1021-00007 · Verimark Hospitality Group · Commitment Letter

commitment-letter-comment-letter.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) 749-6200 Facsimile: (305) 749-6201 www.calderwoodharkness.com

December 11, 2022

VIA EMAIL AND OVERNIGHT COURIER

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

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

Calderwood & Harkness LLP Client Matter No.: 1021-00007

Dear Mr. Tarrant Corporation:

This firm represents Verimark Hospitality Group Inc. ("VHG" or the "Guarantor"), a Delaware corporation (Nasdaq: VMRK) headquartered at 1400 Bayshore Boulevard, Suite 2200, Miami, Florida 33131, and its wholly owned indirect subsidiary, Coral Palms Resort Holdings LLC (the "Borrower"), a Florida limited liability company organized under the laws of the State of Florida, in connection with the proposed $160,000,000 first mortgage loan (the "Loan") from Pinnacle Atlantic Capital, LLC ("PAC" or the "Lender") to the Borrower, to be secured by a first priority lien on the Coral Palms Grand Resort & Spa located at 99000 Overseas Highway, Key Largo, Monroe County, Florida 33037.

We are writing to transmit, under separate cover, the attached redline markup of the Commitment Letter executed by the parties on December 9, 2022 (the "Commitment Letter"). We respectfully request that Whitford Baines & Driscoll LLP ("WBD") and PAC review the attached markup, together with the detailed comments set forth in this letter, at your earliest convenience.

As a preliminary matter, we note that while VHG executed the Commitment Letter on December 9, 2022 to preserve the agreed-upon timing and to demonstrate good faith in the transaction, VHG and the Borrower expressly reserve the right to negotiate the terms addressed herein prior to finalization of the definitive loan documents. Execution of the Commitment Letter shall not be deemed a waiver of any of the comments, objections, or proposed modifications set forth below. It is our understanding that WBD will be responsible for circulating initial drafts of the definitive loan documents, including the Loan Agreement, Mortgage, Note, Guaranty, Assignment of Leases and Rents, Cash Management Agreement, Environmental Indemnity Agreement, and all ancillary documents. We respectfully request that the comments set forth in this letter be reflected in those initial drafts to the greatest extent practicable, so as to facilitate an efficient and productive negotiation process.

We address each substantive topic below.

1. LOAN AMOUNT AND SIZING — LTV AND DEBT YIELD COVENANTS

1.1 Maximum Loan-to-Value Ratio (LTV)

The Commitment Letter provides for a Loan Amount of $160,000,000, subject to a maximum loan-to-value ratio ("LTV") of 68.0%, based upon the appraised value of the Coral Palms Grand Resort & Spa as determined by a Lender-engaged appraiser.

We note that, based on VHG's internal valuation of the property at $235,000,000—a figure consistent with VHG's most recent internal appraisal analysis prepared by its in-house real estate finance team—the resulting LTV is $160,000,000 divided by $235,000,000, or approximately 68.09%. This figure is marginally above the 68.0% maximum LTV stated in the Commitment Letter.

The Borrower and Guarantor understand, based on discussions between Derek Huang (VHG's SVP – Capital Markets & Treasury) and PAC's origination team leading up to the execution of the Commitment Letter, that PAC agreed to waive any discrepancy at this level and to proceed with the $160,000,000 Loan Amount notwithstanding the marginal exceedance of the stated LTV cap. We respectfully request that the Commitment Letter be amended to memorialize this understanding in one of the following ways:

(a) The Commitment Letter should be amended to confirm that the LTV of approximately 68.09% as of the date of execution is deemed compliant with the maximum LTV covenant and shall not constitute a breach thereof or a basis for repricing or reduction of the Loan Amount; or

(b) In the alternative, the maximum LTV should be adjusted from 68.0% to 68.5% to accommodate rounding and minor fluctuations in appraised value, which is consistent with market practice for hospitality loans of this size and structure.

The Borrower's concern here is straightforward: if the third-party appraisal commissioned by the Lender returns a value at or near VHG's projection of $235,000,000, even a minor discrepancy—whether attributable to differences in valuation methodology, the selection of comparable transactions, capitalization rate assumptions, or rounding—should not trigger a repricing, a reduction in Loan Amount, or a termination right in favor of the Lender. The Loan was sized and underwritten at $160,000,000 with both parties' full knowledge of the anticipated LTV, and the definitive documents should reflect this mutual understanding.

Additionally, the Borrower requests clarity on the mechanics applicable in the event the appraised value exceeds $235,000,000. Specifically, the Borrower requests confirmation that the Loan Amount will remain fixed at $160,000,000 regardless of whether the appraised value exceeds VHG's internal projection. Under no circumstances should a higher appraised value result in any obligation on the part of the Borrower to accept a larger Loan Amount or to modify the agreed-upon economic terms. Conversely, the Lender should not have the right to increase the Loan Amount, the interest rate, or the fees in connection with a higher-than-expected appraisal.

1.2 Minimum Debt Yield

The Commitment Letter establishes a minimum debt yield of 9.5% as a sizing constraint for the Loan. Based on the projected net operating income ("NOI") of $18,400,000 for the trailing twelve-month period ending September 30, 2022, and a Loan Amount of $160,000,000, the debt yield is $18,400,000 divided by $160,000,000, or approximately 11.50%. This figure is well in excess of the 9.5% minimum threshold by a comfortable margin of approximately 200 basis points.

Notwithstanding the existing cushion, the Borrower requests the following clarifications regarding the debt yield test:

(a) Timing of Application. The Borrower requests clarification that the debt yield test is applied at closing based upon the trailing twelve-month NOI as of the most recently available operating period (i.e., the T-12 period) and is not subject to forward-looking adjustments, lender discretionary haircuts, stabilized projections, or any other methodology that would deviate from actual historical operating performance.

(b) Definition of Net Operating Income. The Borrower requests that the definition of "Net Operating Income" for purposes of the debt yield test (and all other financial covenants in the definitive loan documents) be aligned with the Uniform System of Accounts for the Lodging Industry ("USALI") standards, 11th Revised Edition, as published by the Hotel Association of New York City and the American Hotel & Lodging Educational Institute. Specifically, the NOI definition should exclude the following items:

(i) Non-recurring income and expenses, including gains or losses from the sale or disposition of assets, litigation settlements, insurance proceeds (other than business interruption insurance applied to replace lost revenue), and one-time charges or credits;

(ii) Capital expenditures, including but not limited to FF&E replacements, building system upgrades, structural repairs, and any amounts properly capitalizable under GAAP;

(iii) Management fees in excess of a market-rate threshold, which the Borrower proposes be set at 3.0% of gross revenues (consistent with the management fee payable to VHG Management Services LLC under the existing Hotel Management Agreement dated January 15, 2019); and

(iv) Reserves for replacement, whether funded or unfunded, which are more appropriately addressed through the reserve provisions of the Loan Agreement.

The Borrower reserves the right to further negotiate the precise NOI definition in the context of the definitive Loan Agreement. However, we believe it is important to establish the general framework at the Commitment Letter stage to avoid potential disputes during the loan document drafting process.

1.3 Appraisal Mechanics

The Commitment Letter references the requirement for an appraisal satisfactory to the Lender but does not provide meaningful detail regarding the appraisal process, the qualifications of the appraiser, or the Borrower's rights in connection therewith. Given the significance of the appraisal to the LTV determination and, consequently, to the final Loan Amount, the Borrower requests that the following provisions be incorporated into the Commitment Letter:

(a) Appraiser Qualifications. The appraisal shall be conducted by a licensed, MAI-designated appraiser with demonstrated expertise in the hospitality sector and specific experience valuing full-service resort properties in the Florida Keys or comparable coastal resort markets. The Borrower requests the right to approve the selected appraiser, such approval not to be unreasonably withheld, conditioned, or delayed.

(b) Delivery of Appraisal Report. The Borrower shall receive a complete copy of the appraisal report, including all supporting data, comparable transactions, and methodological assumptions, promptly upon completion and in any event no later than five (5) business days following the Lender's receipt thereof.

(c) Challenge Rights. In the event that the initial appraised value is more than 10% below the Borrower's projected value of $235,000,000 (i.e., below $211,500,000), the Borrower shall have the right to request a second appraisal at the Borrower's sole cost and expense. The second appraisal shall be conducted by a separate MAI-designated appraiser mutually agreed upon by the parties. If the two appraisals differ by more than 5%, the parties shall engage a third appraiser to render a final determination, and the appraised value for purposes of the LTV calculation shall be the average of the two closest values.

(d) Good-Faith Negotiation Period. In the event that any repricing or resizing of the Loan is triggered by the appraisal results, such repricing or resizing shall be subject to a good-faith negotiation period of not less than fifteen (15) business days before either party may terminate the Commitment Letter or exercise any remedies arising from an LTV exceedance. During such negotiation period, neither party shall be deemed in breach of the Commitment Letter, and all deadlines (including the rate lock period and the outside closing date) shall be tolled accordingly.

2. INTEREST RATE AND RATE LOCK

2.1 Fixed Interest Rate

The Commitment Letter provides for a fixed interest rate of 5.35% per annum for a five-year term, stated to be based upon an interpolated U.S. Treasury yield plus a spread of 175 basis points as of the pricing date in November 2022.

The Borrower requests confirmation that the 5.35% rate is locked as of a date certain and that the Commitment Letter identify the precise rate lock mechanics, including the rate lock effective date, the rate lock expiration date, and any conditions or events that could result in a loss of the rate lock.

In connection with the rate lock, the Borrower notes that VHG wired a rate lock deposit of $800,000 (equal to 0.50% of the $160,000,000 Loan Amount) to Meridian Title & Escrow, Inc. on January 5, 2023. The Borrower requests that the Commitment Letter specify the rate lock period, which the Borrower proposes be sixty (60) days from the date of the rate lock deposit (i.e., through and including March 6, 2023). The Commitment Letter should also specify the conditions under which the rate lock period may be extended, including the cost of any such extension and the maximum number of extensions available to the Borrower.

2.2 Default Rate

The Commitment Letter provides for a default rate of interest applicable upon the occurrence and during the continuance of an event of default. The Borrower requests that the default rate premium be capped at the lesser of (a) 5.00% per annum above the contract rate of 5.35% (i.e., a maximum default rate of 10.35% per annum), or (b) the maximum rate of interest permitted under applicable Florida law, including Chapters 687 and 697 of the Florida Statutes.

Additionally, the Borrower requests that the default rate shall not apply during any applicable notice and cure period provided for in the definitive Loan Agreement with respect to the underlying event of default. The imposition of default interest during a period when the Borrower is actively pursuing cure of a curable default is punitive in nature and inconsistent with the commercial intent of the parties.

2.3 Rate Lock Deposit

As noted above, the rate lock deposit of $800,000 has been deposited with Meridian Title & Escrow, Inc. (Lisa Portman, Title Officer), located at 9100 South Dadeland Boulevard, Suite 1500, Miami, Florida 33156. The Borrower requests that the Commitment Letter address the following matters with respect to the rate lock deposit:

(a) Refundability. The Commitment Letter should specify that the rate lock deposit is fully refundable to the Borrower in the event of: (i) the Lender's failure to close the Loan by the anticipated closing date through no fault of the Borrower; (ii) a material modification to the economic terms of the Loan by the Lender, including without limitation any repricing or resizing of the Loan triggered by the appraisal or the Lender's credit review; or (iii) the failure of any condition precedent to closing that is within the Lender's control or attributable to a third party engaged by the Lender, including without limitation the appraiser, the environmental consultant, or the Lender's title agent.

(b) Interest. All interest accrued on the rate lock deposit during the period it is held in escrow shall be credited to the Borrower and, at closing, shall be applied in accordance with the Borrower's instructions (whether to reduce closing costs, to be credited against the first interest payment, or to be returned to the Borrower).

3. GOOD FAITH DEPOSIT

3.1 Deposit Amount and Escrow

The Commitment Letter provides for a good faith deposit of $1,600,000, equal to 1.0% of the $160,000,000 Loan Amount, which the Borrower wired to Meridian Title & Escrow, Inc. on December 12, 2022. Meridian Title & Escrow, Inc. serves as the escrow agent for the deposit.

The Borrower requests confirmation that the good faith deposit is held in a federally insured, interest-bearing escrow account and that all interest accruing on the deposit during the period it is held in escrow shall accrue for the benefit of the Borrower. The Borrower further requests that the escrow agent provide monthly statements reflecting the balance of the deposit and all interest accrued thereon.

3.2 Refundability Conditions

The Commitment Letter currently provides that the good faith deposit is non-refundable upon the Borrower's termination of the transaction. The Borrower objects to this provision as drafted and takes the position that the good faith deposit should be refundable to the Borrower in the following circumstances:

(a) Lender's Failure to Perform. The good faith deposit shall be refundable if the Lender fails to satisfy its obligations under the Commitment Letter, including without limitation the obligation to fund the Loan on the terms set forth therein, the obligation to process the Loan application in a timely and diligent manner, and the obligation to engage qualified third-party consultants as required thereunder.

(b) Material Adverse Change in Terms. The good faith deposit shall be refundable if the Lender imposes a material adverse change in the proposed terms of the Loan, including without limitation any change in the Loan Amount, the interest rate, the amortization schedule, or the collateral requirements resulting from the appraisal, the Lender's internal credit review, credit committee approval process, or any other Lender-side determination. For purposes of this provision, the Borrower requests that "material modification" be defined to include: (i) any reduction in the Loan Amount exceeding 5% (i.e., a reduction below $152,000,000); (ii) any increase in the fixed interest rate exceeding 25 basis points (i.e., an increase above 5.60%); or (iii) any requirement for additional collateral, guaranty scope, or credit support not contemplated in the Commitment Letter as executed on December 9, 2022.

(c) Failure of Lender-Controlled Conditions. The good faith deposit shall be refundable in the event of the failure of any condition precedent to closing that is within the Lender's control or attributable to a third party engaged by or on behalf of the Lender, including without limitation the appraiser, the environmental consultant, the Lender's title agent, and the Lender's insurance consultant.

(d) Borrower's Termination for Cause. The good faith deposit shall be refundable if the Borrower terminates the Commitment Letter for cause based on the Lender's breach of any material obligation thereunder, including without limitation the Lender's failure to comply with the rate lock provisions, the Lender's failure to close by the outside closing date (as the same may be extended), or the Lender's unilateral imposition of terms or conditions not set forth in the Commitment Letter.

The Borrower's position on this point is straightforward: if the Lender imposes repriced terms, modifies material economic provisions, or otherwise fails to perform its obligations under the Commitment Letter, the Borrower should not be penalized by forfeiture of the good faith deposit. The deposit is intended to evidence the Borrower's commitment to the transaction, not to serve as a non-refundable fee payable to the Lender under all circumstances.

3.3 Application at Closing

At the closing of the Loan, the good faith deposit, together with all accrued interest thereon, shall be applied against closing costs (including without limitation title insurance premiums, recording fees, survey costs, and the Lender's counsel fees) or returned to the Borrower in immediately available funds, at the Borrower's election. The Commitment Letter should be amended to confirm this treatment and to specify that the application of the deposit at closing shall be reflected on the closing statement prepared by Meridian Title & Escrow, Inc.

4. COMMITMENT FEE

The Commitment Letter provides for a commitment fee of $800,000, equal to 0.50% of the $160,000,000 Loan Amount, payable at closing.

The Borrower requests the following clarifications and modifications with respect to the commitment fee:

(a) Payable Only at Closing. The Borrower requests confirmation that the commitment fee is payable only upon a successful closing of the Loan and is not payable in advance, upon execution of the Commitment Letter, or at any time prior to the actual funding of the Loan. In the event the transaction does not close for any reason, whether due to a termination by the Borrower, a termination by the Lender, or a failure of conditions precedent, the commitment fee shall not be payable by the Borrower.

(b) Application of Commitment Fee. The Borrower requests that, at closing, the commitment fee of $800,000 be credited against the first interest payment due under the Note, or, in the alternative, be applied to reduce closing costs, at the Borrower's election. This treatment is consistent with the Borrower's understanding of the commercial arrangement discussed during the term sheet phase.

5. LOAN TERM, AMORTIZATION, AND EXTENSION OPTIONS

5.1 Loan Term and Amortization

The Commitment Letter provides for a five-year term from the funding date, with interest-only payments during years one and two, and a 30-year amortization schedule commencing in year three.

The Borrower requests that the Commitment Letter confirm the following:

(a) The amortization schedule commencing in year three shall be calculated on a 30-year basis (360 months) using the fixed interest rate of 5.35% per annum, with monthly payments of principal and interest, and a balloon payment of the remaining outstanding principal balance due and payable at maturity (or at the expiration of any extension period, if applicable).

(b) For the avoidance of doubt, the annual interest-only debt service during years one and two is calculated as $160,000,000 multiplied by 5.35%, or $8,560,000 per annum ($713,333.33 per month). At the projected trailing twelve-month NOI of $18,400,000, this produces a debt service coverage ratio ("DSCR") of approximately 2.15x during the interest-only period, which is well in excess of any DSCR covenant likely to be imposed in the definitive loan documents.

5.2 Extension Options

The Commitment Letter provides for two one-year extension options, each subject to the following conditions: (i) no event of default exists at the time of the extension; (ii) the DSCR is not less than 1.25x as of the extension date; and (iii) payment of an extension fee equal to 0.25% of the then-outstanding principal balance per extension.

The Borrower has the following comments regarding the extension options:

(a) DSCR Test. The Borrower requests that the DSCR test for each extension option be based upon the trailing twelve-month NOI as of the end of the most recent fiscal quarter preceding the date of the extension notice, rather than a forward-looking projection or a stabilized NOI analysis. This approach is consistent with the DSCR methodology proposed by the Borrower in connection with the debt yield test discussed in Section 1.2 above and provides an objective, verifiable metric that is not subject to the Lender's discretionary adjustments.

(b) Technical Defaults. The Borrower requests that the "no event of default" condition be narrowed such that minor or technical defaults (excluding monetary defaults, voluntary bankruptcy filings, and material breaches of environmental or transfer covenants) shall not preclude the Borrower's exercise of the extension options, provided that the Borrower is diligently pursuing the cure of such default within any applicable cure period. It is commercially unreasonable for the Borrower to lose the benefit of a negotiated extension option due to an immaterial or curable technical default that does not impair the Lender's security or the Borrower's ability to service the Loan.

(c) Notice Period. The Commitment Letter currently requires sixty (60) days' advance written notice for the exercise of each extension option. The Borrower requests that this period be reduced to thirty (30) days' advance written notice, which provides adequate time for the Lender to process the extension request and verify satisfaction of the applicable conditions while affording the Borrower greater flexibility in managing its capital structure and refinancing alternatives.

(d) Extension Fee. The Borrower requests that the extension fee be reduced from 0.25% to 0.15% of the then-outstanding principal balance per extension. In the alternative, if PAC is unwilling to reduce the extension fee for the first extension, the Borrower requests that the extension fee for the second extension be waived in its entirety, provided that the first extension fee was timely paid. This structure incentivizes the Borrower to exercise the first extension and rewards a performing borrower with a reduced cost for the second extension.

6. PREPAYMENT AND EXIT FEE

6.1 Prepayment. The Commitment Letter does not clearly set forth the terms governing voluntary prepayment of the Loan, including the lockout period, the prepayment mechanism, and the applicable prepayment premium or penalty. The Borrower requests that the Commitment Letter be amended to address the following:

(a) Lockout Period. The Borrower proposes a lockout period of twenty-four (24) months from the funding date, during which no voluntary prepayment shall be permitted (the "Lockout Period").

(b) Prepayment After Lockout. Following the expiration of the Lockout Period, the Loan should be voluntarily prepayable, in whole or in part, subject to a yield maintenance premium or, at the Borrower's election, defeasance in accordance with the terms of the definitive Loan Agreement. After the later of (i) the expiration of the Lockout Period and (ii) the date that is six (6) months prior to the scheduled maturity date, the Loan should be prepayable without any premium or penalty (an "open" prepayment window).

(c) Yield Maintenance Formula. To the extent a yield maintenance premium applies, the Borrower requests that the yield maintenance formula utilize U.S. Treasury securities with a maturity date closest to the scheduled maturity date of the Loan (or the scheduled maturity date of the then-current extension period, if applicable) as the benchmark. The yield maintenance premium should be calculated using a present value methodology that discounts the remaining scheduled payments at the applicable Treasury rate, consistent with market practice for comparable commercial mortgage loans.

(d) Partial Prepayment. The Borrower requests that partial prepayments be permitted in minimum amounts of $1,000,000, subject to the same yield maintenance premium applicable to full prepayments. Partial prepayments should be applied to the outstanding principal balance in inverse order of maturity.

6.2 Exit Fee

The Commitment Letter provides for an exit fee of 0.25% of the outstanding principal balance at the time of repayment. The Borrower has the following comments regarding the exit fee:

(a) Exceptions. The exit fee should not apply in the event of: (i) a refinancing of the Loan with PAC or a PAC affiliate, in which case PAC will receive the economic benefit of the continued lending relationship; (ii) a sale of the property where the buyer assumes the Loan with the Lender's consent, in which case the Lender continues to hold the same credit; or (iii) a casualty or condemnation event resulting in a mandatory prepayment of the Loan under the terms of the definitive Loan Agreement, in which case the prepayment is involuntary and should not be subject to an additional fee.

(b) Reduction or Elimination. The Borrower requests that the exit fee be reduced to 0.15% of the outstanding principal balance, or, in the alternative, that the exit fee be eliminated entirely if the Loan has been outstanding for more than forty-eight (48) months (i.e., if the Borrower repays the Loan during the final twelve months of the initial five-year term or during any extension period). A borrower that has performed under the Loan for the substantial majority of the term should not be subject to the same exit fee as a borrower that prepays early.

7. GUARANTY STRUCTURE

7.1 Limited Recourse / Carve-Out Guaranty

The Commitment Letter provides that Verimark Hospitality Group Inc. will execute a limited recourse guaranty (commonly referred to as a "bad boy" carve-out guaranty) in connection with the Loan. The Borrower acknowledges the customary nature of such a guaranty in non-recourse commercial mortgage transactions and does not object to the requirement in principle. However, the Borrower requests that the scope of the carve-out events triggering full recourse liability be narrowly defined and limited to the following events:

(a) A voluntary bankruptcy filing by the Borrower or the Guarantor, or the Borrower's or Guarantor's consent to an involuntary bankruptcy filing;

(b) Fraud or intentional misrepresentation by the Borrower, the Guarantor, or any principal thereof in connection with the Loan or the property;

(c) Misapplication or misappropriation of rents, security deposits, insurance proceeds, or condemnation awards in violation of the terms of the Loan Agreement;

(d) Intentional physical waste of the property; and

(e) A transfer of the property or any interest therein in violation of the transfer restrictions set forth in the Loan Agreement.

With respect to springing full recourse triggers, the Borrower has particular concern regarding involuntary bankruptcy filings. The Borrower requests that an involuntary bankruptcy filing against the Borrower or the Guarantor shall not trigger full recourse liability unless the Borrower or the Guarantor colludes in, solicits, or consents to the filing, and the filing is not dismissed within ninety (90) days. It is fundamentally inequitable to impose full recourse liability on a guarantor for an involuntary bankruptcy filing initiated by a third-party creditor over which the guarantor has no control.

The Borrower further acknowledges that the parties intend to negotiate a separate Environmental Indemnity Agreement in connection with the Loan, pursuant to which VHG will provide customary environmental indemnification. The Borrower requests that the carve-out guaranty not duplicate the environmental obligations to be set forth in the Environmental Indemnity Agreement, so as to avoid overlapping or inconsistent liability.

7.2 Guarantor Financial Covenants

The Commitment Letter references ongoing financial covenants applicable to VHG in its capacity as Guarantor, but does not specify the nature or level of such covenants. The Borrower requests that PAC and WBD clarify at the earliest opportunity whether the Lender intends to impose minimum net worth, minimum liquidity, or other financial maintenance covenants on VHG as Guarantor. If such covenants are proposed, the Borrower takes the following position:

(a) Any financial covenants applicable to VHG as Guarantor should be tied to VHG's consolidated financial statements as audited on an annual basis by Keswick & Holt LLP, VHG's independent registered public accounting firm (Andrew Calloway, CPA, Engagement Partner). Quarterly compliance testing should be based on VHG's unaudited quarterly financial statements prepared in accordance with GAAP and consistent with VHG's SEC reporting obligations.

(b) Minimum net worth and minimum liquidity thresholds should be set at levels that reflect VHG's current financial position with a reasonable cushion, and should not be so restrictive as to constrain VHG's ordinary-course business operations, capital investment program, or dividend policy. The Borrower reserves the right to negotiate specific thresholds after reviewing PAC's proposed levels.

8. COLLATERAL AND SECURITY

8.1 Property as Sole Collateral

The Commitment Letter contemplates the following collateral package for the Loan: (i) a first priority mortgage lien on the Coral Palms Grand Resort & Spa, 99000 Overseas Highway, Key Largo, Monroe County, Florida 33037 (Folio No. 00460780-000100); (ii) an assignment of leases, rents, and profits arising from the property; (iii) a security interest in all tangible and intangible personal property located at or used in connection with the property (to be perfected by UCC-1 financing statement filings with the Florida Secured Transaction Registry); and (iv) an assignment of all contracts, permits, licenses, entitlements, and intangible property related to the operation of the property.

The Borrower's position is that the Coral Palms Grand Resort & Spa, together with the foregoing assignments and security interests, shall constitute the sole collateral for the Loan. No cross-collateralization with any other property owned or operated by VHG or any of its subsidiaries shall be required. The Borrower requests express confirmation in the Commitment Letter that no additional collateral will be required, including without limitation the Driftwood Bay Hotel located in Sarasota, Florida, or any other VHG portfolio property. Any requirement for cross-collateralization would be inconsistent with the non-recourse, asset-level financing structure contemplated by the Commitment Letter and would not be acceptable to VHG. To the extent PAC may seek additional collateral in the future based on changes in circumstances, any such request shall be subject to a subsequent written agreement of the parties and shall not be a unilateral right of the Lender.

8.2 Existing Tidewater Mortgage

The property is currently encumbered by an existing first mortgage held by Tidewater National Bank, N.A. (the "Existing Loan"), which was recorded at O.R. Book 2892, Page 0445, Official Records of Monroe County, Florida. As of October 15, 2022, the outstanding principal balance on the Existing Loan is approximately $118,500,000. The Existing Loan is subject to a prepayment premium of 1.0% of the outstanding principal balance (approximately $1,185,000) if prepaid prior to March 1, 2023.

The Borrower acknowledges that the payoff and discharge of the Existing Loan is a condition precedent to the closing of the Loan. In connection therewith, the Borrower requests that the Commitment Letter confirm the following:

(a) The Lender will fund sufficient proceeds at closing to satisfy the Existing Loan in full, including the outstanding principal balance, all accrued and unpaid interest through the closing date, and the applicable prepayment premium of approximately $1,185,000. The payoff amount shall be confirmed by a payoff letter from Tidewater National Bank, N.A. (Alan Prescott, SVP – Commercial Real Estate), to be delivered prior to closing.

(b) The Borrower shall arrange for the satisfaction and discharge of the existing mortgage of record, together with the filing of a UCC-3 termination statement with respect to the existing UCC-1 financing statement (File No. 202219087643), in each case to be recorded or filed simultaneously with or promptly following the recording of the Lender's mortgage and UCC-1 financing statement.

(c) The closing statement shall reflect the application of Loan proceeds to the payoff of the Existing Loan as a first-priority disbursement, with any remaining proceeds disbursed to the Borrower in accordance with the Borrower's instructions.

9. RESERVES

The Commitment Letter requires upfront reserves totaling $4,800,000 for tax, insurance, furniture, fixtures, and equipment ("FF&E"), and capital improvement reserves. The Borrower requests the following clarifications and modifications:

(a) Itemization. The Commitment Letter should provide a detailed itemization of the reserve amounts by category (i.e., the amount allocated to tax reserves, the amount allocated to insurance reserves, the amount allocated to FF&E reserves, and the amount allocated to capital improvement reserves). Without such itemization, the Borrower is unable to evaluate whether the aggregate reserve amount is appropriately sized for each category.

(b) FF&E Reserve Contributions. The Borrower requests that ongoing FF&E reserve contributions be set at 4.0% of gross revenues, which is the prevailing industry standard for full-service resort properties and is consistent with the FF&E reserve requirement under VHG's existing franchise agreement for the property. The initial FF&E reserve deposit should be credited against the first twelve months of required monthly FF&E contributions.

(c) Capital Improvement Reserve. The Borrower requests that the capital improvement reserve be sized taking into account the property's recent $47,000,000 comprehensive renovation, which was completed in August 2021. This renovation included a full renovation of all 450 guest rooms and suites, replacement of all building mechanical systems (including HVAC, plumbing, and electrical), restoration of the resort's common areas and public spaces, and upgrades to the resort's conference and event facilities. Given the recency and scope of this renovation, the near-term capital expenditure requirements for the property are substantially reduced, and the capital improvement reserve should be sized accordingly.

(d) Interest on Reserves. All reserve funds shall be held in interest-bearing accounts at a financial institution acceptable to both the Borrower and the Lender, and all interest accruing on the reserve accounts shall be credited to the Borrower and treated as part of the applicable reserve.

(e) Disbursement Mechanics. The Borrower requests that the definitive Loan Agreement include disbursement mechanics that allow the Borrower to draw on reserve funds upon submission of invoices, receipts, or other customary documentation, without the requirement of prior Lender approval for individual disbursements below a reasonable threshold. The Borrower proposes that the threshold for disbursements not requiring prior Lender approval be set at $250,000 per draw request. Draws in excess of $250,000 shall be subject to the Lender's approval, not to be unreasonably withheld, conditioned, or delayed.

10. CASH MANAGEMENT

The Commitment Letter contemplates a lockbox and cash management structure pursuant to which all revenues from the property will be deposited into a lockbox account controlled by the Lender, with a cash sweep mechanism triggered by specified events.

The Borrower acknowledges the Lender's interest in establishing appropriate cash management controls but requests that the cash management structure be narrowly tailored so as not to unduly restrict the Borrower's ability to manage the day-to-day operations of the property. Specifically, the Borrower requests the following:

(a) Cash Sweep Triggers. The cash sweep (i.e., the Lender's right to trap excess cash flow after payment of debt service, operating expenses, and required reserve contributions) should be triggered only by: (i) the occurrence and continuance of an event of default under the Loan Agreement; (ii) the DSCR falling below 1.15x for two consecutive fiscal quarters, as determined based on the trailing twelve-month NOI and annualized debt service; or (iii) the occurrence of a material casualty or condemnation event affecting a substantial portion of the property.

(b) Borrower Control of Operating Cash Flow. The Commitment Letter should specify that, so long as no cash sweep trigger event has occurred and is continuing, the Borrower retains full and exclusive control of the property's operating cash flow, including the right to direct disbursements from the operating account for ordinary-course operating expenses, capital expenditures (subject to the reserve provisions), and distributions to VHG.

(c) Detailed Provisions. The Borrower acknowledges that the detailed terms and conditions of the cash management structure will be negotiated and documented in a separate Cash Management Agreement, to be executed concurrently with the closing of the Loan. The Borrower reserves the right to comment on all aspects of the Cash Management Agreement at the appropriate time.

11. CONDITIONS PRECEDENT TO CLOSING

The Borrower requests that the Commitment Letter include a comprehensive and definitive list of all conditions precedent to closing. The current draft of the Commitment Letter references certain conditions in general terms but does not provide the specificity necessary for the Borrower to evaluate the feasibility and timeline for satisfaction of each condition. The Borrower provides the following comments on the anticipated conditions precedent:

(a) Appraisal. Delivery of a satisfactory appraisal by a Lender-engaged, MAI-designated appraiser with hospitality sector expertise, subject to the Borrower's challenge rights and the good-faith negotiation period described in Section 1.3 above.

(b) Title Insurance. Issuance of an ALTA lender's title insurance policy by Meridian Title & Escrow, Inc. (Lisa Portman, Title Officer), in an amount equal to the Loan Amount, insuring the first lien priority of the Lender's mortgage, subject only to standard printed exceptions and such other title exceptions as may be reviewed and approved by the Lender (the "Approved Title Exceptions"). The Borrower shall have the opportunity to review and comment on any proposed title objections and to cure or remove any objectionable exceptions prior to closing.

(c) Survey. Delivery of a current ALTA/NSPS Land Title Survey of the property, prepared by Landis & Shaw Surveying, Inc. (Robert Tran, PLS), certified to the Lender, the Lender's counsel, and the title insurance company, and reflecting no material survey defects or encroachments inconsistent with the Approved Title Exceptions.

(d) Environmental. Delivery of a Phase I Environmental Site Assessment of the property, prepared by Oakridge Environmental Consulting Group, Inc. (Dr. James Whitmore, Principal), in accordance with ASTM Standard E1527-21, and satisfactory to the Lender in its reasonable discretion. The Borrower requests that the Lender's right to reject the Phase I be limited to circumstances where the Phase I identifies a recognized environmental condition ("REC") that would reasonably be expected to have a material adverse effect on the value, operation, or marketability of the property.

(e) Insurance. Delivery of evidence of property, casualty, windstorm, and flood insurance coverage, including such policies as may be required by the definitive Loan Agreement, placed with Southland Mutual Insurance Company and Bayfront Specialty Insurance Corp., arranged through Castlegate Risk Advisors LLC (Monica Iglesias, Account Executive), satisfying the Lender's insurance requirements as set forth in the definitive loan documents.

(f) Entity Documents. Delivery of good standing certificates, organizational documents (including articles of organization, operating agreements, certificates of incorporation, bylaws, and partnership agreements, as applicable), and authorizing resolutions for each of Coral Palms Resort Holdings LLC (from the Florida Secretary of State) and Verimark Hospitality Group Inc. (from the Delaware Secretary of State), together with incumbency certificates and such other organizational documents as the Lender may reasonably require.

(g) Financial Statements. Delivery of: (i) VHG's most recent audited consolidated financial statements (audited by Keswick & Holt LLP, Andrew Calloway, CPA), including the balance sheet, income statement, statement of cash flows, and notes thereto; (ii) trailing twelve-month operating statements for the property, prepared in accordance with USALI standards; and (iii) STR reports (or comparable competitive performance reports) for the property for the trailing twelve-month period, evidencing the property's competitive positioning within its defined competitive set.

(h) Payoff of Existing Loan. Delivery of a payoff letter from Tidewater National Bank, N.A. (Alan Prescott, SVP – Commercial Real Estate), dated no more than five (5) business days prior to the closing date, together with arrangements for the satisfaction and discharge of the existing first mortgage and the filing of a UCC-3 termination statement with respect to the existing UCC-1 financing statement (File No. 202219087643). The payoff letter shall include the total payoff amount (including outstanding principal, accrued interest, prepayment premium, and all other amounts necessary to obtain a full release), per diem interest, wire instructions, and the Lender's commitment to record a satisfaction of mortgage promptly upon receipt of funds.

(i) Legal Opinions. Delivery by Borrower's counsel (Calderwood & Harkness LLP) of customary legal opinions addressed to the Lender and the Lender's counsel, including: (i) a due authorization and valid execution opinion; (ii) an enforceability opinion (subject to customary bankruptcy, insolvency, and equitable principles qualifications); and (iii) a non-contravention opinion confirming that the execution, delivery, and performance of the Loan documents by the Borrower and the Guarantor do not contravene their respective organizational documents or any applicable law or agreement. Such opinions shall be rendered under the laws of the State of Florida and the State of Delaware, as applicable.

In addition to the foregoing, the Borrower requests the inclusion of a "deemed satisfaction" provision in the Commitment Letter, providing that if the Lender has not delivered a written objection to any condition precedent item within ten (10) business days following the Borrower's delivery of the applicable documentation, such condition shall be deemed satisfied for all purposes under the Commitment Letter. This provision is necessary to prevent the indefinite pendency of open conditions that could delay closing or create uncertainty regarding the parties' respective obligations.

Finally, the Borrower requests that the outside closing date be established no earlier than seventy-five (75) days from the date of the Commitment Letter, which would place the outside closing date on or about February 22, 2023. The Borrower further requests the right to extend the outside closing date by an additional fifteen (15) calendar days upon written notice to the Lender delivered no later than five (5) business days prior to the then-scheduled closing date. This extension right shall be exercisable without the payment of any fee and without regard to the status of conditions precedent, provided that the Borrower is diligently pursuing the satisfaction of all open conditions.

12. LENDER'S COUNSEL FEES AND EXPENSES

The Commitment Letter provides that the Borrower shall pay the reasonable legal fees and expenses of the Lender's counsel, Whitford Baines & Driscoll LLP, in connection with the negotiation, drafting, and closing of the definitive loan documents, subject to a cap of $275,000 plus reasonable disbursements.

The Borrower accepts the $275,000 fee cap, which is within the range of market for a transaction of this size and complexity. However, the Borrower requests the following additional provisions:

(a) Disbursement Cap. The Borrower requests that disbursements (including without limitation travel expenses, messenger charges, filing fees, and photocopying costs) be capped at $25,000 in the aggregate, in addition to the $275,000 fee cap. Total Lender's counsel fees and disbursements would therefore be capped at $300,000 in the aggregate.

(b) Payment at Closing Only. The Borrower requests that all fees and disbursements of WBD be payable only at closing and not in advance of closing. The Borrower should not be required to fund Lender's counsel fees prior to the consummation of the transaction, particularly given the risk that the transaction may not close due to circumstances beyond the Borrower's control.

(c) Non-Close Due to Lender's Breach. In the event that the transaction does not close due to the Lender's breach of the Commitment Letter or the Lender's unilateral repricing of the Loan constituting a material modification (as defined in Section 3.2(b) above), the Borrower shall not be obligated to pay any portion of the Lender's counsel fees or disbursements.

(d) Monthly Fee Statements. The Borrower requests that WBD provide monthly fee statements to Calderwood & Harkness LLP reflecting the hours incurred, the billing rates of the professionals performing the work, and a description of the services rendered, for the Borrower's review. Such review shall be for informational purposes only and shall not constitute an obligation to pay fees in advance of closing, nor shall any failure to object to a monthly statement constitute a waiver of the Borrower's rights under the fee cap or any other provision of the Commitment Letter.

13. TRANSFER RESTRICTIONS

The Commitment Letter contains transfer restrictions that limit the Borrower's ability to sell, assign, transfer, or otherwise dispose of the property or any direct or indirect interest therein without the Lender's prior written consent. The Borrower acknowledges the customary nature of transfer restrictions in commercial mortgage transactions and does not object to the requirement in principle. However, the Borrower requests that the Commitment Letter (and the definitive Loan Agreement) provide for the following customary exceptions to the transfer restrictions:

(a) Intra-Company Transfers. Transfers of direct or indirect ownership interests in the Borrower among wholly owned subsidiaries of VHG, or reorganizations of the Borrower's ownership structure within the VHG corporate family, provided that VHG (or an entity controlled by VHG) remains the ultimate beneficial owner of the Borrower and the Guarantor's obligations are not diminished.

(b) Corporate-Level Pledges. Pledges of equity interests in VHG (at the publicly traded parent entity level) in connection with corporate-level financing arrangements, including credit facilities, unsecured notes, and similar instruments, provided that no such pledge results in a change of control of VHG or the Borrower.

(c) Passive Transfers. Transfers of limited partnership interests, non-managing member interests, or other passive ownership interests that do not, individually or in the aggregate, result in a change of control of the Borrower or a change in the Borrower's day-to-day management.

(d) Single-Purpose Entity Transfer. A one-time right to transfer the property to a single-purpose entity that is directly or indirectly controlled by VHG, provided that such entity assumes all of the Borrower's obligations under the Loan documents and VHG's guaranty obligations remain in full force and effect.

Detailed transfer restriction provisions, including the definition of "change of control," the Lender's consent standard (which the Borrower proposes should be "not to be unreasonably withheld, conditioned, or delayed"), and any applicable transfer fees, will be negotiated in the context of the definitive Loan Agreement.

14. GOVERNING LAW AND DISPUTE RESOLUTION

The Borrower requests confirmation that the Commitment Letter and all definitive loan documents, including but not limited to the Loan Agreement, the Mortgage, the Note, the Guaranty, the Assignment of Leases and Rents, the Cash Management Agreement, and the Environmental Indemnity Agreement, will be governed by and construed in accordance with the laws of the State of Florida, without regard to conflicts-of-law principles that would require the application of the law of any other jurisdiction.

The Borrower further requests that any disputes arising out of or in connection with the Commitment Letter or any definitive loan document be resolved by litigation in the courts of competent jurisdiction located in Miami-Dade County, Florida, including the United States District Court for the Southern District of Florida and the Circuit Court of the Eleventh Judicial Circuit in and for Miami-Dade County, Florida. Each party shall submit to the exclusive jurisdiction of such courts and shall waive any objection to venue or personal jurisdiction therein. Each party shall further waive, to the fullest extent permitted by applicable law, the right to a trial by jury in any action, proceeding, or counterclaim arising out of or in connection with the Commitment Letter or any definitive loan document.

15. MISCELLANEOUS COMMENTS

15.1 Reporting Requirements

The Commitment Letter references ongoing financial reporting obligations, including quarterly and annual delivery of property-level and guarantor-level financial statements. The Borrower requests that the reporting requirements be aligned with VHG's existing reporting obligations as a publicly traded company listed on the Nasdaq Stock Market (ticker symbol: VMRK). Specifically, the Borrower proposes that the delivery of VHG's publicly filed SEC reports, including its Annual Report on Form 10-K and its Quarterly Reports on Form 10-Q, shall be deemed to satisfy the Borrower's obligation to deliver guarantor-level financial statements. The Lender shall be deemed to have received such reports upon their filing with the Securities and Exchange Commission and their availability on the SEC's EDGAR database. With respect to property-level financial statements, the Borrower shall deliver quarterly and annual operating statements for the property, prepared in accordance with USALI standards, within the timeframes to be agreed upon in the definitive Loan Agreement.

15.2 Insurance Requirements

The Commitment Letter references insurance requirements for the property but does not provide sufficient detail to permit the Borrower to evaluate whether such requirements are commercially reasonable and obtainable in the current insurance market. Given the unique characteristics of the Florida Keys market, including the limited availability and high cost of windstorm and flood insurance, the Borrower requests that the Commitment Letter reference "customary insurance requirements for comparable full-service hospitality assets in the Florida Keys/Monroe County market" rather than specifying coverage amounts, deductibles, or carrier ratings that may not be commercially available. Detailed insurance requirements, including coverage types, minimum limits, deductible levels, carrier rating requirements, and additional insured endorsements, will be specified in the definitive loan documents and reviewed by Castlegate Risk Advisors LLC (Monica Iglesias) on behalf of the Borrower.

15.3 Exclusivity. The Commitment Letter appears to contain an exclusivity provision that would prevent the Borrower from soliciting, negotiating, or entering into any alternative financing arrangements for the property during the term of the Commitment Letter. The Borrower requests that this provision be removed in its entirety, or, in the alternative, that it be narrowed to prohibit only the Borrower's execution of a binding commitment with an alternative lender (as opposed to preliminary discussions, indicative term sheet negotiations, or market-check activities). The Borrower's ability to explore alternative financing sources serves as an important check on the Lender's incentive to proceed diligently and in good faith, and an overly broad exclusivity provision is not consistent with the Borrower's commercial interests.

15.4 Confidentiality. The Borrower requests that the Commitment Letter include mutual confidentiality obligations. Each party should be obligated to keep confidential the terms of the Commitment Letter and the transaction, and shall not disclose such terms to any third party without the prior written consent of the other party, except as may be required by applicable law, regulation, or court order (including without limitation VHG's disclosure obligations under the federal securities laws), or as may be necessary in connection with the ordinary course administration of the Loan (e.g., disclosures to the parties' respective counsel, accountants, financial advisors, and lenders). The Borrower notes that VHG's obligations as a Nasdaq-listed public company may require disclosure of the Loan in VHG's SEC filings, and the confidentiality provision should expressly carve out such required disclosures.

We appreciate PAC's and WBD's willingness to engage constructively on the terms of this significant financing. We respectfully request that PAC and WBD review the attached redline markup of the Commitment Letter and the comments set forth in this letter and schedule a call to discuss the foregoing at your earliest convenience. Our calendars are flexible, and we are prepared to accommodate any time that works for the PAC origination team and WBD.

For purposes of scheduling and substantive discussions regarding the business terms, the Borrower's primary contacts at Verimark Hospitality Group Inc. are Derek Huang, Senior Vice President – Capital Markets & Treasury (dhuang@verimark.com; (305) 749-8812), and Natasha Ricard, Chief Financial Officer (nricard@verimark.com; (305) 749-8801). Each of them is authorized to discuss the business terms on behalf of VHG and the Borrower, subject to the ultimate approval of Conrad W. Elliston, Chairman and Chief Executive Officer.

VHG and the Borrower are committed to proceeding expeditiously toward closing and look forward to receiving initial drafts of the definitive loan documents from WBD at the earliest practicable date. In the meantime, we are available to address any questions that PAC or WBD may have regarding the foregoing comments or the attached markup.

Nothing in this letter or the attached markup shall constitute a waiver of any rights or remedies of the Borrower, the Guarantor, or any of their respective affiliates, whether arising under the Commitment Letter, at law, or in equity, all of which are expressly reserved.

Very truly yours,

CALDERWOOD & HARKNESS LLP

By: ________

Douglas Fairchild, Partner

Direct Telephone: (305) 749-6218 Direct Facsimile: (305) 749-6219

Email: dfairchild@calderwoodharkness.com

cc: Conrad W. Elliston, Chairman & CEO, Verimark Hospitality Group Inc. cc: Natasha Ricard, CFO, Verimark Hospitality Group Inc. cc: Derek Huang, SVP – Capital Markets & Treasury, Verimark Hospitality Group Inc. cc: Angela Fontaine, Partner, Calderwood & Harkness LLP cc: Grace Nakamura, Associate, Calderwood & Harkness LLP cc: Rafael Dominguez, Associate, Calderwood & Harkness LLP

Encl: Borrower's Redline Markup of the Commitment Letter dated December 9, 2022

CALDERWOOD & HARKNESS LLP Attorneys at Law
100 Southeast Second Street, Suite 3800 Miami, Florida 33131
Telephone: (305) 749-6200 Facsimile: (305) 749-6201 www.calderwoodharkness.com
December 11, 2022
VIA EMAIL AND OVERNIGHT COURIER
Philip Tarrant Corporation, Esq., Partner Whitford Baines & Driscoll LLP 1221 Avenue of the Americas, Suite 4400 New York, New York 10020
Re: Commitment Letter dated December 9, 2022, issued by Pinnacle Atlantic Capital, LLC ("Lender") to Coral Palms Resort Holdings LLC ("Borrower") — Proposed $160,000,000 First Mortgage Loan — Coral Palms Grand Resort & Spa, 99000 Overseas Highway, Key Largo, Monroe County, Florida 33037
Calderwood & Harkness LLP Client Matter No.: 1021-00007
Dear Mr. Tarrant Corporation:
This firm represents Verimark Hospitality Group Inc. ("VHG" or the "Guarantor"), a Delaware corporation (Nasdaq: VMRK) headquartered at 1400 Bayshore Boulevard, Suite 2200, Miami, Florida 33131, and its wholly owned indirect subsidiary, Coral Palms Resort Holdings LLC (the "Borrower"), a Florida limited liability company organized under the laws of the State of Florida, in connection with the proposed $160,000,000 first mortgage loan (the "Loan") from Pinnacle Atlantic Capital, LLC ("PAC" or the "Lender") to the Borrower, to be secured by a first priority lien on the Coral Palms Grand Resort & Spa located at 99000 Overseas Highway, Key Largo, Monroe County, Florida 33037.
We are writing to transmit, under separate cover, the attached redline markup of the Commitment Letter executed by the parties on December 9, 2022 (the "Commitment Letter"). We respectfully request that Whitford Baines & Driscoll LLP ("WBD") and PAC review the attached markup, together with the detailed comments set forth in this letter, at your earliest convenience.
As a preliminary matter, we note that while VHG executed the Commitment Letter on December 9, 2022 to preserve the agreed-upon timing and to demonstrate good faith in the transaction, VHG and the Borrower expressly reserve the right to negotiate the terms addressed herein prior to finalization of the definitive loan documents. Execution of the Commitment Letter shall not be deemed a waiver of any of the comments, objections, or proposed modifications set forth below. It is our understanding that WBD will be responsible for circulating initial drafts of the definitive loan documents, including the Loan Agreement, Mortgage, Note, Guaranty, Assignment of Leases and Rents, Cash Management Agreement, Environmental Indemnity Agreement, and all ancillary documents. We respectfully request that the comments set forth in this letter be reflected in those initial drafts to the greatest extent practicable, so as to facilitate an efficient and productive negotiation process.
We address each substantive topic below.
1. LOAN AMOUNT AND SIZING — LTV AND DEBT YIELD COVENANTS
1.1 Maximum Loan-to-Value Ratio (LTV)
The Commitment Letter provides for a Loan Amount of $160,000,000, subject to a maximum loan-to-value ratio ("LTV") of 68.0%, based upon the appraised value of the Coral Palms Grand Resort & Spa as determined by a Lender-engaged appraiser.
We note that, based on VHG's internal valuation of the property at $235,000,000—a figure consistent with VHG's most recent internal appraisal analysis prepared by its in-house real estate finance team—the resulting LTV is $160,000,000 divided by $235,000,000, or approximately 68.09%. This figure is marginally above the 68.0% maximum LTV stated in the Commitment Letter.
The Borrower and Guarantor understand, based on discussions between Derek Huang (VHG's SVP – Capital Markets & Treasury) and PAC's origination team leading up to the execution of the Commitment Letter, that PAC agreed to waive any discrepancy at this level and to proceed with the $160,000,000 Loan Amount notwithstanding the marginal exceedance of the stated LTV cap. We respectfully request that the Commitment Letter be amended to memorialize this understanding in one of the following ways:
(a) The Commitment Letter should be amended to confirm that the LTV of approximately 68.09% as of the date of execution is deemed compliant with the maximum LTV covenant and shall not constitute a breach thereof or a basis for repricing or reduction of the Loan Amount; or
(b) In the alternative, the maximum LTV should be adjusted from 68.0% to 68.5% to accommodate rounding and minor fluctuations in appraised value, which is consistent with market practice for hospitality loans of this size and structure.
The Borrower's concern here is straightforward: if the third-party appraisal commissioned by the Lender returns a value at or near VHG's projection of $235,000,000, even a minor discrepancy—whether attributable to differences in valuation methodology, the selection of comparable transactions, capitalization rate assumptions, or rounding—should not trigger a repricing, a reduction in Loan Amount, or a termination right in favor of the Lender. The Loan was sized and underwritten at $160,000,000 with both parties' full knowledge of the anticipated LTV, and the definitive documents should reflect this mutual understanding.
Additionally, the Borrower requests clarity on the mechanics applicable in the event the appraised value exceeds $235,000,000. Specifically, the Borrower requests confirmation that the Loan Amount will remain fixed at $160,000,000 regardless of whether the appraised value exceeds VHG's internal projection. Under no circumstances should a higher appraised value result in any obligation on the part of the Borrower to accept a larger Loan Amount or to modify the agreed-upon economic terms. Conversely, the Lender should not have the right to increase the Loan Amount, the interest rate, or the fees in connection with a higher-than-expected appraisal.
1.2 Minimum Debt Yield
The Commitment Letter establishes a minimum debt yield of 9.5% as a sizing constraint for the Loan. Based on the projected net operating income ("NOI") of $18,400,000 for the trailing twelve-month period ending September 30, 2022, and a Loan Amount of $160,000,000, the debt yield is $18,400,000 divided by $160,000,000, or approximately 11.50%. This figure is well in excess of the 9.5% minimum threshold by a comfortable margin of approximately 200 basis points.
Notwithstanding the existing cushion, the Borrower requests the following clarifications regarding the debt yield test:
(a) Timing of Application. The Borrower requests clarification that the debt yield test is applied at closing based upon the trailing twelve-month NOI as of the most recently available operating period (i.e., the T-12 period) and is not subject to forward-looking adjustments, lender discretionary haircuts, stabilized projections, or any other methodology that would deviate from actual historical operating performance.
(b) Definition of Net Operating Income. The Borrower requests that the definition of "Net Operating Income" for purposes of the debt yield test (and all other financial covenants in the definitive loan documents) be aligned with the Uniform System of Accounts for the Lodging Industry ("USALI") standards, 11th Revised Edition, as published by the Hotel Association of New York City and the American Hotel & Lodging Educational Institute. Specifically, the NOI definition should exclude the following items:
(i) Non-recurring income and expenses, including gains or losses from the sale or disposition of assets, litigation settlements, insurance proceeds (other than business interruption insurance applied to replace lost revenue), and one-time charges or credits;
(ii) Capital expenditures, including but not limited to FF&E replacements, building system upgrades, structural repairs, and any amounts properly capitalizable under GAAP;
(iii) Management fees in excess of a market-rate threshold, which the Borrower proposes be set at 3.0% of gross revenues (consistent with the management fee payable to VHG Management Services LLC under the existing Hotel Management Agreement dated January 15, 2019); and
(iv) Reserves for replacement, whether funded or unfunded, which are more appropriately addressed through the reserve provisions of the Loan Agreement.
The Borrower reserves the right to further negotiate the precise NOI definition in the context of the definitive Loan Agreement. However, we believe it is important to establish the general framework at the Commitment Letter stage to avoid potential disputes during the loan document drafting process.
1.3 Appraisal Mechanics
The Commitment Letter references the requirement for an appraisal satisfactory to the Lender but does not provide meaningful detail regarding the appraisal process, the qualifications of the appraiser, or the Borrower's rights in connection therewith. Given the significance of the appraisal to the LTV determination and, consequently, to the final Loan Amount, the Borrower requests that the following provisions be incorporated into the Commitment Letter:
(a) Appraiser Qualifications. The appraisal shall be conducted by a licensed, MAI-designated appraiser with demonstrated expertise in the hospitality sector and specific experience valuing full-service resort properties in the Florida Keys or comparable coastal resort markets. The Borrower requests the right to approve the selected appraiser, such approval not to be unreasonably withheld, conditioned, or delayed.
(b) Delivery of Appraisal Report. The Borrower shall receive a complete copy of the appraisal report, including all supporting data, comparable transactions, and methodological assumptions, promptly upon completion and in any event no later than five (5) business days following the Lender's receipt thereof.
(c) Challenge Rights. In the event that the initial appraised value is more than 10% below the Borrower's projected value of $235,000,000 (i.e., below $211,500,000), the Borrower shall have the right to request a second appraisal at the Borrower's sole cost and expense. The second appraisal shall be conducted by a separate MAI-designated appraiser mutually agreed upon by the parties. If the two appraisals differ by more than 5%, the parties shall engage a third appraiser to render a final determination, and the appraised value for purposes of the LTV calculation shall be the average of the two closest values.
(d) Good-Faith Negotiation Period. In the event that any repricing or resizing of the Loan is triggered by the appraisal results, such repricing or resizing shall be subject to a good-faith negotiation period of not less than fifteen (15) business days before either party may terminate the Commitment Letter or exercise any remedies arising from an LTV exceedance. During such negotiation period, neither party shall be deemed in breach of the Commitment Letter, and all deadlines (including the rate lock period and the outside closing date) shall be tolled accordingly.
2. INTEREST RATE AND RATE LOCK
2.1 Fixed Interest Rate
The Commitment Letter provides for a fixed interest rate of 5.35% per annum for a five-year term, stated to be based upon an interpolated U.S. Treasury yield plus a spread of 175 basis points as of the pricing date in November 2022.
The Borrower requests confirmation that the 5.35% rate is locked as of a date certain and that the Commitment Letter identify the precise rate lock mechanics, including the rate lock effective date, the rate lock expiration date, and any conditions or events that could result in a loss of the rate lock.
In connection with the rate lock, the Borrower notes that VHG wired a rate lock deposit of $800,000 (equal to 0.50% of the $160,000,000 Loan Amount) to Meridian Title & Escrow, Inc. on January 5, 2023. The Borrower requests that the Commitment Letter specify the rate lock period, which the Borrower proposes be sixty (60) days from the date of the rate lock deposit (i.e., through and including March 6, 2023). The Commitment Letter should also specify the conditions under which the rate lock period may be extended, including the cost of any such extension and the maximum number of extensions available to the Borrower.
2.2 Default Rate
The Commitment Letter provides for a default rate of interest applicable upon the occurrence and during the continuance of an event of default. The Borrower requests that the default rate premium be capped at the lesser of (a) 5.00% per annum above the contract rate of 5.35% (i.e., a maximum default rate of 10.35% per annum), or (b) the maximum rate of interest permitted under applicable Florida law, including Chapters 687 and 697 of the Florida Statutes.
Additionally, the Borrower requests that the default rate shall not apply during any applicable notice and cure period provided for in the definitive Loan Agreement with respect to the underlying event of default. The imposition of default interest during a period when the Borrower is actively pursuing cure of a curable default is punitive in nature and inconsistent with the commercial intent of the parties.
2.3 Rate Lock Deposit
As noted above, the rate lock deposit of $800,000 has been deposited with Meridian Title & Escrow, Inc. (Lisa Portman, Title Officer), located at 9100 South Dadeland Boulevard, Suite 1500, Miami, Florida 33156. The Borrower requests that the Commitment Letter address the following matters with respect to the rate lock deposit:
(a) Refundability. The Commitment Letter should specify that the rate lock deposit is fully refundable to the Borrower in the event of: (i) the Lender's failure to close the Loan by the anticipated closing date through no fault of the Borrower; (ii) a material modification to the economic terms of the Loan by the Lender, including without limitation any repricing or resizing of the Loan triggered by the appraisal or the Lender's credit review; or (iii) the failure of any condition precedent to closing that is within the Lender's control or attributable to a third party engaged by the Lender, including without limitation the appraiser, the environmental consultant, or the Lender's title agent.
(b) Interest. All interest accrued on the rate lock deposit during the period it is held in escrow shall be credited to the Borrower and, at closing, shall be applied in accordance with the Borrower's instructions (whether to reduce closing costs, to be credited against the first interest payment, or to be returned to the Borrower).
3. GOOD FAITH DEPOSIT
3.1 Deposit Amount and Escrow
The Commitment Letter provides for a good faith deposit of $1,600,000, equal to 1.0% of the $160,000,000 Loan Amount, which the Borrower wired to Meridian Title & Escrow, Inc. on December 12, 2022. Meridian Title & Escrow, Inc. serves as the escrow agent for the deposit.
The Borrower requests confirmation that the good faith deposit is held in a federally insured, interest-bearing escrow account and that all interest accruing on the deposit during the period it is held in escrow shall accrue for the benefit of the Borrower. The Borrower further requests that the escrow agent provide monthly statements reflecting the balance of the deposit and all interest accrued thereon.
3.2 Refundability Conditions
The Commitment Letter currently provides that the good faith deposit is non-refundable upon the Borrower's termination of the transaction. The Borrower objects to this provision as drafted and takes the position that the good faith deposit should be refundable to the Borrower in the following circumstances:
(a) Lender's Failure to Perform. The good faith deposit shall be refundable if the Lender fails to satisfy its obligations under the Commitment Letter, including without limitation the obligation to fund the Loan on the terms set forth therein, the obligation to process the Loan application in a timely and diligent manner, and the obligation to engage qualified third-party consultants as required thereunder.
(b) Material Adverse Change in Terms. The good faith deposit shall be refundable if the Lender imposes a material adverse change in the proposed terms of the Loan, including without limitation any change in the Loan Amount, the interest rate, the amortization schedule, or the collateral requirements resulting from the appraisal, the Lender's internal credit review, credit committee approval process, or any other Lender-side determination. For purposes of this provision, the Borrower requests that "material modification" be defined to include: (i) any reduction in the Loan Amount exceeding 5% (i.e., a reduction below $152,000,000); (ii) any increase in the fixed interest rate exceeding 25 basis points (i.e., an increase above 5.60%); or (iii) any requirement for additional collateral, guaranty scope, or credit support not contemplated in the Commitment Letter as executed on December 9, 2022.
(c) Failure of Lender-Controlled Conditions. The good faith deposit shall be refundable in the event of the failure of any condition precedent to closing that is within the Lender's control or attributable to a third party engaged by or on behalf of the Lender, including without limitation the appraiser, the environmental consultant, the Lender's title agent, and the Lender's insurance consultant.
(d) Borrower's Termination for Cause. The good faith deposit shall be refundable if the Borrower terminates the Commitment Letter for cause based on the Lender's breach of any material obligation thereunder, including without limitation the Lender's failure to comply with the rate lock provisions, the Lender's failure to close by the outside closing date (as the same may be extended), or the Lender's unilateral imposition of terms or conditions not set forth in the Commitment Letter.
The Borrower's position on this point is straightforward: if the Lender imposes repriced terms, modifies material economic provisions, or otherwise fails to perform its obligations under the Commitment Letter, the Borrower should not be penalized by forfeiture of the good faith deposit. The deposit is intended to evidence the Borrower's commitment to the transaction, not to serve as a non-refundable fee payable to the Lender under all circumstances.
3.3 Application at Closing
At the closing of the Loan, the good faith deposit, together with all accrued interest thereon, shall be applied against closing costs (including without limitation title insurance premiums, recording fees, survey costs, and the Lender's counsel fees) or returned to the Borrower in immediately available funds, at the Borrower's election. The Commitment Letter should be amended to confirm this treatment and to specify that the application of the deposit at closing shall be reflected on the closing statement prepared by Meridian Title & Escrow, Inc.
4. COMMITMENT FEE
The Commitment Letter provides for a commitment fee of $800,000, equal to 0.50% of the $160,000,000 Loan Amount, payable at closing.
The Borrower requests the following clarifications and modifications with respect to the commitment fee:
(a) Payable Only at Closing. The Borrower requests confirmation that the commitment fee is payable only upon a successful closing of the Loan and is not payable in advance, upon execution of the Commitment Letter, or at any time prior to the actual funding of the Loan. In the event the transaction does not close for any reason, whether due to a termination by the Borrower, a termination by the Lender, or a failure of conditions precedent, the commitment fee shall not be payable by the Borrower.
(b) Application of Commitment Fee. The Borrower requests that, at closing, the commitment fee of $800,000 be credited against the first interest payment due under the Note, or, in the alternative, be applied to reduce closing costs, at the Borrower's election. This treatment is consistent with the Borrower's understanding of the commercial arrangement discussed during the term sheet phase.
5. LOAN TERM, AMORTIZATION, AND EXTENSION OPTIONS
5.1 Loan Term and Amortization
The Commitment Letter provides for a five-year term from the funding date, with interest-only payments during years one and two, and a 30-year amortization schedule commencing in year three.
The Borrower requests that the Commitment Letter confirm the following:
(a) The amortization schedule commencing in year three shall be calculated on a 30-year basis (360 months) using the fixed interest rate of 5.35% per annum, with monthly payments of principal and interest, and a balloon payment of the remaining outstanding principal balance due and payable at maturity (or at the expiration of any extension period, if applicable).
(b) For the avoidance of doubt, the annual interest-only debt service during years one and two is calculated as $160,000,000 multiplied by 5.35%, or $8,560,000 per annum ($713,333.33 per month). At the projected trailing twelve-month NOI of $18,400,000, this produces a debt service coverage ratio ("DSCR") of approximately 2.15x during the interest-only period, which is well in excess of any DSCR covenant likely to be imposed in the definitive loan documents.
5.2 Extension Options
The Commitment Letter provides for two one-year extension options, each subject to the following conditions: (i) no event of default exists at the time of the extension; (ii) the DSCR is not less than 1.25x as of the extension date; and (iii) payment of an extension fee equal to 0.25% of the then-outstanding principal balance per extension.
The Borrower has the following comments regarding the extension options:
(a) DSCR Test. The Borrower requests that the DSCR test for each extension option be based upon the trailing twelve-month NOI as of the end of the most recent fiscal quarter preceding the date of the extension notice, rather than a forward-looking projection or a stabilized NOI analysis. This approach is consistent with the DSCR methodology proposed by the Borrower in connection with the debt yield test discussed in Section 1.2 above and provides an objective, verifiable metric that is not subject to the Lender's discretionary adjustments.
(b) Technical Defaults. The Borrower requests that the "no event of default" condition be narrowed such that minor or technical defaults (excluding monetary defaults, voluntary bankruptcy filings, and material breaches of environmental or transfer covenants) shall not preclude the Borrower's exercise of the extension options, provided that the Borrower is diligently pursuing the cure of such default within any applicable cure period. It is commercially unreasonable for the Borrower to lose the benefit of a negotiated extension option due to an immaterial or curable technical default that does not impair the Lender's security or the Borrower's ability to service the Loan.
(c) Notice Period. The Commitment Letter currently requires sixty (60) days' advance written notice for the exercise of each extension option. The Borrower requests that this period be reduced to thirty (30) days' advance written notice, which provides adequate time for the Lender to process the extension request and verify satisfaction of the applicable conditions while affording the Borrower greater flexibility in managing its capital structure and refinancing alternatives.
(d) Extension Fee. The Borrower requests that the extension fee be reduced from 0.25% to 0.15% of the then-outstanding principal balance per extension. In the alternative, if PAC is unwilling to reduce the extension fee for the first extension, the Borrower requests that the extension fee for the second extension be waived in its entirety, provided that the first extension fee was timely paid. This structure incentivizes the Borrower to exercise the first extension and rewards a performing borrower with a reduced cost for the second extension.
6. PREPAYMENT AND EXIT FEE
6.1 Prepayment. The Commitment Letter does not clearly set forth the terms governing voluntary prepayment of the Loan, including the lockout period, the prepayment mechanism, and the applicable prepayment premium or penalty. The Borrower requests that the Commitment Letter be amended to address the following:
(a) Lockout Period. The Borrower proposes a lockout period of twenty-four (24) months from the funding date, during which no voluntary prepayment shall be permitted (the "Lockout Period").
(b) Prepayment After Lockout. Following the expiration of the Lockout Period, the Loan should be voluntarily prepayable, in whole or in part, subject to a yield maintenance premium or, at the Borrower's election, defeasance in accordance with the terms of the definitive Loan Agreement. After the later of (i) the expiration of the Lockout Period and (ii) the date that is six (6) months prior to the scheduled maturity date, the Loan should be prepayable without any premium or penalty (an "open" prepayment window).
(c) Yield Maintenance Formula. To the extent a yield maintenance premium applies, the Borrower requests that the yield maintenance formula utilize U.S. Treasury securities with a maturity date closest to the scheduled maturity date of the Loan (or the scheduled maturity date of the then-current extension period, if applicable) as the benchmark. The yield maintenance premium should be calculated using a present value methodology that discounts the remaining scheduled payments at the applicable Treasury rate, consistent with market practice for comparable commercial mortgage loans.
(d) Partial Prepayment. The Borrower requests that partial prepayments be permitted in minimum amounts of $1,000,000, subject to the same yield maintenance premium applicable to full prepayments. Partial prepayments should be applied to the outstanding principal balance in inverse order of maturity.
6.2 Exit Fee
The Commitment Letter provides for an exit fee of 0.25% of the outstanding principal balance at the time of repayment. The Borrower has the following comments regarding the exit fee:
(a) Exceptions. The exit fee should not apply in the event of: (i) a refinancing of the Loan with PAC or a PAC affiliate, in which case PAC will receive the economic benefit of the continued lending relationship; (ii) a sale of the property where the buyer assumes the Loan with the Lender's consent, in which case the Lender continues to hold the same credit; or (iii) a casualty or condemnation event resulting in a mandatory prepayment of the Loan under the terms of the definitive Loan Agreement, in which case the prepayment is involuntary and should not be subject to an additional fee.
(b) Reduction or Elimination. The Borrower requests that the exit fee be reduced to 0.15% of the outstanding principal balance, or, in the alternative, that the exit fee be eliminated entirely if the Loan has been outstanding for more than forty-eight (48) months (i.e., if the Borrower repays the Loan during the final twelve months of the initial five-year term or during any extension period). A borrower that has performed under the Loan for the substantial majority of the term should not be subject to the same exit fee as a borrower that prepays early.
7. GUARANTY STRUCTURE
7.1 Limited Recourse / Carve-Out Guaranty
The Commitment Letter provides that Verimark Hospitality Group Inc. will execute a limited recourse guaranty (commonly referred to as a "bad boy" carve-out guaranty) in connection with the Loan. The Borrower acknowledges the customary nature of such a guaranty in non-recourse commercial mortgage transactions and does not object to the requirement in principle. However, the Borrower requests that the scope of the carve-out events triggering full recourse liability be narrowly defined and limited to the following events:
(a) A voluntary bankruptcy filing by the Borrower or the Guarantor, or the Borrower's or Guarantor's consent to an involuntary bankruptcy filing;
(b) Fraud or intentional misrepresentation by the Borrower, the Guarantor, or any principal thereof in connection with the Loan or the property;
(c) Misapplication or misappropriation of rents, security deposits, insurance proceeds, or condemnation awards in violation of the terms of the Loan Agreement;
(d) Intentional physical waste of the property; and
(e) A transfer of the property or any interest therein in violation of the transfer restrictions set forth in the Loan Agreement.
With respect to springing full recourse triggers, the Borrower has particular concern regarding involuntary bankruptcy filings. The Borrower requests that an involuntary bankruptcy filing against the Borrower or the Guarantor shall not trigger full recourse liability unless the Borrower or the Guarantor colludes in, solicits, or consents to the filing, and the filing is not dismissed within ninety (90) days. It is fundamentally inequitable to impose full recourse liability on a guarantor for an involuntary bankruptcy filing initiated by a third-party creditor over which the guarantor has no control.
The Borrower further acknowledges that the parties intend to negotiate a separate Environmental Indemnity Agreement in connection with the Loan, pursuant to which VHG will provide customary environmental indemnification. The Borrower requests that the carve-out guaranty not duplicate the environmental obligations to be set forth in the Environmental Indemnity Agreement, so as to avoid overlapping or inconsistent liability.
7.2 Guarantor Financial Covenants
The Commitment Letter references ongoing financial covenants applicable to VHG in its capacity as Guarantor, but does not specify the nature or level of such covenants. The Borrower requests that PAC and WBD clarify at the earliest opportunity whether the Lender intends to impose minimum net worth, minimum liquidity, or other financial maintenance covenants on VHG as Guarantor. If such covenants are proposed, the Borrower takes the following position:
(a) Any financial covenants applicable to VHG as Guarantor should be tied to VHG's consolidated financial statements as audited on an annual basis by Keswick & Holt LLP, VHG's independent registered public accounting firm (Andrew Calloway, CPA, Engagement Partner). Quarterly compliance testing should be based on VHG's unaudited quarterly financial statements prepared in accordance with GAAP and consistent with VHG's SEC reporting obligations.
(b) Minimum net worth and minimum liquidity thresholds should be set at levels that reflect VHG's current financial position with a reasonable cushion, and should not be so restrictive as to constrain VHG's ordinary-course business operations, capital investment program, or dividend policy. The Borrower reserves the right to negotiate specific thresholds after reviewing PAC's proposed levels.
8. COLLATERAL AND SECURITY
8.1 Property as Sole Collateral
The Commitment Letter contemplates the following collateral package for the Loan: (i) a first priority mortgage lien on the Coral Palms Grand Resort & Spa, 99000 Overseas Highway, Key Largo, Monroe County, Florida 33037 (Folio No. 00460780-000100); (ii) an assignment of leases, rents, and profits arising from the property; (iii) a security interest in all tangible and intangible personal property located at or used in connection with the property (to be perfected by UCC-1 financing statement filings with the Florida Secured Transaction Registry); and (iv) an assignment of all contracts, permits, licenses, entitlements, and intangible property related to the operation of the property.
The Borrower's position is that the Coral Palms Grand Resort & Spa, together with the foregoing assignments and security interests, shall constitute the sole collateral for the Loan. No cross-collateralization with any other property owned or operated by VHG or any of its subsidiaries shall be required. The Borrower requests express confirmation in the Commitment Letter that no additional collateral will be required, including without limitation the Driftwood Bay Hotel located in Sarasota, Florida, or any other VHG portfolio property. Any requirement for cross-collateralization would be inconsistent with the non-recourse, asset-level financing structure contemplated by the Commitment Letter and would not be acceptable to VHG. To the extent PAC may seek additional collateral in the future based on changes in circumstances, any such request shall be subject to a subsequent written agreement of the parties and shall not be a unilateral right of the Lender.
8.2 Existing Tidewater Mortgage
The property is currently encumbered by an existing first mortgage held by Tidewater National Bank, N.A. (the "Existing Loan"), which was recorded at O.R. Book 2892, Page 0445, Official Records of Monroe County, Florida. As of October 15, 2022, the outstanding principal balance on the Existing Loan is approximately $118,500,000. The Existing Loan is subject to a prepayment premium of 1.0% of the outstanding principal balance (approximately $1,185,000) if prepaid prior to March 1, 2023.
The Borrower acknowledges that the payoff and discharge of the Existing Loan is a condition precedent to the closing of the Loan. In connection therewith, the Borrower requests that the Commitment Letter confirm the following:
(a) The Lender will fund sufficient proceeds at closing to satisfy the Existing Loan in full, including the outstanding principal balance, all accrued and unpaid interest through the closing date, and the applicable prepayment premium of approximately $1,185,000. The payoff amount shall be confirmed by a payoff letter from Tidewater National Bank, N.A. (Alan Prescott, SVP – Commercial Real Estate), to be delivered prior to closing.
(b) The Borrower shall arrange for the satisfaction and discharge of the existing mortgage of record, together with the filing of a UCC-3 termination statement with respect to the existing UCC-1 financing statement (File No. 202219087643), in each case to be recorded or filed simultaneously with or promptly following the recording of the Lender's mortgage and UCC-1 financing statement.
(c) The closing statement shall reflect the application of Loan proceeds to the payoff of the Existing Loan as a first-priority disbursement, with any remaining proceeds disbursed to the Borrower in accordance with the Borrower's instructions.
9. RESERVES
The Commitment Letter requires upfront reserves totaling $4,800,000 for tax, insurance, furniture, fixtures, and equipment ("FF&E"), and capital improvement reserves. The Borrower requests the following clarifications and modifications:
(a) Itemization. The Commitment Letter should provide a detailed itemization of the reserve amounts by category (i.e., the amount allocated to tax reserves, the amount allocated to insurance reserves, the amount allocated to FF&E reserves, and the amount allocated to capital improvement reserves). Without such itemization, the Borrower is unable to evaluate whether the aggregate reserve amount is appropriately sized for each category.
(b) FF&E Reserve Contributions. The Borrower requests that ongoing FF&E reserve contributions be set at 4.0% of gross revenues, which is the prevailing industry standard for full-service resort properties and is consistent with the FF&E reserve requirement under VHG's existing franchise agreement for the property. The initial FF&E reserve deposit should be credited against the first twelve months of required monthly FF&E contributions.
(c) Capital Improvement Reserve. The Borrower requests that the capital improvement reserve be sized taking into account the property's recent $47,000,000 comprehensive renovation, which was completed in August 2021. This renovation included a full renovation of all 450 guest rooms and suites, replacement of all building mechanical systems (including HVAC, plumbing, and electrical), restoration of the resort's common areas and public spaces, and upgrades to the resort's conference and event facilities. Given the recency and scope of this renovation, the near-term capital expenditure requirements for the property are substantially reduced, and the capital improvement reserve should be sized accordingly.
(d) Interest on Reserves. All reserve funds shall be held in interest-bearing accounts at a financial institution acceptable to both the Borrower and the Lender, and all interest accruing on the reserve accounts shall be credited to the Borrower and treated as part of the applicable reserve.
(e) Disbursement Mechanics. The Borrower requests that the definitive Loan Agreement include disbursement mechanics that allow the Borrower to draw on reserve funds upon submission of invoices, receipts, or other customary documentation, without the requirement of prior Lender approval for individual disbursements below a reasonable threshold. The Borrower proposes that the threshold for disbursements not requiring prior Lender approval be set at $250,000 per draw request. Draws in excess of $250,000 shall be subject to the Lender's approval, not to be unreasonably withheld, conditioned, or delayed.
10. CASH MANAGEMENT
The Commitment Letter contemplates a lockbox and cash management structure pursuant to which all revenues from the property will be deposited into a lockbox account controlled by the Lender, with a cash sweep mechanism triggered by specified events.
The Borrower acknowledges the Lender's interest in establishing appropriate cash management controls but requests that the cash management structure be narrowly tailored so as not to unduly restrict the Borrower's ability to manage the day-to-day operations of the property. Specifically, the Borrower requests the following:
(a) Cash Sweep Triggers. The cash sweep (i.e., the Lender's right to trap excess cash flow after payment of debt service, operating expenses, and required reserve contributions) should be triggered only by: (i) the occurrence and continuance of an event of default under the Loan Agreement; (ii) the DSCR falling below 1.15x for two consecutive fiscal quarters, as determined based on the trailing twelve-month NOI and annualized debt service; or (iii) the occurrence of a material casualty or condemnation event affecting a substantial portion of the property.
(b) Borrower Control of Operating Cash Flow. The Commitment Letter should specify that, so long as no cash sweep trigger event has occurred and is continuing, the Borrower retains full and exclusive control of the property's operating cash flow, including the right to direct disbursements from the operating account for ordinary-course operating expenses, capital expenditures (subject to the reserve provisions), and distributions to VHG.
(c) Detailed Provisions. The Borrower acknowledges that the detailed terms and conditions of the cash management structure will be negotiated and documented in a separate Cash Management Agreement, to be executed concurrently with the closing of the Loan. The Borrower reserves the right to comment on all aspects of the Cash Management Agreement at the appropriate time.
11. CONDITIONS PRECEDENT TO CLOSING
The Borrower requests that the Commitment Letter include a comprehensive and definitive list of all conditions precedent to closing. The current draft of the Commitment Letter references certain conditions in general terms but does not provide the specificity necessary for the Borrower to evaluate the feasibility and timeline for satisfaction of each condition. The Borrower provides the following comments on the anticipated conditions precedent:
(a) Appraisal. Delivery of a satisfactory appraisal by a Lender-engaged, MAI-designated appraiser with hospitality sector expertise, subject to the Borrower's challenge rights and the good-faith negotiation period described in Section 1.3 above.
(b) Title Insurance. Issuance of an ALTA lender's title insurance policy by Meridian Title & Escrow, Inc. (Lisa Portman, Title Officer), in an amount equal to the Loan Amount, insuring the first lien priority of the Lender's mortgage, subject only to standard printed exceptions and such other title exceptions as may be reviewed and approved by the Lender (the "Approved Title Exceptions"). The Borrower shall have the opportunity to review and comment on any proposed title objections and to cure or remove any objectionable exceptions prior to closing.
(c) Survey. Delivery of a current ALTA/NSPS Land Title Survey of the property, prepared by Landis & Shaw Surveying, Inc. (Robert Tran, PLS), certified to the Lender, the Lender's counsel, and the title insurance company, and reflecting no material survey defects or encroachments inconsistent with the Approved Title Exceptions.
(d) Environmental. Delivery of a Phase I Environmental Site Assessment of the property, prepared by Oakridge Environmental Consulting Group, Inc. (Dr. James Whitmore, Principal), in accordance with ASTM Standard E1527-21, and satisfactory to the Lender in its reasonable discretion. The Borrower requests that the Lender's right to reject the Phase I be limited to circumstances where the Phase I identifies a recognized environmental condition ("REC") that would reasonably be expected to have a material adverse effect on the value, operation, or marketability of the property.
(e) Insurance. Delivery of evidence of property, casualty, windstorm, and flood insurance coverage, including such policies as may be required by the definitive Loan Agreement, placed with Southland Mutual Insurance Company and Bayfront Specialty Insurance Corp., arranged through Castlegate Risk Advisors LLC (Monica Iglesias, Account Executive), satisfying the Lender's insurance requirements as set forth in the definitive loan documents.
(f) Entity Documents. Delivery of good standing certificates, organizational documents (including articles of organization, operating agreements, certificates of incorporation, bylaws, and partnership agreements, as applicable), and authorizing resolutions for each of Coral Palms Resort Holdings LLC (from the Florida Secretary of State) and Verimark Hospitality Group Inc. (from the Delaware Secretary of State), together with incumbency certificates and such other organizational documents as the Lender may reasonably require.
(g) Financial Statements. Delivery of: (i) VHG's most recent audited consolidated financial statements (audited by Keswick & Holt LLP, Andrew Calloway, CPA), including the balance sheet, income statement, statement of cash flows, and notes thereto; (ii) trailing twelve-month operating statements for the property, prepared in accordance with USALI standards; and (iii) STR reports (or comparable competitive performance reports) for the property for the trailing twelve-month period, evidencing the property's competitive positioning within its defined competitive set.
(h) Payoff of Existing Loan. Delivery of a payoff letter from Tidewater National Bank, N.A. (Alan Prescott, SVP – Commercial Real Estate), dated no more than five (5) business days prior to the closing date, together with arrangements for the satisfaction and discharge of the existing first mortgage and the filing of a UCC-3 termination statement with respect to the existing UCC-1 financing statement (File No. 202219087643). The payoff letter shall include the total payoff amount (including outstanding principal, accrued interest, prepayment premium, and all other amounts necessary to obtain a full release), per diem interest, wire instructions, and the Lender's commitment to record a satisfaction of mortgage promptly upon receipt of funds.
(i) Legal Opinions. Delivery by Borrower's counsel (Calderwood & Harkness LLP) of customary legal opinions addressed to the Lender and the Lender's counsel, including: (i) a due authorization and valid execution opinion; (ii) an enforceability opinion (subject to customary bankruptcy, insolvency, and equitable principles qualifications); and (iii) a non-contravention opinion confirming that the execution, delivery, and performance of the Loan documents by the Borrower and the Guarantor do not contravene their respective organizational documents or any applicable law or agreement. Such opinions shall be rendered under the laws of the State of Florida and the State of Delaware, as applicable.
In addition to the foregoing, the Borrower requests the inclusion of a "deemed satisfaction" provision in the Commitment Letter, providing that if the Lender has not delivered a written objection to any condition precedent item within ten (10) business days following the Borrower's delivery of the applicable documentation, such condition shall be deemed satisfied for all purposes under the Commitment Letter. This provision is necessary to prevent the indefinite pendency of open conditions that could delay closing or create uncertainty regarding the parties' respective obligations.
Finally, the Borrower requests that the outside closing date be established no earlier than seventy-five (75) days from the date of the Commitment Letter, which would place the outside closing date on or about February 22, 2023. The Borrower further requests the right to extend the outside closing date by an additional fifteen (15) calendar days upon written notice to the Lender delivered no later than five (5) business days prior to the then-scheduled closing date. This extension right shall be exercisable without the payment of any fee and without regard to the status of conditions precedent, provided that the Borrower is diligently pursuing the satisfaction of all open conditions.
12. LENDER'S COUNSEL FEES AND EXPENSES
The Commitment Letter provides that the Borrower shall pay the reasonable legal fees and expenses of the Lender's counsel, Whitford Baines & Driscoll LLP, in connection with the negotiation, drafting, and closing of the definitive loan documents, subject to a cap of $275,000 plus reasonable disbursements.
The Borrower accepts the $275,000 fee cap, which is within the range of market for a transaction of this size and complexity. However, the Borrower requests the following additional provisions:
(a) Disbursement Cap. The Borrower requests that disbursements (including without limitation travel expenses, messenger charges, filing fees, and photocopying costs) be capped at $25,000 in the aggregate, in addition to the $275,000 fee cap. Total Lender's counsel fees and disbursements would therefore be capped at $300,000 in the aggregate.
(b) Payment at Closing Only. The Borrower requests that all fees and disbursements of WBD be payable only at closing and not in advance of closing. The Borrower should not be required to fund Lender's counsel fees prior to the consummation of the transaction, particularly given the risk that the transaction may not close due to circumstances beyond the Borrower's control.
(c) Non-Close Due to Lender's Breach. In the event that the transaction does not close due to the Lender's breach of the Commitment Letter or the Lender's unilateral repricing of the Loan constituting a material modification (as defined in Section 3.2(b) above), the Borrower shall not be obligated to pay any portion of the Lender's counsel fees or disbursements.
(d) Monthly Fee Statements. The Borrower requests that WBD provide monthly fee statements to Calderwood & Harkness LLP reflecting the hours incurred, the billing rates of the professionals performing the work, and a description of the services rendered, for the Borrower's review. Such review shall be for informational purposes only and shall not constitute an obligation to pay fees in advance of closing, nor shall any failure to object to a monthly statement constitute a waiver of the Borrower's rights under the fee cap or any other provision of the Commitment Letter.
13. TRANSFER RESTRICTIONS
The Commitment Letter contains transfer restrictions that limit the Borrower's ability to sell, assign, transfer, or otherwise dispose of the property or any direct or indirect interest therein without the Lender's prior written consent. The Borrower acknowledges the customary nature of transfer restrictions in commercial mortgage transactions and does not object to the requirement in principle. However, the Borrower requests that the Commitment Letter (and the definitive Loan Agreement) provide for the following customary exceptions to the transfer restrictions:
(a) Intra-Company Transfers. Transfers of direct or indirect ownership interests in the Borrower among wholly owned subsidiaries of VHG, or reorganizations of the Borrower's ownership structure within the VHG corporate family, provided that VHG (or an entity controlled by VHG) remains the ultimate beneficial owner of the Borrower and the Guarantor's obligations are not diminished.
(b) Corporate-Level Pledges. Pledges of equity interests in VHG (at the publicly traded parent entity level) in connection with corporate-level financing arrangements, including credit facilities, unsecured notes, and similar instruments, provided that no such pledge results in a change of control of VHG or the Borrower.
(c) Passive Transfers. Transfers of limited partnership interests, non-managing member interests, or other passive ownership interests that do not, individually or in the aggregate, result in a change of control of the Borrower or a change in the Borrower's day-to-day management.
(d) Single-Purpose Entity Transfer. A one-time right to transfer the property to a single-purpose entity that is directly or indirectly controlled by VHG, provided that such entity assumes all of the Borrower's obligations under the Loan documents and VHG's guaranty obligations remain in full force and effect.
Detailed transfer restriction provisions, including the definition of "change of control," the Lender's consent standard (which the Borrower proposes should be "not to be unreasonably withheld, conditioned, or delayed"), and any applicable transfer fees, will be negotiated in the context of the definitive Loan Agreement.
14. GOVERNING LAW AND DISPUTE RESOLUTION
The Borrower requests confirmation that the Commitment Letter and all definitive loan documents, including but not limited to the Loan Agreement, the Mortgage, the Note, the Guaranty, the Assignment of Leases and Rents, the Cash Management Agreement, and the Environmental Indemnity Agreement, will be governed by and construed in accordance with the laws of the State of Florida, without regard to conflicts-of-law principles that would require the application of the law of any other jurisdiction.
The Borrower further requests that any disputes arising out of or in connection with the Commitment Letter or any definitive loan document be resolved by litigation in the courts of competent jurisdiction located in Miami-Dade County, Florida, including the United States District Court for the Southern District of Florida and the Circuit Court of the Eleventh Judicial Circuit in and for Miami-Dade County, Florida. Each party shall submit to the exclusive jurisdiction of such courts and shall waive any objection to venue or personal jurisdiction therein. Each party shall further waive, to the fullest extent permitted by applicable law, the right to a trial by jury in any action, proceeding, or counterclaim arising out of or in connection with the Commitment Letter or any definitive loan document.
15. MISCELLANEOUS COMMENTS
15.1 Reporting Requirements
The Commitment Letter references ongoing financial reporting obligations, including quarterly and annual delivery of property-level and guarantor-level financial statements. The Borrower requests that the reporting requirements be aligned with VHG's existing reporting obligations as a publicly traded company listed on the Nasdaq Stock Market (ticker symbol: VMRK). Specifically, the Borrower proposes that the delivery of VHG's publicly filed SEC reports, including its Annual Report on Form 10-K and its Quarterly Reports on Form 10-Q, shall be deemed to satisfy the Borrower's obligation to deliver guarantor-level financial statements. The Lender shall be deemed to have received such reports upon their filing with the Securities and Exchange Commission and their availability on the SEC's EDGAR database. With respect to property-level financial statements, the Borrower shall deliver quarterly and annual operating statements for the property, prepared in accordance with USALI standards, within the timeframes to be agreed upon in the definitive Loan Agreement.
15.2 Insurance Requirements
The Commitment Letter references insurance requirements for the property but does not provide sufficient detail to permit the Borrower to evaluate whether such requirements are commercially reasonable and obtainable in the current insurance market. Given the unique characteristics of the Florida Keys market, including the limited availability and high cost of windstorm and flood insurance, the Borrower requests that the Commitment Letter reference "customary insurance requirements for comparable full-service hospitality assets in the Florida Keys/Monroe County market" rather than specifying coverage amounts, deductibles, or carrier ratings that may not be commercially available. Detailed insurance requirements, including coverage types, minimum limits, deductible levels, carrier rating requirements, and additional insured endorsements, will be specified in the definitive loan documents and reviewed by Castlegate Risk Advisors LLC (Monica Iglesias) on behalf of the Borrower.
15.3 Exclusivity. The Commitment Letter appears to contain an exclusivity provision that would prevent the Borrower from soliciting, negotiating, or entering into any alternative financing arrangements for the property during the term of the Commitment Letter. The Borrower requests that this provision be removed in its entirety, or, in the alternative, that it be narrowed to prohibit only the Borrower's execution of a binding commitment with an alternative lender (as opposed to preliminary discussions, indicative term sheet negotiations, or market-check activities). The Borrower's ability to explore alternative financing sources serves as an important check on the Lender's incentive to proceed diligently and in good faith, and an overly broad exclusivity provision is not consistent with the Borrower's commercial interests.
15.4 Confidentiality. The Borrower requests that the Commitment Letter include mutual confidentiality obligations. Each party should be obligated to keep confidential the terms of the Commitment Letter and the transaction, and shall not disclose such terms to any third party without the prior written consent of the other party, except as may be required by applicable law, regulation, or court order (including without limitation VHG's disclosure obligations under the federal securities laws), or as may be necessary in connection with the ordinary course administration of the Loan (e.g., disclosures to the parties' respective counsel, accountants, financial advisors, and lenders). The Borrower notes that VHG's obligations as a Nasdaq-listed public company may require disclosure of the Loan in VHG's SEC filings, and the confidentiality provision should expressly carve out such required disclosures.
We appreciate PAC's and WBD's willingness to engage constructively on the terms of this significant financing. We respectfully request that PAC and WBD review the attached redline markup of the Commitment Letter and the comments set forth in this letter and schedule a call to discuss the foregoing at your earliest convenience. Our calendars are flexible, and we are prepared to accommodate any time that works for the PAC origination team and WBD.
For purposes of scheduling and substantive discussions regarding the business terms, the Borrower's primary contacts at Verimark Hospitality Group Inc. are Derek Huang, Senior Vice President – Capital Markets & Treasury (dhuang@verimark.com; (305) 749-8812), and Natasha Ricard, Chief Financial Officer (nricard@verimark.com; (305) 749-8801). Each of them is authorized to discuss the business terms on behalf of VHG and the Borrower, subject to the ultimate approval of Conrad W. Elliston, Chairman and Chief Executive Officer.
VHG and the Borrower are committed to proceeding expeditiously toward closing and look forward to receiving initial drafts of the definitive loan documents from WBD at the earliest practicable date. In the meantime, we are available to address any questions that PAC or WBD may have regarding the foregoing comments or the attached markup.
Nothing in this letter or the attached markup shall constitute a waiver of any rights or remedies of the Borrower, the Guarantor, or any of their respective affiliates, whether arising under the Commitment Letter, at law, or in equity, all of which are expressly reserved.
Very truly yours,
CALDERWOOD & HARKNESS LLP
By: ________
Douglas Fairchild, Partner
Direct Telephone: (305) 749-6218 Direct Facsimile: (305) 749-6219
Email: dfairchild@calderwoodharkness.com
cc: Conrad W. Elliston, Chairman & CEO, Verimark Hospitality Group Inc. cc: Natasha Ricard, CFO, Verimark Hospitality Group Inc. cc: Derek Huang, SVP – Capital Markets & Treasury, Verimark Hospitality Group Inc. cc: Angela Fontaine, Partner, Calderwood & Harkness LLP cc: Grace Nakamura, Associate, Calderwood & Harkness LLP cc: Rafael Dominguez, Associate, Calderwood & Harkness LLP
Encl: Borrower's Redline Markup of the Commitment Letter dated December 9, 2022

CALDERWOOD & HARKNESS LLP Attorneys at Law

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