1021-00007 · Verimark Hospitality Group · Appraisal & Repricing

letter-to-pac-appraisal-challenge.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) 448-7200 Facsimile: (305) 448-7201 www.calderwoodharkness.com

January 25, 2023

Via Email and Overnight Courier

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

With a copy to:

Martin Drubeck, Managing Director – Real Estate Lending Jennifer Kwon, Vice President – Originations Pinnacle Atlantic Capital, LLC 200 Lexington Avenue, 38th Floor New York, NY 10016

Re: Appraisal of the Coral Palms Grand Resort & Spa, 99000 Overseas Highway, Key Largo, Monroe County, Florida 33037; Commitment Letter dated December 9, 2022, between Coral Palms Resort Holdings LLC ("Borrower") and Pinnacle Atlantic Capital, LLC ("Lender") — Proposed $160,000,000 First Mortgage Loan

Client Matter No.: 1021-00007

Dear Mr. Tarrant Corporation:

I. Introduction and Purpose

This firm represents Verimark Hospitality Group Inc. ("VHG") and its wholly owned indirect subsidiary, Coral Palms Resort Holdings LLC (the "Borrower"), in connection with the proposed $160,000,000 first mortgage loan (the "Loan") from Pinnacle Atlantic Capital, LLC (the "Lender" or "PAC") pursuant to that certain Commitment Letter dated December 9, 2022 (the "Commitment Letter"). We write on behalf of our clients with respect to the appraisal report recently delivered to the parties, and we appreciate your attention to the matters discussed herein.

The purpose of this letter is to formally contest the appraised value set forth in the appraisal report prepared by Hargrove & Whitley Valuation Services LLC ("H&W"), dated January 20, 2023, with an effective date of value of January 6, 2023 (the "Appraisal" or the "H&W Appraisal"). The H&W Appraisal, prepared by Scott Tremaine, MAI, MRICS, concluded a market value of $192,000,000 for the Coral Palms Grand Resort & Spa (the "Property").

VHG respectfully submits that this valuation materially understates the Property's fair market value and, as detailed more fully below, contains significant methodological shortcomings that warrant reconsideration. In light of the concerns articulated in this letter, VHG requests that PAC either (a) direct H&W to reconsider the Appraisal in light of the supplemental data and analysis set forth herein, or (b) commission a second independent appraisal of the Property by a mutually agreeable appraiser possessing demonstrated expertise in the luxury resort hospitality sector within the South Florida and Florida Keys markets. VHG is prepared to bear the cost of such second appraisal. We believe that either course of action will demonstrate that the Property's fair market value substantially exceeds the conclusion reached by H&W.

II. Summary of Valuation Discrepancy

The magnitude of the gap between VHG's internal valuation and the H&W Appraisal is significant and warrants careful examination. VHG's internal valuation of the Property, which was prepared by its capital markets and asset management team and informed by current market data, independent broker opinions of value, and a detailed discounted cash flow analysis, supports a fair market value of approximately $235,000,000. The H&W Appraisal concluded a market value of $192,000,000. The resulting valuation shortfall is $43,000,000, representing an 18.30% variance below VHG's projection. A discrepancy of this magnitude is not merely a matter of reasonable professional judgment; it suggests that material inputs, assumptions, or comparable data points were either omitted or misapplied in the H&W analysis.

The impact of the H&W Appraisal on the proposed financing structure is substantial and, if left unaddressed, would fundamentally alter the economic terms of the transaction contemplated by the Commitment Letter:

• Loan-to-Value Ratio. At the appraised value of $192,000,000, the proposed $160,000,000 Loan implies a loan-to-value ratio ("LTV") of approximately 83.33%, which materially exceeds the maximum LTV of 68.0% set forth in the Commitment Letter. The Commitment Letter expressly provides that the Loan amount shall not exceed 68.0% of the "as-is" appraised value of the Property, and the H&W valuation renders the committed Loan amount impermissible under this covenant.

• Maximum Supportable Loan Amount. At a 68.0% LTV applied to the H&W appraised value, the maximum supportable loan amount would be only $130,560,000 — a reduction of $29,440,000 from the committed Loan amount of $160,000,000. Such a reduction would be devastating to the Borrower's capital structure and refinancing plan, and it would represent a material departure from the transaction that the parties negotiated and committed to in good faith.

• Debt Yield. Notwithstanding the valuation shortfall, the Property's debt yield — calculated as the trailing twelve-month net operating income of $18,400,000 divided by the proposed Loan amount of $160,000,000 — equals 11.50%, which continues to exceed the Commitment Letter's minimum debt yield threshold of 9.5% by a comfortable margin of 200 basis points. This metric indicates strong cash flow coverage and underscores VHG's position that the Property's income-generating capacity supports the proposed Loan amount, irrespective of the H&W valuation conclusion.

VHG believes that the H&W Appraisal contains significant methodological shortcomings and fails to account for material value-enhancing factors specific to the Property, each of which is discussed in detail in the sections that follow. The strength of the Property's operating fundamentals, as evidenced by the debt yield metric and the trailing twelve-month financial results, should provide PAC with additional confidence that a reconsideration of the Appraisal is both appropriate and warranted.

III. Property Overview and Recent Capital Investment

The Coral Palms Grand Resort & Spa is a full-service luxury oceanfront resort hotel situated on an irreplaceable site at 99000 Overseas Highway, Key Largo, Monroe County, Florida 33037. The Property is located in the Upper Florida Keys, an internationally recognized destination market characterized by extremely limited supply of comparable luxury resort accommodations, stringent land use and development regulations, and consistently strong leisure and group demand drivers. The following key property statistics are pertinent to the valuation analysis:

• Guest Rooms and Suites: 342 keys, comprising a mix of standard guest rooms, premium oceanview rooms, and multi-room suites

• Meeting and Event Space: Approximately 28,500 square feet of indoor and outdoor meeting and event facilities, including a grand ballroom, breakout rooms, and pre-function areas

• Spa: An 18,000-square-foot full-service spa offering treatment rooms, hydrotherapy facilities, a fitness center, and salon services

• Marina: A 42-slip marina accommodating vessels of varying sizes, a significant and differentiating amenity within the competitive set

• Food and Beverage: Three distinct food and beverage outlets, including a signature fine-dining restaurant, a casual oceanfront dining venue, and a poolside bar and grill

• Parking: A 1,200-space structured parking facility

• Gross Building Area: Approximately 412,000 square feet

• Site Area: Approximately 22.4 acres of oceanfront land

• Year of Original Construction: 2006

Of critical importance to the valuation analysis is the comprehensive renovation and capital improvement program that was completed in August 2021 at a total cost of approximately $47,000,000. This renovation encompassed a full rooms renovation across all 342 keys, a significant expansion and enhancement of the spa facility, marina improvements including dock resurfacing and slip upgrades, a complete food and beverage concept repositioning involving the introduction of new culinary concepts and full interior redesign of all three outlets, and a comprehensive conference center modernization including updated audiovisual systems, lighting, and finish materials.

The $47,000,000 investment represents approximately $137,427 per key — a substantial and meaningful reinvestment that positions the Property at the top of the competitive set in terms of physical condition, guest experience, and market appeal. This level of capital investment is consistent with, and in some cases exceeds, the per-key renovation expenditures observed in recent capital improvement programs undertaken at comparable luxury resort properties throughout the South Florida and Florida Keys markets.

It is particularly significant that the renovation was completed only approximately seventeen (17) months prior to the effective date of the H&W Appraisal. Accordingly, the Property's stabilized performance profile — as reflected in its trailing twelve-month operating results — should be understood as representative of the Property's enhanced physical condition and repositioned market positioning. The renovation is recent enough that the Property has not experienced meaningful physical depreciation since its completion, and the operating improvements attributable to the renovation are now fully embedded in the Property's financial performance.

VHG respectfully submits that the H&W Appraisal did not adequately account for the scope, recency, and value-creating impact of this renovation in its cost approach, income capitalization approach, or comparable sales selection. The failure to give appropriate weight to a $47,000,000 capital improvement program completed less than eighteen months prior to the valuation date is a material omission that, standing alone, calls into question the reliability of the concluded value.

IV. Trailing Twelve-Month Operating Performance

The Property's trailing twelve-month ("T-12") operating performance for the period ending September 30, 2022, demonstrates strong post-renovation financial results that validate VHG's internal valuation thesis and confirm the success of the capital improvement program. The key operating metrics for the T-12 period are as follows:

These metrics reflect the first full year of stabilized operations following completion of the $47,000,000 renovation in August 2021. The T-12 period captures the Property's performance across all four fiscal quarters, including both peak and off-peak demand periods, and thus provides a reliable and representative basis for income capitalization analysis.

The Property's RevPAR of $277.36 represents a significant premium within its competitive set in the Upper Keys luxury resort submarket. This RevPAR performance is the direct result of the Property's enhanced physical product, repositioned market positioning, and the strong demand fundamentals that characterize the Upper Florida Keys luxury resort market. VHG's asset management team has confirmed that the Property's ADR trajectory has continued to strengthen subsequent to the T-12 period, with preliminary data for the fourth quarter of 2022 indicating further ADR gains.

The NOI of $18,400,000 is the critical data point for purposes of the income capitalization analysis. This figure implies the following capitalization rates at the competing valuations:

• At VHG's internal valuation of $235,000,000: an implied capitalization rate of approximately 7.83% ($18,400,000 ÷ $235,000,000)

• At the H&W appraised value of $192,000,000: an implied capitalization rate of approximately 9.58% ($18,400,000 ÷ $192,000,000)

VHG submits that the implied capitalization rate of 9.58% at the H&W valuation is fundamentally inconsistent with recent transactional evidence for comparable luxury waterfront resort properties in South Florida and the Florida Keys. Based on VHG's review of publicly available transaction data, broker intelligence, and independent market research, comparable luxury waterfront resort properties in these markets have traded at capitalization rates in the range of approximately 6.75% to 8.25% over the past twenty-four months. The implied cap rate at the H&W valuation falls well outside this range and suggests that the H&W income capitalization analysis either applied an excessive capitalization rate, understated the Property's stabilized NOI, or both. Each of these concerns is addressed in the following section.

V. Objections to H&W Appraisal Methodology — Income Capitalization Approach

VHG has conducted a thorough review of the income capitalization approach set forth in the H&W Appraisal and has identified the following areas of significant concern. While VHG recognizes that professional appraisers may exercise reasonable judgment in selecting assumptions and inputs, the issues identified below go beyond the bounds of reasonable professional disagreement and, taken together, suggest a systematic undervaluation of the Property.

A. Capitalization Rate Selection

The capitalization rate applied by H&W in its direct capitalization analysis appears to reflect a risk premium that is not supported by current market conditions and that fails to account for several material value drivers specific to the Property. In particular, the selected capitalization rate does not appear to adequately reflect: (i) the Property's recently renovated condition, which significantly reduces near-term capital expenditure risk and physical obsolescence; (ii) the Property's unique oceanfront location in the Florida Keys, an irreplaceable setting that commands a premium in the resort investment market; and (iii) the scarcity value of comparable waterfront sites with existing entitlements for resort use in Monroe County, where the stringent Rate of Growth Ordinance ("ROGO") and other land use regulations severely constrain new development and effectively create a barrier to entry that enhances the value of existing entitled resort properties. VHG believes that a capitalization rate within the range of 7.50% to 8.25% would be more appropriate given these factors, and that the rate selected by H&W overstates the risk profile of the Property and its income stream.

B. Revenue Projections

H&W's projected stabilized revenue appears to discount the demonstrated post-renovation ADR and occupancy trajectory that the Property has achieved. As detailed in Section IV above, the Property's T-12 operating data through September 30, 2022, shows robust occupancy of 71.3% and an ADR of $389, yielding a RevPAR of $277.36. These are not aspirational projections; they are actual, achieved operating results. The H&W Appraisal does not appear to fully credit these demonstrated results in its forward stabilized revenue projections, instead applying what appear to be more conservative assumptions regarding occupancy, rate growth, and ancillary revenue contributions from the spa, marina, food and beverage, and meeting and event operations. VHG submits that any downward adjustment from the Property's demonstrated T-12 revenue performance requires specific justification tied to identified market or property-specific risk factors, and that no such justification is apparent from the Appraisal.

C. Expense Assumptions

VHG believes that certain operating expense line items in the H&W income model are overstated relative to the Property's actual operating history and the efficiencies that have been achieved through the recent renovation. The $47,000,000 renovation not only enhanced the revenue-generating capacity of the Property but also addressed deferred maintenance, upgraded building systems (including HVAC, electrical, and plumbing infrastructure), and implemented energy-efficiency improvements that have meaningfully reduced the Property's ongoing operating costs. VHG's actual operating expense data for the T-12 period reflects these efficiencies, and the H&W expense model does not appear to incorporate the Property's actual expense experience with appropriate weight. To the extent that H&W relied on industry benchmarks or expense ratios derived from properties that have not undergone comparable renovations, such reliance would overstate the Property's normalized expense burden and depress the concluded NOI.

D. Stabilized Net Operating Income

As a result of the foregoing concerns, the H&W Appraisal's stabilized NOI estimate appears to be materially lower than the Property's demonstrated T-12 NOI of $18,400,000, without adequate justification for the downward adjustment. VHG notes that the T-12 NOI reflects actual, audited operating results — not management projections — and that any departure from this demonstrated income level must be supported by specific, identified factors that would cause the Property's income to decline from its current trajectory. VHG has identified no such factors, and to VHG's knowledge, no material adverse changes in market conditions, competitive supply, or Property operations have occurred or are reasonably anticipated that would justify a reduction from the T-12 NOI.

VI. Objections to H&W Appraisal Methodology — Sales Comparison Approach

VHG has also identified significant concerns regarding the comparable sales selected by H&W in the sales comparison approach, which further undermine the reliability of the concluded value.

First, several of the comparable transactions cited in the H&W Appraisal involve properties that are materially dissimilar to the Coral Palms Grand Resort & Spa in one or more critical respects. Specifically, certain of the cited comparables appear to involve properties that (i) are located in non-oceanfront or non-Keys locations that lack the irreplaceable locational attributes of the subject Property, (ii) were in inferior physical condition at the time of sale and had not undergone capital improvement programs comparable in scope or recency to the Property's $47,000,000 renovation, (iii) possessed a materially different amenity base (e.g., no marina, smaller spa facilities, fewer food and beverage outlets, or significantly fewer meeting and event spaces), or (iv) were transacted at dates sufficiently removed from the effective date of the Appraisal that their sale prices may not reflect current market conditions in the luxury resort investment market. The use of such comparables, without adequate adjustments to account for these points of differentiation, introduces downward bias into the concluded value.

Second, the H&W Appraisal appears to give insufficient weight to more recent comparable transactions involving luxury waterfront resort properties in South Florida and the Florida Keys that support per-key values and implied capitalization rates more consistent with VHG's internal valuation. VHG is aware of several transactions in the relevant competitive market that closed within the twelve months preceding the effective date of the Appraisal and that reflect per-key valuations and cap rates substantially above those implied by the H&W conclusion. VHG will provide supplemental comparable transaction data supporting higher per-key values than those reflected in the H&W analysis, as described further in Section IX below.

Third, the per-key value analysis underscores the extent of the undervaluation. At VHG's internal valuation of $235,000,000, the implied per-key value is approximately $687,135 (i.e., $235,000,000 ÷ 342 keys). VHG believes this per-key value is well within the range of recent luxury resort transactions involving properties of comparable quality, location, and condition. By contrast, at the H&W appraised value of $192,000,000, the implied per-key value is approximately $561,404, which VHG submits materially undervalues the Property given its comprehensive recent renovation, premium oceanfront location, and extensive amenity base. VHG's supplemental comparable transaction data will demonstrate that recently transacted luxury resort properties with amenity profiles and locational attributes comparable to the Property have achieved per-key values meaningfully in excess of $561,404, and in many cases in excess of $687,135.

VII. Objections to H&W Appraisal Methodology — Cost Approach

While VHG recognizes that the cost approach is typically given less weight in the valuation of income-producing hotel properties, the cost approach nonetheless provides an important reasonableness check, and the concerns identified below further support the conclusion that the H&W Appraisal understates the Property's value.

The $47,000,000 renovation completed in August 2021 significantly enhanced the replacement cost basis of the Property. VHG submits that the H&W cost approach does not adequately reflect the current replacement cost of the improvements, particularly given the extraordinary construction cost escalation that has occurred in Monroe County and the Florida Keys. Building costs in the Keys are meaningfully higher than mainland Florida averages due to a confluence of factors, including the logistical constraints and costs associated with transporting materials over the Overseas Highway, the limited availability and higher cost of skilled construction labor in the island chain, and the stringent regulatory requirements imposed by Monroe County, the Florida Department of Environmental Protection, and various federal agencies with jurisdiction over coastal and marine environments. These factors result in replacement cost estimates for Keys resort properties that significantly exceed those applicable to comparable mainland properties, and the H&W cost approach must account for these premium construction costs to reach a reliable conclusion.

Furthermore, the cost of land alone for a comparable 22.4-acre oceanfront parcel in the Upper Keys — to the extent any such parcel were even available, which is highly doubtful given current land use restrictions and the near-total buildout of oceanfront resort-zoned sites in Monroe County — would represent a substantial portion of the total value. The scarcity of entitled oceanfront resort sites in the Florida Keys is well documented, and VHG believes that the H&W land valuation may be understated given the extreme supply constraints and the premium that the investment market places on irreplaceable waterfront locations with existing resort entitlements.

VIII. Independent Appraisal Review

In light of the significance of the valuation shortfall and the methodological concerns identified above, VHG has retained Claybourne Advisory Group LLC ("Claybourne"), an independent appraisal review and valuation consulting firm with nationally recognized expertise in the hospitality and resort sectors, effective January 24, 2023, to conduct a detailed review of the H&W Appraisal. Claybourne's engagement encompasses a comprehensive analysis of the H&W Appraisal's methodology, assumptions, comparable data, and conclusions across all three traditional approaches to value.

VHG anticipates that Claybourne's review will further substantiate the concerns identified herein and will provide a detailed technical critique suitable for submission to PAC and H&W. Claybourne's principals include MAI-designated appraisers and former senior professionals at nationally recognized valuation firms with extensive experience in the review and critique of hotel and resort appraisals, and VHG is confident that Claybourne's analysis will meet the highest professional standards.

VHG reserves the right to supplement this letter with Claybourne Advisory Group's findings and conclusions upon completion of its review. VHG anticipates that Claybourne's review will be substantially complete within approximately three to four weeks and will be delivered to all parties promptly thereafter.

IX. Supplemental Data to Be Provided

VHG is prepared to furnish the following supplemental materials to support a reconsideration of the appraised value and to facilitate a constructive dialogue among the parties regarding the appropriate valuation of the Property:

1. Updated trailing twelve-month operating statements through a more recent period, including preliminary unaudited results for the fourth quarter of 2022, to the extent available and in form satisfactory to PAC;

2. Detailed capital expenditure records for the $47,000,000 renovation, including a comprehensive scope of work summary, contractor invoices, change orders, completion documentation, and certificates of substantial completion;

3. Comparable transaction data for luxury waterfront resort hotel sales in South Florida and the Florida Keys, including transaction summaries, per-key metrics, implied capitalization rates, and source documentation;

4. Independent market reports and STR (Penmark Enterprises) data corroborating the Property's competitive positioning within the Upper Keys luxury resort submarket, including historical and forward-looking supply, demand, occupancy, ADR, and RevPAR trends;

5. VHG's internal discounted cash flow model and underlying assumptions supporting the $235,000,000 valuation, including revenue growth projections, operating expense assumptions, capital reserve estimates, terminal capitalization rate, and discount rate; and

6. The Claybourne Advisory Group LLC appraisal review report, when completed, including a detailed technical critique of the H&W Appraisal and, if appropriate, a supported indication of value.

In addition to the foregoing materials, VHG respectfully requests the opportunity to present these materials directly to H&W and to participate in a conference call among PAC, H&W, VHG, and their respective counsel to discuss the valuation methodology, data inputs, and areas of disagreement in a collaborative and constructive manner. VHG believes that a direct dialogue will be the most efficient means of resolving the valuation discrepancy and advancing the transaction toward closing on the terms contemplated by the Commitment Letter.

X. Formal Request for Relief

In light of the foregoing, VHG respectfully requests that PAC take one or both of the following actions to address the valuation shortfall:

1. Reconsideration. Direct Hargrove & Whitley Valuation Services LLC to reconsider its appraised value of the Property in light of the supplemental data, comparable transaction evidence, and methodological concerns identified herein and to be further detailed by Claybourne Advisory Group LLC. VHG requests that H&W be directed to give full and fair consideration to the supplemental materials to be provided by VHG and to issue a revised or supplemental appraisal report reflecting such reconsideration.

2. Second Appraisal. Commission a second independent appraisal of the Property by a mutually agreeable MAI-designated appraiser with demonstrated expertise in the valuation of luxury resort properties in the South Florida and Florida Keys markets. VHG is willing to bear the full cost of such second appraisal and is prepared to cooperate fully in the selection of a qualified appraiser and in providing all necessary Property access, documentation, and management interviews. VHG respectfully suggests that the parties agree upon a short list of qualified appraisers and jointly select the engagement appraiser within ten (10) business days of PAC's response to this letter.

VHG notes that the Commitment Letter dated December 9, 2022, contemplated a Loan amount of $160,000,000, and that both parties entered into the Commitment Letter in good faith based on a mutual understanding that the Property's value would support the proposed financing at the agreed-upon terms, including the 68.0% maximum LTV covenant. VHG invested significant time, resources, and professional fees in negotiating the Commitment Letter and preparing for the closing of the Loan in reliance on the committed terms, and the Borrower has incurred substantial out-of-pocket costs in connection with the due diligence process, including deposits, third-party reports, and legal fees.

The magnitude of the valuation shortfall — $43,000,000, or 18.30% below VHG's well-supported projection — warrants a thorough and rigorous re-examination of the H&W Appraisal before any repricing, downsizing, or restructuring of the committed Loan terms is considered. VHG submits that the concerns identified in this letter and the supplemental data to be provided create a compelling basis for reconsideration, and VHG is confident that a fair and thorough review of the evidence will result in a valuation that supports the proposed $160,000,000 Loan.

XI. Reservation of Rights

VHG and the Borrower hereby expressly reserve all rights, claims, and remedies under the Commitment Letter dated December 9, 2022, including without limitation any rights arising from or related to any proposed modification of the committed Loan terms — whether by reduction of the Loan amount, increase of the interest rate, imposition of additional conditions, or otherwise — that VHG may deem to constitute a material change to, or breach of, the terms and conditions set forth in the Commitment Letter.

Nothing contained in this letter shall be deemed or construed as a waiver of any right, remedy, or defense available to VHG or the Borrower under the Commitment Letter, under applicable law (including without limitation the laws of the State of New York, as specified in the Commitment Letter's governing law provision), or otherwise. VHG's decision to engage cooperatively with PAC in seeking a resolution of the valuation discrepancy shall not prejudice or limit any rights or remedies that VHG or the Borrower may have, whether at law or in equity.

VHG further reserves the right to challenge the H&W Appraisal through any available process or procedure, including but not limited to the submission of the Claybourne Advisory Group review report, the presentation of supplemental market evidence and comparable transaction data, the engagement of additional independent appraisers or valuation consultants, and the pursuit of any contractual or legal remedies that may be available under the Commitment Letter or applicable law.

XII. Conclusion and Request for Prompt Response

VHG and the Borrower remain fully committed to the proposed refinancing transaction and are eager to work cooperatively and in good faith with PAC to resolve the valuation issue identified herein in a manner that allows the transaction to proceed expeditiously on the terms contemplated by the Commitment Letter. VHG values its relationship with PAC and appreciates the significant effort that both parties have invested in bringing this transaction to its current stage. VHG is confident that a thorough review of the supplemental data and a reconsideration of the H&W Appraisal's methodology and conclusions will result in a valuation that supports the committed Loan amount.

Time is of the essence in addressing this matter. The transaction timeline is driven by the approaching maturity of the Borrower's existing first mortgage loan with Tidewater National Bank, which matures on June 1, 2024. While the maturity date provides a reasonable runway, the complexity of the proposed financing, the remaining due diligence and closing requirements, and the time that may be required for a reconsideration or second appraisal process underscore the importance of addressing the valuation issue promptly and without unnecessary delay.

VHG respectfully requests PAC's written response to this letter at the earliest practicable date, and in any event no later than February 3, 2023. VHG further proposes a conference call among VHG, the Borrower, PAC, H&W, and their respective counsel during the week of January 30, 2023, to discuss the matters raised herein and to agree upon a process and timeline for resolving the valuation discrepancy.

Please do not hesitate to contact the undersigned at (305) 448-7215 or dfairchild@calderwoodharkness.com to coordinate scheduling and to discuss any aspect of this letter.

We thank you for your prompt attention to this matter and look forward to your response.

Very truly yours,

CALDERWOOD & HARKNESS LLP

By: ________

Douglas Fairchild, Esq. Partner, Real Estate Calderwood & Harkness LLP 100 Southeast Second Street, Suite 3800 Miami, FL 33131 Telephone: (305) 448-7215

Email: dfairchild@calderwoodharkness.com

cc:

Conrad W. Elliston, Chairman & CEO, Verimark Hospitality Group Inc. Natasha Ricard, CFO, Verimark Hospitality Group Inc. Derek Huang, SVP – Capital Markets & Treasury, Verimark Hospitality Group Inc. Grace Nakamura, Esq., Calderwood & Harkness LLP Angela Fontaine, Esq., Calderwood & Harkness LLP Martin Drubeck, Managing Director – Real Estate Lending, Pinnacle Atlantic Capital, LLC Jennifer Kwon, Vice President – Originations, Pinnacle Atlantic Capital, LLC

Enclosures: None (supplemental data to follow under separate cover)

Metric	T-12 (Period Ending 9/30/2022)
Occupancy	71.3%
Average Daily Rate (ADR)	$389
Revenue Per Available Room (RevPAR)	$277.36
Total Revenue	Approximately $62,800,000
Net Operating Income (NOI)	Approximately $18,400,000

CALDERWOOD & HARKNESS LLP Attorneys at Law
100 Southeast Second Street, Suite 3800 Miami, Florida 33131
Telephone: (305) 448-7200 Facsimile: (305) 448-7201 www.calderwoodharkness.com
January 25, 2023
Via Email and Overnight Courier
Philip Tarrant Corporation, Esq. Partner Whitford Baines & Driscoll LLP 1221 Avenue of the Americas, Suite 4400 New York, NY 10020
With a copy to:
Martin Drubeck, Managing Director – Real Estate Lending Jennifer Kwon, Vice President – Originations Pinnacle Atlantic Capital, LLC 200 Lexington Avenue, 38th Floor New York, NY 10016
Re: Appraisal of the Coral Palms Grand Resort & Spa, 99000 Overseas Highway, Key Largo, Monroe County, Florida 33037; Commitment Letter dated December 9, 2022, between Coral Palms Resort Holdings LLC ("Borrower") and Pinnacle Atlantic Capital, LLC ("Lender") — Proposed $160,000,000 First Mortgage Loan
Client Matter No.: 1021-00007
Dear Mr. Tarrant Corporation:
I. Introduction and Purpose
This firm represents Verimark Hospitality Group Inc. ("VHG") and its wholly owned indirect subsidiary, Coral Palms Resort Holdings LLC (the "Borrower"), in connection with the proposed $160,000,000 first mortgage loan (the "Loan") from Pinnacle Atlantic Capital, LLC (the "Lender" or "PAC") pursuant to that certain Commitment Letter dated December 9, 2022 (the "Commitment Letter"). We write on behalf of our clients with respect to the appraisal report recently delivered to the parties, and we appreciate your attention to the matters discussed herein.
The purpose of this letter is to formally contest the appraised value set forth in the appraisal report prepared by Hargrove & Whitley Valuation Services LLC ("H&W"), dated January 20, 2023, with an effective date of value of January 6, 2023 (the "Appraisal" or the "H&W Appraisal"). The H&W Appraisal, prepared by Scott Tremaine, MAI, MRICS, concluded a market value of $192,000,000 for the Coral Palms Grand Resort & Spa (the "Property").
VHG respectfully submits that this valuation materially understates the Property's fair market value and, as detailed more fully below, contains significant methodological shortcomings that warrant reconsideration. In light of the concerns articulated in this letter, VHG requests that PAC either (a) direct H&W to reconsider the Appraisal in light of the supplemental data and analysis set forth herein, or (b) commission a second independent appraisal of the Property by a mutually agreeable appraiser possessing demonstrated expertise in the luxury resort hospitality sector within the South Florida and Florida Keys markets. VHG is prepared to bear the cost of such second appraisal. We believe that either course of action will demonstrate that the Property's fair market value substantially exceeds the conclusion reached by H&W.
II. Summary of Valuation Discrepancy
The magnitude of the gap between VHG's internal valuation and the H&W Appraisal is significant and warrants careful examination. VHG's internal valuation of the Property, which was prepared by its capital markets and asset management team and informed by current market data, independent broker opinions of value, and a detailed discounted cash flow analysis, supports a fair market value of approximately $235,000,000. The H&W Appraisal concluded a market value of $192,000,000. The resulting valuation shortfall is $43,000,000, representing an 18.30% variance below VHG's projection. A discrepancy of this magnitude is not merely a matter of reasonable professional judgment; it suggests that material inputs, assumptions, or comparable data points were either omitted or misapplied in the H&W analysis.
The impact of the H&W Appraisal on the proposed financing structure is substantial and, if left unaddressed, would fundamentally alter the economic terms of the transaction contemplated by the Commitment Letter:
•  Loan-to-Value Ratio. At the appraised value of $192,000,000, the proposed $160,000,000 Loan implies a loan-to-value ratio ("LTV") of approximately 83.33%, which materially exceeds the maximum LTV of 68.0% set forth in the Commitment Letter. The Commitment Letter expressly provides that the Loan amount shall not exceed 68.0% of the "as-is" appraised value of the Property, and the H&W valuation renders the committed Loan amount impermissible under this covenant.
•  Maximum Supportable Loan Amount. At a 68.0% LTV applied to the H&W appraised value, the maximum supportable loan amount would be only $130,560,000 — a reduction of $29,440,000 from the committed Loan amount of $160,000,000. Such a reduction would be devastating to the Borrower's capital structure and refinancing plan, and it would represent a material departure from the transaction that the parties negotiated and committed to in good faith.
•  Debt Yield. Notwithstanding the valuation shortfall, the Property's debt yield — calculated as the trailing twelve-month net operating income of $18,400,000 divided by the proposed Loan amount of $160,000,000 — equals 11.50%, which continues to exceed the Commitment Letter's minimum debt yield threshold of 9.5% by a comfortable margin of 200 basis points. This metric indicates strong cash flow coverage and underscores VHG's position that the Property's income-generating capacity supports the proposed Loan amount, irrespective of the H&W valuation conclusion.
VHG believes that the H&W Appraisal contains significant methodological shortcomings and fails to account for material value-enhancing factors specific to the Property, each of which is discussed in detail in the sections that follow. The strength of the Property's operating fundamentals, as evidenced by the debt yield metric and the trailing twelve-month financial results, should provide PAC with additional confidence that a reconsideration of the Appraisal is both appropriate and warranted.
III. Property Overview and Recent Capital Investment
The Coral Palms Grand Resort & Spa is a full-service luxury oceanfront resort hotel situated on an irreplaceable site at 99000 Overseas Highway, Key Largo, Monroe County, Florida 33037. The Property is located in the Upper Florida Keys, an internationally recognized destination market characterized by extremely limited supply of comparable luxury resort accommodations, stringent land use and development regulations, and consistently strong leisure and group demand drivers. The following key property statistics are pertinent to the valuation analysis:
•  Guest Rooms and Suites: 342 keys, comprising a mix of standard guest rooms, premium oceanview rooms, and multi-room suites
•  Meeting and Event Space: Approximately 28,500 square feet of indoor and outdoor meeting and event facilities, including a grand ballroom, breakout rooms, and pre-function areas
•  Spa: An 18,000-square-foot full-service spa offering treatment rooms, hydrotherapy facilities, a fitness center, and salon services
•  Marina: A 42-slip marina accommodating vessels of varying sizes, a significant and differentiating amenity within the competitive set
•  Food and Beverage: Three distinct food and beverage outlets, including a signature fine-dining restaurant, a casual oceanfront dining venue, and a poolside bar and grill
•  Parking: A 1,200-space structured parking facility
•  Gross Building Area: Approximately 412,000 square feet
•  Site Area: Approximately 22.4 acres of oceanfront land
•  Year of Original Construction: 2006
Of critical importance to the valuation analysis is the comprehensive renovation and capital improvement program that was completed in August 2021 at a total cost of approximately $47,000,000. This renovation encompassed a full rooms renovation across all 342 keys, a significant expansion and enhancement of the spa facility, marina improvements including dock resurfacing and slip upgrades, a complete food and beverage concept repositioning involving the introduction of new culinary concepts and full interior redesign of all three outlets, and a comprehensive conference center modernization including updated audiovisual systems, lighting, and finish materials.
The $47,000,000 investment represents approximately $137,427 per key — a substantial and meaningful reinvestment that positions the Property at the top of the competitive set in terms of physical condition, guest experience, and market appeal. This level of capital investment is consistent with, and in some cases exceeds, the per-key renovation expenditures observed in recent capital improvement programs undertaken at comparable luxury resort properties throughout the South Florida and Florida Keys markets.
It is particularly significant that the renovation was completed only approximately seventeen (17) months prior to the effective date of the H&W Appraisal. Accordingly, the Property's stabilized performance profile — as reflected in its trailing twelve-month operating results — should be understood as representative of the Property's enhanced physical condition and repositioned market positioning. The renovation is recent enough that the Property has not experienced meaningful physical depreciation since its completion, and the operating improvements attributable to the renovation are now fully embedded in the Property's financial performance.
VHG respectfully submits that the H&W Appraisal did not adequately account for the scope, recency, and value-creating impact of this renovation in its cost approach, income capitalization approach, or comparable sales selection. The failure to give appropriate weight to a $47,000,000 capital improvement program completed less than eighteen months prior to the valuation date is a material omission that, standing alone, calls into question the reliability of the concluded value.
IV. Trailing Twelve-Month Operating Performance
The Property's trailing twelve-month ("T-12") operating performance for the period ending September 30, 2022, demonstrates strong post-renovation financial results that validate VHG's internal valuation thesis and confirm the success of the capital improvement program. The key operating metrics for the T-12 period are as follows:
These metrics reflect the first full year of stabilized operations following completion of the $47,000,000 renovation in August 2021. The T-12 period captures the Property's performance across all four fiscal quarters, including both peak and off-peak demand periods, and thus provides a reliable and representative basis for income capitalization analysis.
The Property's RevPAR of $277.36 represents a significant premium within its competitive set in the Upper Keys luxury resort submarket. This RevPAR performance is the direct result of the Property's enhanced physical product, repositioned market positioning, and the strong demand fundamentals that characterize the Upper Florida Keys luxury resort market. VHG's asset management team has confirmed that the Property's ADR trajectory has continued to strengthen subsequent to the T-12 period, with preliminary data for the fourth quarter of 2022 indicating further ADR gains.
The NOI of $18,400,000 is the critical data point for purposes of the income capitalization analysis. This figure implies the following capitalization rates at the competing valuations:
•  At VHG's internal valuation of $235,000,000: an implied capitalization rate of approximately 7.83% ($18,400,000 ÷ $235,000,000)
•  At the H&W appraised value of $192,000,000: an implied capitalization rate of approximately 9.58% ($18,400,000 ÷ $192,000,000)
VHG submits that the implied capitalization rate of 9.58% at the H&W valuation is fundamentally inconsistent with recent transactional evidence for comparable luxury waterfront resort properties in South Florida and the Florida Keys. Based on VHG's review of publicly available transaction data, broker intelligence, and independent market research, comparable luxury waterfront resort properties in these markets have traded at capitalization rates in the range of approximately 6.75% to 8.25% over the past twenty-four months. The implied cap rate at the H&W valuation falls well outside this range and suggests that the H&W income capitalization analysis either applied an excessive capitalization rate, understated the Property's stabilized NOI, or both. Each of these concerns is addressed in the following section.
V. Objections to H&W Appraisal Methodology — Income Capitalization Approach
VHG has conducted a thorough review of the income capitalization approach set forth in the H&W Appraisal and has identified the following areas of significant concern. While VHG recognizes that professional appraisers may exercise reasonable judgment in selecting assumptions and inputs, the issues identified below go beyond the bounds of reasonable professional disagreement and, taken together, suggest a systematic undervaluation of the Property.
A. Capitalization Rate Selection
The capitalization rate applied by H&W in its direct capitalization analysis appears to reflect a risk premium that is not supported by current market conditions and that fails to account for several material value drivers specific to the Property. In particular, the selected capitalization rate does not appear to adequately reflect: (i) the Property's recently renovated condition, which significantly reduces near-term capital expenditure risk and physical obsolescence; (ii) the Property's unique oceanfront location in the Florida Keys, an irreplaceable setting that commands a premium in the resort investment market; and (iii) the scarcity value of comparable waterfront sites with existing entitlements for resort use in Monroe County, where the stringent Rate of Growth Ordinance ("ROGO") and other land use regulations severely constrain new development and effectively create a barrier to entry that enhances the value of existing entitled resort properties. VHG believes that a capitalization rate within the range of 7.50% to 8.25% would be more appropriate given these factors, and that the rate selected by H&W overstates the risk profile of the Property and its income stream.
B. Revenue Projections
H&W's projected stabilized revenue appears to discount the demonstrated post-renovation ADR and occupancy trajectory that the Property has achieved. As detailed in Section IV above, the Property's T-12 operating data through September 30, 2022, shows robust occupancy of 71.3% and an ADR of $389, yielding a RevPAR of $277.36. These are not aspirational projections; they are actual, achieved operating results. The H&W Appraisal does not appear to fully credit these demonstrated results in its forward stabilized revenue projections, instead applying what appear to be more conservative assumptions regarding occupancy, rate growth, and ancillary revenue contributions from the spa, marina, food and beverage, and meeting and event operations. VHG submits that any downward adjustment from the Property's demonstrated T-12 revenue performance requires specific justification tied to identified market or property-specific risk factors, and that no such justification is apparent from the Appraisal.
C. Expense Assumptions
VHG believes that certain operating expense line items in the H&W income model are overstated relative to the Property's actual operating history and the efficiencies that have been achieved through the recent renovation. The $47,000,000 renovation not only enhanced the revenue-generating capacity of the Property but also addressed deferred maintenance, upgraded building systems (including HVAC, electrical, and plumbing infrastructure), and implemented energy-efficiency improvements that have meaningfully reduced the Property's ongoing operating costs. VHG's actual operating expense data for the T-12 period reflects these efficiencies, and the H&W expense model does not appear to incorporate the Property's actual expense experience with appropriate weight. To the extent that H&W relied on industry benchmarks or expense ratios derived from properties that have not undergone comparable renovations, such reliance would overstate the Property's normalized expense burden and depress the concluded NOI.
D. Stabilized Net Operating Income
As a result of the foregoing concerns, the H&W Appraisal's stabilized NOI estimate appears to be materially lower than the Property's demonstrated T-12 NOI of $18,400,000, without adequate justification for the downward adjustment. VHG notes that the T-12 NOI reflects actual, audited operating results — not management projections — and that any departure from this demonstrated income level must be supported by specific, identified factors that would cause the Property's income to decline from its current trajectory. VHG has identified no such factors, and to VHG's knowledge, no material adverse changes in market conditions, competitive supply, or Property operations have occurred or are reasonably anticipated that would justify a reduction from the T-12 NOI.
VI. Objections to H&W Appraisal Methodology — Sales Comparison Approach
VHG has also identified significant concerns regarding the comparable sales selected by H&W in the sales comparison approach, which further undermine the reliability of the concluded value.
First, several of the comparable transactions cited in the H&W Appraisal involve properties that are materially dissimilar to the Coral Palms Grand Resort & Spa in one or more critical respects. Specifically, certain of the cited comparables appear to involve properties that (i) are located in non-oceanfront or non-Keys locations that lack the irreplaceable locational attributes of the subject Property, (ii) were in inferior physical condition at the time of sale and had not undergone capital improvement programs comparable in scope or recency to the Property's $47,000,000 renovation, (iii) possessed a materially different amenity base (e.g., no marina, smaller spa facilities, fewer food and beverage outlets, or significantly fewer meeting and event spaces), or (iv) were transacted at dates sufficiently removed from the effective date of the Appraisal that their sale prices may not reflect current market conditions in the luxury resort investment market. The use of such comparables, without adequate adjustments to account for these points of differentiation, introduces downward bias into the concluded value.
Second, the H&W Appraisal appears to give insufficient weight to more recent comparable transactions involving luxury waterfront resort properties in South Florida and the Florida Keys that support per-key values and implied capitalization rates more consistent with VHG's internal valuation. VHG is aware of several transactions in the relevant competitive market that closed within the twelve months preceding the effective date of the Appraisal and that reflect per-key valuations and cap rates substantially above those implied by the H&W conclusion. VHG will provide supplemental comparable transaction data supporting higher per-key values than those reflected in the H&W analysis, as described further in Section IX below.
Third, the per-key value analysis underscores the extent of the undervaluation. At VHG's internal valuation of $235,000,000, the implied per-key value is approximately $687,135 (i.e., $235,000,000 ÷ 342 keys). VHG believes this per-key value is well within the range of recent luxury resort transactions involving properties of comparable quality, location, and condition. By contrast, at the H&W appraised value of $192,000,000, the implied per-key value is approximately $561,404, which VHG submits materially undervalues the Property given its comprehensive recent renovation, premium oceanfront location, and extensive amenity base. VHG's supplemental comparable transaction data will demonstrate that recently transacted luxury resort properties with amenity profiles and locational attributes comparable to the Property have achieved per-key values meaningfully in excess of $561,404, and in many cases in excess of $687,135.
VII. Objections to H&W Appraisal Methodology — Cost Approach
While VHG recognizes that the cost approach is typically given less weight in the valuation of income-producing hotel properties, the cost approach nonetheless provides an important reasonableness check, and the concerns identified below further support the conclusion that the H&W Appraisal understates the Property's value.
The $47,000,000 renovation completed in August 2021 significantly enhanced the replacement cost basis of the Property. VHG submits that the H&W cost approach does not adequately reflect the current replacement cost of the improvements, particularly given the extraordinary construction cost escalation that has occurred in Monroe County and the Florida Keys. Building costs in the Keys are meaningfully higher than mainland Florida averages due to a confluence of factors, including the logistical constraints and costs associated with transporting materials over the Overseas Highway, the limited availability and higher cost of skilled construction labor in the island chain, and the stringent regulatory requirements imposed by Monroe County, the Florida Department of Environmental Protection, and various federal agencies with jurisdiction over coastal and marine environments. These factors result in replacement cost estimates for Keys resort properties that significantly exceed those applicable to comparable mainland properties, and the H&W cost approach must account for these premium construction costs to reach a reliable conclusion.
Furthermore, the cost of land alone for a comparable 22.4-acre oceanfront parcel in the Upper Keys — to the extent any such parcel were even available, which is highly doubtful given current land use restrictions and the near-total buildout of oceanfront resort-zoned sites in Monroe County — would represent a substantial portion of the total value. The scarcity of entitled oceanfront resort sites in the Florida Keys is well documented, and VHG believes that the H&W land valuation may be understated given the extreme supply constraints and the premium that the investment market places on irreplaceable waterfront locations with existing resort entitlements.
VIII. Independent Appraisal Review
In light of the significance of the valuation shortfall and the methodological concerns identified above, VHG has retained Claybourne Advisory Group LLC ("Claybourne"), an independent appraisal review and valuation consulting firm with nationally recognized expertise in the hospitality and resort sectors, effective January 24, 2023, to conduct a detailed review of the H&W Appraisal. Claybourne's engagement encompasses a comprehensive analysis of the H&W Appraisal's methodology, assumptions, comparable data, and conclusions across all three traditional approaches to value.
VHG anticipates that Claybourne's review will further substantiate the concerns identified herein and will provide a detailed technical critique suitable for submission to PAC and H&W. Claybourne's principals include MAI-designated appraisers and former senior professionals at nationally recognized valuation firms with extensive experience in the review and critique of hotel and resort appraisals, and VHG is confident that Claybourne's analysis will meet the highest professional standards.
VHG reserves the right to supplement this letter with Claybourne Advisory Group's findings and conclusions upon completion of its review. VHG anticipates that Claybourne's review will be substantially complete within approximately three to four weeks and will be delivered to all parties promptly thereafter.
IX. Supplemental Data to Be Provided
VHG is prepared to furnish the following supplemental materials to support a reconsideration of the appraised value and to facilitate a constructive dialogue among the parties regarding the appropriate valuation of the Property:
1.  Updated trailing twelve-month operating statements through a more recent period, including preliminary unaudited results for the fourth quarter of 2022, to the extent available and in form satisfactory to PAC;
2.  Detailed capital expenditure records for the $47,000,000 renovation, including a comprehensive scope of work summary, contractor invoices, change orders, completion documentation, and certificates of substantial completion;
3.  Comparable transaction data for luxury waterfront resort hotel sales in South Florida and the Florida Keys, including transaction summaries, per-key metrics, implied capitalization rates, and source documentation;
4.  Independent market reports and STR (Penmark Enterprises) data corroborating the Property's competitive positioning within the Upper Keys luxury resort submarket, including historical and forward-looking supply, demand, occupancy, ADR, and RevPAR trends;
5.  VHG's internal discounted cash flow model and underlying assumptions supporting the $235,000,000 valuation, including revenue growth projections, operating expense assumptions, capital reserve estimates, terminal capitalization rate, and discount rate; and
6.  The Claybourne Advisory Group LLC appraisal review report, when completed, including a detailed technical critique of the H&W Appraisal and, if appropriate, a supported indication of value.
In addition to the foregoing materials, VHG respectfully requests the opportunity to present these materials directly to H&W and to participate in a conference call among PAC, H&W, VHG, and their respective counsel to discuss the valuation methodology, data inputs, and areas of disagreement in a collaborative and constructive manner. VHG believes that a direct dialogue will be the most efficient means of resolving the valuation discrepancy and advancing the transaction toward closing on the terms contemplated by the Commitment Letter.
X. Formal Request for Relief
In light of the foregoing, VHG respectfully requests that PAC take one or both of the following actions to address the valuation shortfall:
1.  Reconsideration. Direct Hargrove & Whitley Valuation Services LLC to reconsider its appraised value of the Property in light of the supplemental data, comparable transaction evidence, and methodological concerns identified herein and to be further detailed by Claybourne Advisory Group LLC. VHG requests that H&W be directed to give full and fair consideration to the supplemental materials to be provided by VHG and to issue a revised or supplemental appraisal report reflecting such reconsideration.
2.  Second Appraisal. Commission a second independent appraisal of the Property by a mutually agreeable MAI-designated appraiser with demonstrated expertise in the valuation of luxury resort properties in the South Florida and Florida Keys markets. VHG is willing to bear the full cost of such second appraisal and is prepared to cooperate fully in the selection of a qualified appraiser and in providing all necessary Property access, documentation, and management interviews. VHG respectfully suggests that the parties agree upon a short list of qualified appraisers and jointly select the engagement appraiser within ten (10) business days of PAC's response to this letter.
VHG notes that the Commitment Letter dated December 9, 2022, contemplated a Loan amount of $160,000,000, and that both parties entered into the Commitment Letter in good faith based on a mutual understanding that the Property's value would support the proposed financing at the agreed-upon terms, including the 68.0% maximum LTV covenant. VHG invested significant time, resources, and professional fees in negotiating the Commitment Letter and preparing for the closing of the Loan in reliance on the committed terms, and the Borrower has incurred substantial out-of-pocket costs in connection with the due diligence process, including deposits, third-party reports, and legal fees.
The magnitude of the valuation shortfall — $43,000,000, or 18.30% below VHG's well-supported projection — warrants a thorough and rigorous re-examination of the H&W Appraisal before any repricing, downsizing, or restructuring of the committed Loan terms is considered. VHG submits that the concerns identified in this letter and the supplemental data to be provided create a compelling basis for reconsideration, and VHG is confident that a fair and thorough review of the evidence will result in a valuation that supports the proposed $160,000,000 Loan.
XI. Reservation of Rights
VHG and the Borrower hereby expressly reserve all rights, claims, and remedies under the Commitment Letter dated December 9, 2022, including without limitation any rights arising from or related to any proposed modification of the committed Loan terms — whether by reduction of the Loan amount, increase of the interest rate, imposition of additional conditions, or otherwise — that VHG may deem to constitute a material change to, or breach of, the terms and conditions set forth in the Commitment Letter.
Nothing contained in this letter shall be deemed or construed as a waiver of any right, remedy, or defense available to VHG or the Borrower under the Commitment Letter, under applicable law (including without limitation the laws of the State of New York, as specified in the Commitment Letter's governing law provision), or otherwise. VHG's decision to engage cooperatively with PAC in seeking a resolution of the valuation discrepancy shall not prejudice or limit any rights or remedies that VHG or the Borrower may have, whether at law or in equity.
VHG further reserves the right to challenge the H&W Appraisal through any available process or procedure, including but not limited to the submission of the Claybourne Advisory Group review report, the presentation of supplemental market evidence and comparable transaction data, the engagement of additional independent appraisers or valuation consultants, and the pursuit of any contractual or legal remedies that may be available under the Commitment Letter or applicable law.
XII. Conclusion and Request for Prompt Response
VHG and the Borrower remain fully committed to the proposed refinancing transaction and are eager to work cooperatively and in good faith with PAC to resolve the valuation issue identified herein in a manner that allows the transaction to proceed expeditiously on the terms contemplated by the Commitment Letter. VHG values its relationship with PAC and appreciates the significant effort that both parties have invested in bringing this transaction to its current stage. VHG is confident that a thorough review of the supplemental data and a reconsideration of the H&W Appraisal's methodology and conclusions will result in a valuation that supports the committed Loan amount.
Time is of the essence in addressing this matter. The transaction timeline is driven by the approaching maturity of the Borrower's existing first mortgage loan with Tidewater National Bank, which matures on June 1, 2024. While the maturity date provides a reasonable runway, the complexity of the proposed financing, the remaining due diligence and closing requirements, and the time that may be required for a reconsideration or second appraisal process underscore the importance of addressing the valuation issue promptly and without unnecessary delay.
VHG respectfully requests PAC's written response to this letter at the earliest practicable date, and in any event no later than February 3, 2023. VHG further proposes a conference call among VHG, the Borrower, PAC, H&W, and their respective counsel during the week of January 30, 2023, to discuss the matters raised herein and to agree upon a process and timeline for resolving the valuation discrepancy.
Please do not hesitate to contact the undersigned at (305) 448-7215 or dfairchild@calderwoodharkness.com to coordinate scheduling and to discuss any aspect of this letter.
We thank you for your prompt attention to this matter and look forward to your response.
Very truly yours,
CALDERWOOD & HARKNESS LLP
By: ________
Douglas Fairchild, Esq. Partner, Real Estate Calderwood & Harkness LLP 100 Southeast Second Street, Suite 3800 Miami, FL 33131 Telephone: (305) 448-7215
Email: dfairchild@calderwoodharkness.com
cc:
Conrad W. Elliston, Chairman & CEO, Verimark Hospitality Group Inc. Natasha Ricard, CFO, Verimark Hospitality Group Inc. Derek Huang, SVP – Capital Markets & Treasury, Verimark Hospitality Group Inc. Grace Nakamura, Esq., Calderwood & Harkness LLP Angela Fontaine, Esq., Calderwood & Harkness LLP Martin Drubeck, Managing Director – Real Estate Lending, Pinnacle Atlantic Capital, LLC Jennifer Kwon, Vice President – Originations, Pinnacle Atlantic Capital, LLC
Enclosures: None (supplemental data to follow under separate cover)
Metric | T-12 (Period Ending 9/30/2022)
Occupancy | 71.3%
Average Daily Rate (ADR) | $389
Revenue Per Available Room (RevPAR) | $277.36
Total Revenue | Approximately $62,800,000
Net Operating Income (NOI) | Approximately $18,400,000

CALDERWOOD & HARKNESS LLP Attorneys at Law

CALDERWOOD & HARKNESS LLP

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