counter-proposal-letter-to-pac.docx

1021-00007 · Verimark Hospitality Group · Appraisal & Repricing

counter-proposal-letter-to-pac.docx DOCUMENT Real Estate

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CALDERWOOD & HARKNESS LLP Attorneys at Law 100 Southeast Second Street, Suite 3800 Miami, Florida 33131 Telephone: (305) 444-7200 Facsimile: (305) 444-7201 www.calderwoodharkness.com

February 3, 2023

VIA EMAIL AND OVERNIGHT COURIER

Pinnacle Atlantic Capital, LLC 200 Lexington Avenue, 38th Floor New York, New York 10016

Attention: Martin Drubeck, Managing Director — Real Estate Lending

Jennifer Kwon, Vice President — Originations

Transmitted via counsel:

Whitford Baines & Driscoll LLP 1221 Avenue of the Americas, Suite 4400 New York, New York 10020

Attention: Philip Tarrant Corporation, Partner — Real Estate Finance

cc: Catherine Yee, Associate

Re: Proposed $160,000,000 First Mortgage Loan — Coral Palms Grand Resort & Spa, 99000 Overseas Highway, Key Largo, Monroe County, Florida 33037; Borrower: Coral Palms Resort Holdings LLC; Counter-Proposal to Revised Terms Dated January 27, 2023 (Reference: Commitment Letter dated December 9, 2022)

Dear Mr. Drubeck and Ms. Kwon:

1. Introduction and Purpose

Calderwood & Harkness LLP writes on behalf of its clients, Verimark Hospitality Group Inc. ("VHG") and Coral Palms Resort Holdings LLC (the "Borrower"), in response to the revised term proposal (the "Repriced Terms") delivered by Pinnacle Atlantic Capital, LLC ("PAC") on January 27, 2023, with respect to the above-referenced proposed first mortgage loan (the "Loan") secured by the Coral Palms Grand Resort & Spa located at 99000 Overseas Highway, Key Largo, Monroe County, Florida 33037 (the "Property").

We acknowledge receipt of PAC's Repriced Terms, which were transmitted in response to the appraisal report prepared by Hargrove & Whitley Valuation Services LLC dated January 20, 2023, with an effective date of value of January 6, 2023 (the "Appraisal"). As you are aware, the Appraisal concluded a market value for the Property of $192,000,000 (the "Appraised Value"). The Repriced Terms reflect PAC's determination that significant modifications to the originally committed terms set forth in the Commitment Letter dated December 9, 2022 (the "Commitment Letter") are warranted in light of the Appraised Value.

VHG has carefully and thoroughly reviewed the Repriced Terms. While VHG continues to believe that the Appraised Value materially understates the Property's fair market value — VHG's internal valuation, prepared by its capital markets and asset management teams and reviewed by independent consultants, reflects a value of approximately $235,000,000, representing a shortfall of approximately $43,000,000 or 18.30% relative to the Appraised Value — VHG is prepared to engage constructively with PAC to find a mutually acceptable loan structure that reflects the economic realities of the Property and the strength of VHG as a sponsor.

In furtherance of this objective, VHG has retained Claybourne Advisory Group LLC ("Claybourne") as an independent appraisal review consultant, effective January 24, 2023. Claybourne's preliminary analysis supports VHG's view that certain comparable property selections utilized in the Hargrove & Whitley report, as well as certain capitalization rate assumptions applied therein, warrant reconsideration. VHG anticipates that Claybourne's formal review will be completed in the near term and will be transmitted to PAC and its counsel promptly upon finalization. Without prejudice to VHG's position regarding the Appraised Value, VHG submits this counter-proposal in an effort to advance the transaction on a commercially reasonable basis.

VHG expressly reserves all rights under the Commitment Letter, including without limitation the position that the Repriced Terms constitute a material modification of the commitment originally extended by PAC, and all attendant rights and remedies arising therefrom. Nothing in this letter shall be construed as a waiver of any such rights.

The purpose of this letter is to present VHG's counter-proposal to the Repriced Terms (the "Counter-Proposal"), which is set forth in detail below.

2. Summary of PAC's Repriced Terms (January 27, 2023)

For ease of reference and to establish a clear basis for comparison, VHG recites PAC's Repriced Terms as delivered on January 27, 2023, as follows:

(a) Loan Amount: $139,000,000, reduced from the originally committed amount of $160,000,000, representing a loan-to-value ratio ("LTV") of approximately 72.40% based on the Appraised Value of $192,000,000.

(b) Interest Rate: 6.90% per annum, fixed, representing an increase of 155 basis points from the originally committed fixed rate of 5.35% per annum.

(c) Guaranty Structure: Full recourse guaranty by VHG, upgraded from the limited recourse / "bad boy" carve-out guaranty structure originally contemplated under the Commitment Letter.

(d) Cross-Collateralization: Cross-collateralization with a second VHG-owned property, specifically the Driftwood Bay Hotel located in Sarasota, Florida (the "Driftwood Bay Hotel").

(e) Additional Reserves: An additional upfront PIP/capital improvement reserve in the amount of $3,200,000, to be funded at closing in addition to the original upfront reserves of $4,800,000 (for tax, insurance, FF&E, and capital reserves) as contemplated under the Commitment Letter. Total upfront reserves under the Repriced Terms: $8,000,000.

VHG notes the following financial impacts of the Repriced Terms, which are significant and, taken together, fundamentally alter the economics of the transaction:

(i) Annual Interest-Only Debt Service. Annual interest-only debt service increases from $8,560,000 under the original terms ($160,000,000 × 5.35%) to $9,591,000 under the Repriced Terms ($139,000,000 × 6.90%), an increase of $1,031,000 per annum, or approximately 12.04%.

(ii) Debt Service Coverage Ratio ("DSCR"). Based on the Property's trailing twelve-month net operating income ("T-12 NOI") of $18,400,000, the interest-only DSCR decreases from 2.15x under the original terms to 1.92x under the Repriced Terms. While both ratios remain above the covenanted minimum, the direction of movement is notable given that the rate increase is not driven by any deterioration in the Property's cash flow performance.

(iii) Net Cash-Out to Borrower. Net cash-out proceeds available to the Borrower decrease from approximately $32,265,000 under the original terms to approximately $8,065,000 under the Repriced Terms, a reduction of $24,200,000 or approximately 75.0%. The calculation of repriced net cash-out is as follows:

$139,000,000 (Repriced Loan Amount) Less: $118,500,000 (Tidewater National Bank existing loan payoff) Less: $1,185,000 (Prepayment premium — 1.0% of Tidewater outstanding balance) Less: $3,250,000 (Estimated closing costs) Less: $4,800,000 (Original upfront reserves) Less: $3,200,000 (Additional PIP/capital improvement reserve) = $8,065,000 (Estimated net cash-out under Repriced Terms)

The magnitude of the reduction in net cash-out proceeds is of particular concern to VHG, as the cash-out component was a material element of VHG's capital plan and the basis on which the transaction was initially structured and negotiated.

3. VHG's Position on the Repriced Terms

VHG views several elements of the Repriced Terms as commercially untenable, both individually and in combination. The Repriced Terms, taken as a whole, represent a fundamental departure from the economics and structure of the transaction as originally negotiated and committed by PAC. VHG's specific concerns are as follows.

Rate Increase is Disproportionate. The 155 basis point increase in the fixed interest rate — from 5.35% to 6.90% — is disproportionate to the circumstances. The rate increase does not reflect a deterioration in the Property's operating performance, a change in VHG's creditworthiness, or a shift in the broader interest rate environment of comparable magnitude since the date of the Commitment Letter. Rather, the rate increase appears to be driven entirely by the LTV adjustment resulting from the Appraised Value. VHG submits that a rate adjustment of this magnitude is not warranted given the Property's strong cash flow profile and the Borrower's substantial equity in the Property.

Full Recourse Guaranty is Inconsistent with Market Practice and Corporate Governance. The conversion from a limited recourse / bad boy carve-out guaranty to a full recourse guaranty by VHG fundamentally alters the credit structure and risk allocation of the Loan. The Commitment Letter dated December 9, 2022 expressly contemplated a limited recourse guaranty, and VHG negotiated and executed the Commitment Letter on that basis. Full recourse guaranties are inconsistent with market practice for commercial mortgage loans of this size and type, particularly where the borrower is a single-purpose entity and the guarantor is a publicly traded company. VHG is listed on the Nasdaq Stock Market under the ticker symbol VMRK and has fiduciary obligations to its shareholders that must be considered in connection with any guaranty commitment. A full recourse guaranty on a single-asset mortgage loan of $139,000,000 would require Board-level approval and public disclosure, and would be viewed unfavorably by VHG's investors and rating agencies.

Cross-Collateralization is Impractical and Unacceptable. The requirement to cross-collateralize the Driftwood Bay Hotel is a material change to the transaction structure that was not contemplated under the Commitment Letter and is unacceptable to VHG. The Commitment Letter was negotiated and executed on a single-asset, single-property basis, and VHG expects that framework to be honored. Moreover, as discussed in greater detail in Section 4.4 below, cross-collateralization of the Driftwood Bay Hotel would create significant practical complications, including the triggering of cross-default provisions under the Driftwood Bay Hotel's existing financing arrangements.

Additional Reserve is Excessive. The additional PIP/capital improvement reserve of $3,200,000 is excessive in light of the comprehensive $47,000,000 renovation of the Property completed in August 2021, only approximately eighteen months prior to the date hereof. The Property is in excellent physical condition, and near-term capital improvement requirements are minimal.

Notwithstanding the foregoing concerns, VHG acknowledges certain realities of the current situation. The original Commitment Letter contemplated a maximum LTV of 68.0% and a minimum debt yield of 9.5%, with a loan amount of $160,000,000. VHG acknowledges that the Appraised Value of $192,000,000 makes the original $160,000,000 loan amount mathematically impossible at the 68.0% LTV covenant, as $192,000,000 × 68.0% = $130,560,000 maximum loan. VHG further acknowledges that PAC's decision to stretch to an LTV of 72.40% in the Repriced Terms represents some accommodation on PAC's part.

However, VHG emphasizes that the debt yield metric remains exceptionally strong. At the originally committed loan amount of $160,000,000, the debt yield is 11.50% ($18,400,000 NOI ÷ $160,000,000), well above the 9.5% minimum threshold established in the Commitment Letter. At the repriced loan amount of $139,000,000, the debt yield is even stronger at 13.24% ($18,400,000 ÷ $139,000,000). The debt yield metric — widely recognized as the most reliable measure of a commercial mortgage loan's credit quality — demonstrates that the Property's cash flow comfortably supports a loan amount well in excess of $139,000,000.

VHG further emphasizes the following factors, which collectively support a more favorable loan structure than the Repriced Terms:

• Capital Investment. VHG completed a comprehensive renovation of the Property in August 2021 at a total cost of approximately $47,000,000, encompassing guest rooms, public areas, food and beverage outlets, meeting and conference facilities, spa and wellness center, pool complex, and marina improvements. The Property is in best-in-class physical condition for the Upper Keys luxury resort submarket.

• Strong T-12 Operating Performance. The Property's trailing twelve-month operating metrics are robust: occupancy of 71.3%, average daily rate ("ADR") of $389, revenue per available room ("RevPAR") of $277.36, and total revenue of approximately $62,800,000. These metrics compare favorably to competitive set benchmarks and reflect the positive impact of the renovation program.

• VHG Creditworthiness. VHG is a well-capitalized, publicly traded hospitality company with 2022 consolidated revenue of approximately $487,000,000 and a total enterprise value of approximately $1.9 billion. VHG's portfolio comprises 14 luxury and upscale resort properties across key leisure destinations in the southeastern United States and the Caribbean. VHG's management team has an established track record of successful hotel operations, capital recycling, and debt management.

For these reasons, VHG submits the Counter-Proposal set forth in Section 4 below.

4. VHG's Counter-Proposal — Modified Terms

VHG respectfully submits the following Counter-Proposal, which represents a good-faith effort to bridge the gap between the original Commitment Letter terms and the Repriced Terms on a basis that is commercially reasonable for both parties.

4.1 Loan Amount

VHG proposes a loan amount of $145,000,000, which represents a compromise between the originally committed amount of $160,000,000 and the Repriced Terms amount of $139,000,000. VHG believes this amount appropriately balances PAC's LTV concerns with VHG's capital requirements and the Property's demonstrated cash flow capacity.

At the Appraised Value of $192,000,000, a loan amount of $145,000,000 yields an LTV of approximately 75.52% ($145,000,000 ÷ $192,000,000). VHG acknowledges that this exceeds the original 68.0% maximum LTV covenant set forth in the Commitment Letter. However, VHG notes the following mitigating factors:

(a) The debt yield at a $145,000,000 loan amount is 12.69% ($18,400,000 ÷ $145,000,000), which is well in excess of the 9.5% minimum debt yield threshold established in the Commitment Letter and provides a substantial cushion above that threshold.

(b) The DSCR at this loan amount and VHG's proposed interest rate (discussed in Section 4.2 below) remains robust, as detailed further herein.

(c) VHG is willing to provide additional credit enhancements, including an expanded carve-out guaranty and a cash-funded debt service reserve account, as described in Sections 4.3 and 4.4 below, to provide PAC with additional comfort and liquidity protection in support of the increased LTV.

The estimated net cash-out to the Borrower at the proposed loan amount of $145,000,000, excluding the additional PIP reserve that VHG seeks to cap (as described in Section 4.5 below), is calculated as follows:

$145,000,000 (Proposed Loan Amount) Less: $118,500,000 (Tidewater National Bank existing loan payoff) Less: $1,185,000 (Prepayment premium — 1.0% of Tidewater outstanding balance) Less: $3,250,000 (Estimated closing costs) Less: $4,800,000 (Original upfront reserves) = $17,265,000 (Estimated net cash-out, before additional PIP reserve)

This represents a meaningful improvement over the $8,065,000 net cash-out under the Repriced Terms while still reflecting a significant reduction from the $32,265,000 originally projected, demonstrating VHG's willingness to make substantial concessions in furtherance of a negotiated resolution.

4.2 Interest Rate

VHG proposes a fixed interest rate of 5.95% per annum, which represents an increase of 60 basis points from the originally committed fixed rate of 5.35%, but is 95 basis points below the repriced rate of 6.90%.

VHG acknowledges that some rate adjustment may be warranted in light of the LTV movement and current market conditions since the date of the Commitment Letter. However, a 155 basis point increase is disproportionate to the circumstances and does not reflect the Property's strong cash flow profile, VHG's creditworthiness, or the risk characteristics of the Loan. A 60 basis point adjustment appropriately compensates PAC for the incremental LTV risk while maintaining a debt service burden that is consistent with the Property's operating capacity and the parties' original expectations.

At a loan amount of $145,000,000 and a fixed interest rate of 5.95%, the annual interest-only debt service would be $8,627,500, yielding a DSCR of 2.13x ($18,400,000 T-12 NOI ÷ $8,627,500 annual I/O debt service). This DSCR is essentially comparable to the original DSCR of 2.15x under the Commitment Letter terms, confirming that the proposed rate and loan amount combination preserves the credit quality and debt service coverage that PAC originally underwrote.

VHG is willing to accept a modest rate increase above the originally committed 5.35% rate in exchange for PAC maintaining the other core structural terms of the Commitment Letter, including, critically, the limited recourse guaranty structure and single-asset collateral framework, as described below.

4.3 Guaranty Structure — Maintain Limited Recourse / "Bad Boy" Carve-Out Guaranty

VHG objects to the conversion to a full recourse guaranty and insists on maintaining the originally negotiated limited recourse / "bad boy" carve-out guaranty structure. The Commitment Letter dated December 9, 2022 expressly contemplated a limited recourse guaranty by VHG, with full recourse exposure limited to customary "bad boy" carve-out events, including fraud, intentional misrepresentation, misappropriation of rents or insurance proceeds, voluntary bankruptcy filing, and environmental indemnity obligations. The conversion to full recourse fundamentally and materially alters the credit structure, risk allocation, and economics of the transaction.

VHG emphasizes the following specific objections to the full recourse guaranty requirement:

(a) Market Practice. Full recourse guaranties are not customary or standard in the commercial real estate lending market for single-asset mortgage loans of this size and type, particularly where the borrower is a special-purpose entity capitalized with substantial equity and the guarantor is a publicly traded company with a diversified portfolio of assets. The standard market structure for loans of this character is a non-recourse or limited recourse loan with customary carve-out guaranties, and VHG expects this transaction to conform to that standard.

(b) Corporate Governance and Fiduciary Obligations. As a Nasdaq-listed company (ticker: VMRK), VHG has fiduciary obligations to its shareholders. A full recourse guaranty on a single-asset mortgage loan of $145,000,000 (or $139,000,000, as proposed by PAC) would constitute a material contingent liability requiring Board authorization, public disclosure in VHG's periodic filings with the Securities and Exchange Commission, and potentially adverse treatment by VHG's auditors and credit rating agencies. The magnitude and nature of a full recourse guaranty obligation is inconsistent with VHG's corporate governance framework and risk management policies, and VHG's Board of Directors has not authorized and would be unlikely to authorize such an obligation in connection with this transaction.

(c) Disproportionate Risk Transfer. The Loan is supported by a first-priority mortgage lien on a property with an Appraised Value of $192,000,000 (and an internal valuation of $235,000,000), substantial equity cushion, and strong debt service coverage. In these circumstances, a full recourse guaranty represents a disproportionate transfer of risk from PAC to VHG and is not justified by the credit characteristics of the Loan.

As an accommodation to PAC, and in recognition of the increased LTV, VHG is willing to consider an expansion of the list of carve-out events or "bad boy" triggers beyond those customarily included in guaranties of this type, to provide PAC with additional comfort. For example, VHG would be open to discussing the inclusion of additional carve-out triggers related to failure to maintain required insurance coverages, material non-compliance with environmental laws, or unauthorized transfers of ownership interests in the Borrower. However, the guaranty must remain limited in nature and must not extend to repayment of the Loan upon maturity or upon a non-"bad boy" default event.

The guarantor shall remain Verimark Hospitality Group Inc., as originally contemplated under the Commitment Letter.

4.4 Cross-Collateralization — Elimination of Driftwood Bay Hotel Requirement

VHG categorically rejects the cross-collateralization of the Driftwood Bay Hotel located in Sarasota, Florida. This requirement is unacceptable to VHG for the following reasons:

(a) Departure from Commitment Letter Structure. The Commitment Letter was negotiated and executed on a single-asset, single-property basis. The Loan is intended to be secured solely by the Coral Palms Grand Resort & Spa, and no cross-collateralization requirement was contemplated, discussed, or agreed upon at any point during the negotiation or execution of the Commitment Letter. Requiring cross-collateralization of a second property constitutes a material change to the fundamental transaction structure.

(b) Existing Financing Complications. The Driftwood Bay Hotel is subject to its own financing arrangements and existing mortgage encumbrances. Cross-collateralization of the Driftwood Bay Hotel with the Loan would trigger cross-default provisions under the Driftwood Bay Hotel's existing loan documents and would require the prior written consent of the Driftwood Bay Hotel's existing lender. Obtaining such consent would create significant complexity, delay, and cost, and there is no assurance that such consent would be forthcoming. VHG is not in a position to jeopardize its relationship with the Driftwood Bay Hotel's existing lender or to risk a default under that facility.

(c) Portfolio Management Considerations. Cross-collateralization would limit VHG's ability to manage, refinance, sell, or otherwise dispose of either the Coral Palms Grand Resort & Spa or the Driftwood Bay Hotel independently, creating constraints on VHG's portfolio management flexibility that are unacceptable and unnecessary.

As an alternative to cross-collateralization, and to provide PAC with equivalent liquidity protection, VHG is willing to offer a cash-funded debt service reserve account ("DSRA") in the amount of six (6) months of interest-only debt service, calculated at VHG's proposed loan amount of $145,000,000 and proposed interest rate of 5.95%. The DSRA would be funded at closing in the amount of approximately $4,313,750 (calculated as $8,627,500 annual I/O debt service ÷ 2). The DSRA would be held by PAC or its designated servicer and would be available to PAC to cure any shortfall in debt service payments, subject to customary replenishment obligations by the Borrower. VHG believes that a fully funded, six-month DSRA provides PAC with robust liquidity protection — equivalent to or exceeding the practical benefit of a cross-collateral pledge of a separate property — without encumbering a second asset or creating the operational and legal complications described above.

4.5 Reserves — Cap on Additional PIP/Capital Improvement Reserve

VHG accepts the original upfront reserves of $4,800,000 as contemplated under the Commitment Letter, which include reserves for real estate taxes, insurance premiums, furniture, fixtures, and equipment ("FF&E"), and general capital reserves. These reserves were sized appropriately at the time of the Commitment Letter and remain appropriate.

VHG objects, however, to the additional PIP/capital improvement reserve of $3,200,000 included in the Repriced Terms. This additional reserve requirement is excessive and unwarranted in light of the comprehensive renovation of the Property completed in August 2021 at a total cost of approximately $47,000,000. The renovation, which was completed only approximately eighteen months prior to the date of this letter, addressed substantially all major capital improvement items at the Property, including guest room renovations, lobby and public area upgrades, food and beverage outlet improvements, meeting and conference facility enhancements, spa and wellness center expansion, pool complex redesign, and marina improvements. Near-term capital improvement requirements are minimal, and the Property is operating at a high standard of physical quality and condition.

VHG proposes capping the additional PIP/capital improvement reserve at $1,500,000 (rather than $3,200,000), which is sufficient to address any near-term capital improvement items that may be identified in connection with the Property Improvement Plan or condition assessment. VHG further proposes that the additional reserve be subject to provisions permitting release of funds to the Borrower upon demonstration that the funded capital improvement items have been completed in a manner satisfactory to PAC, subject to customary verification and inspection requirements.

Under VHG's Counter-Proposal, total upfront reserves at closing would be:

$4,800,000 (Original upfront reserves) + $1,500,000 (Capped additional PIP reserve) = $6,300,000 (Total upfront reserves)

4.6 Other Terms — Confirm Consistency with Original Commitment

VHG proposes that all other material terms of the Loan remain as set forth in the Commitment Letter dated December 9, 2022, without modification. For the avoidance of doubt, the following terms shall remain unchanged:

(a) Loan Term: Five (5) years from the funding date.

(b) Amortization: Interest-only for years one (1) and two (2); thirty (30)-year amortization schedule for years three (3) through five (5).

(c) Extension Options: Two (2) one-year extension options, each subject to: (i) no Event of Default existing at the time of exercise or at the commencement of the extension term; (ii) a minimum DSCR of not less than 1.25x as of the date of exercise; and (iii) payment of an extension fee equal to 0.25% of the then-outstanding principal balance of the Loan per extension.

(d) Commitment Fee: 0.50% of the loan amount, payable at closing.

(e) Exit Fee: 0.25% of the outstanding principal balance of the Loan at the time of repayment.

(f) Cash Management: Cash management, lockbox, and reserve mechanics in accordance with the loan documents currently under negotiation between the parties' respective counsel.

(g) Governing Law: The State of Florida.

5. Summary Comparison Table

The following table presents a side-by-side comparison of the original Commitment Letter terms, PAC's Repriced Terms, and VHG's Counter-Proposal for ease of reference:

Note: Estimated net cash-out under VHG Counter-Proposal calculated as: $145,000,000 − $118,500,000 (Tidewater payoff) − $1,185,000 (prepayment premium) − $3,250,000 (estimated closing costs) − $4,800,000 (original upfront reserves) − $1,500,000 (capped additional PIP reserve) = $15,765,000. LTV for Original Commitment calculated against Appraised Value of $192,000,000 for comparison purposes only; the original $160,000,000 loan amount was committed based on a then-anticipated appraised value sufficient to satisfy the 68.0% maximum LTV covenant.

6. Timing and Process

VHG notes that VHG's good faith deposit in the amount of $1,600,000 and rate lock deposit in the amount of $800,000 — a combined total of $2,400,000 — remain on deposit with Meridian Title & Escrow, Inc., held by Lisa Portman, Title Officer, located at 9100 South Dadeland Boulevard, Suite 1500, Miami, Florida 33156. VHG expects these deposits to continue to be held in accordance with the terms of the applicable escrow instructions and the Commitment Letter pending resolution of this Counter-Proposal.

VHG is prepared to move expeditiously to negotiate and finalize modified terms if the parties can reach agreement on the basis of this Counter-Proposal, or on such other modified terms as may be mutually acceptable. VHG's counsel and management team are available to engage in further discussions, whether by telephone, videoconference, or in-person meeting, at PAC's convenience.

VHG notes that timing is of particular importance in connection with this transaction. The Borrower's existing first mortgage loan with Tidewater National Bank has a maturity date of June 1, 2024. A prepayment premium of 1.0% of the outstanding principal balance (approximately $1,185,000, based on the current outstanding balance of $118,500,000) applies if the Tidewater loan is prepaid prior to March 1, 2023. VHG's transaction projections and net cash-out estimates assume payment of this prepayment premium; however, timely resolution of this Counter-Proposal is important to VHG's overall capital planning and to the management of prepayment premium exposure. Unnecessary delay in reaching agreement on modified terms could affect the overall transaction timeline and economics.

Accordingly, VHG respectfully requests that PAC respond to this Counter-Proposal by no later than February 10, 2023. VHG remains available for a call or meeting to discuss the Counter-Proposal terms at PAC's earliest convenience, and our team can be reached through the undersigned or through Grace Nakamura, Lead Associate, at (305) 444-7218 or gnakamura@calderwoodharkness.com.

7. Reservation of Rights

VHG and the Borrower expressly reserve all rights, claims, remedies, and defenses under the Commitment Letter dated December 9, 2022, including without limitation:

(a) The right to terminate the Commitment Letter and the transactions contemplated thereby in accordance with the terms thereof;

(b) The right to a refund of all deposits, including the good faith deposit and rate lock deposit, in the event that PAC's Repriced Terms are determined to constitute a material modification of the commitment, a breach of PAC's obligations under the Commitment Letter, or a constructive termination thereof;

(c) All rights and remedies at law and in equity, including without limitation the right to seek damages for breach of contract; and

(d) The right to challenge the Appraised Value and to submit supplemental valuation evidence, including the findings and conclusions of Claybourne Advisory Group LLC, in support of VHG's position regarding the fair market value of the Property.

Nothing in this Counter-Proposal, or in any prior or subsequent communications relating hereto, shall constitute a waiver of any rights, claims, or defenses of VHG or the Borrower, or an acceptance of PAC's Repriced Terms. This letter is submitted without prejudice and shall not be construed as an admission of any kind regarding the Appraised Value, the appropriateness of the Repriced Terms, or any other matter.

We appreciate PAC's willingness to work constructively toward a mutually acceptable resolution, and we look forward to receiving PAC's response to this Counter-Proposal. Please do not hesitate to contact us with any questions.

Very truly yours,

CALDERWOOD & HARKNESS LLP

By: ________

Douglas Fairchild Partner — Real Estate Direct: (305) 444-7212

Email: dfairchild@calderwoodharkness.com

On behalf of Verimark Hospitality Group Inc. and Coral Palms Resort Holdings LLC

C&H Client Matter No.: 1021-00007

cc (via email):

Conrad W. Elliston, Chairman & Chief Executive Officer, Verimark Hospitality Group Inc., 1400 Bayshore Boulevard, Suite 2200, Miami, Florida 33131

Natasha Ricard, Chief Financial Officer, Verimark Hospitality Group Inc.

Derek Huang, Senior Vice President — Capital Markets & Treasury, Verimark Hospitality Group Inc.

Angela Fontaine, Billing Partner, Calderwood & Harkness LLP

Grace Nakamura, Lead Associate, Calderwood & Harkness LLP

Philip Tarrant Corporation, Partner, Whitford Baines & Driscoll LLP, 1221 Avenue of the Americas, Suite 4400, New York, New York 10020

Catherine Yee, Associate, Whitford Baines & Driscoll LLP

Enclosures / Attachments:

1. Summary comparison table (included in body of letter — Section 5)

2. Claybourne Advisory Group LLC preliminary appraisal review findings (to be transmitted separately upon completion of Claybourne's formal review)

Term	Original Commitment (12/9/22)	PAC Repriced Terms (1/27/23)	VHG Counter-Proposal
Loan Amount	$160,000,000	$139,000,000	$145,000,000
Interest Rate	5.35% fixed	6.90% fixed	5.95% fixed
LTV (at $192M Appraised Value)	83.33%	72.40%	75.52%
Debt Yield	11.50%	13.24%	12.69%
Guaranty	Limited recourse / bad boy carve-out	Full recourse	Limited recourse (expanded carve-outs)
Cross-Collateral	None	Driftwood Bay Hotel, Sarasota, FL	None (cash-funded DSRA alternative of ~$4,313,750)
Additional PIP Reserve	None	$3,200,000	$1,500,000
Total Upfront Reserves	$4,800,000	$8,000,000	$6,300,000
Annual I/O Debt Service	$8,560,000	$9,591,000	$8,627,500
DSCR (I/O, at $18.4M NOI)	2.15x	1.92x	2.13x
Estimated Net Cash-Out	$32,265,000	$8,065,000	$15,765,000

CALDERWOOD & HARKNESS LLP Attorneys at Law 100 Southeast Second Street, Suite 3800 Miami, Florida 33131 Telephone: (305) 444-7200 Facsimile: (305) 444-7201 www.calderwoodharkness.com
February 3, 2023
VIA EMAIL AND OVERNIGHT COURIER
Pinnacle Atlantic Capital, LLC 200 Lexington Avenue, 38th Floor New York, New York 10016
Attention: Martin Drubeck, Managing Director — Real Estate Lending
Jennifer Kwon, Vice President — Originations
Transmitted via counsel:
Whitford Baines & Driscoll LLP 1221 Avenue of the Americas, Suite 4400 New York, New York 10020
Attention: Philip Tarrant Corporation, Partner — Real Estate Finance
cc: Catherine Yee, Associate
Re: Proposed $160,000,000 First Mortgage Loan — Coral Palms Grand Resort & Spa, 99000 Overseas Highway, Key Largo, Monroe County, Florida 33037; Borrower: Coral Palms Resort Holdings LLC; Counter-Proposal to Revised Terms Dated January 27, 2023 (Reference: Commitment Letter dated December 9, 2022)
Dear Mr. Drubeck and Ms. Kwon:
1. Introduction and Purpose
Calderwood & Harkness LLP writes on behalf of its clients, Verimark Hospitality Group Inc. ("VHG") and Coral Palms Resort Holdings LLC (the "Borrower"), in response to the revised term proposal (the "Repriced Terms") delivered by Pinnacle Atlantic Capital, LLC ("PAC") on January 27, 2023, with respect to the above-referenced proposed first mortgage loan (the "Loan") secured by the Coral Palms Grand Resort & Spa located at 99000 Overseas Highway, Key Largo, Monroe County, Florida 33037 (the "Property").
We acknowledge receipt of PAC's Repriced Terms, which were transmitted in response to the appraisal report prepared by Hargrove & Whitley Valuation Services LLC dated January 20, 2023, with an effective date of value of January 6, 2023 (the "Appraisal"). As you are aware, the Appraisal concluded a market value for the Property of $192,000,000 (the "Appraised Value"). The Repriced Terms reflect PAC's determination that significant modifications to the originally committed terms set forth in the Commitment Letter dated December 9, 2022 (the "Commitment Letter") are warranted in light of the Appraised Value.
VHG has carefully and thoroughly reviewed the Repriced Terms. While VHG continues to believe that the Appraised Value materially understates the Property's fair market value — VHG's internal valuation, prepared by its capital markets and asset management teams and reviewed by independent consultants, reflects a value of approximately $235,000,000, representing a shortfall of approximately $43,000,000 or 18.30% relative to the Appraised Value — VHG is prepared to engage constructively with PAC to find a mutually acceptable loan structure that reflects the economic realities of the Property and the strength of VHG as a sponsor.
In furtherance of this objective, VHG has retained Claybourne Advisory Group LLC ("Claybourne") as an independent appraisal review consultant, effective January 24, 2023. Claybourne's preliminary analysis supports VHG's view that certain comparable property selections utilized in the Hargrove & Whitley report, as well as certain capitalization rate assumptions applied therein, warrant reconsideration. VHG anticipates that Claybourne's formal review will be completed in the near term and will be transmitted to PAC and its counsel promptly upon finalization. Without prejudice to VHG's position regarding the Appraised Value, VHG submits this counter-proposal in an effort to advance the transaction on a commercially reasonable basis.
VHG expressly reserves all rights under the Commitment Letter, including without limitation the position that the Repriced Terms constitute a material modification of the commitment originally extended by PAC, and all attendant rights and remedies arising therefrom. Nothing in this letter shall be construed as a waiver of any such rights.
The purpose of this letter is to present VHG's counter-proposal to the Repriced Terms (the "Counter-Proposal"), which is set forth in detail below.
2. Summary of PAC's Repriced Terms (January 27, 2023)
For ease of reference and to establish a clear basis for comparison, VHG recites PAC's Repriced Terms as delivered on January 27, 2023, as follows:
(a) Loan Amount: $139,000,000, reduced from the originally committed amount of $160,000,000, representing a loan-to-value ratio ("LTV") of approximately 72.40% based on the Appraised Value of $192,000,000.
(b) Interest Rate: 6.90% per annum, fixed, representing an increase of 155 basis points from the originally committed fixed rate of 5.35% per annum.
(c) Guaranty Structure: Full recourse guaranty by VHG, upgraded from the limited recourse / "bad boy" carve-out guaranty structure originally contemplated under the Commitment Letter.
(d) Cross-Collateralization: Cross-collateralization with a second VHG-owned property, specifically the Driftwood Bay Hotel located in Sarasota, Florida (the "Driftwood Bay Hotel").
(e) Additional Reserves: An additional upfront PIP/capital improvement reserve in the amount of $3,200,000, to be funded at closing in addition to the original upfront reserves of $4,800,000 (for tax, insurance, FF&E, and capital reserves) as contemplated under the Commitment Letter. Total upfront reserves under the Repriced Terms: $8,000,000.
VHG notes the following financial impacts of the Repriced Terms, which are significant and, taken together, fundamentally alter the economics of the transaction:
(i) Annual Interest-Only Debt Service. Annual interest-only debt service increases from $8,560,000 under the original terms ($160,000,000 × 5.35%) to $9,591,000 under the Repriced Terms ($139,000,000 × 6.90%), an increase of $1,031,000 per annum, or approximately 12.04%.
(ii) Debt Service Coverage Ratio ("DSCR"). Based on the Property's trailing twelve-month net operating income ("T-12 NOI") of $18,400,000, the interest-only DSCR decreases from 2.15x under the original terms to 1.92x under the Repriced Terms. While both ratios remain above the covenanted minimum, the direction of movement is notable given that the rate increase is not driven by any deterioration in the Property's cash flow performance.
(iii) Net Cash-Out to Borrower. Net cash-out proceeds available to the Borrower decrease from approximately $32,265,000 under the original terms to approximately $8,065,000 under the Repriced Terms, a reduction of $24,200,000 or approximately 75.0%. The calculation of repriced net cash-out is as follows:
$139,000,000 (Repriced Loan Amount) Less: $118,500,000 (Tidewater National Bank existing loan payoff) Less: $1,185,000 (Prepayment premium — 1.0% of Tidewater outstanding balance) Less: $3,250,000 (Estimated closing costs) Less: $4,800,000 (Original upfront reserves) Less: $3,200,000 (Additional PIP/capital improvement reserve) = $8,065,000 (Estimated net cash-out under Repriced Terms)
The magnitude of the reduction in net cash-out proceeds is of particular concern to VHG, as the cash-out component was a material element of VHG's capital plan and the basis on which the transaction was initially structured and negotiated.
3. VHG's Position on the Repriced Terms
VHG views several elements of the Repriced Terms as commercially untenable, both individually and in combination. The Repriced Terms, taken as a whole, represent a fundamental departure from the economics and structure of the transaction as originally negotiated and committed by PAC. VHG's specific concerns are as follows.
Rate Increase is Disproportionate. The 155 basis point increase in the fixed interest rate — from 5.35% to 6.90% — is disproportionate to the circumstances. The rate increase does not reflect a deterioration in the Property's operating performance, a change in VHG's creditworthiness, or a shift in the broader interest rate environment of comparable magnitude since the date of the Commitment Letter. Rather, the rate increase appears to be driven entirely by the LTV adjustment resulting from the Appraised Value. VHG submits that a rate adjustment of this magnitude is not warranted given the Property's strong cash flow profile and the Borrower's substantial equity in the Property.
Full Recourse Guaranty is Inconsistent with Market Practice and Corporate Governance. The conversion from a limited recourse / bad boy carve-out guaranty to a full recourse guaranty by VHG fundamentally alters the credit structure and risk allocation of the Loan. The Commitment Letter dated December 9, 2022 expressly contemplated a limited recourse guaranty, and VHG negotiated and executed the Commitment Letter on that basis. Full recourse guaranties are inconsistent with market practice for commercial mortgage loans of this size and type, particularly where the borrower is a single-purpose entity and the guarantor is a publicly traded company. VHG is listed on the Nasdaq Stock Market under the ticker symbol VMRK and has fiduciary obligations to its shareholders that must be considered in connection with any guaranty commitment. A full recourse guaranty on a single-asset mortgage loan of $139,000,000 would require Board-level approval and public disclosure, and would be viewed unfavorably by VHG's investors and rating agencies.
Cross-Collateralization is Impractical and Unacceptable. The requirement to cross-collateralize the Driftwood Bay Hotel is a material change to the transaction structure that was not contemplated under the Commitment Letter and is unacceptable to VHG. The Commitment Letter was negotiated and executed on a single-asset, single-property basis, and VHG expects that framework to be honored. Moreover, as discussed in greater detail in Section 4.4 below, cross-collateralization of the Driftwood Bay Hotel would create significant practical complications, including the triggering of cross-default provisions under the Driftwood Bay Hotel's existing financing arrangements.
Additional Reserve is Excessive. The additional PIP/capital improvement reserve of $3,200,000 is excessive in light of the comprehensive $47,000,000 renovation of the Property completed in August 2021, only approximately eighteen months prior to the date hereof. The Property is in excellent physical condition, and near-term capital improvement requirements are minimal.
Notwithstanding the foregoing concerns, VHG acknowledges certain realities of the current situation. The original Commitment Letter contemplated a maximum LTV of 68.0% and a minimum debt yield of 9.5%, with a loan amount of $160,000,000. VHG acknowledges that the Appraised Value of $192,000,000 makes the original $160,000,000 loan amount mathematically impossible at the 68.0% LTV covenant, as $192,000,000 × 68.0% = $130,560,000 maximum loan. VHG further acknowledges that PAC's decision to stretch to an LTV of 72.40% in the Repriced Terms represents some accommodation on PAC's part.
However, VHG emphasizes that the debt yield metric remains exceptionally strong. At the originally committed loan amount of $160,000,000, the debt yield is 11.50% ($18,400,000 NOI ÷ $160,000,000), well above the 9.5% minimum threshold established in the Commitment Letter. At the repriced loan amount of $139,000,000, the debt yield is even stronger at 13.24% ($18,400,000 ÷ $139,000,000). The debt yield metric — widely recognized as the most reliable measure of a commercial mortgage loan's credit quality — demonstrates that the Property's cash flow comfortably supports a loan amount well in excess of $139,000,000.
VHG further emphasizes the following factors, which collectively support a more favorable loan structure than the Repriced Terms:
• Capital Investment. VHG completed a comprehensive renovation of the Property in August 2021 at a total cost of approximately $47,000,000, encompassing guest rooms, public areas, food and beverage outlets, meeting and conference facilities, spa and wellness center, pool complex, and marina improvements. The Property is in best-in-class physical condition for the Upper Keys luxury resort submarket.
• Strong T-12 Operating Performance. The Property's trailing twelve-month operating metrics are robust: occupancy of 71.3%, average daily rate ("ADR") of $389, revenue per available room ("RevPAR") of $277.36, and total revenue of approximately $62,800,000. These metrics compare favorably to competitive set benchmarks and reflect the positive impact of the renovation program.
• VHG Creditworthiness. VHG is a well-capitalized, publicly traded hospitality company with 2022 consolidated revenue of approximately $487,000,000 and a total enterprise value of approximately $1.9 billion. VHG's portfolio comprises 14 luxury and upscale resort properties across key leisure destinations in the southeastern United States and the Caribbean. VHG's management team has an established track record of successful hotel operations, capital recycling, and debt management.
For these reasons, VHG submits the Counter-Proposal set forth in Section 4 below.
4. VHG's Counter-Proposal — Modified Terms
VHG respectfully submits the following Counter-Proposal, which represents a good-faith effort to bridge the gap between the original Commitment Letter terms and the Repriced Terms on a basis that is commercially reasonable for both parties.
4.1 Loan Amount
VHG proposes a loan amount of $145,000,000, which represents a compromise between the originally committed amount of $160,000,000 and the Repriced Terms amount of $139,000,000. VHG believes this amount appropriately balances PAC's LTV concerns with VHG's capital requirements and the Property's demonstrated cash flow capacity.
At the Appraised Value of $192,000,000, a loan amount of $145,000,000 yields an LTV of approximately 75.52% ($145,000,000 ÷ $192,000,000). VHG acknowledges that this exceeds the original 68.0% maximum LTV covenant set forth in the Commitment Letter. However, VHG notes the following mitigating factors:
(a) The debt yield at a $145,000,000 loan amount is 12.69% ($18,400,000 ÷ $145,000,000), which is well in excess of the 9.5% minimum debt yield threshold established in the Commitment Letter and provides a substantial cushion above that threshold.
(b) The DSCR at this loan amount and VHG's proposed interest rate (discussed in Section 4.2 below) remains robust, as detailed further herein.
(c) VHG is willing to provide additional credit enhancements, including an expanded carve-out guaranty and a cash-funded debt service reserve account, as described in Sections 4.3 and 4.4 below, to provide PAC with additional comfort and liquidity protection in support of the increased LTV.
The estimated net cash-out to the Borrower at the proposed loan amount of $145,000,000, excluding the additional PIP reserve that VHG seeks to cap (as described in Section 4.5 below), is calculated as follows:
$145,000,000 (Proposed Loan Amount) Less: $118,500,000 (Tidewater National Bank existing loan payoff) Less: $1,185,000 (Prepayment premium — 1.0% of Tidewater outstanding balance) Less: $3,250,000 (Estimated closing costs) Less: $4,800,000 (Original upfront reserves) = $17,265,000 (Estimated net cash-out, before additional PIP reserve)
This represents a meaningful improvement over the $8,065,000 net cash-out under the Repriced Terms while still reflecting a significant reduction from the $32,265,000 originally projected, demonstrating VHG's willingness to make substantial concessions in furtherance of a negotiated resolution.
4.2 Interest Rate
VHG proposes a fixed interest rate of 5.95% per annum, which represents an increase of 60 basis points from the originally committed fixed rate of 5.35%, but is 95 basis points below the repriced rate of 6.90%.
VHG acknowledges that some rate adjustment may be warranted in light of the LTV movement and current market conditions since the date of the Commitment Letter. However, a 155 basis point increase is disproportionate to the circumstances and does not reflect the Property's strong cash flow profile, VHG's creditworthiness, or the risk characteristics of the Loan. A 60 basis point adjustment appropriately compensates PAC for the incremental LTV risk while maintaining a debt service burden that is consistent with the Property's operating capacity and the parties' original expectations.
At a loan amount of $145,000,000 and a fixed interest rate of 5.95%, the annual interest-only debt service would be $8,627,500, yielding a DSCR of 2.13x ($18,400,000 T-12 NOI ÷ $8,627,500 annual I/O debt service). This DSCR is essentially comparable to the original DSCR of 2.15x under the Commitment Letter terms, confirming that the proposed rate and loan amount combination preserves the credit quality and debt service coverage that PAC originally underwrote.
VHG is willing to accept a modest rate increase above the originally committed 5.35% rate in exchange for PAC maintaining the other core structural terms of the Commitment Letter, including, critically, the limited recourse guaranty structure and single-asset collateral framework, as described below.
4.3 Guaranty Structure — Maintain Limited Recourse / "Bad Boy" Carve-Out Guaranty
VHG objects to the conversion to a full recourse guaranty and insists on maintaining the originally negotiated limited recourse / "bad boy" carve-out guaranty structure. The Commitment Letter dated December 9, 2022 expressly contemplated a limited recourse guaranty by VHG, with full recourse exposure limited to customary "bad boy" carve-out events, including fraud, intentional misrepresentation, misappropriation of rents or insurance proceeds, voluntary bankruptcy filing, and environmental indemnity obligations. The conversion to full recourse fundamentally and materially alters the credit structure, risk allocation, and economics of the transaction.
VHG emphasizes the following specific objections to the full recourse guaranty requirement:
(a) Market Practice. Full recourse guaranties are not customary or standard in the commercial real estate lending market for single-asset mortgage loans of this size and type, particularly where the borrower is a special-purpose entity capitalized with substantial equity and the guarantor is a publicly traded company with a diversified portfolio of assets. The standard market structure for loans of this character is a non-recourse or limited recourse loan with customary carve-out guaranties, and VHG expects this transaction to conform to that standard.
(b) Corporate Governance and Fiduciary Obligations. As a Nasdaq-listed company (ticker: VMRK), VHG has fiduciary obligations to its shareholders. A full recourse guaranty on a single-asset mortgage loan of $145,000,000 (or $139,000,000, as proposed by PAC) would constitute a material contingent liability requiring Board authorization, public disclosure in VHG's periodic filings with the Securities and Exchange Commission, and potentially adverse treatment by VHG's auditors and credit rating agencies. The magnitude and nature of a full recourse guaranty obligation is inconsistent with VHG's corporate governance framework and risk management policies, and VHG's Board of Directors has not authorized and would be unlikely to authorize such an obligation in connection with this transaction.
(c) Disproportionate Risk Transfer. The Loan is supported by a first-priority mortgage lien on a property with an Appraised Value of $192,000,000 (and an internal valuation of $235,000,000), substantial equity cushion, and strong debt service coverage. In these circumstances, a full recourse guaranty represents a disproportionate transfer of risk from PAC to VHG and is not justified by the credit characteristics of the Loan.
As an accommodation to PAC, and in recognition of the increased LTV, VHG is willing to consider an expansion of the list of carve-out events or "bad boy" triggers beyond those customarily included in guaranties of this type, to provide PAC with additional comfort. For example, VHG would be open to discussing the inclusion of additional carve-out triggers related to failure to maintain required insurance coverages, material non-compliance with environmental laws, or unauthorized transfers of ownership interests in the Borrower. However, the guaranty must remain limited in nature and must not extend to repayment of the Loan upon maturity or upon a non-"bad boy" default event.
The guarantor shall remain Verimark Hospitality Group Inc., as originally contemplated under the Commitment Letter.
4.4 Cross-Collateralization — Elimination of Driftwood Bay Hotel Requirement
VHG categorically rejects the cross-collateralization of the Driftwood Bay Hotel located in Sarasota, Florida. This requirement is unacceptable to VHG for the following reasons:
(a) Departure from Commitment Letter Structure. The Commitment Letter was negotiated and executed on a single-asset, single-property basis. The Loan is intended to be secured solely by the Coral Palms Grand Resort & Spa, and no cross-collateralization requirement was contemplated, discussed, or agreed upon at any point during the negotiation or execution of the Commitment Letter. Requiring cross-collateralization of a second property constitutes a material change to the fundamental transaction structure.
(b) Existing Financing Complications. The Driftwood Bay Hotel is subject to its own financing arrangements and existing mortgage encumbrances. Cross-collateralization of the Driftwood Bay Hotel with the Loan would trigger cross-default provisions under the Driftwood Bay Hotel's existing loan documents and would require the prior written consent of the Driftwood Bay Hotel's existing lender. Obtaining such consent would create significant complexity, delay, and cost, and there is no assurance that such consent would be forthcoming. VHG is not in a position to jeopardize its relationship with the Driftwood Bay Hotel's existing lender or to risk a default under that facility.
(c) Portfolio Management Considerations. Cross-collateralization would limit VHG's ability to manage, refinance, sell, or otherwise dispose of either the Coral Palms Grand Resort & Spa or the Driftwood Bay Hotel independently, creating constraints on VHG's portfolio management flexibility that are unacceptable and unnecessary.
As an alternative to cross-collateralization, and to provide PAC with equivalent liquidity protection, VHG is willing to offer a cash-funded debt service reserve account ("DSRA") in the amount of six (6) months of interest-only debt service, calculated at VHG's proposed loan amount of $145,000,000 and proposed interest rate of 5.95%. The DSRA would be funded at closing in the amount of approximately $4,313,750 (calculated as $8,627,500 annual I/O debt service ÷ 2). The DSRA would be held by PAC or its designated servicer and would be available to PAC to cure any shortfall in debt service payments, subject to customary replenishment obligations by the Borrower. VHG believes that a fully funded, six-month DSRA provides PAC with robust liquidity protection — equivalent to or exceeding the practical benefit of a cross-collateral pledge of a separate property — without encumbering a second asset or creating the operational and legal complications described above.
4.5 Reserves — Cap on Additional PIP/Capital Improvement Reserve
VHG accepts the original upfront reserves of $4,800,000 as contemplated under the Commitment Letter, which include reserves for real estate taxes, insurance premiums, furniture, fixtures, and equipment ("FF&E"), and general capital reserves. These reserves were sized appropriately at the time of the Commitment Letter and remain appropriate.
VHG objects, however, to the additional PIP/capital improvement reserve of $3,200,000 included in the Repriced Terms. This additional reserve requirement is excessive and unwarranted in light of the comprehensive renovation of the Property completed in August 2021 at a total cost of approximately $47,000,000. The renovation, which was completed only approximately eighteen months prior to the date of this letter, addressed substantially all major capital improvement items at the Property, including guest room renovations, lobby and public area upgrades, food and beverage outlet improvements, meeting and conference facility enhancements, spa and wellness center expansion, pool complex redesign, and marina improvements. Near-term capital improvement requirements are minimal, and the Property is operating at a high standard of physical quality and condition.
VHG proposes capping the additional PIP/capital improvement reserve at $1,500,000 (rather than $3,200,000), which is sufficient to address any near-term capital improvement items that may be identified in connection with the Property Improvement Plan or condition assessment. VHG further proposes that the additional reserve be subject to provisions permitting release of funds to the Borrower upon demonstration that the funded capital improvement items have been completed in a manner satisfactory to PAC, subject to customary verification and inspection requirements.
Under VHG's Counter-Proposal, total upfront reserves at closing would be:
$4,800,000 (Original upfront reserves) + $1,500,000 (Capped additional PIP reserve) = $6,300,000 (Total upfront reserves)
4.6 Other Terms — Confirm Consistency with Original Commitment
VHG proposes that all other material terms of the Loan remain as set forth in the Commitment Letter dated December 9, 2022, without modification. For the avoidance of doubt, the following terms shall remain unchanged:
(a) Loan Term: Five (5) years from the funding date.
(b) Amortization: Interest-only for years one (1) and two (2); thirty (30)-year amortization schedule for years three (3) through five (5).
(c) Extension Options: Two (2) one-year extension options, each subject to: (i) no Event of Default existing at the time of exercise or at the commencement of the extension term; (ii) a minimum DSCR of not less than 1.25x as of the date of exercise; and (iii) payment of an extension fee equal to 0.25% of the then-outstanding principal balance of the Loan per extension.
(d) Commitment Fee: 0.50% of the loan amount, payable at closing.
(e) Exit Fee: 0.25% of the outstanding principal balance of the Loan at the time of repayment.
(f) Cash Management: Cash management, lockbox, and reserve mechanics in accordance with the loan documents currently under negotiation between the parties' respective counsel.
(g) Governing Law: The State of Florida.
5. Summary Comparison Table
The following table presents a side-by-side comparison of the original Commitment Letter terms, PAC's Repriced Terms, and VHG's Counter-Proposal for ease of reference:
Note: Estimated net cash-out under VHG Counter-Proposal calculated as: $145,000,000 − $118,500,000 (Tidewater payoff) − $1,185,000 (prepayment premium) − $3,250,000 (estimated closing costs) − $4,800,000 (original upfront reserves) − $1,500,000 (capped additional PIP reserve) = $15,765,000. LTV for Original Commitment calculated against Appraised Value of $192,000,000 for comparison purposes only; the original $160,000,000 loan amount was committed based on a then-anticipated appraised value sufficient to satisfy the 68.0% maximum LTV covenant.
6. Timing and Process
VHG notes that VHG's good faith deposit in the amount of $1,600,000 and rate lock deposit in the amount of $800,000 — a combined total of $2,400,000 — remain on deposit with Meridian Title & Escrow, Inc., held by Lisa Portman, Title Officer, located at 9100 South Dadeland Boulevard, Suite 1500, Miami, Florida 33156. VHG expects these deposits to continue to be held in accordance with the terms of the applicable escrow instructions and the Commitment Letter pending resolution of this Counter-Proposal.
VHG is prepared to move expeditiously to negotiate and finalize modified terms if the parties can reach agreement on the basis of this Counter-Proposal, or on such other modified terms as may be mutually acceptable. VHG's counsel and management team are available to engage in further discussions, whether by telephone, videoconference, or in-person meeting, at PAC's convenience.
VHG notes that timing is of particular importance in connection with this transaction. The Borrower's existing first mortgage loan with Tidewater National Bank has a maturity date of June 1, 2024. A prepayment premium of 1.0% of the outstanding principal balance (approximately $1,185,000, based on the current outstanding balance of $118,500,000) applies if the Tidewater loan is prepaid prior to March 1, 2023. VHG's transaction projections and net cash-out estimates assume payment of this prepayment premium; however, timely resolution of this Counter-Proposal is important to VHG's overall capital planning and to the management of prepayment premium exposure. Unnecessary delay in reaching agreement on modified terms could affect the overall transaction timeline and economics.
Accordingly, VHG respectfully requests that PAC respond to this Counter-Proposal by no later than February 10, 2023. VHG remains available for a call or meeting to discuss the Counter-Proposal terms at PAC's earliest convenience, and our team can be reached through the undersigned or through Grace Nakamura, Lead Associate, at (305) 444-7218 or gnakamura@calderwoodharkness.com.
7. Reservation of Rights
VHG and the Borrower expressly reserve all rights, claims, remedies, and defenses under the Commitment Letter dated December 9, 2022, including without limitation:
(a) The right to terminate the Commitment Letter and the transactions contemplated thereby in accordance with the terms thereof;
(b) The right to a refund of all deposits, including the good faith deposit and rate lock deposit, in the event that PAC's Repriced Terms are determined to constitute a material modification of the commitment, a breach of PAC's obligations under the Commitment Letter, or a constructive termination thereof;
(c) All rights and remedies at law and in equity, including without limitation the right to seek damages for breach of contract; and
(d) The right to challenge the Appraised Value and to submit supplemental valuation evidence, including the findings and conclusions of Claybourne Advisory Group LLC, in support of VHG's position regarding the fair market value of the Property.
Nothing in this Counter-Proposal, or in any prior or subsequent communications relating hereto, shall constitute a waiver of any rights, claims, or defenses of VHG or the Borrower, or an acceptance of PAC's Repriced Terms. This letter is submitted without prejudice and shall not be construed as an admission of any kind regarding the Appraised Value, the appropriateness of the Repriced Terms, or any other matter.
We appreciate PAC's willingness to work constructively toward a mutually acceptable resolution, and we look forward to receiving PAC's response to this Counter-Proposal. Please do not hesitate to contact us with any questions.
Very truly yours,
CALDERWOOD & HARKNESS LLP
By: ________
Douglas Fairchild Partner — Real Estate Direct: (305) 444-7212
Email: dfairchild@calderwoodharkness.com
On behalf of Verimark Hospitality Group Inc. and Coral Palms Resort Holdings LLC
C&H Client Matter No.: 1021-00007
cc (via email):
Conrad W. Elliston, Chairman & Chief Executive Officer, Verimark Hospitality Group Inc., 1400 Bayshore Boulevard, Suite 2200, Miami, Florida 33131
Natasha Ricard, Chief Financial Officer, Verimark Hospitality Group Inc.
Derek Huang, Senior Vice President — Capital Markets & Treasury, Verimark Hospitality Group Inc.
Angela Fontaine, Billing Partner, Calderwood & Harkness LLP
Grace Nakamura, Lead Associate, Calderwood & Harkness LLP
Philip Tarrant Corporation, Partner, Whitford Baines & Driscoll LLP, 1221 Avenue of the Americas, Suite 4400, New York, New York 10020
Catherine Yee, Associate, Whitford Baines & Driscoll LLP
Enclosures / Attachments:
1. Summary comparison table (included in body of letter — Section 5)
2. Claybourne Advisory Group LLC preliminary appraisal review findings (to be transmitted separately upon completion of Claybourne's formal review)
Term | Original Commitment (12/9/22) | PAC Repriced Terms (1/27/23) | VHG Counter-Proposal
Loan Amount | $160,000,000 | $139,000,000 | $145,000,000
Interest Rate | 5.35% fixed | 6.90% fixed | 5.95% fixed
LTV (at $192M Appraised Value) | 83.33% | 72.40% | 75.52%
Debt Yield | 11.50% | 13.24% | 12.69%
Guaranty | Limited recourse / bad boy carve-out | Full recourse | Limited recourse (expanded carve-outs)
Cross-Collateral | None | Driftwood Bay Hotel, Sarasota, FL | None (cash-funded DSRA alternative of ~$4,313,750)
Additional PIP Reserve | None | $3,200,000 | $1,500,000
Total Upfront Reserves | $4,800,000 | $8,000,000 | $6,300,000
Annual I/O Debt Service | $8,560,000 | $9,591,000 | $8,627,500
DSCR (I/O, at $18.4M NOI) | 2.15x | 1.92x | 2.13x
Estimated Net Cash-Out | $32,265,000 | $8,065,000 | $15,765,000

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