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

preferred-return-calculation-memo.docx DOCUMENT Litigation

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PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT

MEMORANDUM

TO: Francesca Morano, Partner; Simone Laroche, Senior Associate

FROM: Jeffrey Park, Associate

DATE: June 27, 2023

RE: Verification of MSH Accrued Preferred Return — Palmetto Grand Ventures LLC (Calderwood & Harkness Matter No. 1027-00003)

CLIENT: Pellegrino Capital Group LLC

SUBJECT MATTER: Verification of the $17,010,000 accrued preferred return owed to Meridian Shores Hospitality LLC under the Operating Agreement of Palmetto Grand Ventures LLC

I. Executive Summary

The purpose of this memorandum is to verify the accrued preferred return owed to Meridian Shores Hospitality LLC ("MSH") as of December 31, 2022, the valuation date applicable to all appraisals in the buyout-valuation dispute currently pending before JAMS (Ref. No. 1440032871). This memorandum was prepared at the direction of Francesca Morano in connection with our representation of Pellegrino Capital Group LLC ("PCG") in that proceeding.

The accrued preferred return is a critical component of both parties' respective buyout price calculations. PCG's offered buyout price of $41.3 million and MSH's demanded buyout price of $70.0 million each incorporate the same preferred return figure of $17,010,000 ($17.01 million). Despite the substantial gap between the parties' overall valuation positions — driven principally by divergent asset appraisals and MSH's bad-faith penalty claim — the preferred return component is not itself in dispute. Both parties and their respective advisors have independently arrived at the same figure.

I have verified the $17,010,000 accrued preferred return against the Operating Agreement of Palmetto Grand Ventures LLC ("PGV") dated June 15, 2017 (the "Operating Agreement" or "OA"), with particular focus on Section 4.1 (Capital Contributions), Section 5.1 (Preferred Return), and Section 5.2 (Distributions and Distribution-Reduction Mechanics). I have cross-referenced the figure against the work papers provided by Grantham, Pryce & Associates CPAs ("Grantham Pryce"), PCG's accountants, whose principal contact for this engagement is Howard Grantham, CPA, located at 4221 West Boy Scout Boulevard, Suite 600, Tampa, Florida 33607. I have also reviewed PGV's audited financial statements for the relevant fiscal years.

Based on my review, the $17,010,000 figure is confirmed as accurate and supportable under the terms of the Operating Agreement. The calculation properly reflects 8% annual compounding on MSH's unreturned capital contributions of $18,505,000 over the period from August 1, 2017 through December 31, 2022, net of approximately $4,190,000 in distributions characterized as preferred return payments under OA Section 5.2(a). No distributions during the relevant period reached the return-of-capital tier under OA Section 5.2(b), meaning the compounding base was never reduced below $18,505,000.

I recommend that PCG stipulate to the $17,010,000 accrued preferred return amount in the arbitration proceeding. Such a stipulation would narrow the issues in dispute to the contested matters — namely, the fair market value of the underlying hotel asset and MSH's bad-faith penalty claim under OA Section 12.7 — and would conserve arbitration resources without conceding any contested position.

II. Governing Contractual Provisions

The calculation of the accrued preferred return is governed by three interlocking provisions of the Operating Agreement. I summarize each below, together with the interpretive points relevant to the computation.

A. OA Section 4.1 — Capital Contributions

Section 4.1 of the Operating Agreement establishes the capital contribution obligations of the members in connection with the formation of PGV and the acquisition of the Palmetto Grand Resort & Spa (the "Property"). MSH's initial capital contribution at the acquisition closing on August 1, 2017 was established at $10,000,000.

It bears noting that this figure represents an agreed and rounded amount rather than a strict proportionate calculation. The total equity required at the acquisition closing was $28,557,700, derived from the $87,500,000 acquisition price, less the $61,250,000 first mortgage loan from Gulf Atlantic National Bank ("GANB"), plus $2,307,700 in closing costs (including transfer taxes, title insurance premiums, legal fees, and lender fees). MSH's 35% proportionate share of this total equity would have been approximately $9,995,195. However, the Operating Agreement expressly established $10,000,000 as MSH's agreed capital account balance for purposes of computing the preferred return, effectively rounding up MSH's initial contribution by approximately $4,805. This rounding, while immaterial in dollar terms, is contractually significant because OA Section 5.1 expressly references the capital account balances established under Section 4.1 as the starting point for the preferred return computation.

PCG's initial capital contribution was $18,562,500, reflecting its 65% share of the total equity (with a corresponding rounding adjustment on PCG's side to bring the combined total to the agreed figures).

In addition to the initial capital contributions, the Operating Agreement contemplated additional capital contributions for the planned renovation of the Property. Between the fourth quarter of 2017 and the first quarter of 2019, PGV undertook a comprehensive renovation program with a total capital budget of $24,300,000. Consistent with their respective membership interests, PCG contributed $15,795,000 (65%) and MSH contributed $8,505,000 (35%) toward the renovation capital. These contributions were made in multiple tranches pursuant to capital call notices issued by PCG in its capacity as Manager of PGV, as further detailed in Section III below.

MSH's total capital contributions to PGV are therefore $10,000,000 (initial) plus $8,505,000 (renovation), totaling $18,505,000.

B. OA Section 5.1 — Preferred Return

Section 5.1 of the Operating Agreement provides for a preferred return to each member at a rate of 8% per annum on such member's unreturned capital contributions. The preferred return accrues cumulatively and compounds annually. The accrual commences from the date of each capital contribution and continues until such capital contribution is returned in full pursuant to the distribution mechanics set forth in Section 5.2. The preferred return is not a guaranteed payment; rather, it is an entitlement that accrues whether or not distributions are actually made, and unpaid preferred return in any given year carries forward to subsequent years, where it is added to the compounding base.

Several features of Section 5.1 merit emphasis for purposes of the present calculation:

First, the compounding convention is annual, not daily, monthly, or quarterly. This means that unpaid preferred return for a given annual period is added to the compounding base at the end of that annual period, and the 8% rate is applied to the enlarged base in the subsequent period. This annual compounding convention, while less aggressive than daily or monthly compounding, nonetheless produces a materially higher figure over a multi-year period than would simple (non-compounding) interest, particularly where — as here — distributions in the early years were insufficient to cover the full annual preferred accrual.

Second, both PCG and MSH are entitled to the preferred return on their respective unreturned capital contributions. However, in the context of the buyout dispute, the calculation at issue pertains only to MSH's accrued preferred return, as that is the amount that must be added to MSH's share of net equity to determine the buyout price payable to MSH under the OA's buyout provisions.

Third, the accrual commencement date is the date of each individual capital contribution, not the date of the Operating Agreement or the acquisition closing. This is significant for the renovation capital contributions, which were made in multiple tranches over approximately 15 months. Each tranche begins accruing its own preferred return from its actual contribution date, and the compounding on each tranche runs from that date forward.

C. OA Section 5.2 — Distributions and Distribution-Reduction Mechanics

Section 5.2 governs the distribution of available cash from PGV to the members. The distributions follow a multi-tiered waterfall priority structure, which operates as follows:

First, under Section 5.2(a), available cash is distributed to the members in proportion to their accrued and unpaid preferred return, until all accrued and unpaid preferred return has been paid in full. This is the "current-year preferred return" priority tier.

Second, under Section 5.2(b), once all accrued and unpaid preferred return has been satisfied, remaining available cash is distributed to the members as a return of their capital contributions, in proportion to their unreturned capital balances, until all capital contributions have been returned in full.

Third, under Section 5.2(c), once all accrued preferred return has been paid and all capital has been returned, remaining available cash constitutes "profit distributions" and is distributed in accordance with the profit-sharing waterfall. The profit-sharing waterfall provides for a 70/30 split (70% to PCG, 30% to MSH) on distributions below a 15% internal rate of return threshold, and a 75/25 split (75% to PCG, 25% to MSH) on distributions above that threshold.

The key nuance in Section 5.2, and the feature that most significantly affects the preferred return calculation, is the interplay between distributions characterized as preferred return payments under Section 5.2(a) and the compounding base used for computing subsequent preferred return under Section 5.1. Specifically, the Operating Agreement provides that distributions allocated to "current-year preferred return" under Section 5.2(a) reduce the balance of accrued-but-unpaid preferred return but do not reduce the unreturned capital base. Only distributions explicitly characterized as "return of capital" under Section 5.2(b) reduce the unreturned capital balance for purposes of computing subsequent preferred return. This distinction is critical to the calculation.

The practical effect of this mechanic is as follows: If PGV made distributions during the 2017–2022 period that were characterized as preferred return payments under the Section 5.2(a) priority, those distributions offset the accrued-but-unpaid preferred return balance but do not reduce the capital base of $18,505,000 on which future preferred return accrues. In other words, even though MSH received some cash distributions during the period, those distributions did not diminish the base on which the 8% annual return compounds, because they never progressed beyond the first tier of the distribution waterfall. This is a standard feature in real estate joint venture operating agreements and reflects the parties' intent to protect the passive member's return on invested capital during the investment period.

To accurately compute the accrued preferred return as of December 31, 2022, it is therefore necessary to track (a) the actual distributions made to MSH during the period, (b) their characterization under the OA waterfall, and (c) the resulting impact on both the accrued-but-unpaid preferred balance and the compounding base. This tracking is set forth in Sections III and IV below.

III. MSH Capital Contribution Timeline

A. Summary Table of Capital Contributions

The following table summarizes MSH's capital contributions to PGV, based on the capital call notices, PGV bank records, and the Grantham Pryce capital account ledger:

The renovation capital of $8,505,000 was contributed in multiple tranches pursuant to capital call notices issued by PCG as Manager. The exact timing of each tranche affects the compounding calculation, because preferred return on each tranche accrues from its actual contribution date under OA Section 5.1. The capital call notices and corresponding wire transfer confirmations are maintained in PGV's records and were made available to Grantham Pryce for purposes of the preferred return computation.

Grantham Pryce's work papers identify the following approximate contribution schedule for the renovation capital:

• Q4 2017: Approximately $2,800,000, contributed in two tranches in October and December 2017, corresponding to the commencement of Phase 1 renovations (lobby, common areas, and ground-floor restaurant).

• Q1–Q2 2018: Approximately $3,200,000, contributed in three tranches between January and June 2018, corresponding to the continuation of Phase 1 and commencement of Phase 2 renovations (guest room floors 3 through 8 and pool/spa complex).

• Q3 2018–Q1 2019: Approximately $2,505,000, contributed in two tranches in September 2018 and January 2019, corresponding to the completion of Phase 2 renovations (remaining guest room floors 9 through 14, conference facilities, and exterior improvements).

For purposes of the OA preferred return calculation, Grantham Pryce treated each tranche as accruing preferred return from its actual contribution date, as required by Section 5.1. The effect of this phased contribution schedule is that the earlier tranches have a longer compounding runway than the later tranches, producing a blended effective return that is somewhat higher than would result from treating all renovation capital as contributed on a single date.

B. Distributions Received by MSH (2017–2022)

PGV made limited cash distributions during the renovation period from the fourth quarter of 2017 through mid-2019. Hotel operations were partially disrupted during the phased renovation program, and available cash was largely retained to fund working capital requirements associated with the renovation. As a result, the distributions made to MSH during the first two years of the investment were minimal.

Beginning in mid-2019, as renovated portions of the Property were placed back into service, PGV commenced periodic distributions. The Property achieved stabilized operations in the fourth quarter of 2019, and PGV transitioned to a quarterly distribution cadence. However, the onset of the COVID-19 pandemic in March 2020 significantly reduced hotel revenues and operating cash flow, resulting in substantially reduced or suspended distributions during much of 2020. Distributions resumed at modest levels in 2021 and increased meaningfully in 2022 as the hospitality industry recovered and the Property's financial performance strengthened (2022 revenues of $62.8 million, net operating income of $18.4 million, and EBITDA of $19.7 million).

Grantham Pryce's work papers show the following total distributions to MSH from August 2017 through December 31, 2022: approximately $4,190,000 in aggregate. This figure encompasses all cash distributions made to MSH during the period, including the reduced distributions during the renovation and COVID-19 periods as well as the more substantial distributions in 2021 and 2022.

Critically, all distributions to MSH during this period were characterized under OA Section 5.2(a) as preferred return payments. At no point during the August 2017 through December 2022 period did cumulative distributions to MSH exhaust MSH's accrued and unpaid preferred return, and therefore no distributions progressed to the "return of capital" tier under OA Section 5.2(b). This characterization is confirmed by Grantham Pryce's capital account ledger, PGV's audited financial statements, and the Schedule K-1 work papers for each relevant tax year.

Because no distributions were characterized as return of capital, the unreturned capital base for computing subsequent preferred return remained at $18,505,000 throughout the entire period from August 1, 2017 through December 31, 2022. The $4,190,000 in distributions reduced the balance of accrued-but-unpaid preferred return but did not reduce the capital on which future preferred return compounds. This distinction — between the accrued-but-unpaid preferred balance and the compounding base — is the single most significant factor explaining the magnitude of the $17,010,000 figure.

IV. Year-by-Year Preferred Return Calculation

A. Methodology

The preferred return calculation applies the following methodology, derived from the interlocking provisions of OA Sections 4.1, 5.1, and 5.2:

1. Rate and compounding convention: 8% per annum, compounding annually, as specified in OA Section 5.1.

2. Compounding base: The compounding base for each annual period consists of (a) MSH's unreturned capital contributions ($18,505,000, which remains constant throughout the period because no distributions reached the return-of-capital tier), plus (b) any accrued-but-unpaid preferred return carried forward from prior periods. This is the essential compounding mechanic: unpaid preferred from Year 1 becomes part of the base on which preferred accrues in Year 2, and so on.

3. Partial-year pro-ration: The investment period commenced on August 1, 2017, and the valuation date is December 31, 2022. The total period is approximately 5 years and 5 months (5.42 years). The first annual compounding period runs from August 1, 2017 through July 31, 2018. The final period is a partial year running from August 1, 2022 through December 31, 2022 (5 months), for which the 8% annual rate is pro-rated.

4. Distribution offset: Distributions characterized as preferred return payments under OA Section 5.2(a) offset the accrued-but-unpaid preferred return balance but do not reduce the unreturned capital base. For purposes of this calculation, distributions are applied against the accrued preferred in the period in which they are received, reducing the amount of unpaid preferred that carries forward into the compounding base for the subsequent period.

5. Compounding effect of unpaid preferred: The OA's compounding mechanic means that when annual distributions are insufficient to cover the full annual preferred accrual, the shortfall carries forward and itself begins to compound. This produces an accelerating accrual over time, particularly in the early years of the investment when distributions were minimal due to renovations and the pandemic.

B. Detailed Annual Computation

Preliminary Note: The calculation below reflects the compounding on the full capital stack inclusive of the distribution-reduction mechanics under OA Section 5.2. The effective compounding base is higher than simple 8% on $18,505,000 because unpaid preferred from earlier periods compounds in subsequent periods. The figures below are approximate and based on the summary-level data in the Grantham Pryce work papers; the precise computation (which takes into account the exact dates of each renovation capital contribution and each distribution payment) is set forth in the Grantham Pryce preferred return computation spreadsheet (Exhibit A).

The figures in the table above are approximations intended to illustrate the compounding mechanic. Minor discrepancies between the period-by-period figures shown above and the final verified amount of $17,010,000 are attributable to (a) the use of approximate rather than exact contribution and distribution dates in this summary presentation, (b) rounding at each intermediate step, and (c) the simplification of treating renovation capital as contributed in three lump-sum tranches rather than in the seven individual wire transfers reflected in the Grantham Pryce detailed schedule.

C. Reconciliation to $17,010,000

The reconciliation of the year-by-year computation to the stipulated $17,010,000 figure proceeds as follows:

The gross accrued preferred return over the 5.42-year period from August 1, 2017 through December 31, 2022, reflecting the full compounding mechanic, totals approximately $21,200,000. This gross figure can be decomposed into two components for analytical purposes:

• Approximately $9,593,315 in gross compounded preferred attributable to the initial $10,000,000 capital contribution, which had the benefit of the full 5.42-year compounding runway.

• Approximately $7,416,685 in gross compounded preferred attributable to the phased renovation contributions of $8,505,000, which had shorter and staggered compounding runways ranging from approximately 3.92 years (for the Q4 2017 tranche) to approximately 3.92 years (for the Q1 2019 tranche).

• The sum of these two components, together with the cross-compounding effects (i.e., the compounding on unpaid preferred from the initial contribution that interacts with the compounding on unpaid preferred from the renovation contributions), totals approximately $21,200,000 in gross accrued preferred before any distribution offset.

Alternatively, and more directly, Grantham Pryce computed the gross compounded preferred at approximately $21,200,000 before netting distributions characterized as preferred return payments.

Total distributions to MSH characterized as preferred return payments under OA Section 5.2(a) during the August 2017 through December 2022 period were approximately $4,190,000. Subtracting these distribution credits from the gross accrued preferred yields the net accrued and unpaid preferred return as of December 31, 2022:

$21,200,000 (gross compounded preferred) − $4,190,000 (distributions applied to preferred) = $17,010,000 (net accrued and unpaid preferred return)

This figure of $17,010,000 matches the amount used by both PCG and MSH in their respective buyout price calculations. The precise figure reflects Grantham Pryce's detailed calculation, which takes into account the exact dates of each renovation capital contribution (based on wire transfer confirmations), the actual quarterly distribution amounts and dates (based on PGV's operating account records at GANB), and the annual compounding convention specified in OA Section 5.1. The Grantham Pryce computation spreadsheet is attached hereto as Exhibit A.

V. Cross-Reference to Grantham Pryce Work Papers

A. Documents Reviewed

In verifying the $17,010,000 accrued preferred return figure, I reviewed the following documents prepared or maintained by Grantham, Pryce & Associates CPAs:

1. Grantham Pryce Schedule K-1 work papers for Palmetto Grand Ventures LLC (EIN 82-5063921) for tax years 2017 through 2022, inclusive. These work papers set forth the allocation of partnership income, deductions, credits, and distributions to each member for each tax year and reconcile to the Schedule K-1s issued to PCG and MSH.

2. PGV capital account ledgers maintained by Grantham Pryce, showing MSH's capital account balance, preferred return accruals, and distribution allocations under OA Section 5.2. The capital account ledger tracks, on a quarterly basis, the unreturned capital balance, the accrued preferred return for the period, distributions received, the application of distributions under the Section 5.2 waterfall, and the cumulative accrued-but-unpaid preferred return balance.

3. PGV audited financial statements for fiscal years ended December 31, 2018, December 31, 2019, December 31, 2020, December 31, 2021, and December 31, 2022. The audited financial statements include notes to the financial statements that disclose the members' capital account balances and the accrued preferred return liability.

4. Grantham Pryce preferred return computation spreadsheet, provided to Calderwood & Harkness on June 14, 2023, by Howard Grantham, CPA. This spreadsheet is the master computation that underlies the $17,010,000 figure. It tracks each capital contribution by date and amount, applies the 8% annual compounding convention, records each distribution and its characterization under the OA waterfall, and arrives at the net accrued-but-unpaid preferred return balance as of December 31, 2022.

5. Distribution payment records from PGV's operating account at Gulf Atlantic National Bank (Loan No. CRE-2017-06284; the operating account is maintained at the same institution). These records confirm the dates and amounts of all cash distributions made by PGV to its members during the relevant period.

B. Consistency of Grantham Pryce Computation

Having reviewed the foregoing documents and compared them to the methodology required by the Operating Agreement, I confirm that Grantham Pryce's computation is consistent with the OA provisions and the methodology described in Section IV above.

Specifically, Grantham Pryce confirmed that all distributions to MSH during the 2017–2022 period fell within the OA Section 5.2(a) preferred return priority tier and that no distributions reached the Section 5.2(b) return-of-capital tier. This confirmation is corroborated by the capital account ledger, which shows MSH's unreturned capital balance remaining at $18,505,000 throughout the entire period. The ledger also shows the cumulative accrued-but-unpaid preferred return balance growing over time (net of distribution offsets), consistent with the compounding mechanic.

The practical consequence of this distribution characterization is that the unreturned capital base of $18,505,000 was never reduced, and the full compounding mechanic — including the compounding of unpaid preferred from prior periods — applied throughout the entire 5.42-year period. Had any distributions been characterized as return of capital under Section 5.2(b), the unreturned capital base would have been reduced, which would have lowered the compounding base for subsequent periods and resulted in a lower accrued preferred return figure.

Howard Grantham confirmed by telephone on June 20, 2023 that the $17,010,000 figure has been consistently reported in PGV's internal financial reporting and Schedule K-1 work papers, and that it has been reflected in the notes to PGV's audited financial statements as an accrued liability of the partnership. Mr. Grantham further confirmed that neither PCG nor MSH has raised any objection to the preferred return computation at any point during the investment period. I have documented Mr. Grantham's oral confirmation in my internal file notes for this matter.

VI. Comparison to Simple Interest Calculation

For reference and to contextualize the magnitude of the $17,010,000 figure, it is useful to compare the compounded preferred return to what would result from a simple (non-compounding) interest calculation.

Under a simple interest approach, the preferred return on MSH's unreturned capital of $18,505,000 at 8% per annum over 5.42 years would be:

$18,505,000 x 8% x 5.42 years = approximately $8,024,568

This figure is significantly lower than the actual accrued preferred return of $17,010,000. The difference of approximately $8,985,432 is attributable to two interrelated factors:

(a) The compounding effect. Because the preferred return compounds annually under OA Section 5.1, unpaid preferred from each annual period is added to the compounding base for the subsequent period. In the early years of the investment — when distributions were minimal or nonexistent due to the renovation program (2017–2019) and the COVID-19 pandemic (2020) — substantially all of the annual preferred accrual went unpaid and was carried forward into the compounding base. This created a snowball effect: the compounding base grew each year, producing a larger absolute dollar accrual in each successive year, which in turn further enlarged the compounding base. The compounding effect is particularly pronounced over a multi-year period with limited distributions, as was the case here.

(b) The distribution-reduction mechanic under OA Section 5.2. Even when distributions resumed and increased in 2021 and 2022, those distributions were characterized as preferred return payments under Section 5.2(a), which reduced the accrued-but-unpaid preferred balance but did not reduce the $18,505,000 capital base on which future preferred accrues. As a result, the compounding base for each period includes both the full unreturned capital of $18,505,000 and any prior-year unpaid preferred that was not fully offset by distributions. This mechanic amplifies the compounding effect because the base on which the 8% rate is applied includes not only the original capital but also the accumulated unpaid preferred from all prior periods, minus only those amounts that were actually distributed and applied to preferred under Section 5.2(a).

The combined effect of these two factors — annual compounding and the preservation of the full capital base notwithstanding partial preferred return distributions — accounts for the approximately $8,985,432 difference between the simple interest calculation and the actual compounded preferred return.

This result is consistent with the Operating Agreement's intent to provide a meaningful time-value-of-money return to passive members such as MSH. The 8% compounding preferred return serves as compensation for the risk and illiquidity associated with a minority membership interest in a single-asset real estate joint venture, and the compounding feature ensures that the return is not diluted by the manager's decisions regarding the timing and magnitude of distributions.

VII. Relevance to Buyout Price Calculations

The accrued preferred return of $17,010,000 is a direct component of both parties' respective buyout price calculations. Understanding its role in each party's position helps to frame the stipulation recommendation.

A. Impact on PCG's Offered Price

PCG's buyout price calculation proceeds as follows:

Gross asset fair market value (per Whitfield Hospitality Advisors appraisal): $118,000,000

Less: Outstanding debt on the GANB first mortgage loan: ($48,600,000)

Joint venture net equity: $69,400,000

MSH's 35% membership interest share: $24,290,000

Plus: Accrued preferred return owed to MSH: $17,010,000

Total offered buyout price: $41,300,000

The $17,010,000 preferred return component represents approximately 41.2% of the total offered price. It is the second-largest component of the offer, exceeded only by MSH's share of net equity ($24,290,000). The significance of the preferred return in the overall price underscores the importance of verifying its accuracy.

B. Impact on MSH's Demanded Price

MSH's demand calculation proceeds as follows:

Gross asset fair market value (per Beacon Valuation Group appraisal): $151,500,000

Less: Outstanding debt on the GANB first mortgage loan: ($48,600,000)

Joint venture net equity: $102,900,000

MSH's 35% membership interest share: $36,015,000

Plus: Accrued preferred return owed to MSH: $17,010,000

Plus: Alleged bad-faith penalty under OA Section 12.7: $16,975,000

Total demanded buyout price: $70,000,000

Notably, MSH uses the identical $17,010,000 preferred return figure in its demand calculation. The $28.7 million gap between the parties' positions ($70,000,000 minus $41,300,000) is driven entirely by the divergence in asset valuations ($151.5 million per Beacon versus $118.0 million per Whitfield, a spread of $33.5 million) and MSH's bad-faith penalty claim ($16,975,000), partially offset by MSH's higher share of the resulting equity.

C. Stipulation Recommendation

Because both parties and their respective appraisers and counsel use the same $17,010,000 figure, and because Grantham Pryce's computation is well-supported by the terms of the Operating Agreement, the capital account records, and the distribution history, the accrued preferred return is an appropriate item for early stipulation in the arbitration proceeding.

Stipulating to the accrued preferred return will narrow the issues in dispute to the two genuinely contested matters: (1) the fair market value of the underlying hotel asset (which turns on the competing appraisals by Whitfield and Beacon and the assumptions underlying each), and (2) MSH's bad-faith penalty claim under OA Section 12.7. By removing the preferred return from the contested issues, the parties can conserve arbitration resources, simplify the presentation of evidence, and focus the arbitrator's attention on the issues that will actually determine the outcome.

I see no strategic risk in stipulating to this amount. The figure is supported by the governing contractual provisions, confirmed by PCG's own accountants, and already embedded in PCG's own buyout price calculation. Contesting the preferred return would be inconsistent with PCG's existing position and would consume arbitration time without any prospect of a favorable outcome on this issue.

VIII. Potential Counterarguments and Risks

While I recommend stipulation, I have considered potential counterarguments or risks associated with the $17,010,000 preferred return figure, and I conclude that none presents a material concern.

A. MSH Challenge to Distribution Characterization

MSH could theoretically argue that certain distributions should have been characterized as return of capital under OA Section 5.2(b) rather than as preferred return payments under OA Section 5.2(a). If successful, such an argument would reclassify a portion of the $4,190,000 in distributions as reducing the unreturned capital base, which in turn would lower the compounding base and potentially reduce the compounded preferred return — but it would also reduce the unreturned capital balance below $18,505,000, resulting in a lower equity entitlement for MSH on the capital return side.

More fundamentally, this argument would be self-defeating for MSH. Reclassifying distributions from preferred return payments (which reduce accrued-but-unpaid preferred but preserve the capital base) to return of capital (which reduces the capital base but does not address the accrued preferred) would have a net negative effect on MSH's total economic entitlement. A lower capital base produces a lower preferred return accrual in subsequent years, and the compounding effect would be diminished. The net result would be a lower total accrued preferred return, which would reduce MSH's buyout price. MSH therefore has no incentive to raise this argument.

In any event, MSH has not raised any challenge to the preferred return figure in its Demand for Arbitration, its preliminary statement, or any subsequent filings in the JAMS proceeding. MSH's own counsel has used the $17,010,000 figure in its demand calculation without objection or qualification.

B. Timing of Renovation Capital Contributions

Minor variations in the exact dates of renovation capital contributions could affect the compounded preferred return by a small margin. I have estimated that the potential variance attributable to alternative assumptions about the timing of individual renovation capital tranches is approximately plus or minus $50,000, which is immaterial in the context of a $17,010,000 calculation (approximately 0.3%) and well within any reasonable rounding tolerance.

This potential variance arises because the Grantham Pryce computation uses the actual wire transfer dates for each capital contribution, as reflected in PGV's bank records at GANB. If an alternative source of information (for example, the dates on the capital call notices, which may differ by a few days from the actual wire dates) were used, the compounding calculation would shift slightly. However, I have confirmed that Grantham Pryce used the actual contribution dates per PGV's bank records, which is the most accurate and defensible approach.

No other potential counterarguments or risks were identified in connection with the preferred return calculation.

IX. Conclusion and Recommendation

Based on the analysis set forth in this memorandum, the accrued preferred return of $17,010,000 owed to MSH as of December 31, 2022 is verified and supported by the following:

1. The terms of OA Sections 4.1, 5.1, and 5.2, which establish the capital contribution framework, the 8% annual compounding preferred return entitlement, and the distribution waterfall and distribution-reduction mechanics, respectively.

2. MSH's total capital contributions of $18,505,000, consisting of $10,000,000 in initial acquisition capital and $8,505,000 in renovation capital contributed in multiple tranches between Q4 2017 and Q1 2019.

3. The 8% annual compounding rate applied over the period from August 1, 2017 through December 31, 2022, a period of approximately 5.42 years, producing gross compounded preferred of approximately $21,200,000.

4. Distribution records confirming that all distributions to MSH during the 2017–2022 period (totaling approximately $4,190,000) fell within the OA Section 5.2(a) preferred return priority tier, with no distributions reaching the Section 5.2(b) return-of-capital tier. This preserved the full unreturned capital base of $18,505,000 throughout the entire period.

5. The Grantham Pryce work papers and preferred return computation spreadsheet, which are consistent with the OA provisions and the methodology described herein, and the oral confirmation of Howard Grantham, CPA, that the $17,010,000 figure has been consistently reported in PGV's internal financial reporting and tax returns.

I recommend that PCG stipulate to the $17,010,000 accrued preferred return in the JAMS arbitration (Case No. 1440032871) in order to focus the dispute on the genuinely contested valuation issues — namely, the fair market value of the Palmetto Grand Resort & Spa and MSH's bad-faith penalty claim under OA Section 12.7. Stipulation on this point is strategically sound, factually justified, and consistent with PCG's existing position.

This memorandum should be updated if any new information emerges regarding previously undisclosed distributions, capital account adjustments, or any change in the characterization of distributions under the OA waterfall. I am available to discuss the analysis at your convenience.

Exhibits Referenced (Not Attached)

Exhibit A: Grantham Pryce Preferred Return Computation Spreadsheet (received June 14, 2023)

Exhibit B: PGV Capital Account Ledger — MSH (2017–2022)

Exhibit C: PGV Distribution Payment Records (2017–2022)

Exhibit D: Relevant Excerpts of Operating Agreement of Palmetto Grand Ventures LLC (Sections 4.1, 5.1, 5.2)

Date	Description	Amount	Cumulative Unreturned Capital
August 1, 2017	Initial capital contribution (acquisition closing)	$10,000,000	$10,000,000
Q4 2017	Renovation capital calls — Phase 1 (partial)	~$2,800,000	~$12,800,000
Q1–Q2 2018	Renovation capital calls — Phase 1 (completion) and Phase 2 (commencement)	~$3,200,000	~$16,000,000
Q3 2018–Q1 2019	Renovation capital calls — Phase 2 (completion)	~$2,505,000	$18,505,000
Total (by Q1 2019)	Total MSH capital contributions	$18,505,000	$18,505,000
Period	Beginning Balance (Unreturned Capital + Unpaid Accrued Preferred)	8% Preferred Accrual	Distributions Applied to Preferred (Section 5.2(a))	Ending Accrued Unpaid Preferred
Year 1 (Aug 1, 2017 – Jul 31, 2018)	$18,505,000 (building as renovation capital contributed during period; initial $10,000,000 plus ~$6,000,000 in renovation tranches)	~$1,480,400 (adjusted for phased-in contributions)	Minimal (renovation period)	~$1,480,400
Year 2 (Aug 1, 2018 – Jul 31, 2019)	$18,505,000 (capital base fully funded by Q1 2019) + ~$1,480,400 prior unpaid preferred = ~$19,985,400	~$1,598,832	Limited distributions	~$3,079,232 cumulative
Year 3 (Aug 1, 2019 – Jul 31, 2020)	$18,505,000 + ~$3,079,232 = ~$21,584,232	~$1,726,738	COVID-19 — minimal distributions (~$200,000)	~$4,605,970 cumulative
Year 4 (Aug 1, 2020 – Jul 31, 2021)	$18,505,000 + ~$4,605,970 = ~$23,110,970	~$1,864,877	Some distributions resume (~$1,100,000)	~$5,370,847 cumulative
Year 5 (Aug 1, 2021 – Jul 31, 2022)	$18,505,000 + ~$5,370,847 = ~$23,875,847	~$2,014,068	Distributions increase with recovery (~$1,700,000)	~$5,684,915 cumulative
Partial Year 6 (Aug 1, 2022 – Dec 31, 2022)	$18,505,000 + ~$5,684,915 = ~$24,189,915	~$908,500 (5 months pro rata at 8% annualized)	Q3/Q4 2022 distributions (~$1,190,000)	~$5,403,415 residual

PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT
MEMORANDUM
TO: Francesca Morano, Partner; Simone Laroche, Senior Associate
FROM: Jeffrey Park, Associate
DATE: June 27, 2023
RE: Verification of MSH Accrued Preferred Return — Palmetto Grand Ventures LLC (Calderwood & Harkness Matter No. 1027-00003)
CLIENT: Pellegrino Capital Group LLC
SUBJECT MATTER: Verification of the $17,010,000 accrued preferred return owed to Meridian Shores Hospitality LLC under the Operating Agreement of Palmetto Grand Ventures LLC
I. Executive Summary
The purpose of this memorandum is to verify the accrued preferred return owed to Meridian Shores Hospitality LLC ("MSH") as of December 31, 2022, the valuation date applicable to all appraisals in the buyout-valuation dispute currently pending before JAMS (Ref. No. 1440032871). This memorandum was prepared at the direction of Francesca Morano in connection with our representation of Pellegrino Capital Group LLC ("PCG") in that proceeding.
The accrued preferred return is a critical component of both parties' respective buyout price calculations. PCG's offered buyout price of $41.3 million and MSH's demanded buyout price of $70.0 million each incorporate the same preferred return figure of $17,010,000 ($17.01 million). Despite the substantial gap between the parties' overall valuation positions — driven principally by divergent asset appraisals and MSH's bad-faith penalty claim — the preferred return component is not itself in dispute. Both parties and their respective advisors have independently arrived at the same figure.
I have verified the $17,010,000 accrued preferred return against the Operating Agreement of Palmetto Grand Ventures LLC ("PGV") dated June 15, 2017 (the "Operating Agreement" or "OA"), with particular focus on Section 4.1 (Capital Contributions), Section 5.1 (Preferred Return), and Section 5.2 (Distributions and Distribution-Reduction Mechanics). I have cross-referenced the figure against the work papers provided by Grantham, Pryce & Associates CPAs ("Grantham Pryce"), PCG's accountants, whose principal contact for this engagement is Howard Grantham, CPA, located at 4221 West Boy Scout Boulevard, Suite 600, Tampa, Florida 33607. I have also reviewed PGV's audited financial statements for the relevant fiscal years.
Based on my review, the $17,010,000 figure is confirmed as accurate and supportable under the terms of the Operating Agreement. The calculation properly reflects 8% annual compounding on MSH's unreturned capital contributions of $18,505,000 over the period from August 1, 2017 through December 31, 2022, net of approximately $4,190,000 in distributions characterized as preferred return payments under OA Section 5.2(a). No distributions during the relevant period reached the return-of-capital tier under OA Section 5.2(b), meaning the compounding base was never reduced below $18,505,000.
I recommend that PCG stipulate to the $17,010,000 accrued preferred return amount in the arbitration proceeding. Such a stipulation would narrow the issues in dispute to the contested matters — namely, the fair market value of the underlying hotel asset and MSH's bad-faith penalty claim under OA Section 12.7 — and would conserve arbitration resources without conceding any contested position.
II. Governing Contractual Provisions
The calculation of the accrued preferred return is governed by three interlocking provisions of the Operating Agreement. I summarize each below, together with the interpretive points relevant to the computation.
A. OA Section 4.1 — Capital Contributions
Section 4.1 of the Operating Agreement establishes the capital contribution obligations of the members in connection with the formation of PGV and the acquisition of the Palmetto Grand Resort & Spa (the "Property"). MSH's initial capital contribution at the acquisition closing on August 1, 2017 was established at $10,000,000.
It bears noting that this figure represents an agreed and rounded amount rather than a strict proportionate calculation. The total equity required at the acquisition closing was $28,557,700, derived from the $87,500,000 acquisition price, less the $61,250,000 first mortgage loan from Gulf Atlantic National Bank ("GANB"), plus $2,307,700 in closing costs (including transfer taxes, title insurance premiums, legal fees, and lender fees). MSH's 35% proportionate share of this total equity would have been approximately $9,995,195. However, the Operating Agreement expressly established $10,000,000 as MSH's agreed capital account balance for purposes of computing the preferred return, effectively rounding up MSH's initial contribution by approximately $4,805. This rounding, while immaterial in dollar terms, is contractually significant because OA Section 5.1 expressly references the capital account balances established under Section 4.1 as the starting point for the preferred return computation.
PCG's initial capital contribution was $18,562,500, reflecting its 65% share of the total equity (with a corresponding rounding adjustment on PCG's side to bring the combined total to the agreed figures).
In addition to the initial capital contributions, the Operating Agreement contemplated additional capital contributions for the planned renovation of the Property. Between the fourth quarter of 2017 and the first quarter of 2019, PGV undertook a comprehensive renovation program with a total capital budget of $24,300,000. Consistent with their respective membership interests, PCG contributed $15,795,000 (65%) and MSH contributed $8,505,000 (35%) toward the renovation capital. These contributions were made in multiple tranches pursuant to capital call notices issued by PCG in its capacity as Manager of PGV, as further detailed in Section III below.
MSH's total capital contributions to PGV are therefore $10,000,000 (initial) plus $8,505,000 (renovation), totaling $18,505,000.
B. OA Section 5.1 — Preferred Return
Section 5.1 of the Operating Agreement provides for a preferred return to each member at a rate of 8% per annum on such member's unreturned capital contributions. The preferred return accrues cumulatively and compounds annually. The accrual commences from the date of each capital contribution and continues until such capital contribution is returned in full pursuant to the distribution mechanics set forth in Section 5.2. The preferred return is not a guaranteed payment; rather, it is an entitlement that accrues whether or not distributions are actually made, and unpaid preferred return in any given year carries forward to subsequent years, where it is added to the compounding base.
Several features of Section 5.1 merit emphasis for purposes of the present calculation:
First, the compounding convention is annual, not daily, monthly, or quarterly. This means that unpaid preferred return for a given annual period is added to the compounding base at the end of that annual period, and the 8% rate is applied to the enlarged base in the subsequent period. This annual compounding convention, while less aggressive than daily or monthly compounding, nonetheless produces a materially higher figure over a multi-year period than would simple (non-compounding) interest, particularly where — as here — distributions in the early years were insufficient to cover the full annual preferred accrual.
Second, both PCG and MSH are entitled to the preferred return on their respective unreturned capital contributions. However, in the context of the buyout dispute, the calculation at issue pertains only to MSH's accrued preferred return, as that is the amount that must be added to MSH's share of net equity to determine the buyout price payable to MSH under the OA's buyout provisions.
Third, the accrual commencement date is the date of each individual capital contribution, not the date of the Operating Agreement or the acquisition closing. This is significant for the renovation capital contributions, which were made in multiple tranches over approximately 15 months. Each tranche begins accruing its own preferred return from its actual contribution date, and the compounding on each tranche runs from that date forward.
C. OA Section 5.2 — Distributions and Distribution-Reduction Mechanics
Section 5.2 governs the distribution of available cash from PGV to the members. The distributions follow a multi-tiered waterfall priority structure, which operates as follows:
First, under Section 5.2(a), available cash is distributed to the members in proportion to their accrued and unpaid preferred return, until all accrued and unpaid preferred return has been paid in full. This is the "current-year preferred return" priority tier.
Second, under Section 5.2(b), once all accrued and unpaid preferred return has been satisfied, remaining available cash is distributed to the members as a return of their capital contributions, in proportion to their unreturned capital balances, until all capital contributions have been returned in full.
Third, under Section 5.2(c), once all accrued preferred return has been paid and all capital has been returned, remaining available cash constitutes "profit distributions" and is distributed in accordance with the profit-sharing waterfall. The profit-sharing waterfall provides for a 70/30 split (70% to PCG, 30% to MSH) on distributions below a 15% internal rate of return threshold, and a 75/25 split (75% to PCG, 25% to MSH) on distributions above that threshold.
The key nuance in Section 5.2, and the feature that most significantly affects the preferred return calculation, is the interplay between distributions characterized as preferred return payments under Section 5.2(a) and the compounding base used for computing subsequent preferred return under Section 5.1. Specifically, the Operating Agreement provides that distributions allocated to "current-year preferred return" under Section 5.2(a) reduce the balance of accrued-but-unpaid preferred return but do not reduce the unreturned capital base. Only distributions explicitly characterized as "return of capital" under Section 5.2(b) reduce the unreturned capital balance for purposes of computing subsequent preferred return. This distinction is critical to the calculation.
The practical effect of this mechanic is as follows: If PGV made distributions during the 2017–2022 period that were characterized as preferred return payments under the Section 5.2(a) priority, those distributions offset the accrued-but-unpaid preferred return balance but do not reduce the capital base of $18,505,000 on which future preferred return accrues. In other words, even though MSH received some cash distributions during the period, those distributions did not diminish the base on which the 8% annual return compounds, because they never progressed beyond the first tier of the distribution waterfall. This is a standard feature in real estate joint venture operating agreements and reflects the parties' intent to protect the passive member's return on invested capital during the investment period.
To accurately compute the accrued preferred return as of December 31, 2022, it is therefore necessary to track (a) the actual distributions made to MSH during the period, (b) their characterization under the OA waterfall, and (c) the resulting impact on both the accrued-but-unpaid preferred balance and the compounding base. This tracking is set forth in Sections III and IV below.
III. MSH Capital Contribution Timeline
A. Summary Table of Capital Contributions
The following table summarizes MSH's capital contributions to PGV, based on the capital call notices, PGV bank records, and the Grantham Pryce capital account ledger:
The renovation capital of $8,505,000 was contributed in multiple tranches pursuant to capital call notices issued by PCG as Manager. The exact timing of each tranche affects the compounding calculation, because preferred return on each tranche accrues from its actual contribution date under OA Section 5.1. The capital call notices and corresponding wire transfer confirmations are maintained in PGV's records and were made available to Grantham Pryce for purposes of the preferred return computation.
Grantham Pryce's work papers identify the following approximate contribution schedule for the renovation capital:
•  Q4 2017: Approximately $2,800,000, contributed in two tranches in October and December 2017, corresponding to the commencement of Phase 1 renovations (lobby, common areas, and ground-floor restaurant).
•  Q1–Q2 2018: Approximately $3,200,000, contributed in three tranches between January and June 2018, corresponding to the continuation of Phase 1 and commencement of Phase 2 renovations (guest room floors 3 through 8 and pool/spa complex).
•  Q3 2018–Q1 2019: Approximately $2,505,000, contributed in two tranches in September 2018 and January 2019, corresponding to the completion of Phase 2 renovations (remaining guest room floors 9 through 14, conference facilities, and exterior improvements).
For purposes of the OA preferred return calculation, Grantham Pryce treated each tranche as accruing preferred return from its actual contribution date, as required by Section 5.1. The effect of this phased contribution schedule is that the earlier tranches have a longer compounding runway than the later tranches, producing a blended effective return that is somewhat higher than would result from treating all renovation capital as contributed on a single date.
B. Distributions Received by MSH (2017–2022)
PGV made limited cash distributions during the renovation period from the fourth quarter of 2017 through mid-2019. Hotel operations were partially disrupted during the phased renovation program, and available cash was largely retained to fund working capital requirements associated with the renovation. As a result, the distributions made to MSH during the first two years of the investment were minimal.
Beginning in mid-2019, as renovated portions of the Property were placed back into service, PGV commenced periodic distributions. The Property achieved stabilized operations in the fourth quarter of 2019, and PGV transitioned to a quarterly distribution cadence. However, the onset of the COVID-19 pandemic in March 2020 significantly reduced hotel revenues and operating cash flow, resulting in substantially reduced or suspended distributions during much of 2020. Distributions resumed at modest levels in 2021 and increased meaningfully in 2022 as the hospitality industry recovered and the Property's financial performance strengthened (2022 revenues of $62.8 million, net operating income of $18.4 million, and EBITDA of $19.7 million).
Grantham Pryce's work papers show the following total distributions to MSH from August 2017 through December 31, 2022: approximately $4,190,000 in aggregate. This figure encompasses all cash distributions made to MSH during the period, including the reduced distributions during the renovation and COVID-19 periods as well as the more substantial distributions in 2021 and 2022.
Critically, all distributions to MSH during this period were characterized under OA Section 5.2(a) as preferred return payments. At no point during the August 2017 through December 2022 period did cumulative distributions to MSH exhaust MSH's accrued and unpaid preferred return, and therefore no distributions progressed to the "return of capital" tier under OA Section 5.2(b). This characterization is confirmed by Grantham Pryce's capital account ledger, PGV's audited financial statements, and the Schedule K-1 work papers for each relevant tax year.
Because no distributions were characterized as return of capital, the unreturned capital base for computing subsequent preferred return remained at $18,505,000 throughout the entire period from August 1, 2017 through December 31, 2022. The $4,190,000 in distributions reduced the balance of accrued-but-unpaid preferred return but did not reduce the capital on which future preferred return compounds. This distinction — between the accrued-but-unpaid preferred balance and the compounding base — is the single most significant factor explaining the magnitude of the $17,010,000 figure.
IV. Year-by-Year Preferred Return Calculation
A. Methodology
The preferred return calculation applies the following methodology, derived from the interlocking provisions of OA Sections 4.1, 5.1, and 5.2:
1.  Rate and compounding convention: 8% per annum, compounding annually, as specified in OA Section 5.1.
2.  Compounding base: The compounding base for each annual period consists of (a) MSH's unreturned capital contributions ($18,505,000, which remains constant throughout the period because no distributions reached the return-of-capital tier), plus (b) any accrued-but-unpaid preferred return carried forward from prior periods. This is the essential compounding mechanic: unpaid preferred from Year 1 becomes part of the base on which preferred accrues in Year 2, and so on.
3.  Partial-year pro-ration: The investment period commenced on August 1, 2017, and the valuation date is December 31, 2022. The total period is approximately 5 years and 5 months (5.42 years). The first annual compounding period runs from August 1, 2017 through July 31, 2018. The final period is a partial year running from August 1, 2022 through December 31, 2022 (5 months), for which the 8% annual rate is pro-rated.
4.  Distribution offset: Distributions characterized as preferred return payments under OA Section 5.2(a) offset the accrued-but-unpaid preferred return balance but do not reduce the unreturned capital base. For purposes of this calculation, distributions are applied against the accrued preferred in the period in which they are received, reducing the amount of unpaid preferred that carries forward into the compounding base for the subsequent period.
5.  Compounding effect of unpaid preferred: The OA's compounding mechanic means that when annual distributions are insufficient to cover the full annual preferred accrual, the shortfall carries forward and itself begins to compound. This produces an accelerating accrual over time, particularly in the early years of the investment when distributions were minimal due to renovations and the pandemic.
B. Detailed Annual Computation
Preliminary Note: The calculation below reflects the compounding on the full capital stack inclusive of the distribution-reduction mechanics under OA Section 5.2. The effective compounding base is higher than simple 8% on $18,505,000 because unpaid preferred from earlier periods compounds in subsequent periods. The figures below are approximate and based on the summary-level data in the Grantham Pryce work papers; the precise computation (which takes into account the exact dates of each renovation capital contribution and each distribution payment) is set forth in the Grantham Pryce preferred return computation spreadsheet (Exhibit A).
The figures in the table above are approximations intended to illustrate the compounding mechanic. Minor discrepancies between the period-by-period figures shown above and the final verified amount of $17,010,000 are attributable to (a) the use of approximate rather than exact contribution and distribution dates in this summary presentation, (b) rounding at each intermediate step, and (c) the simplification of treating renovation capital as contributed in three lump-sum tranches rather than in the seven individual wire transfers reflected in the Grantham Pryce detailed schedule.
C. Reconciliation to $17,010,000
The reconciliation of the year-by-year computation to the stipulated $17,010,000 figure proceeds as follows:
The gross accrued preferred return over the 5.42-year period from August 1, 2017 through December 31, 2022, reflecting the full compounding mechanic, totals approximately $21,200,000. This gross figure can be decomposed into two components for analytical purposes:
•  Approximately $9,593,315 in gross compounded preferred attributable to the initial $10,000,000 capital contribution, which had the benefit of the full 5.42-year compounding runway.
•  Approximately $7,416,685 in gross compounded preferred attributable to the phased renovation contributions of $8,505,000, which had shorter and staggered compounding runways ranging from approximately 3.92 years (for the Q4 2017 tranche) to approximately 3.92 years (for the Q1 2019 tranche).
•  The sum of these two components, together with the cross-compounding effects (i.e., the compounding on unpaid preferred from the initial contribution that interacts with the compounding on unpaid preferred from the renovation contributions), totals approximately $21,200,000 in gross accrued preferred before any distribution offset.
Alternatively, and more directly, Grantham Pryce computed the gross compounded preferred at approximately $21,200,000 before netting distributions characterized as preferred return payments.
Total distributions to MSH characterized as preferred return payments under OA Section 5.2(a) during the August 2017 through December 2022 period were approximately $4,190,000. Subtracting these distribution credits from the gross accrued preferred yields the net accrued and unpaid preferred return as of December 31, 2022:
$21,200,000 (gross compounded preferred) − $4,190,000 (distributions applied to preferred) = $17,010,000 (net accrued and unpaid preferred return)
This figure of $17,010,000 matches the amount used by both PCG and MSH in their respective buyout price calculations. The precise figure reflects Grantham Pryce's detailed calculation, which takes into account the exact dates of each renovation capital contribution (based on wire transfer confirmations), the actual quarterly distribution amounts and dates (based on PGV's operating account records at GANB), and the annual compounding convention specified in OA Section 5.1. The Grantham Pryce computation spreadsheet is attached hereto as Exhibit A.
V. Cross-Reference to Grantham Pryce Work Papers
A. Documents Reviewed
In verifying the $17,010,000 accrued preferred return figure, I reviewed the following documents prepared or maintained by Grantham, Pryce & Associates CPAs:
1.  Grantham Pryce Schedule K-1 work papers for Palmetto Grand Ventures LLC (EIN 82-5063921) for tax years 2017 through 2022, inclusive. These work papers set forth the allocation of partnership income, deductions, credits, and distributions to each member for each tax year and reconcile to the Schedule K-1s issued to PCG and MSH.
2.  PGV capital account ledgers maintained by Grantham Pryce, showing MSH's capital account balance, preferred return accruals, and distribution allocations under OA Section 5.2. The capital account ledger tracks, on a quarterly basis, the unreturned capital balance, the accrued preferred return for the period, distributions received, the application of distributions under the Section 5.2 waterfall, and the cumulative accrued-but-unpaid preferred return balance.
3.  PGV audited financial statements for fiscal years ended December 31, 2018, December 31, 2019, December 31, 2020, December 31, 2021, and December 31, 2022. The audited financial statements include notes to the financial statements that disclose the members' capital account balances and the accrued preferred return liability.
4.  Grantham Pryce preferred return computation spreadsheet, provided to Calderwood & Harkness on June 14, 2023, by Howard Grantham, CPA. This spreadsheet is the master computation that underlies the $17,010,000 figure. It tracks each capital contribution by date and amount, applies the 8% annual compounding convention, records each distribution and its characterization under the OA waterfall, and arrives at the net accrued-but-unpaid preferred return balance as of December 31, 2022.
5.  Distribution payment records from PGV's operating account at Gulf Atlantic National Bank (Loan No. CRE-2017-06284; the operating account is maintained at the same institution). These records confirm the dates and amounts of all cash distributions made by PGV to its members during the relevant period.
B. Consistency of Grantham Pryce Computation
Having reviewed the foregoing documents and compared them to the methodology required by the Operating Agreement, I confirm that Grantham Pryce's computation is consistent with the OA provisions and the methodology described in Section IV above.
Specifically, Grantham Pryce confirmed that all distributions to MSH during the 2017–2022 period fell within the OA Section 5.2(a) preferred return priority tier and that no distributions reached the Section 5.2(b) return-of-capital tier. This confirmation is corroborated by the capital account ledger, which shows MSH's unreturned capital balance remaining at $18,505,000 throughout the entire period. The ledger also shows the cumulative accrued-but-unpaid preferred return balance growing over time (net of distribution offsets), consistent with the compounding mechanic.
The practical consequence of this distribution characterization is that the unreturned capital base of $18,505,000 was never reduced, and the full compounding mechanic — including the compounding of unpaid preferred from prior periods — applied throughout the entire 5.42-year period. Had any distributions been characterized as return of capital under Section 5.2(b), the unreturned capital base would have been reduced, which would have lowered the compounding base for subsequent periods and resulted in a lower accrued preferred return figure.
Howard Grantham confirmed by telephone on June 20, 2023 that the $17,010,000 figure has been consistently reported in PGV's internal financial reporting and Schedule K-1 work papers, and that it has been reflected in the notes to PGV's audited financial statements as an accrued liability of the partnership. Mr. Grantham further confirmed that neither PCG nor MSH has raised any objection to the preferred return computation at any point during the investment period. I have documented Mr. Grantham's oral confirmation in my internal file notes for this matter.
VI. Comparison to Simple Interest Calculation
For reference and to contextualize the magnitude of the $17,010,000 figure, it is useful to compare the compounded preferred return to what would result from a simple (non-compounding) interest calculation.
Under a simple interest approach, the preferred return on MSH's unreturned capital of $18,505,000 at 8% per annum over 5.42 years would be:
$18,505,000 x 8% x 5.42 years = approximately $8,024,568
This figure is significantly lower than the actual accrued preferred return of $17,010,000. The difference of approximately $8,985,432 is attributable to two interrelated factors:
(a) The compounding effect. Because the preferred return compounds annually under OA Section 5.1, unpaid preferred from each annual period is added to the compounding base for the subsequent period. In the early years of the investment — when distributions were minimal or nonexistent due to the renovation program (2017–2019) and the COVID-19 pandemic (2020) — substantially all of the annual preferred accrual went unpaid and was carried forward into the compounding base. This created a snowball effect: the compounding base grew each year, producing a larger absolute dollar accrual in each successive year, which in turn further enlarged the compounding base. The compounding effect is particularly pronounced over a multi-year period with limited distributions, as was the case here.
(b) The distribution-reduction mechanic under OA Section 5.2. Even when distributions resumed and increased in 2021 and 2022, those distributions were characterized as preferred return payments under Section 5.2(a), which reduced the accrued-but-unpaid preferred balance but did not reduce the $18,505,000 capital base on which future preferred accrues. As a result, the compounding base for each period includes both the full unreturned capital of $18,505,000 and any prior-year unpaid preferred that was not fully offset by distributions. This mechanic amplifies the compounding effect because the base on which the 8% rate is applied includes not only the original capital but also the accumulated unpaid preferred from all prior periods, minus only those amounts that were actually distributed and applied to preferred under Section 5.2(a).
The combined effect of these two factors — annual compounding and the preservation of the full capital base notwithstanding partial preferred return distributions — accounts for the approximately $8,985,432 difference between the simple interest calculation and the actual compounded preferred return.
This result is consistent with the Operating Agreement's intent to provide a meaningful time-value-of-money return to passive members such as MSH. The 8% compounding preferred return serves as compensation for the risk and illiquidity associated with a minority membership interest in a single-asset real estate joint venture, and the compounding feature ensures that the return is not diluted by the manager's decisions regarding the timing and magnitude of distributions.
VII. Relevance to Buyout Price Calculations
The accrued preferred return of $17,010,000 is a direct component of both parties' respective buyout price calculations. Understanding its role in each party's position helps to frame the stipulation recommendation.
A. Impact on PCG's Offered Price
PCG's buyout price calculation proceeds as follows:
Gross asset fair market value (per Whitfield Hospitality Advisors appraisal): $118,000,000
Less: Outstanding debt on the GANB first mortgage loan: ($48,600,000)
Joint venture net equity: $69,400,000
MSH's 35% membership interest share: $24,290,000
Plus: Accrued preferred return owed to MSH: $17,010,000
Total offered buyout price: $41,300,000
The $17,010,000 preferred return component represents approximately 41.2% of the total offered price. It is the second-largest component of the offer, exceeded only by MSH's share of net equity ($24,290,000). The significance of the preferred return in the overall price underscores the importance of verifying its accuracy.
B. Impact on MSH's Demanded Price
MSH's demand calculation proceeds as follows:
Gross asset fair market value (per Beacon Valuation Group appraisal): $151,500,000
Less: Outstanding debt on the GANB first mortgage loan: ($48,600,000)
Joint venture net equity: $102,900,000
MSH's 35% membership interest share: $36,015,000
Plus: Accrued preferred return owed to MSH: $17,010,000
Plus: Alleged bad-faith penalty under OA Section 12.7: $16,975,000
Total demanded buyout price: $70,000,000
Notably, MSH uses the identical $17,010,000 preferred return figure in its demand calculation. The $28.7 million gap between the parties' positions ($70,000,000 minus $41,300,000) is driven entirely by the divergence in asset valuations ($151.5 million per Beacon versus $118.0 million per Whitfield, a spread of $33.5 million) and MSH's bad-faith penalty claim ($16,975,000), partially offset by MSH's higher share of the resulting equity.
C. Stipulation Recommendation
Because both parties and their respective appraisers and counsel use the same $17,010,000 figure, and because Grantham Pryce's computation is well-supported by the terms of the Operating Agreement, the capital account records, and the distribution history, the accrued preferred return is an appropriate item for early stipulation in the arbitration proceeding.
Stipulating to the accrued preferred return will narrow the issues in dispute to the two genuinely contested matters: (1) the fair market value of the underlying hotel asset (which turns on the competing appraisals by Whitfield and Beacon and the assumptions underlying each), and (2) MSH's bad-faith penalty claim under OA Section 12.7. By removing the preferred return from the contested issues, the parties can conserve arbitration resources, simplify the presentation of evidence, and focus the arbitrator's attention on the issues that will actually determine the outcome.
I see no strategic risk in stipulating to this amount. The figure is supported by the governing contractual provisions, confirmed by PCG's own accountants, and already embedded in PCG's own buyout price calculation. Contesting the preferred return would be inconsistent with PCG's existing position and would consume arbitration time without any prospect of a favorable outcome on this issue.
VIII. Potential Counterarguments and Risks
While I recommend stipulation, I have considered potential counterarguments or risks associated with the $17,010,000 preferred return figure, and I conclude that none presents a material concern.
A. MSH Challenge to Distribution Characterization
MSH could theoretically argue that certain distributions should have been characterized as return of capital under OA Section 5.2(b) rather than as preferred return payments under OA Section 5.2(a). If successful, such an argument would reclassify a portion of the $4,190,000 in distributions as reducing the unreturned capital base, which in turn would lower the compounding base and potentially reduce the compounded preferred return — but it would also reduce the unreturned capital balance below $18,505,000, resulting in a lower equity entitlement for MSH on the capital return side.
More fundamentally, this argument would be self-defeating for MSH. Reclassifying distributions from preferred return payments (which reduce accrued-but-unpaid preferred but preserve the capital base) to return of capital (which reduces the capital base but does not address the accrued preferred) would have a net negative effect on MSH's total economic entitlement. A lower capital base produces a lower preferred return accrual in subsequent years, and the compounding effect would be diminished. The net result would be a lower total accrued preferred return, which would reduce MSH's buyout price. MSH therefore has no incentive to raise this argument.
In any event, MSH has not raised any challenge to the preferred return figure in its Demand for Arbitration, its preliminary statement, or any subsequent filings in the JAMS proceeding. MSH's own counsel has used the $17,010,000 figure in its demand calculation without objection or qualification.
B. Timing of Renovation Capital Contributions
Minor variations in the exact dates of renovation capital contributions could affect the compounded preferred return by a small margin. I have estimated that the potential variance attributable to alternative assumptions about the timing of individual renovation capital tranches is approximately plus or minus $50,000, which is immaterial in the context of a $17,010,000 calculation (approximately 0.3%) and well within any reasonable rounding tolerance.
This potential variance arises because the Grantham Pryce computation uses the actual wire transfer dates for each capital contribution, as reflected in PGV's bank records at GANB. If an alternative source of information (for example, the dates on the capital call notices, which may differ by a few days from the actual wire dates) were used, the compounding calculation would shift slightly. However, I have confirmed that Grantham Pryce used the actual contribution dates per PGV's bank records, which is the most accurate and defensible approach.
No other potential counterarguments or risks were identified in connection with the preferred return calculation.
IX. Conclusion and Recommendation
Based on the analysis set forth in this memorandum, the accrued preferred return of $17,010,000 owed to MSH as of December 31, 2022 is verified and supported by the following:
1.  The terms of OA Sections 4.1, 5.1, and 5.2, which establish the capital contribution framework, the 8% annual compounding preferred return entitlement, and the distribution waterfall and distribution-reduction mechanics, respectively.
2.  MSH's total capital contributions of $18,505,000, consisting of $10,000,000 in initial acquisition capital and $8,505,000 in renovation capital contributed in multiple tranches between Q4 2017 and Q1 2019.
3.  The 8% annual compounding rate applied over the period from August 1, 2017 through December 31, 2022, a period of approximately 5.42 years, producing gross compounded preferred of approximately $21,200,000.
4.  Distribution records confirming that all distributions to MSH during the 2017–2022 period (totaling approximately $4,190,000) fell within the OA Section 5.2(a) preferred return priority tier, with no distributions reaching the Section 5.2(b) return-of-capital tier. This preserved the full unreturned capital base of $18,505,000 throughout the entire period.
5.  The Grantham Pryce work papers and preferred return computation spreadsheet, which are consistent with the OA provisions and the methodology described herein, and the oral confirmation of Howard Grantham, CPA, that the $17,010,000 figure has been consistently reported in PGV's internal financial reporting and tax returns.
I recommend that PCG stipulate to the $17,010,000 accrued preferred return in the JAMS arbitration (Case No. 1440032871) in order to focus the dispute on the genuinely contested valuation issues — namely, the fair market value of the Palmetto Grand Resort & Spa and MSH's bad-faith penalty claim under OA Section 12.7. Stipulation on this point is strategically sound, factually justified, and consistent with PCG's existing position.
This memorandum should be updated if any new information emerges regarding previously undisclosed distributions, capital account adjustments, or any change in the characterization of distributions under the OA waterfall. I am available to discuss the analysis at your convenience.
Exhibits Referenced (Not Attached)
Exhibit A: Grantham Pryce Preferred Return Computation Spreadsheet (received June 14, 2023)
Exhibit B: PGV Capital Account Ledger — MSH (2017–2022)
Exhibit C: PGV Distribution Payment Records (2017–2022)
Exhibit D: Relevant Excerpts of Operating Agreement of Palmetto Grand Ventures LLC (Sections 4.1, 5.1, 5.2)
Date | Description | Amount | Cumulative Unreturned Capital
August 1, 2017 | Initial capital contribution (acquisition closing) | $10,000,000 | $10,000,000
Q4 2017 | Renovation capital calls — Phase 1 (partial) | ~$2,800,000 | ~$12,800,000
Q1–Q2 2018 | Renovation capital calls — Phase 1 (completion) and Phase 2 (commencement) | ~$3,200,000 | ~$16,000,000
Q3 2018–Q1 2019 | Renovation capital calls — Phase 2 (completion) | ~$2,505,000 | $18,505,000
Total (by Q1 2019) | Total MSH capital contributions | $18,505,000 | $18,505,000
Period | Beginning Balance (Unreturned Capital + Unpaid Accrued Preferred) | 8% Preferred Accrual | Distributions Applied to Preferred (Section 5.2(a)) | Ending Accrued Unpaid Preferred
Year 1 (Aug 1, 2017 – Jul 31, 2018) | $18,505,000 (building as renovation capital contributed during period; initial $10,000,000 plus ~$6,000,000 in renovation tranches) | ~$1,480,400 (adjusted for phased-in contributions) | Minimal (renovation period) | ~$1,480,400
Year 2 (Aug 1, 2018 – Jul 31, 2019) | $18,505,000 (capital base fully funded by Q1 2019) + ~$1,480,400 prior unpaid preferred = ~$19,985,400 | ~$1,598,832 | Limited distributions | ~$3,079,232 cumulative
Year 3 (Aug 1, 2019 – Jul 31, 2020) | $18,505,000 + ~$3,079,232 = ~$21,584,232 | ~$1,726,738 | COVID-19 — minimal distributions (~$200,000) | ~$4,605,970 cumulative
Year 4 (Aug 1, 2020 – Jul 31, 2021) | $18,505,000 + ~$4,605,970 = ~$23,110,970 | ~$1,864,877 | Some distributions resume (~$1,100,000) | ~$5,370,847 cumulative
Year 5 (Aug 1, 2021 – Jul 31, 2022) | $18,505,000 + ~$5,370,847 = ~$23,875,847 | ~$2,014,068 | Distributions increase with recovery (~$1,700,000) | ~$5,684,915 cumulative
Partial Year 6 (Aug 1, 2022 – Dec 31, 2022) | $18,505,000 + ~$5,684,915 = ~$24,189,915 | ~$908,500 (5 months pro rata at 8% annualized) | Q3/Q4 2022 distributions (~$1,190,000) | ~$5,403,415 residual

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