Conrad,
I wanted to reach you first thing this morning regarding an important development on the Coral Palms refinancing. Yesterday afternoon, Pinnacle Atlantic Capital's appraiser — Hargrove & Whitley Valuation Services LLC, with Scott Tremaine, MAI, MRICS, as lead appraiser — delivered its completed appraisal report for the Coral Palms Grand Resort & Spa, 99000 Overseas Highway, Key Largo, Monroe County, Florida. The appraisal effective date is January 6, 2023, reflecting the date of the appraiser's physical inspection of the property.
The concluded market value is **$192,000,000**.
This represents a **$43,000,000 shortfall** from VHG's internal projected value of $235,000,000 — approximately 18.3% below your projection. Given the significance of this gap, I did not want to wait until Monday to bring it to your attention.
**Impact on the Proposed $160,000,000 Loan**
Under the Commitment Letter dated December 9, 2022, the $160,000,000 loan is subject to a maximum loan-to-value ratio of 68.0% and a minimum debt yield of 9.5%. At the appraised value, the numbers break down as follows:
- **LTV at appraised value:** $160,000,000 ÷ $192,000,000 = **83.33%** — this materially exceeds the 68.0% maximum LTV covenant. - **Maximum supportable loan amount at 68% LTV:** $192,000,000 × 68.0% = **$130,560,000** — a reduction of $29,440,000 from the proposed loan amount. - **Debt yield:** $18,400,000 NOI ÷ $160,000,000 = **11.50%** — this still clears the 9.5% minimum debt yield threshold (debt yield being independent of property value), but the LTV constraint is the binding constraint here.
In short, the loan at $160,000,000 simply cannot close at the appraised value under the current commitment terms.
**Anticipated Lender Response**
I expect PAC will come back to VHG with restructured or repriced terms in the near term. Based on our experience with similar situations, we should anticipate some combination of the following:
- A significant reduction in loan amount, possibly to or near the $130,560,000 maximum at 68% LTV, though PAC may stretch somewhat above that figure if VHG agrees to additional credit enhancements. - An increase in the interest rate from the original 5.35% fixed rate, reflecting increased perceived risk at a higher relative leverage point. - A potential demand for additional collateral, including cross-collateralization with other VHG properties. - A possible upgrade from the limited recourse / "bad boy" carve-out guaranty structure to full recourse. - Enhanced reserve requirements.
I want to be candid about the downstream impact. As you will recall, the original net cash-out to VHG was estimated at approximately $32,265,000 — based on $160,000,000 in loan proceeds less the $118,500,000 Tidewater payoff, the $1,185,000 prepayment premium, approximately $3,250,000 in estimated closing costs, and $4,800,000 in upfront reserves. A loan sized at $130,560,000 would not even provide sufficient proceeds to cover the Tidewater payoff plus closing costs and reserves without VHG contributing equity into the transaction.
**Preliminary Assessment of the Appraisal**
Grace Nakamura and the team are already conducting an initial review of the appraisal report and its methodology. On a preliminary basis, the appraisal appears to have applied a more conservative capitalization rate and selected comparable sales that may not fully reflect the Coral Palms property's market positioning following the comprehensive $47,000,000 renovation completed in August 2021.
The property's trailing 12-month operating performance — occupancy of 71.3%, ADR of $389, RevPAR of $277.36, total revenue of approximately $62.8 million, and NOI of approximately $18.4 million for the T-12 ending September 30, 2022 — should, in our view, support a higher valuation, though we defer to valuation professionals on that point. This is a 342-room full-service luxury oceanfront resort with significant amenities (28,500 square feet of meeting and event space, an 18,000-square-foot spa, a 42-slip marina, and three food and beverage outlets) — an asset class where comparable transaction selection criteria can produce materially different value conclusions.
**Recommended Next Steps**
I recommend the following actions:
1. **Retain an independent appraisal review consultant.** I strongly recommend that VHG promptly engage a qualified valuation advisory firm to independently review the Hargrove & Whitley report, identify potential weaknesses in methodology, comparable selections, and assumptions, and prepare a written rebuttal or critique. This will be essential if VHG wishes to challenge the appraisal or request that PAC commission a second appraisal. We have worked with several qualified firms in this space and are happy to provide recommendations.
2. **Schedule an internal strategy call early next week.** I recommend we convene a call — Conrad, Natasha, Derek, Angela, Grace, and myself — to discuss VHG's full range of options, including: (a) challenging the appraisal and requesting PAC reconsider or commission a second opinion of value; (b) negotiating any repriced terms PAC may propose; (c) evaluating alternative refinancing sources if PAC's revised terms become commercially unacceptable; and (d) considering the timeline pressure, given the existing Tidewater loan maturity of June 1, 2024, and the 1.0% prepayment premium ($1,185,000) that applies if the Tidewater loan is prepaid before March 1, 2023. Derek — would you coordinate availability for Monday or Tuesday?
3. **Deposit exposure.** I want to remind the team that VHG currently has $2,400,000 in deposits held by Meridian Title & Escrow, Inc. — the $1,600,000 good faith deposit wired on December 12, 2022, and the $800,000 rate lock deposit wired on January 5, 2023. The refundability of these deposits under the Commitment Letter and the side letter will be a critical consideration in any decision about how to proceed. We will prepare a detailed analysis of the deposit provisions for the strategy call.
4. **Preserve VHG's rights under the Commitment Letter.** We will carefully review the Commitment Letter provisions regarding the appraisal condition, material adverse change, and borrower's rights in the event of a valuation shortfall. I want to make certain that VHG's contractual position is fully preserved while we evaluate the path forward.
**Looking Ahead**
Conrad, I am confident that the team will navigate this carefully and that there are viable paths forward — but I want to be straightforward with you that this shortfall is substantial and will materially alter the economics of the transaction as originally contemplated. We will have a much clearer picture once we complete our detailed review of the appraisal methodology and assess the strength of any challenge.
I understand Derek received the appraisal report directly from PAC's team yesterday. We are reviewing it under the lender's confidentiality restrictions and will circulate a more detailed internal appraisal review memorandum early next week, ahead of or concurrent with our strategy call.
Please do not hesitate to call me over the weekend if you would like to discuss any of this further. I am available on my mobile at (305) 555-0194.
Best regards,
Douglas Fairchild Partner Calderwood & Harkness LLP 100 Southeast Second Street, Suite 3800 Miami, FL 33131 T: (305) 555-0100 M: (305) 555-0194 E: dfairchild@calderwoodharkness.com
---
CONFIDENTIALITY NOTICE: This email and any attachments are intended solely for the use of the individual or entity to whom it is addressed and may contain information that is privileged, confidential, and exempt from disclosure under applicable law, including attorney-client privileged communications and attorney work product. If you are not the intended recipient, or the employee or agent responsible for delivering this message to the intended recipient, you are hereby notified that any dissemination, distribution, or copying of this communication is strictly prohibited. If you have received this communication in error, please notify the sender immediately by reply email and delete the original message and all copies from your system. Thank you.