MEMORANDUM
PRIVILEGED & CONFIDENTIAL — ATTORNEY WORK PRODUCT
TO: Douglas Fairchild, Responsible Partner; Angela Fontaine, Billing Partner
FROM: Grace Nakamura, Lead Associate; Rafael Dominguez, Working Associate
DATE: November 30, 2022
RE: Transaction Summary — Proposed $160,000,000 First Mortgage Refinancing of Coral Palms Grand Resort & Spa, Key Largo, Florida
CLIENT: Verimark Hospitality Group Inc.
MATTER NO.: 1021-00007
I. Executive Summary
Calderwood & Harkness LLP ("C&H" or the "Firm") has been engaged by Verimark Hospitality Group Inc. ("VHG"), a publicly traded Delaware corporation (Nasdaq: VMRK) headquartered at 1400 Bayshore Boulevard, Suite 2200, Miami, FL 33131, to represent its wholly owned indirect subsidiary, Coral Palms Resort Holdings LLC ("CPRH" or the "Borrower"), a Florida limited liability company, as borrower's counsel in a proposed $160,000,000 first mortgage refinancing of the Coral Palms Grand Resort & Spa (the "Property"), an independently operated luxury oceanfront resort located at 99000 Overseas Highway, Key Largo, Monroe County, FL 33037.
The proposed lender is Pinnacle Atlantic Capital, LLC ("PAC"), a Delaware limited liability company and private commercial real estate lending platform with approximately $12 billion in assets under management ("AUM"), affiliated with Greystone Peak Asset Management LP, a New York-based alternative asset manager. PAC's principal office is located at 200 Lexington Avenue, 38th Floor, New York, NY 10016. PAC focuses its lending activities on transitional and stabilized hospitality and multifamily assets and has demonstrated an active appetite for resort-class hotel debt products in the Southeastern United States.
The proposed refinancing will retire an existing $125,000,000 first mortgage loan originated by Tidewater National Bank, N.A. ("Tidewater" or "TNB"), a national banking association chartered by the Office of the Comptroller of the Currency, of which approximately $118,500,000 in principal remains outstanding as of October 15, 2022. After payment of the outstanding principal balance, the applicable prepayment premium, estimated closing costs, and the funding of upfront reserves, the transaction is expected to generate estimated net cash-out proceeds of approximately $32,265,000 for VHG. These proceeds will be available for general corporate purposes, including potential redeployment into VHG's broader hospitality portfolio.
The C&H engagement was opened on October 19, 2022, and the Firm's engagement letter was fully executed on December 5, 2022. VHG deposited a $50,000 evergreen retainer on December 7, 2022. The client matter number assigned to this representation is 1021-00007.
Lender's counsel in the transaction is Whitford Baines & Driscoll LLP ("WBD"), led by Philip Tarrant Corporation (Partner) and Catherine Yee (Associate), based at 1221 Avenue of the Americas, Suite 4400, New York, NY 10020. WBD circulated initial drafts of the loan documentation package on December 19, 2022, which are currently under review by the C&H deal team.
The purpose of this memorandum is to provide the C&H deal team — and in particular the responsible partner and billing partner — with a comprehensive summary of the transaction structure, the parties involved, the subject property, the proposed loan terms, the existing indebtedness to be retired, the anticipated sources and uses of loan proceeds, key financial metrics and covenants, diligence requirements and workstreams, the anticipated transaction timeline, risk factors and open issues, fee arrangements, and immediate next steps. This memorandum is intended as a working reference document and will be updated as the transaction progresses through negotiation, diligence, and closing.
II. The Parties
A. Borrower — Coral Palms Resort Holdings LLC
Full Legal Name: Coral Palms Resort Holdings LLC
Entity Type: Florida limited liability company
Role in Transaction: CPRH is the fee simple owner of the Coral Palms Grand Resort & Spa and will serve as the named borrower under the proposed PAC loan. The Property constitutes the sole material asset of CPRH, and CPRH was formed as a single-purpose entity in connection with VHG's original acquisition of the Property. CPRH holds title to the Property by virtue of that certain Warranty Deed recorded in Official Records Book 2847, Page 1122, of the Public Records of Monroe County, Florida.
Relationship to VHG: CPRH is a wholly owned indirect subsidiary of Verimark Hospitality Group Inc. The organizational structure, as reflected in VHG's most recently delivered organizational chart (dated October 2022), provides that VHG owns 100% of the membership interests of Verimark Florida Holdings LLC, a Delaware limited liability company, which in turn owns 100% of the membership interests of CPRH. This two-tier subsidiary structure is consistent with VHG's standard asset-holding framework across its portfolio and provides entity-level separation between VHG's corporate-level obligations and the property-level mortgage indebtedness. Confirmation of the precise organizational chain, including any intervening entities, is a diligence deliverable that C&H will verify against VHG's certified organizational documents.
Manager/Managing Member: VHG or its designee serves as the sole manager of CPRH. The operating agreement of CPRH is expected to be delivered as a diligence item and will require review to confirm that CPRH possesses the requisite authority to enter into the proposed loan transaction and to grant the mortgage, security interest, and other liens contemplated by the loan documents.
B. Guarantor — Verimark Hospitality Group Inc.
Full Legal Name: Verimark Hospitality Group Inc.
Entity Type: Delaware corporation, publicly traded on the Nasdaq Stock Market under the ticker symbol VMRK
Headquarters: 1400 Bayshore Boulevard, Suite 2200, Miami, FL 33131
Key Personnel:
• Conrad W. Elliston — Chairman of the Board and Chief Executive Officer
• Natasha Ricard — Chief Financial Officer
• Derek Huang — Senior Vice President, Capital Markets & Treasury
Company Background: VHG is a leading owner and operator of luxury and upscale resort properties across the Southeastern United States and the Caribbean. The company currently owns and operates a portfolio of 14 properties, comprising a mix of branded and independently operated hotels and resorts. VHG completed its initial public offering in 2017 and has since grown its portfolio through a combination of acquisitions and strategic capital investments. For the fiscal year ending December 31, 2022, VHG's consolidated revenue is projected at approximately $487 million, and its total enterprise value is estimated at approximately $1.9 billion. VHG's publicly filed financial statements and SEC disclosures provide the financial backdrop against which PAC will evaluate VHG's creditworthiness as guarantor.
Role in Transaction / Guaranty Type: VHG will serve as the guarantor under a limited recourse, or so-called "bad boy" carve-out, guaranty (the "Guaranty"). The Guaranty will be limited in scope to specified acts and omissions by the Borrower or the Guarantor that trigger recourse liability, including, without limitation, fraud, misrepresentation, misapplication of funds, voluntary bankruptcy filings, and environmental liabilities. VHG will not provide a full recourse guaranty on the underlying loan obligation. The specific carve-out triggers, including any springing full recourse provisions, are expected to be a key area of negotiation given VHG's status as a publicly traded entity. C&H will pay particular attention to the scope and breadth of the carve-outs in WBD's initial drafts.
VHG's Primary Contact for the Transaction: Derek Huang, SVP – Capital Markets & Treasury, has been designated as VHG's primary day-to-day contact for this refinancing. Mr. Huang will coordinate with Natasha Ricard, CFO, on financial deliverables and approvals. Conrad Elliston, as CEO, will be the ultimate signatory on the Guaranty and any required board or corporate-level authorizations.
C. Proposed Lender — Pinnacle Atlantic Capital, LLC
Full Legal Name: Pinnacle Atlantic Capital, LLC
Entity Type: Delaware limited liability company
Principal Office: 200 Lexington Avenue, 38th Floor, New York, NY 10016
Key Personnel:
• Martin Drubeck — Managing Director, Real Estate Lending
• Jennifer Kwon — Vice President, Originations
Company Background: PAC is a private commercial real estate lending platform with approximately $12 billion in AUM, focused primarily on originating transitional and stabilized hospitality and multifamily loans. PAC is an affiliate of Greystone Peak Asset Management LP, a Delaware limited partnership and New York-based alternative asset manager. Greystone Peak manages capital on behalf of institutional investors, including pension funds, endowments, and sovereign wealth funds. PAC's lending activities are funded through a combination of managed fund vehicles and, in certain cases, warehouse credit facilities maintained by Greystone Peak affiliates. The specific lending entity and any co-lenders or participation structures will be confirmed through diligence review of the loan documents.
Transaction Timeline with PAC:
• PAC issued its initial term sheet on November 14, 2022.
• VHG executed the PAC term sheet on November 28, 2022, following internal review and approval by VHG's capital markets team and board of directors.
• PAC issued its formal Commitment Letter on December 9, 2022 (the "Commitment Letter"), which was countersigned by VHG on the same date.
• The Good Faith Deposit of $1,600,000 was wired by VHG to Meridian Title & Escrow, Inc. on December 12, 2022, in accordance with the terms of the Commitment Letter.
D. Existing Lender — Tidewater National Bank, N.A.
Full Legal Name: Tidewater National Bank, N.A.
Entity Type: National banking association, chartered by the Office of the Comptroller of the Currency ("OCC")
Principal Office: 600 Waterside Drive, Norfolk, VA 23510
Key Personnel: Alan Prescott, Senior Vice President, Commercial Real Estate
Company Background: Tidewater is a regional bank headquartered in Norfolk, Virginia, with approximately $38 billion in total assets. Tidewater maintains an active commercial real estate lending practice across the Mid-Atlantic and Southeastern United States, with a particular focus on hospitality and mixed-use assets. Tidewater originated the existing $125,000,000 first mortgage loan to CPRH on June 1, 2019.
Role in Transaction: Tidewater is the current holder of the existing first mortgage loan encumbering the Property. The existing Tidewater mortgage is recorded in Official Records Book 2892, Page 0445, of the Public Records of Monroe County, Florida. In connection with the proposed refinancing, the existing Tidewater loan will be repaid in full at closing, and Tidewater will be required to deliver a satisfaction and discharge of mortgage, a UCC-3 termination statement (with respect to its UCC-1 financing statement, File No. 202219087643, filed with the Florida Secured Transaction Registry), and such other payoff-related documentation as may be required by the title insurer and the incoming lender.
E. Other Key Parties
The following additional parties are involved in the transaction and will play significant roles in the diligence, documentation, and closing process:
Lender's Counsel: Whitford Baines & Driscoll LLP, 1221 Avenue of the Americas, Suite 4400, New York, NY 10020. Lead Partner: Philip Tarrant Corporation. Lead Associate: Catherine Yee. WBD is preparing all loan documentation on behalf of PAC and circulated initial drafts on December 19, 2022. All borrower's counsel fees owed to WBD are capped at $275,000 plus disbursements and are payable by the Borrower at closing.
Borrower's Counsel (Our Firm): Calderwood & Harkness LLP, 100 Southeast Second Street, Suite 3800, Miami, FL 33131. Responsible Partner: Douglas Fairchild. Billing Partner: Angela Fontaine. Lead Associate: Grace Nakamura. Working Associate: Rafael Dominguez. C&H is serving as borrower's counsel, responsible for reviewing and negotiating all loan documents, coordinating diligence, and guiding the Borrower and Guarantor through the closing process.
Appraiser (Lender-Engaged): Hargrove & Whitley Valuation Services LLC, 3300 PGA Boulevard, Suite 120, Palm Beach Gardens, FL 33410. Lead Appraiser: Scott Tremaine, MAI, MRICS. Hargrove & Whitley has been engaged directly by PAC to prepare a full narrative appraisal of the Property in compliance with the Uniform Standards of Professional Appraisal Practice ("USPAP") and the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"), as applicable. The appraisal is a critical path item for the transaction, as the final loan amount is contingent on the appraised value supporting the Commitment Letter's maximum loan-to-value ratio.
Title Insurer / Escrow Agent: Meridian Title & Escrow, Inc., 9100 South Dadeland Boulevard, Suite 1500, Miami, FL 33156. Title Officer: Lisa Portman. Meridian Title will issue the lender's title insurance policy and serve as the escrow agent for the closing. The Good Faith Deposit of $1,600,000 is currently held in escrow by Meridian Title.
Environmental Consultant: Oakridge Environmental Consulting Group, Inc., 2850 Douglas Road, Suite 400, Coral Gables, FL 33134. Lead Consultant: Dr. James Whitmore. Oakridge has been engaged by PAC to prepare a Phase I Environmental Site Assessment ("Phase I ESA") of the Property in accordance with ASTM Standard Practice E1527-21. Results of the Phase I ESA are expected in January 2023.
Insurance Broker: Castlegate Risk Advisors LLC, 701 Brickell Avenue, Suite 1400, Miami, FL 33131. Senior Vice President: Monica Iglesias. Castlegate serves as VHG's insurance broker and will coordinate procurement of evidence of insurance compliance with PAC's insurance requirements, including property, general liability, windstorm, and flood coverages.
Property & Casualty Insurer: Southland Mutual Insurance Company, 400 North Ashley Drive, Tampa, FL 33602. Southland Mutual is domiciled in the State of Florida and provides property, general liability, and windstorm coverage for the Property.
Flood Insurance Carrier: Bayfront Specialty Insurance Corp. Bayfront is a surplus lines flood insurer domiciled in Florida. Bayfront provides supplemental flood insurance coverage in excess of National Flood Insurance Program ("NFIP") coverage limits. Given the Property's oceanfront location in Monroe County (the Florida Keys), flood insurance is a particularly significant component of the overall insurance program.
VHG's Auditor: Keswick & Holt LLP, 200 South Biscayne Boulevard, Suite 2900, Miami, FL 33131. Lead Partner: Andrew Calloway, CPA. Keswick & Holt serves as VHG's independent auditor and may be called upon to provide audited financial statements, comfort letters, or other financial attestations as part of the diligence process.
Surveyor: Landis & Shaw Surveying, Inc., 7600 Red Road, Suite 210, South Miami, FL 33143. Lead Surveyor: Robert Tran, PLS. Landis & Shaw has been engaged to prepare an ALTA/NSPS Land Title Survey of the Property, which will be required by both the title insurer and the lender as a condition to closing.
III. The Property
A. Property Overview
Name: Coral Palms Grand Resort & Spa
Address: 99000 Overseas Highway, Key Largo, Monroe County, FL 33037
Property Type: Full-service luxury oceanfront resort hotel with conference center, spa, marina, and ancillary commercial uses. The Property is situated on the waterfront in Key Largo, the northernmost island in the Florida Keys, and benefits from direct ocean access, proximity to John Pennekamp Coral Reef State Park, and access to the primary thoroughfare of the Florida Keys (U.S. Route 1 / Overseas Highway).
Brand Affiliation: The Property is independently operated under the "Coral Palms" trade name. It is not subject to a franchise agreement, license agreement, or management agreement with any national or international hotel brand. VHG operates the Property through its own in-house management platform. The absence of a national brand affiliation is a relevant factor in the underwriting analysis, as lenders and appraisers may apply more conservative assumptions to the revenue and expense projections of an independently operated resort relative to a branded property. This consideration is discussed further in Section X (Risk Factors and Open Issues) below.
Fee Owner: Coral Palms Resort Holdings LLC, a Florida limited liability company and wholly owned indirect subsidiary of VHG.
B. Legal Description and Recording Information
The Property is legally described as a portion of Section 27, Township 60 South, Range 39 East, Monroe County, Florida, as more particularly described in that certain Warranty Deed recorded in Official Records Book 2847, Page 1122, of the Public Records of Monroe County, Florida (the "Vesting Deed"). The complete metes and bounds legal description is set forth in Exhibit A to the Vesting Deed and will be incorporated by reference into the mortgage and other loan documents. C&H will confirm the legal description against the ALTA/NSPS survey and the title commitment upon receipt of those items.
Folio No.: 00460780-000100 (Monroe County Property Appraiser)
C. Physical Characteristics
The Coral Palms Grand Resort & Spa is a substantial, full-service luxury resort complex with the following key physical characteristics:
• Guest Rooms and Suites: 342 keys, comprising a mix of standard guest rooms, deluxe oceanfront rooms, junior suites, one-bedroom suites, and premium multi-bedroom suites. The room mix is designed to serve both leisure and group/meeting demand.
• Meeting and Event Space: Approximately 28,500 square feet of indoor and outdoor meeting and event space, including a grand ballroom, junior ballroom, multiple breakout meeting rooms, pre-function areas, and outdoor event lawns. The conference facilities position the Property as a destination meeting and incentive venue.
• Spa Facility: An 18,000-square-foot full-service spa offering treatment rooms, hydrotherapy areas, sauna and steam facilities, a fitness center, and a dedicated retail boutique.
• Marina: A 42-slip marina with deep-water access, accommodating vessels of varying size. The marina generates ancillary revenue and enhances the Property's appeal to the leisure boating market.
• Food and Beverage Outlets: Three (3) food and beverage outlets, including a signature fine-dining restaurant, a casual waterfront grill, and a poolside bar and lounge. Food and beverage operations contribute meaningfully to the Property's total revenue.
• Parking Structure: A 1,200-space structured parking garage serving resort guests, event attendees, and marina users.
• Gross Building Area: Approximately 412,000 square feet across all structures.
• Site Area: Approximately 22.4 acres, waterfront. The site includes direct oceanfront exposure, landscaped grounds, pool decks, and ancillary outdoor amenities.
D. Construction and Renovation History
The Property was originally constructed in 2006 as a ground-up development. The original construction incorporated hurricane-resistant design standards consistent with the Florida Building Code requirements for Monroe County, including impact-rated glazing, reinforced structural systems, and elevated mechanical equipment.
A comprehensive renovation of the Property was completed in August 2021 at a total cost of approximately $47,000,000 (approximately $137,427 per key). The renovation scope encompassed a full refresh of all guest rooms and suites, upgrades to the spa and fitness facilities, renovation of all food and beverage outlets, modernization of the conference center, enhancement of the pool deck and outdoor amenity areas, upgrades to back-of-house infrastructure, and improvements to the marina facilities. The renovation was funded in part by proceeds from the existing Tidewater loan and in part by VHG equity contributions. The renovation has contributed to significant improvement in the Property's operating performance, as reflected in the trailing twelve-month financial results discussed below.
E. 2022 Operating Performance (Trailing 12 Months Ending September 30, 2022)
The following operating metrics reflect the Property's performance for the trailing twelve-month period ending September 30, 2022 ("T-12"), as reported by VHG and subject to confirmation through the diligence process:
• Occupancy: 71.3%
• Average Daily Rate (ADR): $389
• Revenue Per Available Room (RevPAR): $277.36 (calculated as ADR of $389 × Occupancy of 71.3%)
• Total Revenue: Approximately $62,800,000. Total revenue includes rooms revenue, food and beverage revenue, spa revenue, marina revenue, parking revenue, and other ancillary income streams.
• Net Operating Income (NOI): Approximately $18,400,000. NOI is calculated before debt service, capital expenditures, and management fees payable to VHG or its affiliates (if any).
These operating metrics reflect the post-renovation stabilization of the Property. The $47,000,000 renovation completed in August 2021 has enabled the Property to command premium rate positioning within the Key Largo and Upper Keys competitive set. The NOI of $18,400,000 represents a 29.3% NOI margin on total revenue of $62,800,000, which is within the range of expectations for a full-service luxury resort of this caliber and location, though VHG's management team has indicated that they believe further upside exists as the Property continues to ramp and capture incremental group and catering business.
IV. Existing Debt — Tidewater National Bank Loan
The following is a summary of the existing first mortgage loan originated by Tidewater National Bank, N.A., which will be refinanced and paid off in full at the closing of the proposed PAC loan:
Lender: Tidewater National Bank, N.A.
Original Principal Amount: $125,000,000
Origination Date: June 1, 2019
Maturity Date: June 1, 2024 (five-year term from origination)
Outstanding Principal Balance: Approximately $118,500,000 as of approximately October 15, 2022. The reduction in principal from $125,000,000 to $118,500,000 reflects approximately $6,500,000 in scheduled amortization payments made during years four and five of the loan term (the interest-only period having expired after year three).
Interest Rate: SOFR (Secured Overnight Financing Rate) plus 2.25% (225 basis points). The existing loan was originally indexed to LIBOR plus 2.25%. Pursuant to a fallback amendment executed by CPRH and Tidewater, dated March 15, 2022, the interest rate benchmark was converted from LIBOR to SOFR in anticipation of the cessation of LIBOR. The SOFR-based rate includes a credit spread adjustment as specified in the fallback amendment.
Amortization: The existing loan provided for interest-only payments during years one through three (June 1, 2019 through May 31, 2022) and a 30-year amortization schedule commencing in year four (June 1, 2022) and continuing through maturity.
Prepayment Premium: The existing Tidewater loan documents provide for a prepayment premium of 1.0% of the outstanding principal balance if the loan is prepaid prior to March 1, 2023. After March 1, 2023, no prepayment premium applies, and the loan may be repaid without penalty through the June 1, 2024 maturity date.
• Estimated Prepayment Premium (if closing occurs before March 1, 2023): $118,500,000 × 1.0% = $1,185,000
Mortgage Recording: The existing mortgage, assignment of leases and rents, and security agreement was recorded in Official Records Book 2892, Page 0445, of the Public Records of Monroe County, Florida.
UCC-1 Financing Statement: Filed with the Florida Secured Transaction Registry, File No. 202219087643, covering personal property, fixtures, and other collateral at the Property.
Rationale for Early Refinancing: The existing Tidewater loan does not mature until June 1, 2024, providing approximately 18 months of remaining term. However, VHG has elected to pursue the refinancing at this time for several strategic reasons:
(i) Fixed-Rate Lock: VHG seeks to transition from the floating-rate Tidewater loan (SOFR + 225 bps) to a fixed-rate loan at 5.35% per annum, thereby eliminating ongoing interest rate exposure in a rising rate environment;
(ii) Cash-Out Proceeds: The refinancing will generate estimated net cash-out proceeds of approximately $32,265,000, providing VHG with liquidity for general corporate purposes, portfolio reinvestment, or shareholder returns;
(iii) Post-Renovation Recapitalization: The $47,000,000 renovation completed in August 2021 has significantly enhanced the Property's value and operating performance. The current Tidewater loan was sized on pre-renovation basis and does not reflect the value created by the capital investment. The proposed PAC loan allows VHG to recapitalize the Property at a loan amount that more appropriately reflects the post-renovation value; and
(iv) Favorable Lending Market: Despite rising interest rates, the private CRE lending market remains liquid for stabilized, high-quality hospitality assets, and PAC's proposed terms are competitive for this asset class.
V. Proposed Refinancing Loan — Key Terms
The following is a summary of the key terms of the proposed refinancing loan, based on the PAC Commitment Letter executed December 9, 2022, and the underlying term sheet. All terms remain subject to the execution of definitive loan documents.
A. Loan Amount and Structure
Loan Amount: $160,000,000
Borrower: Coral Palms Resort Holdings LLC, a Florida limited liability company
Guarantor: Verimark Hospitality Group Inc., a Delaware corporation (limited recourse / "bad boy" carve-out guaranty only)
Lender: Pinnacle Atlantic Capital, LLC, a Delaware limited liability company
Loan Type: First mortgage loan secured by the Coral Palms Grand Resort & Spa, including the fee interest in the real property, all improvements, fixtures, personal property (including furniture, fixtures, and equipment), leases and rents, accounts, and other assets of the Borrower related to the Property
Purpose of Loan: (i) Refinance and pay off in full the existing Tidewater National Bank first mortgage loan (approximately $118,500,000 outstanding principal plus prepayment premium); (ii) fund upfront reserves for taxes, insurance, FF&E replacement, and capital expenditures; (iii) pay transaction costs including title insurance, recording fees, legal fees (both borrower's and lender's counsel), appraisal, survey, environmental, and related closing expenses; and (iv) return excess net proceeds of approximately $32,265,000 to VHG for general corporate purposes.
B. Interest Rate and Amortization
Interest Rate: Fixed rate of 5.35% per annum for the full loan term. The fixed rate is based on an interpolated U.S. Treasury yield plus a spread of 175 basis points, as established in the Commitment Letter based on market conditions as of November 2022. The rate will be locked upon the Borrower's delivery of the Rate Lock Deposit (discussed below) and execution of a rate lock agreement.
Amortization: Interest-only for years one and two of the loan term. Commencing in year three and continuing through the end of the initial five-year term (and through any extension periods, if applicable), the loan will amortize on a 30-year amortization schedule based on the original principal balance.
Term: Five (5) years from the funding date, subject to two one-year extension options as described below.
C. Extension Options
The Commitment Letter provides for two (2) one-year extension options, each subject to the satisfaction of the following conditions:
(i) No event of default under the loan documents shall have occurred and be continuing at the time of the extension request or at the commencement of the extension period;
(ii) The debt service coverage ratio ("DSCR") shall be not less than 1.25x, calculated based on the Property's trailing twelve-month net operating income divided by the projected annual debt service for the applicable extension period;
(iii) The Borrower shall pay an extension fee equal to 0.25% of the then-outstanding principal balance of the loan for each extension exercised; and
(iv) Such other conditions as may be set forth in the definitive loan documents, which are expected to include delivery of updated financial statements, estoppel certificates, and evidence of insurance compliance.
If both extension options are exercised, the maximum loan term would be seven (7) years from the funding date.
D. Loan-to-Value and Debt Yield Covenants
Maximum Loan-to-Value ("LTV") Ratio: The Commitment Letter specifies a maximum LTV of 68.0%, calculated as the loan amount divided by the lender's appraised value of the Property as determined by the appraisal to be commissioned by PAC.
Minimum Debt Yield: The Commitment Letter specifies a minimum debt yield of 9.5%, calculated as the Property's trailing twelve-month net operating income divided by the loan amount.
VHG Internal Valuation of the Property: VHG has projected an internal valuation of the Property of $235,000,000. Based on this internal valuation:
• LTV Check: $160,000,000 ÷ $235,000,000 = 68.09%. This LTV is marginally above the Commitment Letter's 68.0% maximum. PAC has agreed to waive at this level, acknowledging the de minimis overage of nine basis points. However, this waiver is subject to the condition that the lender's independent appraisal confirms a value at or near VHG's $235,000,000 projection.
• Debt Yield Check: $18,400,000 NOI ÷ $160,000,000 = 11.50%. This debt yield comfortably exceeds the 9.5% minimum debt yield threshold specified in the Commitment Letter.
Critical Note on Appraisal Contingency: The Commitment Letter expressly provides that the final loan amount is subject to the lender's independently appraised value. If the appraised value comes in below $235,000,000, the loan amount may be reduced on a dollar-for-dollar basis to maintain the 68.0% maximum LTV. By way of illustration, an appraised value of $225,000,000 would cap the loan amount at $153,000,000 ($225,000,000 × 68.0%), a reduction of $7,000,000 from the proposed $160,000,000. This would correspondingly reduce the net cash-out proceeds available to VHG.
E. Fees, Deposits, and Reserves
Good Faith Deposit: $1,600,000, representing 1.0% of the proposed loan amount. The Good Faith Deposit was wired by VHG to Meridian Title & Escrow, Inc. on December 12, 2022, and is currently held in escrow. The refundability conditions applicable to the Good Faith Deposit are governed by the Commitment Letter and any side letter; C&H is reviewing these provisions.
Rate Lock Deposit: $800,000, representing 0.50% of the proposed loan amount. The Rate Lock Deposit is to be deposited with Meridian Title & Escrow, Inc. upon the Borrower's election to lock the interest rate, which is anticipated to occur in early January 2023. The Rate Lock Deposit may be non-refundable upon delivery, subject to the terms of the rate lock agreement.
Commitment Fee: 0.50% of the loan amount, equal to $800,000. The Commitment Fee is payable by the Borrower at closing and will be deducted from loan proceeds at the closing table.
Exit Fee: 0.25% of the then-outstanding principal balance of the loan, payable at the time of repayment, whether at maturity or upon earlier prepayment.
Upfront Reserves: $4,800,000, to be funded at closing from loan proceeds and deposited into reserve accounts controlled by the Lender. The upfront reserves are expected to include the following components: (i) a real estate tax reserve, to be funded in an amount equal to the estimated taxes accruing from the closing date through the next tax installment due date; (ii) an insurance reserve, to be funded in an amount equal to estimated insurance premiums accruing from the closing date through the next premium renewal date; (iii) an FF&E (furniture, fixtures, and equipment) replacement reserve, to be funded on a per-key basis to ensure adequate capital for ongoing replacement of furnishings, equipment, and operating assets; and (iv) a capital expenditure reserve for deferred maintenance items and anticipated near-term capital needs. The specific allocation among these reserve accounts will be determined during the loan document negotiation process.
Lender's Counsel Legal Fee Cap: $275,000 plus reasonable out-of-pocket disbursements. This fee cap applies to WBD's fees for the negotiation and closing of the loan documents and is payable in full by the Borrower at closing.
F. Governing Law
The loan documents will be governed by the laws of the State of Florida, consistent with the location of the Property and the Borrower's state of organization.
VI. Sources and Uses of Funds
The following table sets forth the anticipated sources and uses of funds for the proposed refinancing transaction:
A. Sources
B. Uses
Note on Estimated Closing Costs: The estimated closing costs of $3,250,000 represent a preliminary estimate and include the following major components: (i) lender's title insurance premium (the premium on a $160,000,000 loan policy in Florida is substantial); (ii) documentary stamp tax and intangible tax on the mortgage (Florida imposes documentary stamp tax at a rate of $0.35 per $100 of indebtedness and intangible tax at a rate of $0.002 per dollar of indebtedness; on a $160,000,000 mortgage, these taxes are estimated at $560,000 and $320,000, respectively, for a combined total of approximately $880,000, subject to any credit for the existing mortgage of record); (iii) C&H legal fees, estimated at $350,000 to $475,000 for a full closing; (iv) WBD legal fees (capped at $275,000 plus disbursements); (v) the PAC commitment fee of $800,000; (vi) ALTA/NSPS survey costs; (vii) Phase I ESA costs; (viii) appraisal fees; (ix) recording fees; and (x) miscellaneous closing costs and escrow charges. The final closing costs will be confirmed through the preparation of a detailed closing statement and proration schedule.
VII. Key Financial Metrics
A. Debt Service Coverage
Annual Interest-Only Debt Service (at 5.35%): $160,000,000 × 5.35% = $8,560,000 per year
Debt Service Coverage Ratio (DSCR), Interest-Only Basis: $18,400,000 NOI ÷ $8,560,000 = 2.15x
The DSCR of 2.15x on an interest-only basis is robust and exceeds the extension threshold of 1.25x by a comfortable margin of approximately 72%. This level of debt service coverage provides substantial cushion against potential declines in the Property's net operating income and demonstrates the borrower's ability to service the proposed loan under the initial interest-only payment structure. Even under a stressed scenario in which NOI declines by approximately 40% from its current level, the DSCR would remain above the 1.25x extension threshold. Once the loan converts to the 30-year amortization schedule in year three, the DSCR will compress due to the addition of principal amortization payments; however, the coverage is expected to remain well above covenant levels based on current performance projections.
B. Loan-to-Value
At VHG Projected Value ($235,000,000): $160,000,000 ÷ $235,000,000 = 68.09%
Commitment Letter Maximum LTV: 68.0%
PAC has agreed to waive at the 68.09% level, which represents an overage of approximately nine (9) basis points. However, as noted throughout this memorandum, the final LTV will be determined by the lender's independently commissioned appraisal. If the appraised value is equal to or greater than $235,294,118 (the precise value that would produce a 68.0% LTV at the $160,000,000 loan amount), the LTV covenant will be satisfied without the need for a waiver.
Critical Observation: Transaction sizing is predicated on the lender's appraisal confirming a value at or near VHG's $235,000,000 internal projection. Any material shortfall in the appraised value relative to VHG's projection could require a reduction in the loan amount to maintain the 68.0% maximum LTV, repricing of the loan, the posting of additional collateral, or other credit enhancements required by PAC. The appraisal outcome is the single most significant variable affecting the economics of this transaction.
C. Debt Yield
Debt Yield: $18,400,000 NOI ÷ $160,000,000 = 11.50%
The debt yield of 11.50% exceeds the 9.5% minimum debt yield threshold specified in the Commitment Letter by approximately 200 basis points. This metric provides PAC with comfort that the Property generates sufficient income relative to the loan amount to mitigate credit risk. The debt yield metric is generally viewed as a more conservative underwriting tool than LTV, as it is not subject to the subjectivity inherent in property valuation.
D. Property Yield Metrics
NOI Margin: $18,400,000 NOI ÷ $62,800,000 Total Revenue = 29.3%
The 29.3% NOI margin is consistent with luxury full-service resort properties in the Florida Keys market, which typically generate NOI margins in the range of 25% to 35%, depending on the property's operational efficiency, ancillary revenue streams, and cost structure. VHG has indicated that it believes the NOI margin has room for improvement as the post-renovation revenue ramp continues and as operational efficiencies are realized.
Estimated Rooms Revenue: RevPAR of $277.36 × 342 rooms × 365 days = approximately $34,612,421 in annual rooms revenue. Rooms revenue represents the single largest component of the Property's total revenue, accounting for approximately 55.1% of the $62,800,000 total. The balance of total revenue is generated by food and beverage operations, spa services, marina fees, parking, and other ancillary income.
VIII. Transaction Timeline
The following table sets forth the key dates and milestones for the proposed refinancing transaction, including historical events and projected forward-looking dates:
Note on Closing Timeline: VHG has expressed a strong preference to close the refinancing before March 1, 2023. This preference is driven in part by the desire to manage the prepayment premium exposure: if closing occurs before March 1, 2023, the 1.0% prepayment premium on the Tidewater loan ($1,185,000) will apply. If closing slips beyond March 1, 2023, the prepayment premium falls away entirely, which would reduce the total uses by $1,185,000 and correspondingly increase the net cash-out to VHG by the same amount. In this sense, a delay beyond March 1, 2023 would be economically favorable to VHG with respect to the prepayment premium; however, any material delay in closing also creates execution risk with respect to PAC's commitment and the rate lock, and may signal to the lender potential diligence or documentation issues. Accordingly, VHG and the C&H deal team should aim to maintain the February/March 2023 target closing window while recognizing that the March 1 prepayment premium cutoff provides a modest economic benefit if the closing extends slightly beyond that date.
IX. Key Diligence and Workstream Summary
A. Loan Document Negotiation
WBD circulated the initial draft loan documents on December 19, 2022. The loan document package is expected to include the following principal documents, all of which require C&H review, markup, and negotiation on behalf of the Borrower:
(i) Loan Agreement — The primary credit agreement between CPRH and PAC, setting forth the terms and conditions of the loan, representations and warranties, affirmative and negative covenants, events of default, remedies, and related provisions.
(ii) Promissory Note — The note evidencing CPRH's obligation to repay the $160,000,000 principal amount plus interest.
(iii) Mortgage, Assignment of Leases and Rents, Security Agreement, and Fixture Filing — The mortgage instrument to be recorded in the Public Records of Monroe County, Florida, creating the first-priority lien on the Property and assigning all leases, rents, and profits to the Lender as additional security.
(iv) Guaranty Agreement — The limited recourse / "bad boy" carve-out guaranty to be executed by VHG, specifying the circumstances under which VHG will bear personal liability for the loan obligations.
(v) Environmental Indemnity Agreement — A separate indemnity from both CPRH and VHG, jointly and severally, covering environmental liabilities associated with the Property.
(vi) Cash Management Agreement — The agreement establishing the lockbox, cash management account, and cash sweep mechanics, including the trigger events that activate cash trapping or cash sweeps.
(vii) Reserve Agreement — The agreement governing the establishment, funding, and disbursement of the tax, insurance, FF&E, and capital expenditure reserve accounts.
Key Negotiation Areas: Based on the C&H deal team's preliminary review of the Commitment Letter and initial experience with WBD's document forms, the following areas are anticipated to be the most significant points of negotiation:
• Guaranty Carve-Out Scope: The breadth and specificity of the "bad boy" carve-outs, including any springing full recourse triggers (e.g., voluntary bankruptcy filing, violation of SPE covenants, prohibited transfers). Given VHG's status as a publicly traded company, the guaranty provisions must be carefully calibrated to avoid creating material contingent liabilities that would require public disclosure under SEC reporting obligations.
• Cash Management Triggers: Hospitality loans typically include aggressive cash management structures with performance-based trigger events (e.g., DSCR falling below a specified threshold) that activate cash trapping or cash sweeps. The Borrower will seek to negotiate trigger thresholds that provide adequate operational flexibility and avoid premature lockbox activation during seasonal revenue fluctuations common in the resort hotel business.
• Transfer Restrictions: Restrictions on transfers of direct and indirect ownership interests in the Borrower and the Property. VHG will seek carve-outs for permitted transfers, including transfers among VHG affiliates and transfers of publicly traded VHG shares on the Nasdaq exchange.
• Default Cure Periods: The length and availability of cure periods for monetary and non-monetary defaults, including notice requirements and the borrower's right to cure before the lender may exercise remedies.
• Casualty and Condemnation Provisions: Given the Property's oceanfront location in the Florida Keys, the casualty and condemnation provisions are of particular importance. C&H will negotiate for the borrower's right to restore the Property following a casualty event (subject to customary conditions), rather than permitting the lender to apply insurance proceeds to reduce the loan balance.
• Reserve Mechanics: The funding methodology, disbursement conditions, and any performance-based release provisions applicable to the upfront reserves.
• Extension Conditions: The specific conditions precedent to the exercise of each extension option, including the DSCR calculation methodology, the testing period, and any additional conditions beyond those specified in the Commitment Letter.
B. Title and Survey
Title Commitment: Meridian Title & Escrow, Inc. (Title Officer: Lisa Portman) will issue a title commitment for a lender's title insurance policy in the amount of $160,000,000. C&H will review the title commitment in detail, with particular attention to the Schedule B exceptions (including easements, restrictions, encumbrances, and other matters affecting title), any requirements or conditions to issuance of the policy, and the legal description of the Property. C&H will work with Meridian Title to clear any objectionable exceptions and to obtain such endorsements as may be required by PAC, including, without limitation, a zoning endorsement, survey endorsement, access endorsement, contiguity endorsement (if applicable), and such other endorsements as are customary for a first mortgage loan of this size and nature in the State of Florida.
ALTA/NSPS Land Title Survey: Landis & Shaw Surveying, Inc. (Robert Tran, PLS) will prepare an ALTA/NSPS Land Title Survey of the Property. The survey will depict the boundaries of the Property, all improvements, easements, rights-of-way, encroachments, flood zone designations, and other matters relevant to the title review. C&H will review the survey in conjunction with the title commitment to identify any encroachments, boundary discrepancies, easement conflicts, or other survey matters that may require resolution prior to closing.
Existing Mortgage Discharge: The existing Tidewater mortgage recorded in Official Records Book 2892, Page 0445, of the Public Records of Monroe County, Florida, must be satisfied and discharged at closing. C&H will coordinate with Tidewater (Alan Prescott) and Meridian Title to ensure that a proper satisfaction of mortgage is prepared, executed, and recorded simultaneously with or immediately following the closing. The title insurer will require evidence of the satisfaction as a condition to insuring PAC's first-priority lien position.
C. Appraisal
PAC has commissioned Hargrove & Whitley Valuation Services LLC (Lead Appraiser: Scott Tremaine, MAI, MRICS) to prepare a full narrative appraisal of the Property in compliance with USPAP and, to the extent applicable, FIRREA. The appraisal is expected to employ the income capitalization approach, the sales comparison approach, and the cost approach, with primary reliance on the income capitalization approach, consistent with standard practice for income-producing hospitality properties.
VHG's internal valuation of $235,000,000 serves as the baseline for loan sizing. The transaction is contingent on the appraisal supporting a value sufficient to maintain the 68.0% maximum LTV. As noted above, the precise appraised value required to support the full $160,000,000 loan amount at a 68.0% LTV is $235,294,118. Any material shortfall in the appraised value below this threshold will require either a reduction in the loan amount, the negotiation of additional credit support, or a restructuring of the transaction economics.