1027-00003 · Calderwood & Harkness LLP · Strategy & Analysis

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ATTORNEY-CLIENT PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT

MEMORANDUM

TO: Francesca Morano, Partner, Calderwood & Harkness LLP

FROM: Simone Laroche, Lead Associate, Calderwood & Harkness LLP

DATE: October 2023

RE: Analysis of Meridian Shores Hospitality LLC's Deferred Maintenance Claim Under OA Section 8.3 — Palmetto Grand Ventures LLC

MATTER NO.: 1027-00003

This memorandum is a privileged and confidential attorney-client communication and attorney work product prepared in anticipation of litigation. It is intended solely for the use of Calderwood & Harkness LLP attorneys and authorized personnel working on this matter. This memorandum should not be disclosed, distributed, or otherwise made available to any third party without the express written authorization of the undersigned or Francesca Morano, Partner.

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I. EXECUTIVE SUMMARY

The purpose of this memorandum is to analyze the deferred maintenance claim asserted by Meridian Shores Hospitality LLC ("MSH") against Palmetto Coast Group LLC ("PCG"), in PCG's capacity as sole Manager of Palmetto Grand Ventures LLC ("PGV" or the "Joint Venture"). Specifically, MSH contends that PCG breached Section 8.3 of the Amended and Restated Operating Agreement of Palmetto Grand Ventures LLC, dated June 15, 2017 (the "Operating Agreement" or "OA"), by failing to fund approximately $8.2 million in allegedly deferred maintenance at The Palmetto Grand Resort & Spa, located at 650 Mandalay Avenue, Clearwater Beach, Florida 33767 (the "Property" or the "Hotel"). This claim has been raised both as an independent breach-of-contract theory in the pending JAMS arbitration and, critically, as a valuation adjustment embedded in MSH's appraisal of the Property.

MSH's appraiser, Dr. Priya Ramanathan, CFA, ASA, of Beacon Valuation Group Inc. ("Beacon"), incorporated the $8.2 million deferred-maintenance figure as an upward adjustment to the Property's fair market value in Beacon's appraisal report completed April 14, 2023, which concluded at a fair market value of $151.5 million for 100% of the Joint Venture's assets. Beacon's position is that, absent management neglect by PCG, the Property would command a higher value, and that the fair market value determination should reflect the Property in a hypothetical well-maintained condition rather than in its as-is state. In effect, Dr. Ramanathan contends that the $8.2 million represents the cost to cure deferred items that, once remediated, would support higher stabilized cash flows, a lower capitalization rate, and a correspondingly higher indicated fair market value.

PCG's position is diametrically opposed. PCG maintains that the Property was the subject of a comprehensive $24.3 million renovation program executed between 2017 and 2019 — funded through capital contributions by both PCG and MSH — and has been maintained in accordance with the obligations set forth in OA Section 8.3 and the quality standards mandated by Aurelian Hotels & Resorts Inc. ("Aurelian") under the franchise agreement governing the Hotel. PCG argues that the $8.2 million figure is inflated, that many of the line items identified by Beacon are duplicative of work already completed during the 2017–2019 renovation, that the Property has consistently passed Aurelian's annual quality assurance inspections, and that the treatment of the deferred-maintenance claim as a value-additive adjustment in the appraisal is methodologically unsound under the Uniform Standards of Professional Appraisal Practice ("USPAP").

Based on the analysis set forth in detail below, our conclusion is that the deferred-maintenance claim is weak on the merits when considered as a whole, but that certain individual line items — estimated at approximately $1.5 million to $2.5 million — may have arguable support. These items are concentrated primarily in accelerated HVAC component replacement (partial, not the full $2.8 million claimed) and certain guestroom FF&E items that could reasonably be characterized as approaching the end of their useful life cycles. The remaining $5.7 million to $6.7 million of the claimed amount is either duplicative of renovation-era work, falls within the normal useful life of the relevant systems, or constitutes elective upgrades rather than mandatory maintenance obligations under OA Section 8.3.

This residual exposure of $1.5 million to $2.5 million creates some risk that the neutral appraiser, Thomas Carraway, MAI, FRICS, of Linden Park Advisory LLC ("Linden Park"), could incorporate a partial adjustment into his final determination of fair market value. Mr. Carraway's preliminary indication of value, delivered July 14, 2023, placed the Property within a range of $130.0 million to $138.0 million, which does not appear to incorporate the full $8.2 million adjustment but may reflect some modest property-condition considerations. This analysis should inform PCG's settlement posture, arbitration strategy, and approach to the neutral appraisal process.

II. BACKGROUND

A. The Joint Venture and Operating Agreement

Palmetto Grand Ventures LLC was formed as a Florida limited liability company on June 15, 2017, and is registered with the Florida Division of Corporations under Filing No. L17000124583, with Employer Identification Number 82-5063921. The Joint Venture was organized pursuant to the Operating Agreement executed contemporaneously with PGV's formation.

The ownership structure of the Joint Venture is as follows: PCG holds a sixty-five percent (65%) membership interest, and MSH holds a thirty-five percent (35%) membership interest. Under Article V of the Operating Agreement, PCG serves as the sole Manager of the Joint Venture, with authority over all aspects of the day-to-day operations and management of PGV's assets, including the Property. MSH is a passive, non-managing member, although it retains certain protective consent rights specified in the Operating Agreement, including approval rights over capital calls exceeding $2 million, material amendments to the franchise agreement, and refinancing of the senior secured debt.

The stated purpose of PGV, as set forth in Article II of the Operating Agreement, is the acquisition, renovation, and ongoing operation of The Palmetto Grand Resort & Spa. The Property is a 312-room (including 42 suites) full-service luxury beachfront hotel situated on the Gulf of Mexico in Clearwater Beach, Florida. The Hotel's amenities include two full-service restaurants (The Meridian Grill, a fine-dining establishment, and Saltgrass Brasserie, a casual waterfront dining venue), a rooftop bar and lounge, an 18,000-square-foot spa and wellness center, approximately 22,000 square feet of meeting and event space (including two ballrooms and six breakout rooms), a beachfront cabana service program, two heated outdoor pools, a fitness center, and a business center. The Property is situated on approximately 4.7 acres of beachfront real property.

The Hotel was acquired by PGV on August 1, 2017, at a purchase price of $87.5 million. The acquisition was financed through a combination of equity contributions from the members and senior secured debt. Gulf Atlantic National Bank ("GANB") provided a $61.25 million commercial real estate loan (Loan No. CRE-2017-06284) at a floating rate of SOFR plus 2.25%, with a ten-year term maturing on August 1, 2027. As of December 31, 2022 — the agreed-upon valuation date for purposes of the call-option exercise — the outstanding principal balance on the GANB loan was $48.6 million.

The Hotel is operated under a franchise agreement with Aurelian Hotels & Resorts Inc., one of the premier luxury hospitality brands in North America. The franchise agreement was executed on July 15, 2017, and has a twenty-year term expiring on July 14, 2037. Under the franchise agreement, PGV pays a franchise fee of 5% of gross room revenue plus a 2% contribution to the Aurelian system-wide marketing fund. The franchise agreement imposes detailed quality and condition standards on the Property, including requirements for periodic renovations, FF&E replacement cycles, and ongoing maintenance of physical plant and guest-facing areas.

B. Capital Contributions and Renovation

The total equity invested in PGV at the time of acquisition, inclusive of $2,307,700 in closing costs (comprising title insurance, recording fees, transfer taxes, lender fees, legal costs, and due diligence expenses), was $28,557,700. In accordance with OA Section 4.1, the initial capital contributions were allocated as follows:

• PCG capital contribution at acquisition: $18,562,500 (representing 65% of the required equity)

• MSH capital contribution at acquisition: $10,000,000 (an agreed-upon amount reflecting MSH's negotiated entry into the Joint Venture, rather than a strict pro rata share; the difference was reflected in the parties' capital account balances and addressed through the preferred return mechanism described below)

Following the acquisition, PGV undertook a comprehensive renovation of the Property. The total capital invested in the renovation program between 2017 and 2019 was $24.3 million, which was funded through additional capital contributions by both members in accordance with their respective ownership percentages:

• PCG renovation capital contribution: $15,795,000 (65%)

• MSH renovation capital contribution: $8,505,000 (35%)

Accordingly, MSH's total capital contributions to PGV from inception through the completion of the renovation were $18,505,000 (comprising the initial $10,000,000 contribution and the $8,505,000 renovation contribution).

Under OA Section 6.2, MSH is entitled to a preferred return on its capital contributions at a rate of 8% per annum, compounding annually. The parties have stipulated, for purposes of the pending arbitration, that MSH's accrued but unpaid preferred return as of December 31, 2022 was $17,010,000. This amount is a component of the buyout price calculation upon exercise of the call option.

C. The Call-Option Exercise and Valuation Dispute

Article XII of the Operating Agreement grants PCG a call option to acquire MSH's 35% membership interest in PGV. Under OA Section 12.4, the call option became exercisable on June 15, 2022, the fifth anniversary of the Operating Agreement. PCG delivered a written call-option exercise notice to MSH on January 9, 2023, in accordance with the notice provisions of OA Section 12.4(a).

The buyout price under the call option is determined by reference to the fair market value ("FMV") of 100% of the Joint Venture's assets as of the valuation date (December 31, 2022), less outstanding indebtedness, multiplied by MSH's 35% membership interest, plus MSH's accrued preferred return. The Operating Agreement provides for a structured appraisal process to determine FMV.

PCG's appraiser, Gerald K. Whitfield, MAI, of Whitfield Realty Advisors LLC ("Whitfield"), completed his appraisal of the Property on February 10, 2023. Mr. Whitfield concluded at a fair market value of $118.0 million for 100% of PGV's assets. Whitfield's valuation methodology employed a blended approach consisting of a 40% weighting to the income approach and a 60% weighting to the sales comparison approach. Key assumptions in the Whitfield appraisal include a direct capitalization rate of 9.5% and a discounted cash flow analysis at a 10.75% discount rate.

Based on the Whitfield appraisal, PCG calculated a buyout price of $41.3 million and tendered that amount to MSH on March 1, 2023. The derivation of the tendered amount is as follows:

• Fair Market Value (Whitfield): $118,000,000

• Less Outstanding Debt: ($48,600,000)

• Net Equity Value: $69,400,000

• MSH's 35% Share of Net Equity: $24,290,000

• Plus MSH Accrued Preferred Return: $17,010,000

• Total Tender Amount: $41,300,000

MSH rejected the tender on March 10, 2023, contesting both the methodology and conclusions of the Whitfield appraisal and asserting that the Property was significantly undervalued. MSH engaged Beacon Valuation Group Inc. as its appraiser. Dr. Priya Ramanathan, CFA, ASA, completed the Beacon appraisal on April 14, 2023, concluding at a fair market value of $151.5 million. The Beacon appraisal employed the income approach exclusively, utilizing a discounted cash flow analysis at an 8.5% discount rate and a 7.75% terminal capitalization rate. Notably, and central to this memorandum, the Beacon appraisal includes an $8.2 million deferred-maintenance adjustment that effectively increases the Property's indicated FMV.

Based on the Beacon appraisal, MSH demanded a total payment of $70.0 million, inclusive of a $16.975 million bad-faith penalty claim asserted under OA Section 12.7. This claim is the subject of a separate analysis. See Bad-Faith Penalty Risk Assessment Memorandum (September 2023, prepared by Morano and Laroche).

The divergence between the Whitfield appraisal ($118.0 million) and the Beacon appraisal ($151.5 million) is approximately 28.4%. This divergence exceeds the 10% threshold specified in OA Section 12.4(c), which provides that if the two appraisals differ by more than 10%, the parties shall jointly appoint a neutral third-party appraiser. Pursuant to this provision, the parties jointly retained Thomas Carraway, MAI, FRICS, of Linden Park Advisory LLC as the neutral appraiser, effective June 1, 2023.

Mr. Carraway delivered a preliminary indication of value on July 14, 2023, placing the Property within a range of $130.0 million to $138.0 million. Mr. Carraway's formal appraisal report has not yet been finalized as of the date of this memorandum.

In addition to the appraisal dispute, MSH initiated arbitration proceedings on March 20, 2023. The arbitration is pending before JAMS under Reference No. 1440032871, with the Honorable Margaret Liu Chen (Ret.) serving as sole arbitrator. MSH is represented by Victoria Castillo and Ryan Matsuda of Hargrove, Dunlap & Castillo LLP. The arbitration encompasses MSH's claims for breach of OA Section 8.3 (deferred maintenance), breach of OA Section 12.4 (undervaluation), and the bad-faith penalty claim under OA Section 12.7, among other claims.

III. OA SECTION 8.3 — TEXT AND INTERPRETATION

A. Full Text of Section 8.3

The operative language of OA Section 8.3 provides, in pertinent part:

Section 8.3. Property Maintenance and Capital Expenditures. The Manager shall maintain the Property in first-class condition consistent with the standards of a luxury beachfront resort and in compliance with all franchise and brand standards imposed by the Franchisor under the Franchise Agreement. The Manager shall fund all reasonably necessary capital expenditures and repairs from available Joint Venture cash flow or, if Joint Venture cash flow is insufficient, through capital calls to the Members in accordance with Section 4.3 hereof; provided, however, that any capital call in excess of Two Million Dollars ($2,000,000) in any fiscal year shall require the prior written consent of the Non-Managing Member. The Manager shall, in its reasonable discretion, establish annual capital expenditure budgets and prioritize capital improvement items, taking into account the overall condition of the Property, the requirements of the Franchise Agreement, the availability of Joint Venture funds, and such other factors as the Manager deems relevant. The Manager shall maintain a reserve for furniture, fixtures, and equipment replacement and capital repairs in an amount not less than four percent (4%) of the gross revenues of the Property for such fiscal year, consistent with the requirements of the Franchise Agreement.

Several features of this provision merit careful attention. First, the standard imposed is one of maintaining the Property in "first-class condition consistent with the standards of a luxury beachfront resort." This is a qualitative standard, not a quantitative one, and its application necessarily involves the exercise of judgment. Second, the Manager is obligated to fund "reasonably necessary" capital expenditures — not all conceivable capital improvements, but those that a reasonable manager would deem necessary to maintain the Property in the required condition. Third, the Manager is granted express discretion in prioritizing capital expenditure items and establishing annual budgets, subject to range considerations. Fourth, the FF&E reserve requirement of 4% of gross revenues establishes a quantitative floor for ongoing capital reinvestment, aligned with the Aurelian franchise standards.

Importantly, OA Section 4.3, which governs capital calls, imposes a consent right in favor of MSH (as the Non-Managing Member) for capital calls exceeding $2 million in any fiscal year. This creates a structural tension: the Manager is obligated to maintain the Property in first-class condition, but the Manager's ability to fund capital expenditures beyond $2 million per year through capital calls is dependent on MSH's consent. To the extent that MSH now asserts that PCG should have invested more capital in the Property, PCG has a colorable argument that MSH's consent right effectively constrained the available funding mechanisms.

The annual capital budget approval process under OA Section 8.4 further supports PCG's position. Under Section 8.4, the Manager is required to submit a proposed annual budget — including both operating and capital components — to MSH no later than November 15 of each year for the following fiscal year. MSH has the right to review and comment on the proposed budget but does not have a veto right over the capital expenditure component (as distinguished from the consent right on capital calls exceeding $2 million). MSH did not formally object to any of the annual capital budgets proposed by PCG for fiscal years 2020, 2021, or 2022.

B. The "First-Class Condition" Standard

The phrase "first-class condition" is not defined in the Operating Agreement and does not have a statutory definition under Florida law. Chapter 605 of the Florida Statutes (the Florida Revised Limited Liability Company Act) does not address property maintenance standards for LLC-owned assets in any specificity. Accordingly, the interpretation of this standard requires reference to industry norms, the specific context of the Property, the franchise requirements, and the conditions of comparable luxury beachfront resort properties.

In the hospitality industry, the concept of "first-class condition" is generally understood to mean that the property is maintained at a level consistent with the expectations of the target guest demographic, the competitive positioning of the hotel within its market segment, and the requirements of any applicable brand or franchise affiliation. For a luxury beachfront resort operating under the Aurelian Hotels & Resorts brand, this standard implies maintenance at a level that satisfies Aurelian's quality assurance program and positions the Property competitively among comparable luxury resort properties in the Clearwater Beach and broader Tampa Bay market.

PCG's principal argument on this point is compelling: the Property has consistently passed Aurelian's annual quality assurance inspections and has maintained its luxury brand designation without interruption throughout PGV's ownership period. Aurelian's inspection program is rigorous and covers all aspects of the physical plant, including guestroom condition, public area presentation, building systems, exterior condition, and guest-facing amenities. A property that consistently meets Aurelian's luxury-tier standards is, almost by definition, being maintained in "first-class condition" as that term is used in the Operating Agreement.

That said, it bears noting that franchise inspection standards represent a minimum threshold for brand compliance, not necessarily the ceiling for the "first-class condition" obligation. MSH could argue that OA Section 8.3 requires maintenance above and beyond the franchise minimum — i.e., that the parties' agreement contemplated a higher standard of care than mere franchise compliance. While this argument has some theoretical force, it is difficult to sustain in the absence of any specific, articulable standard beyond the franchise requirements, and courts interpreting similar provisions have generally looked to brand standards as the primary benchmark.

The standard is emphatically not one of perfection. No reasonable interpretation of "first-class condition" requires a property owner to replace every system and component at the earliest possible date, to maintain the property in as-new condition at all times, or to fund every conceivable upgrade. Normal wear and depreciation are expected, and the relevant inquiry is whether the Manager exercised reasonable judgment in maintaining the Property at a level consistent with the applicable standards.

C. Manager's Discretion and Business Judgment

The Operating Agreement grants PCG, as Manager, broad discretion in making operational decisions with respect to the Property, including decisions regarding the timing, scope, and prioritization of capital expenditures. This grant of discretion is not limitless — it is bounded by the "first-class condition" standard and the other obligations set forth in OA Section 8.3 — but it is meaningful and should be given effect.

Under Florida law, the duty of care owed by managers of a limited liability company is governed by Section 605.04093 of the Florida Statutes. This provision establishes a standard analogous to the business judgment rule applicable in the corporate context. A manager satisfies the duty of care if the manager acts in good faith, with the care that a person in a like position would reasonably believe appropriate under similar circumstances, and in a manner the manager reasonably believes to be in the best interests of the limited liability company. The business judgment rule creates a rebuttable presumption that the manager's decisions were informed, made in good faith, and made in the honest belief that the actions taken were in the company's best interests.

Applied to the present dispute, this means that PCG's decisions regarding the timing and prioritization of capital expenditures are entitled to deference, provided that PCG acted in good faith and exercised reasonable judgment. The Manager need not fund every conceivable capital improvement at the earliest opportunity; rather, the Manager must exercise its judgment in allocating resources among competing needs, taking into account the overall condition of the Property, the requirements of the franchise agreement, the availability of Joint Venture funds, market conditions, and other relevant factors. This is precisely the framework articulated in OA Section 8.3 itself.

MSH's burden in establishing a breach of OA Section 8.3 is therefore substantial. MSH must demonstrate not merely that additional capital expenditures could have been made, but that PCG's failure to make those expenditures fell below the standard of reasonable management judgment, considering all relevant circumstances — including the recent $24.3 million renovation, the ongoing post-renovation CapEx program, the Aurelian inspection results, and the significant disruption caused by the COVID-19 pandemic to hotel operations and revenues during 2020.

IV. MSH'S DEFERRED MAINTENANCE CLAIM — DETAILED ANALYSIS

A. Overview of the $8.2 Million Claim

MSH, acting through the Beacon appraisal, asserts that $8.2 million in deferred maintenance existed at the Property as of December 31, 2022, the agreed-upon valuation date. The term "deferred maintenance" as used in the Beacon report encompasses a range of conditions that Dr. Ramanathan characterizes as capital repairs and replacements that should have been, but were not, performed by PCG during the period following the 2017–2019 renovation.

Beacon's treatment of this $8.2 million figure in the appraisal is unusual and warrants close scrutiny. Rather than treating the deferred maintenance as a deduction from the Property's as-is value (which is the standard appraisal methodology for deferred maintenance under USPAP), Beacon treated it as an adjustment that effectively increases the indicated FMV. Beacon's reasoning is as follows: had the Manager complied with its obligations under OA Section 8.3 and performed the identified maintenance, the Property would have been in better physical condition, would have generated higher revenue (through improved guest satisfaction, higher occupancy, and higher average daily rates), and would have commanded a lower capitalization rate (reflecting reduced risk associated with a well-maintained property). Therefore, according to Beacon, the fair market value for purposes of the call-option buyout should reflect the Property's value as if the Manager had fulfilled its obligations — not the Property's actual, allegedly impaired condition.

MSH characterizes this as a necessary correction: the fair market value determination should not reward the Manager for its own breach. In MSH's view, if the OA requires the Manager to maintain the Property in first-class condition, and the Manager failed to do so, the fair market value used to price the buyout should reflect the condition the Property would have been in absent the breach. This is, in substance, a "but-for" damages theory embedded within a valuation analysis.

The methodological and legal implications of this approach are discussed in detail in Section VI below. For present purposes, the critical point is that the $8.2 million figure, as incorporated into the Beacon appraisal, adds $8.2 million to the indicated FMV and thereby increases the buyout price payable to MSH by approximately $2.87 million (35% of $8.2 million). This gives MSH a direct financial incentive to maximize the deferred-maintenance claim.

B. Itemized Breakdown of Claimed Deferred Maintenance

The following subsections address each category of the Beacon deferred-maintenance claim, presenting both Beacon's asserted amount and the basis for the claim, as well as PCG's response and our assessment of the item's merit.

1. HVAC System Replacement/Upgrades — $2.8 Million Claimed. Beacon claims that the central plant chiller units at the Property are operating below current efficiency standards and require partial replacement. Dr. Ramanathan's report identifies the main chiller units — two Trane CenTraVac centrifugal chillers serving the Hotel's guest tower and public areas — as the primary deficiency. Beacon asserts that the chillers, while functional, have experienced performance degradation and are consuming energy at rates approximately 15–20% above design specifications, resulting in elevated utility costs and a compromised guest comfort profile, particularly during peak summer cooling demand.

Beacon further identifies the cooling towers, air handling units serving the spa and wellness center, and the variable frequency drives on several fan coil units as requiring upgrades. The $2.8 million figure encompasses both equipment replacement and the associated labor, engineering, and temporary cooling costs during replacement.

PCG's response is that the central plant chiller units were installed new in 2018 as part of the $24.3 million renovation program and carry a manufacturer's warranty through 2028. The chillers have been subject to annual preventive maintenance performed by a licensed HVAC contractor (Coastal Climate Systems, Inc. of Tampa, Florida) under a multi-year service agreement. According to PCG's maintenance records, the chillers are within their expected useful life (industry standard for centrifugal chillers is 20–25 years), and while some performance degradation is normal over the first five years of operation, the units are not at or near the point of requiring replacement. PCG further contends that this item is duplicative of the renovation work completed in 2018 — the chillers were already replaced once, and Beacon is essentially claiming that a second replacement is necessary within five years.

Our assessment: This is the largest single line item in Beacon's claim and warrants the most scrutiny. While PCG's position that the chillers are within their useful life is generally sound, there may be a limited basis for a partial adjustment. If the chillers are in fact operating at reduced efficiency, there may be component-level repairs (compressor overhauls, condenser tube replacements, or refrigerant system modifications) that a reasonable manager would undertake to restore efficiency, even if a full unit replacement is premature. We estimate the arguable exposure on this item at approximately $500,000 to $1.2 million for component-level work and ancillary system upgrades, but the full $2.8 million claim for wholesale replacement is not supportable.

2. Roof Membrane and Waterproofing — $1.4 Million Claimed. Beacon claims that the roof system on the main guest tower and the conference center wing requires re-coating and partial replacement of the roof membrane, as well as remediation of waterproofing deficiencies at several locations along the parapet walls and rooftop mechanical equipment pads. Dr. Ramanathan's report cites evidence of ponding water in certain areas, minor membrane blistering, and deterioration of the elastomeric coating on the conference center wing.

PCG's response is that the roof was substantially repaired during the 2017–2019 renovation, including replacement of the roof membrane on the conference center wing and re-coating of the main guest tower roof. PCG further notes that annual roof inspections have been conducted by a licensed roofing contractor (SunCoast Roofing & Solar, Inc.), and that spot repairs were completed in 2021 (at a cost of approximately $185,000) and 2022 (at a cost of approximately $92,000) to address localized conditions identified during the annual inspections. Notably, none of the Aurelian property inspections conducted during the relevant period flagged the roof condition as deficient or requiring remediation. PCG emphasizes that in a coastal Florida environment, roof maintenance is inherently ongoing due to exposure to salt air, UV radiation, and severe weather events, and that the performance of routine spot repairs does not indicate a deferred condition.

Our assessment: This item is relatively weak for MSH. The fact that PCG has been performing regular inspections and spot repairs demonstrates active, rather than deferred, maintenance of the roof system. The 2021 and 2022 expenditures totaling $277,000 indicate that PCG was responsive to identified conditions. While it is possible that a more aggressive roof maintenance program could have been pursued, the absence of any Aurelian inspection finding on this point is significant. We estimate the arguable exposure on this item at $0 to $200,000 at most, primarily for any specific conditions that a neutral property condition assessor might independently identify.

3. Elevator Modernization — $1.1 Million Claimed. Beacon claims that the four guest elevators and two service elevators at the Property require modernization, including replacement of controllers, door operators, and cab interiors, and potential upgrading to destination dispatch technology. Dr. Ramanathan's report characterizes the elevator systems as "functionally adequate but approaching the end of their current service cycle," and notes that guest satisfaction survey data from Aurelian's post-stay feedback system reflects occasional complaints about elevator wait times and ride quality.

PCG's response is that the elevator systems were serviced and updated during the 2017–2019 renovation, including modernization of the control systems and refurbishment of the cab interiors. PGV maintains an ongoing elevator maintenance contract with Brightmoor Holdings, which provides monthly preventive maintenance and 24/7 emergency service. PCG notes that there have been no elevator code violations issued by the Pinellas County Building Department or the Florida Bureau of Elevator Safety at any time during PGV's ownership. Additionally, while Aurelian's guest satisfaction surveys reflect occasional elevator-related comments (as is common at any multi-story hotel property), the overall guest satisfaction scores for vertical transportation are within the acceptable range for Aurelian luxury-tier properties.

Our assessment: The elevator modernization claim is weak. Elevator systems that are functional, code-compliant, within their expected service life, and subject to ongoing professional maintenance do not constitute "deferred maintenance" under any reasonable interpretation. The $1.1 million claim appears to encompass elective upgrades (such as destination dispatch technology) that go beyond maintenance and into improvement territory. We estimate the arguable exposure at $0 to $150,000, limited to any specific component-level repairs (e.g., door operators or cab finish work) that a neutral assessor might identify.

4. Pool Deck and Exterior Hardscape — $850,000 Claimed. Beacon claims that the pool deck requires resurfacing, that paver sections in the main entry motor court and garden walkways need replacement, and that portions of the seawall require structural repairs. Dr. Ramanathan's report notes surface cracking and discoloration on the pool deck, uneven pavers in the motor court area, and erosion of mortar joints on the seawall.

PCG's response is that the pool deck was fully resurfaced in 2019 as part of the renovation program using a high-quality, UV-resistant acrylic coating system. Seawall inspections have been conducted annually by a licensed marine contractor (Bayshore Marine Construction, LLC), and minor repairs have been completed routinely as part of the Property's ongoing maintenance program. PCG emphasizes that coastal properties in Florida are subject to accelerated weathering from salt exposure, wave action, and tropical storm events, and that the conditions described by Beacon represent normal wear consistent with the coastal environment rather than deferred maintenance. PCG further notes that the paver conditions referenced by Beacon are cosmetic and have been addressed on a rolling basis.

Our assessment: This item has limited merit. The pool deck, which was fully resurfaced only three years before the valuation date, may exhibit some surface wear, but this is a normal condition for a heavily used outdoor amenity in a coastal environment. The seawall issues are potentially more substantive, as structural seawall deterioration can have safety and regulatory implications. However, if annual inspections are being performed and repairs are being made, the claim of deferred maintenance is difficult to sustain. We estimate the arguable exposure at $100,000 to $300,000, concentrated primarily in any seawall conditions that a structural engineer might identify as requiring near-term remediation.

5. Spa and Wellness Center Fixtures — $650,000 Claimed. Beacon claims that treatment room fixtures and hydrotherapy equipment in the 18,000-square-foot spa and wellness center are outdated and require replacement. Dr. Ramanathan's report identifies specific items including Vichy shower systems, hydrotherapy tubs, steam room tile and fixtures, and treatment room cabinetry as being in fair condition and approaching the end of their useful life.

PCG's response is that the spa was fully fitted out during the 2019 renovation with new equipment and fixtures, and that the identified items are within their expected replacement cycle. PCG further contends that some of the items cited by Beacon — particularly the treatment room cabinetry and certain aesthetic elements — are matters of design preference rather than maintenance, and that the Aurelian spa standards (which were met during the relevant inspection periods) are the appropriate benchmark. PCG notes that spa equipment typically has a useful life of 7–10 years, and that the items in question were only 3–4 years old as of the valuation date.

Our assessment: This item is weak. Spa equipment installed in 2019 and only 3–4 years old as of the valuation date is not reasonably characterized as deferred maintenance. To the extent that certain equipment shows normal wear, that is expected and does not represent a breach of the maintenance obligation. We estimate the arguable exposure at $0 to $100,000 for any specific items that may require near-term attention.

6. Guestroom Soft Goods and FF&E Refresh — $900,000 Claimed. Beacon claims that soft goods — including carpeting, drapery, and upholstery — in approximately 80 of the Hotel's 312 rooms are past their replacement cycle and require immediate refresh. Dr. Ramanathan's report notes that luxury hotel industry standards generally call for soft goods replacement every 5–7 years, and that rooms not refreshed since the 2017–2019 renovation are at or approaching the end of that cycle as of the December 31, 2022 valuation date.

PCG's response is multifaceted. First, PCG has maintained the FF&E reserve at or above the 4% of gross revenue threshold mandated by both OA Section 8.3 and the Aurelian franchise agreement, ensuring that adequate funds are available for ongoing cyclical replacements. Second, FF&E replacement in a 312-room hotel is inherently a rolling process — not all rooms are refreshed simultaneously, and a well-managed program stages replacements across multiple years to minimize revenue displacement and manage cash flow. Third, PCG notes that approximately 75 rooms underwent soft goods refresh in 2021 and an additional 60 rooms were refreshed in 2022, totaling 135 rooms over the two-year period. The remaining rooms (including the approximately 80 rooms identified by Beacon) were scheduled for refresh within the normal replacement cycle, and the existence of rooms that have not yet been refreshed does not constitute "deferred" maintenance so long as the overall program is on track.

Our assessment: This item has moderate support and represents one of the areas of arguable exposure. While PCG's rolling replacement program is a reasonable approach, it is fair to observe that 80 rooms with soft goods that are 4–5 years old (in a luxury context) could be characterized as approaching the end of their useful life. The question is whether the existence of these rooms, within a context of an active replacement program, constitutes a breach of the "first-class condition" standard. We believe it is more accurately characterized as a normal phase in a multi-year replacement cycle, but a neutral appraiser or arbitrator could view it differently. We estimate the arguable exposure at $300,000 to $600,000 — less than the $900,000 claimed, reflecting that many of the identified rooms may be within, rather than past, their cycle, and that the per-room cost figure used by Beacon may be inflated.

7. Miscellaneous Building Systems (Fire Alarm, Plumbing, Electrical) — $500,000 Claimed. Beacon includes a catch-all category for various building systems, including the fire alarm and life safety systems, domestic plumbing (particularly hot water recirculation systems and fixtures in back-of-house areas), and electrical systems (including panel upgrades, emergency generator maintenance, and lighting). The $500,000 figure is presented without detailed itemization in the Beacon report, which characterizes these as "general building systems that require updating and repair."

PCG's response is that all building systems at the Property are code-compliant and have been inspected by both Pinellas County authorities and the State Fire marshal's office. No outstanding code violations, deficiency notices, or required corrective actions exist with respect to any building system. PCG maintains service contracts with licensed trades contractors for each major building system, and routine maintenance and repairs are performed on an ongoing basis. PCG characterizes this line item as a vague, unsupported catch-all that fails to identify any specific deficiency warranting a $500,000 expenditure.

Our assessment: This is the weakest item in Beacon's claim. The absence of any code violations or deficiency notices, combined with the lack of specific itemization in the Beacon report, makes it very difficult for MSH to establish that any particular building system is in a condition that constitutes deferred maintenance. We estimate the arguable exposure at $0 to $100,000 at most, and that only if a neutral property inspector identifies specific conditions not reflected in the existing inspection records.

C. Total Claimed vs. PCG's Assessment of Legitimate Exposure

The following table summarizes the deferred-maintenance claim on an item-by-item basis:

For purposes of our settlement and risk analysis, we use a range of approximately $1.5 million to $2.5 million as the realistic exposure window, reflecting our judgment that the low end of certain categories is unlikely to be zero in practice (a neutral assessor will almost certainly identify some conditions of note) while the high end of the HVAC category is unlikely to be fully realized. The remaining $5.7 million to $6.7 million of the Beacon claim is either duplicative of renovation work already completed, represents systems and components well within their expected useful life, or constitutes elective improvements and upgrades rather than mandatory maintenance obligations under OA Section 8.3.

V. PCG'S CAPITAL EXPENDITURE HISTORY AND MAINTENANCE RECORD

A. 2017–2019 Renovation Program ($24.3 Million)

The 2017–2019 renovation was a comprehensive, property-wide program undertaken immediately following PGV's acquisition of the Hotel. The renovation was designed to bring the Property into full compliance with Aurelian Hotels & Resorts brand standards and to position the Hotel as a leading luxury beachfront resort in the Clearwater Beach and Tampa Bay market. The $24.3 million renovation budget was jointly funded by PCG and MSH in proportion to their respective ownership interests.

The scope of the renovation encompassed virtually every aspect of the Property's physical plant and guest-facing areas, including:

• Guestrooms: Full renovation of all 312 keys (including 42 suites), encompassing hard goods (case goods, bathroom fixtures, lighting, HVAC fan coil units, entry and connecting doors), soft goods (carpeting, drapery, upholstery, bedding), technology upgrades (smart room controls, high-speed Wi-Fi infrastructure, streaming-enabled television systems), and bathroom finishes (tile, stone countertops, glass shower enclosures).

• Lobby and Public Spaces: Complete redesign and renovation of the main lobby, registration area, concierge lounge, pre-function space, and corridors on all guest floors.

• Food and Beverage Outlets: Build-out of The Meridian Grill fine-dining restaurant, renovation of Saltgrass Brasserie, and construction of the new rooftop bar and lounge (an amenity that did not exist prior to the renovation).

• Spa and Wellness Center: Expansion and complete fit-out of the 18,000-square-foot spa and wellness center, including new treatment rooms, hydrotherapy facilities, relaxation areas, a retail boutique, and associated mechanical systems.

• HVAC Central Plant: Replacement of the main chiller units, cooling towers, and associated distribution piping and controls (the same systems now at issue in the Beacon claim).

• Elevator Systems: Servicing and modernization of all six elevator units, including control system upgrades and cab interior refurbishment.

• Roof Repairs: Substantial repair and re-coating of the roof system on the main guest tower and replacement of the roof membrane on the conference center wing.

• Exterior and Hardscape: Pool deck resurfacing, motor court re-paving, landscape redesign, and seawall repairs.

• Meeting and Event Space: Renovation of the two ballrooms, six breakout rooms, and pre-function areas, including new audiovisual infrastructure, lighting systems, and acoustic treatments.

• IT Infrastructure: Installation of property-wide high-speed fiber-optic backbone, guest Wi-Fi upgrade, property management system (PMS) hardware refresh, and in-room technology platform.

The renovation was completed on time and within budget. Following the renovation, the Property was formally re-launched under the Aurelian Hotels & Resorts brand, with the full suite of luxury-tier brand standards applicable from the date of re-launch forward.

The relevance of this renovation program to the present dispute cannot be overstated. Many of the items identified in the Beacon deferred-maintenance claim — particularly the HVAC systems, roof, elevators, pool deck, and spa fixtures — were either replaced or substantially renovated only three to five years before the December 31, 2022 valuation date. The assertion that these same items now require $8.2 million in additional investment is, at minimum, inconsistent with the recent renovation history and industry-standard useful life expectations for the relevant building components.

B. Post-Renovation Annual Capital Expenditure Budgets (2020–2022)

Following the completion of the renovation program, PCG continued to invest in the Property through annual capital expenditure programs. The post-renovation CapEx spending for the three years preceding the valuation date is summarized as follows:

Fiscal Year 2020: Approximately $2.1 Million

The year 2020 presented extraordinary challenges for the hospitality industry due to the COVID-19 pandemic. The Palmetto Grand Resort & Spa experienced significant revenue declines, with gross revenues falling to approximately $39.5 million — a reduction of nearly 30% from the Property's stabilized performance level. In light of the severe revenue disruption, PCG made the managerial decision to reduce non-essential capital spending while continuing to fund critical maintenance items. The $2.1 million in CapEx during 2020 was directed primarily toward life safety systems, essential mechanical repairs, and critical building envelope maintenance. Importantly, Aurelian Hotels & Resorts recognized the unprecedented nature of the pandemic and issued a system-wide waiver of certain brand-standard compliance deadlines during 2020 and into early 2021, providing franchisees with additional time to complete capital projects that had been deferred due to the pandemic. Notwithstanding the reduced spending level, the 2020 CapEx of $2.1 million represented approximately 5.3% of the reduced 2020 gross revenues — a percentage that actually exceeded the 4% minimum required by OA Section 8.3 and the franchise agreement.

Fiscal Year 2021: Approximately $3.0 Million

As hotel operations began to recover in 2021, PCG increased capital spending to $3.0 million, reflecting a catch-up in spending that had been prudently deferred during the pandemic period. Key projects in 2021 included a 75-room soft goods refresh (carpeting, drapery, and upholstery replacement in selected guestrooms), roof spot repairs totaling approximately $185,000 (addressing localized conditions identified during the annual roof inspection), building systems maintenance (including HVAC preventive maintenance, elevator servicing, and plumbing system repairs), and exterior maintenance projects. The 2021 CapEx exceeded the 4% of gross revenue minimum.

Fiscal Year 2022: Approximately $3.2 Million

In 2022, with the Property operating at near-stabilized performance levels, PCG maintained its capital reinvestment program at $3.2 million. Key projects included a 60-room FF&E refresh, ongoing building systems maintenance (including an additional $92,000 in roof spot repairs), exterior work (including pool deck maintenance, landscape improvements, and seawall inspection and minor repairs), and technology upgrades. As with 2021, the 2022 CapEx exceeded the 4% of gross revenue minimum.

Three-Year Summary:

The total post-renovation CapEx for the period 2020–2022 was approximately $8.3 million. This figure represents a significant and sustained capital reinvestment in the Property, above and beyond the $24.3 million renovation that preceded it. The cumulative capital investment in the Property during PGV's ownership (renovation plus post-renovation CapEx) is therefore approximately $32.6 million — a figure that undercuts MSH's narrative that the Property has been neglected.

C. Aurelian Franchise Inspections

The Aurelian Hotels & Resorts franchise quality assurance program is a critical benchmark for evaluating PCG's compliance with the "first-class condition" standard of OA Section 8.3. Aurelian conducts annual property quality assurance inspections at all franchised properties, covering a comprehensive range of physical condition, housekeeping, service delivery, and brand standard compliance criteria. Properties are rated on a standardized scoring system, with a minimum threshold for continued luxury-tier designation.

The inspection history for The Palmetto Grand Resort & Spa during PGV's ownership period is as follows:

• 2020 Inspection: Deferred by Aurelian due to the COVID-19 pandemic. Aurelian suspended its routine inspection program for all properties during 2020 and issued a system-wide waiver of inspection requirements.

• 2021 Inspection: Conducted in the fourth quarter of 2021. The Property received a satisfactory rating, meeting the threshold for continued luxury-tier designation. No mandatory capital improvement directives were issued. The inspection report noted the Property's overall good condition and recognized the comprehensive 2017–2019 renovation. The inspector made advisory recommendations for soft goods refresh in certain guestroom categories, consistent with the normal replacement cycle, but these were characterized as recommendations, not requirements, and no timeline for compliance was imposed.

• 2022 Inspection: Conducted in the third quarter of 2022. The Property again received a satisfactory rating. As with the 2021 inspection, minor recommendations were made for continued guestroom soft goods refresh in selected room categories, but no formal non-compliance notice was issued, and no mandatory capital improvement directives were required.

At no time during PGV's ownership has Aurelian Hotels & Resorts issued a franchise default notice, a cure notice, or a formal non-compliance determination with respect to the Property's physical condition. The franchise agreement remains in good standing as of the date of this memorandum, and the Property continues to operate under the Aurelian luxury-tier brand designation. This unbroken record of franchise compliance is powerful evidence that the Property has been maintained in accordance with the standards applicable to a luxury beachfront resort.

D. MSH's Consent Right and Capital Call History

An important contextual factor in evaluating the deferred-maintenance claim is MSH's own conduct during the period in question. Under the Operating Agreement, MSH has a consent right on capital calls exceeding $2 million in any fiscal year. This consent right serves as both a protective mechanism for MSH as a non-managing member and, as relevant here, a potential constraint on the Manager's ability to fund large-scale capital projects through capital calls.

During the post-renovation period (2020–2022), PCG did not make any capital calls exceeding the $2 million threshold. All post-renovation CapEx was funded from Joint Venture operating cash flow and the FF&E reserve. This approach was consistent with the JV's financial structure and the Property's revenue-generating capacity, and it avoided the need to seek MSH's consent for additional capital contributions.

Crucially, MSH never requested that PCG make additional capital calls or fund additional maintenance during the 2020–2022 period. MSH received the annual capital budgets proposed by PCG, had the opportunity to review and comment on those budgets, and did not formally object to any of them. MSH did not submit any written request for additional capital expenditures, did not demand that PCG fund any specific maintenance or improvement project, and did not exercise any right to request a capital call for property maintenance purposes.

Nathaniel Cordero, the principal of MSH with over 25 years of experience in Southeast luxury hospitality operations, was deposed on October 10, 2023. While Mr. Cordero's full deposition transcript has not yet been received as of the date of this memorandum, we anticipate — based on the pre-deposition briefing from opposing counsel — that Mr. Cordero may testify that he raised informal concerns about property condition during site visits and telephone conversations with PCG's representatives. However, the absence of any written request, formal demand, or documented objection is significant. MSH is a sophisticated party with an experienced principal who understands hotel operations and the importance of capital reinvestment. The failure to make any formal demand for additional CapEx during the relevant period, followed by a $8.2 million deferred-maintenance claim raised only after PCG exercised the call option, supports PCG's position that the claim is strategically motivated rather than a reflection of genuine property condition concerns.

VI. CRITIQUE OF BEACON'S TREATMENT OF DEFERRED MAINTENANCE IN THE APPRAISAL

A. Methodological Issues

The Beacon appraisal raises several methodological concerns that significantly undermine the reliability of the $8.2 million deferred-maintenance adjustment.

Single-Approach Methodology. Beacon employed the income approach exclusively, using a discounted cash flow analysis at an 8.5% discount rate and a 7.75% terminal capitalization rate. No sales comparison approach was utilized, notwithstanding the availability of comparable luxury hotel transactions in the Florida Gulf Coast market. While the income approach is widely used and appropriate for income-producing properties such as hotels, the complete exclusion of the sales comparison approach — particularly for a property with identifiable comparables — narrows the analytical framework and increases the risk that assumptions embedded in the DCF model (including the deferred-maintenance adjustment) will disproportionately influence the concluded value. By contrast, Whitfield's blended approach (40% income / 60% sales comparison) provides a check on the assumptions of either approach and is more consistent with accepted appraisal practice for full-service luxury hotels.

The Deferred-Maintenance Adjustment as a Value-Add. The most significant methodological issue is Beacon's treatment of the $8.2 million deferred-maintenance figure as a positive adjustment to the Property's fair market value. Under standard appraisal practice as articulated in USPAP and the leading treatises, deferred maintenance is treated as a "cost to cure" — i.e., a deduction from the property's value as if in good condition, resulting in an as-is value that reflects the property's actual physical condition. This is the standard treatment because the market price a willing buyer would pay for a property with deferred maintenance is the property's hypothetical value in good condition minus the cost to bring it to that condition.

Beacon inverted this methodology. Rather than deducting the $8.2 million from a hypothetical value in good condition to arrive at the as-is value, Beacon added $8.2 million to the as-is value to arrive at a "but-for" value — i.e., the value the property would have had if the Manager had complied with its obligations. This is not a fair market value conclusion; it is a damages calculation. The question before the neutral appraiser and the arbitrator is "What is the fair market value of the Property?" not "What would the Property be worth if the Manager had performed differently?" By conflating these two questions, Beacon has produced an appraisal that incorporates a damages theory masquerading as a valuation conclusion.

This conflation of a damages claim with a valuation conclusion is, in our view, a significant vulnerability in the Beacon report. If the arbitrator or the neutral appraiser accepts the view that fair market value means the as-is value of the Property as of the valuation date, the $8.2 million adjustment falls away entirely. MSH's remedy for any proven breach of OA Section 8.3 would then be a separate damages claim — not an embedded adjustment to the FMV determination.

Lack of Market Support for the Adjustment. Beacon does not provide any market evidence to support the proposition that the $8.2 million in identified deferred maintenance actually depressed the Property's revenue, occupancy, or market capitalization rate relative to comparable properties. Dr. Ramanathan's report asserts that a well-maintained property would command higher revenue and a lower cap rate, but this assertion is stated as a general premise rather than supported by specific market data. The Property's 2022 operating performance — $62.8 million in gross revenues, $289 in Revenue Per Available Room ("RevPAR"), $18.4 million in Net Operating Income, and $19.7 million in EBITDA — reflects robust performance that is inconsistent with a property suffering from material deferred maintenance.

For a full methodological comparison of the Whitfield and Beacon appraisals, including analysis of discount rate selection, capitalization rate assumptions, revenue projections, and comparable transactions, see the Comparative Appraisal Analysis Memorandum (August 2023, prepared by Laroche and Park).

B. Whitfield's Treatment of Property Condition

In contrast to Beacon's approach, Gerald K. Whitfield, MAI, of Whitfield Realty Advisors LLC conducted a comprehensive property inspection and appraised the Property in its as-is condition as of December 31, 2022. Mr. Whitfield's $118.0 million fair market value conclusion reflects the Property's actual physical condition at the time of inspection, without adjustments for hypothetical improvements or remediation of alleged deferred maintenance.

In his inspection notes and appraisal narrative, Mr. Whitfield described the Property's overall condition as "good to very good," consistent with a five-year-old renovation and ongoing maintenance. Mr. Whitfield noted normal wear and use in certain guestroom categories and minor cosmetic conditions in common areas, but did not identify any conditions that he characterized as material deferred maintenance. Mr. Whitfield's condition assessment is consistent with the Aurelian inspection results and PCG's maintenance records, and it provides a credible, market-grounded alternative to Beacon's characterization.

C. Linden Park Preliminary Indications

Thomas Carraway, MAI, FRICS, of Linden Park Advisory LLC delivered a preliminary indication of value on July 14, 2023, placing the Property within a range of $130.0 million to $138.0 million. While Mr. Carraway's formal appraisal report has not yet been finalized, the preliminary range provides a useful data point for assessing the likely treatment of the deferred-maintenance issue.

The midpoint of the Linden Park preliminary range ($134.0 million) falls significantly below the Beacon conclusion of $151.5 million and meaningfully above the Whitfield conclusion of $118.0 million. The fact that the preliminary range does not appear to incorporate the full $8.2 million deferred-maintenance adjustment suggests that Mr. Carraway is unlikely to adopt Beacon's approach wholesale. The $130.0 million low end of the range is $21.5 million below Beacon's conclusion — a gap that is consistent with Mr. Carraway applying a lower discount rate than Whitfield while declining to include the Beacon deferred-maintenance adjustment, or applying a modest (but significantly less than $8.2 million) property condition adjustment.

The principal risk is that Mr. Carraway, in the course of his independent property inspection and analysis, identifies specific co

ATTORNEY-CLIENT PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT
MEMORANDUM
TO: Francesca Morano, Partner, Calderwood & Harkness LLP
FROM: Simone Laroche, Lead Associate, Calderwood & Harkness LLP
DATE: October 2023
RE: Analysis of Meridian Shores Hospitality LLC's Deferred Maintenance Claim Under OA Section 8.3 — Palmetto Grand Ventures LLC
MATTER NO.: 1027-00003
This memorandum is a privileged and confidential attorney-client communication and attorney work product prepared in anticipation of litigation. It is intended solely for the use of Calderwood & Harkness LLP attorneys and authorized personnel working on this matter. This memorandum should not be disclosed, distributed, or otherwise made available to any third party without the express written authorization of the undersigned or Francesca Morano, Partner.
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I. EXECUTIVE SUMMARY
The purpose of this memorandum is to analyze the deferred maintenance claim asserted by Meridian Shores Hospitality LLC ("MSH") against Palmetto Coast Group LLC ("PCG"), in PCG's capacity as sole Manager of Palmetto Grand Ventures LLC ("PGV" or the "Joint Venture"). Specifically, MSH contends that PCG breached Section 8.3 of the Amended and Restated Operating Agreement of Palmetto Grand Ventures LLC, dated June 15, 2017 (the "Operating Agreement" or "OA"), by failing to fund approximately $8.2 million in allegedly deferred maintenance at The Palmetto Grand Resort & Spa, located at 650 Mandalay Avenue, Clearwater Beach, Florida 33767 (the "Property" or the "Hotel"). This claim has been raised both as an independent breach-of-contract theory in the pending JAMS arbitration and, critically, as a valuation adjustment embedded in MSH's appraisal of the Property.
MSH's appraiser, Dr. Priya Ramanathan, CFA, ASA, of Beacon Valuation Group Inc. ("Beacon"), incorporated the $8.2 million deferred-maintenance figure as an upward adjustment to the Property's fair market value in Beacon's appraisal report completed April 14, 2023, which concluded at a fair market value of $151.5 million for 100% of the Joint Venture's assets. Beacon's position is that, absent management neglect by PCG, the Property would command a higher value, and that the fair market value determination should reflect the Property in a hypothetical well-maintained condition rather than in its as-is state. In effect, Dr. Ramanathan contends that the $8.2 million represents the cost to cure deferred items that, once remediated, would support higher stabilized cash flows, a lower capitalization rate, and a correspondingly higher indicated fair market value.
PCG's position is diametrically opposed. PCG maintains that the Property was the subject of a comprehensive $24.3 million renovation program executed between 2017 and 2019 — funded through capital contributions by both PCG and MSH — and has been maintained in accordance with the obligations set forth in OA Section 8.3 and the quality standards mandated by Aurelian Hotels & Resorts Inc. ("Aurelian") under the franchise agreement governing the Hotel. PCG argues that the $8.2 million figure is inflated, that many of the line items identified by Beacon are duplicative of work already completed during the 2017–2019 renovation, that the Property has consistently passed Aurelian's annual quality assurance inspections, and that the treatment of the deferred-maintenance claim as a value-additive adjustment in the appraisal is methodologically unsound under the Uniform Standards of Professional Appraisal Practice ("USPAP").
Based on the analysis set forth in detail below, our conclusion is that the deferred-maintenance claim is weak on the merits when considered as a whole, but that certain individual line items — estimated at approximately $1.5 million to $2.5 million — may have arguable support. These items are concentrated primarily in accelerated HVAC component replacement (partial, not the full $2.8 million claimed) and certain guestroom FF&E items that could reasonably be characterized as approaching the end of their useful life cycles. The remaining $5.7 million to $6.7 million of the claimed amount is either duplicative of renovation-era work, falls within the normal useful life of the relevant systems, or constitutes elective upgrades rather than mandatory maintenance obligations under OA Section 8.3.
This residual exposure of $1.5 million to $2.5 million creates some risk that the neutral appraiser, Thomas Carraway, MAI, FRICS, of Linden Park Advisory LLC ("Linden Park"), could incorporate a partial adjustment into his final determination of fair market value. Mr. Carraway's preliminary indication of value, delivered July 14, 2023, placed the Property within a range of $130.0 million to $138.0 million, which does not appear to incorporate the full $8.2 million adjustment but may reflect some modest property-condition considerations. This analysis should inform PCG's settlement posture, arbitration strategy, and approach to the neutral appraisal process.
II. BACKGROUND
A. The Joint Venture and Operating Agreement
Palmetto Grand Ventures LLC was formed as a Florida limited liability company on June 15, 2017, and is registered with the Florida Division of Corporations under Filing No. L17000124583, with Employer Identification Number 82-5063921. The Joint Venture was organized pursuant to the Operating Agreement executed contemporaneously with PGV's formation.
The ownership structure of the Joint Venture is as follows: PCG holds a sixty-five percent (65%) membership interest, and MSH holds a thirty-five percent (35%) membership interest. Under Article V of the Operating Agreement, PCG serves as the sole Manager of the Joint Venture, with authority over all aspects of the day-to-day operations and management of PGV's assets, including the Property. MSH is a passive, non-managing member, although it retains certain protective consent rights specified in the Operating Agreement, including approval rights over capital calls exceeding $2 million, material amendments to the franchise agreement, and refinancing of the senior secured debt.
The stated purpose of PGV, as set forth in Article II of the Operating Agreement, is the acquisition, renovation, and ongoing operation of The Palmetto Grand Resort & Spa. The Property is a 312-room (including 42 suites) full-service luxury beachfront hotel situated on the Gulf of Mexico in Clearwater Beach, Florida. The Hotel's amenities include two full-service restaurants (The Meridian Grill, a fine-dining establishment, and Saltgrass Brasserie, a casual waterfront dining venue), a rooftop bar and lounge, an 18,000-square-foot spa and wellness center, approximately 22,000 square feet of meeting and event space (including two ballrooms and six breakout rooms), a beachfront cabana service program, two heated outdoor pools, a fitness center, and a business center. The Property is situated on approximately 4.7 acres of beachfront real property.
The Hotel was acquired by PGV on August 1, 2017, at a purchase price of $87.5 million. The acquisition was financed through a combination of equity contributions from the members and senior secured debt. Gulf Atlantic National Bank ("GANB") provided a $61.25 million commercial real estate loan (Loan No. CRE-2017-06284) at a floating rate of SOFR plus 2.25%, with a ten-year term maturing on August 1, 2027. As of December 31, 2022 — the agreed-upon valuation date for purposes of the call-option exercise — the outstanding principal balance on the GANB loan was $48.6 million.
The Hotel is operated under a franchise agreement with Aurelian Hotels & Resorts Inc., one of the premier luxury hospitality brands in North America. The franchise agreement was executed on July 15, 2017, and has a twenty-year term expiring on July 14, 2037. Under the franchise agreement, PGV pays a franchise fee of 5% of gross room revenue plus a 2% contribution to the Aurelian system-wide marketing fund. The franchise agreement imposes detailed quality and condition standards on the Property, including requirements for periodic renovations, FF&E replacement cycles, and ongoing maintenance of physical plant and guest-facing areas.
B. Capital Contributions and Renovation
The total equity invested in PGV at the time of acquisition, inclusive of $2,307,700 in closing costs (comprising title insurance, recording fees, transfer taxes, lender fees, legal costs, and due diligence expenses), was $28,557,700. In accordance with OA Section 4.1, the initial capital contributions were allocated as follows:
• PCG capital contribution at acquisition: $18,562,500 (representing 65% of the required equity)
• MSH capital contribution at acquisition: $10,000,000 (an agreed-upon amount reflecting MSH's negotiated entry into the Joint Venture, rather than a strict pro rata share; the difference was reflected in the parties' capital account balances and addressed through the preferred return mechanism described below)
Following the acquisition, PGV undertook a comprehensive renovation of the Property. The total capital invested in the renovation program between 2017 and 2019 was $24.3 million, which was funded through additional capital contributions by both members in accordance with their respective ownership percentages:
• PCG renovation capital contribution: $15,795,000 (65%)
• MSH renovation capital contribution: $8,505,000 (35%)
Accordingly, MSH's total capital contributions to PGV from inception through the completion of the renovation were $18,505,000 (comprising the initial $10,000,000 contribution and the $8,505,000 renovation contribution).
Under OA Section 6.2, MSH is entitled to a preferred return on its capital contributions at a rate of 8% per annum, compounding annually. The parties have stipulated, for purposes of the pending arbitration, that MSH's accrued but unpaid preferred return as of December 31, 2022 was $17,010,000. This amount is a component of the buyout price calculation upon exercise of the call option.
C. The Call-Option Exercise and Valuation Dispute
Article XII of the Operating Agreement grants PCG a call option to acquire MSH's 35% membership interest in PGV. Under OA Section 12.4, the call option became exercisable on June 15, 2022, the fifth anniversary of the Operating Agreement. PCG delivered a written call-option exercise notice to MSH on January 9, 2023, in accordance with the notice provisions of OA Section 12.4(a).
The buyout price under the call option is determined by reference to the fair market value ("FMV") of 100% of the Joint Venture's assets as of the valuation date (December 31, 2022), less outstanding indebtedness, multiplied by MSH's 35% membership interest, plus MSH's accrued preferred return. The Operating Agreement provides for a structured appraisal process to determine FMV.
PCG's appraiser, Gerald K. Whitfield, MAI, of Whitfield Realty Advisors LLC ("Whitfield"), completed his appraisal of the Property on February 10, 2023. Mr. Whitfield concluded at a fair market value of $118.0 million for 100% of PGV's assets. Whitfield's valuation methodology employed a blended approach consisting of a 40% weighting to the income approach and a 60% weighting to the sales comparison approach. Key assumptions in the Whitfield appraisal include a direct capitalization rate of 9.5% and a discounted cash flow analysis at a 10.75% discount rate.
Based on the Whitfield appraisal, PCG calculated a buyout price of $41.3 million and tendered that amount to MSH on March 1, 2023. The derivation of the tendered amount is as follows:
• Fair Market Value (Whitfield): $118,000,000
• Less Outstanding Debt: ($48,600,000)
• Net Equity Value: $69,400,000
• MSH's 35% Share of Net Equity: $24,290,000
• Plus MSH Accrued Preferred Return: $17,010,000
• Total Tender Amount: $41,300,000
MSH rejected the tender on March 10, 2023, contesting both the methodology and conclusions of the Whitfield appraisal and asserting that the Property was significantly undervalued. MSH engaged Beacon Valuation Group Inc. as its appraiser. Dr. Priya Ramanathan, CFA, ASA, completed the Beacon appraisal on April 14, 2023, concluding at a fair market value of $151.5 million. The Beacon appraisal employed the income approach exclusively, utilizing a discounted cash flow analysis at an 8.5% discount rate and a 7.75% terminal capitalization rate. Notably, and central to this memorandum, the Beacon appraisal includes an $8.2 million deferred-maintenance adjustment that effectively increases the Property's indicated FMV.
Based on the Beacon appraisal, MSH demanded a total payment of $70.0 million, inclusive of a $16.975 million bad-faith penalty claim asserted under OA Section 12.7. This claim is the subject of a separate analysis. See Bad-Faith Penalty Risk Assessment Memorandum (September 2023, prepared by Morano and Laroche).
The divergence between the Whitfield appraisal ($118.0 million) and the Beacon appraisal ($151.5 million) is approximately 28.4%. This divergence exceeds the 10% threshold specified in OA Section 12.4(c), which provides that if the two appraisals differ by more than 10%, the parties shall jointly appoint a neutral third-party appraiser. Pursuant to this provision, the parties jointly retained Thomas Carraway, MAI, FRICS, of Linden Park Advisory LLC as the neutral appraiser, effective June 1, 2023.
Mr. Carraway delivered a preliminary indication of value on July 14, 2023, placing the Property within a range of $130.0 million to $138.0 million. Mr. Carraway's formal appraisal report has not yet been finalized as of the date of this memorandum.
In addition to the appraisal dispute, MSH initiated arbitration proceedings on March 20, 2023. The arbitration is pending before JAMS under Reference No. 1440032871, with the Honorable Margaret Liu Chen (Ret.) serving as sole arbitrator. MSH is represented by Victoria Castillo and Ryan Matsuda of Hargrove, Dunlap & Castillo LLP. The arbitration encompasses MSH's claims for breach of OA Section 8.3 (deferred maintenance), breach of OA Section 12.4 (undervaluation), and the bad-faith penalty claim under OA Section 12.7, among other claims.
III. OA SECTION 8.3 — TEXT AND INTERPRETATION
A. Full Text of Section 8.3
The operative language of OA Section 8.3 provides, in pertinent part:
Section 8.3. Property Maintenance and Capital Expenditures. The Manager shall maintain the Property in first-class condition consistent with the standards of a luxury beachfront resort and in compliance with all franchise and brand standards imposed by the Franchisor under the Franchise Agreement. The Manager shall fund all reasonably necessary capital expenditures and repairs from available Joint Venture cash flow or, if Joint Venture cash flow is insufficient, through capital calls to the Members in accordance with Section 4.3 hereof; provided, however, that any capital call in excess of Two Million Dollars ($2,000,000) in any fiscal year shall require the prior written consent of the Non-Managing Member. The Manager shall, in its reasonable discretion, establish annual capital expenditure budgets and prioritize capital improvement items, taking into account the overall condition of the Property, the requirements of the Franchise Agreement, the availability of Joint Venture funds, and such other factors as the Manager deems relevant. The Manager shall maintain a reserve for furniture, fixtures, and equipment replacement and capital repairs in an amount not less than four percent (4%) of the gross revenues of the Property for such fiscal year, consistent with the requirements of the Franchise Agreement.
Several features of this provision merit careful attention. First, the standard imposed is one of maintaining the Property in "first-class condition consistent with the standards of a luxury beachfront resort." This is a qualitative standard, not a quantitative one, and its application necessarily involves the exercise of judgment. Second, the Manager is obligated to fund "reasonably necessary" capital expenditures — not all conceivable capital improvements, but those that a reasonable manager would deem necessary to maintain the Property in the required condition. Third, the Manager is granted express discretion in prioritizing capital expenditure items and establishing annual budgets, subject to range considerations. Fourth, the FF&E reserve requirement of 4% of gross revenues establishes a quantitative floor for ongoing capital reinvestment, aligned with the Aurelian franchise standards.
Importantly, OA Section 4.3, which governs capital calls, imposes a consent right in favor of MSH (as the Non-Managing Member) for capital calls exceeding $2 million in any fiscal year. This creates a structural tension: the Manager is obligated to maintain the Property in first-class condition, but the Manager's ability to fund capital expenditures beyond $2 million per year through capital calls is dependent on MSH's consent. To the extent that MSH now asserts that PCG should have invested more capital in the Property, PCG has a colorable argument that MSH's consent right effectively constrained the available funding mechanisms.
The annual capital budget approval process under OA Section 8.4 further supports PCG's position. Under Section 8.4, the Manager is required to submit a proposed annual budget — including both operating and capital components — to MSH no later than November 15 of each year for the following fiscal year. MSH has the right to review and comment on the proposed budget but does not have a veto right over the capital expenditure component (as distinguished from the consent right on capital calls exceeding $2 million). MSH did not formally object to any of the annual capital budgets proposed by PCG for fiscal years 2020, 2021, or 2022.
B. The "First-Class Condition" Standard
The phrase "first-class condition" is not defined in the Operating Agreement and does not have a statutory definition under Florida law. Chapter 605 of the Florida Statutes (the Florida Revised Limited Liability Company Act) does not address property maintenance standards for LLC-owned assets in any specificity. Accordingly, the interpretation of this standard requires reference to industry norms, the specific context of the Property, the franchise requirements, and the conditions of comparable luxury beachfront resort properties.
In the hospitality industry, the concept of "first-class condition" is generally understood to mean that the property is maintained at a level consistent with the expectations of the target guest demographic, the competitive positioning of the hotel within its market segment, and the requirements of any applicable brand or franchise affiliation. For a luxury beachfront resort operating under the Aurelian Hotels & Resorts brand, this standard implies maintenance at a level that satisfies Aurelian's quality assurance program and positions the Property competitively among comparable luxury resort properties in the Clearwater Beach and broader Tampa Bay market.
PCG's principal argument on this point is compelling: the Property has consistently passed Aurelian's annual quality assurance inspections and has maintained its luxury brand designation without interruption throughout PGV's ownership period. Aurelian's inspection program is rigorous and covers all aspects of the physical plant, including guestroom condition, public area presentation, building systems, exterior condition, and guest-facing amenities. A property that consistently meets Aurelian's luxury-tier standards is, almost by definition, being maintained in "first-class condition" as that term is used in the Operating Agreement.
That said, it bears noting that franchise inspection standards represent a minimum threshold for brand compliance, not necessarily the ceiling for the "first-class condition" obligation. MSH could argue that OA Section 8.3 requires maintenance above and beyond the franchise minimum — i.e., that the parties' agreement contemplated a higher standard of care than mere franchise compliance. While this argument has some theoretical force, it is difficult to sustain in the absence of any specific, articulable standard beyond the franchise requirements, and courts interpreting similar provisions have generally looked to brand standards as the primary benchmark.
The standard is emphatically not one of perfection. No reasonable interpretation of "first-class condition" requires a property owner to replace every system and component at the earliest possible date, to maintain the property in as-new condition at all times, or to fund every conceivable upgrade. Normal wear and depreciation are expected, and the relevant inquiry is whether the Manager exercised reasonable judgment in maintaining the Property at a level consistent with the applicable standards.
C. Manager's Discretion and Business Judgment
The Operating Agreement grants PCG, as Manager, broad discretion in making operational decisions with respect to the Property, including decisions regarding the timing, scope, and prioritization of capital expenditures. This grant of discretion is not limitless — it is bounded by the "first-class condition" standard and the other obligations set forth in OA Section 8.3 — but it is meaningful and should be given effect.
Under Florida law, the duty of care owed by managers of a limited liability company is governed by Section 605.04093 of the Florida Statutes. This provision establishes a standard analogous to the business judgment rule applicable in the corporate context. A manager satisfies the duty of care if the manager acts in good faith, with the care that a person in a like position would reasonably believe appropriate under similar circumstances, and in a manner the manager reasonably believes to be in the best interests of the limited liability company. The business judgment rule creates a rebuttable presumption that the manager's decisions were informed, made in good faith, and made in the honest belief that the actions taken were in the company's best interests.
Applied to the present dispute, this means that PCG's decisions regarding the timing and prioritization of capital expenditures are entitled to deference, provided that PCG acted in good faith and exercised reasonable judgment. The Manager need not fund every conceivable capital improvement at the earliest opportunity; rather, the Manager must exercise its judgment in allocating resources among competing needs, taking into account the overall condition of the Property, the requirements of the franchise agreement, the availability of Joint Venture funds, market conditions, and other relevant factors. This is precisely the framework articulated in OA Section 8.3 itself.
MSH's burden in establishing a breach of OA Section 8.3 is therefore substantial. MSH must demonstrate not merely that additional capital expenditures could have been made, but that PCG's failure to make those expenditures fell below the standard of reasonable management judgment, considering all relevant circumstances — including the recent $24.3 million renovation, the ongoing post-renovation CapEx program, the Aurelian inspection results, and the significant disruption caused by the COVID-19 pandemic to hotel operations and revenues during 2020.
IV. MSH'S DEFERRED MAINTENANCE CLAIM — DETAILED ANALYSIS
A. Overview of the $8.2 Million Claim
MSH, acting through the Beacon appraisal, asserts that $8.2 million in deferred maintenance existed at the Property as of December 31, 2022, the agreed-upon valuation date. The term "deferred maintenance" as used in the Beacon report encompasses a range of conditions that Dr. Ramanathan characterizes as capital repairs and replacements that should have been, but were not, performed by PCG during the period following the 2017–2019 renovation.
Beacon's treatment of this $8.2 million figure in the appraisal is unusual and warrants close scrutiny. Rather than treating the deferred maintenance as a deduction from the Property's as-is value (which is the standard appraisal methodology for deferred maintenance under USPAP), Beacon treated it as an adjustment that effectively increases the indicated FMV. Beacon's reasoning is as follows: had the Manager complied with its obligations under OA Section 8.3 and performed the identified maintenance, the Property would have been in better physical condition, would have generated higher revenue (through improved guest satisfaction, higher occupancy, and higher average daily rates), and would have commanded a lower capitalization rate (reflecting reduced risk associated with a well-maintained property). Therefore, according to Beacon, the fair market value for purposes of the call-option buyout should reflect the Property's value as if the Manager had fulfilled its obligations — not the Property's actual, allegedly impaired condition.
MSH characterizes this as a necessary correction: the fair market value determination should not reward the Manager for its own breach. In MSH's view, if the OA requires the Manager to maintain the Property in first-class condition, and the Manager failed to do so, the fair market value used to price the buyout should reflect the condition the Property would have been in absent the breach. This is, in substance, a "but-for" damages theory embedded within a valuation analysis.
The methodological and legal implications of this approach are discussed in detail in Section VI below. For present purposes, the critical point is that the $8.2 million figure, as incorporated into the Beacon appraisal, adds $8.2 million to the indicated FMV and thereby increases the buyout price payable to MSH by approximately $2.87 million (35% of $8.2 million). This gives MSH a direct financial incentive to maximize the deferred-maintenance claim.
B. Itemized Breakdown of Claimed Deferred Maintenance
The following subsections address each category of the Beacon deferred-maintenance claim, presenting both Beacon's asserted amount and the basis for the claim, as well as PCG's response and our assessment of the item's merit.
1. HVAC System Replacement/Upgrades — $2.8 Million Claimed. Beacon claims that the central plant chiller units at the Property are operating below current efficiency standards and require partial replacement. Dr. Ramanathan's report identifies the main chiller units — two Trane CenTraVac centrifugal chillers serving the Hotel's guest tower and public areas — as the primary deficiency. Beacon asserts that the chillers, while functional, have experienced performance degradation and are consuming energy at rates approximately 15–20% above design specifications, resulting in elevated utility costs and a compromised guest comfort profile, particularly during peak summer cooling demand.
Beacon further identifies the cooling towers, air handling units serving the spa and wellness center, and the variable frequency drives on several fan coil units as requiring upgrades. The $2.8 million figure encompasses both equipment replacement and the associated labor, engineering, and temporary cooling costs during replacement.
PCG's response is that the central plant chiller units were installed new in 2018 as part of the $24.3 million renovation program and carry a manufacturer's warranty through 2028. The chillers have been subject to annual preventive maintenance performed by a licensed HVAC contractor (Coastal Climate Systems, Inc. of Tampa, Florida) under a multi-year service agreement. According to PCG's maintenance records, the chillers are within their expected useful life (industry standard for centrifugal chillers is 20–25 years), and while some performance degradation is normal over the first five years of operation, the units are not at or near the point of requiring replacement. PCG further contends that this item is duplicative of the renovation work completed in 2018 — the chillers were already replaced once, and Beacon is essentially claiming that a second replacement is necessary within five years.
Our assessment: This is the largest single line item in Beacon's claim and warrants the most scrutiny. While PCG's position that the chillers are within their useful life is generally sound, there may be a limited basis for a partial adjustment. If the chillers are in fact operating at reduced efficiency, there may be component-level repairs (compressor overhauls, condenser tube replacements, or refrigerant system modifications) that a reasonable manager would undertake to restore efficiency, even if a full unit replacement is premature. We estimate the arguable exposure on this item at approximately $500,000 to $1.2 million for component-level work and ancillary system upgrades, but the full $2.8 million claim for wholesale replacement is not supportable.
2. Roof Membrane and Waterproofing — $1.4 Million Claimed. Beacon claims that the roof system on the main guest tower and the conference center wing requires re-coating and partial replacement of the roof membrane, as well as remediation of waterproofing deficiencies at several locations along the parapet walls and rooftop mechanical equipment pads. Dr. Ramanathan's report cites evidence of ponding water in certain areas, minor membrane blistering, and deterioration of the elastomeric coating on the conference center wing.
PCG's response is that the roof was substantially repaired during the 2017–2019 renovation, including replacement of the roof membrane on the conference center wing and re-coating of the main guest tower roof. PCG further notes that annual roof inspections have been conducted by a licensed roofing contractor (SunCoast Roofing & Solar, Inc.), and that spot repairs were completed in 2021 (at a cost of approximately $185,000) and 2022 (at a cost of approximately $92,000) to address localized conditions identified during the annual inspections. Notably, none of the Aurelian property inspections conducted during the relevant period flagged the roof condition as deficient or requiring remediation. PCG emphasizes that in a coastal Florida environment, roof maintenance is inherently ongoing due to exposure to salt air, UV radiation, and severe weather events, and that the performance of routine spot repairs does not indicate a deferred condition.
Our assessment: This item is relatively weak for MSH. The fact that PCG has been performing regular inspections and spot repairs demonstrates active, rather than deferred, maintenance of the roof system. The 2021 and 2022 expenditures totaling $277,000 indicate that PCG was responsive to identified conditions. While it is possible that a more aggressive roof maintenance program could have been pursued, the absence of any Aurelian inspection finding on this point is significant. We estimate the arguable exposure on this item at $0 to $200,000 at most, primarily for any specific conditions that a neutral property condition assessor might independently identify.
3. Elevator Modernization — $1.1 Million Claimed. Beacon claims that the four guest elevators and two service elevators at the Property require modernization, including replacement of controllers, door operators, and cab interiors, and potential upgrading to destination dispatch technology. Dr. Ramanathan's report characterizes the elevator systems as "functionally adequate but approaching the end of their current service cycle," and notes that guest satisfaction survey data from Aurelian's post-stay feedback system reflects occasional complaints about elevator wait times and ride quality.
PCG's response is that the elevator systems were serviced and updated during the 2017–2019 renovation, including modernization of the control systems and refurbishment of the cab interiors. PGV maintains an ongoing elevator maintenance contract with Brightmoor Holdings, which provides monthly preventive maintenance and 24/7 emergency service. PCG notes that there have been no elevator code violations issued by the Pinellas County Building Department or the Florida Bureau of Elevator Safety at any time during PGV's ownership. Additionally, while Aurelian's guest satisfaction surveys reflect occasional elevator-related comments (as is common at any multi-story hotel property), the overall guest satisfaction scores for vertical transportation are within the acceptable range for Aurelian luxury-tier properties.
Our assessment: The elevator modernization claim is weak. Elevator systems that are functional, code-compliant, within their expected service life, and subject to ongoing professional maintenance do not constitute "deferred maintenance" under any reasonable interpretation. The $1.1 million claim appears to encompass elective upgrades (such as destination dispatch technology) that go beyond maintenance and into improvement territory. We estimate the arguable exposure at $0 to $150,000, limited to any specific component-level repairs (e.g., door operators or cab finish work) that a neutral assessor might identify.
4. Pool Deck and Exterior Hardscape — $850,000 Claimed. Beacon claims that the pool deck requires resurfacing, that paver sections in the main entry motor court and garden walkways need replacement, and that portions of the seawall require structural repairs. Dr. Ramanathan's report notes surface cracking and discoloration on the pool deck, uneven pavers in the motor court area, and erosion of mortar joints on the seawall.
PCG's response is that the pool deck was fully resurfaced in 2019 as part of the renovation program using a high-quality, UV-resistant acrylic coating system. Seawall inspections have been conducted annually by a licensed marine contractor (Bayshore Marine Construction, LLC), and minor repairs have been completed routinely as part of the Property's ongoing maintenance program. PCG emphasizes that coastal properties in Florida are subject to accelerated weathering from salt exposure, wave action, and tropical storm events, and that the conditions described by Beacon represent normal wear consistent with the coastal environment rather than deferred maintenance. PCG further notes that the paver conditions referenced by Beacon are cosmetic and have been addressed on a rolling basis.
Our assessment: This item has limited merit. The pool deck, which was fully resurfaced only three years before the valuation date, may exhibit some surface wear, but this is a normal condition for a heavily used outdoor amenity in a coastal environment. The seawall issues are potentially more substantive, as structural seawall deterioration can have safety and regulatory implications. However, if annual inspections are being performed and repairs are being made, the claim of deferred maintenance is difficult to sustain. We estimate the arguable exposure at $100,000 to $300,000, concentrated primarily in any seawall conditions that a structural engineer might identify as requiring near-term remediation.
5. Spa and Wellness Center Fixtures — $650,000 Claimed. Beacon claims that treatment room fixtures and hydrotherapy equipment in the 18,000-square-foot spa and wellness center are outdated and require replacement. Dr. Ramanathan's report identifies specific items including Vichy shower systems, hydrotherapy tubs, steam room tile and fixtures, and treatment room cabinetry as being in fair condition and approaching the end of their useful life.
PCG's response is that the spa was fully fitted out during the 2019 renovation with new equipment and fixtures, and that the identified items are within their expected replacement cycle. PCG further contends that some of the items cited by Beacon — particularly the treatment room cabinetry and certain aesthetic elements — are matters of design preference rather than maintenance, and that the Aurelian spa standards (which were met during the relevant inspection periods) are the appropriate benchmark. PCG notes that spa equipment typically has a useful life of 7–10 years, and that the items in question were only 3–4 years old as of the valuation date.
Our assessment: This item is weak. Spa equipment installed in 2019 and only 3–4 years old as of the valuation date is not reasonably characterized as deferred maintenance. To the extent that certain equipment shows normal wear, that is expected and does not represent a breach of the maintenance obligation. We estimate the arguable exposure at $0 to $100,000 for any specific items that may require near-term attention.
6. Guestroom Soft Goods and FF&E Refresh — $900,000 Claimed. Beacon claims that soft goods — including carpeting, drapery, and upholstery — in approximately 80 of the Hotel's 312 rooms are past their replacement cycle and require immediate refresh. Dr. Ramanathan's report notes that luxury hotel industry standards generally call for soft goods replacement every 5–7 years, and that rooms not refreshed since the 2017–2019 renovation are at or approaching the end of that cycle as of the December 31, 2022 valuation date.
PCG's response is multifaceted. First, PCG has maintained the FF&E reserve at or above the 4% of gross revenue threshold mandated by both OA Section 8.3 and the Aurelian franchise agreement, ensuring that adequate funds are available for ongoing cyclical replacements. Second, FF&E replacement in a 312-room hotel is inherently a rolling process — not all rooms are refreshed simultaneously, and a well-managed program stages replacements across multiple years to minimize revenue displacement and manage cash flow. Third, PCG notes that approximately 75 rooms underwent soft goods refresh in 2021 and an additional 60 rooms were refreshed in 2022, totaling 135 rooms over the two-year period. The remaining rooms (including the approximately 80 rooms identified by Beacon) were scheduled for refresh within the normal replacement cycle, and the existence of rooms that have not yet been refreshed does not constitute "deferred" maintenance so long as the overall program is on track.
Our assessment: This item has moderate support and represents one of the areas of arguable exposure. While PCG's rolling replacement program is a reasonable approach, it is fair to observe that 80 rooms with soft goods that are 4–5 years old (in a luxury context) could be characterized as approaching the end of their useful life. The question is whether the existence of these rooms, within a context of an active replacement program, constitutes a breach of the "first-class condition" standard. We believe it is more accurately characterized as a normal phase in a multi-year replacement cycle, but a neutral appraiser or arbitrator could view it differently. We estimate the arguable exposure at $300,000 to $600,000 — less than the $900,000 claimed, reflecting that many of the identified rooms may be within, rather than past, their cycle, and that the per-room cost figure used by Beacon may be inflated.
7. Miscellaneous Building Systems (Fire Alarm, Plumbing, Electrical) — $500,000 Claimed. Beacon includes a catch-all category for various building systems, including the fire alarm and life safety systems, domestic plumbing (particularly hot water recirculation systems and fixtures in back-of-house areas), and electrical systems (including panel upgrades, emergency generator maintenance, and lighting). The $500,000 figure is presented without detailed itemization in the Beacon report, which characterizes these as "general building systems that require updating and repair."
PCG's response is that all building systems at the Property are code-compliant and have been inspected by both Pinellas County authorities and the State Fire marshal's office. No outstanding code violations, deficiency notices, or required corrective actions exist with respect to any building system. PCG maintains service contracts with licensed trades contractors for each major building system, and routine maintenance and repairs are performed on an ongoing basis. PCG characterizes this line item as a vague, unsupported catch-all that fails to identify any specific deficiency warranting a $500,000 expenditure.
Our assessment: This is the weakest item in Beacon's claim. The absence of any code violations or deficiency notices, combined with the lack of specific itemization in the Beacon report, makes it very difficult for MSH to establish that any particular building system is in a condition that constitutes deferred maintenance. We estimate the arguable exposure at $0 to $100,000 at most, and that only if a neutral property inspector identifies specific conditions not reflected in the existing inspection records.
C. Total Claimed vs. PCG's Assessment of Legitimate Exposure
The following table summarizes the deferred-maintenance claim on an item-by-item basis:
For purposes of our settlement and risk analysis, we use a range of approximately $1.5 million to $2.5 million as the realistic exposure window, reflecting our judgment that the low end of certain categories is unlikely to be zero in practice (a neutral assessor will almost certainly identify some conditions of note) while the high end of the HVAC category is unlikely to be fully realized. The remaining $5.7 million to $6.7 million of the Beacon claim is either duplicative of renovation work already completed, represents systems and components well within their expected useful life, or constitutes elective improvements and upgrades rather than mandatory maintenance obligations under OA Section 8.3.
V. PCG'S CAPITAL EXPENDITURE HISTORY AND MAINTENANCE RECORD
A. 2017–2019 Renovation Program ($24.3 Million)
The 2017–2019 renovation was a comprehensive, property-wide program undertaken immediately following PGV's acquisition of the Hotel. The renovation was designed to bring the Property into full compliance with Aurelian Hotels & Resorts brand standards and to position the Hotel as a leading luxury beachfront resort in the Clearwater Beach and Tampa Bay market. The $24.3 million renovation budget was jointly funded by PCG and MSH in proportion to their respective ownership interests.
The scope of the renovation encompassed virtually every aspect of the Property's physical plant and guest-facing areas, including:
• Guestrooms: Full renovation of all 312 keys (including 42 suites), encompassing hard goods (case goods, bathroom fixtures, lighting, HVAC fan coil units, entry and connecting doors), soft goods (carpeting, drapery, upholstery, bedding), technology upgrades (smart room controls, high-speed Wi-Fi infrastructure, streaming-enabled television systems), and bathroom finishes (tile, stone countertops, glass shower enclosures).
• Lobby and Public Spaces: Complete redesign and renovation of the main lobby, registration area, concierge lounge, pre-function space, and corridors on all guest floors.
• Food and Beverage Outlets: Build-out of The Meridian Grill fine-dining restaurant, renovation of Saltgrass Brasserie, and construction of the new rooftop bar and lounge (an amenity that did not exist prior to the renovation).
• Spa and Wellness Center: Expansion and complete fit-out of the 18,000-square-foot spa and wellness center, including new treatment rooms, hydrotherapy facilities, relaxation areas, a retail boutique, and associated mechanical systems.
• HVAC Central Plant: Replacement of the main chiller units, cooling towers, and associated distribution piping and controls (the same systems now at issue in the Beacon claim).
• Elevator Systems: Servicing and modernization of all six elevator units, including control system upgrades and cab interior refurbishment.
• Roof Repairs: Substantial repair and re-coating of the roof system on the main guest tower and replacement of the roof membrane on the conference center wing.
• Exterior and Hardscape: Pool deck resurfacing, motor court re-paving, landscape redesign, and seawall repairs.
• Meeting and Event Space: Renovation of the two ballrooms, six breakout rooms, and pre-function areas, including new audiovisual infrastructure, lighting systems, and acoustic treatments.
• IT Infrastructure: Installation of property-wide high-speed fiber-optic backbone, guest Wi-Fi upgrade, property management system (PMS) hardware refresh, and in-room technology platform.
The renovation was completed on time and within budget. Following the renovation, the Property was formally re-launched under the Aurelian Hotels & Resorts brand, with the full suite of luxury-tier brand standards applicable from the date of re-launch forward.
The relevance of this renovation program to the present dispute cannot be overstated. Many of the items identified in the Beacon deferred-maintenance claim — particularly the HVAC systems, roof, elevators, pool deck, and spa fixtures — were either replaced or substantially renovated only three to five years before the December 31, 2022 valuation date. The assertion that these same items now require $8.2 million in additional investment is, at minimum, inconsistent with the recent renovation history and industry-standard useful life expectations for the relevant building components.
B. Post-Renovation Annual Capital Expenditure Budgets (2020–2022)
Following the completion of the renovation program, PCG continued to invest in the Property through annual capital expenditure programs. The post-renovation CapEx spending for the three years preceding the valuation date is summarized as follows:
Fiscal Year 2020: Approximately $2.1 Million
The year 2020 presented extraordinary challenges for the hospitality industry due to the COVID-19 pandemic. The Palmetto Grand Resort & Spa experienced significant revenue declines, with gross revenues falling to approximately $39.5 million — a reduction of nearly 30% from the Property's stabilized performance level. In light of the severe revenue disruption, PCG made the managerial decision to reduce non-essential capital spending while continuing to fund critical maintenance items. The $2.1 million in CapEx during 2020 was directed primarily toward life safety systems, essential mechanical repairs, and critical building envelope maintenance. Importantly, Aurelian Hotels & Resorts recognized the unprecedented nature of the pandemic and issued a system-wide waiver of certain brand-standard compliance deadlines during 2020 and into early 2021, providing franchisees with additional time to complete capital projects that had been deferred due to the pandemic. Notwithstanding the reduced spending level, the 2020 CapEx of $2.1 million represented approximately 5.3% of the reduced 2020 gross revenues — a percentage that actually exceeded the 4% minimum required by OA Section 8.3 and the franchise agreement.
Fiscal Year 2021: Approximately $3.0 Million
As hotel operations began to recover in 2021, PCG increased capital spending to $3.0 million, reflecting a catch-up in spending that had been prudently deferred during the pandemic period. Key projects in 2021 included a 75-room soft goods refresh (carpeting, drapery, and upholstery replacement in selected guestrooms), roof spot repairs totaling approximately $185,000 (addressing localized conditions identified during the annual roof inspection), building systems maintenance (including HVAC preventive maintenance, elevator servicing, and plumbing system repairs), and exterior maintenance projects. The 2021 CapEx exceeded the 4% of gross revenue minimum.
Fiscal Year 2022: Approximately $3.2 Million
In 2022, with the Property operating at near-stabilized performance levels, PCG maintained its capital reinvestment program at $3.2 million. Key projects included a 60-room FF&E refresh, ongoing building systems maintenance (including an additional $92,000 in roof spot repairs), exterior work (including pool deck maintenance, landscape improvements, and seawall inspection and minor repairs), and technology upgrades. As with 2021, the 2022 CapEx exceeded the 4% of gross revenue minimum.
Three-Year Summary:
The total post-renovation CapEx for the period 2020–2022 was approximately $8.3 million. This figure represents a significant and sustained capital reinvestment in the Property, above and beyond the $24.3 million renovation that preceded it. The cumulative capital investment in the Property during PGV's ownership (renovation plus post-renovation CapEx) is therefore approximately $32.6 million — a figure that undercuts MSH's narrative that the Property has been neglected.
C. Aurelian Franchise Inspections
The Aurelian Hotels & Resorts franchise quality assurance program is a critical benchmark for evaluating PCG's compliance with the "first-class condition" standard of OA Section 8.3. Aurelian conducts annual property quality assurance inspections at all franchised properties, covering a comprehensive range of physical condition, housekeeping, service delivery, and brand standard compliance criteria. Properties are rated on a standardized scoring system, with a minimum threshold for continued luxury-tier designation.
The inspection history for The Palmetto Grand Resort & Spa during PGV's ownership period is as follows:
• 2020 Inspection: Deferred by Aurelian due to the COVID-19 pandemic. Aurelian suspended its routine inspection program for all properties during 2020 and issued a system-wide waiver of inspection requirements.
• 2021 Inspection: Conducted in the fourth quarter of 2021. The Property received a satisfactory rating, meeting the threshold for continued luxury-tier designation. No mandatory capital improvement directives were issued. The inspection report noted the Property's overall good condition and recognized the comprehensive 2017–2019 renovation. The inspector made advisory recommendations for soft goods refresh in certain guestroom categories, consistent with the normal replacement cycle, but these were characterized as recommendations, not requirements, and no timeline for compliance was imposed.
• 2022 Inspection: Conducted in the third quarter of 2022. The Property again received a satisfactory rating. As with the 2021 inspection, minor recommendations were made for continued guestroom soft goods refresh in selected room categories, but no formal non-compliance notice was issued, and no mandatory capital improvement directives were required.
At no time during PGV's ownership has Aurelian Hotels & Resorts issued a franchise default notice, a cure notice, or a formal non-compliance determination with respect to the Property's physical condition. The franchise agreement remains in good standing as of the date of this memorandum, and the Property continues to operate under the Aurelian luxury-tier brand designation. This unbroken record of franchise compliance is powerful evidence that the Property has been maintained in accordance with the standards applicable to a luxury beachfront resort.
D. MSH's Consent Right and Capital Call History
An important contextual factor in evaluating the deferred-maintenance claim is MSH's own conduct during the period in question. Under the Operating Agreement, MSH has a consent right on capital calls exceeding $2 million in any fiscal year. This consent right serves as both a protective mechanism for MSH as a non-managing member and, as relevant here, a potential constraint on the Manager's ability to fund large-scale capital projects through capital calls.
During the post-renovation period (2020–2022), PCG did not make any capital calls exceeding the $2 million threshold. All post-renovation CapEx was funded from Joint Venture operating cash flow and the FF&E reserve. This approach was consistent with the JV's financial structure and the Property's revenue-generating capacity, and it avoided the need to seek MSH's consent for additional capital contributions.
Crucially, MSH never requested that PCG make additional capital calls or fund additional maintenance during the 2020–2022 period. MSH received the annual capital budgets proposed by PCG, had the opportunity to review and comment on those budgets, and did not formally object to any of them. MSH did not submit any written request for additional capital expenditures, did not demand that PCG fund any specific maintenance or improvement project, and did not exercise any right to request a capital call for property maintenance purposes.
Nathaniel Cordero, the principal of MSH with over 25 years of experience in Southeast luxury hospitality operations, was deposed on October 10, 2023. While Mr. Cordero's full deposition transcript has not yet been received as of the date of this memorandum, we anticipate — based on the pre-deposition briefing from opposing counsel — that Mr. Cordero may testify that he raised informal concerns about property condition during site visits and telephone conversations with PCG's representatives. However, the absence of any written request, formal demand, or documented objection is significant. MSH is a sophisticated party with an experienced principal who understands hotel operations and the importance of capital reinvestment. The failure to make any formal demand for additional CapEx during the relevant period, followed by a $8.2 million deferred-maintenance claim raised only after PCG exercised the call option, supports PCG's position that the claim is strategically motivated rather than a reflection of genuine property condition concerns.
VI. CRITIQUE OF BEACON'S TREATMENT OF DEFERRED MAINTENANCE IN THE APPRAISAL
A. Methodological Issues
The Beacon appraisal raises several methodological concerns that significantly undermine the reliability of the $8.2 million deferred-maintenance adjustment.
Single-Approach Methodology. Beacon employed the income approach exclusively, using a discounted cash flow analysis at an 8.5% discount rate and a 7.75% terminal capitalization rate. No sales comparison approach was utilized, notwithstanding the availability of comparable luxury hotel transactions in the Florida Gulf Coast market. While the income approach is widely used and appropriate for income-producing properties such as hotels, the complete exclusion of the sales comparison approach — particularly for a property with identifiable comparables — narrows the analytical framework and increases the risk that assumptions embedded in the DCF model (including the deferred-maintenance adjustment) will disproportionately influence the concluded value. By contrast, Whitfield's blended approach (40% income / 60% sales comparison) provides a check on the assumptions of either approach and is more consistent with accepted appraisal practice for full-service luxury hotels.
The Deferred-Maintenance Adjustment as a Value-Add. The most significant methodological issue is Beacon's treatment of the $8.2 million deferred-maintenance figure as a positive adjustment to the Property's fair market value. Under standard appraisal practice as articulated in USPAP and the leading treatises, deferred maintenance is treated as a "cost to cure" — i.e., a deduction from the property's value as if in good condition, resulting in an as-is value that reflects the property's actual physical condition. This is the standard treatment because the market price a willing buyer would pay for a property with deferred maintenance is the property's hypothetical value in good condition minus the cost to bring it to that condition.
Beacon inverted this methodology. Rather than deducting the $8.2 million from a hypothetical value in good condition to arrive at the as-is value, Beacon added $8.2 million to the as-is value to arrive at a "but-for" value — i.e., the value the property would have had if the Manager had complied with its obligations. This is not a fair market value conclusion; it is a damages calculation. The question before the neutral appraiser and the arbitrator is "What is the fair market value of the Property?" not "What would the Property be worth if the Manager had performed differently?" By conflating these two questions, Beacon has produced an appraisal that incorporates a damages theory masquerading as a valuation conclusion.
This conflation of a damages claim with a valuation conclusion is, in our view, a significant vulnerability in the Beacon report. If the arbitrator or the neutral appraiser accepts the view that fair market value means the as-is value of the Property as of the valuation date, the $8.2 million adjustment falls away entirely. MSH's remedy for any proven breach of OA Section 8.3 would then be a separate damages claim — not an embedded adjustment to the FMV determination.
Lack of Market Support for the Adjustment. Beacon does not provide any market evidence to support the proposition that the $8.2 million in identified deferred maintenance actually depressed the Property's revenue, occupancy, or market capitalization rate relative to comparable properties. Dr. Ramanathan's report asserts that a well-maintained property would command higher revenue and a lower cap rate, but this assertion is stated as a general premise rather than supported by specific market data. The Property's 2022 operating performance — $62.8 million in gross revenues, $289 in Revenue Per Available Room ("RevPAR"), $18.4 million in Net Operating Income, and $19.7 million in EBITDA — reflects robust performance that is inconsistent with a property suffering from material deferred maintenance.
For a full methodological comparison of the Whitfield and Beacon appraisals, including analysis of discount rate selection, capitalization rate assumptions, revenue projections, and comparable transactions, see the Comparative Appraisal Analysis Memorandum (August 2023, prepared by Laroche and Park).
B. Whitfield's Treatment of Property Condition
In contrast to Beacon's approach, Gerald K. Whitfield, MAI, of Whitfield Realty Advisors LLC conducted a comprehensive property inspection and appraised the Property in its as-is condition as of December 31, 2022. Mr. Whitfield's $118.0 million fair market value conclusion reflects the Property's actual physical condition at the time of inspection, without adjustments for hypothetical improvements or remediation of alleged deferred maintenance.
In his inspection notes and appraisal narrative, Mr. Whitfield described the Property's overall condition as "good to very good," consistent with a five-year-old renovation and ongoing maintenance. Mr. Whitfield noted normal wear and use in certain guestroom categories and minor cosmetic conditions in common areas, but did not identify any conditions that he characterized as material deferred maintenance. Mr. Whitfield's condition assessment is consistent with the Aurelian inspection results and PCG's maintenance records, and it provides a credible, market-grounded alternative to Beacon's characterization.
C. Linden Park Preliminary Indications
Thomas Carraway, MAI, FRICS, of Linden Park Advisory LLC delivered a preliminary indication of value on July 14, 2023, placing the Property within a range of $130.0 million to $138.0 million. While Mr. Carraway's formal appraisal report has not yet been finalized, the preliminary range provides a useful data point for assessing the likely treatment of the deferred-maintenance issue.
The midpoint of the Linden Park preliminary range ($134.0 million) falls significantly below the Beacon conclusion of $151.5 million and meaningfully above the Whitfield conclusion of $118.0 million. The fact that the preliminary range does not appear to incorporate the full $8.2 million deferred-maintenance adjustment suggests that Mr. Carraway is unlikely to adopt Beacon's approach wholesale. The $130.0 million low end of the range is $21.5 million below Beacon's conclusion — a gap that is consistent with Mr. Carraway applying a lower discount rate than Whitfield while declining to include the Beacon deferred-maintenance adjustment, or applying a modest (but significantly less than $8.2 million) property condition adjustment.
The principal risk is that Mr. Carraway, in the course of his independent property inspection and analysis, identifies specific co

ATTORNEY-CLIENT PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT

MEMORANDUM

MATTER NO.: 1027-00003

I. EXECUTIVE SUMMARY

II. BACKGROUND

V. PCG'S CAPITAL EXPENDITURE HISTORY AND MAINTENANCE RECORD

VI. CRITIQUE OF BEACON'S TREATMENT OF DEFERRED MAINTENANCE IN THE APPRAISAL

Record

Parties

Dates

Amounts