693,000,000 (rather than par) and all scheduled payments of principal and interest. Incorporating the $7,000,000 of OID over the seven-year term, the estimated YTM of the New TLB is approximately 6.30% on a semi-annual bond-equivalent basis. This YTM reflects the combined effect of the coupon interest, the 1.00% OID amortized to maturity, and the quarterly principal amortization schedule.
Applicable Federal Rate. For instruments issued in July 2022, the AFR for long-term instruments (i.e., instruments with a term greater than nine years; for instruments with shorter terms, mid-term AFR applies, but the long-term AFR is typically used as a conservative benchmark in AHYDO analyses) with semi-annual compounding was approximately 3.22%, based on prevailing Treasury rates and IRS published guidance. The AFR plus five percentage points is therefore:
3.22% + 5.00% = 8.22%
Because the estimated YTM of 6.30% is well below the 8.22% threshold, Test 2 is NOT satisfied. The New TLB's yield does not equal or exceed the AFR plus five percentage points. There is a margin of approximately 192 basis points between the estimated YTM and the AHYDO trigger level.
Test 3 — Significant OID
Because the AHYDO tests are cumulative — all three must be met for AHYDO classification to apply — and Test 2 has not been satisfied, it is not strictly necessary to analyze Test 3. However, for completeness and to provide comfort to the deal team, we note the following:
The $7,000,000 of OID on the New TLB is de minimis, as demonstrated in Section III.A above. Moreover, the quarterly amortization payments of $1,750,000 ensure that principal is being returned to lenders on an ongoing basis, which reduces the accumulation of accrued but unpaid amounts through the five-year test date. The significant OID test would not be met even if Test 2 had been satisfied.
Conclusion.  The New TLB does not constitute an AHYDO. Because the three AHYDO tests are cumulative and Test 2 is clearly not met, AHYDO classification does not apply to the New TLB. Consequently, no deferral of VHG's OID deductions and no recharacterization of any portion of OID as a non-deductible dividend equivalent will result from the issuance of the New TLB.
C. Sensitivity Analysis
We have considered whether changes to the pricing of the New TLB pursuant to the confidential flex provisions in the syndication flex letter between Crescent Harbor Bank, N.A. and VHG could alter the AHYDO analysis. The flex letter permits the lead arranger to adjust the applicable margin, the OID, and the SOFR floor within specified parameters to facilitate successful syndication of the New TLB.
For AHYDO classification to be triggered, the flex adjustments would need to increase the YTM of the New TLB from approximately 6.30% to at least 8.22% — an increase of nearly 192 basis points. Based on our review of the flex letter, the maximum contemplated upward adjustments to margin and OID would increase the all-in yield by no more than approximately 75 basis points in the aggregate, which would result in a YTM of approximately 7.05% — still well below the 8.22% AHYDO threshold. We therefore do not anticipate that the exercise of flex provisions would cause the New TLB to be classified as an AHYDO.
Recommendation: If flex is exercised and the pricing of the New TLB changes materially before closing, the AHYDO analysis should be re-run using the final pricing terms and the AFR in effect for the month of closing. We will address this in the supplemental tax opinion memorandum that we expect to deliver closer to the closing date.
V. Deductibility of the $3,125,000 Prepayment Premium on the Existing Greystone Facility
A. Character of the Prepayment Premium
In connection with the retirement of the Existing TLB, VHG will pay a prepayment premium of $3,125,000 to Greystone Federal Credit Corp. (as administrative agent for the existing lender syndicate). The premium is calculated as 0.50% of the $625,000,000 original principal amount of the Existing TLB, as provided in Section 2.06(c) of the existing Greystone credit agreement.
The proper characterization of the prepayment premium is relevant to both its deductibility and its treatment under the Section 163(j) business interest expense limitation. Under well-established principles of federal income tax law, a premium paid by a borrower to retire debt prior to its scheduled maturity is generally treated as additional interest expense — that is, as compensation to the lender for the loss of the expected yield stream resulting from early termination.
Treasury Regulation Section 1.163-7(c) provides that a repurchase premium paid by an issuer to reacquire its own debt instrument is deductible as interest expense under IRC Section 163(a), to the extent the premium does not exceed the amount of OID remaining unaccrued on the retired instrument. To the extent the premium exceeds unaccrued OID, the excess may be deductible as a loss on the retirement of indebtedness under IRC Section 165, or as an ordinary and necessary business expense under IRC Section 162. See also Coltec Industries, Inc. v. United States, 454 F.3d 1340 (Fed. Cir. 2006) (discussing treatment of debt retirement costs).
The $3,125,000 prepayment premium is modest in relation to the outstanding principal of the Existing TLB (representing only 0.50% of the original face amount). The premium is contractually designated as a "make-whole" payment compensating lenders for the early termination of their investment, and it functions economically as a substitute for the interest income that the Greystone lenders would have received had the Existing TLB remained outstanding through its scheduled maturity. Accordingly, the premium is most appropriately characterized as additional interest expense, deductible under IRC Section 163(a).
B. Timing of Deduction
The prepayment premium will become due and payable on the payoff date, which is expected to be July 21, 2022. VHG is a calendar-year taxpayer that reports its income and deductions on the accrual method of accounting. Under the accrual method, the prepayment premium will be deductible in the taxable year in which the liability becomes fixed and determinable — that is, the taxable year ending December 31, 2022, assuming the refinancing closes as currently scheduled.
The accrued and unpaid interest on the Existing TLB through the payoff date (estimated at approximately $2,916,667) is separately deductible as ordinary interest expense in the same taxable year. Taken together, VHG's deductible charges associated with the retirement of the Existing TLB in 2022 will include:
•  Prepayment premium: $3,125,000
•  Accrued and unpaid interest: approximately $2,916,667
•  Unamortized debt issuance costs (discussed in Section VI below): approximately $4,583,333
•  Total retirement-related deductions: approximately $10,625,000
C. Section 163(j) Interaction
To the extent the prepayment premium is characterized as interest expense, it is subject to the business interest expense limitation under IRC Section 163(j). As enacted by the Tax Cuts and Jobs Act of 2017 and as in effect for taxable years beginning after December 31, 2021, Section 163(j)(1) limits a taxpayer's deduction for business interest expense to the sum of (a) business interest income, (b) 30% of adjusted taxable income ("ATI"), and (c) floor plan financing interest (not applicable to VHG).
Given VHG's FY2021 Adjusted EBITDA of approximately $341 million, the Company's Section 163(j) limitation is substantial. Even treating the full $3,125,000 prepayment premium as business interest expense subject to the limitation, VHG's aggregate interest expense for 2022 (as detailed further in Section VII below) is well within the 30% of ATI cap. No disallowance or limitation of the prepayment premium deduction under Section 163(j) is anticipated.
VI. Treatment of Unamortized Debt Issuance Costs and OID from the 2020 Greystone Financing
A. Existing Unamortized Costs
The Existing TLB was originated on February 14, 2020. In connection with that origination, VHG incurred debt issuance costs that were required to be capitalized and amortized over the seven-year term of the facility (February 14, 2020 through February 14, 2027, or approximately 84 months). Based on typical transaction costs for a leveraged term loan facility of this size, we estimate that original debt issuance costs were in the range of $6,000,000 to $8,000,000. For purposes of this analysis, we use a midpoint estimate of $7,000,000, subject to confirmation of the actual amount with Clearmont & Wharton LLP based on VHG's books and records.
As of the anticipated payoff date of July 21, 2022, approximately 29 months of the 84-month original amortization period will have elapsed (February 14, 2020 through July 21, 2022). Approximately 55 months of amortization period remains. The estimated unamortized balance of the original debt issuance costs is therefore:
$7,000,000 × (55 months remaining ÷ 84 months total) ≈ $4,583,333 (illustrative)
If the Existing TLB was issued with OID (which we have not been able to confirm from the documents currently available), any remaining unamortized OID from the 2020 issuance must also be addressed. The treatment of unamortized OID on retirement of the Existing TLB would parallel the treatment of unamortized debt issuance costs, as discussed below.
B. Retirement vs. Modification Analysis Under Treasury Regulation Section 1.1001-3
A critical threshold question in determining the tax treatment of unamortized costs is whether the proposed refinancing constitutes a "significant modification" of the Existing TLB (resulting in a deemed exchange of the old instrument for a new instrument under Treas. Reg. § 1.1001-3) or a straightforward retirement and new issuance. The distinction is important because:
•  If the refinancing is treated as a modification (deemed exchange), unamortized costs from the Existing TLB may need to be carried over to the new instrument and amortized over the remaining term of the modified debt, rather than written off immediately.
•  If the refinancing is treated as a retirement and new issuance, unamortized costs from the Existing TLB are written off as an accelerated deduction in the year of retirement, and new issuance costs are separately capitalized and amortized.
Under Treasury Regulation Section 1.1001-3, a "modification" of a debt instrument means any alteration, including any deletion or addition, of a legal right or obligation of the issuer or a holder, whether the alteration is evidenced by an express agreement, a course of performance, or otherwise. A modification is "significant" if, based on all facts and circumstances, the legal rights and obligations under the modified instrument differ materially from the legal rights and obligations under the unmodified instrument. Specific safe harbors and bright-line tests apply for certain types of changes (e.g., changes in yield, changes in timing of payments, changes in obligor).
In the present case, however, the modification analysis under Regulation Section 1.1001-3 is not applicable for the following reasons:
•  Different obligees. The Existing TLB is held by the Greystone lender syndicate, with Greystone Federal Credit Corp. as administrative agent. The New TLB will be held by a new syndicate arranged by Crescent Harbor Bank, N.A. The lender groups are not the same.
•  Different administrative agent. Greystone Federal Credit Corp. serves as administrative agent for the Existing TLB; Crescent Harbor Bank, N.A. will serve as administrative agent for the New TLB.
•  Different principal amount. The outstanding principal of the Existing TLB at payoff is approximately $621,875,000; the New TLB has a principal amount of $700,000,000. The change in principal amount is material.
•  Different benchmark rate. The Existing TLB bears interest at LIBOR + 425 bps; the New TLB bears interest at Adjusted Term SOFR + 375 bps. Although this change partially reflects the LIBOR-to-SOFR transition, it also involves a meaningful change in the applicable margin.
•  Full payoff and discharge. The transaction is mechanically structured as a full payoff of the Existing TLB and termination of the existing Greystone credit agreement, followed by the issuance of a new credit facility under an entirely separate credit agreement. There is no amendment of the existing credit agreement; the existing agreement is being terminated, and all obligations thereunder are being discharged in full.
Conclusion. The proposed refinancing is properly characterized as a retirement of the Existing TLB and issuance of a new debt instrument under the Crescent Harbor facility. This is not an amendment or modification of existing debt. The Treasury Regulation Section 1.1001-3 modification analysis does not apply because the existing debt is being repaid in full and terminated — not modified. See Treas. Reg. § 1.1001-3(c)(1)(i) (providing that the regulation applies to alterations of existing debt instruments, not to the retirement and issuance of different instruments).
C. Tax Treatment Upon Retirement
Because the refinancing constitutes a retirement of the Existing TLB, VHG may deduct the remaining unamortized debt issuance costs in the year of retirement. Under Treasury Regulation Section 1.446-5(b), when a debt instrument is retired prior to its stated maturity, any unamortized debt issuance costs allocable to the retired instrument are deductible in the taxable year of retirement. See also IRC Section 165(a) (providing for the deduction of losses sustained during the taxable year, including losses on the retirement of debt).
Similarly, if the Existing TLB was issued with OID, any unamortized OID that VHG has not yet accrued as a deduction under IRC Section 163(e) would be deductible upon retirement of the instrument. The write-off of such unamortized OID accelerates a deduction that would otherwise have been taken ratably over the remaining life of the instrument.
The write-off of unamortized costs upon retirement provides VHG with an accelerated tax deduction in the 2022 taxable year, which is favorable from a cash-tax perspective. Using our illustrative estimate of approximately $4,583,333 in unamortized debt issuance costs, the estimated federal tax benefit of the accelerated deduction is:
$4,583,333 × 21% federal corporate tax rate ≈ $962,500 in tax savings
This tax benefit is realized in the 2022 taxable year, rather than being spread over the remaining approximately 55 months (4.6 years) of the Existing TLB's original term. The present value benefit of accelerating this deduction is meaningful, though the precise calculation depends on VHG's discount rate and tax position in future years.
D. Coordination with New Facility Costs
It is important to emphasize that the unamortized debt issuance costs from the Existing TLB and the new debt issuance costs associated with the New TLB must be tracked independently. Because the refinancing constitutes a full retirement and new issuance — not a modification — there is no basis for "rolling over" or tacking the unamortized costs from the Greystone facility into the new Crescent Harbor facility. VHG should not carry forward any portion of the old issuance costs to the new facility.
The two sets of costs are summarized as follows:
VHG's accounting department should establish separate amortization schedules for the new facility costs and should ensure that the write-off of old facility costs is properly reflected in the Company's FY2022 tax return.
VII. Interest Expense Deductibility — Section 163(j) Overview
IRC Section 163(j), as amended by the Tax Cuts and Jobs Act of 2017, imposes a limitation on the deduction of "business interest expense" for taxable years beginning after December 31, 2017. Under Section 163(j)(1), a taxpayer's deduction for business interest expense in any taxable year is limited to the sum of:
(a) the taxpayer's business interest income for the year;
(b) 30% of the taxpayer's adjusted taxable income ("ATI") for the year; and
(c) the taxpayer's floor plan financing interest expense for the year (not applicable to VHG).
For taxable years beginning after December 31, 2021, ATI is computed without adding back deductions for depreciation, amortization, or depletion — a change from the more generous EBITDA-based computation that applied for taxable years beginning before January 1, 2022. However, for purposes of this preliminary analysis, we use FY2021 Adjusted EBITDA as an approximate proxy for ATI, recognizing that the actual ATI computation for FY2022 will require adjustment for depreciation and amortization.
For VHG's taxable year ending December 31, 2022, estimated total business interest expense (including amounts treated as interest for Section 163(j) purposes) is as follows:
VHG's Section 163(j) limitation, using FY2021 Adjusted EBITDA as a proxy for ATI, is:
30% × $341,000,000 = $102,300,000
Because VHG's estimated total business interest expense of approximately $59.8 million is well below the $102.3 million Section 163(j) cap, no disallowance of business interest expense is anticipated for FY2022. VHG has substantial headroom under the limitation — approximately $42.5 million — which provides a significant buffer even if actual interest rates, outstanding balances, or other variables differ from the estimates set forth above.
We note that the Section 163(j) limitation must be computed on a consolidated group basis if VHG files a consolidated federal income tax return with its subsidiaries. We assume for purposes of this analysis that VHG is the common parent of a consolidated group that files a single consolidated return. The estimated figures above reflect VHG's consolidated interest expense and consolidated ATI.
Recommendation: VHG should include the items discussed in this memorandum — including the prepayment premium, the unamortized cost write-off, OID amortization (if elected), and new debt issuance cost amortization — in its annual Section 163(j) computation worksheet prepared in connection with the filing of its FY2022 federal income tax return.
VIII. State and Local Tax Considerations (Brief Note)
This memorandum addresses only U.S. federal income tax considerations. We note, however, that VHG operates hotel properties in 18 states across the United States, and state income and franchise tax treatment of the items discussed herein — including OID accrual, prepayment premium deductions, debt issuance cost amortization, and business interest expense limitations — may vary from federal treatment in material respects.
The following state-level considerations are flagged for further analysis:
Florida. VHG is headquartered in Boca Raton, Florida. Florida imposes a corporate income tax at a rate of 5.5% (with a 3.535% surtax applicable for certain taxable years). Florida generally conforms to the federal Internal Revenue Code for purposes of computing Florida taxable income, beginning with federal taxable income as the starting point. The treatment of the items discussed herein should generally conform to federal treatment for Florida corporate income tax purposes, but this should be verified with respect to the specific items at issue, including in particular the accelerated write-off of unamortized debt issuance costs and the treatment of the prepayment premium.
Delaware. VHG is incorporated in Delaware. Delaware does not impose a corporate income tax on income earned outside of Delaware. VHG does not appear to have substantial Delaware-source income. Delaware franchise tax (based on authorized shares or assumed par value capital) is not affected by the refinancing.
Other states. The 18 states in which VHG operates may have varying conformity rules, apportionment methodologies, and business interest expense limitation regimes (some states have decoupled from IRC Section 163(j)). A state-by-state review is beyond the scope of this memorandum.
Recommendation: VHG's internal tax department and Clearmont & Wharton LLP should undertake a separate review of state and local tax implications of the refinancing, with particular attention to (i) states that have decoupled from Section 163(j), (ii) states with different conformity dates that may not incorporate recent federal law changes, and (iii) the treatment of the accelerated deduction of unamortized debt issuance costs in states with different cost-recovery rules.
IX. Recommendations and Action Items
Based on the analysis set forth in this memorandum, we recommend the following action items in connection with the proposed refinancing:
1.  OID Treatment. Confirm the $7,000,000 of OID on the New TLB as de minimis under Treasury Regulation Section 1.1273-1(d). VHG may nonetheless elect to accrue the OID ratably over the seven-year term for book-tax conformity purposes. This election should be coordinated with Clearmont & Wharton LLP (Ronald Ashby, Engagement Partner) and VHG's internal accounting team.
2.  AHYDO Classification. The New TLB does not constitute an AHYDO based on current pricing terms and the anticipated AFR for July 2022. If syndication flex is exercised and the pricing of the New TLB changes materially before closing, the AHYDO analysis should be re-run using the revised terms. Leonard Cross will update the AHYDO analysis in the supplemental tax opinion memorandum to be prepared in connection with closing.
3.  Prepayment Premium. VHG should deduct the $3,125,000 prepayment premium as interest expense in its taxable year ending December 31, 2022. The characterization of the premium as interest expense should be confirmed with VHG's Treasurer (Glenn Fischbach) and Chief Financial Officer (Renata Haines) to ensure consistent treatment for financial reporting and tax purposes.
4.  Unamortized Issuance Costs. VHG should write off the remaining unamortized debt issuance costs from the 2020 Greystone financing as an accelerated deduction in FY2022. The exact unamortized balance should be confirmed with Clearmont & Wharton LLP based on VHG's books and records. If any unamortized OID from the 2020 financing exists, it should be written off on the same basis.
5.  New Facility Costs. Capitalize approximately $8,100,000 in new debt issuance costs and amortize over the seven-year term of the New TLB (July 21, 2022 through July 21, 2029). Establish a separate amortization schedule for these costs, independent of any costs associated with the Existing TLB.
6.  Section 163(j) Computation. No limitation on business interest expense deductions is anticipated for FY2022. VHG should include all interest-related items from the refinancing (prepayment premium, unamortized cost write-off, OID amortization if elected, and new debt issuance cost amortization) in its annual Section 163(j) computation worksheet.
7.  State and Local Taxes. Flag the refinancing transaction for VHG's internal tax team and Clearmont & Wharton LLP for a multi-state review of state and local tax implications, with particular attention to conformity issues and states that have decoupled from IRC Section 163(j).
8.  Subsequent Memorandum. Leonard Cross will prepare a more detailed tax opinion memorandum closer to closing (targeted for the first week of July 2022) to confirm the conclusions set forth herein based on final deal terms, the actual AFR in effect at the time of issuance, and any changes resulting from the syndication process.
X. Assumptions and Qualifications
This memorandum is subject to the following assumptions and qualifications:
1.  Legal Authority. The analysis set forth herein is based on the Internal Revenue Code of 1986, as amended, the Treasury Regulations promulgated thereunder, and judicial and administrative interpretations thereof, all as in effect as of the date of this memorandum (April 18, 2022). Changes in applicable law, regulations, or interpretive authority subsequent to the date hereof could alter the conclusions expressed in this memorandum.
2.  Financial Data. The financial data and projections relied upon in this memorandum have been sourced from VHG management and Clearmont & Wharton LLP, including VHG's audited financial statements for the fiscal year ended December 31, 2021. We have not independently verified the accuracy or completeness of such data.
3.  Transaction Structure. Our analysis assumes that the refinancing will close as currently structured — that is, as a simultaneous sign-and-close transaction in which VHG borrows $700,000,000 under the New TLB, uses a portion of the proceeds to retire the Existing TLB in full, and retains the balance for permitted acquisitions and general corporate purposes. If the material terms of the transaction change (including, without limitation, the principal amount, the pricing, the maturity, the amortization schedule, or the identity of the counterparties), the conclusions set forth herein should be revisited.
4.  Attorney Work Product / Privilege. This memorandum constitutes attorney work product prepared in anticipation of providing legal advice to VHG and is protected by the attorney work product doctrine and the attorney-client privilege. This memorandum is privileged and confidential and is not intended as tax advice to any party other than VHG. No third party should rely upon the analysis or conclusions set forth herein without the express written consent of Calderwood & Harkness LLP.
5.  Scope Limitations. This memorandum addresses only U.S. federal income tax considerations. The analysis does not address:
(a) state and local income, franchise, or other tax considerations (except to the limited extent noted in Section VIII above);
(b) potential employment tax or excise tax implications;
(c) withholding tax obligations with respect to payments of interest or principal to foreign lenders participating in the syndication of the New TLB (including under IRC Sections 1441, 1442, and 1471–1474 (FATCA));
(d) any non-U.S. tax consequences; or
(e) alternative minimum tax considerations (noting that the corporate AMT was repealed by the Tax Cuts and Jobs Act of 2017, but may be reinstated or modified by future legislation, including the Inflation Reduction Act currently under consideration in Congress).
6.  No Guarantee of Outcome. The conclusions expressed in this memorandum represent our best professional judgment based on the facts, assumptions, and authorities described herein. We cannot guarantee that the Internal Revenue Service will agree with the positions described or that a court would sustain such positions if challenged.
Prepared by: Leonard Cross, Specialist Partner, Tax Calderwood & Harkness LLP One Liberty Plaza, 52nd Floor New York, New York 10006 Direct: (212) 555-8140 lcross@calderwoodharkness.com
Billing Rate: $1,550/hr
Distribution: This memorandum is distributed on a limited and confidential basis to the following individuals only:
•  Ian Blackwood, Partner, Banking & Finance, Calderwood & Harkness LLP
•  Sophie Tremblay, Associate, Banking & Finance, Calderwood & Harkness LLP
•  Priya Narayanan, General Counsel, Verimark Hospitality Group Inc. (upon partner approval)
•  Glenn Fischbach, Treasurer, Verimark Hospitality Group Inc. (upon partner approval)
•  Renata Haines, Chief Financial Officer, Verimark Hospitality Group Inc. (upon partner approval)
cc: Engagement File 1016-00009
— END OF MEMORANDUM —
Date: | April 18, 2022
To: | Ian Blackwood, Partner, Banking & Finance
Sophie Tremblay, Associate, Banking & Finance
From: | Leonard Cross, Specialist Partner, Tax
Re: | U.S. Federal Income Tax Considerations — Verimark Hospitality Group Inc. $700,000,000 Term Loan B Refinancing
Engagement No.: | 1016-00009
Client: | Verimark Hospitality Group Inc. (NYSE: VMRK), a Delaware corporation; 8200 West Palmetto Park Road, Suite 1500, Boca Raton, FL 33433; EIN: 82-3741956
Component | Amount
Outstanding principal | $621,875,000
Accrued and unpaid interest (estimated through July 21, 2022) | $2,916,667
Prepayment premium (0.50% × $625,000,000 original principal) | $3,125,000
Total estimated payoff | $627,916,667
Cost Component | Payee | Estimated Amount
Arrangement fee | Crescent Harbor Bank, N.A. | $3,500,000
Advisory fee | Meridian Strauss Advisory LLC | $1,400,000
Legal and closing costs | Calderwood & Harkness LLP; Whitfield Gage & Partridge LLP; other | $3,200,000
Total estimated capitalizable debt issuance costs | $8,100,000
Item | Treatment | Timing
Unamortized issuance costs from Existing TLB (est. ~$4,583,333) | Deducted in full upon retirement | FY2022 (year of payoff)
New issuance costs for New TLB (est. ~$8,100,000) | Capitalized and amortized over 7-year term | July 21, 2022 – July 21, 2029
Component | Estimated Amount
Interest on Existing TLB (Jan. 1 – July 21, 2022; ~6.5 months at LIBOR + 425 bps on ~$622M) | $18,300,000
Prepayment premium on Existing TLB (to extent treated as interest) | $3,125,000
Interest on New TLB (July 21 – Dec. 31, 2022; ~5.3 months at ~6.14% on $700M) | $19,100,000
Interest on $245M senior unsecured notes (full year, ~6% coupon) | $14,700,000
Unamortized issuance cost write-off (to extent treated as interest expense) | $4,583,333
Total estimated 2022 business interest expense | $59,808,333

PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT

INTERNAL MEMORANDUM

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