PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT
CALDERWOOD & HARKNESS LLP 801 Brickell Avenue, Suite 2800 Miami, Florida 33131
MEMORANDUM
TO: Francesca Morano, Partner; Samuel Eklund, Partner
FROM: Simone Laroche, Lead Associate; Jeffrey Park, Working Associate
DATE: September 12, 2023
RE: Deposition Outline — Dr. Priya Ramanathan, CFA, ASA (Beacon Valuation Group Inc.)
MATTER: Pellegrino Capital Group LLC — Buyout Valuation Dispute
MATTER NO.: 1027-00003
CASE: JAMS Ref. No. 1440032871 — Meridian Shores Hospitality LLC v. Pellegrino Capital Group LLC
DEPOSITION DATE: September 18, 2023
DEPOSITION LOCATION: JAMS Jacksonville Resolution Center, 1 Independent Drive, Suite 1600, Jacksonville, FL 32202
STATUS: This memorandum is an internal work-product outline prepared for use by Francesca Morano (examining attorney) at the deposition of Dr. Priya Ramanathan, lead appraiser for Claimant Meridian Shores Hospitality LLC. The memorandum sets forth a comprehensive question outline, supporting document references, strategic objectives, suggested time allocations, and areas to reserve or avoid. This document is protected in its entirety by the attorney-client privilege and the work-product doctrine, and no portion of it should be disclosed to opposing counsel, the witness, or any third party. If produced inadvertently, prompt notice should be given and the document returned or destroyed.
Right-click to update Table of Contents
I. BACKGROUND AND DEPOSITION OBJECTIVES
A. Overview of the Witness
Dr. Priya Ramanathan, CFA, ASA, is the lead appraiser at Beacon Valuation Group Inc., with offices at 2600 South Bayshore Drive, Suite 1050, Miami, Florida 33133. She was retained by Meridian Shores Hospitality LLC ("MSH"), through its counsel Hargrove, Dunlap & Castillo LLP (lead partner Victoria Castillo), to prepare an appraisal of 100% of the real property and operating assets of Palmetto Grand Ventures LLC ("PGV") as of a valuation date of December 31, 2022.
The subject property is The Palmetto Grand Resort & Spa, a 312-room luxury beachfront resort located at 650 Mandalay Avenue, Clearwater Beach, Florida 33767. PGV is a joint venture between MSH (holding a 55% Class A membership interest) and Pellegrino Capital Group LLC ("PCG") (holding a 45% Class B membership interest), governed by the Operating Agreement of Palmetto Grand Ventures LLC dated June 15, 2017 (the "OA"). PCG serves as the Manager of PGV under the OA.
Beacon completed its appraisal on April 14, 2023 and concluded a fair market value ("FMV") of 100% of PGV's assets at $151.5 million. This appraisal forms the foundation of MSH's demand for a buyout price of $70.0 million for MSH's 55% interest (adjusted for certain OA-specified premiums and discounts), versus PCG's tendered buyout price of $41.3 million — a gap of $28.7 million that lies at the heart of this arbitration proceeding.
B. Primary Deposition Objectives
The deposition of Dr. Ramanathan is designed to achieve the following six primary objectives, each of which directly supports PCG's defense and cross-claims in this proceeding:
1. Undermine the credibility of the 8.5% discount rate and 7.75% terminal capitalization rate used in the Beacon DCF analysis. These rates are materially below market for Gulf Coast luxury hotel properties as of the December 31, 2022 valuation date. The 8.5% discount rate is 225 basis points below the 10.75% rate used by Gerald K. Whitfield, MAI (Whitfield Realty Advisors LLC, PCG's appraiser), and published market data indicates that DCF discount rates for comparable properties typically range from 9.5% to 11.5%. Similarly, the 7.75% terminal cap rate is below even the going-in cap rates observed in comparable transactions, which is anomalous and unjustifiable under standard valuation methodology.
2. Challenge the $8.2 million deferred-maintenance adjustment as speculative, unsupported by any independent engineering or property condition assessment, and improperly included in a fair market value determination. The adjustment appears to have been constructed from items identified by MSH or its principal Nathaniel Cordero, rather than through an independent investigation by the appraiser. Moreover, the adjustment is internally inconsistent with the selection of a below-market terminal cap rate, which should be elevated — not depressed — if significant deferred maintenance truly exists.
3. Expose the absence of a sales-comparison approach, which is standard practice for hotel valuations under both USPAP and the Appraisal Institute's guidance, and which Whitfield weighted at 60% in his appraisal. Beacon's decision to rely exclusively on a single DCF analysis — an income approach that is highly sensitive to the discount rate and terminal cap rate assumptions that are themselves contested — renders the appraisal incomplete and unreliable. The omission of the sales-comparison approach may have been a strategic decision to avoid a methodology that would have produced a lower indicated value.
4. Highlight methodological inconsistencies and departures from the Uniform Standards of Professional Appraisal Practice (USPAP) and Appraisal Institute standards. Under USPAP Standards Rule 1-4, an appraiser must consider all applicable approaches to value and explain the reasons for any departure. The absence of two of the three standard approaches, combined with the internal inconsistencies identified above (e.g., below-market cap rate paired with a deferred-maintenance adjustment), raises serious questions about the reliability and credibility of the Beacon appraisal.
5. Establish that the Beacon appraisal's conclusions are an outlier relative to the Linden Park Advisory LLC ("Linden Park") neutral appraiser's preliminary indication of value of $130.0–$138.0 million (Thomas Carraway, MAI, FRICS, dated July 14, 2023). The Beacon appraisal at $151.5 million is $13.5 million to $21.5 million above the top of the Linden Park range, suggesting that it is the Beacon appraisal — not the Whitfield appraisal — that is the outlier in this proceeding. If Linden Park's final conclusion falls within or near its preliminary range, the "two closest" averaging mechanic under OA Section 12.4(c) would pair Whitfield with Linden Park, excluding Beacon entirely.
6. Lay the groundwork for PCG's position that the Whitfield appraisal at $118.0 million was reasonable and conducted in good faith under OA Section 12.4, thereby negating MSH's bad-faith claim under OA Section 12.7. To the extent that the Beacon appraisal is discredited, MSH's assertion that PCG's tender of $41.3 million was made in bad faith loses its evidentiary foundation, because the $118.0 million Whitfield appraisal — not the inflated Beacon appraisal — reflects a reasonable view of FMV.
C. Companion Deposition
Gerald K. Whitfield, MAI, of Whitfield Realty Advisors LLC, is being deposed on the same date (September 18, 2023) by MSH's counsel. His deposition is expected to follow Dr. Ramanathan's, or to occur concurrently in a separate conference room at the JAMS Jacksonville Resolution Center. Coordination between the Morano deposition team (handling Dr. Ramanathan) and the Eklund deposition team (defending Whitfield) is essential. Specifically:
• Ensure no inconsistency between questions posed to Dr. Ramanathan regarding comparable transactions, cap rate data, or market conditions and the expected testimony of Whitfield on those same topics.
• Avoid asking Dr. Ramanathan questions that would preview the specific arguments Whitfield intends to make in his rebuttal testimony or supplemental report.
• Share real-time notes between the two deposition teams via the secure document portal to identify any unexpected testimony by Dr. Ramanathan that may affect the defense of Whitfield's deposition later in the day.
II. PRELIMINARY / FOUNDATIONAL QUESTIONS
A. Qualifications and Professional Background
The opening segment of the deposition should establish Dr. Ramanathan's qualifications and professional background with specificity. While she should be given reasonable latitude to describe her credentials, the examination should focus on eliciting facts that distinguish her qualifications from those of the other two appraisers in this matter (Whitfield and Carraway), particularly the absence of the MAI designation.
Suggested lines of questioning:
• Confirm her full legal name, current title, and employer (Beacon Valuation Group Inc.).
• Confirm her professional designations: Chartered Financial Analyst (CFA), Accredited Senior Appraiser (ASA). Confirm she obtained the CFA charter from the CFA Institute and the ASA designation from the American Society of Appraisers.
• Inquire as to her educational background: undergraduate degree institution, field of study, and year of graduation; any graduate degrees, including any MBA or master's in real estate or finance; any specialized appraisal coursework or continuing education in hotel/hospitality valuation specifically.
• Establish her total years of experience in commercial real estate appraisal generally, and in hotel/hospitality real property appraisal specifically. Distinguish between general commercial appraisal experience and hotel-specific experience — many appraisers have broad commercial portfolios but limited hotel-specific work.
• Determine the total number of hotel appraisals she has completed in her career. Break this down further: how many were in the State of Florida? How many were on the Gulf Coast of Florida specifically? How many involved luxury beachfront resort properties comparable in scale, quality, and market position to The Palmetto Grand Resort & Spa (a 312-room luxury beachfront property branded under the Aurelian Hotels & Resorts flag)?
• Confirm that Dr. Ramanathan does not hold the MAI designation from the Appraisal Institute. The MAI (Member, Appraisal Institute) designation is widely recognized as the premier credential for commercial real estate appraisers and requires completion of rigorous coursework, a comprehensive examination, and demonstrated experience in commercial real estate valuation. By contrast, the ASA designation from the American Society of Appraisers, while reputable, encompasses a broader range of personal and business property valuations and does not carry the same specialization in real estate. Emphasize this distinction in the context of this proceeding: Gerald K. Whitfield holds the MAI designation, and Thomas Carraway of Linden Park Advisory holds both the MAI and FRICS (Fellow of the Royal Institution of Chartered Surveyors) designations.
• Explore any prior engagements — appraisal, consulting, advisory, or expert witness — for Meridian Shores Hospitality LLC, its principals Nathaniel Cordero or Elena Cordero, or its counsel Hargrove, Dunlap & Castillo LLP. If prior engagements exist, determine the nature, scope, and outcome of each.
• Explore any prior engagements adverse to Pellegrino Capital Group LLC, Adriana Pellegrino-Voss, Marcus Thiel, or any entity affiliated with the Pellegrino family. This includes any prior arbitration, litigation, or regulatory proceeding in which Dr. Ramanathan or Beacon provided appraisal services that opposed a Pellegrino-affiliated entity.
• Establish her expert witness history over the last ten years. Determine the total number of times she has testified at deposition, at trial, in arbitration, or submitted expert reports in connection with litigation or arbitration proceedings. Of those engagements, inquire how many times her valuation conclusions were adopted, in whole or in part, by the trier of fact, and how many times her conclusions were rejected, criticized, or given reduced weight. If any court or arbitrator has previously commented unfavorably on her methodology or conclusions, this should be explored.
B. Engagement and Scope
This segment should establish the circumstances and timing of Dr. Ramanathan's retention, the scope of her engagement, the fee arrangement, and any communications with MSH or its counsel that may bear on the objectivity and independence of her appraisal.
Suggested lines of questioning:
• Determine when and how she was retained by MSH. Request the specific date of the engagement letter. Identify the retaining party — was she retained by MSH directly (i.e., by Nathaniel Cordero or Elena Cordero) or through Hargrove, Dunlap & Castillo LLP? If retained through counsel, who specifically at Hargrove Dunlap made the initial contact?
• Establish the timeline of retention relative to key events in this dispute:
(a) PCG tendered a buyout price of $41.3 million on or about March 10, 2023.
(b) MSH rejected the tender and filed the JAMS Demand for Arbitration on March 20, 2023.
(c) The Whitfield appraisal was completed on February 10, 2023.
(d) The Beacon appraisal was completed on April 14, 2023.
• Determine whether Dr. Ramanathan reviewed the Whitfield appraisal at any time before completing her own appraisal on April 14, 2023. If she did review the Whitfield appraisal, when did she first receive it, who provided it, and to what extent did knowledge of Whitfield's $118.0 million conclusion influence her own methodology, assumptions, or conclusions? This is a critical area — if she reviewed the Whitfield appraisal and then crafted her analysis to produce a significantly higher value, that sequence of events suggests result-oriented appraisal work rather than independent professional judgment.
• Establish the fee arrangement. Is Beacon compensated on an hourly basis, a flat-fee basis, or some hybrid arrangement? What are the applicable hourly rates for Dr. Ramanathan and any other Beacon personnel who worked on the engagement? What are the total fees billed to date by Beacon in connection with this engagement, including the appraisal itself and any subsequent work related to the arbitration (e.g., preparation for deposition testimony, supplemental analyses, correspondence with counsel)? Critically, determine whether any component of Beacon's compensation is contingent on the outcome of the arbitration, the amount of the final award, or the adoption of a particular value conclusion. Any contingency or success-based component would constitute a serious violation of USPAP Ethics Rule and would render the appraisal unreliable.
• Establish the scope of engagement. Was she instructed to appraise 100% of PGV's real property and operating assets, or some other scope? Was she asked to determine FMV, or some other standard of value? Did MSH or counsel direct her to reach a particular value or value range? Did MSH or counsel direct her to use or avoid any particular valuation methodology? Did MSH or counsel suggest or instruct that the sales-comparison approach not be employed?
• Explore all communications between Dr. Ramanathan and MSH's counsel (Victoria Castillo, Ryan Matsuda, or any other Hargrove Dunlap attorney) regarding the appraisal. Determine the frequency of such communications, the medium (email, telephone, in-person meetings), and the substance. Were any written communications exchanged in which counsel provided guidance on methodology, assumptions, or the selection of discount rates, cap rates, or comparable transactions? Explore all communications between Dr. Ramanathan and MSH's principals, Nathaniel Cordero and Elena Cordero, regarding the appraisal. Did Nathaniel or Elena Cordero provide information, data, or opinions that influenced the appraisal, particularly with respect to the $8.2 million deferred-maintenance adjustment?
C. Property Inspection and Data Sources
Suggested lines of questioning:
• Determine the date or dates on which Dr. Ramanathan conducted an on-site inspection of The Palmetto Grand Resort & Spa at 650 Mandalay Avenue, Clearwater Beach, Florida 33767.
• Establish the duration and scope of the inspection. How many hours was she on-site? What areas of the property did she inspect (guest rooms, common areas, pool/deck facilities, mechanical rooms, rooftop, kitchen/food service areas, spa, fitness center, parking structures, exterior facades, landscaping)? How many individual guest rooms did she inspect, and how were they selected? Did she use a standardized property condition checklist?
• Determine who accompanied her during the inspection. Was she accompanied by MSH representatives (Nathaniel Cordero, Elena Cordero, or others)? Was she accompanied by PCG personnel (Adriana Pellegrino-Voss, Marcus Thiel, hotel general manager, chief engineer, or other property-level staff)? If she met only with MSH representatives during her inspection, probe whether the absence of PCG management's perspective affected her understanding of the property's condition and operations.
• Identify the financial and operating data she reviewed. Specifically, did she review PGV's 2022 audited financial statements, which reflect total revenue of $62.8 million, net operating income ("NOI") of $18.4 million, and EBITDA of $19.7 million? Did she review historical financial data for prior years (2018–2021)? Did she review PGV's 2023 budget or any forward-looking financial projections prepared by PCG management? Did she review STR (formerly Penmark Enterprises) reports for the subject property's competitive set?
• Determine whether she reviewed the Aurelian Hotels & Resorts Inc. franchise agreement, dated July 15, 2017, with a 20-year term expiring July 14, 2037, under which PGV pays franchise fees of 5% of gross room revenue plus a 2% marketing fund contribution (7% total of gross room revenue). Understanding of this franchise agreement is essential to evaluating Beacon's treatment of franchise fees in the DCF model and the alleged "below-market" franchise agreement adjustment.
• Determine whether she reviewed the loan documents for the Greater Atlantic National Bank ("GANB") senior secured credit facility, Loan No. CRE-2017-06284, with an outstanding principal balance of $48.6 million as of December 31, 2022, bearing interest at SOFR plus 2.25%. Understanding of the debt structure is relevant to any adjustments for leverage, debt-service coverage, and the property's overall financial position.
III. APPRAISAL METHODOLOGY — OVERVIEW
A. Approaches Employed
This segment of the deposition should establish, clearly and unambiguously on the record, the methodological choices made in the Beacon appraisal — specifically, the decision to rely exclusively on a single income approach (a discounted cash flow model) and the omission of both the sales-comparison approach and the cost approach.
Suggested lines of questioning:
• Confirm that the Beacon appraisal employed the income approach only, specifically a discounted cash flow ("DCF") model projecting future cash flows over a defined holding period and discounting those cash flows to present value at a selected discount rate.
• Confirm that the Beacon appraisal did not employ a sales-comparison approach (i.e., an analysis of recent sales of comparable hotel properties to derive an indicated value through comparison and adjustment).
• Confirm that the Beacon appraisal did not employ a cost approach (i.e., an analysis of the cost to reproduce or replace the improvements, less depreciation, plus land value).
• Probe whether a sales-comparison approach was considered and rejected. If it was considered and rejected, on what basis was it rejected? What specific analysis was performed to determine that the sales-comparison approach was inapplicable? What comparable sales were investigated, and why were they deemed insufficient or unreliable?
• If the sales-comparison approach was not even considered, probe why not. Is it her standard practice to omit the sales-comparison approach when appraising an operating hotel? Has she ever appraised an operating hotel using a sales-comparison approach?
• Establish the standard of practice: Is it standard practice under USPAP and the Appraisal Institute's guidelines — including, specifically, The Appraisal of Real Estate (15th Edition) and the Appraisal Institute's specialized publication Hotels and Motels: Valuations and Market Studies — to employ at least two approaches when appraising an operating hotel property? Does USPAP Standards Rule 1-4(a) require the appraiser to collect, verify, and analyze all information applicable to the appraisal problem, including information sufficient to "develop each approach that is necessary for credible assignment results"?
• Draw the contrast with the Whitfield appraisal: Gerald K. Whitfield, MAI, employed both the income approach (a blended analysis using direct capitalization at a 9.5% cap rate and a DCF analysis at a 10.75% discount rate) and the sales-comparison approach. Whitfield weighted the income approach at 40% and the sales-comparison approach at 60% in arriving at his final value conclusion of $118.0 million. Does Dr. Ramanathan have an opinion on why Whitfield chose to weight the sales-comparison approach at 60%?
• Inquire whether she is aware of what approaches the neutral appraiser, Linden Park Advisory LLC (Thomas Carraway, MAI, FRICS), employed in arriving at the preliminary indication of value of $130.0–$138.0 million. If she is aware, probe whether Linden Park's use of multiple approaches (if applicable) is consistent with standard practice.
B. USPAP Compliance
Suggested lines of questioning:
• Confirm that Dr. Ramanathan is a state-certified general real estate appraiser licensed in the State of Florida and that her appraisal was intended to comply with the Uniform Standards of Professional Appraisal Practice ("USPAP") as promulgated by The Appraisal Foundation.
• Confirm that her appraisal was intended to comply with USPAP Standards Rules 1 and 2. Standards Rule 1 governs the development of a real property appraisal, requiring the appraiser to identify the problem to be solved, determine the scope of work necessary to produce credible assignment results, and collect, verify, and analyze all information applicable to the appraisal problem. Standards Rule 2 governs reporting, requiring the appraiser to communicate the results of the appraisal in a manner that is not misleading and that contains sufficient information to enable the intended users to understand the rationale for the conclusions.
• Under USPAP Standards Rule 1-4(a), the appraiser is required to consider all three recognized approaches to value — cost, sales comparison, and income — and to explain the reasons for excluding any approach that is not developed. Did her report contain an adequate explanation for the omission of both the sales-comparison approach and the cost approach? What specific language did her report use to justify these omissions?
• Determine whether she considered this a "complete" appraisal or a "limited scope" appraisal under USPAP. If she considered it a complete appraisal, probe the basis for that characterization given the omission of two of the three standard approaches. If she considered it a limited scope appraisal, probe whether that limitation was disclosed to the intended users and whether it is appropriate for a limited-scope appraisal to serve as the foundation for a $70.0 million buyout demand in a high-stakes arbitration proceeding.
IV. INCOME APPROACH — DISCOUNT RATE CHALLENGE
A. DCF Model Structure
Before challenging the discount rate and terminal cap rate assumptions, it is important to establish the architecture of the DCF model to ensure a clear record of the inputs that drive the value conclusion.
Suggested lines of questioning:
• Establish the projection period used in the DCF model. How many years of explicit cash-flow projections were modeled (e.g., 10 years, 11 years)? What was the first projection year and what was the terminal year?
• Establish the revenue growth assumptions used in each year of the projection period. What was the assumed annual growth rate for total revenue in year one, year two, and each subsequent year? Were different growth rates applied to different revenue categories (room revenue, food and beverage revenue, spa revenue, other revenue)? What was the basis for these growth rate assumptions — historical performance, management projections, market data, or some other source?
• Establish the expense growth assumptions for each year. Were operating expenses assumed to grow at the same rate as revenues, or at a different rate? Was there an assumed improvement in operating margins over the projection period?
• Establish the capital reserve and FF&E (furniture, fixtures, and equipment) reserve assumptions. What percentage of total revenue was reserved for capital expenditures and FF&E replacement? Was this percentage consistent with industry norms for luxury hotel properties (typically 4%–5% of total revenue)?
• Establish the treatment of franchise fees under the Aurelian Hotels & Resorts franchise agreement. Were franchise fees modeled at the contractual rate of 5% of gross room revenue plus 2% marketing fund contribution (7% total)? If a different rate was used, what was the basis for departing from the contractual rate?
• Establish the treatment of management fees. What management fee rate was assumed? Was the management fee based on total revenue, NOI, or some other metric?
• Clarify whether NOI or EBITDA was the cash-flow metric used as the basis for the DCF analysis. For hotel-level 2022 actuals, NOI was $18.4 million and EBITDA was $19.7 million — a difference of approximately $1.3 million that could affect the value conclusion.
B. 8.5% discount Rate — Core Challenge
This is one of the three priority areas for the deposition. The 8.5% discount rate is the single most impactful assumption in the Beacon appraisal and is, in our view, indefensible in the context of a Gulf Coast luxury hotel property as of the December 31, 2022 valuation date. The following lines of questioning are designed to systematically deconstruct the rate and demonstrate that it is materially below market.
Suggested lines of questioning:
• Identify the specific components of the 8.5% discount rate. Standard practice in real estate DCF analysis is to construct the discount rate using a build-up method or a comparable-transaction-derived method (or both). Under the build-up method, the discount rate typically consists of: (i) a risk-free rate, (ii) a general equity risk premium, (iii) a property-specific or asset-class risk premium, and (iv) an illiquidity premium. What specific rate did she assign to each of these components, and what was the basis for each?
• Confirm the risk-free rate used. As of December 31, 2022, the 10-year U.S. Treasury yield was approximately 3.88%. Did she use this rate, or a different risk-free rate? If she used a different rate, what was it and why?
• What equity risk premium did she apply above the risk-free rate? What was the source of the equity risk premium data (e.g., Aldermere Solutions, historical market equity risk premium studies)?
• What property-specific risk premium did she apply to account for the unique risks associated with a 312-room luxury beachfront hotel on the Gulf Coast of Florida — including hurricane risk, seasonal demand fluctuations, sensitivity to economic cycles, dependency on the Aurelian Hotels & Resorts brand, and the inherent operating risk of a hospitality asset?
• What illiquidity premium, if any, did she apply to account for the fact that luxury hotel properties are not liquid assets and cannot be sold quickly at full market value?
• When the components are summed, how do they arrive at 8.5%? Walk through the arithmetic on the record.
• How does the 8.5% discount rate compare to published hospitality discount rate surveys and industry benchmarking data as of the fourth quarter of 2022 and the first quarter of 2023? Specifically, reference published data from the following sources:
(a) Marlowe Crane CPAs LLP (formerly Thackeray Consulting Group) Hospitality Directions U.S. market surveys, which report discount rates for full-service luxury hotels;
(b) CBRE Hotels Investor Survey / Cap Rate Survey;
(c) Stonefield Technologies (RCA) data on hotel transaction pricing, implied cap rates, and discount rates;
(d) The American Hotel & Lodging Association's Investment Outlook reports.
• Introduce the Cap Rate and discount Rate Market Survey prepared by Jeffrey Park (July 2023) on behalf of Calderwood & Harkness LLP, which analyzes comparable Gulf Coast luxury hotel transactions and concludes that DCF discount rates for Gulf Coast luxury hotel properties typically range from 9.5% to 11.5% as of the fourth quarter of 2022. Dr. Ramanathan's 8.5% rate falls 100 basis points below the low end of this range.
• Point and probe: The Whitfield appraisal used a 10.75% discount rate. The 225-basis-point difference between Whitfield's 10.75% and Beacon's 8.5% is enormous in the context of a DCF analysis and alone accounts for a significant portion — likely tens of millions of dollars — of the $33.5 million gap between the Whitfield value conclusion ($118.0 million) and the Beacon value conclusion ($151.5 million). Does she agree that the discount rate is the single most impactful assumption in a DCF model?
• Did she perform any sensitivity analysis showing the impact of the discount rate on the value conclusion? Specifically:
(a) What would the FMV conclusion be if the discount rate were 9.5% instead of 8.5%?
(b) What would the FMV conclusion be if the discount rate were 10.0%?
(c) What would the FMV conclusion be if the discount rate were 10.75% (i.e., the Whitfield rate)?
• If she did not perform a sensitivity analysis, why not? Sensitivity analysis on key assumptions is a standard component of a credible DCF analysis, particularly in litigation or arbitration contexts where the reasonableness of assumptions will be scrutinized.
• Has she ever, in any prior hotel appraisal in her career, used a discount rate below 9.0%? If so, for what type of property, in what market, and under what market conditions? Was that prior appraisal for a newly constructed, fully stabilized, core-quality asset in a primary market — conditions that might justify a lower discount rate? The Palmetto Grand Resort & Spa is a property that was acquired in August 2017, renovated in 2017–2019, and has been operating for over five years — it is not a newly constructed, lease-up asset in a gateway market.
C. 7.75% Terminal Capitalization Rate — Core Challenge
This is the second priority area for the deposition. The terminal capitalization rate (also referred to as the "exit cap rate" or "reversion cap rate") determines the value assigned to the property at the end of the DCF projection period. A below-market terminal cap rate inflates the terminal value (reversion), which typically constitutes the largest single component of total present value in a hotel DCF analysis.
Suggested lines of questioning:
• Identify the basis for selecting a 7.75% terminal cap rate. What methodology did she use to derive this rate — market extraction from comparable sales, band of investment, survey data, or some other method?
• How does 7.75% compare to prevailing cap rates for Gulf Coast luxury hotels as of December 31, 2022? Reference specific comparable transactions from the Cap Rate and discount Rate Market Survey (Jeffrey Park, July 2023) showing that cap rates for Gulf Coast luxury hotel transactions have ranged from 8.5% to 10.0% during the relevant period.
• Establish the standard relationship between going-in cap rates and terminal cap rates. Standard appraisal practice provides that the terminal cap rate should be higher than the going-in cap rate, typically by 50 to 100 basis points, to account for property aging, increased uncertainty at the end of the projection period, and the risk that the property may not maintain its current competitive position. The Whitfield appraisal used a 9.5% direct capitalization rate as a going-in rate. Beacon's 7.75% terminal cap rate is 175 basis points below Whitfield's going-in rate — a result that is anomalous and contrary to standard practice.
• Did she make any upward adjustment to the terminal cap rate for property age, deferred maintenance, or market risk at the end of the projection period? If the property has $8.2 million in deferred maintenance as of December 31, 2022 (per her own adjustment), wouldn't the property be in even worse condition at the end of a 10- or 11-year projection period, absent additional capital investment beyond what was modeled in the capital reserve?
• Highlight the internal inconsistency between the $8.2 million deferred-maintenance adjustment and the 7.75% terminal cap rate. If $8.2 million in deferred maintenance exists, the property is in a state of physical deterioration that should increase — not decrease — the risk premium embedded in the terminal cap rate. A below-market terminal cap rate is fundamentally inconsistent with a simultaneous claim that the property suffers from significant deferred maintenance. She cannot have it both ways: either the property is well-maintained (justifying a lower cap rate) or it suffers from deferred maintenance (requiring a higher cap rate).
• Reference specific comparable hotel sale cap rates. From the Jeffrey Park market survey, the following are illustrative transactions:
(a) Comparable Sale 1 — Gulf Coast luxury resort, 2022 transaction, cap rate 9.2%;
(b) Comparable Sale 2 — Florida beachfront full-service hotel, 2022 transaction, cap rate 8.7%;
(c) Comparable Sale 3 — Southeast U.S. luxury resort, late 2021 transaction, cap rate 8.5%;
(d) Comparable Sale 4 — Gulf Coast full-service branded hotel, 2022 transaction, cap rate 9.8%.
• All of these transactions reflect cap rates above 8.5%, and several are above 9.0%. A terminal cap rate of 7.75% — which should be higher than prevailing going-in cap rates — is unsupported by any comparable market data.
• Sensitivity analysis: What would the FMV conclusion be if the terminal cap rate were 8.5%? 9.0%? 9.5%? Because the terminal value (reversion) typically constitutes 50%–70% of the total present value in a hotel DCF model, even modest changes to the terminal cap rate produce significant changes in the value conclusion.
D. Revenue and Growth Assumptions
Suggested lines of questioning:
• Establish the stabilized RevPAR (Revenue Per Available Room) assumption used in the Beacon DCF model. The property's 2022 actual RevPAR was $289 for 312 rooms. What RevPAR did Beacon project in the stabilized year (typically the final year of the explicit projection period or the terminal year)? If the stabilized RevPAR exceeds 2022 actual RevPAR by more than inflation, what is the basis for the above-inflation growth assumption?
• What revenue growth rate was assumed above inflation? Was revenue projected to grow at a rate exceeding the general rate of inflation (approximately 3.5%–4.0% as of year-end 2022)? If so, what property-specific or market-specific factors justified above-inflation revenue growth?
• What occupancy rate was assumed in the stabilized year? The property's 2022 actual occupancy rate was approximately 70%. If a higher occupancy rate was assumed (e.g., 75% or higher), what is the basis for the assumption that occupancy will increase above 2022 levels?
• Were any above-market growth assumptions driven by a theory that the Aurelian Hotels & Resorts franchise agreement is "below-market" and therefore creates an upside opportunity that should be reflected in projected revenue growth? If so, this theory is speculative and inappropriate — the franchise agreement was entered into at arm's length in 2017 and its fees are within the standard range for luxury hotel brands.
• How was the Aurelian franchise agreement valued as "below-market"? What comparable franchise fee structures were analyzed? Aurelian's total fee of 7% of gross room revenue (5% franchise fee + 2% marketing fund contribution) is within the standard range for luxury hotel franchise agreements, which typically range from 6% to 10% of gross room revenue depending on brand tier, geographic market, and negotiated terms. Is she aware that many luxury hotel franchise agreements carry total fees in the 7%–9% range?
V. ABSENCE OF SALES-COMPARISON APPROACH
A. Justification for Omission
Suggested lines of questioning:
• Return to and expand upon the questions raised in Section III regarding the omission of the sales-comparison approach. Ask Dr. Ramanathan to explain, in her own words, why the sales-comparison approach was not used in the Beacon appraisal.
• If she claims that there were insufficient comparable sales to support a reliable sales-comparison analysis, probe the specific steps she took to identify comparable sales. How many potential comparable transactions did she investigate? What databases, brokerage contacts, or published sources did she consult? What specific criteria did she use to identify comparable properties (e.g., property size, quality tier, geographic market, date of sale)?
• For each potential comparable that she considered and rejected, identify the specific reasons for rejection. Was the property too dissimilar in size? Too distant geographically? Was the transaction date too remote from the valuation date? Was the transaction a distressed sale or otherwise atypical?
• Highlight that Gerald K. Whitfield, MAI, using the same valuation date and appraising the same property, identified sufficient comparable sales to develop a sales-comparison analysis that he weighted at 60% of his final value conclusion. If Whitfield was able to identify adequate comparables, why was Dr. Ramanathan unable to do so? Did she simply not try, or did she apply unreasonably narrow criteria that excluded transactions Whitfield deemed comparable?
• The Appraisal Institute's authoritative guidance on hotel valuations — including Hotels and Motels: Valuations and Market Studies — considers the sales-comparison approach a primary indicator of market value for hotel properties, particularly where recent transactions involving comparable properties are available. Is she familiar with this guidance? Does she disagree with it?
B. Impact on Value Conclusion
Suggested lines of questioning:
• If the sales-comparison approach had been employed, what range of indicated values would it have produced? Even if she did not include a sales-comparison analysis in her report, she presumably has some awareness of recent hotel transactions in the Gulf Coast market. Can she provide even a rough indication of what a sales-comparison analysis would have suggested?
• Does she acknowledge that the sales-comparison approach often produces more conservative (i.e., lower) values for luxury hotel properties than a DCF analysis with aggressive revenue growth assumptions and a low discount rate? If so, is this one reason the sales-comparison approach was omitted — because it would have produced a lower value that would have undermined her $151.5 million conclusion?
• Explore whether the omission was influenced by MSH or its counsel. Did Victoria Castillo, Ryan Matsuda, or any other representative of MSH or Hargrove Dunlap suggest, recommend, or instruct that the sales-comparison approach not be employed? Were there any communications in which the omission of the sales-comparison approach was discussed?
C. Linden Park Comparison
Suggested lines of questioning:
• Is Dr. Ramanathan aware that the neutral appraiser, Linden Park Advisory LLC (Thomas Carraway, MAI, FRICS), arrived at a preliminary indication of value of $130.0–$138.0 million, as set forth in a letter dated July 14, 2023?
• Is she aware that Linden Park's preliminary indication is $13.5 million to $21.5 million below Beacon's $151.5 million conclusion?
• Does she have any opinion on why the neutral appraiser — an appraiser jointly selected by both parties and retained to provide an independent and unbiased valuation — arrived at a range that is significantly below hers?
• The Linden Park midpoint of $134.0 million is approximately 11.5% below Beacon's $151.5 million. Does she attribute this divergence to methodological differences? If so, what specific methodological differences? Does she believe that the neutral appraiser's methodology was flawed?
• Does the fact that Linden Park's range is closer to the Whitfield appraisal ($118.0 million) than to the Beacon appraisal ($151.5 million) give her any pause about the reliability or reasonableness of her own conclusions?
VI. $8.2 MILLION DEFERRED-MAINTENANCE ADJUSTMENT
A. Nature and Basis of the Adjustment
This is the third priority area for the deposition. The $8.2 million deferred-maintenance adjustment is both legally and factually problematic, and the examination should probe its foundations with specificity.
Suggested lines of questioning:
• Identify each specific deferred-maintenance item that comprises the $8.2 million total. Request a line-by-line itemization with estimated costs for each item.
• Categorize the items. Did the $8.2 million include any of the following: HVAC system replacement or upgrades; roofing repair or replacement; elevator modernization; pool and deck resurfacing; guest room FF&E replacement beyond normal wear and tear; exterior facade restoration; plumbing or electrical system upgrades; life-safety system upgrades; ADA compliance improvements; parking structure repair?
• For each item, identify the source of the cost estimate. Did she commission an independent engineering report, property condition assessment ("PCA"), or reserve study from a qualified engineering firm? If so, identify the firm, the date of the report, and its conclusions. If she did not commission an independent PCA, what was the basis for the $8.2 million figure?
• Did MSH, Nathaniel Cordero, Elena Cordero, or MSH's counsel provide the deferred-maintenance item list or cost estimates to her? If so, who provided the information, when, and in what form? Did she independently verify the information provided by MSH?
• Is it standard appraisal practice to include a deferred-maintenance adjustment in an FMV appraisal without an independent property condition assessment? What level of verification is required under USPAP and the Appraisal Institute's standards?
B. Challenge: Renovation History
Suggested lines of questioning:
• Establish the renovation history of The Palmetto Grand Resort & Spa. PGV invested a total of $24.3 million in renovation capital during 2017–2019, comprising $15.795 million contributed by PCG and $8.505 million contributed by MSH. This was a comprehensive renovation of the hotel following its acquisition in August 2017 for $87.5 million. The renovation addressed the guest rooms, public areas, food and beverage outlets, pool and deck areas, spa, fitness center, and building systems.
• Did Dr. Ramanathan account for this $24.3 million renovation investment in her analysis? Was she even aware of the scope and magnitude of the 2017–2019 renovation when she prepared her deferred-maintenance adjustment?
• What was the overall condition of the property at the time of her on-site inspection? Did she observe conditions consistent with a property that had undergone a comprehensive $24.3 million renovation only three to five years before the valuation date? Or did she observe conditions consistent with a property in a state of material neglect and deferred maintenance?
• Did the property's 2022 operating performance — including RevPAR of $289, total revenue of $62.8 million, and NOI of $18.4 million — suggest a hotel in a state of material deferred maintenance? These are strong operating metrics for a 312-room Gulf Coast luxury resort. Would a property suffering from $8.2 million in deferred maintenance typically be able to sustain such robust operating performance?
C. Challenge: OA Section 8.3 and Valuation Methodology
Suggested lines of questioning:
• OA Section 8.3 imposes an obligation on the Manager (PCG) to maintain the property in "first-class condition consistent with the standards of comparable luxury beachfront hotel properties." MSH has asserted, separately from its valuation claim, that PCG breached this obligation. However, the question for Dr. Ramanathan is whether a claimed breach of a contractual maintenance obligation is the same as a fair-market-value adjustment in an appraisal.
• In a standard FMV appraisal, is it appropriate to include a separate line-item deduction for alleged deferred maintenance that is also the subject of a separate breach-of-contract claim? If MSH is pursuing damages for PCG's alleged breach of OA Section 8.3 and simultaneously asking that the FMV appraisal reflect an $8.2 million deduction for the same deferred maintenance, does this constitute double-counting of the same alleged harm?
• Does a standard FMV appraisal of an operating hotel typically include a deduction for deferred maintenance, or does it appraise the property in its "as-is" condition (i.e., the condition existing at the valuation date, with the market drawing its own conclusions about the impact of deferred maintenance on value)?
• Clarify the mechanical treatment of the $8.2 million adjustment in the DCF model. Was the adjustment applied as: (a) a reduction to projected cash flows in one or more years; (b) a lump-sum deduction from the DCF terminal value (reversion); or (c) an additive adjustment to the final value conclusion (i.e., added on top of the DCF value)? The mechanical treatment matters because it determines the magnitude of the adjustment's impact on the value conclusion.
D. Inconsistency with Terminal Cap Rate
Suggested lines of questioning:
• Return to the internal inconsistency between the $8.2 million deferred-maintenance adjustment and the 7.75% terminal cap rate. If the property suffers from $8.2 million in deferred maintenance as of December 31, 2022, this indicates elevated physical risk and the prospect of additional capital expenditure requirements in future years. A buyer acquiring the property at the end of the DCF projection period would discount the price to account for this risk — resulting in a higher cap rate, not a lower one.
• Why does the 7.75% terminal cap rate not reflect the risk of ongoing or worsening deferred maintenance? If anything, a property with documented deferred maintenance should command a terminal cap rate at the high end of the market range, not 100–200 basis points below the market range.
• Is she able to reconcile these two positions — that the property has significant deferred maintenance (justifying an $8.2 million value reduction) and that the property also merits a below-market terminal cap rate (implying low risk and high desirability at reversion)? These positions are, in our view, mutually exclusive.
VII. "BELOW-MARKET" FRANCHISE AGREEMENT ADJUSTMENT
A. Nature of the Adjustment
Suggested lines of questioning:
• Determine whether the Beacon appraisal included an explicit adjustment — either as a separate line item or embedded in the DCF cash-flow projections — for an alleged "below-market" Aurelian Hotels & Resorts franchise agreement.
• If such an adjustment was included, what was the dollar value of the adjustment? How was it calculated and where in the DCF model does it appear?
• The Aurelian Hotels & Resorts franchise agreement was dated July 15, 2017, has a 20-year term expiring July 14, 2037, and provides for fees of 5% of gross room revenue plus a 2% marketing fund contribution (7% total of gross room revenue). What is the basis for concluding that this 7% total fee is "below-market"?
• What comparable franchise fee structures were analyzed to support the conclusion that 7% is below-market? Identify the specific luxury hotel brand franchise agreements she reviewed, including the brand name, fee structure, geographic market, and date of agreement.
• Is 5% plus 2% (7% total) outside the standard range for luxury hotel franchise agreements? In our research, luxury hotel franchise fees typically range from 6% to 10% of gross room revenue, with 7% falling squarely within the normal range.
B. Challenge
Suggested lines of questioning:
• The Aurelian franchise agreement was entered into at arm's length at the time of PGV's acquisition in 2017. It was negotiated between PGV (a joint venture of sophisticated real estate investors) and Aurelian Hotels & Resorts Inc. (a national luxury hotel brand). The terms were market-rate at inception. Any value that may have accrued from the passage of time (i.e., if market franchise fees have increased since 2017) is speculative and is a function of the normal market dynamics of a long-term contractual arrangement.
• Is it standard USPAP practice to add intangible value for a "below-market" franchise agreement in a real property appraisal? A franchise agreement is an intangible business asset, not real property. If the scope of the appraisal is to value the real property and operating assets of PGV, is the inclusion of a "below-market" franchise premium appropriate, or does it improperly attribute intangible business value to the real property?
• Even if an adjustment for a below-market franchise agreement were theoretically appropriate, is the remaining term of the agreement (approximately 14.5 years as of the valuation date) sufficient to justify a material value premium? Would a sophisticated buyer acquiring the property in the market attribute significant value to a franchise agreement with 14.5 years remaining?
VIII. APPRAISAL DIVERGENCE AND THE 10% THRESHOLD
A. OA Section 12.4(c) Mechanics