MEMORANDUM
PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT This memorandum is a privileged and confidential attorney work product prepared by Calderwood & Harkness LLP in connection with our representation of Verimark Hospitality Group Inc. and Coral Palms Resort Holdings LLC. This memorandum is protected by the attorney-client privilege and the work product doctrine. Do not distribute or disclose the contents of this memorandum to any person or entity outside of the Calderwood & Harkness client team without the prior authorization of the undersigned.
TO: Douglas Fairchild, Responsible Partner Angela Fontaine, Billing Partner
FROM: Grace Nakamura, Lead Associate Rafael Dominguez, Working Associate
DATE: January 9, 2023
RE: Open Issues — Loan Document Negotiation Coral Palms Grand Resort & Spa Refinancing Matter No. 1021-00007
CLIENT: Verimark Hospitality Group Inc. ("VHG") / Coral Palms Resort Holdings LLC ("Borrower")
LENDER: Pinnacle Atlantic Capital, LLC ("PAC")
LOAN AMOUNT: $160,000,000
PROPERTY: Coral Palms Grand Resort & Spa, 99000 Overseas Highway, Key Largo, Monroe County, Florida 33037 (the "Property")
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I. Introduction and Purpose
The purpose of this memorandum is to catalog and analyze all material open issues across the loan document suite prepared by Whitford Baines & Driscoll LLP ("WBD") (Philip Tarrant Corporation, Partner; Catherine Yee, Associate) on behalf of Pinnacle Atlantic Capital, LLC ("PAC"), in connection with the proposed $160,000,000 refinancing of the Coral Palms Grand Resort & Spa, located at 99000 Overseas Highway, Key Largo, Monroe County, Florida 33037 (the "Property"). WBD circulated the initial draft loan documents to our office on December 19, 2022.
Calderwood & Harkness's borrower markups (redlines) of all seven loan documents are being transmitted to WBD concurrently with this memorandum. This memo is intended to serve as an internal briefing tool for the partner team, providing a comprehensive overview of the positions reflected in our redlines, the rationale underlying each proposed revision, and our recommended negotiation strategy for the discussions that will follow.
The seven loan documents comprising the loan document suite, and addressed herein, are as follows:
(1) Loan Agreement;
(2) Promissory Note;
(3) Mortgage, Assignment of Leases and Rents, Security Agreement and Fixture Filing (the "Mortgage");
(4) Guaranty Agreement;
(5) Environmental Indemnity Agreement;
(6) Cash Management Agreement; and
(7) Reserve Agreement.
This memorandum is organized by issue category rather than by document. For each issue, we provide: (a) a summary of the WBD draft position, (b) the borrower's position as reflected in the Calderwood & Harkness redline, and (c) our recommended negotiation strategy, including an assessment of the likelihood that PAC and WBD will accept, partially accept, or reject each proposed revision. A cross-reference table in Section VI identifies which issues are applicable to each document to facilitate document-level review.
Throughout this memorandum, we reference the PAC Commitment Letter dated December 9, 2022 (the "Commitment Letter"), which sets forth the agreed principal terms of the loan, including: a maximum loan-to-value ratio ("LTV") of 68.0%, a minimum debt yield of 9.5%, a fixed interest rate of 5.35% per annum, a five-year term, interest-only payments during years one and two, a thirty-year amortization schedule during years three through five, and two one-year extension options. Where the WBD draft loan documents deviate from or exceed the terms set forth in the Commitment Letter, we have flagged such deviations and recommend that they be raised as threshold matters in our discussions with WBD.
The Borrower, Coral Palms Resort Holdings LLC, is a Florida limited liability company and a wholly owned indirect subsidiary of Verimark Hospitality Group Inc. ("VHG"), a Delaware corporation listed on the Nasdaq Stock Market (Nasdaq: VMRK). VHG will serve as the guarantor under the Guaranty Agreement and the Environmental Indemnity Agreement. VHG's status as a publicly traded company on the Nasdaq exchange is relevant to several of the issues discussed herein, including the transfer restriction carve-outs, the guaranty financial covenants, the reporting obligations, and the form of financial deliverables.
The Property is a 342-room luxury oceanfront resort situated on approximately 22.4 acres in Key Largo, Monroe County, Florida. The resort features three food and beverage outlets, a full-service spa, a marina, and approximately 32,000 square feet of indoor and outdoor event space. The Property operates independently under the "Coral Palms" trade name and is not affiliated with any national hotel franchise or management company. VHG completed a comprehensive $47 million renovation of the Property in August 2021, which included a full renovation of all guest rooms, a new spa facility, marina improvements, and upgrades to the food and beverage program. Current operating metrics include a 71.3% occupancy rate, an average daily rate ("ADR") of $389, revenue per available room ("RevPAR") of $277.36, total revenue of approximately $62.8 million, and net operating income ("NOI") of approximately $18.4 million.
II. Summary of Key Open Issues
The following table provides an index of all material open issues identified in our review of the WBD draft loan documents. Each issue is assigned a priority ranking of High, Medium, or Low based on our assessment of the issue's economic significance, its potential impact on VHG's operational and corporate flexibility, and its likelihood of being a contested negotiation point. Each issue is discussed in detail in Section III below.
III. Detailed Issue Analysis
Issue 1: Transfer Restrictions
Document: Loan Agreement, Article — Transfers
Priority: HIGH
A. WBD Draft Position
The WBD draft Loan Agreement contains an absolute prohibition on any direct or indirect transfer of the Property or any ownership interest in the Borrower (Coral Palms Resort Holdings LLC) or the Guarantor (VHG) without the prior written consent of PAC, which consent may be withheld in PAC's sole and absolute discretion. The definition of "Transfer" in the WBD draft is drafted broadly and encompasses any sale, conveyance, assignment, pledge, encumbrance, or other disposition of: (a) the Property or any interest therein, (b) any direct or indirect ownership interest in the Borrower, or (c) any controlling interest in the Guarantor.
The WBD draft includes a change-of-control trigger that is activated by any transfer of more than ten percent (10%) of the equity interests in the Borrower or the Guarantor. This threshold is set at the level of both direct and indirect ownership interests and applies at both the Borrower and Guarantor levels. A violation of the transfer restrictions constitutes an immediate Event of Default under the WBD draft, with no notice requirement and no cure period. The practical effect of this provision is that any organizational restructuring, equity issuance, or secondary market transaction involving VHG's publicly traded shares on the Nasdaq Stock Market could, if sufficient shares are transferred, constitute a default under the Loan Agreement.
B. Borrower's Position (C&H Redline)
In our redline, we have accepted the general prohibition on property-level transfers (i.e., sales, conveyances, or dispositions of the Property itself) and on direct transfers of the Borrower's membership interests, which are standard provisions in commercial real estate loan agreements. However, we have proposed the following carve-outs for "Permitted Transfers," which are essential to VHG's corporate flexibility and operational requirements:
(a) Affiliate Transfers. Transfers of direct or indirect ownership interests in the Borrower among VHG affiliates, provided that VHG remains the direct or indirect controlling parent of the Borrower and continues to serve as the Guarantor under the Guaranty Agreement. VHG operates a portfolio of fourteen resort properties through a complex subsidiary structure, and the ability to restructure intermediate holding entities for tax, liability, and operational purposes without triggering a default is essential.
(b) Publicly Traded Securities. Transfers of shares of VHG common stock (Nasdaq: VMRK) on the Nasdaq Stock Market or any other nationally recognized securities exchange. VHG is a publicly traded company, and transfers of its shares on the open market occur continuously and are beyond VHG's control. The WBD draft's change-of-control trigger at the ten percent (10%) threshold, applied to VHG's publicly traded equity, is fundamentally incompatible with VHG's status as a public company. This carve-out is market standard for borrowers whose ultimate parent is publicly traded.
(c) Estate Planning Transfers. Transfers by individual principals (including officers, directors, and senior executives of VHG who may hold direct or indirect equity interests) to family trusts, estate planning vehicles, or charitable entities, provided that such transfers do not result in a change of control of VHG or the Borrower.
(d) Increased Change-of-Control Threshold. We have proposed raising the change-of-control threshold from ten percent (10%) to forty-nine percent (49%) of the direct or indirect equity interests in the Borrower or the Guarantor, excluding for purposes of this calculation any transfers of publicly traded shares of VHG on the Nasdaq Stock Market.
(e) Ordinary Course Leasing. Leasing of hotel spaces (including food and beverage outlets, the spa, the marina, and retail or service vendor spaces) in the ordinary course of business shall not constitute a "Transfer" for purposes of the transfer restriction provisions. The operation of a luxury resort of this scale necessarily involves numerous license agreements, concession agreements, and short-term leasing arrangements with third-party operators and vendors, and these transactions should be expressly excluded from the transfer restrictions.
In addition, we have requested that any inadvertent transfer that would otherwise constitute a violation of the transfer restrictions shall not constitute an Event of Default if the Borrower cures or reverses such transfer within thirty (30) days following written notice from PAC. This cure right is intended to address the practical reality that, in a publicly traded holding company structure, indirect transfers of equity interests may occur without VHG's knowledge or involvement.
C. Recommended Negotiation Strategy
VHG's status as a publicly traded company on the Nasdaq Stock Market is the single strongest argument in support of the proposed transfer restriction carve-outs. The publicly traded securities carve-out, in particular, is widely recognized as market standard in commercial real estate loan transactions involving public company borrowers or guarantors, and we are confident that WBD and PAC will ultimately accept this carve-out, as any alternative would effectively impose a lock-up on VHG's publicly traded shares — a result that is neither practical nor commercially reasonable.
The affiliate transfer carve-out is important for VHG's internal restructuring flexibility. VHG operates fourteen resort properties through a multi-tiered subsidiary structure, and the ability to transfer intermediate holding company interests among affiliates for tax planning, liability management, and operational efficiency purposes is a standard feature of commercial real estate loan agreements involving institutional borrowers. We expect WBD to request that any affiliate transfer be conditioned upon delivery of prior written notice to PAC, together with organizational charts and legal opinions confirming that VHG remains the controlling parent and Guarantor, and we are prepared to accept such conditions.
With respect to the change-of-control threshold, we expect WBD to push back on the proposed forty-nine percent (49%) level, which is aggressive. As a compromise position, we are prepared to accept a threshold in the range of twenty-five percent (25%) to thirty percent (30%) of direct or indirect equity interests, coupled with the publicly traded securities carve-out, which effectively removes VHG's open-market share transfers from the calculation. At a twenty-five to thirty percent threshold, with the public company carve-out in place, VHG would retain meaningful flexibility for internal restructuring and private equity transactions while providing PAC with a reasonable measure of control over changes in the ownership structure.
The cure right for inadvertent transfers is a reasonable request and should be defensible. We expect WBD to seek a shorter cure period (perhaps fifteen (15) days), and we are prepared to negotiate within that range provided that the cure period runs from the date of written notice by PAC to the Borrower.
This issue is rated HIGH priority. The transfer restrictions directly affect VHG's corporate flexibility, including its ability to restructure its subsidiary holdings, execute capital markets transactions, and facilitate estate planning for its principals. This is a potential deal-breaker for VHG if the publicly traded securities carve-out is not included.
Issue 2: Cash Management / Lockbox Triggers
Document: Cash Management Agreement
Priority: HIGH
A. WBD Draft Position
The WBD draft Cash Management Agreement establishes a hard lockbox structure with a cash sweep mechanism commencing on Day 1 of the loan term. Under this structure, all revenues generated by the Coral Palms Grand Resort & Spa — including room revenues, food and beverage revenues, spa revenues, marina revenues, event and conference revenues, and all other operating income from the Property's 342 rooms, three food and beverage outlets, spa, marina, and event space — must be deposited into a lockbox account controlled by PAC at all times during the loan term.
The WBD draft establishes a lender-controlled waterfall for the disbursement of funds from the lockbox account, with the following priority of payments: (i) first, to the payment of debt service on the loan; (ii) second, to the funding of all required reserves (including tax, insurance, FF&E, and capital expenditure reserves); (iii) third, to the payment of approved operating expenses of the Property; and (iv) fourth, any surplus funds to a lender-controlled excess cash flow account during any Cash Sweep Period.
A "Cash Sweep Period" is triggered under the WBD draft upon the occurrence of any of the following events: (a) any Event of Default under the Loan Agreement or any other loan document; (b) the debt service coverage ratio ("DSCR") of the Property falling below 1.40x for any trailing twelve-month period; or (c) the commencement of a "Trigger Period" at any time within twelve (12) months prior to the stated maturity date of the loan. During a Cash Sweep Period, all excess cash flow (i.e., revenues remaining after debt service, reserves, and approved operating expenses) is trapped in a lender-controlled reserve account. The Cash Sweep Period does not terminate, and trapped cash is not released, until the DSCR exceeds 1.50x for two consecutive calendar quarters.
B. Borrower's Position (C&H Redline)
In our redline, we have proposed a fundamental restructuring of the cash management framework from a hard lockbox to a soft lockbox / springing cash management structure. Under the proposed structure, all revenues from the Property would be deposited into a borrower-controlled operating account maintained at a financial institution reasonably acceptable to PAC. Cash management and cash sweep provisions would spring into effect only upon the occurrence of a Cash Sweep Trigger Event, at which point revenues would be redirected to a lender-controlled lockbox account and disbursed in accordance with the lender-controlled waterfall.
Our specific proposed revisions to the cash management structure are as follows:
(a) Springing Lockbox. The lockbox and cash sweep provisions should not be operative from Day 1. Rather, the cash management framework should be a springing mechanism that activates only upon the occurrence of a Cash Sweep Trigger Event, as defined below.
(b) Reduced DSCR Trigger. We have proposed lowering the DSCR cash sweep trigger from 1.40x to 1.15x. The current DSCR at the Property, based on trailing twelve-month NOI of $18,400,000 and annualized interest-only debt service of $8,560,000 (calculated as $160,000,000 × 5.35%), is approximately 2.15x. A 1.40x trigger is set at a level that provides PAC with an extremely wide cushion and is inconsistent with the strong operating performance of the Property. A 1.15x trigger, while aggressive from the borrower's perspective, remains well above the break-even level and provides PAC with a meaningful early warning mechanism.
(c) Cash Sweep Cure Threshold. Under the WBD draft, a Cash Sweep Period does not terminate until the DSCR exceeds 1.50x for two consecutive calendar quarters. We have proposed that the cure threshold be set at a DSCR of 1.25x for one consecutive calendar quarter. The 1.50x cure threshold creates a material hysteresis effect (i.e., a wide gap between the trigger level and the cure level) that could result in cash being trapped for an extended period even after the Property's performance has recovered well above the trigger level.
(d) Maturity Cash Sweep Period. We have proposed reducing the pre-maturity cash sweep period from twelve (12) months to six (6) months prior to the stated maturity date of the loan. A twelve-month pre-maturity lockbox is excessive for a performing loan and would result in a full year of cash being trapped even if VHG is actively pursuing refinancing or payoff.
(e) Operating Expenses Priority. During any Cash Sweep Period, the Borrower should retain the right to fund approved operating expenses from the lockbox account prior to the application of the debt service sweep. The Property is a full-service luxury resort with substantial operating expenses (including payroll for approximately 380 full-time equivalent employees, food and beverage cost of goods, utility costs, property taxes, and insurance premiums), and any interruption in the funding of operating expenses could result in a deterioration of guest experience and operating performance — an outcome that is detrimental to both Borrower and Lender.
(f) Seasonality Provision. Given the seasonal nature of resort operations in the Florida Keys (with peak season generally running from mid-December through April and a slower summer and fall season), DSCR should be tested exclusively on a trailing twelve-month basis and not on quarterly snapshots. A quarterly DSCR test could result in a Cash Sweep Period being triggered during a seasonal trough even when the annualized DSCR remains well above the trigger threshold. We have proposed language expressly providing that all DSCR calculations for purposes of the Cash Management Agreement shall be based on trailing twelve-month NOI and trailing twelve-month debt service.
C. Recommended Negotiation Strategy
A springing lockbox is the market standard cash management structure for stabilized hospitality loans, and we have strong arguments in support of this position. The Property's current operating metrics are robust: 71.3% occupancy, $389 ADR, $277.36 RevPAR, $62.8 million total revenue, and $18.4 million NOI. The current DSCR of 2.15x provides substantial headroom above any reasonable cash sweep trigger level. The Property has demonstrated consistent performance following the completion of VHG's $47 million renovation in August 2021, and there is no operational or financial basis for imposing a hard lockbox from Day 1.
We acknowledge that PAC may cite the Property's lack of affiliation with a national hotel franchise or management company as a risk factor supporting tighter cash management controls. The Property is independently operated under the "Coral Palms" trade name, and no franchisor comfort letter or management agreement subordination is implicated. However, we would counter that VHG is an experienced institutional hospitality operator with a portfolio of fourteen resort properties and a demonstrated track record of managing luxury independent hotels. The absence of a brand affiliation does not, standing alone, justify a Day 1 hard lockbox when the Property is performing at stabilized levels.
As a compromise position, we recommend accepting a springing lockbox with a DSCR cash sweep trigger at 1.25x (the midpoint between the WBD draft's 1.40x and our proposed 1.15x), with a cash sweep cure threshold at 1.35x for one consecutive calendar quarter. This compromise provides PAC with a reasonable trigger level while preserving VHG's ability to manage property-level cash flow during normal operations. We expect that the maturity cash sweep period will likely settle at nine (9) months as a compromise between six and twelve months.
This issue is rated HIGH priority. The cash management structure is fundamental to VHG's ability to manage property-level operations, fund capital improvements, and exercise operational flexibility at the Coral Palms Grand Resort & Spa.
Issue 3: Guaranty Carve-Outs / Springing Full Recourse
Document: Guaranty Agreement
Priority: HIGH
A. WBD Draft Position
The WBD draft Guaranty Agreement establishes a limited recourse or "bad boy" carve-out guaranty by VHG in favor of PAC, which is consistent with the structure contemplated by the Commitment Letter. Under the WBD draft, the loan is structured as a non-recourse obligation of the Borrower, subject to the following standard non-recourse carve-outs for which VHG, as Guarantor, assumes liability:
(i) fraud or intentional misrepresentation by the Borrower or Guarantor in connection with the loan;
(ii) misapplication or misappropriation of funds, including rents, security deposits, insurance proceeds, or condemnation awards;
(iii) waste of the Property;
(iv) environmental liability arising from the presence, release, or threatened release of hazardous substances at, on, under, or from the Property;
(v) the filing of a voluntary bankruptcy petition by the Borrower or the Guarantor;
(vi) the filing of an involuntary bankruptcy petition against the Borrower or the Guarantor that is not dismissed within sixty (60) days; and
(vii) any violation of the transfer restrictions set forth in the Loan Agreement.
In addition to the foregoing non-recourse carve-outs, the WBD draft contains "springing full recourse" triggers, which, upon occurrence, convert the entire outstanding loan balance ($160,000,000) from non-recourse to full recourse against both the Borrower and the Guarantor. The springing full recourse triggers in the WBD draft include: (a) any voluntary bankruptcy filing by the Borrower or the Guarantor; (b) any involuntary bankruptcy filing against the Borrower or the Guarantor that is not dismissed within sixty (60) days; (c) any violation of the single-purpose entity ("SPE") covenants set forth in the Loan Agreement; and (d) any violation of the transfer restrictions.
The WBD draft also imposes ongoing financial covenants on the Guarantor: (i) a minimum net worth of $500,000,000 and (ii) minimum liquidity of $25,000,000, each tested on a quarterly basis. The Guarantor is required to deliver annual audited financial statements (audited by Keswick & Holt LLP) within ninety (90) days of the end of each fiscal year and quarterly unaudited financial statements within forty-five (45) days of the end of each fiscal quarter.
B. Borrower's Position (C&H Redline)
In our redline, we have accepted the standard non-recourse carve-outs for fraud, intentional misrepresentation, misapplication of funds, waste, and environmental liability, which are market standard and non-controversial. Our proposed revisions focus on the following areas:
Springing Full Recourse Triggers. We have proposed the following modifications to narrow the springing full recourse triggers:
(a) Voluntary Bankruptcy. The springing full recourse trigger for a voluntary bankruptcy filing should apply only to a voluntary filing by the Borrower, and not to a voluntary filing by the Guarantor. VHG is a publicly traded company on the Nasdaq Stock Market. The inclusion of a guarantor-level voluntary bankruptcy trigger is unusual for public company guarantors and creates a disproportionate risk: in the event that VHG were to file for bankruptcy protection at the parent level (an event that would be driven by VHG's consolidated financial condition, not by the performance of this individual asset), VHG would face full recourse exposure of $160,000,000 on a single property loan. This is inconsistent with the non-recourse structure contemplated by the Commitment Letter.
(b) Involuntary Bankruptcy. We have proposed extending the dismissal period for involuntary bankruptcy filings from sixty (60) days to ninety (90) days. Involuntary bankruptcy petitions are, by definition, beyond the control of the debtor, and a ninety-day dismissal window provides a more reasonable period to contest and dismiss a frivolous or bad-faith filing, particularly given the procedural requirements of the Bankruptcy Code.
(c) SPE Covenant Violations. Violation of the SPE covenants should trigger full recourse only if such violation is "material" and is not cured within thirty (30) days following written notice from PAC. Many SPE covenants are technical in nature (e.g., requirements to maintain separate books and records, to hold annual meetings, to use separate stationery), and an inadvertent technical violation of a ministerial SPE covenant should not convert a $160,000,000 non-recourse loan into a full recourse obligation.
(d) Transfer Restriction Violations. A violation of the transfer restrictions should trigger full recourse only if such violation constitutes a "willful" violation (and not an inadvertent violation). As discussed in Issue 1 above, in a publicly traded holding company structure, indirect transfers of equity interests can occur without VHG's knowledge or involvement.
Cap on Non-Recourse Carve-Out Liability. We have proposed a cap on the Guarantor's liability for non-springing non-recourse carve-outs (specifically, waste and misapplication of funds) at twenty percent (20%) of the then-outstanding principal balance of the loan. Under the WBD draft, the Guarantor's liability for all non-recourse carve-outs is uncapped, meaning that a relatively minor instance of waste or misapplication could theoretically expose VHG to liability equal to the full outstanding loan balance. We have accepted uncapped liability for fraud and intentional misrepresentation (which are inherently unlimited in scope), but the liability for waste and misapplication should be proportionate.
Guarantor Financial Covenants. We have proposed the following revisions to the Guarantor financial covenants:
(i) Net Worth. Reduce the minimum net worth covenant from $500,000,000 to $300,000,000. VHG's total enterprise value is approximately $1.9 billion, and its 2022 consolidated revenue was approximately $487 million. While VHG's balance sheet can readily support a $300 million net worth covenant, the $500 million threshold set by WBD appears to have been set without reference to VHG's actual financial profile and is unnecessarily restrictive. We have requested that PAC's credit team provide the analytical basis for the $500 million threshold.
(ii) Liquidity. Reduce the minimum liquidity covenant from $25,000,000 to $15,000,000. VHG maintains substantial liquidity through its corporate revolving credit facility and cash reserves, and a $15 million liquidity covenant is proportionate to the size of this individual loan within VHG's broader portfolio.
Financial Reporting. We have proposed that VHG's obligation to deliver annual and quarterly financial statements be satisfied by delivery of VHG's public filings with the Securities and Exchange Commission — specifically, the Annual Report on Form 10-K and the Quarterly Report on Form 10-Q. VHG is a publicly traded company whose financial statements are audited by Keswick & Holt LLP (Andrew Calloway, CPA) and filed with the SEC on a regular basis. Requiring the preparation and delivery of separate lender-specific financial packages imposes an unnecessary administrative burden when the same information (and more) is publicly available through the SEC's EDGAR filing system.
C. Recommended Negotiation Strategy
The guarantor-level bankruptcy springing trigger is the most contentious issue within this section and warrants significant partner-level attention. VHG's position — that a Nasdaq-listed company should not face full recourse exposure for a filing at the parent level — is well supported by market practice for public company guarantors. We recommend framing this argument in terms of the structural incongruity of the provision: the non-recourse structure of the loan was a negotiated term reflected in the Commitment Letter, and the inclusion of a guarantor-level bankruptcy trigger effectively converts the loan to full recourse in a scenario that is entirely unrelated to the performance of the Property or the conduct of the Borrower. We expect WBD to push back on this point, as PAC's credit team likely views the guarantor-level trigger as a structural protection for the non-recourse loan. As a fallback position, we may propose that the guarantor-level voluntary bankruptcy trigger be removed, while accepting that an involuntary filing against the Guarantor that is not dismissed within ninety (90) days could trigger full recourse — this provides PAC with protection against a scenario in which VHG is in genuine financial distress while removing the risk that a voluntary filing by a publicly traded parent could trigger catastrophic consequences on a single property loan.
The financial covenant levels should be benchmarked against VHG's actual balance sheet, and we should request that PAC's credit team provide its underwriting analysis supporting the $500 million net worth threshold. If PAC's analysis is based on a percentage of VHG's total enterprise value or total assets, we can work with the team to arrive at a mutually agreeable level.
The SEC public filings argument for financial reporting is strong and market standard for public company guarantors. We expect WBD to accept this with the addition of a requirement that VHG promptly deliver property-level financial statements (which are not included in VHG's SEC filings) on a separate schedule.
With respect to the cap on non-recourse carve-out liability, we expect WBD to push back. We may need to concede uncapped liability on fraud, intentional misrepresentation, and intentional acts, while maintaining a cap of twenty percent (20%) on waste and misapplication. Alternatively, we could propose a fixed dollar cap (e.g., $32,000,000, representing 20% of the loan amount) rather than a floating percentage.
This issue is rated HIGH priority. The guaranty structure defines VHG's total exposure under this loan and is a critical component of VHG's enterprise risk management framework.
Issue 4: Default / Event of Default Cure Periods
Document: Loan Agreement, Article — Events of Default
Priority: HIGH
A. WBD Draft Position
The WBD draft Loan Agreement establishes the following cure periods (or absence thereof) for Events of Default:
• Payment Default: No cure period. Failure to make any payment of principal, interest, or any other amount due under the loan documents when due constitutes an immediate Event of Default.
• Non-Monetary Default: Fifteen (15) day cure period from the date of written notice from PAC.
• Bankruptcy Default: No cure for a voluntary filing. Sixty (60) day dismissal period for an involuntary filing.
• Transfer Restriction Violation: No cure period. Any violation of the transfer restrictions constitutes an immediate Event of Default.
• Insurance Lapse: Five (5) day cure period from the date of written notice.
• Financial Reporting Default: Ten (10) day cure period from the date of written notice.
• Cross-Default: Any default by the Borrower or the Guarantor under any other indebtedness exceeding $1,000,000 in aggregate principal amount constitutes an Event of Default under the Loan Agreement.
B. Borrower's Position (C&H Redline)
In our redline, we have proposed the following revisions to the cure periods and default provisions:
• Payment Default: A grace period of five (5) business days for administrative or wire transfer delays. This grace period is not intended to excuse a deliberate failure to pay but rather to address the practical reality that, in commercial real estate transactions of this complexity, payment processing delays, banking system errors, and wire transfer failures occasionally occur through no fault of the borrower. This grace period is market standard.
• Non-Monetary Default: Thirty (30) days from the date of written notice from PAC. If the default is not reasonably susceptible of cure within thirty (30) days, the Borrower shall have such additional time as is reasonably necessary to effect a cure (not to exceed ninety (90) days in the aggregate), provided that the Borrower has commenced the cure within the initial thirty-day period and is diligently and continuously pursuing the cure to completion. This extended cure framework is market standard for non-monetary defaults in hospitality loans of this size and complexity, where certain defaults (e.g., a zoning or building code compliance issue, a vendor dispute, or a permitting delay) may require more than fifteen (15) days to resolve.
• Bankruptcy: We have accepted that a voluntary bankruptcy filing by the Borrower constitutes an immediate Event of Default. For involuntary filings, we have proposed extending the dismissal period from sixty (60) days to ninety (90) days, consistent with our position on the guaranty springing full recourse triggers (Issue 3).
• Transfer Restriction Violation: A cure period of thirty (30) days for inadvertent transfers, consistent with the transfer restriction carve-outs discussed in Issue 1 above. Willful violations of the transfer restrictions would remain an immediate Event of Default.
• Insurance Lapse: Fifteen (15) days from the date of written notice from PAC. Given the complexity of commercial insurance programs for luxury resort properties in the Florida Keys — including all-risk property insurance, windstorm insurance, flood insurance, business interruption insurance, and commercial general liability insurance — a five (5) day cure period is insufficient to address a lapse that may result from a carrier's administrative error, a late renewal, or a coverage dispute.
• Financial Reporting Default: Thirty (30) days from the date of written notice from PAC. Financial reporting defaults are typically ministerial in nature, and a ten (10) day cure period is unreasonably short, particularly given that VHG's SEC filing obligations impose their own deadlines.
• Cross-Default Threshold: We have proposed raising the cross-default threshold from $1,000,000 to $5,000,000. VHG operates fourteen (14) resort properties with a total enterprise value of approximately $1.9 billion and total consolidated indebtedness that may include numerous individual loan facilities, credit lines, and other obligations. A $1,000,000 cross-default threshold is disproportionately low for a borrower and guarantor of VHG's size and complexity, and could result in an Event of Default under this loan being triggered by an immaterial dispute on an unrelated obligation.
• Notice-and-Cure Requirement: All Events of Default (other than voluntary bankruptcy filings and fraud) should require written notice from PAC and the expiration of the applicable cure period before PAC may exercise any remedies, including acceleration of the loan. The WBD draft, in several instances, permits PAC to exercise remedies upon the occurrence of an Event of Default without prior notice, which deprives the Borrower of the opportunity to cure a curable default before facing the consequences of acceleration and foreclosure.
C. Recommended Negotiation Strategy
The payment grace period of five (5) business days is market standard for commercial real estate loans of this size, and we expect WBD to accept this provision without significant resistance. The conversion from calendar days to business days is a minor point but addresses the scenario in which a payment due date falls on a Friday or before a holiday weekend.
The non-monetary cure period of thirty (30) days, with a diligence-based extension to ninety (90) days, is market standard for hospitality loans of this size. We expect WBD to accept the thirty-day base period and negotiate the maximum extension period. A compromise at sixty (60) days for the maximum extension (rather than ninety) may be appropriate depending on PAC's flexibility.
The cross-default threshold is an important issue for VHG given the size and complexity of its portfolio. A $5,000,000 threshold is our opening position; we are prepared to compromise in the range of $2,500,000 to $3,000,000, which is more proportionate to the size of this loan relative to VHG's total enterprise obligations.
This issue is rated HIGH priority. Cure periods directly affect VHG's risk exposure and its ability to address operational issues before facing the consequences of a declared Event of Default.
Issue 5: Casualty and Condemnation Provisions
Document: Loan Agreement, Article — Casualty and Condemnation; Mortgage
Priority: HIGH
A. WBD Draft Position
The WBD draft Loan Agreement and Mortgage provide that all insurance proceeds received in connection with a casualty event and all condemnation awards received in connection with a taking are to be applied to reduce the outstanding loan balance, unless PAC elects, in its sole and absolute discretion, to make such proceeds available for the restoration of the Property. This framework places the restoration decision entirely within PAC's control, and the Borrower has no right to restore the Property absent PAC's affirmative election.
Under the WBD draft, PAC will make insurance proceeds or condemnation awards available for restoration only if all of the following conditions are satisfied:
(a) The casualty or taking affects less than fifteen percent (15%) of the Property's gross building area (approximately 412,000 square feet, meaning the threshold is approximately 61,800 square feet);
(b) The estimated cost of restoration does not exceed $10,000,000;
(c) Restoration can be completed within twelve (12) months from the date of the casualty or taking;
(d) No Event of Default exists under the loan documents at the time of the casualty or taking; and
(e) The post-restoration appraised value of the Property, as determined by a lender-approved appraiser, equals or exceeds the pre-casualty appraised value of the Property.
If PAC elects to make proceeds available for restoration, such proceeds are held by PAC and disbursed in accordance with a lender-approved restoration plan, subject to PAC's standard construction disbursement procedures. If restoration is not completed within twelve (12) months, all remaining undisbursed proceeds are applied to the outstanding loan balance.
B. Borrower's Position (C&H Redline)
The casualty and condemnation provisions are among the most critical issues in the loan document suite, given the Property's location in Key Largo, Monroe County, Florida — a hurricane-prone coastal zone that is subject to periodic windstorm events, flooding, and storm surge. Our redline proposes the following revisions:
(a) Borrower's Right to Restore. The Borrower should have the affirmative right to restore the Property following a casualty or taking, provided that no Event of Default exists and the conditions for restoration are otherwise satisfied. The restoration decision should not be subject to PAC's sole and absolute discretion. VHG is a sophisticated institutional hospitality operator that has demonstrated its willingness and ability to invest in the Property, as evidenced by the $47 million renovation completed in August 2021.
(b) Increased Restoration Thresholds. We have proposed increasing the restoration thresholds as follows: (i) the casualty or taking threshold increased from fifteen percent (15%) to twenty-five percent (25%) of gross building area; (ii) the estimated restoration cost threshold increased from $10,000,000 to $20,000,000; (iii) the restoration completion period extended from twelve (12) months to eighteen (18) months, with an additional six (6) month extension for force majeure events (including hurricanes, tropical storms, government-mandated evacuations, and permitting delays attributable to governmental authorities); and (iv) the "no Event of Default" condition modified to "no material Event of Default" — a minor reporting or administrative default should not deprive the Borrower of the right to restore the Property following a devastating casualty event.
(c) Post-Restoration Appraisal. We have proposed deleting the requirement that the post-restoration appraised value equal or exceed the pre-casualty value. This condition is impractical: appraised values are influenced by market conditions, comparable sales, capitalization rates, and other factors beyond the Borrower's control, and a decline in appraised value following restoration may be attributable to market-wide conditions rather than to any deficiency in the restoration work. The relevant question should be whether the restoration has been completed in a good and workmanlike manner in accordance with the approved restoration plan, not whether the appraised value meets a particular threshold.
(d) Escrow of Proceeds. Insurance proceeds and condemnation awards should be deposited in an interest-bearing escrow account maintained by Meridian Title & Escrow, Inc. (Lisa Portman) and disbursed monthly in accordance with the Borrower's restoration plan, subject to inspection and certification by PAC's architect or construction consultant. Interest accruing on the escrowed proceeds should be credited to the Borrower.
(e) Extended Restoration Deadline for Monroe County. If a casualty event occurs in Monroe County, Florida (including a named hurricane, tropical storm, or other federally declared disaster), the twelve-month restoration deadline in the WBD draft is unreasonable and should be extended to twenty-four (24) months. Monroe County has unique permitting and construction constraints, including limited contractor availability, restricted transportation access (the Property is accessible only via U.S. Route 1 / Overseas Highway), stringent building code requirements under the Florida Building Code for the Florida Keys, and environmental permitting requirements under the Florida Keys Area of Critical State Concern regulations. Following Hurricane Irma in September 2017, restoration of comparable properties in the Florida Keys took eighteen to thirty-six months due to permitting backlogs and contractor shortages.
C. Recommended Negotiation Strategy
The Property's location in Key Largo, Monroe County, Florida, makes the casualty and condemnation provisions among the most commercially significant provisions in the entire loan document suite. Monroe County is classified as a Special Flood Hazard Area by FEMA, and the Property is located in a designated hurricane evacuation zone. The risk of a significant casualty event is not theoretical — it is a foreseeable probability over the five-to-seven-year loan term (including extension options).
We recommend emphasizing the following points in our discussions with WBD:
First, VHG has demonstrated its commitment to the Property through the $47 million renovation completed in August 2021. This renovation included structural improvements designed to meet or exceed the current Florida Building Code requirements for wind resistance and flood protection. VHG's track record of capital investment in the Property should provide PAC with confidence in VHG's ability and willingness to execute a post-casualty restoration.
Second, the fifteen percent (15%) / $10,000,000 threshold in the WBD draft is unusually low for a property of this size and appraised value (VHG's internal projection is approximately $235,000,000, pending the formal appraisal by Hargrove & Whitley Valuation Services LLC). Market standard restoration thresholds for properties of comparable size and value are typically in the range of twenty to twenty-five percent of gross building area and $15,000,000 to $20,000,000 in estimated restoration costs. A major roof replacement alone at a property of this scale could exceed $10,000,000.
Third, the Monroe County permitting and construction timeline considerations are well documented and provide strong support for the extended restoration deadline. We recommend preparing a brief factual summary of post-Hurricane Irma restoration timelines for comparable Florida Keys properties to present to WBD in support of our position.
This issue is rated HIGH priority. Given the Property's coastal location and hurricane exposure, the casualty and condemnation provisions are critically important to VHG's investment thesis and risk profile.
Issue 6: Reserve Mechanics and Release Conditions
Document: Reserve Agreement
Priority: MEDIUM
A. WBD Draft Position
The WBD draft Reserve Agreement requires the establishment of upfront reserves totaling $4,800,000 at closing, consisting of: (i) a tax reserve, (ii) an insurance reserve, (iii) a furniture, fixtures and equipment ("FF&E") reserve (calculated at 4% of gross revenue), and (iv) a capital expenditure reserve. Monthly reserve contributions are required for taxes, insurance, and FF&E.
The monthly FF&E reserve contribution is calculated as one-twelfth (1/12) of four percent (4%) of trailing twelve-month gross revenue. Based on the Property's current trailing twelve-month gross revenue of approximately $62,800,000, the monthly FF&E reserve contribution would be approximately $209,333 per month, or approximately $2,512,000 per year.
All reserve funds are held in lender-controlled accounts at PAC's designated depository, and disbursement of reserve funds is subject to PAC's prior written approval. There is no provision for the release of excess reserves (i.e., reserve balances that exceed upcoming obligations) during the loan term. In addition, PAC may require additional reserves upon the occurrence of a "Trigger Event," defined as the DSCR falling below 1.40x on a trailing twelve-month basis.
B. Borrower's Position (C&H Redline)
We have accepted the upfront reserve structure at $4,800,000, which is consistent with the terms set forth in the Commitment Letter. Our proposed revisions focus on the following:
(a) FF&E Reserve Calculation Base. The FF&E reserve contribution should be calculated at four percent (4%) of rooms revenue, not total gross revenue. The industry standard FF&E reserve for hospitality properties is four percent (4%) of rooms revenue, as established by the Uniform System of Accounts for the Lodging Industry ("USALI"). The Property's food and beverage, spa, marina, and event revenues have their own departmental capital expenditure budgets, and the FF&E associated with those revenue centers is funded through departmental budgets, not the FF&E reserve. Including total gross revenue in the FF&E reserve base calculation effectively double-counts capital expenditures for non-rooms revenue centers. Based on estimated rooms revenue of approximately $34,400,000 (342 rooms × 365 days × 71.3% occupancy × $389 ADR), the FF&E reserve contribution at 4% of rooms revenue would be approximately $1,376,000 per year, or approximately $114,667 per month — a difference of approximately $1,136,000 per year compared to the WBD draft calculation.
(b) Reserve Disbursement Procedures. The Borrower should submit requisitions for reserve disbursements with reasonable supporting documentation (including invoices, contracts, and evidence of work completion, as applicable). PAC should be required to approve or object to each requisition within ten (10) business days of receipt, and if PAC fails to respond within such period, the requisition shall be deemed approved. The WBD draft provides no timeline for PAC's review and approval, which could result in indefinite delays in the disbursement of funds that the Borrower has deposited into the reserve accounts.
(c) Excess Reserve Release. Reserve balances that exceed one hundred and ten percent (110%) of the upcoming annual obligations for the applicable reserve category should be released to the Borrower. The WBD draft's prohibition on any release of excess reserves during the loan term means that PAC would continue to hold (and earn interest on) reserve funds that are not needed for their intended purpose.
(d) Additional Reserve Trigger. The DSCR trigger for additional reserve requirements should be lowered from 1.40x to 1.15x, consistent with our proposed cash sweep trigger in the Cash Management Agreement (Issue 2).
(e) Springing Reserve Waiver. If the Property maintains a DSCR above 1.50x for four (4) consecutive calendar quarters, monthly reserve contributions should be waived, and the Borrower should be permitted to self-fund reserves from operating cash flow. This springing waiver is appropriate for a high-performing property with a current DSCR of 2.15x and provides an incentive for the Borrower to maintain strong operating performance.
C. Recommended Negotiation Strategy
The FF&E reserve base calculation — total gross revenue versus rooms revenue — has significant dollar implications that should be quantified for the partner team. The difference between 4% of total gross revenue ($2,512,000 per year) and 4% of rooms revenue ($1,376,000 per year) is approximately $1,136,000 per year, or approximately $5,680,000 over the initial five-year loan term. This is a material economic point, and the industry standard calculation (4% of rooms revenue per USALI) provides strong support for the Borrower's position.
The excess reserve release provisions are market standard for loans of this size and should be defensible. We expect WBD to accept a release mechanism, though the threshold may be negotiated (perhaps 125% of upcoming annual obligations rather than 110%).
The springing reserve waiver at a 1.50x DSCR is an aggressive request, but it is defensible given the Property's current DSCR of 2.15x. We may need to concede on this point or accept a higher DSCR threshold for the waiver (e.g., 1.75x).
This issue is rated MEDIUM priority.
Issue 7: Prepayment / Defeasance / Yield Maintenance
Document: Loan Agreement, Article — Prepayment; Promissory Note
Priority: HIGH
A. WBD Draft Position
The WBD draft Loan Agreement and Promissory Note establish the following prepayment framework:
• Lockout Period: No prepayment of the loan is permitted for the first twenty-four (24) months following the funding date. During the lockout period, the Borrower may not voluntarily prepay, in whole or in part, any portion of the outstanding principal balance.
• Yield Maintenance: Following the expiration of the lockout period, prepayment is permitted subject to a yield maintenance premium equal to the greater of (a) one percent (1.0%) of the prepaid amount and (b) the present value of the remaining scheduled interest payments from the date of prepayment through the stated maturity date, discounted at the applicable U.S. Treasury rate plus fifty (50) basis points. The addition of fifty (50) basis points to the Treasury discount rate has the effect of increasing the calculated yield maintenance premium by reducing the discount rate, thereby increasing the present value of the remaining interest stream.
• Defeasance: As an alternative to yield maintenance, the Borrower may elect to defease the loan after twenty-four (24) months by substituting U.S. government securities as collateral for the loan. The defeasance process is subject to standard conditions, including delivery of a defeasance collateral pledge agreement, a legal opinion, and a rating agency confirmation (if the loan has been securitized).
• Exit Fee: An exit fee of 0.25% of the outstanding principal balance is payable at any repayment of the loan, including at maturity.
• No Partial Prepayment: The WBD draft does not permit partial prepayments. Any prepayment must be a prepayment of the entire outstanding principal balance.
B. Borrower's Position (C&H Redline)
Our redline proposes the following revisions to the prepayment framework:
(a) Reduced Lockout Period. We have proposed reducing the lockout period from twenty-four (24) months to twelve (12) months. VHG requires flexibility to respond to market conditions and corporate strategic decisions, including the potential sale or refinancing of the Property, within a reasonable time frame following closing. A twenty-four-month lockout effectively prevents VHG from executing any disposition or refinancing transaction during the first two years of the loan term, which is a significant constraint.
(b) Yield Maintenance discount Rate. We have accepted the "greater of" formula for the yield maintenance premium but have proposed deleting the fifty (50) basis point adder to the U.S. Treasury discount rate. The yield maintenance premium should be calculated by discounting the remaining scheduled interest payments at the applicable U.S. Treasury rate flat, without any spread. The purpose of the yield maintenance premium is to compensate PAC for the loss of the negotiated interest rate spread relative to the risk-free Treasury rate; the addition of a fifty (50) basis point adder to the discount rate creates an artificially high premium that exceeds the lender's actual economic loss and is above market for loans of this type and size.
(c) Borrower's Election of Defeasance or Yield Maintenance. The Borrower should have the right to elect either defeasance or yield maintenance at the Borrower's option. The WBD draft is ambiguous as to whether the election of defeasance versus yield maintenance is made by the Borrower or the Lender. We have proposed language clarifying that the election is at the Borrower's sole discretion.
(d) Partial Prepayment. We have proposed permitting partial prepayments in minimum increments of $5,000,000, subject to the yield maintenance premium calculated on the prepaid amount. Partial prepayments allow VHG to deleverage the Property and reduce interest expense in response to favorable operating performance or capital availability, and are a standard feature of commercial real estate loan agreements of this size.
(e) Exit Fee. We have proposed deleting the exit fee in its entirety. The imposition of an exit fee of 0.25% of the outstanding principal balance at maturity (which would be approximately $400,000 based on the original principal balance, or less if amortization has occurred) is not market standard for commercial real estate loans of this type and was not contemplated in the Commitment Letter. An exit fee at maturity effectively penalizes the Borrower for repaying the loan on time and in full, which is an anomalous result. The exit fee was not set forth in the Commitment Letter, and we have a strong argument that its inclusion in the loan documents is inconsistent with the parties' agreed terms.
(f) Open Prepayment Window. The last six (6) months of the loan term (including any extension periods) should be an open prepayment window during which the Borrower may prepay the loan, in whole or in part, without any yield maintenance premium, defeasance obligation, or other prepayment penalty. An open window at the end of the loan term is market standard and facilitates orderly refinancing or disposition as the maturity date approaches.
C. Recommended Negotiation Strategy
The twenty-four-month lockout period is standard for a five-year fixed-rate term, and we expect WBD to resist a reduction to twelve months. As a compromise, we are prepared to accept an eighteen (18) month lockout period, which preserves PAC's investment return expectation for the first year and a half while providing VHG with incrementally greater flexibility.
The fifty (50) basis point adder to the yield maintenance discount rate is the most commercially significant prepayment issue and should be pushed back on firmly. The standard market practice for yield maintenance calculations in fixed-rate commercial real estate loans is to discount the remaining interest payments at the applicable U.S. Treasury rate without a spread. The adder reduces the effective discount rate, which mathematically increases the present value of the remaining interest stream and results in a higher yield maintenance premium. We should present a numerical example to WBD illustrating the dollar impact of the adder under various interest rate scenarios.
The exit fee is unusual and, critically, was not reflected in the Commitment Letter. This provides a strong basis for deletion. The Commitment Letter set forth a comprehensive summary of the economic terms of the loan, including the interest rate, loan term, amortization, extension fees, and prepayment provisions, and did not include any exit fee. We should flag this as a deviation from the Commitment Letter and request that WBD explain the basis for its inclusion.
The open prepayment window in the last six (6) months of the loan term is market standard, and we expect WBD to accept this provision without significant negotiation. Some lenders prefer a three (3) month open window; if necessary, we can accept this as a fallback.
This issue is rated HIGH priority. The prepayment framework directly affects VHG's flexibility to sell, refinance, or recapitalize the Property during the loan term.
Issue 8: Extension Option Conditions
Document: Loan Agreement, Article — Extension Options