MEMORANDUM — PRIVILEGED & CONFIDENTIAL — ATTORNEY WORK PRODUCT
TO: Douglas Fairchild, Responsible Partner Angela Fontaine, Billing Partner
FROM: Grace Nakamura, Lead Associate
DATE: March 3, 2023
RE: Matter Closing Memorandum — Matter No. 1021-00007: Verimark Hospitality Group Inc. / Coral Palms Resort Holdings LLC — Coral Palms Grand Resort & Spa Refinancing
FIRM: Calderwood & Harkness LLP 100 Southeast Second Street, Suite 3800 Miami, FL 33131
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I. PURPOSE
The purpose of this memorandum is to document the final disposition and closure of Matter No. 1021-00007, and to provide a comprehensive summary of the engagement, the underlying transaction, the reasons for the termination of the transaction, the financial settlement reached between the parties, Calderwood & Harkness LLP's ("C&H") fees and expenses incurred in connection with the engagement, and all file closing procedures that have been undertaken or remain to be completed.
This memorandum serves as the definitive closing record for the firm's representation of Verimark Hospitality Group Inc. ("VHG") and Coral Palms Resort Holdings LLC ("CPRH" or the "Borrower") in connection with the proposed $160,000,000 first mortgage refinancing (the "Proposed Refinancing" or the "Transaction") of the Coral Palms Grand Resort & Spa, located at 99000 Overseas Highway, Key Largo, Monroe County, Florida 33037 (the "Property"). The proposed lender in the Transaction was Pinnacle Atlantic Capital, LLC ("PAC"), an affiliate of Greystone Peak Asset Management LP, a New York–based alternative asset manager.
As described in detail below, the Transaction was terminated by VHG following an appraisal shortfall that resulted in PAC's material repricing of the loan terms. A deposit settlement letter agreement resolving the parties' respective claims was fully executed on February 28, 2023. The matter is now fully closed, with no outstanding obligations, deliverables, open items, or pending disputes. No litigation or threatened litigation has arisen from the terminated Transaction. This memorandum is intended for internal use only, is protected by the attorney work product doctrine, and should not be distributed outside of Calderwood & Harkness LLP.
II. ENGAGEMENT SUMMARY
A. Client Information
Verimark Hospitality Group Inc. VHG is a Delaware corporation, publicly traded on the Nasdaq Stock Market under the ticker symbol "VMRK." VHG's principal executive offices are located at 1400 Bayshore Boulevard, Suite 2200, Miami, Florida 33131. VHG is a hospitality and real estate company that owns and operates a portfolio of fourteen luxury and upscale resort properties located across the Southeastern United States and the Caribbean. For the fiscal year ended December 31, 2022, VHG reported consolidated revenue of approximately $487 million. VHG's total enterprise value, based on publicly available market data and internal estimates, is approximately $1.9 billion. VHG completed its initial public offering in 2017 and is subject to the reporting requirements of the Securities Exchange Act of 1934, as amended.
Coral Palms Resort Holdings LLC. CPRH is a Florida limited liability company organized under the Florida Revised Limited Liability Company Act and is a wholly owned indirect subsidiary of VHG. CPRH is the fee simple owner of the Property and served as the proposed Borrower in the Transaction. CPRH's organizational documents, including its articles of organization and operating agreement, were reviewed by C&H during the course of the engagement for purposes of preparing entity and authorization documentation in connection with the Proposed Refinancing.
Key Client Contacts. The following VHG personnel served as the primary points of contact throughout the engagement:
• Conrad W. Elliston — Chairman of the Board and Chief Executive Officer
• Natasha Ricard — Chief Financial Officer
• Derek Huang — Senior Vice President, Capital Markets & Treasury
Day-to-day communication was conducted primarily with Derek Huang, with Natasha Ricard and Conrad W. Elliston involved in key decision points, including the review of the repriced terms, the counter-proposal, and the ultimate board-level decision to terminate the Transaction.
B. Engagement Opening and Team
The engagement was opened on October 19, 2022, following initial discussions between Douglas Fairchild and Conrad W. Elliston regarding VHG's desire to refinance the existing first mortgage loan on the Property. The formal engagement letter was executed on December 5, 2022, after completion of the firm's conflict check procedures and agreement on the terms of the engagement. VHG deposited an evergreen retainer in the amount of $50,000 on December 7, 2022, via wire transfer to Calderwood & Harkness LLP's IOTA trust account, in accordance with the terms of the engagement letter.
The matter was assigned client matter number 1021-00007 in the firm's matter management and billing system.
The engagement team assigned to this matter was as follows:
Douglas Fairchild served as the responsible partner with primary relationship oversight and strategic transaction counsel. Angela Fontaine served as the billing partner with responsibility for matter budgeting, invoice review, and billing compliance. Grace Nakamura served as the lead associate with day-to-day responsibility for all aspects of the representation, including loan document review and negotiation, title and survey review, coordination with third-party consultants, and client communications. Rafael Dominguez provided working-level associate support, principally in the areas of entity documentation, title diligence, and insurance compliance analysis.
C. Scope of Representation
C&H was engaged to represent VHG and CPRH as borrower's counsel in connection with the proposed $160,000,000 first mortgage refinancing of the Property. The engagement letter described the scope of the firm's representation to encompass the following activities:
(a) review and negotiation of the term sheet and commitment letter issued by PAC;
(b) review, markup, and negotiation of all loan documentation to be prepared by lender's counsel, Whitford Baines & Driscoll LLP ("WBD"), including the loan agreement, promissory note, mortgage and security agreement, environmental indemnity agreement, guaranty, assignment of leases and rents, subordination, non-disturbance and attornment agreements, cash management agreement, lockbox agreement, and all related ancillary loan documents;
(c) review and analysis of the title commitment and exceptions, and preparation of a title objection letter to PAC and the title company;
(d) review of the ALTA/NSPS Land Title Survey and preparation of a survey review memorandum;
(e) review and analysis of PAC's insurance requirements and preparation of an insurance compliance memorandum and correspondence with VHG's insurance broker;
(f) preparation of entity and authorization documentation for the Borrower and Guarantor, including authorizing resolutions and incumbency certificates;
(g) coordination of the payoff and release of the existing first mortgage loan held by Tidewater National Bank, N.A. ("Tidewater"), including preparation of a payoff request letter and review of the payoff statement;
(h) analysis of the lender-commissioned appraisal and preparation of correspondence challenging the appraised value;
(i) negotiation regarding the repriced loan terms proposed by PAC following the appraisal shortfall;
(j) preparation and delivery of the formal termination notice on behalf of VHG and CPRH; and
(k) negotiation and documentation of the deposit settlement with PAC.
At the time of engagement, the estimated legal fees for a full closing of the Transaction were $350,000 to $475,000, based on the anticipated complexity of the loan document package, the number of parties involved, and the customary scope of borrower's counsel work in a hospitality refinancing of this size. The matter terminated prior to closing, and actual fees incurred were approximately $287,500, as further described in Section VII below.
III. TRANSACTION OVERVIEW
A. The Property
The subject property in the Transaction is the Coral Palms Grand Resort & Spa, a full-service luxury oceanfront resort hotel with conference center, full-service spa, marina, and ancillary commercial uses, located at 99000 Overseas Highway, Key Largo, Monroe County, Florida 33037.
Legal Description. The Property is legally described as a portion of Section 27, Township 60 South, Range 39 East, Monroe County, Florida, more particularly described in that certain Warranty Deed recorded in Official Records Book 2847, Page 1122, of the Public Records of Monroe County, Florida.
Tax Folio Number. 00460780-000100 (Monroe County Property Appraiser).
Physical Description. The Property is a waterfront resort complex situated on a site of approximately 22.4 acres along the Atlantic Ocean in Key Largo, Florida. The principal improvements consist of the following:
• 342 guest rooms and suites
• Approximately 28,500 square feet of meeting and event space, including a grand ballroom, junior ballroom, and multiple breakout rooms
• An 18,000 square foot full-service spa and wellness center
• A 42-slip deep-water marina
• Three food and beverage outlets (a fine dining restaurant, a casual oceanfront restaurant, and a poolside bar and grill)
• A 1,200-space structured parking facility
• Gross building area of approximately 412,000 square feet
Construction and Renovation History. The resort was originally constructed in 2006. A comprehensive renovation was completed in August 2021 at a total cost of approximately $47 million. The renovation encompassed a full reimagining of the guest rooms and suites, public areas, food and beverage outlets, spa and wellness center, pool complex, and marina facilities. VHG undertook the renovation to reposition the Property within the luxury tier of the Upper Florida Keys hospitality market.
Operations. The Property is independently operated by VHG under the "Coral Palms" trade name. The Property is not subject to a franchise agreement, license agreement, or management agreement with a national hotel brand. VHG manages the Property directly through its in-house hospitality management platform.
Trailing 12-Month Operating Performance (Period Ending September 30, 2022):
The Property's trailing 12-month operating performance reflected a stabilized post-renovation run rate, with strong average daily rate performance driven by the luxury repositioning. Occupancy performance was consistent with the broader Upper Florida Keys hospitality market for the relevant period, factoring in typical seasonality patterns.
B. Existing Loan (Tidewater National Bank)
At the time of the proposed Transaction, the Property was encumbered by an existing first mortgage loan originated by Tidewater National Bank, N.A. The material terms of the existing loan are summarized as follows:
Lender: Tidewater National Bank, N.A. (relationship contact: Alan Prescott, Senior Vice President, Commercial Real Estate), 600 Waterside Drive, Norfolk, Virginia 23510.
Original Principal Amount: $125,000,000.
Origination Date: June 1, 2019.
Maturity Date: June 1, 2024 (five-year term).
Outstanding Principal Balance: Approximately $118,500,000 as of October 15, 2022 (the approximate date on which VHG provided the existing loan information to C&H).
Interest Rate: SOFR plus 2.25% (floating rate). The loan was originally indexed to LIBOR. Following the anticipated cessation of LIBOR, a LIBOR-to-SOFR fallback amendment was executed on March 15, 2022, converting the reference rate to the Secured Overnight Financing Rate (SOFR) as published by the Federal Reserve Bank of New York.
Amortization: Interest-only during years one through three of the loan term. During years four and five, the loan amortizes on a 30-year amortization schedule.
Prepayment Premium: A prepayment premium of 1.0% of the outstanding principal balance is applicable if the loan is prepaid prior to March 1, 2023. Based on the outstanding principal balance of approximately $118,500,000, the estimated prepayment premium was $1,185,000. No prepayment premium applies to prepayments made on or after March 1, 2023.
Recorded Mortgage: The mortgage securing the existing loan is recorded at Official Records Book 2892, Page 0445, of the Public Records of Monroe County, Florida.
UCC-1 Filing: A UCC-1 financing statement was filed with the Florida Secured Transaction Registry under File No. 202219087643.
Post-Termination Status: As a result of the termination of the Proposed Refinancing, the existing Tidewater loan remains in place and continues to be the first priority lien on the Property. The loan matures on June 1, 2024, and VHG will need to pursue an alternative refinancing, a loan extension with Tidewater, or another capital markets solution in advance of that maturity date. The remaining considerations and implications of the Tidewater loan maturity are discussed further in Section IX below.
C. Proposed Refinancing Loan — Original Terms
The Proposed Refinancing was to be funded by Pinnacle Atlantic Capital, LLC as lender. The original terms of the Proposed Refinancing, as set forth in the term sheet dated November 14, 2022 (as executed by VHG on November 28, 2022) and confirmed in the Commitment Letter dated December 9, 2022, are summarized as follows:
Lender: Pinnacle Atlantic Capital, LLC ("PAC"), 200 Lexington Avenue, 38th Floor, New York, New York 10016. The principal contacts at PAC for the Transaction were Martin Drubeck, Managing Director, Real Estate Lending, and Jennifer Kwon, Vice President, Originations. PAC is an affiliate of Greystone Peak Asset Management LP, a Delaware limited partnership and New York–based alternative asset manager with approximately $12 billion in assets under management.
Lender's Counsel: Whitford Baines & Driscoll LLP ("WBD"), 1221 Avenue of the Americas, Suite 4400, New York, New York 10020. The principal contacts at WBD were Philip Tarrant Corporation, Partner, and Catherine Yee, Associate. The Commitment Letter provided for a legal fee cap for lender's counsel of $275,000 plus reasonable out-of-pocket disbursements, payable by the Borrower at closing.
Proposed Loan Amount: $160,000,000 (first mortgage loan).
Borrower: Coral Palms Resort Holdings LLC.
Guarantor: Verimark Hospitality Group Inc. The guaranty was structured as a limited recourse guaranty, commonly referred to as a "bad boy" carve-out guaranty, under which the Guarantor's liability would be triggered only upon the occurrence of specified events of default or "bad acts" by the Borrower, including fraud, intentional misrepresentation, misappropriation of funds, voluntary bankruptcy, and environmental liability.
Purpose: The proceeds of the proposed loan were to be used to: (i) refinance the existing Tidewater first mortgage (approximately $118,500,000 outstanding principal, plus accrued interest and any applicable prepayment premium); (ii) fund upfront reserves; (iii) pay transaction costs, including closing costs, legal fees, and title insurance premiums; and (iv) return excess proceeds to the Borrower and/or Guarantor as cash-out.
Interest Rate: 5.35% per annum, fixed, for the initial five-year term. This rate was calculated based on an interpolated U.S. Treasury yield plus a spread of 175 basis points, as quoted by PAC in November 2022.
Amortization: Interest-only during years one and two of the loan term. During years three through five, the loan was to amortize on a 30-year amortization schedule.
Term: Five years from the funding date, with two one-year extension options exercisable at the Borrower's election, subject to satisfaction of the following conditions: (i) no event of default; (ii) a trailing debt service coverage ratio of not less than 1.25x; and (iii) payment of an extension fee equal to 0.25% of the then-outstanding principal balance for each extension.
Maximum Loan-to-Value Ratio (LTV): The Commitment Letter provided for a maximum LTV of 68.0%, based on the lender's appraised value of the Property. At VHG's internal valuation of $235,000,000, the LTV was $160,000,000 ÷ $235,000,000 = 68.09%. PAC had agreed during the commitment letter negotiation to waive the marginal excess (approximately nine basis points) above the 68.0% threshold.
Minimum Debt Yield: 9.5%. At the proposed loan amount, the debt yield was $18,400,000 (trailing NOI) ÷ $160,000,000 = 11.50%, which exceeded the minimum threshold.
Commitment Fee: 0.50% of the loan amount, equal to $800,000, payable at closing. This fee was not incurred because the Transaction did not close.
Exit Fee: 0.25% of the outstanding principal balance at repayment. This fee was not incurred.
Good Faith Deposit: $1,600,000 (1.0% of the loan amount), deposited with Meridian Title & Escrow, Inc. ("Meridian Title") on December 12, 2022, pursuant to the terms of the Commitment Letter.
Rate Lock Deposit: $800,000 (0.50% of the loan amount), deposited with Meridian Title on January 5, 2023, in connection with the borrower's election to lock the fixed interest rate at 5.35%.
Estimated Original Net Cash-Out: The estimated net cash-out to VHG/CPRH, based on the original loan terms, was calculated as follows:
Original Annual Debt Service (Interest-Only Period): $160,000,000 × 5.35% = $8,560,000 per year. The resulting debt service coverage ratio during the interest-only period was $18,400,000 ÷ $8,560,000 = 2.15x, providing substantial coverage and margin above the Commitment Letter's 1.25x DSCR threshold for extension eligibility.
IV. KEY DATES TIMELINE
The following table sets forth a chronological listing of all significant dates in connection with the engagement and the Transaction:
V. APPRAISAL SHORTFALL AND REPRICING — SUMMARY OF EVENTS LEADING TO TERMINATION
A. Appraisal Shortfall
Pursuant to the terms of the Commitment Letter, PAC commissioned an independent appraisal of the Property from Hargrove & Whitley Valuation Services LLC ("Hargrove & Whitley"). The appraiser assigned to the engagement was Scott Tremaine, MAI, MRICS, a partner in Hargrove & Whitley's hospitality valuation practice, located at 3300 PGA Boulevard, Suite 120, Palm Beach Gardens, Florida 33410.
The physical inspection of the Property was conducted by Mr. Tremaine on January 6, 2023. The appraisal report was delivered to PAC on January 20, 2023, with an effective date of value of January 6, 2023.
The Hargrove & Whitley appraisal concluded an "as-is" market value for the Property of $192,000,000. This valuation represented a significant shortfall from VHG's internal valuation of the Property, which had been projected at $235,000,000 — a figure that VHG believed was supported by the Property's post-renovation operating performance, the approximately $47 million renovation investment, and recent comparable transactions in the Upper Florida Keys and broader South Florida hospitality market.
The resulting valuation shortfall was $43,000,000, or approximately 18.30% below VHG's internal projection. The primary drivers of the appraisal shortfall, as identified by C&H and Claybourne Advisory Group LLC upon their respective reviews, appeared to include Hargrove & Whitley's selection of comparable transactions, their application of capitalization rates that arguably did not fully account for the luxury repositioning of the Property following the 2021 renovation, and certain adjustments to the income capitalization approach that resulted in a lower stabilized NOI assumption than the Property's actual trailing performance would have supported.
The impact of the appraised value on the Transaction's loan sizing was material:
• LTV at proposed $160,000,000 loan amount: $160,000,000 ÷ $192,000,000 = 83.33%, which materially exceeded the Commitment Letter's maximum LTV covenant of 68.0%.
• Maximum loan amount at 68.0% LTV based on appraised value: $192,000,000 × 68.0% = $130,560,000, representing a reduction of $29,440,000 from the originally proposed $160,000,000 loan amount.
• Debt yield at $160,000,000: $18,400,000 ÷ $160,000,000 = 11.50%. While the debt yield remained above the 9.5% minimum threshold set forth in the Commitment Letter, PAC communicated that the LTV exceedance triggered internal credit policy constraints that could not be waived regardless of the debt yield cushion.
Upon receipt of the appraisal report, C&H immediately notified VHG's team, including Derek Huang and Natasha Ricard, and conducted a detailed review of the appraisal methodology and conclusions. At VHG's direction, C&H recommended the retention of an independent appraisal review consultant, and on January 24, 2023, VHG retained Claybourne Advisory Group LLC ("Claybourne") for that purpose.
B. C&H's Appraisal Challenge
Following the receipt of the Hargrove & Whitley appraisal report and the completion of C&H's internal review (conducted in coordination with Claybourne's preliminary findings), C&H submitted a detailed letter to PAC, transmitted via WBD, contesting the appraised value of $192,000,000. The letter set forth the following principal grounds for VHG's objection to the Hargrove & Whitley valuation:
(a) Renovation Investment. The appraisal did not, in VHG's view, adequately reflect the approximately $47 million comprehensive renovation completed in August 2021, which fundamentally repositioned the Property within the luxury tier of the Upper Florida Keys hospitality market. VHG contended that the appraiser's comparable selection and capitalization rate analysis undervalued the impact of the renovation on stabilized cash flow and reversionary value.
(b) Comparable Transactions. The letter identified several recent comparable transactions in the South Florida and Florida Keys hospitality market that supported a significantly higher per-key and per-room valuation than that implied by the Hargrove & Whitley appraisal. Specifically, VHG's analysis indicated that recent luxury resort transactions in the market reflected per-key valuations in the range of $600,000 to $750,000, whereas the Hargrove & Whitley appraisal implied a per-key value of approximately $561,404 ($192,000,000 ÷ 342 keys), at the lower end of the range and arguably inconsistent with the Property's quality and competitive positioning.
(c) Trailing 12-Month Operating Performance. The letter emphasized the Property's strong trailing 12-month operating performance, including NOI of approximately $18.4 million, occupancy of 71.3%, an ADR of $389, and RevPAR of $277.36, all of which represented stabilized post-renovation run rates and supported a higher capitalized value.
The letter concluded by requesting that PAC either reconsider the Hargrove & Whitley appraised value or commission a second independent appraisal from a different firm, at the Borrower's expense if necessary.
PAC, through WBD, declined both requests. PAC communicated that it had confidence in the Hargrove & Whitley valuation, that its underwriting policy required reliance on a single lender-commissioned appraisal, and that it was not willing to entertain a borrower-initiated second appraisal as a basis for modifying the loan sizing.
C. PAC Repriced Terms (January 27, 2023)
On January 27, 2023, PAC delivered to VHG (with a copy to C&H) a revised set of proposed loan terms reflecting the impact of the appraised value on PAC's underwriting. The repriced terms represented a substantial and material departure from the original Commitment Letter terms and are summarized as follows:
The repriced terms had the following economic impact on the Transaction:
Repriced Annual Debt Service (Interest-Only Period): $139,000,000 × 6.90% = $9,591,000 per year. The resulting DSCR during the interest-only period was $18,400,000 ÷ $9,591,000 = 1.92x — still above the 1.25x extension threshold, but significantly reduced from the original 2.15x.
Repriced Estimated Net Cash-Out:
This represented a reduction of approximately $24,200,000 in net cash-out compared to the originally estimated $32,265,000 — a decrease of approximately 75%. Moreover, the conversion from a limited recourse guaranty to a full recourse guaranty represented a fundamental change in the risk profile of the Transaction from VHG's perspective. The cross-collateralization requirement, which would have required VHG to pledge the Driftwood Bay Hotel in Sarasota, Florida as additional security for the loan, further compounded the adverse impact of the repricing by encumbering a separate, unrelated asset within VHG's portfolio.
D. Counter-Proposal and Rejection
Following internal deliberations with VHG's senior management team, including Conrad W. Elliston, Natasha Ricard, and Derek Huang, C&H submitted a counter-proposal to PAC on behalf of VHG on February 3, 2023. The counter-proposal sought to bridge the gap between the original and repriced terms by proposing the following modifications:
(a) Guaranty: VHG proposed maintaining the limited recourse ("bad boy" carve-out) guaranty structure, as opposed to the full recourse guaranty demanded by PAC. VHG acknowledged PAC's credit concerns arising from the appraised value shortfall but argued that the Property's strong operating performance and the Guarantor's financial strength (as a publicly traded company with approximately $1.9 billion in total enterprise value) provided adequate credit support without the need for full recourse.
(b) Cross-Collateralization: VHG proposed eliminating the cross-collateralization requirement with the Driftwood Bay Hotel entirely. VHG's position was that pledging a separate, unrelated asset to secure a loan on the Property was commercially unreasonable and inconsistent with VHG's portfolio-level capital allocation strategy.
(c) Loan Amount and Interest Rate: VHG expressed willingness to accept a reduced loan amount in the range of $135,000,000 to $139,000,000, subject to a lower interest rate increase — VHG proposed a rate of no more than 5.85% fixed (a spread increase of approximately 50 basis points from the original 5.35%, rather than the 155 basis point increase to 6.90% proposed by PAC).
(d) Additional Reserves: VHG proposed capping the additional PIP/capital improvement reserve at $1,500,000 (rather than PAC's proposed $3,200,000), given the recent completion of the $47 million renovation in August 2021 and the absence of any significant near-term capital expenditure requirements.
PAC rejected VHG's counter-proposal in its entirety on February 7, 2023. In its response, PAC communicated through WBD that the repriced terms as delivered on January 27, 2023 represented PAC's final offer and that no further negotiation would be entertained. PAC cited its internal credit committee's determination that the full recourse guaranty and cross-collateralization provisions were non-negotiable conditions for proceeding with the loan at the repriced amount, given the LTV exceedance under the appraised value.
E. Board Decision and Termination
Following PAC's rejection of the counter-proposal, VHG's senior management team briefed VHG's board of directors on the status of the Transaction, the repriced terms, and the economic and risk implications of proceeding under the revised structure. C&H prepared a memorandum for VHG's board summarizing the repriced terms, the impact on net cash-out, the implications of the full recourse guaranty and cross-collateralization requirements, and the available alternatives, including termination of the Transaction, acceptance of the repriced terms, or pursuit of alternative lender proposals.
On February 10, 2023, VHG's board of directors, including Conrad W. Elliston (Chairman & CEO) and Natasha Ricard (CFO), determined that the repriced terms were commercially unacceptable. The board voted unanimously to terminate the Transaction. Key factors cited by the board in reaching this decision included:
(i) the reduction in net cash-out from approximately $32.3 million to approximately $8.1 million, which rendered the Transaction uneconomic relative to VHG's original objectives for the refinancing;
(ii) the conversion to a full recourse guaranty, which exposed VHG as a publicly traded guarantor to significant incremental liability beyond the value of the Property;
(iii) the cross-collateralization requirement, which would have encumbered the Driftwood Bay Hotel and restricted VHG's flexibility to finance, refinance, or dispose of that asset independently; and
(iv) the 155 basis point increase in the fixed interest rate, which increased annual debt service and reduced the Property's debt service coverage cushion.
At the board's direction, C&H prepared and delivered a formal termination notice on behalf of VHG and CPRH to PAC on February 15, 2023. The termination notice was delivered to PAC at its offices at 200 Lexington Avenue, 38th Floor, New York, New York 10016, with copies to Philip Tarrant Corporation at WBD and Lisa Portman at Meridian Title & Escrow, Inc. The termination notice referenced the Commitment Letter dated December 9, 2022, asserted that PAC's repriced terms constituted a material modification of the commitment that fundamentally altered the economic terms upon which VHG and CPRH had entered into the Commitment Letter, and reserved VHG's rights with respect to the return of the deposits held by Meridian Title.
VI. DEPOSIT SETTLEMENT
A. Deposit Dispute
As of the date of termination, the total deposits held by Meridian Title & Escrow, Inc. in connection with the Transaction were $2,400,000, consisting of:
(a) Good Faith Deposit: $1,600,000 (1.0% of the loan amount), deposited on December 12, 2022; and
(b) Rate Lock Deposit: $800,000 (0.50% of the loan amount), deposited on January 5, 2023.
Upon receipt of VHG's termination notice, a dispute arose between the parties regarding the disposition of the deposits. The parties' respective positions were as follows:
PAC's Position. PAC asserted that both deposits — the $1,600,000 good faith deposit and the $800,000 rate lock deposit — were non-refundable upon the Borrower's termination of the Transaction. PAC contended that the termination was initiated by the Borrower, that the Commitment Letter's deposit provisions did not provide for a refund upon borrower-initiated termination, and that the repriced terms did not constitute a "material modification" of the Commitment Letter because PAC retained the right under the Commitment Letter to adjust loan terms based on the results of the appraisal and due diligence. PAC communicated its position on deposit retention to C&H and VHG on February 22, 2023.
VHG's Position. VHG, through C&H, asserted that PAC's repriced terms constituted a material modification of the Commitment Letter that fundamentally altered the economic bargain between the parties. VHG argued that the repricing — including the $21,000,000 reduction in loan amount, the 155 basis point increase in interest rate, the conversion from limited recourse to full recourse guaranty, and the introduction of a cross-collateralization requirement not contemplated in the original term sheet or Commitment Letter — excused VHG's obligation to close and entitled VHG to a full refund of both deposits. VHG further argued that the Commitment Letter's deposit provisions should be interpreted in light of the implied covenant of good faith and fair dealing and that PAC's refusal to consider a second appraisal or to negotiate the repriced terms in good faith supported VHG's right to return of the deposits.
B. Settlement
Following the exchange of position letters between C&H (on behalf of VHG/CPRH) and WBD (on behalf of PAC), and after further telephonic discussions between Douglas Fairchild and Philip Tarrant Corporation, the parties reached a negotiated resolution of the deposit dispute.
Under the terms of the settlement, PAC agreed to return the rate lock deposit of $800,000 to VHG/CPRH, while retaining the good faith deposit of $1,600,000 as liquidated damages in connection with the termination of the Transaction by the Borrower.
The settlement was confirmed and documented in a deposit settlement letter agreement (the "Settlement Agreement") dated February 28, 2023, executed by Coral Palms Resort Holdings LLC, Verimark Hospitality Group Inc., and Pinnacle Atlantic Capital, LLC. The Settlement Agreement provides as follows:
(a) Meridian Title & Escrow, Inc. (Lisa Portman, Title Officer) was instructed to disburse the deposits as follows: $1,600,000 to PAC (or as directed by PAC), and $800,000 refunded to VHG/CPRH (or as directed by VHG).
(b) The Settlement Agreement contains a mutual release of claims among VHG, CPRH, and PAC relating to or arising from the terminated Transaction, the Commitment Letter, the term sheet, and the deposits. Each party released the other parties from any and all claims, demands, causes of action, liabilities, and obligations, whether known or unknown, that arise out of or are related to the Transaction.
(c) The Settlement Agreement is governed by Florida law, without regard to conflict of laws principles.
Net Forfeited Deposit: $1,600,000 (the good faith deposit retained by PAC as liquidated damages).
The execution of the Settlement Agreement resolved all outstanding disputes between the parties and permitted the closure of the matter.
VII. CALDERWOOD & HARKNESS FEES AND EXPENSES
A. Fee Summary
The engagement was conducted on an hourly fee basis, as set forth in the engagement letter dated December 5, 2022. The applicable hourly rates for the engagement team were as follows:
At the time of engagement, the estimated legal fees for the Transaction, assuming a full closing, were $350,000 to $475,000. The fee estimate contemplated the full scope of borrower's counsel work described in Section II.C above, including loan document negotiation through closing, title and survey review, insurance compliance, entity documentation, payoff coordination, and closing and post-closing deliverables.
Because the Transaction terminated prior to closing, the scope of work actually performed was less than originally anticipated, although significant work had been completed on loan document markup and negotiation, title and survey review, insurance analysis, and the appraisal challenge and repricing negotiation before the matter concluded.
Total actual fees incurred through the termination of the matter: approximately $287,500.
Billing was conducted on a monthly cycle, with invoices rendered net 30 days from the date of the invoice, in accordance with the engagement letter and VHG's accounts payable procedures. All invoices through the penultimate billing period have been paid by VHG. The final invoice for the remaining unbilled fees and disbursements is to be prepared and submitted as described below.
B. Retainer Disposition
VHG deposited an evergreen retainer of $50,000 on December 7, 2022, via wire transfer to Calderwood & Harkness LLP's Interest on Trust Accounts (IOTA) trust account. Pursuant to the terms of the engagement letter, the retainer was to be maintained on deposit throughout the engagement and applied against the final invoice(s) upon conclusion of the matter. Any remaining balance after application against the final invoice is to be refunded to VHG.
The final accounting of the retainer application and any refund balance should be confirmed with Angela Fontaine, Billing Partner, in connection with the preparation and issuance of the final invoice.
C. Disbursements and Out-of-Pocket Costs
Standard disbursements and out-of-pocket costs incurred by C&H in connection with the engagement — including copying and reproduction charges, messenger and courier fees, overnight delivery charges, filing fees, database and search fees, and travel expenses for the engagement team — are to be itemized and included in the final invoice. These disbursements are expected to be modest in the aggregate, as the engagement did not proceed to a closing that would have generated the more substantial disbursement items associated with recording fees, title insurance premiums, and the like.
With respect to lender's counsel fees, the Commitment Letter provided that WBD's legal fees, subject to a cap of $275,000 plus reasonable disbursements, were payable by the Borrower at closing. Because no closing occurred, WBD's fees were not invoiced to VHG by WBD. However, the Commitment Letter included a side letter addressing the Borrower's obligation for lender's counsel fees in the event of termination prior to closing. VHG's obligation, if any, for WBD's pre-closing work should be confirmed by reference to the terms of the Commitment Letter side letter. As of the date of this memorandum, C&H is not aware of any claim by WBD or PAC for payment of WBD's fees by VHG, and the mutual release contained in the Settlement Agreement dated February 28, 2023, may have extinguished any such claim. This item should be flagged for Angela Fontaine's review in connection with the final billing.
VIII. STATUS OF THIRD-PARTY ENGAGEMENTS AND WORK PRODUCT
A. Title and Escrow
Title Company: Meridian Title & Escrow, Inc. (Lisa Portman, Title Officer), 9100 South Dadeland Boulevard, Suite 1500, Miami, Florida 33156.
Meridian Title was engaged to provide title and escrow services in connection with the Proposed Refinancing. During the course of the engagement, Meridian Title issued a title commitment for the Property, which C&H reviewed in detail. C&H prepared a comprehensive title commitment review memorandum identifying and analyzing all Schedule B exceptions and requirements, and prepared a title objection letter to be transmitted to PAC/WBD and Meridian Title setting forth VHG's objections to certain title exceptions and requesting curative action.
Because the Transaction did not close, no lender's title insurance policy was issued by Meridian Title. Meridian Title has been instructed on the disbursement of the deposits held in escrow pursuant to the Settlement Agreement dated February 28, 2023, as described in Section VI.B above. Meridian Title has confirmed receipt of the joint instructions and has indicated that disbursement will be processed in accordance with the Settlement Agreement. As of the date of this memorandum, there are no outstanding obligations to Meridian Title.
B. Survey
Surveyor: Landis & Shaw Surveying, Inc. (Robert Tran, PLS), 7600 Red Road, Suite 210, South Miami, Florida 33143.
Landis & Shaw was retained to prepare an ALTA/NSPS Land Title Survey of the Property in accordance with the 2021 Minimum Standard Detail Requirements for ALTA/NSPS Land Title Surveys, as jointly established by the American Land Title Association and the National Society of Professional Surveyors. The survey was completed and delivered to C&H and VHG during the course of the engagement. C&H prepared a survey review memorandum identifying and analyzing all survey matters, including boundary dimensions and areas, easements, encroachments, setback compliance, and flood zone determinations.
Survey fees were paid directly by VHG to Landis & Shaw Surveying, Inc. As of the date of this memorandum, C&H is not aware of any outstanding invoices from Landis & Shaw related to this engagement.
C. Environmental
Environmental Consultant: Oakridge Environmental Consulting Group, Inc. (Dr. James Whitmore), 2850 Douglas Road, Suite 400, Coral Gables, Florida 33134.
Oakridge was engaged by PAC to prepare a Phase I Environmental Site Assessment of the Property in accordance with ASTM Standard E1527-21. C&H did not directly supervise or manage the Oakridge engagement, as the Phase I was commissioned by and conducted on behalf of the lender. The status of the Phase I report — specifically, whether the report was completed and delivered, and whether any outstanding fees remain payable by VHG (if the Commitment Letter or side letter allocated Phase I costs to the Borrower) — should be confirmed with Derek Huang at VHG.
D. Appraisal
Appraiser: Hargrove & Whitley Valuation Services LLC (Scott Tremaine, MAI, MRICS), 3300 PGA Boulevard, Suite 120, Palm Beach Gardens, Florida 33410.
The appraisal of the Property was commissioned and paid for by PAC. The appraisal report, dated January 20, 2023, with an effective date of value of January 6, 2023, concluded an "as-is" market value of $192,000,000, as described in detail in Section V.A above. There is no outstanding Borrower obligation to Hargrove & Whitley, as appraisal fees were borne by PAC.
Appraisal Review Consultant: Claybourne Advisory Group LLC was retained by VHG on January 24, 2023, to conduct an independent review of the Hargrove & Whitley appraisal report. Claybourne's fees were paid directly by VHG. The status of Claybourne's final appraisal review report — specifically, whether a formal report was delivered to VHG or whether Claybourne's work remained in preliminary/draft form at the time of transaction termination — should be confirmed with Derek Huang.
E. Insurance
Insurance Broker: Castlegate Risk Advisors LLC (Monica Iglesias, Senior Vice President), 701 Brickell Avenue, Suite 1400, Miami, Florida 33131.
C&H reviewed PAC's insurance requirements as set forth in the draft loan agreement and prepared an insurance compliance memorandum analyzing the adequacy of VHG's existing insurance programs against the lender's requirements. C&H also prepared a letter to Castlegate Risk Advisors summarizing PAC's insurance requirements and requesting confirmation of compliance, together with drafts of any additional endorsements or policy modifications that would be necessary to satisfy PAC's requirements at closing.
Because the Transaction did not close, the following insurance-related closing deliverables were not finalized:
• Additional insured endorsements naming PAC and its servicer as additional insureds under VHG's property, general liability, and windstorm insurance policies (currently placed with Southland Mutual Insurance Company);
• Lender's loss payable and mortgagee endorsements;
• Modifications to the flood insurance policy (currently placed with Bayfront Specialty Insurance Corp.) to comply with PAC's flood coverage requirements; and
• Certificates of insurance in form acceptable to PAC and WBD.
VHG's existing insurance programs with Southland Mutual Insurance Company (property, general liability, and windstorm coverage) and Bayfront Specialty Insurance Corp. (flood coverage) remain in place and continue to satisfy the requirements of the existing Tidewater loan.
F. Entity Documentation
During the course of the engagement, C&H prepared the following entity and authorization documents in draft form:
• Draft authorizing resolutions for Coral Palms Resort Holdings LLC (Borrower), authorizing the execution and delivery of the loan documents and the consummation of the Proposed Refinancing;
• Draft authorizing resolutions for Verimark Hospitality Group Inc. (Guarantor), authorizing the execution and delivery of the guaranty and environmental indemnity;
• Draft incumbency certificates for the officers and authorized signatories of the Borrower and Guarantor.
None of the foregoing documents were executed, as the Transaction terminated prior to closing. Good standing certificate requests were initiated with the Florida Department of State, Division of Corporations (for CPRH, a Florida LLC) and the Delaware Secretary of State, Division of Corporations (for VHG, a Delaware corporation). Any certificates of good standing that were received are included in the matter file.
IX. EXISTING TIDEWATER LOAN — REMAINING CONSIDERATIONS
The existing $125,000,000 first mortgage loan from Tidewater National Bank, N.A. (with an outstanding principal balance of approximately $118,500,000 as of October 2022) remains in place as the first priority lien on the Property. The key terms and the near-term implications of the existing loan are summarized as follows:
Interest Rate: SOFR plus 2.25% (floating rate, as converted from LIBOR pursuant to the fallback amendment dated March 15, 2022).
Maturity Date: June 1, 2024.
Prepayment Premium: The prepayment premium window of 1.0% of outstanding principal for prepayments made prior to March 1, 2023 has likely passed or is imminently passing as of the date of this memorandum. No prepayment premium applies to prepayments made on or after March 1, 2023, which will be advantageous to VHG in connection with any future refinancing.
Near-Term Implications: With the Tidewater loan maturing on June 1, 2024 — approximately fifteen months from the date of this memorandum — VHG faces a near-term obligation to pursue one or more of the following alternatives:
(a) an alternative refinancing of the Property through a new lender, at terms that reflect the current appraised value and market conditions;
(b) a negotiated extension of the existing Tidewater loan, subject to Tidewater's willingness to extend the maturity date and any conditions that Tidewater may impose;
(c) a disposition of the Property, with loan proceeds applied to pay off the existing Tidewater mortgage; or
(d) another capital markets solution, such as a mezzanine or preferred equity financing to supplement a lower first mortgage loan sizing.