MEMORANDUM
PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT This memorandum is protected by the attorney-client privilege and the work product doctrine. It is intended solely for the use of the addressees identified herein and should not be disclosed to any third party without the prior written consent of Calderwood & Harkness LLP.
TO: Douglas Fairchild, Partner Angela Fontaine, Partner
FROM: Grace Nakamura, Associate Rafael Dominguez, Associate
DATE: November 2, 2022
RE: Review of Existing Mortgage Loan Documents — Tidewater National Bank, N.A. Loan to Coral Palms Resort Holdings LLC
CLIENT: Verimark Hospitality Group Inc.
MATTER NO.: 1021-00007
Right-click to update Table of Contents
I. PURPOSE AND SCOPE
The purpose of this memorandum is to set forth the results of our review and analysis of the existing first mortgage loan (the "Existing Loan") made by Tidewater National Bank, N.A. ("Tidewater" or "TNB") to Coral Palms Resort Holdings LLC ("CPRH" or the "Borrower"), secured by the Coral Palms Grand Resort & Spa located in Key Largo, Monroe County, Florida (the "Property"). This review has been undertaken in connection with the proposed $160,000,000 refinancing of the Property by Pinnacle Atlantic Capital, LLC ("PAC"), and is intended to identify and analyze provisions within the Existing Loan documents that are relevant to, and that could potentially impede or complicate, the proposed refinancing transaction.
Our scope of review encompasses the following Existing Loan documents, each of which was provided to us by Derek Huang, Senior Vice President – Capital Markets & Treasury, at Verimark Hospitality Group Inc. ("VHG"):
(a) Loan Agreement, dated as of June 1, 2019, by and between Tidewater National Bank, N.A. and Coral Palms Resort Holdings LLC (the "Loan Agreement");
(b) Promissory Note, dated June 1, 2019, executed by Coral Palms Resort Holdings LLC in favor of Tidewater National Bank, N.A., in the original principal amount of $125,000,000 (the "Note");
(c) Mortgage, Assignment of Leases and Rents, Security Agreement, and Fixture Filing, dated June 1, 2019, recorded in Official Records Book 2892, Page 0445, Public Records of Monroe County, Florida (the "Mortgage");
(d) Environmental Indemnity Agreement, dated as of June 1, 2019, executed by Coral Palms Resort Holdings LLC and Verimark Hospitality Group Inc. in favor of Tidewater National Bank, N.A. (the "Environmental Indemnity");
(e) Guaranty Agreement, dated as of June 1, 2019, executed by Verimark Hospitality Group Inc. in favor of Tidewater National Bank, N.A. (the "Guaranty");
(f) UCC-1 Financing Statement, filed with the Florida Secured Transaction Registry, File No. 202219087643 (the "UCC-1");
(g) First Amendment to Loan Agreement and Note (LIBOR-to-SOFR Fallback Amendment), dated March 15, 2022, by and between Tidewater National Bank, N.A. and Coral Palms Resort Holdings LLC (the "Fallback Amendment"); and
(h) Ancillary documents, including the borrower's organizational certificate and incumbency certificate delivered at origination.
Our analysis has focused on the following areas of particular relevance to the proposed PAC refinancing: (i) prepayment provisions and premium calculations; (ii) consent and notice requirements applicable to the refinancing and payoff of the Existing Loan; (iii) defeasance provisions and their economic viability relative to direct prepayment; (iv) the assignment of leases and rents and its termination mechanics; (v) the UCC-1 financing statement and required UCC-3 termination; (vi) transfer and encumbrance restrictions (due-on-sale and due-on-encumbrance clauses); and (vii) any other provisions that could impede, delay, or otherwise complicate the proposed refinancing.
By way of background, VHG is a Delaware corporation publicly traded on the Nasdaq Stock Market (ticker: VMRK). VHG owns and operates a portfolio of fourteen luxury and upscale resort properties across the southeastern United States and the Caribbean. CPRH is a Florida limited liability company and a wholly owned indirect subsidiary of VHG, formed for the purpose of holding title to the Property. VHG serves as the indirect parent of CPRH and is the guarantor under the Existing Loan.
II. SUMMARY OF KEY FINDINGS AND RECOMMENDATIONS
Set forth below is a summary of our principal findings and recommendations resulting from the review described herein. Each of these items is discussed in greater detail in the sections that follow.
1. Prepayment Premium — Timing Is Critical. Prepayment of the Existing Loan is permitted in full at any time, subject to payment of a prepayment premium of 1.0% of the outstanding principal balance if the prepayment occurs prior to March 1, 2023. The premium drops to zero on and after March 1, 2023, at which point the Existing Loan is "open" for prepayment without penalty. At the current approximate outstanding balance of $118,500,000, the prepayment premium, if triggered, would be approximately $1,185,000. The timing of the PAC refinancing closing relative to the March 1, 2023 threshold date is therefore a material economic consideration. We strongly recommend that the deal team coordinate the PAC closing schedule to target a closing date on or after March 1, 2023, to the extent commercially practicable, in order to preserve this savings.
2. No Lender Consent Required for Payoff. The Loan Agreement does not require Tidewater's consent to the prepayment or refinancing of the Existing Loan. CPRH has the unilateral right to prepay the Existing Loan in full, subject only to the premium schedule and the requirement that written notice of prepayment be provided at least thirty (30) calendar days in advance of the proposed prepayment date. The notice, once delivered, is irrevocable.
3. Defeasance Is Not Economically Advantageous. The Loan Agreement includes a defeasance provision permitting the substitution of collateral with U.S. Treasury obligations. However, given the upcoming open prepayment window commencing March 1, 2023, and the relatively modest prepayment premium of 1.0% if prepayment occurs before that date, defeasance is not economically advantageous and should not be pursued.
4. Assignment of Rents Terminates Automatically. The assignment of leases and rents contained within the Mortgage terminates automatically upon full payment and satisfaction of the Existing Loan and the recording of a satisfaction and discharge of the Mortgage. No separate release instrument is required.
5. UCC-3 Termination Statement Required. The UCC-1 financing statement filed by Tidewater (File No. 202219087643) must be terminated via a UCC-3 termination statement filed with the Florida Secured Transaction Registry upon payoff of the Existing Loan. The payoff request letter to Tidewater should expressly request delivery of an executed UCC-3 termination statement at or prior to closing.
6. Mortgage Satisfaction and Discharge. The existing Mortgage must be satisfied and discharged of record in the Public Records of Monroe County, Florida, at or in connection with the closing of the new PAC loan. The closing must be structured to ensure the Tidewater Mortgage is satisfied and the new PAC mortgage is recorded in proper first lien priority sequence, in coordination with Meridian Title & Escrow, Inc.
7. No Impediments Identified. Subject to the timing considerations regarding the prepayment premium, and subject to the surviving environmental indemnity (which warrants further attention as discussed in Section IV.L below), we have not identified any material impediments to the proposed refinancing in the Existing Loan documents.
III. LOAN SUMMARY
A. Parties. The parties to the Existing Loan are as follows:
Borrower: Coral Palms Resort Holdings LLC, a Florida limited liability company. CPRH was organized under the laws of the State of Florida for the specific purpose of acquiring and holding title to the Property and operating the Coral Palms Grand Resort & Spa. CPRH is a wholly owned indirect subsidiary of VHG, with its membership interests held through an intermediate holding entity structure.
Guarantor: Verimark Hospitality Group Inc., a Delaware corporation. VHG provided a limited recourse guaranty (commonly referred to as a "carve-out" or "bad boy" guaranty) in connection with the Existing Loan, pursuant to which VHG guarantees the obligations of CPRH only in respect of certain enumerated "bad acts," as more fully described in Section IV.K below. VHG is publicly traded on the Nasdaq Stock Market under the ticker symbol "VMRK."
Lender: Tidewater National Bank, N.A., a national banking association chartered and regulated by the Office of the Comptroller of the Currency ("OCC"). Tidewater's principal office is located at 600 Waterside Drive, Norfolk, Virginia 23510. Tidewater is a regional banking institution with approximately $38 billion in total assets, with significant commercial real estate lending operations concentrated in the mid-Atlantic and southeastern United States. The Existing Loan appears to have been originated and retained on Tidewater's own balance sheet and does not appear to have been securitized or participated to third-party investors.
Key Lender Contact: Alan Prescott, Senior Vice President – Commercial Real Estate, Tidewater National Bank, N.A. Mr. Prescott has been identified by VHG as the primary relationship manager for the Existing Loan and should be the initial point of contact for all payoff-related communications.
B. Loan Terms
The material economic terms of the Existing Loan are as follows:
The outstanding principal balance of approximately $118,500,000 as of October 15, 2022 reflects the commencement of scheduled amortization payments beginning June 1, 2022. During the initial three-year interest-only period, the principal balance remained at the original $125,000,000. Amortization payments since June 1, 2022, based on a 30-year amortization schedule, have reduced the outstanding balance by approximately $6,500,000 through the date of our review. The outstanding balance will continue to decrease modestly with each monthly amortization payment, and the exact balance as of the payoff date will be confirmed in the Tidewater payoff statement.
C. Collateral / Security
The Existing Loan is secured by the following collateral:
Real Property: The Coral Palms Grand Resort & Spa, located at 99000 Overseas Highway, Key Largo, Monroe County, Florida 33037. The Property bears Monroe County Property Folio No. 00460780-000100. The legal description of the Property is set forth in that certain Warranty Deed recorded in Official Records Book 2847, Page 1122, Public Records of Monroe County, Florida, and generally encompasses a portion of Section 27, Township 60 South, Range 39 East, Monroe County, Florida, as more particularly described therein.
The Property consists of a full-service luxury oceanfront resort hotel comprising approximately 412,000 gross square feet situated on approximately 22.4 acres of waterfront land in Key Largo, within the Florida Keys. The resort includes 342 guest rooms and suites, approximately 28,500 square feet of meeting and event space, an approximately 18,000 square-foot full-service spa, a 42-slip marina, three food and beverage outlets, and a 1,200-space structured parking facility. The Property was originally constructed in 2006 and underwent a comprehensive renovation completed in August 2021 at an approximate cost of $47 million, funded through a combination of operating cash flow and a portion of the Existing Loan proceeds.
Personal Property: All personal property of the Borrower located at or used in connection with the Property, as described in the UCC-1 financing statement and the security agreement component of the Mortgage, including furniture, fixtures, and equipment ("FF&E"), accounts, general intangibles, chattel paper, instruments, deposit accounts, inventory, and all proceeds and products thereof.
Fee Owner: Coral Palms Resort Holdings LLC holds fee simple title to the Property.
D. Recording Information
IV. DETAILED ANALYSIS OF KEY PROVISIONS
A. Prepayment Provisions
1. Prepayment Premium Schedule. Article 2 of the Loan Agreement and Section 3 of the Note contain the prepayment provisions governing the Existing Loan. Both instruments provide that the Borrower may prepay the outstanding principal balance of the Existing Loan, in whole or in part, at any time, subject to the payment of a prepayment premium calculated as follows:
(a) Prior to March 1, 2023: A prepayment premium equal to 1.0% of the outstanding principal balance being prepaid, payable to Tidewater at the time of prepayment.
(b) On or after March 1, 2023: No prepayment premium. The Existing Loan becomes "open" for prepayment without penalty, premium, or charge of any kind.
The Loan Agreement specifies that the prepayment premium is intended to compensate Tidewater for the loss of anticipated interest income and the costs associated with redeployment of the prepaid funds, and that the premium represents a reasonable estimate of damages rather than a penalty. This characterization is consistent with Florida law governing the enforceability of prepayment premium provisions in commercial real estate loans. See § 697.06, Fla. Stat.
Based on the current approximate outstanding principal balance of $118,500,000, the prepayment premium, if the prepayment occurs prior to March 1, 2023, would be calculated as follows:
$118,500,000 × 1.0% = $1,185,000
It should be noted that the outstanding principal balance will continue to decrease slightly with each scheduled amortization payment during the remaining term of the Existing Loan. Accordingly, the actual prepayment premium will be calculated based on the outstanding principal balance as of the specific prepayment date, which will be confirmed in the Tidewater payoff statement. The difference, however, is unlikely to be material — monthly principal amortization on a 30-year schedule applied to the current balance results in a monthly principal reduction of approximately $200,000 to $250,000, meaning the premium amount would be reduced by only approximately $2,000 to $2,500 per month.
2. Prepayment Notice Requirements. Section 2.4 of the Loan Agreement requires that the Borrower provide written notice of its intent to prepay the Existing Loan at least thirty (30) calendar days prior to the proposed prepayment date. The notice provisions contain several important requirements:
(a) The prepayment notice must specify the proposed prepayment date, the amount to be prepaid (or, in the case of a full prepayment, a statement that the entire outstanding balance will be prepaid), and whether the prepayment is being made in connection with a refinancing or other transaction.
(b) The prepayment notice, once delivered to Tidewater, is irrevocable. The Borrower may not rescind or withdraw the notice after delivery. If the Borrower fails to prepay on the noticed prepayment date, such failure may, under certain circumstances described in the Loan Agreement, constitute an event of default. Specifically, the Loan Agreement provides that failure to consummate the prepayment within five (5) business days following the noticed prepayment date shall constitute a monetary default, subject to the standard five business day cure period for monetary defaults.
(c) The prepayment notice must be delivered to Tidewater's Commercial Real Estate Department, Attention: Alan Prescott, Senior Vice President, at 600 Waterside Drive, Norfolk, Virginia 23510, with a copy to Tidewater's loan servicing department at the same address or at such other address as Tidewater may designate by notice to Borrower.
(d) The Loan Agreement incorporates standard notice provisions requiring delivery by (i) hand delivery, (ii) nationally recognized overnight courier, or (iii) certified mail, return receipt requested. Notice by email or facsimile is permitted only as a courtesy copy and does not constitute effective notice under the Loan Agreement.
Recommendation: Given the irrevocable nature of the prepayment notice and the potential default implications of failing to close on the noticed date, Calderwood & Harkness should send a formal payoff request letter to Tidewater promptly once the PAC closing date has been established with reasonable certainty, and in any event no later than thirty (30) calendar days prior to the anticipated closing date. Care should be taken to ensure that the noticed prepayment date is achievable. If there is any uncertainty regarding the PAC closing timeline, it may be advisable to notice a prepayment date that provides a small buffer beyond the anticipated PAC closing, to account for potential delays in the PAC closing process.
3. Partial Prepayment. Section 2.5 of the Loan Agreement permits partial prepayments of the outstanding principal balance in minimum increments of $1,000,000, subject to the same prepayment premium schedule described above. Partial prepayments are applied first to accrued and unpaid interest and then to outstanding principal in inverse order of maturity (i.e., applied to the last scheduled payments first). Partial prepayments do not relieve the Borrower of its obligation to make regularly scheduled monthly payments.
The partial prepayment provision is not directly relevant to the proposed refinancing, which contemplates a full payoff of the Existing Loan. We note this provision solely for completeness.
4. Timing Considerations for the Refinancing. The prepayment premium schedule creates a clear economic incentive to time the PAC refinancing closing to occur on or after March 1, 2023. The potential savings of $1,185,000 are substantial and warrant careful coordination of the closing timeline. We summarize the economic analysis as follows:
Scenario 1 — Closing Before March 1, 2023:
Scenario 2 — Closing On or After March 1, 2023:
*Estimated, reflecting approximately four additional months of amortization from October 2022 through February 2023, reducing the outstanding balance by approximately $800,000 to $1,000,000.
The difference in net cash-out between the two scenarios is approximately $2,185,000 (reflecting both the avoided prepayment premium and the reduced outstanding balance due to additional amortization). We recommend that Douglas Fairchild and the deal team discuss with Derek Huang at VHG whether the PAC closing timeline can accommodate a post-March 1, 2023 closing date. Based on our understanding of the PAC commitment letter process and the anticipated loan document negotiation timeline, a March 2023 closing appears achievable, but this should be confirmed with the PAC lending team.
B. LIBOR-to-SOFR Fallback Amendment
On March 15, 2022, Tidewater and CPRH executed the Fallback Amendment to address the cessation of LIBOR publication by ICE Benchmark Administration Limited. The key provisions of the Fallback Amendment are as follows:
Background. The Existing Loan was originally structured with a floating interest rate based on one-month LIBOR plus a spread of 2.25%. Following the announcement by the Financial Conduct Authority and ICE Benchmark Administration that most U.S. dollar LIBOR settings would cease publication after June 30, 2023, Tidewater and CPRH agreed to transition the benchmark rate from LIBOR to the Secured Overnight Financing Rate ("SOFR"), as published by the Federal Reserve Bank of New York, in advance of the cessation date.
Replacement Benchmark. The Fallback Amendment replaced all references to LIBOR in the Loan Agreement and the Note with CME Term SOFR (one-month tenor), as published by CME Group Benchmark Administration Limited, as the replacement benchmark rate. The contractual spread of 2.25% was maintained. In addition, the Fallback Amendment incorporated a credit spread adjustment ("CSA") of 0.11448%, consistent with the ARRC-recommended spread adjustment for the one-month LIBOR/SOFR transition. The CSA is embedded in the benchmark rate calculation such that the contractual spread remains stated as SOFR + 2.25%, but the effective all-in spread, when accounting for the CSA, is SOFR + 2.36448%.
Interest Rate Floor. The Fallback Amendment maintained the existing interest rate floor of 0.50% on the benchmark rate. Accordingly, if CME Term SOFR falls below 0.50%, the interest rate is calculated as if the benchmark were 0.50%, resulting in a minimum all-in interest rate of 2.75% (0.50% floor + 2.25% spread).
No Other Material Modifications. The Fallback Amendment contains a representation and warranty by both parties that, other than the substitution of the benchmark rate, no other material terms of the Loan Agreement or the Note have been modified or amended. Specifically, the Fallback Amendment did not alter the maturity date, amortization schedule, prepayment terms, financial covenants, transfer restrictions, or any other material provision of the Existing Loan documents. The Mortgage was not modified or amended in connection with the Fallback Amendment.
The Fallback Amendment is well-drafted and consistent with market-standard LIBOR transition amendments. We do not identify any issues arising from the Fallback Amendment that would affect the proposed refinancing.
C. Defeasance Provisions
Article 2 of the Loan Agreement also includes a defeasance provision, set forth at Section 2.7, which provides the Borrower with an alternative to prepayment with premium. The defeasance provision permits the Borrower to substitute the real property collateral with a portfolio of U.S. Treasury obligations (the "Defeasance Collateral") sufficient to generate cash flows equal to all remaining scheduled payments of principal and interest through the maturity date.
Defeasance Mechanics. To effect a defeasance, the Borrower must: (i) deliver to Tidewater a defeasance collateral pledge agreement in form and substance satisfactory to Tidewater; (ii) purchase and pledge to Tidewater U.S. Treasury obligations (direct, non-callable obligations of the United States of America) with a cash flow schedule that, without reinvestment, provides payments on each remaining payment date in an amount equal to or greater than the scheduled payment of principal and interest due on such date; and (iii) cause the existing Mortgage to be released and discharged of record.
Defeasance Requirements. The Loan Agreement conditions the Borrower's right to defease upon satisfaction of the following requirements:
(i) No event of default, and no event which with the passage of time or giving of notice (or both) would constitute an event of default, shall exist under the Existing Loan documents at the time the defeasance notice is delivered or at the time the defeasance is consummated;
(ii) The Borrower shall deliver to Tidewater a defeasance collateral pledge agreement, in form and substance satisfactory to Tidewater, pledging the Defeasance Collateral as substitute collateral for the Existing Loan;
(iii) The Borrower shall deliver an opinion of counsel, from nationally recognized counsel experienced in defeasance transactions, confirming that the Defeasance Collateral is sufficient to provide funds equal to or in excess of all remaining scheduled payments of principal and interest through maturity;
(iv) If the Existing Loan has been securitized or included in a REMIC trust, the Borrower shall deliver a REMIC opinion confirming that the defeasance will not cause the trust to fail to qualify as a REMIC. As noted above, the Existing Loan does not appear to have been securitized — it remains on Tidewater's balance sheet — and accordingly, a REMIC opinion would not be required;
(v) The Borrower shall bear all costs and expenses associated with the defeasance, including the cost of purchasing the Defeasance Collateral, legal fees, accountant and verification agent fees, recording costs, and rating agency fees (if applicable).
Defeasance Window. Section 2.7(c) of the Loan Agreement specifies that the defeasance option is available from and after the date that is two (2) years following the origination date of the Existing Loan (i.e., from June 1, 2021) through the date that is ninety (90) days prior to the maturity date (i.e., through approximately March 3, 2024). The Existing Loan is currently within the defeasance window.
Practical Assessment. We have evaluated the economic viability of defeasance as an alternative to direct prepayment and have concluded that defeasance is not economically advantageous under the circumstances. Our analysis is based on the following considerations:
First, the cost of purchasing a portfolio of U.S. Treasury obligations sufficient to defease the remaining approximately $118,500,000 in principal, plus all remaining scheduled interest payments through the June 1, 2024 maturity date, would be substantial. As of the date of this memorandum, the yield on short-term U.S. Treasury securities is approximately 4.0% to 4.5%, while the current interest rate on the Existing Loan (SOFR + 2.25%) is approximately 6.0% to 6.5%. Because the Existing Loan bears interest at a rate above current Treasury yields, the Defeasance Collateral would need to generate cash flows sufficient to cover the higher interest rate, requiring the purchase of Treasury obligations at a premium or in a larger notional amount. The resulting defeasance cost would likely exceed the $1,185,000 prepayment premium.
Second, defeasance would entail substantial additional transactional costs, including legal fees for counsel to the Borrower and to Tidewater, verification agent fees, the cost of obtaining the required opinion of counsel, and potential administrative fees charged by Tidewater for processing the defeasance.
Third, defeasance is a mechanically complex transaction that would require significant lead time to structure and consummate, potentially delaying the PAC closing.
Recommendation: We recommend that VHG proceed with a direct prepayment of the Existing Loan rather than pursuing defeasance. If the PAC refinancing closing occurs on or after March 1, 2023, no prepayment premium is required, making defeasance entirely unnecessary. Even if the closing occurs before March 1, 2023, the $1,185,000 prepayment premium is almost certainly less costly than defeasance would be.
D. Assignment of Leases and Rents
The Mortgage includes an absolute assignment of all leases, rents, revenues, income, and profits derived from the Property, granted by CPRH to Tidewater as additional security for the Existing Loan. The assignment is documented within the body of the Mortgage itself, as reflected in the instrument's full title: "Mortgage, Assignment of Leases and Rents, Security Agreement, and Fixture Filing."
Scope of Assignment. The assignment covers all present and future leases, subleases, licenses, occupancy agreements, concession agreements, management agreements, and all other agreements pursuant to which any person or entity is entitled to occupy, use, or possess all or any portion of the Property. In the context of a resort hotel property, the assignment of rents extends broadly to encompass:
• Hotel guest room revenues, including all daily room rates, nightly charges, and incidental charges;
• Food and beverage revenues from the three on-site dining outlets and catering operations;
• Marina revenues from the 42-slip marina, including slip rental fees, launch fees, and fuel sales;
• Spa revenues from the 18,000 square-foot spa facility;
• Conference and event space revenues from the 28,500 square feet of meeting and event space;
• Parking revenues from the 1,200-space parking structure;
• Gift shop, retail, and sundry revenues; and
• All other income, revenue, and proceeds derived from the operation of the Property, including insurance proceeds and condemnation awards to the extent not otherwise addressed by the casualty and condemnation provisions of the Mortgage.
License Back. Consistent with standard commercial mortgage lending practice, the Mortgage provides that so long as no event of default exists under the Existing Loan documents, the Borrower retains a revocable license to collect, receive, and use all rents and revenues from the Property in the ordinary course of business. Upon the occurrence and during the continuance of an event of default, the license is automatically revoked and Tidewater is entitled to collect rents and revenues directly, appoint a receiver, or exercise any other remedies available under the Mortgage and applicable law.
Termination. The assignment of leases and rents terminates automatically and in its entirety upon the full payment and satisfaction of all obligations under the Existing Loan and the recording of a satisfaction and discharge of the Mortgage in the Public Records of Monroe County, Florida. No separate release or termination instrument is required with respect to the assignment of rents; the satisfaction and discharge of the Mortgage effectively extinguishes the assignment.
Action Required. Upon payoff of the Existing Loan, Tidewater must execute and deliver: (i) a satisfaction and discharge of the Mortgage (which will include the termination of the assignment of rents) in recordable form, suitable for recording in the Public Records of Monroe County, Florida; and (ii) any separate UCC-3 amendments or termination statements as may be applicable to the personal property components of the assigned collateral (discussed further in Section IV.E below).
Lien Priority Coordination Risk. We note a practical closing coordination issue that warrants careful attention. If the payoff of the Existing Loan does not occur simultaneously with the PAC closing and the recording of the new PAC mortgage, there is a brief window during which the Property could potentially be encumbered by both the existing Tidewater Mortgage and the new PAC mortgage. To avoid any lien priority issues, the closing must be structured to ensure that: (a) the Tidewater Mortgage is satisfied and the satisfaction/discharge instrument is recorded; and (b) the new PAC mortgage is recorded immediately thereafter in proper first lien priority sequence. We will coordinate closely with Lisa Portman, Title Officer at Meridian Title & Escrow, Inc., to ensure that the simultaneous closing and recording mechanics are properly structured. Meridian Title will be issuing the lender's title insurance policy to PAC and will require confirmation that the Tidewater Mortgage has been satisfied before insuring PAC's first lien position.
E. Security Interest and UCC Filings
1. UCC-1 Financing Statement. In addition to the real property mortgage lien, Tidewater holds a perfected security interest in the personal property of the Borrower located at or used in connection with the Property. This security interest was perfected by the filing of a UCC-1 financing statement with the Florida Secured Transaction Registry. The key details of the UCC-1 are as follows:
The collateral description in the UCC-1 is broadly drafted and encompasses virtually all categories of personal property associated with the Property, consistent with standard commercial mortgage lending practice for hospitality properties. Given the nature of the Property as a full-service luxury resort, the personal property collateral is substantial and includes, among other things, guest room furnishings, kitchen and food service equipment, spa equipment, marina equipment, audiovisual equipment, information technology systems, and operating supplies.
2. UCC-3 Termination. Upon payoff of the Existing Loan, Tidewater is obligated to file, or authorize the Borrower to file, a UCC-3 termination statement with the Florida Secured Transaction Registry, terminating the UCC-1 financing statement bearing File No. 202219087643. Under Section 9-513 of the Florida Uniform Commercial Code, a secured party is required to file a termination statement within twenty (20) days after receiving an authenticated demand from the debtor, if the secured party has received full satisfaction of all obligations secured by the financing statement.
The payoff request letter to Tidewater should expressly request delivery of an executed UCC-3 termination statement at or prior to the PAC closing. Failure to obtain a timely UCC-3 termination could result in a competing or prior security interest that would be identified as an exception on the PAC title commitment and/or lender's title insurance policy, and could impede or delay the PAC closing. Meridian Title will likely require evidence of the UCC-3 termination (or at minimum, Tidewater's irrevocable authorization to file) as a condition to issuing the PAC lender's title policy without exception for the prior security interest.
3. Fixture Filing. The Mortgage, as recorded in Official Records Book 2892, Page 0445, Public Records of Monroe County, Florida, includes a fixture filing component covering all fixtures located on the Property. The fixture filing was made in accordance with Section 9-502(c) of the Florida Uniform Commercial Code by recording a financing statement (as part of the Mortgage instrument) in the real property records of Monroe County. The fixture filing provides Tidewater with a perfected security interest in all fixtures attached to or used in connection with the Property, with priority over the interest of any subsequent real property mortgagee or purchaser.
Upon satisfaction and discharge of the Tidewater Mortgage, the fixture filing component terminates by operation of law, as the fixture filing is contained within the Mortgage instrument itself and is extinguished when the Mortgage is satisfied and discharged of record. However, we recommend confirming with Meridian Title & Escrow that the PAC lender's title policy will not take exception to the prior fixture filing and that the recorded satisfaction and discharge will be sufficient to clear the fixture filing from the title.
F. Transfer and Encumbrance Restrictions
Due-on-Transfer Clause. Section 5.2 of the Loan Agreement contains a standard due-on-transfer and due-on-encumbrance provision (commonly referred to as a "lock-out" or "lock-box" provision), which prohibits, without Tidewater's prior written consent:
(i) Any sale, assignment, transfer, conveyance, or other disposition of the Property or any interest therein, whether voluntary or involuntary, by operation of law or otherwise;
(ii) Any additional encumbrance, mortgage, lien, pledge, or security interest on or affecting the Property or any portion thereof; and
(iii) Any sale, transfer, assignment, or pledge of any direct or indirect ownership interest in the Borrower (i.e., membership interests in CPRH) or in any entity that directly or indirectly controls the Borrower, if such transfer would result in a change of control.
A violation of the due-on-transfer clause constitutes an immediate event of default under the Loan Agreement and, at Tidewater's option, causes the entire outstanding principal balance of the Existing Loan to become immediately due and payable.
Exceptions. The Loan Agreement identifies the following transfers that are expressly permitted without Tidewater's consent and do not trigger the due-on-transfer clause:
(i) The leasing of individual hotel guest rooms and suites in the ordinary course of the hospitality business, on standard hotel terms consistent with comparable luxury resort properties;
(ii) The granting of short-term licenses for event space, meeting rooms, and marina slips, in each case in the ordinary course of the Property's operations and on commercially reasonable terms; and
(iii) Transfers of equity ownership interests in VHG (the indirect parent and publicly traded guarantor) in the ordinary course of public market trading, provided that such transfers do not result in a "change of control" as defined in the Loan Agreement. The Loan Agreement defines "change of control" as any event or series of events resulting in (a) any person or group (as defined in Section 13(d) of the Securities Exchange Act of 1934) acquiring beneficial ownership of more than 50% of the outstanding voting equity interests of VHG, or (b) the individuals constituting VHG's board of directors as of the origination date (or their approved successors) ceasing to constitute a majority of the board.
Relevance to Refinancing. The due-on-transfer and due-on-encumbrance clause does not impede the proposed refinancing. Because the Existing Loan will be paid in full at the closing of the PAC refinancing, the Tidewater lien will be extinguished contemporaneously with the closing, and there is no need to obtain Tidewater's consent to the new PAC mortgage. The recording of the new PAC mortgage is not a "transfer" or "encumbrance" that triggers the due-on-transfer clause, because the Tidewater lien will no longer be in existence at the time the PAC mortgage attaches.
Important Caveat. If for any reason the proposed transaction were restructured such that the Tidewater loan would not be fully repaid at the PAC closing — for example, if the PAC loan were structured as a subordinate or mezzanine loan, or if VHG decided to maintain the Tidewater loan in a first lien position — Tidewater's prior written consent to the new encumbrance would be required. However, this is not the contemplated transaction structure. The proposed refinancing contemplates a full payoff and discharge of the Existing Loan, with the PAC loan replacing it as a new first mortgage.
G. Consent and Notice Requirements Relevant to Refinancing
We have reviewed the Existing Loan documents to identify all consent and notice requirements that may be applicable in connection with the proposed refinancing and payoff. Our findings are as follows:
No Consent Required for Payoff. The Loan Agreement does not require Tidewater's consent to the prepayment or payoff of the Existing Loan. The Borrower has the unilateral contractual right to prepay the Existing Loan in whole at any time, subject only to: (a) the applicable prepayment premium, if any (as described in Section IV.A above); and (b) the 30-day advance written notice requirement (as described in Section IV.A.2 above). Tidewater cannot refuse to accept prepayment or condition acceptance of prepayment on any terms other than those expressly set forth in the Loan Agreement.
30-Day Advance Written Notice. As discussed in detail in Section IV.A.2, the Borrower must deliver written notice of its intent to prepay at least thirty (30) calendar days prior to the proposed prepayment date. This notice is irrevocable once delivered.
Payoff Letter / Estoppel. Although the Loan Agreement does not contain an express contractual obligation requiring Tidewater to deliver a payoff letter or estoppel certificate in connection with a prepayment, it is standard practice in commercial real estate refinancing transactions to request and obtain a formal payoff letter from the existing lender. We strongly recommend that Calderwood & Harkness request a payoff letter from Tidewater confirming the following:
(a) The exact outstanding principal balance as of the proposed payoff date;
(b) Accrued and unpaid interest through the proposed payoff date, together with per diem interest to account for any variance in the actual payoff date;
(c) The applicable prepayment premium, if any;
(d) Any other amounts due and owing under the Existing Loan, including any outstanding late charges, default interest, servicing fees, legal fees, or other charges;
(e) A confirmation that no event of default, and no event which with the passage of time or giving of notice (or both) would constitute an event of default, exists under the Existing Loan documents as of the date of the payoff letter;
(f) Wire transfer instructions for remittance of the payoff amount; and
(g) A statement that upon receipt of the payoff amount, Tidewater will execute and deliver a satisfaction and discharge of the Mortgage, a UCC-3 termination statement, and a release and termination of the VHG Guaranty.
Notification to Servicer. The Existing Loan documents do not identify a sub-servicer or third-party loan servicer. The loan appears to have been originated and retained by Tidewater on its own balance sheet and serviced internally by Tidewater's commercial real estate servicing department. However, it is possible that Tidewater has subsequently engaged a sub-servicer for day-to-day loan administration functions. We recommend confirming with Tidewater (through Alan Prescott) whether the Existing Loan is serviced internally or by a third-party servicer, and if the latter, obtaining the servicer's contact information and any separate notice requirements.
H. Events of Default and Cure Provisions
We have reviewed Article 8 of the Loan Agreement, which sets forth the events of default under the Existing Loan and the associated cure provisions. Based on our review of the face of the loan documents, we have not identified any existing events of default. However, we note the following important caveats:
First, our review has been limited to the loan documents themselves and does not include an independent verification of the Borrower's compliance with the financial covenants contained in the Loan Agreement. Specifically, the Loan Agreement includes the following financial covenants that are tested on a quarterly basis: (a) a minimum debt service coverage ratio ("DSCR") of 1.25x, calculated on a trailing twelve-month basis; (b) a maximum loan-to-value ratio ("LTV") of 75%, based on the most recent appraised value of the Property; and (c) a minimum debt yield of 9.0%, calculated as the trailing twelve-month net operating income divided by the outstanding principal balance. We have not reviewed the Borrower's quarterly compliance certificates or verified compliance with these covenants.
Second, we have not reviewed the Borrower's compliance with non-financial covenants, including insurance requirements, environmental compliance requirements, or reporting obligations.
Recommendation: We recommend that VHG (through Derek Huang, SVP – Capital Markets & Treasury) request from Tidewater (Alan Prescott) a written confirmation that no events of default or potential events of default exist under the Existing Loan as of a recent date. This confirmation should be obtained in advance of the PAC closing, as PAC will very likely require, as a condition precedent to the closing of the refinancing, a representation and warranty from the Borrower and the Guarantor that the Existing Loan is in good standing with no existing defaults. Additionally, the Tidewater payoff letter, if properly negotiated, should include a confirmation of no existing defaults as of its date.
Standard Cure Periods. For reference, the Loan Agreement provides the following standard cure periods for events of default:
(a) Monetary Defaults: Five (5) business days from the date the payment is due (or, if earlier, five business days from the date written notice of non-payment is delivered by Tidewater);
(b) Non-Monetary Defaults: Thirty (30) calendar days from the date written notice of the default is delivered by Tidewater; provided, however, that if the default is of a nature that cannot reasonably be cured within thirty (30) calendar days, the cure period is extended for such additional time as is reasonably necessary, so long as the Borrower commences the cure within the initial thirty-day period and thereafter diligently and continuously pursues the cure to completion.
I. Insurance and Casualty Provisions
Article 6 of the Loan Agreement and the corresponding provisions of the Mortgage require the Borrower to maintain comprehensive insurance coverage with respect to the Property at all times during the term of the Existing Loan. The required insurance coverages include, without limitation:
(a) Property and Casualty Insurance: "All risk" or "special form" property insurance covering the full replacement cost of all improvements on the Property, including the resort hotel buildings, parking structure, marina facilities, spa, and all other structures;
(b) Windstorm Insurance: Separate windstorm coverage (or a windstorm endorsement to the property policy) with limits adequate to cover windstorm damage to the Property, as required for coastal properties in Monroe County, Florida;
(c) Flood Insurance: Flood insurance in the maximum amount available under the National Flood Insurance Program ("NFIP"), supplemented by excess or surplus lines flood coverage to achieve a total coverage amount equal to the lesser of the outstanding principal balance of the Existing Loan or the full replacement cost of the improvements;
(d) General Liability Insurance: Commercial general liability insurance with minimum limits of $5,000,000 per occurrence and $10,000,000 aggregate; and
(e) Business Interruption Insurance: Business interruption or loss of rents insurance covering at least twelve (12) months of projected gross revenues from the Property.
All policies are required to name Tidewater National Bank, N.A. as mortgagee and loss payee under a standard New York (or equivalent) mortgagee endorsement.
Current Insurance. Based on information provided by VHG, the Property is currently insured as follows:
• Property and Casualty Insurance: Provided by Southland Mutual Insurance Company. Policy includes "all risk" / "special form" coverage and windstorm coverage.
• Flood Insurance: NFIP coverage is supplemented by surplus lines flood coverage provided by Bayfront Specialty Insurance Corp.
• Insurance Broker: All insurance for the Property is placed through Castlegate Risk Advisors LLC, a nationally recognized hospitality insurance brokerage. The primary contact at Castlegate is Monica Iglesias, Senior Vice President.
Relevance to Refinancing. Upon payoff of the Existing Loan, Tidewater's interest as named mortgagee and loss payee under the insurance policies terminates. The existing policies will need to be endorsed to: (a) remove Tidewater National Bank, N.A. as mortgagee and loss payee; and (b) add Pinnacle Atlantic Capital, LLC (or its designee) as the new mortgagee and loss payee. These endorsement changes should be coordinated with Castlegate Risk Advisors (Monica Iglesias) and the respective insurance carriers in advance of the PAC closing, as PAC will require delivery of certificates of insurance and mortgagee endorsements as a condition precedent to funding.
Casualty and Condemnation Provisions. Section 6.3 of the Loan Agreement and the corresponding provisions of the Mortgage contain standard casualty and condemnation provisions. In the event of a casualty loss or condemnation affecting the Property, insurance proceeds and condemnation awards are required to be applied first to the outstanding balance of the Existing Loan, with any excess returned to the Borrower. Tidewater retains discretion, in certain circumstances, to permit the Borrower to apply insurance proceeds to restoration of the Property rather than to the loan balance. These provisions are not directly relevant to the proposed refinancing unless a casualty event or condemnation proceeding occurs between the date of this memorandum and the closing of the PAC refinancing.
J. Reserve and Escrow Accounts
The Existing Loan requires the Borrower to fund and maintain certain reserve and escrow accounts held by (or for the benefit of) Tidewater, as follows:
(a) Real Property Tax Escrow: Monthly deposits equal to one-twelfth of the estimated annual real property taxes for the Property, to be used by Tidewater to pay real property taxes when due;
(b) Insurance Premium Escrow: Monthly deposits equal to one-twelfth of the estimated annual insurance premiums for the required coverages described in Section IV.I above;
(c) FF&E Reserve: Monthly deposits equal to 4.0% of gross revenue from the Property (consistent with industry standards for full-service luxury resort properties), to be used for the periodic replacement and refurbishment of furniture, fixtures, and equipment.
Current Reserve Balances. We have not yet obtained current reserve and escrow account balances from Tidewater. These balances should be confirmed as part of the payoff process. Depending on the timing of the payoff relative to the annual tax and insurance payment cycles, the accumulated reserve balances could be significant.
Release of Reserves Upon Payoff. The Loan Agreement provides that upon full payment and satisfaction of the Existing Loan, all funds held in reserve and escrow accounts shall be released and disbursed to the Borrower. The payoff request letter to Tidewater should specifically request:
(i) A current statement of the balance of each reserve and escrow account;
(ii) Confirmation that all reserve and escrow balances will be released to the Borrower (or, at the Borrower's direction, credited against the payoff amount) upon satisfaction of the Existing Loan; and
(iii) Wire transfer instructions or disbursement mechanics for the release of reserve funds, including the timing of such release (i.e., whether the release will occur simultaneously with the payoff or within a specified period thereafter).
Coordination with PAC Reserves. PAC will require its own upfront reserve deposits in connection with the new $160,000,000 loan. Based on the current PAC term sheet, the required upfront reserves total approximately $4,800,000, allocated among tax and insurance escrows, FF&E reserves, and capital reserves. To the extent that Tidewater reserve balances are released to the Borrower at or promptly following the closing, these released funds can be applied toward the PAC reserve funding, thereby reducing VHG's out-of-pocket cash requirement at closing.
K. Guaranty Provisions (Existing Loan)
VHG executed the Guaranty in favor of Tidewater in connection with the origination of the Existing Loan. The Guaranty is structured as a limited recourse or "carve-out" guaranty, pursuant to which VHG guarantees the obligations of the Borrower only in respect of certain enumerated "bad acts" or "bad boy" events. The Guaranty does not guaranty the full payment of the Existing Loan; rather, it imposes personal liability on VHG only if one or more of the following triggering events occurs:
(a) Fraud, intentional misrepresentation, or willful misconduct by the Borrower, VHG, or any of their respective officers, directors, managers, or agents in connection with the Existing Loan or the Property;
(b) Misapplication or misappropriation of rents, security deposits, insurance proceeds, condemnation awards, or other funds received by the Borrower in connection with the Property;
(c) Voluntary filing of a petition for bankruptcy, insolvency, reorganization, or similar relief by the Borrower, VHG, or any direct or indirect owner of the Borrower, or the consent to or acquiescence in any involuntary filing thereof;
(d) Violation of environmental laws or the presence of hazardous materials at the Property attributable to the acts or omissions of the Borrower, VHG, or their agents;
(e) Transfer of the Property or any interest therein in violation of the due-on-transfer clause of the Loan Agreement;
(f) Removal or waste of any portion of the collateral securing the Existing Loan; and
(g) Failure to maintain the single-purpose entity status of the Borrower as required by the Loan Agreement.
Termination. The Guaranty provides that it terminates automatically upon the full payment and satisfaction of all obligations of the Borrower under the Existing Loan documents, including the payment of the outstanding principal balance, all accrued interest, the prepayment premium (if applicable), and any other amounts due. The Guaranty does not require VHG's consent to prepayment; it terminates by its own terms upon payoff.
No Consent Required. Nothing in the Guaranty requires VHG to obtain Tidewater's consent for the proposed refinancing or imposes any restrictions on VHG's ability to enter into new guaranty obligations in connection with the PAC loan.
Action Required. We recommend that the payoff request letter to Tidewater expressly request that Tidewater deliver, at or promptly following receipt of the payoff amount, a written release and termination of the Guaranty. While the Guaranty terminates by its own terms upon payoff, obtaining a separate written release provides additional documentation and certainty, which will be useful for VHG's records and may be requested by PAC as part of the refinancing closing deliverables.
L. Environmental Indemnity (Existing Loan)
CPRH, as Borrower, and VHG, as Guarantor, jointly and severally executed the Environmental Indemnity in favor of Tidewater in connection with the origination of the Existing Loan. The Environmental Indemnity provides a broad indemnification of Tidewater against all environmental liabilities, claims, losses, costs, and expenses arising from or related to (i) the presence, release, or threatened release of hazardous materials at, on, under, or from the Property, (ii) any violation of applicable environmental laws at the Property, and (iii) any environmental cleanup, remediation, or response costs with respect to the Property.
Survival. Significantly, Article 5 of the Environmental Indemnity expressly provides that the Environmental Indemnity survives the repayment, satisfaction, and discharge of the Existing Loan, the release of the Mortgage, and the termination of all other Existing Loan documents. This survival provision is typical in commercial real estate lending transactions and reflects the fact that environmental liabilities may not become apparent until years after the loan has been repaid. The survival provision does not contain a termination date or "sunset" provision.
Practical Implications. The survival of the Environmental Indemnity means that even after the Existing Loan is paid in full, the Mortgage is discharged, and the Guaranty is terminated, both VHG and CPRH will remain subject to the surviving environmental indemnification obligations in favor of Tidewater with respect to the Property. This creates a potentially indefinite continuing liability exposure for VHG and CPRH.
Furthermore, because VHG and CPRH will also be providing a new environmental indemnity agreement to PAC as part of the PAC loan document suite, the payoff of the Existing Loan will result in overlapping environmental indemnification obligations — one in favor of Tidewater (surviving from the Existing Loan) and one in favor of PAC (executed in connection with the new loan). While this does not create a legal conflict per se (the two indemnities run in favor of different parties and would apply independently), it does create the potential for dual claims against VHG and CPRH with respect to the same environmental condition at the Property.
Recommendation: We recommend the following approach:
(a) Primary Recommendation: Negotiate with Tidewater for a termination of the surviving Environmental Indemnity in connection with the payoff of the Existing Loan. If Tidewater agrees, the release of the Environmental Indemnity should be included as part of the payoff deliverables, along with the satisfaction and discharge of the Mortgage, the UCC-3 termination, and the Guaranty release. In our experience, some lenders will agree to terminate a surviving environmental indemnity at payoff, particularly where the loan has been fully repaid and the lender no longer has any interest in the property. However, other lenders resist such termination, preferring to retain the indemnity as a backstop against latent environmental claims.
(b) Alternative Recommendation: If Tidewater refuses to terminate the Environmental Indemnity, negotiate for a limitation or narrowing of the indemnity, such that it applies only to environmental conditions existing at the Property as of the payoff date and does not extend to conditions arising after the payoff date. This would limit VHG's and CPRH's continuing exposure to pre-existing conditions only.
(c) Risk Assessment: If Tidewater will not agree to either termination or limitation, we should assess the practical risk of the surviving indemnity. In evaluating this risk, the results of the Phase I Environmental Site Assessment being conducted by Oakridge Environmental Consulting Group, Inc. (Dr. James Whitmore, Principal) on behalf of PAC will be highly relevant. If the Phase I ESA does not identify any recognized environmental conditions ("RECs") at the Property, the risk of a future claim by Tidewater under the surviving Environmental Indemnity is likely low, though not zero. We will update our risk assessment upon receipt of the Phase I ESA report.
Environmental Consultant. As noted above, Oakridge Environmental Consulting Group, Inc. has been engaged by PAC to conduct a Phase I Environmental Site Assessment of the Property in accordance with ASTM Standard E1527-21. Dr. James Whitmore, a certified environmental professional and principal of Oakridge, is overseeing the assessment. The Phase I ESA is expected to be completed within the next four to six weeks. The results of the Phase I ESA may inform both: (i) our risk analysis on the surviving Tidewater Environmental Indemnity; and (ii) the scope and terms of the new Environmental Indemnity to be provided to PAC.
V. PAYOFF PROCESS AND MECHANICS
A. Steps Required for Payoff
Based on our review of the Existing Loan documents, the following steps must be completed in connection with the payoff of the Existing Loan and the transition to the new PAC mortgage:
Step 1. Send a formal payoff request letter to Tidewater National Bank, N.A. (Attention: Alan Prescott, Senior Vice President – Commercial Real Estate, 600 Waterside Drive, Norfolk, Virginia 23510), requesting the following:
(a) A payoff statement setting forth the exact outstanding principal balance as of the anticipated payoff date, accrued and unpaid interest through the payoff date, per diem interest (to account for any variance between the anticipated and actual payoff dates), the prepayment premium (if applicable based on the payoff date), and all other amounts due and owing under the Existing Loan, including any outstanding fees, charges, or reimbursable expenses;
(b) A written confirmation that no event of default, and no event which with the passage of time or giving of notice (or both) would constitute an event of default, exists under the Existing Loan documents as of the date of the payoff statement;
(c) A statement of the current balance of all reserve and escrow accounts held by Tidewater, together with disbursement instructions and confirmation that such balances will be released to the Borrower (or credited against the payoff amount, at the Borrower's direction) upon satisfaction of the Existing Loan;