MEMORANDUM
PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT
TO: Theodore Langston, Responsible Partner, Capital Markets Vivienne St. Claire, Billing Partner, Capital Markets Claire Dempsey, Lead Associate, Capital Markets
FROM: Audrey Zhou, Working Associate, Capital Markets
DATE: April 29, 2024
RE: Subsidiary Guarantor Structure and Entity Diligence — Verimark Hospitality Group Inc. $500,000,000 8.250% Senior Notes due 2031
CLIENT/MATTER: Verimark Hospitality Group Inc. / Senior Notes Offering
I. Purpose and Scope
This memorandum summarizes the organizational structure of Verimark Hospitality Group Inc. ("VHG" or the "Issuer") and its five subsidiary guarantors in connection with the proposed issuance of $500,000,000 aggregate principal amount of 8.250% Senior Notes due 2031 (the "Notes") in a Rule 144A / Regulation S private placement. The purpose of this memorandum is to (i) identify each guarantor entity and its role within the VHG corporate family, (ii) confirm the jurisdiction of formation and organizational status of each guarantor, (iii) assess the authority of each guarantor entity to provide its subsidiary guarantee of the Notes, and (iv) catalog and track all outstanding diligence items required to be completed prior to the anticipated closing date.
VHG is a Delaware corporation, publicly traded on the Nasdaq Global Select Market under the ticker symbol "VMRK," with its principal executive offices located at 2400 Brickell Bay Drive, Suite 3100, Miami, Florida 33129. VHG's Employer Identification Number is 84-3291057, and its SEC Central Index Key (CIK) is 0001847293. As a publicly reporting company, VHG files annual, quarterly, and current reports with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended.
The Notes will be guaranteed on a senior unsecured basis by each of the five subsidiary guarantors identified in detail in Section III below. The guarantees will be incorporated into Article 10 of the Indenture to be entered into on the closing date and will be evidenced by individual Guarantor Joinder Agreements executed by each guarantor at closing. The guarantees will rank pari passu in right of payment with all existing and future senior unsecured indebtedness of each guarantor and will be senior in right of payment to all future subordinated indebtedness, if any, of each guarantor.
Calderwood & Harkness LLP serves as issuer's counsel in connection with the Notes offering. This memorandum supports the due diligence workstream being conducted by the engagement team and will inform the preparation of the legal opinions to be delivered at closing (including the 10b-5 negative assurance letter and the enforceability opinion), as well as the officer's and secretary's certificates, incumbency certificates, and other closing deliverables required under the terms of the Purchase Agreement to be entered into among VHG, the Guarantors, and the initial purchasers.
This memorandum is current as of the date set forth above and will be updated on a rolling basis as diligence materials are received and reviewed. All items identified herein as "Pending" or "To be confirmed" represent open diligence items that must be resolved prior to the circulation of the Preliminary Offering Memorandum (targeted for June 3, 2024) and, in all events, prior to the anticipated closing date of June 25, 2024.
II. Organizational Structure Overview
A. VHG Corporate Family — Simplified Structure
The following is a narrative description of the top-down ownership structure of the VHG corporate family, depicting the Issuer, the intermediate holding company, and each of the five subsidiary guarantors and their respective positions within the organizational hierarchy.
Verimark Hospitality Group Inc. is the ultimate parent entity and the Issuer of the Notes. VHG is a Delaware corporation and is publicly traded on the Nasdaq Global Select Market. VHG directly owns 100% of the membership interests in two entities: (1) Verimark Capital Holdings LLC, the intermediate holding company, and (2) Bayshore Hotel Management LLC, the hotel management and operations subsidiary.
Verimark Capital Holdings LLC ("VCH") is a Delaware limited liability company that functions as an intermediate holding company within the VHG corporate family. VCH is 100% owned by VHG and, in turn, holds VHG's equity interests in three operating subsidiaries:
(i) Verimark Resort Holdings LLC ("VRH") — a Delaware limited liability company that holds VHG's resort property portfolio, consisting of 12 resort properties located across multiple U.S. states and the U.S. Virgin Islands. VRH is 100% owned by VCH.
(ii) VHG Properties Inc. — a Delaware corporation that holds fee-simple interests in 32 hotel properties across multiple U.S. jurisdictions. VHG Properties is 100% owned by VCH, which holds all of the outstanding shares of capital stock of VHG Properties.
(iii) Pinnacle Lodging Enterprises Inc. ("Pinnacle Lodging") — a Delaware corporation that was acquired by the VHG corporate family and holds brand and intellectual property assets related to VHG's lodging brands. Pinnacle Lodging is 100% owned by VCH, which holds all of the outstanding shares of capital stock of Pinnacle Lodging.
Bayshore Hotel Management LLC ("Bayshore") is a Florida limited liability company that serves as VHG's hotel management and operations subsidiary, managing the day-to-day operations of VHG's hotel and resort portfolio. Bayshore is held directly by VHG (i.e., not through VCH) and VHG is its sole member.
It is important to note the structural distinction between Bayshore and the three operating subsidiaries held through VCH. Bayshore is the only subsidiary guarantor held directly by VHG, which has implications for the characterization of Bayshore's guarantee (as a direct subsidiary guarantee) as distinguished from the guarantees provided by VRH, VHG Properties, and Pinnacle Lodging, which are held indirectly through VCH and whose guarantees therefore constitute guarantees by indirect subsidiaries of the Issuer.
Additionally, VCH occupies a structurally significant position within the corporate family. As the intermediate holding company that sits between VHG and three of the five guarantors, VCH's guarantee of the Notes is essential to ensure that noteholders have a direct claim against the entity that holds the equity in these three operating subsidiaries. Without VCH's guarantee, noteholders' ability to access the assets held by the three subsidiaries of VCH would be limited to VHG's equity interest in VCH, which is a level of structural subordination that the guarantee is designed to eliminate.
Business Context. VHG owns and operates a diversified portfolio of 47 full-service hotels and 12 resort properties located across 19 U.S. states and the U.S. Virgin Islands, representing approximately 18,400 guest rooms. For the last twelve months ended March 31, 2024, VHG reported consolidated revenues of approximately $1.82 billion and consolidated Adjusted EBITDA of approximately $412 million (as calculated in accordance with the Adjusted EBITDA definition to be included in the Offering Memorandum, which will add back certain non-recurring items and stock-based compensation). These financial metrics provide relevant context for the fraudulent conveyance analysis discussed in Section VII.E below and for the leverage and coverage ratios to be set forth in the Indenture.
B. Organizational Chart Diagram
A simplified organizational chart depicting the ownership lines and entity jurisdictions described above is attached hereto as Exhibit A. The organizational chart was prepared based on information provided by David K. Moretti, General Counsel of VHG, and will be updated as additional diligence information is received. The chart reflects only the entities that are relevant to the guarantor structure and does not purport to depict all subsidiaries, joint ventures, or affiliated entities within the broader VHG corporate family. A complete subsidiary list, as required for purposes of the Offering Memorandum and SEC filings, is being compiled separately.
III. Entity-by-Entity Summary of Subsidiary Guarantors
This Section III provides a detailed entity-level summary for each of the five subsidiary guarantors, including formation details, organizational information, business descriptions, and identification of outstanding diligence items. Each entity summary is presented in tabular format for ease of reference, followed by supplemental narrative discussion where applicable.
A. Verimark Resort Holdings LLC
Supplemental Notes — VRH. Given that VRH holds 12 resort properties across multiple states and the U.S. Virgin Islands, this entity will require significant real property diligence, including title searches and mortgage lien searches in each county in which resort properties are located. Additionally, VRH's foreign qualification status must be confirmed in each jurisdiction where its resort properties are situated. Of particular note, the U.S. Virgin Islands qualification process may involve different procedures and timelines than domestic state qualifications, and this should be factored into the diligence timeline. VRH's multi-jurisdictional property holdings also have implications for the scope of the UCC lien search, which should be conducted not only in Delaware (as VRH's jurisdiction of formation) but also in each state in which VRH has assets.
B. VHG Properties Inc.
Supplemental Notes — VHG Properties. VHG Properties is the guarantor entity with the most extensive real property holdings, consisting of fee-simple interests in 32 hotel properties across multiple jurisdictions. This entity will require the most extensive and time-intensive real property lien diligence of any entity in the guarantor group. Coordination with Greystone National Bank, N.A. — specifically with Thomas P. Quirk, who serves as the relationship manager for the Existing Credit Facility — will be necessary to obtain payoff letters, lien release documentation, and confirmation of the process and timeline for filing mortgage releases and UCC-3 termination statements in each applicable county and state. We should anticipate that the real property lien release process for VHG Properties may extend beyond the closing date, and the engagement team should discuss with the initial purchasers' counsel whether a post-closing covenant regarding completion of lien releases is appropriate.
Additionally, the board of directors of VHG Properties must be convened (or act by unanimous written consent) to adopt resolutions specifically authorizing the guarantee. We will need to confirm the current composition of the board of directors and the identity and title of the officer or officers who will execute the Guarantor Joinder Agreement and other closing documents on behalf of VHG Properties.
C. Bayshore Hotel Management LLC
Supplemental Notes — Bayshore; Florida Formation. Bayshore is the only guarantor entity formed under the laws of a state other than Delaware. As a Florida limited liability company, Bayshore is governed by the Florida Revised Limited Liability Company Act, Chapter 605 of the Florida Statutes, which was enacted effective January 1, 2014 and has been amended from time to time since its initial enactment. While the Florida LLC Act is generally similar to the Delaware LLC Act in its treatment of LLC operating agreements, member authority, and manager authority, there are certain differences that may be relevant to the authorization of the guarantee.
In particular, the engagement team should confirm whether the Florida LLC Act contains any specific requirements regarding the authorization of guarantee obligations by a manager-managed or member-managed LLC that differ from analogous provisions of the Delaware LLC Act. The opinion of issuer's counsel (Calderwood & Harkness LLP) is expected to cover New York law and Delaware law; accordingly, we will need to determine whether Calderwood & Harkness LLP can opine on matters of Florida law applicable to Bayshore or whether a separate opinion from local Florida counsel will be required. This issue should be raised with Theodore Langston at the earliest opportunity, as engaging local Florida counsel will require additional time and coordination.
Additionally, because Bayshore is held directly by VHG (rather than through VCH), the guarantee by Bayshore constitutes a direct subsidiary guarantee rather than an indirect subsidiary guarantee. This distinction is relevant for structural subordination analysis but does not affect the enforceability analysis in any material respect.
D. Verimark Capital Holdings LLC
Supplemental Notes — VCH. As noted above, VCH occupies a structurally critical position within the VHG corporate family. VCH is the direct parent of three of the five subsidiary guarantors and serves as the intermediate holding company between VHG and these operating subsidiaries. VCH's guarantee of the Notes is therefore essential to the structural integrity of the guarantee package. Without VCH's guarantee, noteholders would have no direct claim against VCH and would be structurally subordinated to any creditors of VCH with respect to the assets (i.e., the equity interests in VRH, VHG Properties, and Pinnacle Lodging) held by VCH.
Although VCH is a holding company with no independent operations, the engagement team should confirm whether VCH's equity interests in its three subsidiaries are pledged under the Existing Credit Facility, as any such pledges would need to be released in connection with the closing of the Notes offering. Additionally, because VCH is the sole shareholder of VHG Properties and Pinnacle Lodging (both Delaware corporations), VCH, acting as sole stockholder, may execute written consents in lieu of stockholder meetings to ratify any board actions taken by the boards of directors of these two corporate subsidiaries, if necessary.
E. Pinnacle Lodging Enterprises Inc.
Supplemental Notes — Pinnacle Lodging. As an acquired entity, Pinnacle Lodging requires additional layers of diligence beyond those applicable to the other guarantors. The engagement team must obtain and review the acquisition agreement pursuant to which VHG or VCH acquired Pinnacle Lodging to determine whether any surviving covenants, indemnification obligations, restrictive covenants, or consent requirements exist that could affect Pinnacle Lodging's ability to provide the guarantee. In particular, the team should focus on (i) any negative pledge or anti-assignment provisions, (ii) any change of control provisions that may have been triggered at the time of acquisition and, if so, whether proper consents were obtained, (iii) any earn-out or contingent consideration obligations that remain outstanding and may be affected by the guarantee, and (iv) any intellectual property license agreements entered into in connection with the acquisition that may contain restrictions on the encumbrance or guarantee of licensed assets.
Additionally, the engagement team should confirm that all post-acquisition corporate housekeeping has been completed, including (a) reconstitution of the board of directors to reflect VCH's ownership, (b) updating of the registered agent and principal office information with the Delaware Secretary of State, (c) adoption of any necessary post-closing amendments to the Certificate of Incorporation or Bylaws, and (d) filing of any required post-acquisition state regulatory notices or qualifications.
IV. Summary of Guarantee Structure Under the Indenture
The Notes will be guaranteed by each of the five subsidiary guarantors identified in Section III above on a joint and several, senior unsecured basis. The following summarizes the key structural features of the guarantee arrangement as currently contemplated for the Indenture.
Guarantee Provisions. The guarantees will be set forth in Article 10 of the Indenture (the "Indenture"), which will be dated as of the closing date, currently anticipated to be June 25, 2024. The Indenture will be entered into among VHG, as issuer, the subsidiary guarantors named therein, and Fidelitas Trust Company, N.A., as trustee (the "Trustee"). Each guarantor will unconditionally guarantee, on a joint and several basis, the full and punctual payment of the principal of, premium (if any), and interest on the Notes when due, whether at maturity, upon acceleration, upon redemption, or otherwise, and all other monetary obligations of VHG under the Indenture and the Notes.
Guarantor Joinder Agreements. Each guarantor will execute a Guarantor Joinder Agreement on the closing date, pursuant to which it will formally join the Indenture as a guarantor party and agree to be bound by all of the terms and conditions of the Indenture applicable to guarantors, including the guarantee obligations set forth in Article 10. Each guarantor will also join the Registration Rights Agreement to be entered into among VHG, the Guarantors, and the initial purchasers on the closing date, pursuant to which VHG and the Guarantors will agree to file and cause to become effective a registration statement covering the exchange of the Notes for registered notes within the time periods specified therein.
Future Guarantor Covenant. The Indenture will contain a covenant requiring that any future restricted subsidiary of VHG that meets specified thresholds (to be negotiated and set forth in the Indenture) must execute a supplemental indenture and become a guarantor of the Notes. The form of supplemental indenture for future guarantor joinders will be attached as an exhibit to the Indenture. This covenant is intended to ensure that the guarantee coverage remains proportionate to VHG's consolidated operations as the VHG corporate family evolves over the term of the Notes.
Ranking. Each guarantee will constitute a senior unsecured obligation of the applicable guarantor and will rank (i) pari passu in right of payment with all existing and future senior unsecured indebtedness of such guarantor, (ii) senior in right of payment to all future subordinated indebtedness (if any) of such guarantor, and (iii) effectively junior to all existing and future secured indebtedness of such guarantor, to the extent of the value of the assets securing such indebtedness. As of the closing date, assuming the payoff of the Existing Credit Facility, the guarantors are not expected to have any secured indebtedness outstanding.
Fraudulent Conveyance Limitations. The enforceability of each guarantee is subject to customary limitations under applicable fraudulent conveyance and fraudulent transfer laws, including under the Uniform Fraudulent Transfer Act (or the Uniform Voidable Transactions Act, as applicable in relevant jurisdictions), the Uniform Fraudulent Conveyance Act, and Section 548 of the Bankruptcy Code. A creditor or a bankruptcy trustee could challenge the enforceability of a guarantor's guarantee on the grounds that, at the time the guarantee was incurred, the guarantor (a) received less than reasonably equivalent value or fair consideration in exchange for the guarantee, and (b) was insolvent or rendered insolvent by the guarantee, was left with unreasonably small capital, or intended to incur or believed it would incur debts beyond its ability to pay as they matured. The opinion of issuer's counsel to be delivered at closing will be qualified to reflect these limitations.
Savings Clause. The engagement team should consider whether each guarantor's guarantee should include a "savings clause" limiting the guarantee obligation to the maximum amount that would not render the guarantee voidable under applicable fraudulent transfer laws. The inclusion of savings clauses is standard market practice in high yield offerings involving subsidiary guarantees, and the engagement team should review recent hospitality-sector high yield precedents to confirm the appropriate formulation. This issue should be discussed with Theodore Langston and Claire Dempsey during the next engagement team meeting.
Release of Guarantees. The Indenture will contain customary provisions for the release of a guarantor's guarantee upon the occurrence of specified events, including (i) the sale or disposition of all of the capital stock or assets of the guarantor in a transaction not prohibited by the Indenture, (ii) the designation of the guarantor as an unrestricted subsidiary in accordance with the terms of the Indenture, (iii) the release of the guarantor's guarantee of the Existing Credit Facility (or any replacement facility) if the guarantee was required solely because of the guarantor's guarantee of such facility, and (iv) the defeasance or discharge of the Notes in accordance with the Indenture.
V. Diligence Checklist — Items Required for Each Guarantor
This Section V sets forth the comprehensive diligence checklist applicable to each of the five subsidiary guarantors. The items identified below must be obtained, reviewed, and confirmed prior to closing. Certain items are required earlier in the timeline — specifically, prior to the circulation of the Preliminary Offering Memorandum (targeted for June 3, 2024) — to support the disclosure review and accuracy of the organizational and legal descriptions contained therein.
A. Formation and Organizational Documents
For each of the five subsidiary guarantors, the following formation and organizational documents must be obtained and reviewed:
1. Certificate of Formation / Certificate of Incorporation. A certified copy of the Certificate of Formation (for LLCs: VRH, Bayshore, and VCH) or Certificate of Incorporation (for corporations: VHG Properties and Pinnacle Lodging), as currently on file with the Secretary of State (or Department of State, in the case of Bayshore) of the jurisdiction of formation, together with all amendments, restatements, and certificates of correction, if any.
2. LLC Agreement / Operating Agreement or Bylaws. For each LLC guarantor (VRH, Bayshore, and VCH), the current LLC Agreement or Operating Agreement, together with all amendments thereto. For each corporate guarantor (VHG Properties and Pinnacle Lodging), the current Bylaws and the current Certificate of Incorporation (including all amendments, restatements, and certificates of designation, if any).
3. All Amendments to Organizational Documents. A complete set of all amendments to the formation documents and governing documents of each guarantor, in chronological order, to ensure that the engagement team has a complete and current picture of the organizational framework of each entity.
4. Current Registered Agent and Registered Office. Confirmation of the current registered agent and registered office address in the jurisdiction of formation for each guarantor. This information should be cross-referenced against the records of the applicable Secretary of State to confirm accuracy.
B. Good Standing and Qualifications
For each of the five subsidiary guarantors, the following good standing and qualification documents must be obtained:
1. Certificate of Good Standing — Jurisdiction of Formation. A Certificate of Good Standing (or equivalent certificate) from the Secretary of State (or Department of State, as applicable) of the jurisdiction of formation of each guarantor. Specifically:
• For VRH, VHG Properties, VCH, and Pinnacle Lodging: Certificate of Good Standing from the Delaware Secretary of State.
• For Bayshore: Certificate of Status from the Florida Department of State, Division of Corporations.
2. Certificates of Good Standing — Foreign Qualifications. For each guarantor, a Certificate of Good Standing (or equivalent certificate of authority or certificate of qualification) from each state (and, in the case of VRH, potentially the U.S. Virgin Islands) in which the guarantor is qualified to do business as a foreign entity. The number of such certificates will depend on the results of the foreign qualification review.
3. Timing of Good Standing Certificates. Good standing certificates should be ordered on or about June 20, 2024, which is five business days prior to the anticipated closing date of June 25, 2024. This timing is intended to ensure that the certificates are current as of or near the closing date, which is typically required by the initial purchasers and their counsel. If the closing date is delayed, updated certificates may need to be ordered.
C. Authority and Resolutions
For each of the five subsidiary guarantors, appropriate authorizing resolutions or consents must be drafted, circulated, and adopted:
1. Board Resolutions / Member or Manager Consents. The following authorizing actions must be taken:
• For the corporate guarantors (VHG Properties and Pinnacle Lodging): The board of directors of each entity must adopt resolutions (either at a duly convened meeting or by unanimous written consent in lieu of a meeting) authorizing the following actions:
(a) Execution, delivery, and performance of the Guarantor Joinder Agreement;
(b) Guarantee of the Notes pursuant to Article 10 of the Indenture;
(c) Execution, delivery, and performance of the Registration Rights Agreement (as a guarantor party thereto);
(d) Execution, delivery, and performance of all other documents, instruments, and agreements to be executed and delivered by the guarantor in connection with the Notes offering; and
(e) Authorization of one or more officers to execute and deliver each of the foregoing documents on behalf of the guarantor.
• For the LLC guarantors (VRH, Bayshore, and VCH): The sole member or the designated manager of each entity must execute a written consent or resolution authorizing the same actions identified in items (a) through (e) above.
2. Target Date for Adoption. The target date for adoption of all guarantor resolutions and consents is June 14, 2024, which is the same date currently scheduled for the VHG board meeting at which VHG's board of directors will approve the Notes offering and related transactions. Coordinating the guarantor authorization with the VHG board meeting will streamline the process, particularly because certain individuals may serve in multiple capacities across the VHG corporate family.
3. Authorized Signatories and Incumbency Certificates. The resolutions or consents for each guarantor should specifically identify the officer(s) or authorized person(s) who are authorized to execute closing documents on behalf of the guarantor. Incumbency certificates will be prepared and delivered at closing to confirm the identity, title, and specimen signatures of each authorized signatory.
D. Incumbency and Signatories
For each of the five subsidiary guarantors, the following incumbency-related items must be confirmed and documented:
1. Identification of Authorized Persons. Identify the officer(s) or authorized person(s) of each guarantor who will execute the Guarantor Joinder Agreement, the Registration Rights Agreement, and other closing documents on behalf of the guarantor. For corporate guarantors, this will typically be an officer (e.g., President, Vice President, Secretary, or Treasurer). For LLC guarantors, this will be the manager, managing member, or an authorized officer or representative, as specified in the LLC Agreement.
2. Incumbency Certificates. An incumbency certificate will be prepared for each guarantor, to be included in or appended to the Secretary's Certificate (or equivalent officer's certificate) delivered at closing. The incumbency certificate will certify the name, title, and specimen signature of each person authorized to execute documents on behalf of the guarantor.
3. Specimen Signatures. Specimen signatures of each authorized signatory must be obtained in advance of closing for inclusion in the incumbency certificates and for use by the Trustee and the initial purchasers in verifying executed documents.
E. Existing Liens and Encumbrances
The following lien-related diligence must be conducted for each of the five subsidiary guarantors:
1. UCC Lien Searches — Jurisdiction of Formation. A Uniform Commercial Code lien search must be conducted in the jurisdiction of formation of each guarantor to identify all existing UCC financing statements filed against the entity. Specifically:
• For VRH, VHG Properties, VCH, and Pinnacle Lodging: UCC search in the Delaware Secretary of State's office.
• For Bayshore: UCC search in the Florida Department of State's office.
2. UCC Lien Searches — Asset Locations. Additional UCC lien searches should be conducted in each state in which a guarantor has significant assets, to the extent that UCC filings may have been made in states other than the guarantor's jurisdiction of formation.
3. Real Property Lien Searches. For VRH (12 resort properties) and VHG Properties (32 hotel properties), title searches and mortgage lien searches must be conducted in each county in which real property is located. These searches will identify existing mortgages, deeds of trust, liens, judgments, and other encumbrances of record affecting the real property.
4. Confirmation of Existing Credit Facility Liens. All existing liens identified through the UCC and real property searches should be confirmed to relate to the Existing Credit Facility (Amended and Restated Credit Agreement dated as of March 15, 2021, with Greystone National Bank, N.A. as administrative agent; Loan No. GNB-SYN-2021-04417). All such liens are expected to be released upon payoff and termination of the Existing Credit Facility in connection with the closing of the Notes offering.
5. Identification of Other Liens. Any liens, judgments, tax liens, or other encumbrances that do not relate to the Existing Credit Facility must be identified and flagged for further investigation and resolution prior to closing.
F. Material Agreements and Restrictions
For each of the five subsidiary guarantors, the following agreement-level diligence must be conducted:
1. Organizational Document Restrictions. Review the governing documents (LLC Agreement, Operating Agreement, Certificate of Incorporation, Bylaws) of each guarantor for any provisions that restrict, condition, or prohibit the incurrence of guarantee obligations, contingent liabilities, or intercompany obligations by the entity.
2. Third-Party Agreement Restrictions. Review any material agreements to which the guarantor is a party (including management agreements, franchise agreements, license agreements, joint venture agreements, and commercial contracts) for any provisions that contain change of control triggers, negative pledge covenants, anti-assignment provisions, or consent requirements that may be triggered by the guarantor's execution and delivery of the guarantee.
3. Pinnacle Lodging — Acquisition Agreement Review. For Pinnacle Lodging specifically, obtain and review the acquisition agreement (and all ancillary agreements) pursuant to which VHG or VCH acquired Pinnacle Lodging. Focus on surviving covenants, restrictive covenants, indemnification obligations, earn-out provisions, and any consent or notification requirements that may be triggered by the guarantee.
4. Litigation and Proceedings. Confirm that there are no outstanding litigation matters, arbitration proceedings, regulatory investigations, or other legal proceedings involving any guarantor that could affect the guarantor's authority to execute and deliver the guarantee or that could give rise to a material adverse change in the guarantor's financial condition or business.
G. Tax and Regulatory
The following tax and regulatory diligence must be conducted for each of the five subsidiary guarantors:
1. EIN / Tax Identification Number. Confirm the Employer Identification Number (EIN) for each guarantor entity. This information will be required for various closing documents and filings.
2. Tax Status. Confirm the U.S. federal income tax classification of each guarantor entity:
• For single-member LLCs (VRH, Bayshore, and VCH): Confirm treatment as a disregarded entity for U.S. federal income tax purposes (i.e., confirm that no election has been made on Form 8832 to be classified as a corporation).
• For corporations (VHG Properties and Pinnacle Lodging): Confirm treatment as C-corporations for U.S. federal income tax purposes.
The tax status of each guarantor is relevant to the tax opinion and the OID/interest deductibility analysis currently being prepared by Sylvia Hartwell of the firm's Tax Practice Group.
3. Regulatory Approvals and Licenses. Confirm whether any guarantor holds gaming licenses, liquor licenses, or other regulated licenses that impose restrictions on the incurrence of guarantee obligations, the encumbrance of licensed assets, or changes in the ownership or control of the license holder. Given VHG's hospitality business, certain hotel and resort properties may hold liquor licenses, and any applicable regulatory restrictions should be identified and analyzed.
VI. Summary Status Table
The following table summarizes the current status of diligence items for each of the five subsidiary guarantors as of the date of this memorandum:
All items are currently marked as "Pending" as of the date of this memorandum (April 29, 2024). Requests for organizational documents and related entity information have been sent to David K. Moretti, General Counsel of VHG, via email on April 26, 2024, with a follow-up request to be sent on April 30, 2024.
The target for completion of all material diligence items is prior to the circulation of the Preliminary Offering Memorandum, currently targeted for June 3, 2024. Final confirmations, good standing certificates, and fully executed resolutions must be in hand by the anticipated closing date of June 25, 2024. Good standing certificates will be ordered within the five-business-day window preceding closing to ensure that they are current.
The engagement team will maintain an updated version of this status table on the deal team's shared document management system and will circulate weekly status updates beginning the week of May 6, 2024.
VII. Key Observations and Open Items
This Section VII highlights specific observations, issues, and open items that the engagement team should be aware of and that may require further analysis, coordination, or resolution in connection with the guarantor diligence workstream.
A. Bayshore Hotel Management LLC — Florida Formation
Bayshore is the only guarantor entity formed outside of Delaware. As a Florida limited liability company, Bayshore is governed by the Florida Revised Limited Liability Company Act (Chapter 605, Florida Statutes), rather than the Delaware Limited Liability Company Act. While the two statutes are broadly similar in their approach to the governance of LLCs, there are certain differences that may be relevant to the authorization of the guarantee.
The engagement team should confirm whether the Florida Revised LLC Act contains any specific procedural requirements for the authorization of guarantee obligations by a Florida LLC that differ from the analogous provisions of the Delaware LLC Act. In particular, the team should review Section 605.04071 of the Florida Statutes (relating to activities and affairs of the LLC) and Section 605.04072 (relating to the authority of members and managers) to confirm that the authorization process contemplated by the engagement team is consistent with Florida law.
Additionally, the legal opinion to be delivered by Calderwood & Harkness LLP at closing is expected to cover matters of New York law and Delaware law. The engagement team must determine whether Calderwood & Harkness LLP can render an opinion on matters of Florida law as they relate to Bayshore's authority to enter into the guarantee, or whether a separate opinion from local Florida counsel will be required. If local Florida counsel is needed, the engagement team should identify and engage such counsel promptly, as the timeline for the offering leaves limited flexibility for additional counsel engagement. This issue should be raised with Theodore Langston at the earliest opportunity.
B. VHG Properties Inc. — Significant Real Property Holdings
VHG Properties holds fee-simple interests in 32 hotel properties across multiple U.S. jurisdictions, making it the guarantor entity with the most extensive real property portfolio. This concentration of real property assets has several important implications for the diligence workstream:
First, VHG Properties will require the most extensive real property lien diligence of any entity in the guarantor group. Title searches and mortgage lien searches must be conducted in each county in which a hotel property is located, which may involve searches in numerous jurisdictions depending on the geographic distribution of the 32 properties. The engagement team should request from VHG a complete list of the hotel properties held by VHG Properties, including the street address, county, and state of each property, to enable the team to scope and order the necessary title and lien searches.
Second, the existing mortgages and deeds of trust securing the Existing Credit Facility must be released in every county in which a VHG Properties hotel is located upon payoff of the Existing Credit Facility at closing. This will require coordination with Greystone National Bank, N.A. — specifically with Thomas P. Quirk, who has been identified as the relationship manager for the Existing Credit Facility — regarding the preparation and execution of mortgage release documents and the timeline for recording such releases with the applicable county recorders' offices. The engagement team should initiate contact with Mr. Quirk promptly to begin this coordination.
Third, following the release of the Existing Credit Facility liens, UCC-3 termination statements must be filed in Delaware (as the jurisdiction of formation of VHG Properties) and in each state in which UCC financing statements were filed against VHG Properties. The engagement team should confirm the filing jurisdictions for all existing UCC financing statements as part of the UCC lien search process.
C. Verimark Resort Holdings LLC — Multi-State Property Portfolio
VRH holds 12 resort properties across multiple U.S. states and the U.S. Virgin Islands. Similar to VHG Properties, VRH's multi-state property portfolio creates significant diligence requirements, including:
• Confirmation of VRH's foreign qualification status in each state (and the U.S. Virgin Islands) in which a resort property is located or in which VRH otherwise conducts business.
• Real property lien searches in each county in which a resort property is located.
• Release of existing liens upon payoff of the Existing Credit Facility.
• Confirmation of VRH's qualification and good standing in the U.S. Virgin Islands, which may involve different procedures, timelines, and requirements than domestic state qualifications. The U.S. Virgin Islands is a territory of the United States, and the filing and qualification requirements of the Office of the Lieutenant Governor (Division of Corporations and Trademarks) should be reviewed.
The engagement team should request from VHG a complete list of the resort properties held by VRH, including the location (address, county/territory, and state/territory) of each property, to scope the necessary lien searches and foreign qualification confirmations.
D. Pinnacle Lodging Enterprises Inc. — Acquired Entity
Pinnacle Lodging was acquired by VHG or VCH at a date to be confirmed and holds brand and intellectual property assets related to VHG's lodging brands. As an acquired entity, Pinnacle Lodging presents several unique diligence considerations:
1. Acquisition Agreement Review. The acquisition agreement pursuant to which VHG or VCH acquired Pinnacle Lodging must be obtained and reviewed in its entirety, with particular focus on (a) surviving covenants and representations, (b) indemnification obligations that may create contingent liabilities, (c) restrictive covenants that may prohibit or restrict the incurrence of guarantee obligations, (d) any earn-out or contingent consideration provisions, and (e) any consent or notification requirements triggered by the guarantee or by changes in Pinnacle Lodging's capital structure or financial obligations.
2. Prior Ownership Restrictions. The engagement team should verify that no restrictive covenants from Pinnacle Lodging's prior ownership survive the acquisition and would prohibit the guarantee. This includes reviewing any pre-acquisition credit agreements, note purchase agreements, or indentures to which Pinnacle Lodging was a party and confirming that all obligations thereunder were terminated or assumed in connection with the acquisition.
3. Post-Acquisition Corporate Housekeeping. The engagement team should confirm that all post-acquisition corporate housekeeping has been completed, including reconstitution of the board of directors, updating of the registered agent, appointment of new officers, adoption of amended bylaws (if applicable), and filing of all required post-closing notices and filings.
4. intellectual Property Assets. Because Pinnacle Lodging holds brand and intellectual property assets, the engagement team should conduct intellectual property lien searches (including searches of the United States Patent and Trademark Office records) to identify any existing security interests, assignments, or encumbrances affecting Pinnacle Lodging's intellectual property. Additionally, the team should confirm whether any intellectual property license agreements exist that contain restrictions on the encumbrance or guarantee of licensed assets.
E. Fraudulent Conveyance Considerations
Each guarantor's guarantee of the Notes must be analyzed for fraudulent conveyance risk. This analysis is particularly important for subsidiary guarantors that are not direct borrowers of the proceeds of the Notes and receive only an indirect benefit from the offering (i.e., through their affiliation with VHG and the availability of the Notes proceeds for general corporate purposes of the VHG corporate family).
Under applicable fraudulent transfer laws, a guarantee may be avoided as a fraudulent transfer if a court determines that (i) the guarantor received less than reasonably equivalent value or fair consideration in exchange for the guarantee, and (ii) at the time the guarantee was made, the guarantor (a) was insolvent or was rendered insolvent by the guarantee, (b) was engaged in a business or transaction for which the guarantor's remaining assets constituted unreasonably small capital, or (c) intended to incur, or believed or reasonably should have believed it would incur, debts beyond its ability to pay as they matured. Courts may also consider whether the guarantee was made with actual intent to hinder, delay, or defraud creditors.
To mitigate this risk, the engagement team should consider the following:
• Savings Clauses. Include a savings clause in each guarantee (in Article 10 of the Indenture) limiting the guarantee obligation of each guarantor to the maximum amount that would not render the guarantee voidable under applicable fraudulent transfer laws. While the enforceability of savings clauses has been the subject of varying judicial treatment, they remain standard market practice in high yield offerings and are expected by the initial purchasers.
• Corporate Benefit Analysis. Document the corporate benefit received by each guarantor from the Notes offering, including access to the Notes proceeds for working capital and capital expenditure needs, improved financial flexibility for the VHG corporate family, and the benefit of the payoff of the Existing Credit Facility and release of liens on the guarantors' assets.
• Solvency Analysis. Consider whether a solvency opinion or solvency certificate should be obtained from VHG or an independent financial advisor to support the conclusion that each guarantor is solvent after giving effect to the guarantee. This issue should be discussed with Theodore Langston and Claire Dempsey.
The engagement team should review recent hospitality-sector high yield precedents to confirm the standard market approach for fraudulent conveyance savings clauses and to identify any sector-specific considerations.
F. Intercompany upstream and Cross-Stream Guarantees
The guarantee structure contemplated for the Notes involves both upstream guarantees and cross-stream guarantees, each of which requires careful analysis:
• upstream Guarantees. Guarantees provided by subsidiaries (VRH, VHG Properties, Bayshore, VCH, and Pinnacle Lodging) of their parent's (VHG's) debt obligations constitute upstream guarantees. In an upstream guarantee, the subsidiary is guaranteeing the obligations of its direct or indirect parent entity, and the subsidiary does not receive the proceeds of the debt issuance directly.
• Cross-Stream Guarantees. To the extent that any guarantor guarantees obligations that benefit a sister subsidiary (e.g., VRH guaranteeing obligations the proceeds of which are used by VHG Properties), the guarantee constitutes a cross-stream guarantee.
Both upstream and cross-stream guarantees are subject to heightened scrutiny under fraudulent transfer laws because the guarantor does not directly receive the loan proceeds. The engagement team must confirm that each guarantor's organizational documents expressly permit the incurrence of upstream and cross-stream guarantee obligations. If the organizational documents are silent on this point, the engagement team should consider whether amendments to the organizational documents are necessary or whether the general authority provisions of the applicable LLC Act or corporation statute are sufficient.
Additionally, a corporate benefit analysis should be prepared and documented for each guarantor to establish that the guarantee is supported by reasonably equivalent value, even if the guarantor does not receive the Notes proceeds directly. The indirect benefits of the guarantee — including the guarantor's membership in an integrated corporate group, access to centralized treasury and cash management functions, and the benefit of the payoff of the Existing Credit Facility — should be documented in the corporate benefit analysis.
VIII. Next Steps and Timeline
The following table sets forth the key action items, responsible parties, and target dates for the subsidiary guarantor diligence workstream:
The engagement team will hold weekly status calls beginning the week of May 6, 2024, to track progress on the diligence items identified in this memorandum and to identify and resolve any issues as they arise. Updates to this memorandum and to the summary status table in Section VI will be circulated in advance of each weekly call.
Any delays in the receipt of organizational documents or other diligence materials from VHG should be escalated promptly, as the diligence timeline is driven by the Preliminary Offering Memorandum circulation date of June 3, 2024. To the extent that the closing date is accelerated or delayed, the target dates set forth above will be adjusted accordingly.
IX. Exhibits / Attachments
The following exhibits and attachments are referenced in this memorandum:
Exhibit A: Simplified Organizational Chart of VHG and Subsidiary Guarantors — depicting the ownership lines, entity types, and jurisdictions of formation for VHG and each of the five subsidiary guarantors. To be prepared upon confirmation of the organizational structure based on organizational documents received from VHG.
Exhibit B: Diligence Request List — comprehensive list of documents and information requested from David K. Moretti, General Counsel of VHG, in connection with the subsidiary guarantor diligence workstream. To be sent to Mr. Moretti on April 30, 2024.
Exhibit C: Entity Summary Table (Expanded) — expanded version of the summary status table set forth in Section VI of this memorandum, with additional fields for EIN/tax identification number, date of formation, registered agent and registered office, officer/manager information, authorized signatories, and foreign qualification jurisdictions. To be populated on a rolling basis as diligence materials are received and reviewed.
Prepared by: Audrey Zhou, Working Associate, Capital Markets, Calderwood & Harkness LLP
Distribution: Internal Calderwood & Harkness LLP engagement team only — Theodore Langston (Responsible Partner, Capital Markets), Vivienne St. Claire (Billing Partner, Capital Markets), Claire Dempsey (Lead Associate, Capital Markets)
PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT
This memorandum was prepared in anticipation of litigation and/or in connection with the provision of legal advice by Calderwood & Harkness LLP to its client, Verimark Hospitality Group Inc. This memorandum is protected by the attorney-client privilege and the work product doctrine. Do not distribute, copy, or disclose the contents of this memorandum to any person outside of the Calderwood & Harkness LLP engagement team without the prior written approval of Theodore Langston, Responsible Partner.
Calderwood & Harkness LLP One Liberty Plaza, 45th Floor New York, New York 10006
| Field | Detail |
| Full Legal Name | Verimark Resort Holdings LLC |
| Short Name / Abbreviation | VRH |
| Entity Type | Limited Liability Company |
| Jurisdiction of Formation | Delaware |
| Governing Statute | Delaware Limited Liability Company Act (6 Del. C. §§ 18-101 et seq.) |
| Date of Formation | To be confirmed via Delaware Secretary of State records |
| Certificate of Formation Filed | To be confirmed; certified copy to be obtained |
| Registered Agent (DE) | Crowne Albany Corporation, Cobalt Ridge Technologies, 1209 Orange Street, Wilmington, Delaware 19801 |
| Principal Office | 2400 Brickell Bay Drive, Suite 3100, Miami, Florida 33129 (c/o VHG) |
| Business Description | Holds VHG's resort property portfolio, consisting of 12 resort properties located across multiple U.S. states and the U.S. Virgin Islands |
| Sole Member | Verimark Capital Holdings LLC (100% membership interest) |
| Manager / Managing Member | Managed by its sole member or by a designated manager — structure to be confirmed upon review of the LLC Agreement |
| Good Standing Status | To be confirmed; Delaware Certificate of Good Standing to be ordered from the Delaware Secretary of State |
| Foreign Qualifications | To be confirmed — VRH likely requires foreign qualification in each state (and potentially the U.S. Virgin Islands) in which it holds real property or conducts business; foreign qualification certificates to be obtained from each such jurisdiction |
| Authority for Guarantee | LLC Agreement to be reviewed to confirm (i) whether the sole member or a designated manager has the authority to authorize the execution and delivery of the guarantee, (ii) whether there are any restrictions on the incurrence of contingent obligations or guarantee liabilities, and (iii) whether any third-party consents (including from lenders or other counterparties) are required |
| Existing Liens / Encumbrances | Resort properties held by VRH are pledged as collateral under the Existing Credit Facility (Amended and Restated Credit Agreement dated as of March 15, 2021, among VHG, as borrower, the subsidiary guarantors party thereto, the lenders from time to time party thereto, and Greystone National Bank, N.A., as administrative agent and collateral agent; Loan No. GNB-SYN-2021-04417); existing liens are expected to be released upon payoff and termination of the Existing Credit Facility in connection with the closing of the Notes offering |
| EIN / Tax ID | To be confirmed |
| Tax Status | Expected to be treated as a disregarded entity for U.S. federal income tax purposes (single-member LLC); to be confirmed |
| Field | Detail |
| Full Legal Name | VHG Properties Inc. |
| Short Name / Abbreviation | VHG Properties |
| Entity Type | Corporation |
| Jurisdiction of Incorporation | Delaware |
| Governing Statute | Delaware General Corporation Law (8 Del. C. §§ 101 et seq.) |
| Date of Incorporation | To be confirmed via Delaware Secretary of State records |
| Certificate of Incorporation Filed | To be confirmed; certified copy to be obtained |
| Registered Agent (DE) | Crowne Albany Corporation, Cobalt Ridge Technologies, 1209 Orange Street, Wilmington, Delaware 19801 |
| Principal Office | 2400 Brickell Bay Drive, Suite 3100, Miami, Florida 33129 (c/o VHG) |
| Business Description | Holds fee-simple interests in 32 hotel properties located across multiple U.S. jurisdictions |
| Sole Shareholder | Verimark Capital Holdings LLC (100% of all outstanding shares of capital stock) |
| Directors | To be confirmed; full list of current directors needed for purposes of board resolution and incumbency certificate |
| Officers | To be confirmed; full list of current officers needed, including identification of the authorized signatory(ies) for execution of closing documents |
| Good Standing Status | To be confirmed; Delaware Certificate of Good Standing to be ordered from the Delaware Secretary of State |
| Foreign Qualifications | To be confirmed — VHG Properties holds fee-simple interests in 32 hotel properties, and foreign qualification in each state in which properties are located is expected to be required; certificates of good standing / authority from each such state to be obtained |
| Authority for Guarantee | Certificate of Incorporation and Bylaws to be reviewed; the board of directors of VHG Properties must adopt resolutions authorizing the execution, delivery, and performance of the guarantee and related documents; confirm that the Certificate of Incorporation does not contain any restrictions on the incurrence of contingent obligations, intercompany guarantees, or upstream guarantees |
| Existing Liens / Encumbrances | Fee-simple hotel property interests held by VHG Properties are pledged as collateral under the Existing Credit Facility, secured by mortgages and deeds of trust in each applicable county; all such mortgages and deeds of trust are to be released upon payoff of the Existing Credit Facility at closing; UCC-3 termination statements to be filed in Delaware and in each applicable state upon release of the security interests |
| EIN / Tax ID | To be confirmed |
| Tax Status | C-corporation for U.S. federal income tax purposes; to be confirmed |
| Field | Detail |
| Full Legal Name | Bayshore Hotel Management LLC |
| Short Name / Abbreviation | Bayshore |
| Entity Type | Limited Liability Company |
| Jurisdiction of Formation | Florida |
| Governing Statute | Florida Revised Limited Liability Company Act (Chapter 605, Florida Statutes) |
| Date of Formation | To be confirmed via Florida Department of State, Division of Corporations records |
| Articles of Organization Filed | To be confirmed; certified copy to be obtained |
| Registered Agent (FL) | To be confirmed — likely Ashgrove Services Inc., 1200 South Pine Island Road, Plantation, Florida 33324, or a similar corporate service company; may also be an officer of VHG serving as registered agent |
| Principal Office | 2400 Brickell Bay Drive, Suite 3100, Miami, Florida 33129 (c/o VHG) |
| Business Description | Hotel management and operations subsidiary; manages the day-to-day operations of VHG's hotel and resort portfolio, including staffing, food and beverage operations, revenue management, and property-level financial reporting |
| Sole Member | Verimark Hospitality Group Inc. (100% membership interest; Bayshore is held directly by VHG, not through VCH) |
| Manager / Managing Member | To be confirmed upon review of the operating agreement; expected to be managed by its sole member (VHG) or by a designated manager or managers appointed by VHG |
| Good Standing Status | To be confirmed; Florida Department of State Certificate of Status (the Florida equivalent of a Certificate of Good Standing) to be ordered |
| Foreign Qualifications | To be confirmed — Bayshore manages hotel operations across multiple U.S. states, and may be required to qualify as a foreign LLC in states other than Florida where it conducts management activities or employs personnel; foreign qualification certificates to be obtained from each such state |
| Authority for Guarantee | Florida LLC operating agreement to be reviewed to confirm (i) whether the sole member (VHG) or a designated manager has the authority to authorize the guarantee on behalf of Bayshore, (ii) whether there are any restrictions in the operating agreement on the incurrence of contingent obligations, guarantee liabilities, or intercompany obligations, and (iii) whether the Florida Revised Limited Liability Company Act imposes any specific procedural requirements for authorization of guarantees by a Florida LLC that differ from the Delaware LLC Act |
| Existing Liens / Encumbrances | To be confirmed; Bayshore is an operating company (not a property-holding entity) and is not expected to have significant real property liens, but UCC lien searches should be conducted in Florida to confirm |
| EIN / Tax ID | To be confirmed |
| Tax Status | Expected to be treated as a disregarded entity for U.S. federal income tax purposes (single-member LLC); to be confirmed |
| Field | Detail |
| Full Legal Name | Verimark Capital Holdings LLC |
| Short Name / Abbreviation | VCH |
| Entity Type | Limited Liability Company |
| Jurisdiction of Formation | Delaware |
| Governing Statute | Delaware Limited Liability Company Act (6 Del. C. §§ 18-101 et seq.) |
| Date of Formation | To be confirmed via Delaware Secretary of State records |
| Certificate of Formation Filed | To be confirmed; certified copy to be obtained |
| Registered Agent (DE) | Crowne Albany Corporation, Cobalt Ridge Technologies, 1209 Orange Street, Wilmington, Delaware 19801 |
| Principal Office | 2400 Brickell Bay Drive, Suite 3100, Miami, Florida 33129 (c/o VHG) |
| Business Description | Intermediate holding company; holds VHG's equity interests in three operating subsidiaries: Verimark Resort Holdings LLC, VHG Properties Inc., and Pinnacle Lodging Enterprises Inc. |
| Sole Member | Verimark Hospitality Group Inc. (100% membership interest) |
| Manager / Managing Member | To be confirmed upon review of the LLC Agreement; expected to be managed by its sole member (VHG) or by a designated manager or managers appointed by VHG |
| Good Standing Status | To be confirmed; Delaware Certificate of Good Standing to be ordered from the Delaware Secretary of State |
| Foreign Qualifications | As a holding company, VCH may not be qualified to do business in any state other than Delaware; however, this should be confirmed upon review of VCH's activities and any state-level filing requirements |
| Authority for Guarantee | LLC Agreement to be reviewed to confirm sole member or manager authority to authorize the guarantee; as a holding company, VCH's organizational documents may be relatively straightforward, but confirmation is nonetheless required |
| Existing Liens / Encumbrances | VCH's equity interests in VRH, VHG Properties, and Pinnacle Lodging may be pledged as collateral under the Existing Credit Facility; UCC lien searches to be conducted in Delaware to confirm |
| EIN / Tax ID | To be confirmed |
| Tax Status | Expected to be treated as a disregarded entity for U.S. federal income tax purposes (single-member LLC); to be confirmed |
| Field | Detail |
| Full Legal Name | Pinnacle Lodging Enterprises Inc. |
| Short Name / Abbreviation | Pinnacle Lodging |
| Entity Type | Corporation |
| Jurisdiction of Incorporation | Delaware |
| Governing Statute | Delaware General Corporation Law (8 Del. C. §§ 101 et seq.) |
| Date of Incorporation | To be confirmed via Delaware Secretary of State records |
| Certificate of Incorporation Filed | To be confirmed; certified copy to be obtained |
| Registered Agent (DE) | Crowne Albany Corporation, Cobalt Ridge Technologies, 1209 Orange Street, Wilmington, Delaware 19801 |
| Principal Office | 2400 Brickell Bay Drive, Suite 3100, Miami, Florida 33129 (c/o VHG) |
| Business Description | Acquired hotel brand subsidiary; holds brand and intellectual property assets related to VHG's lodging brands, inclu |