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Coral Palms Grand Resort & Spa — $160,000,000 Refinancing: Termination Recommendation
Coral Palms Grand Resort & Spa — $160,000,000 Refinancing
Termination Recommendation
Prepared by Calderwood & Harkness LLP for the Board of Directors of Verimark Hospitality Group Inc.
Board Meeting — February 10, 2023
CONFIDENTIAL — Attorney-Client Privileged
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Executive Summary
VHG pursued a $160,000,000 first mortgage refinancing of the Coral Palms Grand Resort & Spa in Key Largo, FL, with Pinnacle Atlantic Capital, LLC as lender
Lender-commissioned appraisal by Hargrove & Whitley valued the property at $192,000,000 — $43,000,000 (18.30%) below VHG's internal projection of $235,000,000
Appraisal shortfall triggered material repricing: loan reduced to $139,000,000 at 6.90% fixed (up from $160,000,000 at 5.35%), with full recourse guaranty and cross-collateralization requirements
VHG's counter-proposal submitted February 3, 2023, was rejected by PAC on February 7, 2023
Calderwood & Harkness recommends VHG terminate the transaction — the repriced terms are commercially unacceptable and fundamentally alter the economic rationale for the refinancing
Total deposit exposure: $2,400,000; estimated net forfeiture: $1,600,000 (good faith deposit)
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Transaction Overview — Original Terms
Borrower: Coral Palms Resort Holdings LLC (wholly owned indirect subsidiary of VHG)
Guarantor: Verimark Hospitality Group Inc. — limited recourse / 'bad boy' carve-out guaranty only
Lender: Pinnacle Atlantic Capital, LLC (affiliate of Greystone Peak Asset Management LP)
Loan Amount: $160,000,000 — first mortgage loan
Interest Rate: 5.35% fixed (5-year term; interpolated Treasury + 175 bps)
Amortization: Interest-only years 1–2; 30-year amortization years 3–5
Maximum LTV: 68.0% (per Commitment Letter dated December 9, 2022)
Minimum Debt Yield: 9.5%
Extension Options: Two 1-year extensions (DSCR ≥ 1.25x; 0.25% extension fee)
Estimated Net Cash-Out: $32,265,000
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The Property — Coral Palms Grand Resort & Spa
Location: 99000 Overseas Highway, Key Largo, Monroe County, FL 33037
Property Type: Full-service luxury oceanfront resort — 342 guest rooms/suites
Amenities: 28,500 SF meeting/event space; 18,000 SF spa; 42-slip marina; 3 F&B outlets; 1,200-space parking structure
Site: ~22.4 acres waterfront; ~412,000 SF gross building area
Renovation: Comprehensive $47 million renovation completed August 2021
Trailing 12-Month Performance (ending September 30, 2022): Occupancy 71.3% | ADR $389 | RevPAR $277.36
Total Revenue: ~$62.8 million | Net Operating Income: ~$18.4 million
Independently operated under the 'Coral Palms' trade name (no national brand franchise)
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Existing Tidewater National Bank Loan
Lender: Tidewater National Bank, N.A.
Original Principal: $125,000,000 (originated June 1, 2019)
Outstanding Balance: ~$118,500,000 (as of October 15, 2022)
Interest Rate: SOFR + 2.25% (converted from LIBOR via fallback amendment dated March 15, 2022)
Maturity Date: June 1, 2024 — approximately 16 months remaining
Prepayment Premium: 1.0% ($1,185,000) if prepaid before March 1, 2023; no premium thereafter
Mortgage recorded: O.R. Book 2892, Page 0445, Monroe County, FL
UCC-1: File No. 202219087643, Florida Secured Transaction Registry
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Transaction Timeline — Key Milestones
Oct 19, 2022 — Calderwood & Harkness engagement opened
Nov 14, 2022 — PAC term sheet issued; executed by VHG Nov 28, 2022
Dec 5–9, 2022 — C&H engagement letter executed; PAC Commitment Letter executed
Dec 12, 2022 — Good faith deposit ($1,600,000) wired to Meridian Title & Escrow, Inc.
Dec 19, 2022 — Initial loan document drafts circulated by WBD
Jan 5, 2023 — Rate lock deposit ($800,000) wired to Meridian Title
Jan 6, 2023 — Hargrove & Whitley appraiser site inspection
Jan 20, 2023 — Appraisal report delivered — value: $192,000,000
Jan 24, 2023 — VHG retained Claybourne Advisory Group LLC for appraisal review
Jan 27, 2023 — PAC delivered repriced/restructured terms
Feb 3, 2023 — VHG counter-proposal submitted to PAC
Feb 7, 2023 — PAC rejected VHG counter-proposal
Feb 10, 2023 — Board meeting (today)
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The Appraisal — Hargrove & Whitley Report
Appraiser: Hargrove & Whitley Valuation Services LLC (Scott Tremaine, MAI, MRICS)
Engagement: Commissioned by Pinnacle Atlantic Capital (lender-engaged)
Appraisal Report Date: January 20, 2023 | Effective Date: January 6, 2023
Appraised Value: $192,000,000 vs. VHG Internal Valuation: $235,000,000
Valuation Shortfall: $43,000,000 (18.30% below VHG projection)
VHG retained Claybourne Advisory Group LLC (January 24, 2023) for independent appraisal review
Calderwood & Harkness submitted formal appraisal challenge letter to PAC/WBD — citing $47M renovation, comparable transactions, trailing 12-month NOI, occupancy, and RevPAR
PAC declined to order a second appraisal or adjust the value
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Impact of Appraisal on Loan Sizing
Commitment Letter Maximum LTV: 68.0%
LTV at appraised value ($192M): $160M ÷ $192M = 83.33% — materially exceeds 68.0% cap
Maximum loan at 68.0% LTV: $192M × 68.0% = $130,560,000
Implied loan reduction to comply with LTV cap: $160M − $130.56M = $29,440,000
Debt Yield at $160M: $18.4M ÷ $160M = 11.50% — passes 9.5% minimum (value-independent)
Lender's internal credit policy applies heightened scrutiny when LTV exceeds thresholds
PAC elected to stretch to $139M (72.4% LTV) but required significant credit enhancements
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PAC Repriced Terms vs. Original Terms
Loan Amount: $160,000,000 → $139,000,000 (reduction of $21,000,000)
Interest Rate: 5.35% fixed → 6.90% fixed (+155 bps)
LTV: 68.09% (at VHG value) → 72.40% (at appraised value)
Guaranty: Limited recourse ('bad boy' carve-out) → Full recourse
Collateral: Single asset (Coral Palms only) → Cross-collateralization with Driftwood Bay Hotel, Sarasota, FL
Additional Reserve: None → $3,200,000 PIP/capital improvement reserve
Annual I/O Debt Service: $8,560,000 → $9,591,000 (+$1,031,000/year)
DSCR (I/O): 2.15x → 1.92x
Net Cash-Out: $32,265,000 → $8,065,000 (reduction of $24,200,000)
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VHG Counter-Proposal and PAC Rejection
VHG counter-proposal submitted February 3, 2023 (via Calderwood & Harkness to PAC/WBD)
Key elements of counter-proposal:
— Maintain limited recourse guaranty (reject full recourse upgrade)
— Eliminate cross-collateralization with Driftwood Bay Hotel
— Accept a reduced loan amount with a more moderate rate increase
— Cap additional reserves below $3,200,000
PAC rejected the counter-proposal in its entirety on February 7, 2023
PAC's position: repriced terms are final and non-negotiable
No path to a mutually acceptable structure has been identified
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Deposit Exposure Analysis
Good Faith Deposit: $1,600,000 (wired December 12, 2022 to Meridian Title & Escrow, Inc.)
Rate Lock Deposit: $800,000 (wired January 5, 2023 to Meridian Title)
Total Deposits: $2,400,000
Under Commitment Letter terms, PAC may assert both deposits are non-refundable upon borrower termination
VHG's position: the repricing constitutes a material modification of the Commitment Letter, excusing borrower's obligation and entitling VHG to a refund
C&H assessment: strong argument for refund of rate lock deposit ($800,000); good faith deposit ($1,600,000) refundability is more contested
Estimated most likely outcome: forfeiture of good faith deposit ($1,600,000); refund of rate lock deposit ($800,000)
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Total Transaction Costs Incurred
Calderwood & Harkness legal fees incurred through termination: ~$287,500
Estimated deposit forfeiture (good faith deposit): $1,600,000
Expected rate lock deposit refund: ($800,000)
Commitment fee ($800,000): not incurred — payable only at closing
WBD legal fee cap ($275,000 plus disbursements): only amounts for work completed are due
Net estimated total sunk cost: ~$1,887,500 (legal fees + net forfeited deposit)
Retainer on deposit with C&H: $50,000 (evergreen; to be applied against final invoice)
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Alternative Refinancing Options
Existing Tidewater National Bank loan does not mature until June 1, 2024 — approximately 16 months of runway
Prepayment premium of 1.0% ($1,185,000) expires March 1, 2023 — any refinancing closing after that date eliminates this cost
Option 1: Approach alternative institutional lenders at current market terms — debt yield of 11.50% remains strong
Option 2: Negotiate a loan modification/extension with Tidewater National Bank to extend maturity beyond June 2024
Option 3: Pursue a smaller refinancing ($130M–$140M range) aligned with conservative 68% LTV at $192M appraised value
Option 4: Commission a new appraisal from a different firm — if value comes in higher, improved pricing may be available
Derek Huang and the Capital Markets team to evaluate market conditions and lender appetite
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Risk Considerations
Risks of Proceeding with Repriced Terms:
— Full recourse guaranty exposes VHG's corporate balance sheet to the full $139M obligation
— Cross-collateralization encumbers the Driftwood Bay Hotel, restricting future portfolio flexibility
— Net cash-out of only $8.065M does not justify the transaction costs and structural concessions
— 6.90% fixed rate significantly above current market for stabilized luxury hospitality assets
Risks of Termination:
— Forfeiture of up to $1,600,000 in deposits (mitigated by expected return of $800K rate lock deposit)
— Existing Tidewater loan matures June 1, 2024 — must secure refinancing or extension before then
— Rising interest rate environment may result in higher rates on alternative financing
— No guarantee a new appraisal will yield a higher value
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Calderwood & Harkness Recommendation
Recommendation: Authorize termination of the $160,000,000 refinancing with Pinnacle Atlantic Capital, LLC
The repriced terms fundamentally alter the economic and structural rationale for the refinancing:
— $24.2 million reduction in net cash-out proceeds
— 155 basis point rate increase (5.35% → 6.90%)
— Conversion from limited recourse to full recourse guaranty
— Cross-collateralization with the Driftwood Bay Hotel — portfolio encumbrance risk
Estimated cost of termination: ~$1.9 million (net forfeited deposit + legal fees) — manageable relative to the avoided downside risk
VHG retains 16 months of runway before Tidewater maturity to pursue alternatives
The property's fundamentals support refinancing at better terms when market conditions allow
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Proposed Actions & Next Steps
1. Board Resolution: Authorize VHG to terminate the PAC refinancing transaction
2. Termination Notice: Calderwood & Harkness to deliver formal termination notice to PAC (cc: WBD, Meridian Title)
3. Deposit Negotiation: C&H to negotiate deposit recovery — target: retain rate lock deposit ($800,000); accept forfeiture of good faith deposit ($1,600,000)
4. Instruct Meridian Title & Escrow, Inc. to hold deposits pending settlement agreement execution
5. Engage Derek Huang / Capital Markets to evaluate alternative refinancing strategies and begin lender outreach
6. Consider approaching Tidewater National Bank regarding potential loan modification or maturity extension as a backstop
7. Monitor market conditions for timing of new refinancing effort
8. Calderwood & Harkness to prepare matter closing memorandum and archive transaction files
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Appendix A — Financial Comparison Summary
Original Loan: $160,000,000 | Repriced Loan: $139,000,000 | Difference: ($21,000,000)
Original Rate: 5.35% | Repriced Rate: 6.90% | Difference: +155 bps
Original I/O Debt Service: $8,560,000/yr | Repriced: $9,591,000/yr | Difference: +$1,031,000/yr
Original DSCR: 2.15x | Repriced DSCR: 1.92x
Original Net Cash-Out: $32,265,000 | Repriced Net Cash-Out: $8,065,000 | Difference: ($24,200,000)
Guaranty: Limited Recourse → Full Recourse
Collateral: Single Asset → Cross-Collateral (+ Driftwood Bay Hotel, Sarasota)
Additional Reserves: $0 → $3,200,000 (PIP/Capital Improvement)
Debt Yield (both scenarios): 11.50% (NOI $18.4M ÷ $160M) — value-independent
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Appendix B — Key Parties and Contacts
Borrower: Coral Palms Resort Holdings LLC (FL LLC, wholly owned indirect subsidiary of VHG)
Guarantor: Verimark Hospitality Group Inc. (DE corp; Nasdaq: VMRK) — Conrad W. Elliston, CEO; Natasha Ricard, CFO; Derek Huang, SVP
Lender: Pinnacle Atlantic Capital, LLC — Martin Drubeck, MD; Jennifer Kwon, VP
Lender's Counsel: Whitford Baines & Driscoll LLP — Philip Tarrant Corporation (Partner); Catherine Yee (Associate)
Borrower's Counsel: Calderwood & Harkness LLP — Douglas Fairchild; Angela Fontaine; Grace Nakamura; Rafael Dominguez
Existing Lender: Tidewater National Bank, N.A. — Alan Prescott, SVP
Appraiser: Hargrove & Whitley Valuation Services LLC — Scott Tremaine, MAI, MRICS
Appraisal Review: Claybourne Advisory Group LLC
Title/Escrow: Meridian Title & Escrow, Inc. — Lisa Portman
Environmental: Oakridge Environmental Consulting Group, Inc. — Dr. James Whitmore
Insurance Broker: Castlegate Risk Advisors LLC — Monica Iglesias
Insurers: Southland Mutual Insurance Co. (P&C/windstorm); Bayfront Specialty Insurance Corp. (flood)
Auditor: Keswick & Holt LLP — Andrew Calloway, CPA
Surveyor: Landis & Shaw Surveying, Inc. — Robert Tran, PLS