1027-00003 · Calderwood & Harkness LLP · Mediation & Settlement

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PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT COMMUNICATION ATTORNEY WORK PRODUCT

CALDERWOOD & HARKNESS LLP 801 Brickell Avenue, Suite 2800 Miami, Florida 33131

MEMORANDUM

PRIVILEGE LEGEND: This memorandum is a privileged and confidential attorney-client communication and attorney work product prepared in anticipation of litigation and for the purpose of providing legal advice. It is intended solely for the addressees identified above and should not be disclosed, distributed, or otherwise made available to any third party without the prior written consent of Calderwood & Harkness LLP. Unauthorized disclosure may result in a waiver of applicable privileges.

I. Executive Summary and Recommendation

The purpose of this memorandum is to provide our recommendation regarding the settlement authority that Pellegrino Capital Group LLC ("PCG") should authorize in connection with the pending JAMS arbitration brought by Meridian Shores Hospitality LLC ("MSH"), JAMS Ref. No. 1440032871, and the upcoming mediation session scheduled for February 12, 2024. The core dispute concerns the negotiated redemption of MSH's 35% membership interest in Palmetto Grand Ventures LLC ("PGV"), the joint venture entity that owns and operates The Palmetto Grand Resort & Spa in Naples, Florida.

We recommend that PCG authorize settlement authority in the range of $48.0 million to $54.0 million, with an optimal target settlement point of approximately $50.0 million to $52.0 million.

This recommendation is grounded in the following analytical framework. The neutral third-party appraiser, Linden Park Advisory LLC, delivered a preliminary indication of value for 100% of PGV's assets in the range of $130.0 million to $138.0 million. Taking the midpoint of that range ($134.0 million), deducting PGV's outstanding indebtedness to Gulf Atlantic National Bank ("GANB") of $48.6 million, and applying MSH's 35% membership share plus the stipulated $17.01 million in accrued preferred return, yields an analytical midpoint of approximately $46.9 million. This figure represents the baseline from which settlement authority should be calibrated.

The recommended range above this baseline incorporates a risk-adjusted litigation premium that accounts for several factors: (a) the exposure, however modest in probability, to a bad-faith penalty under Section 12.7 of the Amended and Restated Operating Agreement of Palmetto Grand Ventures LLC, dated June 15, 2017 (the "Operating Agreement" or "OA"); (b) the possibility that the arbitrator may credit some portion of MSH's $8.2 million deferred-maintenance adjustment; (c) the inherent uncertainty in Linden Park's final appraisal, which was never finalized beyond a preliminary indication; (d) the avoidance of an estimated $615,000 to $860,000 in incremental defense costs through the conclusion of the arbitration; and (e) the significant business value to PCG of achieving prompt resolution and consolidating 100% ownership of PGV.

The outcome we seek in any settlement is straightforward: a lump-sum redemption payment to MSH at closing; a full mutual release of all claims, counterclaims, and causes of action arising out of or relating to the Operating Agreement, the call-option exercise, and the arbitration; dismissal of JAMS Ref. No. 1440032871 with prejudice; and an agreement that each party bears its own attorneys' fees and costs. We do not recommend agreeing to any structured payment, earnout, or holdback arrangement.

The parties agreed on January 15, 2024 to submit this dispute to mediation. The mediation will be conducted by Raymond Alcazar of Alcazar Dispute Resolution LLC in Miami, with the first session scheduled for February 12, 2024. This memorandum is intended to inform the client's decision regarding settlement authority in advance of that session and to outline a mediation strategy designed to resolve this matter within the recommended range.

II. Procedural Status of the Arbitration

A. Case Caption and Parties

The arbitration is pending before JAMS under Reference Number 1440032871. The presiding arbitrator is the Honorable Margaret Liu Chen (Ret.), a former judge of the Eleventh Judicial Circuit of Florida who has extensive experience in complex commercial disputes.

Claimant: Meridian Shores Hospitality LLC, a Florida limited liability company. MSH is represented by the law firm of Hargrove, Dunlap & Castillo LLP, with Victoria Castillo, Partner, serving as lead counsel and Ryan Matsuda, Senior Associate, serving as second chair.

Respondent: Pellegrino Capital Group LLC, a Florida limited liability company. PCG is represented by Calderwood & Harkness LLP, with the undersigned, Francesca Morano, serving as lead counsel, supported by Simone Laroche, Lead Associate, and Jeffrey Park, Associate.

B. Procedural Timeline

The arbitration has been proceeding for approximately ten months. The key procedural milestones are summarized as follows:

March 20, 2023: MSH filed its Demand for Arbitration with JAMS, asserting claims for breach of the Operating Agreement, declaratory relief regarding the fair market value of MSH's 35% membership interest, and an award of the bad-faith penalty provided under OA Section 12.7. MSH demanded that the arbitrator determine fair market value at $151.5 million (based on the Beacon Valuation Group appraisal) and award MSH a total redemption payment of $70.0 million.

April 5, 2023: PCG filed its Response and Counterclaim. PCG denied MSH's claims, asserted that the call-option exercise was conducted in full compliance with the Operating Agreement, and filed a counterclaim seeking declaratory relief that the proper fair market value of 100% of PGV's assets is $118.0 million (based on the Whitfield Realty Advisors appraisal) and that the appropriate redemption price for MSH's 35% interest is $41.3 million.

April 28, 2023: The Honorable Margaret Liu Chen (Ret.) was appointed as the sole arbitrator by mutual agreement of the parties under the JAMS Comprehensive Arbitration Rules & Procedures.

May 15, 2023: Arbitrator Chen conducted the preliminary conference. The parties agreed upon a discovery schedule, including deadlines for document production, expert disclosures, depositions, and the retention of a neutral third appraiser as required under OA Section 12.4(c).

June 1, 2023: Linden Park Advisory LLC, headed by Thomas Carraway, MAI, FRICS, was jointly retained by the parties as the neutral third appraiser pursuant to OA Section 12.4(c). The engagement letter provided for delivery of a formal appraisal report within ninety (90) days.

July 14, 2023: Linden Park Advisory LLC delivered a preliminary indication of value for 100% of PGV's assets, placing the range at $130.0 million to $138.0 million as of the valuation date of December 31, 2022. This preliminary indication was accompanied by a letter from Thomas Carraway stating that additional analysis was required before a formal report could be issued. As discussed below, that formal report was never finalized.

August 22, 2023: The document production deadline passed. Both parties produced substantial document sets. PCG produced approximately 18,500 documents (Bates Nos. PCG-000001 through PCG-018517), including financial statements, capital-account records, renovation budgets, correspondence with GANB and Aurelian Hotels & Resorts, and selected internal communications. MSH produced approximately 9,200 documents (Bates Nos. MSH-000001 through MSH-009203).

September 18, 2023: Expert depositions were conducted. Gerald K. Whitfield, MAI, of Whitfield Realty Advisors LLC (PCG's appraiser) was deposed by Victoria Castillo. Dr. Priya Ramanathan, CFA, ASA, of Beacon Valuation Group Inc. (MSH's appraiser) was deposed by the undersigned. Both depositions were held at the JAMS offices in Miami.

October 10, 2023: Party depositions were conducted. Dominic R. Pellegrino, Managing Member of PCG, was deposed by Victoria Castillo. Nathaniel Cordero, a principal of MSH, was deposed by Simone Laroche. Both depositions were held at the JAMS offices in Miami.

November 6, 2023: MSH filed a Motion to Compel Production of PCG Internal Investment-Committee Memoranda. MSH argued that PCG's investment-committee memoranda from the period of 2020–2022 were directly relevant to the bad-faith claim under OA Section 12.7, contending that such documents would reveal PCG's internal assessment of PGV's value and any intent to understate fair market value through the Whitfield appraisal.

November 30, 2023: Arbitrator Chen partially granted the Motion to Compel. The ruling required PCG to produce investment-committee memoranda from 2021–2022 that specifically reference PGV's valuation, the contemplated exercise of the call option, or the Whitfield engagement. The ruling excluded memoranda relating to other PCG portfolio assets and memoranda protected by attorney-client privilege (subject to a privilege log, which was duly provided). PCG produced an additional thirty-seven (37) documents pursuant to this order in December 2023.

January 15, 2024: Counsel for both parties informed Arbitrator Chen that the parties had agreed to submit the dispute to mediation before Raymond Alcazar of Alcazar Dispute Resolution LLC, with the first mediation session scheduled for February 12, 2024. Arbitrator Chen stayed the arbitration proceedings pending the outcome of the mediation.

C. Current Posture

Fact discovery is substantially complete. Expert reports have not yet been exchanged, and the expert-report deadline has not yet been set. The arbitration hearing has not been scheduled. Linden Park Advisory LLC's formal appraisal report was never finalized — only the preliminary indication of value delivered on July 14, 2023 is available. The stay entered by Arbitrator Chen pending mediation means that no further proceedings are currently calendared in the arbitration itself.

III. Summary of the Parties' Positions

The valuation dispute between the parties is substantial. PCG has tendered a buyout price of $41.3 million; MSH has demanded $70.0 million. The $28.7 million gap reflects fundamentally different appraisals of PGV's asset value, as well as MSH's assertion of a bad-faith penalty that PCG contests in its entirety. We summarize each party's position below.

A. PCG's Position (Offered Buyout Price: $41.3 Million)

On January 9, 2023, PCG delivered a call-option exercise notice to MSH pursuant to OA Section 12.4. The call option became exercisable upon the fifth anniversary of the Operating Agreement's effective date, which was June 15, 2022. PCG's exercise of the call option was timely and procedurally proper under the terms of the Operating Agreement.

In connection with the call-option exercise, PCG retained Whitfield Realty Advisors LLC, a Fort Lauderdale-based real estate advisory firm, to prepare an independent appraisal of 100% of PGV's assets. The appraiser, Gerald K. Whitfield, MAI, is a Member of the Appraisal Institute with over twenty-five years of experience in the valuation of hospitality and resort properties in the southeastern United States. Mr. Whitfield completed his appraisal on February 10, 2023, concluding that the fair market value of 100% of PGV's assets was $118.0 million as of the valuation date of December 31, 2022.

Mr. Whitfield's methodology employed both an income approach and a sales comparison approach. Under the income approach, Mr. Whitfield utilized a blended direct capitalization and discounted cash flow ("DCF") analysis, applying a capitalization rate of 9.5% and a discount rate of 10.75%. Under the sales comparison approach, Mr. Whitfield analyzed comparable sales of luxury resort properties along the Gulf Coast of Florida and adjusted for differences in location, property condition, franchise affiliation, and revenue-per-available-room metrics. Mr. Whitfield weighted the income approach at 40% and the sales comparison approach at 60%, consistent with what he characterized as prevailing valuation practice for hotel properties where sufficient comparable sales data is available.

PCG's offered buyout price was derived as follows:

PCG tendered the buyout price of $41.3 million to MSH on March 1, 2023. MSH rejected the tender on March 10, 2023, asserting that the offered price materially understated the fair market value of MSH's membership interest.

B. MSH's Position (Demanded Buyout Price: $70.0 Million)

MSH retained Beacon Valuation Group Inc., a Miami-based valuation firm, to prepare its own independent appraisal. The appraiser, Dr. Priya Ramanathan, CFA, ASA, is a Chartered Financial Analyst charterholder and Accredited Senior Appraiser with a specialization in hospitality-sector valuations. Dr. Ramanathan completed her appraisal on April 14, 2023, concluding that the fair market value of 100% of PGV's assets was $151.5 million as of December 31, 2022.

Dr. Ramanathan's methodology relied exclusively on an income approach, utilizing a discounted cash flow analysis with a discount rate of 8.5% and a terminal capitalization rate of 7.75%. Notably, Dr. Ramanathan did not employ a sales comparison approach, a methodological choice that PCG has challenged as inconsistent with prevailing appraisal standards for hotel properties. Dr. Ramanathan's DCF model incorporated two significant adjustments: first, an upward adjustment for what she characterized as the "below-market" franchise agreement with Aurelian Hotels & Resorts, contending that the franchise fees payable by PGV under the existing agreement are materially below current franchise-market rates, thereby enhancing PGV's net cash flow relative to a market-rate franchise arrangement; and second, an $8.2 million deferred-maintenance adjustment reflecting capital expenditures that MSH alleges PCG failed to fund in accordance with the capital-improvement and maintenance obligations set forth in OA Section 8.3.

MSH's demanded buyout price was derived as follows:

The bad-faith penalty of $16,975,000 is calculated by MSH as approximately 32% of the sum of MSH's equity share and accrued preferred return ($36,015,000 + $17,010,000 = $53,025,000 × 0.32 ≈ $16,975,000). PCG contests both the applicability and the calculation of this penalty. As discussed in Section V.A below, OA Section 12.7 caps the bad-faith penalty at 25% of the determined fair market value of the redeemed interest, not 32%. MSH's calculation appears to overstate the penalty even under its own theory of the case.

The gap between the parties' positions is $28.7 million ($70.0 million minus $41.3 million). This is a substantial divergence, but as discussed throughout this memorandum, both parties' positions contain significant vulnerabilities that create meaningful incentives for compromise.

C. Appraisal Divergence and Third-Appraiser Trigger

The divergence between the Whitfield appraisal ($118.0 million) and the Beacon appraisal ($151.5 million) is calculated as follows:

|$151,500,000 − $118,000,000| / $118,000,000 = 28.4%

This divergence of 28.4% far exceeds the 10% threshold established in OA Section 12.4(c), which provides that if the two parties' appraisals diverge by more than 10%, the parties shall jointly retain a neutral third appraiser. The fair market value is then determined as the average of the two appraisals that are closest to each other. This mechanism was triggered, leading to the joint retention of Linden Park Advisory LLC on June 1, 2023.

The significance of the two-closest-appraisals averaging mechanism under OA Section 12.4(c) cannot be overstated. Depending on where Linden Park's final appraised value falls, either the Whitfield or the Beacon appraisal will be excluded from the averaging calculation. As analyzed in Section IV below, this mechanism introduces material uncertainty for both parties and is a powerful incentive for settlement.

IV. Linden Park Preliminary Indication of Value and Midpoint Equity Analysis

A. Linden Park Findings

Linden Park Advisory LLC was jointly retained by the parties on June 1, 2023, pursuant to OA Section 12.4(c) and the discovery stipulation entered at the May 15, 2023 preliminary conference. The engagement was led by Thomas Carraway, MAI, FRICS, the founder and principal of Linden Park. Mr. Carraway is a Member of the Appraisal Institute and a Fellow of the Royal Institution of Chartered Surveyors, with more than thirty years of experience in the valuation of hospitality and resort properties throughout the United States and the Caribbean.

On July 14, 2023, Linden Park delivered a preliminary indication of value letter to both parties. The letter stated that, based on Linden Park's analysis of the property, financial data, market conditions, and comparable transactions available as of the valuation date of December 31, 2022, the preliminary indication of fair market value for 100% of PGV's assets was in the range of $130.0 million to $138.0 million. Mr. Carraway's letter emphasized that this was a preliminary indication only, that additional analysis — including a more thorough examination of the deferred-maintenance claims, a detailed review of the Aurelian franchise agreement, and supplemental comparable-sales analysis — was required before a formal appraisal report could be issued.

The formal report was never finalized. The delay appears to be attributable to several factors, including the ongoing discovery disputes (particularly the motion to compel), Linden Park's request for additional documentation regarding the deferred-maintenance claims, and the parties' subsequent agreement to pursue mediation. Accordingly, the $130.0 million to $138.0 million range remains an informal indication and does not constitute a binding appraisal under the terms of the Operating Agreement.

Despite its informal nature, the Linden Park preliminary indication is highly informative for purposes of settlement analysis. Several observations are noteworthy:

First, Linden Park's range is meaningfully closer to the Whitfield appraisal ($118.0 million) than to the Beacon appraisal ($151.5 million). The low end of Linden Park's range ($130.0 million) is $12.0 million above Whitfield and $21.5 million below Beacon. The high end ($138.0 million) is $20.0 million above Whitfield and $13.5 million below Beacon. This positioning suggests that a credible, neutral appraiser found more merit in PCG's valuation methodology than in MSH's, though also concluded that the Whitfield appraisal was materially below fair market value.

Second, the OA Section 12.4(c) averaging mechanism creates an important analytical dynamic. Under the "average of the two closest" formula:

• If Linden Park's final value falls anywhere from $130.0 million to approximately $134.75 million, the two closest appraisals would be Linden Park and Whitfield ($118.0 million), and the determined FMV would be the average of those two, ranging from ($118.0M + $130.0M) / 2 = $124.0 million to ($118.0M + $134.75M) / 2 = $126.375 million.

• If Linden Park's final value falls above approximately $134.75 million (the midpoint between Whitfield and Beacon, i.e., ($118.0M + $151.5M) / 2 = $134.75M), the two closest appraisals would be Linden Park and Beacon ($151.5 million), and the determined FMV would be the average of those two, potentially ranging from ($134.75M + $151.5M) / 2 = $143.125 million to ($138.0M + $151.5M) / 2 = $144.75 million.

The difference between these two scenarios is dramatic. The determined FMV under OA Section 12.4(c) could range from approximately $124.0 million to approximately $144.75 million, a spread of over $20 million, depending solely on where Linden Park's final appraised value falls within its own preliminary range. This uncertainty is a significant risk factor for both parties and constitutes one of the strongest arguments in favor of negotiated settlement.

B. Midpoint Equity Derivation

For purposes of establishing an analytical baseline for settlement authority, we use the midpoint of Linden Park's preliminary range:

This figure of $46.9 million represents the analytical baseline for settlement negotiations, before the application of any risk premium or discount. It is the value that MSH would receive if Linden Park's final appraisal came in at the exact midpoint of its preliminary range, the OA Section 12.4(c) mechanism produced an FMV of $134.0 million, the bad-faith claim were rejected in its entirety, and no deferred-maintenance adjustment were applied. As discussed in the following sections, several risk factors justify a settlement premium above this baseline.

V. Analysis of Key Risk Factors Affecting Settlement Authority

In determining the appropriate settlement authority range, we have identified and analyzed five principal risk factors that could affect the outcome of the arbitration and that should inform PCG's negotiating posture. Each is discussed in turn below.

A. Bad-Faith Penalty Exposure (OA Section 12.7)

OA Section 12.7 is the most consequential risk factor in this dispute. The provision states, in relevant part:

"In the event that the Manager exercises the Call Option in bad faith or with the intent to materially understate the Fair Market Value of the Company's assets, the Redemption Price shall include a penalty in an amount up to twenty-five percent (25%) of the determined Fair Market Value of the redeemed Membership Interest, as the Arbitrator shall determine in its sole discretion."

MSH's primary argument in support of the bad-faith penalty rests on three contentions. First, MSH contends that PCG intentionally selected an appraiser — Gerald Whitfield — who could be expected to produce a conservative valuation, and that PCG directed or influenced Whitfield's methodology and assumptions to achieve a below-market result. Second, MSH argues that the capitalization rate of 9.5% and discount rate of 10.75% employed by Whitfield are above market rates for comparable Gulf Coast luxury hotel assets, and that these rates were deliberately inflated to suppress the appraised value. Third, MSH asserts that PCG's failure to maintain The Palmetto Grand Resort & Spa in first-class condition — the deferred-maintenance claim discussed in Section V.B below — was itself a form of bad faith designed to depress the property's value in advance of the call-option exercise.

PCG's defense against the bad-faith claim is substantial and, in our assessment, likely to prevail. Gerald Whitfield is a reputable MAI-certified appraiser with an established track record in the hospitality sector. His capitalization rate of 9.5% and discount rate of 10.75% fall within the range of market-standard metrics for Gulf Coast luxury hotel assets, as supported by published industry surveys and comparable transaction data. PCG exercised the call option in accordance with the express terms of the Operating Agreement and followed the contractual appraisal process without deviation. There is no direct evidence in the documentary record that PCG directed or influenced Whitfield's conclusions.

However, we note the following areas of concern. The 28.4% divergence between the Whitfield and Beacon appraisals is high by any measure and could be cited by the arbitrator as circumstantial evidence suggesting that one or both appraisals deviated from the standard of care. More importantly, the partially granted motion to compel regarding PCG's investment-committee memoranda is a meaningful risk factor. The thirty-seven documents produced pursuant to Arbitrator Chen's November 30, 2023 order have been reviewed by Calderwood & Harkness. While none of these documents contains a "smoking gun" — that is, an explicit statement by any PCG principal that the Whitfield appraisal was intended to understate fair market value — several memoranda reference internal discussions about the timing and economics of the call-option exercise in terms that, if taken out of context, could be characterized by MSH's counsel as reflecting a strategic intent to minimize the redemption price. As we discussed in our privileged September 2023 assessment memorandum, the risk of an adverse finding on bad faith is low but not negligible.

The potential financial exposure under OA Section 12.7 is calculated as follows. If the arbitrator finds bad faith and applies the maximum 25% penalty to MSH's equity share at the midpoint of Linden Park's preliminary range, the penalty would equal ($29,890,000 + $17,010,000) × 25% = $46,900,000 × 25% = $11,725,000. At the higher end of the Beacon valuation, MSH claims a penalty of $16,975,000, though as noted above, MSH's calculation applies a 32% rate that exceeds the 25% cap in OA Section 12.7 and is therefore legally unsustainable at the claimed level.

Applying a probability-weighted analysis, and drawing on our assessment that the probability of an adverse bad-faith finding is in the range of 15% to 20%, the risk-weighted bad-faith exposure ranges from approximately $1.75 million ($11.725M × 15%) to approximately $2.35 million ($11.725M × 20%). This risk-weighted cost should be factored into the settlement calculus as a premium above the analytical midpoint.

B. Deferred Maintenance Claim (OA Section 8.3)

MSH's appraiser, Dr. Ramanathan, incorporated an $8.2 million deferred-maintenance adjustment into her appraisal. This adjustment is based on MSH's contention that PCG, as Manager of PGV, failed to fund certain capital improvements and ongoing maintenance necessary to keep The Palmetto Grand Resort & Spa in "first-class condition" as required under OA Section 8.3 of the Operating Agreement.

The factual record on this point is mixed. PCG invested a total of $24.3 million in renovations during the 2017–2019 period, of which PCG funded $15,795,000 (65%) and MSH funded $8,505,000 (35%), consistent with their respective membership percentages. These renovations included a comprehensive guest-room renovation of the main tower, upgrades to the spa and fitness facilities, resurfacing of the pool deck, and refurbishment of the main lobby and public areas. PCG contends that the property has been maintained to a high standard and that subsequent annual maintenance budgets have been adequate and consistent with the Aurelian Hotels & Resorts brand standards.

MSH contends that PCG curtailed capital expenditure spending beginning in 2020, allegedly in anticipation of the call-option exercise, and that the property's mechanical systems, exterior finishes, and certain guest-facing amenities have deteriorated below the standard required by OA Section 8.3. The $8.2 million figure represents Beacon's estimate of the cost to cure these alleged deferred-maintenance items, which MSH argues should be added back to the property's appraised value on the theory that the property would have been worth more absent PCG's failure to maintain it.

Our assessment is that this claim presents moderate risk. It is unlikely that the full $8.2 million adjustment would be sustained. The property underwent significant renovations within the five years preceding the valuation date, and PCG can point to annual maintenance budgets and Aurelian quality-assurance inspection reports that generally reflect satisfactory property condition. However, there is some documentary evidence — including internal capital-budget memoranda and correspondence between PCG's asset management team and the hotel general manager — that suggests certain planned capital expenditures were deferred or scaled back in 2021 and 2022. The arbitrator may credit some portion of MSH's deferred-maintenance claim, which would increase the appraised value and, consequently, MSH's equity share.

We estimate that the likely range of any deferred-maintenance credit is $2.0 million to $5.0 million on the total asset value. MSH's 35% share of this adjustment would be $700,000 to $1,750,000. This range is incorporated into the settlement authority analysis.

C. Uncertainty of Linden Park's Final Appraisal

As noted above, Linden Park Advisory LLC's formal appraisal report was never finalized. The preliminary indication of value — $130.0 million to $138.0 million — is the only data point available from the neutral appraiser, and it carries inherent uncertainty. The final appraised value could shift in either direction upon completion of Mr. Carraway's additional analysis, including his examination of the deferred-maintenance claims, the Aurelian franchise agreement, and supplemental comparable-sales data.

The impact of this uncertainty is amplified by the OA Section 12.4(c) averaging mechanism. As illustrated in Section IV.A above, the determined FMV under the Operating Agreement could range from approximately $124.0 million to approximately $144.75 million depending on where Linden Park's final number falls. The specific breakpoint — approximately $134.75 million, the midpoint between Whitfield and Beacon — determines whether Linden Park is averaged with Whitfield (a favorable outcome for PCG) or with Beacon (a substantially less favorable outcome for PCG).

To illustrate the upside risk for PCG, consider a scenario in which Linden Park finalizes near the high end of its preliminary range at $138.0 million. In that case, Linden Park would be closer to Beacon ($151.5 million) than to Whitfield ($118.0 million), and the determined FMV under OA Section 12.4(c) would be:

($138,000,000 + $151,500,000) / 2 = $144,750,000

MSH's equity value under this scenario would be:

($144,750,000 − $48,600,000) × 0.35 + $17,010,000 = $33,652,500 + $17,010,000 = $50,662,500

This figure — $50.67 million — is $3.77 million above the midpoint baseline of $46.9 million, before any bad-faith penalty. If a bad-faith penalty were also assessed at 25% of MSH's equity value, the total could reach approximately $63.3 million. While this worst-case scenario remains improbable (it requires both a high Linden Park appraisal and a bad-faith finding), it underscores the asymmetric risk that PCG faces and the prudence of settling within the recommended range.

D. Costs of Continued Arbitration

Continued arbitration through a final hearing and award would entail significant additional expense. Based on our current understanding of the remaining procedural steps and the complexity of the issues, we estimate the following incremental costs:

In addition to these prospective costs, PCG has already incurred substantial expenses in connection with this dispute. As of January 2024, costs incurred to date are as follows:

PCG has tendered this matter to its managers' liability insurer, Atlantic Omnivrel Insurance Company, under Policy No. AFML-2022-08745, which provides a $10.0 million limit. Atlantic Fidelity has accepted the tender and has been funding defense costs under a reservation of rights. As of January 2024, approximately $425,000 has been reimbursed by the carrier. However, continued coverage remains uncertain. Atlantic Fidelity's reservation of rights letter reserves the right to withdraw coverage if the arbitrator determines that PCG engaged in intentional misconduct or bad faith — precisely the issue at the heart of MSH's OA Section 12.7 claim. If an adverse bad-faith finding is made, Atlantic Fidelity may retroactively deny coverage for defense costs and refuse to indemnify PCG against the penalty. This coverage uncertainty further supports the case for a negotiated settlement that resolves the bad-faith claim without an adjudication on the merits.

A settlement eliminates these incremental costs in their entirety and removes the risk of an adverse arbitration award. The cost savings alone — $615,000 to $860,000 — justify a meaningful premium over the analytical midpoint.

E. Time Value and Business Considerations

Beyond the direct financial costs, continued arbitration imposes significant indirect costs on PCG and PGV's business operations. We highlight the following considerations:

First, continued arbitration would delay resolution of this dispute by an estimated six to twelve months. If mediation is unsuccessful and the arbitration proceeds, expert reports will need to be exchanged, pre-hearing briefs filed, and a hearing scheduled. Based on Arbitrator Chen's current calendar and the complexity of the case, a final hearing is unlikely before the third or fourth quarter of 2024, with an award to follow some weeks or months thereafter.

Second, the ongoing uncertainty regarding PGV's ownership structure complicates important operational and financing decisions. PGV is currently engaged in discussions with Gulf Atlantic National Bank regarding the refinancing or modification of the existing credit facility (Loan No. CRE-2017-06284, maturing August 1, 2027). GANB has indicated informally that the unresolved ownership dispute creates underwriting uncertainty that could affect the terms of any refinancing. Similarly, upcoming decisions regarding the Aurelian Hotels & Resorts franchise agreement — including potential renewal negotiations and brand-mandated property improvement plans — would benefit from a clear and unified ownership structure.

Third, Dominic Pellegrino and Adriana Pellegrino-Voss have communicated a desire to resolve this matter efficiently and to transition PGV to 100% PCG ownership. The strategic value of full ownership — including simplified governance, unilateral decision-making authority, and enhanced flexibility in capital allocation — is significant, though difficult to quantify precisely.

Fourth, PCG has the financial capacity to fund a settlement within the recommended range. PCG's assets under management of approximately $1.2 billion provide a strong liquidity base. As discussed in Section VII below, a settlement can be funded through a combination of existing PCG liquidity (approximately $22.0 million available) and an incremental draw on PGV's revolving credit facility with GANB.

VI. Derivation of Recommended Settlement Range ($48.0M – $54.0M)

Drawing on the midpoint equity analysis in Section IV and the risk-factor assessment in Section V, we derive the recommended settlement authority range as follows.

A. Floor of Range: $48.0 Million

The floor of the recommended range is $48.0 million. This figure represents the midpoint equity value for MSH ($46.9 million) plus a modest premium of approximately $1.1 million. The premium at this level reflects the following considerations:

• A minimal litigation-risk concession to MSH, acknowledging that some degree of risk exists on the bad-faith claim and deferred-maintenance issue even though PCG believes its positions are meritorious;

• Recognition that even a partial credit for deferred maintenance — at the low end of our estimated range of $2.0 million to $5.0 million on total asset value — would modestly increase MSH's equity share;

• An incentive for MSH to accept a prompt and certain resolution rather than incurring the costs and uncertainties of continued arbitration; and

• Avoidance by PCG of the incremental defense costs estimated at $615,000 to $860,000.

At $48.0 million, the settlement would represent a strong outcome for PCG. It would be $22.0 million below MSH's demand of $70.0 million — a reduction of approximately 31.4%. It would be $6.7 million above PCG's tendered price of $41.3 million — an increase of approximately 16.2% — which is a reasonable adjustment given the Linden Park preliminary indication that the Whitfield appraisal was below fair market value. In our assessment, $48.0 million is the lowest figure at which a settlement is likely achievable, and even at this level, significant negotiating skill will be required to bring MSH to agreement.

B. Ceiling of Range: $54.0 Million

The ceiling of the recommended range is $54.0 million. This figure represents the midpoint equity value for MSH ($46.9 million) plus a premium of approximately $7.1 million. The premium at this level reflects a more comprehensive accounting of the risk factors identified in Section V:

• Full risk-weighted bad-faith exposure: $1.75 million to $2.35 million;

• Partial deferred-maintenance credit at the mid-to-upper range: $0.7 million to $1.75 million (reflecting MSH's 35% share of a $2.0M to $5.0M adjustment);

• An uncertainty premium for the Linden Park final appraisal outcome, accounting for the possibility that the final appraised value falls in the upper portion of the preliminary range and triggers the averaging of Linden Park and Beacon under OA Section 12.4(c);

• Full savings from avoided incremental defense costs: $615,000 to $860,000; and

• The significant business value to PCG of achieving certainty, eliminating litigation risk, and consolidating 100% ownership of PGV on an accelerated timeline.

At $54.0 million, the settlement would still represent a favorable result for PCG. It would be $16.0 million below MSH's demand — a reduction of approximately 22.9%. However, it would be $7.1 million above the midpoint analysis, which is a substantial premium. We view $54.0 million as the upper boundary of a reasonable settlement. Beyond this level, the economics favor proceeding to arbitration on the merits. At settlement values above $54.0 million, PCG would be conceding more than the combined risk-weighted cost of all identified risk factors, and the expected value of an arbitration award becomes more attractive than the settlement price.

C. Target / Optimal Settlement Point

Within the recommended range, we believe the optimal settlement target is approximately $50.0 million to $52.0 million. This range provides meaningful savings relative to the worst-case arbitration outcomes while reflecting a fair and economically justified resolution of the underlying valuation dispute. It represents a premium of $3.1 million to $5.1 million over the midpoint analysis — enough to account for the principal risk factors without overcompensating MSH for claims of uncertain merit.

Any settlement at any point within the recommended range should be conditioned on the following terms:

(a) A lump-sum cash payment to MSH at closing, funded by wire transfer of immediately available funds;

(b) A full mutual release of all claims, counterclaims, and causes of action by and between PCG, MSH, PGV, and their respective affiliates, members, managers, officers, employees, agents, and representatives, arising out of or in any way relating to the Operating Agreement, the call-option exercise, the Whitfield and Beacon appraisals, the Linden Park engagement, and the arbitration proceeding;

(d) An agreement that each party shall bear its own attorneys' fees, costs, and expenses incurred in connection with the arbitration, the mediation, and the negotiation of the settlement.

We do not recommend agreeing to any structured payment, holdback, escrow, or earnout arrangement. A clean, lump-sum closing is in PCG's interest and eliminates the risk of post-settlement disputes.

VII. Funding Considerations

A settlement within the recommended range of $48.0 million to $54.0 million will require PCG to arrange adequate funding for the lump-sum redemption payment. Based on our understanding of PCG's financial position and PGV's existing credit facility, the anticipated funding sources are as follows:

PCG Existing Liquidity. PCG has approximately $22.0 million in available cash and liquid assets that can be deployed toward the settlement payment without impairing its ability to meet ongoing obligations and investment commitments.

PGV Revolving Credit Facility. The remaining balance would be funded through an incremental draw on PGV's revolving credit facility with Gulf Atlantic National Bank, Loan No. CRE-2017-06284. The existing term loan balance as of December 31, 2022 was $48.6 million. The term loan matures on August 1, 2027 and bears interest at SOFR plus 2.25%. The revolving credit facility has additional capacity that may be drawn for corporate purposes, subject to borrowing base and covenant compliance. GANB consent will be required for both the ownership-structure change (the redemption of MSH's 35% interest) and any incremental borrowing.

At the midpoint of the recommended settlement range — approximately $51.0 million — PCG would contribute $22.0 million from existing liquidity and would need approximately $29.0 million from the revolving credit facility, bringing PGV's total outstanding indebtedness with GANB to approximately $77.6 million. At the ceiling of the range ($54.0 million), the required revolver draw would be approximately $32.0 million, bringing total PGV indebtedness to approximately $80.6 million.

We recommend that Marcus Thiel, PCG's Chief Financial Officer, confirm the available revolving-credit capacity under the existing GANB facility and make a preliminary inquiry regarding GANB's willingness to consent to the ownership transfer and the incremental borrowing. The GANB relationship should be managed carefully; Christine Delacroix, Senior Vice President, is PCG's primary contact at the bank and should be engaged informally at this stage. We do not recommend disclosing the specific settlement range to GANB at this time.

Following the closing of the settlement and the redemption of MSH's membership interest, PCG may wish to consider refinancing PGV's outstanding indebtedness to optimize the capital structure of The Palmetto Grand Resort & Spa as a 100%-owned PCG asset. A refinancing could potentially achieve more favorable terms by eliminating the governance complexity of a joint venture structure and presenting a simplified single-borrower credit profile.

VIII. Mediation Strategy

The mediation with Raymond Alcazar of Alcazar Dispute Resolution LLC (333 SE 2nd Avenue, Suite 2100, Miami, Florida 33131) is scheduled to commence on February 12, 2024. Mr. Alcazar is an experienced mediator with a strong reputation in commercial real estate disputes in South Florida. He typically conducts full-day mediation sessions with an initial joint session followed by extended private caucuses.

A. Opening Position

We recommend that PCG enter the mediation with an initial offer in the range of $45.0 million to $46.0 million. This opening position is deliberately set below the midpoint equity analysis ($46.9 million) and well below the floor of the recommended settlement range ($48.0 million) in order to preserve adequate negotiating room. The opening offer signals to MSH that PCG is prepared to negotiate meaningfully above its tendered price of $41.3 million, but that it views the midpoint equity analysis as the anchor for negotiations, not as a floor.

B. Key Arguments to Emphasize

In both the confidential mediation position statement and the mediation session itself, PCG should emphasize the following points:

1. Linden Park's preliminary range undercuts Beacon. The neutral appraiser's preliminary indication of value ($130.0M–$138.0M) is substantially below the Beacon appraisal ($151.5M). Even at the high end of Linden Park's range, the neutral appraiser's assessment is $13.5 million below Beacon. This validates PCG's core contention that MSH's valuation is inflated.

2. Beacon's methodology is flawed. Beacon's exclusive reliance on the income approach, without a sales comparison approach, is inconsistent with accepted appraisal practice for hotel properties. The Appraisal Institute's published guidance and industry practice recognize the sales comparison approach as a critical check on income-approach valuations, particularly in active markets with sufficient comparable-sales data. Beacon's discount rate of 8.5% and terminal capitalization rate of 7.75% are below-market for Gulf Coast luxury hotel assets and overstate the property's value.

3. The bad-faith claim lacks evidentiary support. PCG engaged Gerald Whitfield, a reputable MAI-certified appraiser, and followed the contractual appraisal process without deviation. Divergent appraisals, without more, are insufficient to establish bad faith under Florida law. The investment-committee memoranda produced pursuant to Arbitrator Chen's November 30, 2023 order contain no evidence of intentional undervaluation. The bad-faith penalty claim is a litigation tactic designed to inflate MSH's negotiating leverage, not a claim with a realistic probability of success.

4. The deferred-maintenance adjustment is exaggerated. The Palmetto Grand Resort & Spa underwent $24.3 million in renovations during 2017–2019. Subsequent maintenance budgets have been consistent with Aurelian Hotels & Resorts brand standards. Dr. Ramanathan's $8.2 million deferred-maintenance adjustment is speculative and unsupported by the property's actual condition.

5. MSH's demanded penalty exceeds the OA cap. MSH's claimed bad-faith penalty of $16.975 million implies a 32% penalty rate, which exceeds the 25% cap expressly stated in OA Section 12.7. Even under MSH's own theory, the penalty claim is mathematically overstated.

C. Key Concessions to Anticipate from MSH

Based on our experience in similar disputes and our assessment of MSH's litigation posture, we anticipate the following dynamics during the mediation:

• MSH will likely retreat from the bad-faith penalty demand if PCG demonstrates a willingness to negotiate meaningfully above the $41.3 million tendered price. The bad-faith claim serves primarily as a negotiating lever, and MSH's counsel — Victoria Castillo — is a pragmatic and experienced litigator who understands the evidentiary limitations of the claim.

• MSH's realistic settlement expectation is likely in the range of $50.0 million to $60.0 million. The high end of this range reflects the possibility that Linden Park's final appraisal could trigger the averaging of Linden Park and Beacon under OA Section 12.4(c), plus some portion of the bad-faith and deferred-maintenance claims. The low end reflects MSH's recognition that the Linden Park preliminary indication undercuts the Beacon appraisal and that the bad-faith claim carries significant litigation risk.

• MSH may seek a structured payment or holdback arrangement — for example, a deferred payment of a portion of the redemption price or an escrow to cover potential post-closing adjustments. PCG should firmly insist on a lump-sum wire transfer at closing and resist any structure that extends PCG's exposure or creates opportunities for post-settlement disputes.

D. Confidentiality

All communications with the mediator and all statements made during the mediation session are confidential and inadmissible in the arbitration under both the JAMS mediation rules and the parties' mediation agreement. PCG should participate in the mediation candidly and with the objective of achieving a settlement within the authorized range.

IX. Recommended Next Steps

In light of the foregoing analysis, we recommend the following next steps:

1. Client Settlement Authority. Dominic R. Pellegrino and Adriana Pellegrino-Voss should confirm settlement authority in the range of $48.0 million to $54.0 million, with an optimal target of $50.0 million to $52.0 million. This authorization should be communicated to the undersigned in writing (by email to fmorano@calderwoodharkness.com) at the earliest opportunity, and in no event later than February 5, 2024, to allow adequate time for mediation preparation.

2. Mediation Position Statement. Calderwood & Harkness will prepare a confidential mediation position statement for submission to Raymond Alcazar in advance of the February 12, 2024 mediation session. The submission deadline under Alcazar Dispute Resolution's standard protocol is typically seven (7) calendar days before the session. We will circulate a draft to the client for review by February 1, 2024.

3. Tax Implications. Marcus Thiel should coordinate with Grantham, Pryce & Associates CPAs (contact: Howard Grantham, CPA) to analyze the tax implications of the redemption payment at various price points within the recommended range. Key considerations will include the allocation of the payment between the return of MSH's capital contribution, the accrued preferred return, and any premium over equity value, as well as the deductibility of any portion of the settlement payment for federal and state income tax purposes.

4. GANB Coordination. Marcus Thiel should make preliminary inquiries with Gulf Atlantic National Bank (contact: Christine Delacroix, SVP) regarding (a) available revolving-credit capacity under Loan No. CRE-2017-06284, (b) GANB's preliminary willingness to consent to the ownership-structure change resulting from the redemption of MSH's 35% interest, and (c) any conditions or requirements GANB may impose in connection with an incremental draw to fund the settlement payment. As noted above, we do not recommend disclosing the specific settlement range to GANB at this stage.

5. Mediation Preparation. Francesca Morano and Simone Laroche will continue preparation for the mediation session, including the development of negotiation strategy, preparation of talking points for the joint session and private caucuses, and coordination with Dominic Pellegrino regarding his participation in the mediation. Jeffrey Park will finalize the supporting financial exhibits, including detailed equity analyses at multiple valuation scenarios, to be used during the mediation.

6. Contingency Planning. If mediation is unsuccessful, the parties should be prepared for continued arbitration proceedings. Calderwood & Harkness will resume work on the expert-report exchange timeline, including coordination with Gerald Whitfield regarding finalization of any supplemental or rebuttal appraisal analysis, and will begin drafting pre-hearing briefs. We will also re-engage with Linden Park Advisory LLC regarding the completion of the formal appraisal report.

X. Conclusion

Settlement of this dispute within the recommended range of $48.0 million to $54.0 million represents a sound and well-supported resolution for Pellegrino Capital Group LLC. The recommended range is anchored in a disciplined analysis of the Linden Park preliminary indication of value, the OA Section 12.4(c) averaging mechanism, and the parties' respective appraisals, and it incorporates a calibrated risk premium to account for the principal uncertainties and exposures that PCG faces in continued arbitration.

The negotiated premium above the midpoint equity analysis of $46.9 million reflects a realistic assessment of the litigation risks — principally the bad-faith penalty exposure under OA Section 12.7, the deferred-maintenance claim under OA Section 8.3, and the uncertainty surrounding Linden Park's final appraisal — while achieving a settlement result that would be substantially below MSH's $70.0 million demand. At the target range of $50.0 million to $52.0 million, PCG would secure a resolution that is $18.0 million to $20.0 million below MSH's position, a meaningful and demonstrable win.

Prompt resolution eliminates an estimated $615,000 to $860,000 in incremental defense costs, removes the uncertainty of an arbitration award on issues where the outcome is far from certain, resolves the insurance-coverage uncertainty with Atlantic Fidelity, and enables PCG to consolidate 100% ownership of Palmetto Grand Ventures LLC and The Palmetto Grand Resort & Spa. The strategic and operational benefits of unified ownership — simplified governance, enhanced refinancing flexibility, and unilateral decision-making authority — provide additional value that, while difficult to quantify precisely, reinforces the case for settlement.

We are available to discuss this recommendation with you at your earliest convenience. Please do not hesitate to contact the undersigned at (305) 555-4100 or fmorano@calderwoodharkness.com.

Respectfully submitted,

CALDERWOOD & HARKNESS LLP

By: ________

Francesca Morano Partner

cc: Samuel Eklund, Billing Partner, Calderwood & Harkness LLP (by secure email, privileged) Simone Laroche, Lead Associate, Calderwood & Harkness LLP (by secure email, privileged)

TO:

Adriana Pellegrino-Voss, Senior Vice President of Investments, Pellegrino Capital Group LLC

FROM:	Francesca Morano, Partner, Calderwood & Harkness LLP
DATE:	January 10, 2024
RE:	Settlement Authority Recommendation — Redemption of Meridian Shores Hospitality LLC's 35% Interest in Palmetto Grand Ventures LLC; JAMS Ref. No. 1440032871
MATTER NO.:	1027-00003
Component	Amount
Gross Asset Value (Whitfield Appraisal)	$118,000,000
Less: Outstanding Debt — GANB Loan No. CRE-2017-06284	($48,600,000)
Net Joint Venture Equity	$69,400,000
MSH's 35% Membership Share	$24,290,000
Plus: MSH Accrued Preferred Return (Stipulated)	$17,010,000
Total Offered Buyout Price	$41,300,000
Component	Amount
Gross Asset Value (Beacon Appraisal)	$151,500,000
Less: Outstanding Debt — GANB Loan No. CRE-2017-06284	($48,600,000)
Net Joint Venture Equity	$102,900,000
MSH's 35% Membership Share	$36,015,000
Plus: MSH Accrued Preferred Return (Stipulated)	$17,010,000
Plus: Bad-Faith Penalty under OA Section 12.7	$16,975,000
Total Demanded Buyout Price	$70,000,000
Component	Amount
Midpoint of Linden Park Preliminary Range [($130.0M + $138.0M) / 2]	$134,000,000
Less: Outstanding Debt — GANB Loan No. CRE-2017-06284	($48,600,000)
Net Equity at Midpoint	$85,400,000
MSH's 35% Membership Share ($85.4M × 0.35)	$29,890,000
Plus: MSH Accrued Preferred Return (Stipulated)	$17,010,000

Subtotal — Midpoint Equity Value for MSH	$46,900,000
Cost Category	Estimated Range
Calderwood & Harkness fees (expert reports, pre-hearing briefs, hearing preparation, hearing)	$450,000 – $600,000
Linden Park completion of formal appraisal report (PCG's share)	$75,000 – $100,000
JAMS arbitrator fees and hearing costs (PCG's share)	$40,000 – $60,000
Rebuttal expert work (if needed)	$50,000 – $100,000
Total Estimated Incremental Litigation Cost	$615,000 – $860,000
Cost Category	Approximate Amount
Calderwood & Harkness fees to date	$875,000
Expert and appraiser costs to date	$285,000
JAMS fees to date	$35,000
Total Costs Incurred to Date	$1,195,000

PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT COMMUNICATION ATTORNEY WORK PRODUCT
CALDERWOOD & HARKNESS LLP 801 Brickell Avenue, Suite 2800 Miami, Florida 33131
MEMORANDUM
PRIVILEGE LEGEND: This memorandum is a privileged and confidential attorney-client communication and attorney work product prepared in anticipation of litigation and for the purpose of providing legal advice. It is intended solely for the addressees identified above and should not be disclosed, distributed, or otherwise made available to any third party without the prior written consent of Calderwood & Harkness LLP. Unauthorized disclosure may result in a waiver of applicable privileges.
I. Executive Summary and Recommendation
The purpose of this memorandum is to provide our recommendation regarding the settlement authority that Pellegrino Capital Group LLC ("PCG") should authorize in connection with the pending JAMS arbitration brought by Meridian Shores Hospitality LLC ("MSH"), JAMS Ref. No. 1440032871, and the upcoming mediation session scheduled for February 12, 2024. The core dispute concerns the negotiated redemption of MSH's 35% membership interest in Palmetto Grand Ventures LLC ("PGV"), the joint venture entity that owns and operates The Palmetto Grand Resort & Spa in Naples, Florida.
We recommend that PCG authorize settlement authority in the range of $48.0 million to $54.0 million, with an optimal target settlement point of approximately $50.0 million to $52.0 million.
This recommendation is grounded in the following analytical framework. The neutral third-party appraiser, Linden Park Advisory LLC, delivered a preliminary indication of value for 100% of PGV's assets in the range of $130.0 million to $138.0 million. Taking the midpoint of that range ($134.0 million), deducting PGV's outstanding indebtedness to Gulf Atlantic National Bank ("GANB") of $48.6 million, and applying MSH's 35% membership share plus the stipulated $17.01 million in accrued preferred return, yields an analytical midpoint of approximately $46.9 million. This figure represents the baseline from which settlement authority should be calibrated.
The recommended range above this baseline incorporates a risk-adjusted litigation premium that accounts for several factors: (a) the exposure, however modest in probability, to a bad-faith penalty under Section 12.7 of the Amended and Restated Operating Agreement of Palmetto Grand Ventures LLC, dated June 15, 2017 (the "Operating Agreement" or "OA"); (b) the possibility that the arbitrator may credit some portion of MSH's $8.2 million deferred-maintenance adjustment; (c) the inherent uncertainty in Linden Park's final appraisal, which was never finalized beyond a preliminary indication; (d) the avoidance of an estimated $615,000 to $860,000 in incremental defense costs through the conclusion of the arbitration; and (e) the significant business value to PCG of achieving prompt resolution and consolidating 100% ownership of PGV.
The outcome we seek in any settlement is straightforward: a lump-sum redemption payment to MSH at closing; a full mutual release of all claims, counterclaims, and causes of action arising out of or relating to the Operating Agreement, the call-option exercise, and the arbitration; dismissal of JAMS Ref. No. 1440032871 with prejudice; and an agreement that each party bears its own attorneys' fees and costs. We do not recommend agreeing to any structured payment, earnout, or holdback arrangement.
The parties agreed on January 15, 2024 to submit this dispute to mediation. The mediation will be conducted by Raymond Alcazar of Alcazar Dispute Resolution LLC in Miami, with the first session scheduled for February 12, 2024. This memorandum is intended to inform the client's decision regarding settlement authority in advance of that session and to outline a mediation strategy designed to resolve this matter within the recommended range.
II. Procedural Status of the Arbitration
A. Case Caption and Parties
The arbitration is pending before JAMS under Reference Number 1440032871. The presiding arbitrator is the Honorable Margaret Liu Chen (Ret.), a former judge of the Eleventh Judicial Circuit of Florida who has extensive experience in complex commercial disputes.
Claimant: Meridian Shores Hospitality LLC, a Florida limited liability company. MSH is represented by the law firm of Hargrove, Dunlap & Castillo LLP, with Victoria Castillo, Partner, serving as lead counsel and Ryan Matsuda, Senior Associate, serving as second chair.
Respondent: Pellegrino Capital Group LLC, a Florida limited liability company. PCG is represented by Calderwood & Harkness LLP, with the undersigned, Francesca Morano, serving as lead counsel, supported by Simone Laroche, Lead Associate, and Jeffrey Park, Associate.
B. Procedural Timeline
The arbitration has been proceeding for approximately ten months. The key procedural milestones are summarized as follows:
March 20, 2023: MSH filed its Demand for Arbitration with JAMS, asserting claims for breach of the Operating Agreement, declaratory relief regarding the fair market value of MSH's 35% membership interest, and an award of the bad-faith penalty provided under OA Section 12.7. MSH demanded that the arbitrator determine fair market value at $151.5 million (based on the Beacon Valuation Group appraisal) and award MSH a total redemption payment of $70.0 million.
April 5, 2023: PCG filed its Response and Counterclaim. PCG denied MSH's claims, asserted that the call-option exercise was conducted in full compliance with the Operating Agreement, and filed a counterclaim seeking declaratory relief that the proper fair market value of 100% of PGV's assets is $118.0 million (based on the Whitfield Realty Advisors appraisal) and that the appropriate redemption price for MSH's 35% interest is $41.3 million.
April 28, 2023: The Honorable Margaret Liu Chen (Ret.) was appointed as the sole arbitrator by mutual agreement of the parties under the JAMS Comprehensive Arbitration Rules & Procedures.
May 15, 2023: Arbitrator Chen conducted the preliminary conference. The parties agreed upon a discovery schedule, including deadlines for document production, expert disclosures, depositions, and the retention of a neutral third appraiser as required under OA Section 12.4(c).
June 1, 2023: Linden Park Advisory LLC, headed by Thomas Carraway, MAI, FRICS, was jointly retained by the parties as the neutral third appraiser pursuant to OA Section 12.4(c). The engagement letter provided for delivery of a formal appraisal report within ninety (90) days.
July 14, 2023: Linden Park Advisory LLC delivered a preliminary indication of value for 100% of PGV's assets, placing the range at $130.0 million to $138.0 million as of the valuation date of December 31, 2022. This preliminary indication was accompanied by a letter from Thomas Carraway stating that additional analysis was required before a formal report could be issued. As discussed below, that formal report was never finalized.
August 22, 2023: The document production deadline passed. Both parties produced substantial document sets. PCG produced approximately 18,500 documents (Bates Nos. PCG-000001 through PCG-018517), including financial statements, capital-account records, renovation budgets, correspondence with GANB and Aurelian Hotels & Resorts, and selected internal communications. MSH produced approximately 9,200 documents (Bates Nos. MSH-000001 through MSH-009203).
September 18, 2023: Expert depositions were conducted. Gerald K. Whitfield, MAI, of Whitfield Realty Advisors LLC (PCG's appraiser) was deposed by Victoria Castillo. Dr. Priya Ramanathan, CFA, ASA, of Beacon Valuation Group Inc. (MSH's appraiser) was deposed by the undersigned. Both depositions were held at the JAMS offices in Miami.
October 10, 2023: Party depositions were conducted. Dominic R. Pellegrino, Managing Member of PCG, was deposed by Victoria Castillo. Nathaniel Cordero, a principal of MSH, was deposed by Simone Laroche. Both depositions were held at the JAMS offices in Miami.
November 6, 2023: MSH filed a Motion to Compel Production of PCG Internal Investment-Committee Memoranda. MSH argued that PCG's investment-committee memoranda from the period of 2020–2022 were directly relevant to the bad-faith claim under OA Section 12.7, contending that such documents would reveal PCG's internal assessment of PGV's value and any intent to understate fair market value through the Whitfield appraisal.
November 30, 2023: Arbitrator Chen partially granted the Motion to Compel. The ruling required PCG to produce investment-committee memoranda from 2021–2022 that specifically reference PGV's valuation, the contemplated exercise of the call option, or the Whitfield engagement. The ruling excluded memoranda relating to other PCG portfolio assets and memoranda protected by attorney-client privilege (subject to a privilege log, which was duly provided). PCG produced an additional thirty-seven (37) documents pursuant to this order in December 2023.
January 15, 2024: Counsel for both parties informed Arbitrator Chen that the parties had agreed to submit the dispute to mediation before Raymond Alcazar of Alcazar Dispute Resolution LLC, with the first mediation session scheduled for February 12, 2024. Arbitrator Chen stayed the arbitration proceedings pending the outcome of the mediation.
C. Current Posture
Fact discovery is substantially complete. Expert reports have not yet been exchanged, and the expert-report deadline has not yet been set. The arbitration hearing has not been scheduled. Linden Park Advisory LLC's formal appraisal report was never finalized — only the preliminary indication of value delivered on July 14, 2023 is available. The stay entered by Arbitrator Chen pending mediation means that no further proceedings are currently calendared in the arbitration itself.
III. Summary of the Parties' Positions
The valuation dispute between the parties is substantial. PCG has tendered a buyout price of $41.3 million; MSH has demanded $70.0 million. The $28.7 million gap reflects fundamentally different appraisals of PGV's asset value, as well as MSH's assertion of a bad-faith penalty that PCG contests in its entirety. We summarize each party's position below.
A. PCG's Position (Offered Buyout Price: $41.3 Million)
On January 9, 2023, PCG delivered a call-option exercise notice to MSH pursuant to OA Section 12.4. The call option became exercisable upon the fifth anniversary of the Operating Agreement's effective date, which was June 15, 2022. PCG's exercise of the call option was timely and procedurally proper under the terms of the Operating Agreement.
In connection with the call-option exercise, PCG retained Whitfield Realty Advisors LLC, a Fort Lauderdale-based real estate advisory firm, to prepare an independent appraisal of 100% of PGV's assets. The appraiser, Gerald K. Whitfield, MAI, is a Member of the Appraisal Institute with over twenty-five years of experience in the valuation of hospitality and resort properties in the southeastern United States. Mr. Whitfield completed his appraisal on February 10, 2023, concluding that the fair market value of 100% of PGV's assets was $118.0 million as of the valuation date of December 31, 2022.
Mr. Whitfield's methodology employed both an income approach and a sales comparison approach. Under the income approach, Mr. Whitfield utilized a blended direct capitalization and discounted cash flow ("DCF") analysis, applying a capitalization rate of 9.5% and a discount rate of 10.75%. Under the sales comparison approach, Mr. Whitfield analyzed comparable sales of luxury resort properties along the Gulf Coast of Florida and adjusted for differences in location, property condition, franchise affiliation, and revenue-per-available-room metrics. Mr. Whitfield weighted the income approach at 40% and the sales comparison approach at 60%, consistent with what he characterized as prevailing valuation practice for hotel properties where sufficient comparable sales data is available.
PCG's offered buyout price was derived as follows:
PCG tendered the buyout price of $41.3 million to MSH on March 1, 2023. MSH rejected the tender on March 10, 2023, asserting that the offered price materially understated the fair market value of MSH's membership interest.
B. MSH's Position (Demanded Buyout Price: $70.0 Million)
MSH retained Beacon Valuation Group Inc., a Miami-based valuation firm, to prepare its own independent appraisal. The appraiser, Dr. Priya Ramanathan, CFA, ASA, is a Chartered Financial Analyst charterholder and Accredited Senior Appraiser with a specialization in hospitality-sector valuations. Dr. Ramanathan completed her appraisal on April 14, 2023, concluding that the fair market value of 100% of PGV's assets was $151.5 million as of December 31, 2022.
Dr. Ramanathan's methodology relied exclusively on an income approach, utilizing a discounted cash flow analysis with a discount rate of 8.5% and a terminal capitalization rate of 7.75%. Notably, Dr. Ramanathan did not employ a sales comparison approach, a methodological choice that PCG has challenged as inconsistent with prevailing appraisal standards for hotel properties. Dr. Ramanathan's DCF model incorporated two significant adjustments: first, an upward adjustment for what she characterized as the "below-market" franchise agreement with Aurelian Hotels & Resorts, contending that the franchise fees payable by PGV under the existing agreement are materially below current franchise-market rates, thereby enhancing PGV's net cash flow relative to a market-rate franchise arrangement; and second, an $8.2 million deferred-maintenance adjustment reflecting capital expenditures that MSH alleges PCG failed to fund in accordance with the capital-improvement and maintenance obligations set forth in OA Section 8.3.
MSH's demanded buyout price was derived as follows:
The bad-faith penalty of $16,975,000 is calculated by MSH as approximately 32% of the sum of MSH's equity share and accrued preferred return ($36,015,000 + $17,010,000 = $53,025,000 × 0.32 ≈ $16,975,000). PCG contests both the applicability and the calculation of this penalty. As discussed in Section V.A below, OA Section 12.7 caps the bad-faith penalty at 25% of the determined fair market value of the redeemed interest, not 32%. MSH's calculation appears to overstate the penalty even under its own theory of the case.
The gap between the parties' positions is $28.7 million ($70.0 million minus $41.3 million). This is a substantial divergence, but as discussed throughout this memorandum, both parties' positions contain significant vulnerabilities that create meaningful incentives for compromise.
C. Appraisal Divergence and Third-Appraiser Trigger
The divergence between the Whitfield appraisal ($118.0 million) and the Beacon appraisal ($151.5 million) is calculated as follows:
|$151,500,000 − $118,000,000| / $118,000,000 = 28.4%
This divergence of 28.4% far exceeds the 10% threshold established in OA Section 12.4(c), which provides that if the two parties' appraisals diverge by more than 10%, the parties shall jointly retain a neutral third appraiser. The fair market value is then determined as the average of the two appraisals that are closest to each other. This mechanism was triggered, leading to the joint retention of Linden Park Advisory LLC on June 1, 2023.
The significance of the two-closest-appraisals averaging mechanism under OA Section 12.4(c) cannot be overstated. Depending on where Linden Park's final appraised value falls, either the Whitfield or the Beacon appraisal will be excluded from the averaging calculation. As analyzed in Section IV below, this mechanism introduces material uncertainty for both parties and is a powerful incentive for settlement.
IV. Linden Park Preliminary Indication of Value and Midpoint Equity Analysis
A. Linden Park Findings
Linden Park Advisory LLC was jointly retained by the parties on June 1, 2023, pursuant to OA Section 12.4(c) and the discovery stipulation entered at the May 15, 2023 preliminary conference. The engagement was led by Thomas Carraway, MAI, FRICS, the founder and principal of Linden Park. Mr. Carraway is a Member of the Appraisal Institute and a Fellow of the Royal Institution of Chartered Surveyors, with more than thirty years of experience in the valuation of hospitality and resort properties throughout the United States and the Caribbean.
On July 14, 2023, Linden Park delivered a preliminary indication of value letter to both parties. The letter stated that, based on Linden Park's analysis of the property, financial data, market conditions, and comparable transactions available as of the valuation date of December 31, 2022, the preliminary indication of fair market value for 100% of PGV's assets was in the range of $130.0 million to $138.0 million. Mr. Carraway's letter emphasized that this was a preliminary indication only, that additional analysis — including a more thorough examination of the deferred-maintenance claims, a detailed review of the Aurelian franchise agreement, and supplemental comparable-sales analysis — was required before a formal appraisal report could be issued.
The formal report was never finalized. The delay appears to be attributable to several factors, including the ongoing discovery disputes (particularly the motion to compel), Linden Park's request for additional documentation regarding the deferred-maintenance claims, and the parties' subsequent agreement to pursue mediation. Accordingly, the $130.0 million to $138.0 million range remains an informal indication and does not constitute a binding appraisal under the terms of the Operating Agreement.
Despite its informal nature, the Linden Park preliminary indication is highly informative for purposes of settlement analysis. Several observations are noteworthy:
First, Linden Park's range is meaningfully closer to the Whitfield appraisal ($118.0 million) than to the Beacon appraisal ($151.5 million). The low end of Linden Park's range ($130.0 million) is $12.0 million above Whitfield and $21.5 million below Beacon. The high end ($138.0 million) is $20.0 million above Whitfield and $13.5 million below Beacon. This positioning suggests that a credible, neutral appraiser found more merit in PCG's valuation methodology than in MSH's, though also concluded that the Whitfield appraisal was materially below fair market value.
Second, the OA Section 12.4(c) averaging mechanism creates an important analytical dynamic. Under the "average of the two closest" formula:
• If Linden Park's final value falls anywhere from $130.0 million to approximately $134.75 million, the two closest appraisals would be Linden Park and Whitfield ($118.0 million), and the determined FMV would be the average of those two, ranging from ($118.0M + $130.0M) / 2 = $124.0 million to ($118.0M + $134.75M) / 2 = $126.375 million.
• If Linden Park's final value falls above approximately $134.75 million (the midpoint between Whitfield and Beacon, i.e., ($118.0M + $151.5M) / 2 = $134.75M), the two closest appraisals would be Linden Park and Beacon ($151.5 million), and the determined FMV would be the average of those two, potentially ranging from ($134.75M + $151.5M) / 2 = $143.125 million to ($138.0M + $151.5M) / 2 = $144.75 million.
The difference between these two scenarios is dramatic. The determined FMV under OA Section 12.4(c) could range from approximately $124.0 million to approximately $144.75 million, a spread of over $20 million, depending solely on where Linden Park's final appraised value falls within its own preliminary range. This uncertainty is a significant risk factor for both parties and constitutes one of the strongest arguments in favor of negotiated settlement.
B. Midpoint Equity Derivation
For purposes of establishing an analytical baseline for settlement authority, we use the midpoint of Linden Park's preliminary range:
This figure of $46.9 million represents the analytical baseline for settlement negotiations, before the application of any risk premium or discount. It is the value that MSH would receive if Linden Park's final appraisal came in at the exact midpoint of its preliminary range, the OA Section 12.4(c) mechanism produced an FMV of $134.0 million, the bad-faith claim were rejected in its entirety, and no deferred-maintenance adjustment were applied. As discussed in the following sections, several risk factors justify a settlement premium above this baseline.
V. Analysis of Key Risk Factors Affecting Settlement Authority
In determining the appropriate settlement authority range, we have identified and analyzed five principal risk factors that could affect the outcome of the arbitration and that should inform PCG's negotiating posture. Each is discussed in turn below.
A. Bad-Faith Penalty Exposure (OA Section 12.7)
OA Section 12.7 is the most consequential risk factor in this dispute. The provision states, in relevant part:
"In the event that the Manager exercises the Call Option in bad faith or with the intent to materially understate the Fair Market Value of the Company's assets, the Redemption Price shall include a penalty in an amount up to twenty-five percent (25%) of the determined Fair Market Value of the redeemed Membership Interest, as the Arbitrator shall determine in its sole discretion."
MSH's primary argument in support of the bad-faith penalty rests on three contentions. First, MSH contends that PCG intentionally selected an appraiser — Gerald Whitfield — who could be expected to produce a conservative valuation, and that PCG directed or influenced Whitfield's methodology and assumptions to achieve a below-market result. Second, MSH argues that the capitalization rate of 9.5% and discount rate of 10.75% employed by Whitfield are above market rates for comparable Gulf Coast luxury hotel assets, and that these rates were deliberately inflated to suppress the appraised value. Third, MSH asserts that PCG's failure to maintain The Palmetto Grand Resort & Spa in first-class condition — the deferred-maintenance claim discussed in Section V.B below — was itself a form of bad faith designed to depress the property's value in advance of the call-option exercise.
PCG's defense against the bad-faith claim is substantial and, in our assessment, likely to prevail. Gerald Whitfield is a reputable MAI-certified appraiser with an established track record in the hospitality sector. His capitalization rate of 9.5% and discount rate of 10.75% fall within the range of market-standard metrics for Gulf Coast luxury hotel assets, as supported by published industry surveys and comparable transaction data. PCG exercised the call option in accordance with the express terms of the Operating Agreement and followed the contractual appraisal process without deviation. There is no direct evidence in the documentary record that PCG directed or influenced Whitfield's conclusions.
However, we note the following areas of concern. The 28.4% divergence between the Whitfield and Beacon appraisals is high by any measure and could be cited by the arbitrator as circumstantial evidence suggesting that one or both appraisals deviated from the standard of care. More importantly, the partially granted motion to compel regarding PCG's investment-committee memoranda is a meaningful risk factor. The thirty-seven documents produced pursuant to Arbitrator Chen's November 30, 2023 order have been reviewed by Calderwood & Harkness. While none of these documents contains a "smoking gun" — that is, an explicit statement by any PCG principal that the Whitfield appraisal was intended to understate fair market value — several memoranda reference internal discussions about the timing and economics of the call-option exercise in terms that, if taken out of context, could be characterized by MSH's counsel as reflecting a strategic intent to minimize the redemption price. As we discussed in our privileged September 2023 assessment memorandum, the risk of an adverse finding on bad faith is low but not negligible.
The potential financial exposure under OA Section 12.7 is calculated as follows. If the arbitrator finds bad faith and applies the maximum 25% penalty to MSH's equity share at the midpoint of Linden Park's preliminary range, the penalty would equal ($29,890,000 + $17,010,000) × 25% = $46,900,000 × 25% = $11,725,000. At the higher end of the Beacon valuation, MSH claims a penalty of $16,975,000, though as noted above, MSH's calculation applies a 32% rate that exceeds the 25% cap in OA Section 12.7 and is therefore legally unsustainable at the claimed level.
Applying a probability-weighted analysis, and drawing on our assessment that the probability of an adverse bad-faith finding is in the range of 15% to 20%, the risk-weighted bad-faith exposure ranges from approximately $1.75 million ($11.725M × 15%) to approximately $2.35 million ($11.725M × 20%). This risk-weighted cost should be factored into the settlement calculus as a premium above the analytical midpoint.
B. Deferred Maintenance Claim (OA Section 8.3)
MSH's appraiser, Dr. Ramanathan, incorporated an $8.2 million deferred-maintenance adjustment into her appraisal. This adjustment is based on MSH's contention that PCG, as Manager of PGV, failed to fund certain capital improvements and ongoing maintenance necessary to keep The Palmetto Grand Resort & Spa in "first-class condition" as required under OA Section 8.3 of the Operating Agreement.
The factual record on this point is mixed. PCG invested a total of $24.3 million in renovations during the 2017–2019 period, of which PCG funded $15,795,000 (65%) and MSH funded $8,505,000 (35%), consistent with their respective membership percentages. These renovations included a comprehensive guest-room renovation of the main tower, upgrades to the spa and fitness facilities, resurfacing of the pool deck, and refurbishment of the main lobby and public areas. PCG contends that the property has been maintained to a high standard and that subsequent annual maintenance budgets have been adequate and consistent with the Aurelian Hotels & Resorts brand standards.
MSH contends that PCG curtailed capital expenditure spending beginning in 2020, allegedly in anticipation of the call-option exercise, and that the property's mechanical systems, exterior finishes, and certain guest-facing amenities have deteriorated below the standard required by OA Section 8.3. The $8.2 million figure represents Beacon's estimate of the cost to cure these alleged deferred-maintenance items, which MSH argues should be added back to the property's appraised value on the theory that the property would have been worth more absent PCG's failure to maintain it.
Our assessment is that this claim presents moderate risk. It is unlikely that the full $8.2 million adjustment would be sustained. The property underwent significant renovations within the five years preceding the valuation date, and PCG can point to annual maintenance budgets and Aurelian quality-assurance inspection reports that generally reflect satisfactory property condition. However, there is some documentary evidence — including internal capital-budget memoranda and correspondence between PCG's asset management team and the hotel general manager — that suggests certain planned capital expenditures were deferred or scaled back in 2021 and 2022. The arbitrator may credit some portion of MSH's deferred-maintenance claim, which would increase the appraised value and, consequently, MSH's equity share.
We estimate that the likely range of any deferred-maintenance credit is $2.0 million to $5.0 million on the total asset value. MSH's 35% share of this adjustment would be $700,000 to $1,750,000. This range is incorporated into the settlement authority analysis.
C. Uncertainty of Linden Park's Final Appraisal
As noted above, Linden Park Advisory LLC's formal appraisal report was never finalized. The preliminary indication of value — $130.0 million to $138.0 million — is the only data point available from the neutral appraiser, and it carries inherent uncertainty. The final appraised value could shift in either direction upon completion of Mr. Carraway's additional analysis, including his examination of the deferred-maintenance claims, the Aurelian franchise agreement, and supplemental comparable-sales data.
The impact of this uncertainty is amplified by the OA Section 12.4(c) averaging mechanism. As illustrated in Section IV.A above, the determined FMV under the Operating Agreement could range from approximately $124.0 million to approximately $144.75 million depending on where Linden Park's final number falls. The specific breakpoint — approximately $134.75 million, the midpoint between Whitfield and Beacon — determines whether Linden Park is averaged with Whitfield (a favorable outcome for PCG) or with Beacon (a substantially less favorable outcome for PCG).
To illustrate the upside risk for PCG, consider a scenario in which Linden Park finalizes near the high end of its preliminary range at $138.0 million. In that case, Linden Park would be closer to Beacon ($151.5 million) than to Whitfield ($118.0 million), and the determined FMV under OA Section 12.4(c) would be:
($138,000,000 + $151,500,000) / 2 = $144,750,000
MSH's equity value under this scenario would be:
($144,750,000 − $48,600,000) × 0.35 + $17,010,000 = $33,652,500 + $17,010,000 = $50,662,500
This figure — $50.67 million — is $3.77 million above the midpoint baseline of $46.9 million, before any bad-faith penalty. If a bad-faith penalty were also assessed at 25% of MSH's equity value, the total could reach approximately $63.3 million. While this worst-case scenario remains improbable (it requires both a high Linden Park appraisal and a bad-faith finding), it underscores the asymmetric risk that PCG faces and the prudence of settling within the recommended range.
D. Costs of Continued Arbitration
Continued arbitration through a final hearing and award would entail significant additional expense. Based on our current understanding of the remaining procedural steps and the complexity of the issues, we estimate the following incremental costs:
In addition to these prospective costs, PCG has already incurred substantial expenses in connection with this dispute. As of January 2024, costs incurred to date are as follows:
PCG has tendered this matter to its managers' liability insurer, Atlantic Omnivrel Insurance Company, under Policy No. AFML-2022-08745, which provides a $10.0 million limit. Atlantic Fidelity has accepted the tender and has been funding defense costs under a reservation of rights. As of January 2024, approximately $425,000 has been reimbursed by the carrier. However, continued coverage remains uncertain. Atlantic Fidelity's reservation of rights letter reserves the right to withdraw coverage if the arbitrator determines that PCG engaged in intentional misconduct or bad faith — precisely the issue at the heart of MSH's OA Section 12.7 claim. If an adverse bad-faith finding is made, Atlantic Fidelity may retroactively deny coverage for defense costs and refuse to indemnify PCG against the penalty. This coverage uncertainty further supports the case for a negotiated settlement that resolves the bad-faith claim without an adjudication on the merits.
A settlement eliminates these incremental costs in their entirety and removes the risk of an adverse arbitration award. The cost savings alone — $615,000 to $860,000 — justify a meaningful premium over the analytical midpoint.
E. Time Value and Business Considerations
Beyond the direct financial costs, continued arbitration imposes significant indirect costs on PCG and PGV's business operations. We highlight the following considerations:
First, continued arbitration would delay resolution of this dispute by an estimated six to twelve months. If mediation is unsuccessful and the arbitration proceeds, expert reports will need to be exchanged, pre-hearing briefs filed, and a hearing scheduled. Based on Arbitrator Chen's current calendar and the complexity of the case, a final hearing is unlikely before the third or fourth quarter of 2024, with an award to follow some weeks or months thereafter.
Second, the ongoing uncertainty regarding PGV's ownership structure complicates important operational and financing decisions. PGV is currently engaged in discussions with Gulf Atlantic National Bank regarding the refinancing or modification of the existing credit facility (Loan No. CRE-2017-06284, maturing August 1, 2027). GANB has indicated informally that the unresolved ownership dispute creates underwriting uncertainty that could affect the terms of any refinancing. Similarly, upcoming decisions regarding the Aurelian Hotels & Resorts franchise agreement — including potential renewal negotiations and brand-mandated property improvement plans — would benefit from a clear and unified ownership structure.
Third, Dominic Pellegrino and Adriana Pellegrino-Voss have communicated a desire to resolve this matter efficiently and to transition PGV to 100% PCG ownership. The strategic value of full ownership — including simplified governance, unilateral decision-making authority, and enhanced flexibility in capital allocation — is significant, though difficult to quantify precisely.
Fourth, PCG has the financial capacity to fund a settlement within the recommended range. PCG's assets under management of approximately $1.2 billion provide a strong liquidity base. As discussed in Section VII below, a settlement can be funded through a combination of existing PCG liquidity (approximately $22.0 million available) and an incremental draw on PGV's revolving credit facility with GANB.
VI. Derivation of Recommended Settlement Range ($48.0M – $54.0M)
Drawing on the midpoint equity analysis in Section IV and the risk-factor assessment in Section V, we derive the recommended settlement authority range as follows.
A. Floor of Range: $48.0 Million
The floor of the recommended range is $48.0 million. This figure represents the midpoint equity value for MSH ($46.9 million) plus a modest premium of approximately $1.1 million. The premium at this level reflects the following considerations:
• A minimal litigation-risk concession to MSH, acknowledging that some degree of risk exists on the bad-faith claim and deferred-maintenance issue even though PCG believes its positions are meritorious;
• Recognition that even a partial credit for deferred maintenance — at the low end of our estimated range of $2.0 million to $5.0 million on total asset value — would modestly increase MSH's equity share;
• An incentive for MSH to accept a prompt and certain resolution rather than incurring the costs and uncertainties of continued arbitration; and
• Avoidance by PCG of the incremental defense costs estimated at $615,000 to $860,000.
At $48.0 million, the settlement would represent a strong outcome for PCG. It would be $22.0 million below MSH's demand of $70.0 million — a reduction of approximately 31.4%. It would be $6.7 million above PCG's tendered price of $41.3 million — an increase of approximately 16.2% — which is a reasonable adjustment given the Linden Park preliminary indication that the Whitfield appraisal was below fair market value. In our assessment, $48.0 million is the lowest figure at which a settlement is likely achievable, and even at this level, significant negotiating skill will be required to bring MSH to agreement.
B. Ceiling of Range: $54.0 Million
The ceiling of the recommended range is $54.0 million. This figure represents the midpoint equity value for MSH ($46.9 million) plus a premium of approximately $7.1 million. The premium at this level reflects a more comprehensive accounting of the risk factors identified in Section V:
• Full risk-weighted bad-faith exposure: $1.75 million to $2.35 million;
• Partial deferred-maintenance credit at the mid-to-upper range: $0.7 million to $1.75 million (reflecting MSH's 35% share of a $2.0M to $5.0M adjustment);
• An uncertainty premium for the Linden Park final appraisal outcome, accounting for the possibility that the final appraised value falls in the upper portion of the preliminary range and triggers the averaging of Linden Park and Beacon under OA Section 12.4(c);
• Full savings from avoided incremental defense costs: $615,000 to $860,000; and
• The significant business value to PCG of achieving certainty, eliminating litigation risk, and consolidating 100% ownership of PGV on an accelerated timeline.
At $54.0 million, the settlement would still represent a favorable result for PCG. It would be $16.0 million below MSH's demand — a reduction of approximately 22.9%. However, it would be $7.1 million above the midpoint analysis, which is a substantial premium. We view $54.0 million as the upper boundary of a reasonable settlement. Beyond this level, the economics favor proceeding to arbitration on the merits. At settlement values above $54.0 million, PCG would be conceding more than the combined risk-weighted cost of all identified risk factors, and the expected value of an arbitration award becomes more attractive than the settlement price.
C. Target / Optimal Settlement Point
Within the recommended range, we believe the optimal settlement target is approximately $50.0 million to $52.0 million. This range provides meaningful savings relative to the worst-case arbitration outcomes while reflecting a fair and economically justified resolution of the underlying valuation dispute. It represents a premium of $3.1 million to $5.1 million over the midpoint analysis — enough to account for the principal risk factors without overcompensating MSH for claims of uncertain merit.
Any settlement at any point within the recommended range should be conditioned on the following terms:
(a) A lump-sum cash payment to MSH at closing, funded by wire transfer of immediately available funds;
(b) A full mutual release of all claims, counterclaims, and causes of action by and between PCG, MSH, PGV, and their respective affiliates, members, managers, officers, employees, agents, and representatives, arising out of or in any way relating to the Operating Agreement, the call-option exercise, the Whitfield and Beacon appraisals, the Linden Park engagement, and the arbitration proceeding;
(c) Dismissal of JAMS Ref. No. 1440032871 with prejudice; and
(d) An agreement that each party shall bear its own attorneys' fees, costs, and expenses incurred in connection with the arbitration, the mediation, and the negotiation of the settlement.
We do not recommend agreeing to any structured payment, holdback, escrow, or earnout arrangement. A clean, lump-sum closing is in PCG's interest and eliminates the risk of post-settlement disputes.
VII. Funding Considerations
A settlement within the recommended range of $48.0 million to $54.0 million will require PCG to arrange adequate funding for the lump-sum redemption payment. Based on our understanding of PCG's financial position and PGV's existing credit facility, the anticipated funding sources are as follows:
PCG Existing Liquidity. PCG has approximately $22.0 million in available cash and liquid assets that can be deployed toward the settlement payment without impairing its ability to meet ongoing obligations and investment commitments.
PGV Revolving Credit Facility. The remaining balance would be funded through an incremental draw on PGV's revolving credit facility with Gulf Atlantic National Bank, Loan No. CRE-2017-06284. The existing term loan balance as of December 31, 2022 was $48.6 million. The term loan matures on August 1, 2027 and bears interest at SOFR plus 2.25%. The revolving credit facility has additional capacity that may be drawn for corporate purposes, subject to borrowing base and covenant compliance. GANB consent will be required for both the ownership-structure change (the redemption of MSH's 35% interest) and any incremental borrowing.
At the midpoint of the recommended settlement range — approximately $51.0 million — PCG would contribute $22.0 million from existing liquidity and would need approximately $29.0 million from the revolving credit facility, bringing PGV's total outstanding indebtedness with GANB to approximately $77.6 million. At the ceiling of the range ($54.0 million), the required revolver draw would be approximately $32.0 million, bringing total PGV indebtedness to approximately $80.6 million.
We recommend that Marcus Thiel, PCG's Chief Financial Officer, confirm the available revolving-credit capacity under the existing GANB facility and make a preliminary inquiry regarding GANB's willingness to consent to the ownership transfer and the incremental borrowing. The GANB relationship should be managed carefully; Christine Delacroix, Senior Vice President, is PCG's primary contact at the bank and should be engaged informally at this stage. We do not recommend disclosing the specific settlement range to GANB at this time.
Following the closing of the settlement and the redemption of MSH's membership interest, PCG may wish to consider refinancing PGV's outstanding indebtedness to optimize the capital structure of The Palmetto Grand Resort & Spa as a 100%-owned PCG asset. A refinancing could potentially achieve more favorable terms by eliminating the governance complexity of a joint venture structure and presenting a simplified single-borrower credit profile.
VIII. Mediation Strategy
The mediation with Raymond Alcazar of Alcazar Dispute Resolution LLC (333 SE 2nd Avenue, Suite 2100, Miami, Florida 33131) is scheduled to commence on February 12, 2024. Mr. Alcazar is an experienced mediator with a strong reputation in commercial real estate disputes in South Florida. He typically conducts full-day mediation sessions with an initial joint session followed by extended private caucuses.
A. Opening Position
We recommend that PCG enter the mediation with an initial offer in the range of $45.0 million to $46.0 million. This opening position is deliberately set below the midpoint equity analysis ($46.9 million) and well below the floor of the recommended settlement range ($48.0 million) in order to preserve adequate negotiating room. The opening offer signals to MSH that PCG is prepared to negotiate meaningfully above its tendered price of $41.3 million, but that it views the midpoint equity analysis as the anchor for negotiations, not as a floor.
B. Key Arguments to Emphasize
In both the confidential mediation position statement and the mediation session itself, PCG should emphasize the following points:
1. Linden Park's preliminary range undercuts Beacon. The neutral appraiser's preliminary indication of value ($130.0M–$138.0M) is substantially below the Beacon appraisal ($151.5M). Even at the high end of Linden Park's range, the neutral appraiser's assessment is $13.5 million below Beacon. This validates PCG's core contention that MSH's valuation is inflated.
2. Beacon's methodology is flawed. Beacon's exclusive reliance on the income approach, without a sales comparison approach, is inconsistent with accepted appraisal practice for hotel properties. The Appraisal Institute's published guidance and industry practice recognize the sales comparison approach as a critical check on income-approach valuations, particularly in active markets with sufficient comparable-sales data. Beacon's discount rate of 8.5% and terminal capitalization rate of 7.75% are below-market for Gulf Coast luxury hotel assets and overstate the property's value.
3. The bad-faith claim lacks evidentiary support. PCG engaged Gerald Whitfield, a reputable MAI-certified appraiser, and followed the contractual appraisal process without deviation. Divergent appraisals, without more, are insufficient to establish bad faith under Florida law. The investment-committee memoranda produced pursuant to Arbitrator Chen's November 30, 2023 order contain no evidence of intentional undervaluation. The bad-faith penalty claim is a litigation tactic designed to inflate MSH's negotiating leverage, not a claim with a realistic probability of success.
4. The deferred-maintenance adjustment is exaggerated. The Palmetto Grand Resort & Spa underwent $24.3 million in renovations during 2017–2019. Subsequent maintenance budgets have been consistent with Aurelian Hotels & Resorts brand standards. Dr. Ramanathan's $8.2 million deferred-maintenance adjustment is speculative and unsupported by the property's actual condition.
5. MSH's demanded penalty exceeds the OA cap. MSH's claimed bad-faith penalty of $16.975 million implies a 32% penalty rate, which exceeds the 25% cap expressly stated in OA Section 12.7. Even under MSH's own theory, the penalty claim is mathematically overstated.
C. Key Concessions to Anticipate from MSH
Based on our experience in similar disputes and our assessment of MSH's litigation posture, we anticipate the following dynamics during the mediation:
• MSH will likely retreat from the bad-faith penalty demand if PCG demonstrates a willingness to negotiate meaningfully above the $41.3 million tendered price. The bad-faith claim serves primarily as a negotiating lever, and MSH's counsel — Victoria Castillo — is a pragmatic and experienced litigator who understands the evidentiary limitations of the claim.
• MSH's realistic settlement expectation is likely in the range of $50.0 million to $60.0 million. The high end of this range reflects the possibility that Linden Park's final appraisal could trigger the averaging of Linden Park and Beacon under OA Section 12.4(c), plus some portion of the bad-faith and deferred-maintenance claims. The low end reflects MSH's recognition that the Linden Park preliminary indication undercuts the Beacon appraisal and that the bad-faith claim carries significant litigation risk.
• MSH may seek a structured payment or holdback arrangement — for example, a deferred payment of a portion of the redemption price or an escrow to cover potential post-closing adjustments. PCG should firmly insist on a lump-sum wire transfer at closing and resist any structure that extends PCG's exposure or creates opportunities for post-settlement disputes.
D. Confidentiality
All communications with the mediator and all statements made during the mediation session are confidential and inadmissible in the arbitration under both the JAMS mediation rules and the parties' mediation agreement. PCG should participate in the mediation candidly and with the objective of achieving a settlement within the authorized range.
IX. Recommended Next Steps
In light of the foregoing analysis, we recommend the following next steps:
1. Client Settlement Authority. Dominic R. Pellegrino and Adriana Pellegrino-Voss should confirm settlement authority in the range of $48.0 million to $54.0 million, with an optimal target of $50.0 million to $52.0 million. This authorization should be communicated to the undersigned in writing (by email to fmorano@calderwoodharkness.com) at the earliest opportunity, and in no event later than February 5, 2024, to allow adequate time for mediation preparation.
2. Mediation Position Statement. Calderwood & Harkness will prepare a confidential mediation position statement for submission to Raymond Alcazar in advance of the February 12, 2024 mediation session. The submission deadline under Alcazar Dispute Resolution's standard protocol is typically seven (7) calendar days before the session. We will circulate a draft to the client for review by February 1, 2024.
3. Tax Implications. Marcus Thiel should coordinate with Grantham, Pryce & Associates CPAs (contact: Howard Grantham, CPA) to analyze the tax implications of the redemption payment at various price points within the recommended range. Key considerations will include the allocation of the payment between the return of MSH's capital contribution, the accrued preferred return, and any premium over equity value, as well as the deductibility of any portion of the settlement payment for federal and state income tax purposes.
4. GANB Coordination. Marcus Thiel should make preliminary inquiries with Gulf Atlantic National Bank (contact: Christine Delacroix, SVP) regarding (a) available revolving-credit capacity under Loan No. CRE-2017-06284, (b) GANB's preliminary willingness to consent to the ownership-structure change resulting from the redemption of MSH's 35% interest, and (c) any conditions or requirements GANB may impose in connection with an incremental draw to fund the settlement payment. As noted above, we do not recommend disclosing the specific settlement range to GANB at this stage.
5. Mediation Preparation. Francesca Morano and Simone Laroche will continue preparation for the mediation session, including the development of negotiation strategy, preparation of talking points for the joint session and private caucuses, and coordination with Dominic Pellegrino regarding his participation in the mediation. Jeffrey Park will finalize the supporting financial exhibits, including detailed equity analyses at multiple valuation scenarios, to be used during the mediation.
6. Contingency Planning. If mediation is unsuccessful, the parties should be prepared for continued arbitration proceedings. Calderwood & Harkness will resume work on the expert-report exchange timeline, including coordination with Gerald Whitfield regarding finalization of any supplemental or rebuttal appraisal analysis, and will begin drafting pre-hearing briefs. We will also re-engage with Linden Park Advisory LLC regarding the completion of the formal appraisal report.
X. Conclusion
Settlement of this dispute within the recommended range of $48.0 million to $54.0 million represents a sound and well-supported resolution for Pellegrino Capital Group LLC. The recommended range is anchored in a disciplined analysis of the Linden Park preliminary indication of value, the OA Section 12.4(c) averaging mechanism, and the parties' respective appraisals, and it incorporates a calibrated risk premium to account for the principal uncertainties and exposures that PCG faces in continued arbitration.
The negotiated premium above the midpoint equity analysis of $46.9 million reflects a realistic assessment of the litigation risks — principally the bad-faith penalty exposure under OA Section 12.7, the deferred-maintenance claim under OA Section 8.3, and the uncertainty surrounding Linden Park's final appraisal — while achieving a settlement result that would be substantially below MSH's $70.0 million demand. At the target range of $50.0 million to $52.0 million, PCG would secure a resolution that is $18.0 million to $20.0 million below MSH's position, a meaningful and demonstrable win.
Prompt resolution eliminates an estimated $615,000 to $860,000 in incremental defense costs, removes the uncertainty of an arbitration award on issues where the outcome is far from certain, resolves the insurance-coverage uncertainty with Atlantic Fidelity, and enables PCG to consolidate 100% ownership of Palmetto Grand Ventures LLC and The Palmetto Grand Resort & Spa. The strategic and operational benefits of unified ownership — simplified governance, enhanced refinancing flexibility, and unilateral decision-making authority — provide additional value that, while difficult to quantify precisely, reinforces the case for settlement.
We are available to discuss this recommendation with you at your earliest convenience. Please do not hesitate to contact the undersigned at (305) 555-4100 or fmorano@calderwoodharkness.com.
Respectfully submitted,
CALDERWOOD & HARKNESS LLP
By: ________
Francesca Morano Partner
cc: Samuel Eklund, Billing Partner, Calderwood & Harkness LLP (by secure email, privileged) Simone Laroche, Lead Associate, Calderwood & Harkness LLP (by secure email, privileged)
TO: | Dominic R. Pellegrino, Managing Member, Pellegrino Capital Group LLC
Adriana Pellegrino-Voss, Senior Vice President of Investments, Pellegrino Capital Group LLC
FROM: | Francesca Morano, Partner, Calderwood & Harkness LLP
DATE: | January 10, 2024
RE: | Settlement Authority Recommendation — Redemption of Meridian Shores Hospitality LLC's 35% Interest in Palmetto Grand Ventures LLC; JAMS Ref. No. 1440032871
MATTER NO.: | 1027-00003
Component | Amount
Gross Asset Value (Whitfield Appraisal) | $118,000,000
Less: Outstanding Debt — GANB Loan No. CRE-2017-06284 | ($48,600,000)
Net Joint Venture Equity | $69,400,000
MSH's 35% Membership Share | $24,290,000
Plus: MSH Accrued Preferred Return (Stipulated) | $17,010,000
Total Offered Buyout Price | $41,300,000
Component | Amount
Gross Asset Value (Beacon Appraisal) | $151,500,000
Less: Outstanding Debt — GANB Loan No. CRE-2017-06284 | ($48,600,000)
Net Joint Venture Equity | $102,900,000
MSH's 35% Membership Share | $36,015,000
Plus: MSH Accrued Preferred Return (Stipulated) | $17,010,000
Plus: Bad-Faith Penalty under OA Section 12.7 | $16,975,000
Total Demanded Buyout Price | $70,000,000
Component | Amount
Midpoint of Linden Park Preliminary Range [($130.0M + $138.0M) / 2] | $134,000,000
Less: Outstanding Debt — GANB Loan No. CRE-2017-06284 | ($48,600,000)
Net Equity at Midpoint | $85,400,000
MSH's 35% Membership Share ($85.4M × 0.35) | $29,890,000
Plus: MSH Accrued Preferred Return (Stipulated) | $17,010,000
Subtotal — Midpoint Equity Value for MSH | $46,900,000
Cost Category | Estimated Range
Calderwood & Harkness fees (expert reports, pre-hearing briefs, hearing preparation, hearing) | $450,000 – $600,000
Linden Park completion of formal appraisal report (PCG's share) | $75,000 – $100,000
JAMS arbitrator fees and hearing costs (PCG's share) | $40,000 – $60,000
Rebuttal expert work (if needed) | $50,000 – $100,000
Total Estimated Incremental Litigation Cost | $615,000 – $860,000
Cost Category | Approximate Amount
Calderwood & Harkness fees to date | $875,000
Expert and appraiser costs to date | $285,000
JAMS fees to date | $35,000
Total Costs Incurred to Date | $1,195,000

PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT COMMUNICATION ATTORNEY WORK PRODUCT

MEMORANDUM

CALDERWOOD & HARKNESS LLP

Record

Parties

Dates

Amounts