MEMORANDUM
PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT
From: Rafael Dominguez, Associate, Real Estate Group, Calderwood & Harkness LLP
To: Angela Fontaine, Partner, Real Estate Group, Calderwood & Harkness LLP Veronica Suárez-Pellegrino, General Counsel, Pellegrino Capital Group LLC
Date: July 14, 2025
Re: Review and Analysis of Loan Term Sheet — Meridian Coast Bank, N.A. — Acquisition Financing for The Marisol Hotel, 455 South Ocean Boulevard, Delray Beach, FL 33483
C&H Matter No.: 40225.00001
Lender Loan Reference No.: MCB-CRE-2025-07184
This memorandum constitutes privileged and confidential attorney work product prepared in connection with the representation of Pellegrino Capital Group LLC and its affiliates. This document is protected by the attorney-client privilege and the work-product doctrine. It is intended solely for the use of the addressees identified above and authorized persons within the distribution list. Any dissemination, distribution, or copying of this memorandum to persons not identified in the distribution list without the prior written consent of Calderwood & Harkness LLP is strictly prohibited.
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I. Executive Summary
The purpose of this memorandum is to summarize and analyze the loan term sheet (the "Term Sheet") received on July 10, 2025, from Meridian Coast Bank, N.A. ("MCB" or the "Lender"), headquartered at 100 West Bay Street, Suite 1500, Jacksonville, Florida 32202, for a proposed first-mortgage acquisition loan (the "Loan") to finance PCG Delray Hotel LLC's (the "Borrower") acquisition of The Marisol Hotel (the "Property") from Saltaire Hospitality Holdings LLC (the "Seller") for a purchase price of Thirty-Five Million and 00/100 Dollars ($35,000,000.00).
The Borrower, PCG Delray Hotel LLC, is a to-be-formed Florida single-member limited liability company that will be wholly owned by Pellegrino Capital Group LLC ("PCG" or the "Sponsor"). PCG, under the direction of its Managing Principal, Marco A. Pellegrino, is a privately held real estate investment platform that manages approximately $680 million in assets across hospitality, multifamily, and mixed-use sectors. The Borrower entity will be organized as a single-purpose entity ("SPE") in accordance with Lender requirements, as discussed further in Section IV.E below.
The proposed Loan Amount is Twenty-Four Million Five Hundred Thousand and 00/100 Dollars ($24,500,000.00), representing a seventy percent (70%) loan-to-value ("LTV") ratio based on the stated purchase price. Total buyer equity required to consummate the acquisition is Ten Million Five Hundred Thousand and 00/100 Dollars ($10,500,000.00), constituting the remaining thirty percent (30%) of the purchase price. This equity requirement consists of deposits previously made or to be made under the Purchase and Sale Agreement (the "PSA") in the aggregate amount of Two Million Six Hundred Twenty-Five Thousand and 00/100 Dollars ($2,625,000.00), with additional equity of Seven Million Eight Hundred Seventy-Five Thousand and 00/100 Dollars ($7,875,000.00) to be funded at closing.
The Lender's outside counsel for the transaction is Braddock Reeves LLP, located at 801 Brickell Avenue, Suite 2200, Miami, Florida 33131, with Jonathan Ng serving as lead partner on the engagement. We anticipate that Braddock Reeves LLP will be responsible for drafting the loan documents, and that our office will undertake the review and negotiation of such documents on behalf of the Borrower and the Sponsor.
Key transaction milestones include a loan commitment deadline of August 28, 2025, and a targeted closing date of September 15, 2025. These dates align generally with the due-diligence period established under the PSA, which runs from July 7 through August 21, 2025 (forty-five calendar days from PSA execution). Given the compressed timeline between the commitment deadline and closing — a period of only eighteen calendar days — it is essential that the parties move expeditiously in negotiating the loan documents and satisfying all conditions precedent to closing.
Overall Assessment: Following our review, it is our opinion that the terms set forth in the Term Sheet are generally market-standard for a hospitality acquisition loan of this size and asset class in the current lending environment. The 70% LTV, the 25-year amortization schedule, and the hybrid fixed-to-floating rate structure are all consistent with prevailing terms offered by regional and national commercial real estate lenders for comparable hotel properties in the Southeast Florida market. However, as detailed below, several provisions warrant negotiation before the Borrower should agree to proceed to a formal loan commitment. These include, most significantly: (a) the absence of a rate-lock mechanism; (b) the lack of extension options; (c) the cash management and lockbox structure; (d) the methodology for DSCR testing and the definition of Net Operating Income; (e) the replacement reserve requirements; (f) the scope of the recourse carve-out guaranty; (g) the treatment of casualty and condemnation proceeds; and (h) the restrictions on transfers and permitted transfers. Each of these topics is addressed in detail in the body of this memorandum.
II. Summary of Key Loan Terms
A. Borrower and Guarantor
Borrower. The Borrower under the proposed Loan will be PCG Delray Hotel LLC, a single-purpose entity to be formed under the laws of the State of Florida as a single-member limited liability company. PCG, the Sponsor, will serve as the sole member of the Borrower. The Borrower's Employer Identification Number ("EIN") will be obtained from the Internal Revenue Service upon formation; we anticipate filing the Articles of Organization with the Florida Division of Corporations promptly following approval of the term sheet markup and no later than August 1, 2025, to ensure that the entity is in good standing well in advance of the loan commitment deadline.
The Borrower will be structured as an SPE in compliance with the Lender's anticipated separateness and bankruptcy-remoteness requirements. As discussed in greater detail in Section IV.E, the Borrower's operating agreement will incorporate customary SPE covenants, including restrictions on additional indebtedness, requirements for the appointment of at least one independent director or manager, prohibitions on commingling of assets, and limitations on the Borrower's activities to the ownership, operation, and financing of the Property.
Guarantor / Recourse Carve-Out Guarantor. The Term Sheet references "non-recourse" financing subject to standard "bad boy" carve-outs. The expected Guarantor (also referred to as the "Recourse Carve-Out Guarantor" or "Non-Recourse Carve-Out Guarantor") under the Loan is anticipated to be Pellegrino Capital Group LLC (EIN: 83-2749016) and/or Marco A. Pellegrino, individually, as Managing Principal of PCG. The Term Sheet does not specify which entity or individual will serve as Guarantor, or whether the Lender will require both the entity-level guaranty and an individual guaranty from Mr. Pellegrino. This is a critical point that requires clarification at the earliest opportunity.
We recommend discussing with the client the scope and nature of the carve-out guaranty obligations before agreeing to the specific guarantor structure. In our experience, institutional lenders in the hospitality space frequently require both an entity-level guarantor with substantial net worth and liquidity, as well as an individual principal guaranty to ensure personal accountability for the enumerated carve-out events. Mr. Pellegrino and PCG should be advised of the potential personal liability exposure attendant to the guaranty, even in a nominally "non-recourse" loan structure. The substantive carve-out provisions are discussed in detail in Section V.G below.
Guarantor's Financial Capacity. The Lender will almost certainly impose net-worth and liquidity covenants on the Guarantor(s) that will be tested periodically throughout the Loan term. PCG currently manages approximately $680 million in assets across its portfolio, which should provide a comfortable basis for satisfying customary net-worth requirements. However, we need to confirm with the client the specific net-worth and liquidity figures that PCG and Mr. Pellegrino are prepared to covenant to, and ensure that such covenants are structured in a manner that accounts for the illiquid nature of much of PCG's asset base (predominantly real property holdings). We also recommend confirming whether Mr. Pellegrino has any other outstanding personal guaranties on other PCG portfolio loans that might limit his capacity or willingness to provide an individual guaranty here.
B. Loan Amount and Loan-to-Value
Loan Amount. The proposed Loan amount is Twenty-Four Million Five Hundred Thousand and 00/100 Dollars ($24,500,000.00).
Purchase Price / Appraised Value. The purchase price for the Property, as established in the PSA, is Thirty-Five Million and 00/100 Dollars ($35,000,000.00). The Term Sheet identifies the LTV ratio as 70.0%, calculated as follows:
$24,500,000.00 (Loan Amount) ÷ $35,000,000.00 (Purchase Price / Appraised Value) = 70.0% LTV
Appraisal Requirement. The Lender will require a satisfactory third-party appraisal confirming that the "as-is" market value of the Property is at least $35,000,000.00. The appraisal is to be performed by Saylor & Beckett Valuation Services LLC, with Martin Saylor, MAI, serving as the appraiser of record. The cost of the appraisal ($12,000) is to be borne by the Borrower.
Appraisal Risk — Important Client Alert. We wish to flag for the client's attention the risk associated with the appraisal. If the appraised value comes in below the $35,000,000.00 purchase price, the LTV ratio would exceed 70%, and the Lender would in all likelihood reduce the Loan amount to maintain the 70% LTV ceiling. This would result in an increased equity requirement for the Borrower. By way of illustration:
The implied capitalization rate based on the purchase price and trailing twelve-month ("TTM") Net Operating Income is approximately 8.91% ($3,120,000 NOI ÷ $35,000,000 purchase price). Hotel valuations are inherently sensitive to the capitalization rate applied by the appraiser, and relatively small differences in cap-rate assumptions can produce materially different valuations. We recommend that the client prepare for the possibility of an appraisal gap and identify any contingency sources of equity if needed.
C. Loan Term and Maturity
Term. The Loan will have a term of five (5) years from the date of closing.
Maturity Date. Assuming the Loan closes on the targeted closing date of September 15, 2025, the Maturity Date would be September 15, 2030.
Extension Options — Absence Thereof. Notably, the Term Sheet does not include any extension options beyond the initial five-year term. This is a meaningful gap that we strongly recommend addressing in the Borrower's markup. In the current hospitality lending market, it is not uncommon for loans of this type and size to include one or two twelve-month extension options, each exercisable at the Borrower's election upon satisfaction of specified conditions. The absence of extension options leaves the Borrower exposed to refinancing risk at maturity, particularly if credit markets tighten or property performance deteriorates in years four and five of the Loan term — the very period during which the interest rate transitions from fixed to floating.
We recommend negotiating for at least one, and preferably two, successive twelve-month extension options, subject to customary conditions such as: (i) no event of default at the time of exercise or during the extension period; (ii) DSCR at or above the 1.25x minimum at the time of extension; (iii) payment of an extension fee in the range of 0.25% to 0.50% of the then-outstanding principal balance; and (iv) if the extension falls within the floating-rate period, Borrower's procurement of an interest rate cap agreement from a counterparty acceptable to the Lender.
D. Amortization
Amortization Period. The Loan will be structured as a self-amortizing mortgage with a twenty-five (25) year amortization schedule.
Payment Structure. Monthly payments of principal and interest will be calculated on the basis of the 25-year amortization schedule, with the precise monthly payment amount varying between the fixed-rate period (Years 1–3) and the floating-rate period (Years 4–5). During the fixed-rate period, the monthly payment will be a constant amount of approximately $163,814 (as calculated in Section II.F below). During the floating-rate period, the monthly payment will fluctuate in accordance with changes in the applicable SOFR index.
Balloon Payment. The remaining outstanding principal balance of the Loan will be due and payable in full on the Maturity Date (September 15, 2030) as a balloon payment. Based on a preliminary amortization schedule, the estimated outstanding principal balance at maturity (assuming no prepayments and constant fixed-rate payments for illustration) will be approximately $22,600,000 to $22,900,000, depending on the actual interest rates during the floating-rate period in Years 4 and 5. The Borrower should be aware that a substantial refinancing or sale event will be required at or before maturity to satisfy this balloon obligation.
E. Interest Rate
Fixed-Rate Period (Years 1–3). The interest rate during the first three years of the Loan term will be fixed at 6.35% per annum. The Term Sheet does not specify the rate-lock mechanism or timing, which is a significant gap addressed in Section V.A below.
Floating-Rate Period (Years 4–5). During Years 4 and 5, the interest rate will convert to a floating rate equal to SOFR plus 275 basis points (2.75%).
SOFR Determination. The Term Sheet refers to "SOFR" without specifying the particular variant of the Secured Overnight Financing Rate to be used. There are several common formulations:
(a) Term SOFR — a forward-looking rate published by CME Group based on SOFR futures, available in 1-month, 3-month, 6-month, and 12-month tenors. This provides the greatest certainty and predictability, as the rate is known at the beginning of each interest period.
(b) 30-Day Average SOFR — a backward-looking average published by the Federal Reserve Bank of New York. Less predictable than Term SOFR, as the rate is calculated in arrears.
(c) Daily Simple SOFR — the most variable formulation, based on the daily overnight rate compounded or averaged over the interest period, typically determined in arrears.
We recommend negotiating for Term SOFR (1-month) as the reference rate, as it offers the Borrower the greatest predictability for cash-flow planning and budgeting purposes. This is the most commonly used formulation in the commercial real estate lending market and has become the standard successor to LIBOR.
SOFR Floor. The Term Sheet likely includes, or will include in the definitive loan documents, a floor on the SOFR component of the floating rate. A SOFR floor establishes a minimum base rate regardless of where SOFR actually trades. As of the date of this memorandum, the 1-month Term SOFR rate is approximately 4.33%. If the Term Sheet includes a SOFR floor at or near current levels (e.g., 3.50% or 4.00%), the floor would not currently be binding, but could become relevant if SOFR decreases materially during Years 4 and 5. We need to identify the floor rate and assess its impact on the Borrower's interest cost scenarios. To the extent a floor is included, we recommend negotiating for the lowest possible floor, or for the elimination of the floor entirely.
Interest Calculation Convention. The Term Sheet does not specify whether interest will be calculated on an Actual/360 or 30/360 basis. This distinction is not trivial:
• 30/360: Assumes each month has 30 days and each year has 360 days. This is the simpler convention and results in twelve equal interest periods per year.
• Actual/360: Calculates interest based on the actual number of days in each month, divided by a 360-day year. Because the actual number of days in a calendar year (365 or 366) exceeds 360, this convention results in a slightly higher effective annual interest cost — approximately 1.39% more interest over the course of a year than a 30/360 calculation on the same stated rate.
On a Loan of $24,500,000 at a rate of 6.35%, the difference between Actual/360 and 30/360 calculations amounts to approximately $21,600 in additional annual interest cost. While not enormous in the context of this transaction, we recommend confirming the convention and, if Actual/360 is proposed, negotiating for 30/360.
Default Rate. The Term Sheet does not specify the default rate of interest. In our experience, default rates for loans of this type are typically set at the lesser of: (i) the contract rate plus four to five percentage points (4%–5%), or (ii) the maximum rate permitted by applicable law. We will need to review the specific default-rate provision in the definitive loan documents and ensure it is commercially reasonable. Under Florida law, there is no general usury ceiling for commercial loans of this size, but we will confirm that the default rate provision does not give rise to any regulatory or enforceability concerns.
F. Debt Service Analysis
Monthly Debt Service — Fixed-Rate Period. Based on the proposed Loan amount of $24,500,000.00, a fixed interest rate of 6.35% per annum, and a 25-year (300-month) amortization schedule, we have calculated the estimated monthly payment of principal and interest as follows:
Monthly Payment (P&I) ≈ $163,814
This calculation assumes a 30/360 interest convention. If the Lender applies an Actual/360 convention, the effective monthly payment will be slightly higher, as noted above.
Annual Debt Service — Fixed-Rate Period. The estimated annual debt service during the fixed-rate period (Years 1–3) is:
$163,814 × 12 = $1,965,768 per annum
Floating-Rate Period (Years 4–5). During the floating-rate period, monthly debt service will fluctuate in accordance with changes in the applicable SOFR index. At current SOFR levels (approximately 4.33% for 1-month Term SOFR), the all-in floating rate would be approximately 7.08% (4.33% + 2.75%), which exceeds the 6.35% fixed rate by 73 basis points. This would result in an estimated monthly payment of approximately $171,500 and an annual debt service of approximately $2,058,000 — an increase of approximately $92,200 per year relative to the fixed-rate period. The Borrower should be prepared for the possibility that the floating-rate period will result in higher debt-service costs than the fixed-rate period, particularly if interest rates remain elevated or increase further.
We recommend that the client's internal finance team model a range of SOFR scenarios for Years 4 and 5, including a stress scenario at SOFR + 200 basis points above current levels (i.e., approximately 6.33% SOFR, yielding an all-in rate of 9.08%), to assess the impact on debt service coverage and cash flow.
G. Debt Service Coverage Ratio (DSCR) Covenant
Minimum DSCR. The Term Sheet establishes a minimum Debt Service Coverage Ratio of 1.25x. The testing frequency — whether quarterly, semi-annually, or annually — is not specified in the Term Sheet and must be clarified. In our experience, quarterly or semi-annual testing is more common in hospitality loans due to the seasonal nature of hotel revenues, while annual testing is more common in stabilized office or multifamily loans. We recommend negotiating for annual testing, or at minimum, trailing twelve-month testing on a quarterly measurement date, to smooth out seasonal fluctuations in hotel revenue.
Current DSCR. Based on the TTM Net Operating Income of $3,120,000 and the estimated annual debt service of $1,965,768 during the fixed-rate period, the current DSCR is:
$3,120,000 ÷ $1,965,768 = 1.59x
This provides an approximate 27% cushion above the 1.25x minimum covenant level, which is a comfortable margin. However, the cushion is sensitive to both the NOI calculation methodology (discussed below) and the level of interest rates during the floating-rate period.
DSCR Testing Methodology. We need to confirm the Lender's specific methodology for calculating DSCR, including:
(i) Whether the Lender uses trailing actual NOI, forward-looking projected NOI, or a blended approach. We recommend negotiating for trailing twelve-month actual NOI, which is the most objective and verifiable methodology.
(ii) The definition of Net Operating Income, including the treatment of FF&E reserves, management fees, capital expenditures, and non-recurring or one-time expenses. This is a critical point discussed further in Section V.D below.
(iii) The denominator — whether "debt service" for DSCR purposes includes only scheduled principal and interest payments, or also includes required reserve deposits, ground rent (if any), or other periodic Lender-required payments.
DSCR Cure Rights. The Term Sheet does not address the Borrower's ability to cure a DSCR shortfall. We strongly recommend negotiating the right to cure a DSCR deficiency by depositing additional cash into a reserve account held by the Lender, or by making a partial prepayment of the Loan principal sufficient to bring the DSCR back into compliance, in either case without such shortfall constituting an event of default. DSCR cure rights are increasingly standard in the commercial real estate lending market and are particularly important in the hospitality sector, where seasonal revenue fluctuations can cause temporary DSCR dips that do not reflect the overall health or viability of the asset.
NOI Definition — Critical Consideration. Hotel NOI can vary significantly depending on the methodology employed. The Uniform System of Accounts for the Lodging Industry ("USALI"), published by the Hotel Association of New York City and the American Hotel & Lodging Educational Institute, provides standardized accounting formats for hotel operations. However, lenders do not always adhere strictly to USALI definitions, and may include or exclude certain line items in their NOI calculation that differ from the USALI methodology. Key items to address include:
• FF&E Reserves: Whether contributions to the FF&E replacement reserve are deducted from NOI for DSCR testing purposes. As discussed in Section V.D, if the Lender deducts the estimated $392,000 annual FF&E reserve from NOI, the adjusted NOI would be approximately $2,728,000, yielding a DSCR of approximately 1.39x — still above the 1.25x minimum, but with considerably less cushion.
• Management Fees: Whether the Lender imputes a "market" management fee (typically 3%–5% of gross revenues for full-service hotels) regardless of the actual fee paid, or uses the actual management fee. If the Borrower self-manages or negotiates a below-market management fee, a lender-imputed market fee could reduce calculated NOI.
• Capital Expenditures: Whether any capital expenditure deductions are included in the NOI calculation beyond the FF&E reserve.
• One-Time and Non-Recurring Items: Whether non-recurring revenue items (e.g., business interruption insurance proceeds, one-time event revenues) are excluded, and whether non-recurring expenses (e.g., litigation settlements, casualty-related costs) are added back.
H. Origination Fee and Other Lender Fees
Origination Fee. The Lender will charge an origination fee of 1.00% of the Loan amount, calculated as follows:
$24,500,000.00 × 1.00% = $245,000.00
The origination fee is payable in full at closing. This fee is within the market range for hospitality acquisition loans of this size, where origination fees typically range from 0.75% to 1.50%.
Other Anticipated Fees. In addition to the origination fee, the Borrower should anticipate the following additional Lender-related fees and costs, some of which may not be fully specified in the Term Sheet:
• Application / Commitment Fee: The Lender may charge a non-refundable commitment fee upon issuance of the formal loan commitment. We need to confirm whether the origination fee includes or is in addition to any commitment fee.
• Rate-Lock Fee: If a rate-lock mechanism is negotiated (see Section V.A), the Lender may charge a fee for locking the fixed rate, particularly if the lock period is extended. Rate-lock fees typically range from 0.125% to 0.50% of the Loan amount.
• Exit Fee: Some lenders impose an exit fee upon repayment of the Loan at maturity or upon prepayment. The Term Sheet does not appear to include an exit fee, but this should be confirmed in the definitive documents.
• Lender's Counsel Fees: The Borrower will be required to pay the legal fees and disbursements of Lender's counsel, Braddock Reeves LLP (Jonathan Ng, lead partner), in connection with the preparation and negotiation of the Loan documents. These fees can be substantial, and we recommend negotiating a cap on Lender's counsel fees — a cap in the range of $50,000 to $75,000 would be commercially reasonable for a transaction of this size and complexity. Absent a cap, the Borrower's exposure to Lender's counsel fees is open-ended.
We recommend requesting a complete fee schedule from the Lender at the time the Borrower submits its markup of the Term Sheet.
I. Prepayment Provisions
The Term Sheet sets forth the following prepayment structure:
Years 1–3: Yield Maintenance. During the first three years of the Loan term (the fixed-rate period), any prepayment will be subject to a yield-maintenance premium. Yield maintenance is a prepayment penalty calculated to compensate the Lender for the present value of the interest income it would have received had the Loan remained outstanding through the end of the fixed-rate period. The standard calculation involves discounting the remaining scheduled payments at a benchmark rate (typically the yield on a U.S. Treasury security with a maturity corresponding to the remaining fixed-rate period) plus a specified spread, with the borrower paying the difference between the present value of the remaining payments at the contract rate and the present value at the benchmark rate.
We need to confirm the specific yield-maintenance formula and the benchmark rate in the definitive Loan documents. Key items to review include:
(a) The identity and tenor of the benchmark Treasury security.
(b) Whether the formula includes a "floor" ensuring the Lender receives at least the par prepayment amount (i.e., yield maintenance cannot result in a negative premium).
(c) Whether the yield-maintenance obligation applies to involuntary prepayments resulting from casualty or condemnation, or only to voluntary prepayments. We recommend negotiating an exception for involuntary prepayments arising from insurance or condemnation proceeds applied to the Loan.
Year 4: 1% Prepayment Premium. During the fourth year of the Loan term, prepayment will be subject to a premium of 1.00% of the outstanding principal balance at the time of prepayment. Based on the estimated outstanding balance in Year 4, this premium would be approximately $225,000 to $230,000.
Year 5: Open. During the fifth and final year of the Loan term, the Loan may be prepaid without premium or penalty. This is a standard and favorable provision.
Partial Prepayments. The Term Sheet does not address whether partial prepayments are permitted. We recommend confirming whether the Borrower may make partial prepayments of principal, and if so, the minimum amount of any partial prepayment (typically $100,000 or $250,000), whether partial prepayments are applied to reduce the monthly payment amount or to shorten the remaining amortization term, and whether partial prepayments are subject to the same yield-maintenance or premium schedule as full prepayments.
Practical Implications. The yield-maintenance provision during Years 1–3 is restrictive but typical for commercial real estate loans with a fixed-rate component. The practical effect is that any early refinancing, sale, or payoff of the Loan during the first three years will be economically costly. The client should be aware that if an opportunity arises to sell the Property or refinance at more favorable terms during Years 1–3, the yield-maintenance premium could substantially offset the economic benefit of such a transaction. We recommend that the client's financial advisors model the estimated yield-maintenance cost under various prepayment scenarios to inform the Borrower's decision-making.
III. Security Package
A. First-Priority Mortgage Lien
The Lender will require a first-priority mortgage lien (together with an assignment of rents) encumbering the Property, legally described as the real property located at 455 South Ocean Boulevard, Delray Beach, Florida 33483, and more particularly identified by Palm Beach County Property Appraiser Parcel Identification Number 12-43-46-27-01-005-0010.
The Property consists of approximately 1.87 acres of oceanfront land improved with a four-story, 42-key boutique hotel comprising approximately 38,600 gross square feet of building area, together with all appurtenances, improvements, easements, and rights of way belonging or appertaining thereto.
Satisfaction of Existing Mortgage. The Property is currently encumbered by a first-priority mortgage lien in favor of Seaview National Lending Corp., securing a loan with an original principal amount of $16,800,000.00. The approximate current payoff balance, based on information provided by the Seller, is $14,350,000.00 (subject to per-diem interest accrual and confirmation via formal payoff letter). The Lender will require that this existing mortgage be satisfied and released of record at or prior to closing, with the payoff to be made from the Seller's proceeds at the closing table. We will need to obtain a formal payoff letter from Seaview National Lending Corp. in advance of closing, and coordinate with Palmetto Title & Escrow Company to ensure that the satisfaction and release are properly recorded in the Official Records of Palm Beach County.
Documentary Stamp Tax and Intangible Tax. Under Florida law, the recordation of the mortgage will be subject to the following taxes, both of which are the Borrower's responsibility:
• Documentary Stamp Tax on Mortgage: $24,500,000.00 × $0.35 per $100 (or fraction thereof) = $85,750.00 (per Florida Statutes § 201.08).
• Intangible Tax on Mortgage: $24,500,000.00 × $0.002 = $49,000.00 (per Florida Statutes § 199.133).
These taxes are non-negotiable statutory obligations and represent a significant component of the Borrower's closing costs.
ALTA Loan Policy of Title Insurance. The Lender will require issuance of an ALTA Loan Policy of Title Insurance (2006 Form, or such later form as may be in effect) in the face amount of $24,500,000.00, issued by Commonwealth Southern Title Insurance Company through Palmetto Title & Escrow Company (title officer: Denise Lafleur). The loan policy will insure the first-priority lien of the Lender's mortgage, subject only to those encumbrances and exceptions approved by the Lender as "Permitted Exceptions."
The estimated simultaneous-issue premium for the loan policy (issued simultaneously with the owner's policy being obtained in connection with the acquisition) is approximately $28,000.00. We will confirm the exact premium based on the applicable Florida Department of Insurance promulgated rate schedule.
B. Assignment of Rents and Leases
The Lender will require an assignment of all rents, revenues, income, and profits derived from the Property, including without limitation: (i) hotel room revenues; (ii) food and beverage revenues from the Property's restaurant and bar operations, including the on-site establishment known as "Terrazza"; (iii) spa and wellness revenues; (iv) event and conference revenues; (v) parking revenues; and (vi) all other income streams of any kind generated by the Property.
A key issue to be addressed in the definitive loan documents is whether this assignment is structured as an absolute assignment or a collateral assignment. Under an absolute assignment, legal title to the rents is transferred to the Lender immediately, with the Borrower merely holding a revocable license to collect and use the rents. Under a collateral assignment, the Borrower retains the right to collect and use rents in the ordinary course of business unless and until an event of default occurs, at which point the Lender's right to collect rents is activated.
We recommend negotiating for a collateral assignment structure, which is the more borrower-friendly formulation and is consistent with common practice in the Florida commercial real estate market. Under a collateral assignment, the Borrower retains operational control over revenue collection and deployment absent a default, which is critical for the day-to-day management of a full-service hotel. We note that Florida courts have generally upheld both absolute and collateral assignments of rents, and that the practical distinction between the two may be less significant in Florida than in some other jurisdictions, given the provisions of Florida Statutes § 697.07. Nonetheless, we recommend that the assignment be structured as a collateral assignment for clarity and to preserve the Borrower's operational flexibility.
C. Assignment of Hotel Management Agreement
The Lender will require an assignment of the hotel management agreement as additional collateral for the Loan.
Current Status of Management Agreement. The existing hotel management agreement with Saltaire Management Co. LLC (an affiliate of the Seller) is being terminated at closing in connection with the change of ownership. As a result, there will be no existing management agreement to assign at the time of Loan closing. The Borrower intends to either (a) self-manage the Property through a PCG-affiliated management entity, or (b) engage a third-party hotel management company following closing.
Lender Approval Rights. Regardless of which approach the Borrower selects, the Lender will almost certainly require: (i) approval rights over the identity and qualifications of any hotel management company (whether affiliated or third-party); (ii) approval rights over the material terms of any new management agreement, including the management fee structure, the term and termination provisions, and subordination of the management agreement to the mortgage and loan documents; and (iii) the right to terminate the management agreement upon an event of default under the Loan.
We recommend negotiating the following with respect to the Lender's consent rights:
• A pre-approved list of qualified hotel management companies that the Borrower may engage without further Lender consent.
• A specified turnaround time (e.g., 15 business days) within which the Lender must respond to a request for approval of a management agreement or replacement manager, with deemed approval if the Lender fails to respond within such period.
• The standard of consent — "not to be unreasonably withheld, conditioned, or delayed" rather than "in Lender's sole and absolute discretion."
• The right of the Borrower to self-manage the Property through a PCG-affiliated entity, subject to Lender's confirmation that the affiliated entity has adequate hospitality management experience and infrastructure.
D. UCC-1 Financing Statement — FF&E and Personal Property
The Lender will file a UCC-1 financing statement with the Florida Secured Transaction Registry (Florida Department of State, Division of Corporations) covering all furniture, fixtures, and equipment ("FF&E"), inventories, supplies, and other tangible and intangible personal property located at or used in connection with the Property. The UCC-1 filing will perfect the Lender's security interest in the personal property collateral, which for a full-service hotel includes a substantial base of assets — guest room furnishings, lobby and common-area furnishings, kitchen and restaurant equipment (Terrazza), spa equipment, housekeeping and laundry equipment, audio/visual and technology systems, signage, and all related supplies and inventories.
We should coordinate with the acquisition team to ensure that the descriptions of personal property in the Lender's UCC-1 financing statement are consistent with the descriptions contained in: (i) the Bill of Sale to be delivered by the Seller at closing; (ii) the Assignment and Assumption of Contracts; and (iii) any FF&E inventory or schedule prepared in connection with the acquisition. Inconsistencies between these documents could create gaps in the Lender's collateral coverage or, conversely, could result in the Lender asserting a security interest in personal property that the Borrower did not intend to pledge.
E. Other Potential Collateral
In addition to the foregoing primary collateral, the Lender may require security interests in or control over the following additional items:
Reserve Accounts. As discussed in Section V.B below, the Lender will likely require the Borrower to maintain one or more reserve accounts (including an FF&E replacement reserve, a tax and insurance escrow reserve, and potentially a seasonality reserve) held by the Lender or at a Lender-designated depository institution. Funds in these accounts will serve as additional collateral for the Loan.
Operating Accounts. As discussed in Section V.C below, the Lender may require a lockbox and cash-management arrangement pursuant to which hotel revenues are deposited into a Lender-controlled account. The funds in such operating accounts would constitute additional collateral.
Permits and Licenses. The Lender may seek an assignment of, or security interest in, all permits, licenses, and governmental approvals relating to the operation of the Property and the hotel business conducted thereon. Key permits and licenses include:
• DBPR Liquor License No. BEV-5812947 — The Property holds an active alcoholic beverage license issued by the Florida Department of Business and Professional Regulation ("DBPR"), Division of Alcoholic Beverages and Tobacco. The pledge or assignment of a liquor license is subject to DBPR regulatory approval and restrictions. Under Florida Statutes § 561.32, the transfer or pledge of a liquor license requires the approval of the DBPR, and any such pledge may be subject to conditions imposed by the regulator. We will need to coordinate with DBPR counsel to determine the feasibility of pledging the liquor license as collateral and any regulatory filing requirements.
• Elevator Permit No. EL-2019-003417 — issued by the Bureau of Elevator Safety, Florida Department of Business and Professional Regulation. This permit is not typically pledgeable as standalone collateral, but the Lender may require a representation that the permit is current and in good standing.
• Other permits, including the Hotel Operating License, Certificate of Occupancy, health and food-service permits, and any coastal construction or environmental permits applicable to the oceanfront Property.
IV. Conditions to Closing / Conditions Precedent
The Lender's obligation to fund the Loan at closing will be subject to satisfaction of the following conditions precedent, among others that may be specified in the formal loan commitment and definitive loan documents:
A. Appraisal
The Lender requires a satisfactory third-party appraisal confirming that the "as-is" fair market value of the Property is at least $35,000,000.00, thereby supporting the 70% LTV ratio. The appraisal will be performed by Saylor & Beckett Valuation Services LLC, with Martin Saylor, MAI, serving as the appraiser of record. The estimated cost of the appraisal is $12,000.00, which is the Borrower's expense.
The appraisal must conform to the Uniform Standards of Professional Appraisal Practice ("USPAP") and must be satisfactory to the Lender in its reasonable judgment. We anticipate that the appraiser will employ both the income capitalization approach and the sales comparison approach in arriving at the Property's value, with the income approach likely receiving primary weight given that the Property is an income-producing hotel asset.
As noted in Section II.B, the implied capitalization rate based on the purchase price and TTM NOI is approximately 8.91% ($3,120,000 ÷ $35,000,000). If the appraiser applies a different cap rate — for example, an 8.50% cap rate, which would yield a value of approximately $36,706,000 — the appraisal would support the purchase price. Conversely, if the appraiser uses a 9.25% cap rate, the indicated value would be approximately $33,730,000, resulting in a potential appraisal shortfall of approximately $1,270,000 and a corresponding reduction in the Loan amount.
We recommend ordering the appraisal immediately upon approval of the Term Sheet markup in order to ensure that the appraisal is completed and delivered to the Lender well in advance of the August 28, 2025, loan commitment deadline.
B. Environmental
The Lender requires a satisfactory Phase I Environmental Site Assessment ("Phase I ESA") of the Property, prepared in accordance with ASTM Standard E1527-21. The Phase I ESA will be performed by Verdana Environmental Group LLC, under the direction of Dr. Anita Robles, P.E. The estimated cost of the Phase I ESA is $6,200.00, which is the Borrower's expense.
The Phase I ESA will evaluate the Property for the presence or likely presence of Recognized Environmental Conditions ("RECs"), Controlled Recognized Environmental Conditions ("CRECs"), and Historical Recognized Environmental Conditions ("HRECs") as defined in the ASTM standard. The assessment will include a review of historical property use, environmental database searches, government records review, interviews with current and former owners and operators, and a site reconnaissance.
If the Phase I ESA identifies one or more RECs, the Lender may require a Phase II Environmental Site Assessment involving subsurface investigation (soil borings, groundwater sampling) at additional cost (typically $15,000–$50,000 or more, depending on the scope) and potential delay to the closing timeline. Given the Property's oceanfront location and its historical use as a hospitality property, the environmental risk profile is generally favorable, but the Borrower should be prepared for the possibility of a Phase II requirement, particularly given the potential for legacy contamination associated with historic use of the site or adjacent properties.
C. Title and Survey
Title Insurance. The Lender requires issuance of both an ALTA Owner's Policy and an ALTA Loan Policy of Title Insurance, issued by Commonwealth Southern Title Insurance Company through Palmetto Title & Escrow Company (title officer: Denise Lafleur). Both policies must be issued free of any exceptions or encumbrances that are objectionable to the Lender, except for those encumbrances specifically approved by the Lender as "Permitted Exceptions."
The title commitment has been ordered and is expected to be received shortly. We will review the commitment upon receipt and identify any title exceptions that may require resolution or Lender approval.
Survey. The Lender requires a current ALTA/NSPS Land Title Survey of the Property, prepared by Crestline Surveying & Mapping, Inc. (George Tavares, PSM, Florida License No. LS-7214). The estimated cost of the survey is $18,500.00. The survey must comply with the 2021 Minimum Standard Detail Requirements for ALTA/NSPS Land Title Surveys, including any optional Table A items specified by the Lender (which typically include items 1, 2, 3, 4, 6(a), 6(b), 7(a), 7(b)(1), 7(c), 8, 9, 10, 11(a), 13, 14, 16, 17, 18, and 19).
Existing Encumbrances — Permitted Exceptions. Based on our preliminary review, the following existing encumbrances of record will need to be approved by the Lender as Permitted Exceptions:
(i) Beach Access Easement — recorded in Official Records Book 31245, Page 1822, Official Records of Palm Beach County, Florida. This easement grants public pedestrian access across the southeastern portion of the Property to the beach. Given the Property's oceanfront location, this easement is typical and should not materially impact hotel operations or value, but the Lender will need to confirm its acceptance.
(ii) Vireo Group (FPL) Utility Easement — recorded in Official Records Book 22017, Page 934, Official Records of Palm Beach County, Florida. This easement grants FPL the right to install, maintain, and operate electrical utility infrastructure on a defined portion of the Property. This is a standard utility easement and should be acceptable to the Lender.
(iii) Declaration of Covenants, Conditions, and Restrictions (CC&Rs) — recorded in Official Records Book 18904, Page 455, Official Records of Palm Beach County, Florida. We will need to review the specific provisions of this declaration to assess any restrictions that could affect the Property's use as a hotel, the Borrower's ability to mortgage the Property, or the Lender's rights upon foreclosure. Key items to review include any restrictions on use, transfer restrictions, assessment obligations, and any first-refusal or consent-to-mortgage provisions.
D. Insurance
The Lender will require evidence of comprehensive property and casualty insurance coverage in amounts, from carriers, and with policy terms satisfactory to the Lender. Insurance coverage is being placed through Atlantic Keystone Insurance Company, with placement by Harborview Risk Advisors LLC (the Borrower's insurance broker). The Lender must be named as mortgagee and loss payee under the property insurance policy.
Required Coverages. We anticipate that the Lender will require, at a minimum, the following categories of insurance coverage:
(a) Property Insurance (All-Risk / Special Form): Coverage for the full replacement cost of the improvements and FF&E, with no coinsurance penalty. Replacement cost for the 42-key hotel building and improvements is estimated at approximately $22,000,000 to $25,000,000 (to be confirmed by the Borrower's insurance advisor).
(b) Flood Insurance: The Property is located in FEMA Flood Zone AE, as designated on FEMA Flood Insurance Rate Map ("FIRM") Panel 12099C0826J, dated as revised. Flood Zone AE is a designated Special Flood Hazard Area ("SFHA") subject to inundation by the 1% annual-chance flood (commonly referred to as the "100-year flood"). Accordingly, flood insurance coverage is required by federal law for any federally regulated or insured lender. Coverage may be obtained through the National Flood Insurance Program ("NFIP") or through a private flood insurance policy meeting the requirements of the Biggert-Waters Flood Insurance Reform Act of 2012 and subsequent legislation. The NFIP maximum coverage limit for commercial properties is $500,000 for building coverage — this is almost certainly inadequate for a $35,000,000 hotel property, and supplemental excess flood coverage will be required. We need to coordinate with Harborview Risk Advisors to confirm adequate coverage limits and verify that the deductible is acceptable to the Lender.
(c) Wind / Hurricane / Named-Storm Coverage: Given the Property's oceanfront location in Delray Beach, Palm Beach County, Florida — within a hurricane-prone coastal zone — the Lender will almost certainly require dedicated windstorm or named-storm coverage with specified deductible limits. Florida windstorm coverage can be expensive and is sometimes difficult to obtain in the private market for oceanfront properties. If private coverage is not available at commercially reasonable rates, coverage may need to be obtained through Corvinael Property Insurance Corporation, Florida's insurer of last resort. We recommend that Harborview Risk Advisors begin soliciting windstorm coverage quotes immediately.
(d) General Liability Insurance: Coverage in an amount typically not less than $1,000,000 per occurrence and $2,000,000 in the aggregate, with the Lender named as an additional insured.
(e) Business Interruption / Loss of Rents Insurance: Typically required for a period of twelve to eighteen months, covering the loss of hotel revenues and the continuing debt service obligation during a period of restoration following a covered casualty.
(f) Workers' Compensation Insurance: As required by Florida law.
(g) Umbrella / Excess Liability Insurance: In an amount to be specified by the Lender, typically $5,000,000 to $10,000,000 for a property of this size and type.
E. Formation and Entity Documentation
The Lender will require the following documentation relating to the formation and organization of the Borrower:
(a) Evidence of Formation and Good Standing: Certificate of Formation (Articles of Organization) for PCG Delray Hotel LLC, filed with the Florida Division of Corporations, together with a Certificate of Good Standing or Certificate of Status dated not more than 30 days prior to closing.
(b) Organizational Documents: A copy of the Borrower's Operating Agreement, which will identify PCG as the sole member and set forth the governance structure, management authority, and SPE covenants.
(c) Authorizing Resolutions: Resolutions of PCG, as the sole member of the Borrower, authorizing the Borrower to enter into the Loan, execute and deliver the Loan documents, grant the security interests, and perform all obligations thereunder.
(d) SPE Covenants: The Lender will require that the Borrower's organizational documents incorporate single-purpose entity covenants designed to ensure the Borrower's separateness and bankruptcy remoteness. Customary SPE covenants include:
(1) The Borrower's sole purpose is to own, hold, sell, lease, transfer, exchange, manage, and operate the Property, and to enter into the Loan.
(2) The Borrower shall not own any asset other than the Property and incidental personal property related thereto.
(3) The Borrower shall not incur any indebtedness other than the Loan, trade payables in the ordinary course, and other customary exceptions.
(4) The Borrower shall not commingle its assets with those of any other person or entity.
(5) The Borrower shall maintain separate books, records, and financial statements.
(6) The Borrower shall observe all organizational formalities.
(7) The Borrower shall appoint at least one independent director or manager (a "springing member") whose affirmative consent is required for any filing of a bankruptcy petition or dissolution.
(8) The Borrower shall hold itself out as a separate and distinct entity from PCG and any other affiliated entity.
F. Legal Opinions
The Lender's counsel, Braddock Reeves LLP (Jonathan Ng), will require that the Borrower's counsel deliver customary legal opinions in connection with the closing of the Loan. We anticipate that Calderwood & Harkness LLP will be requested to provide the following opinions:
(a) Due Organization and Good Standing: That the Borrower is duly organized, validly existing, and in good standing under the laws of the State of Florida.
(b) Due Authorization: That the execution, delivery, and performance of the Loan documents have been duly authorized by all necessary organizational action on the part of the Borrower and PCG.
(c) Enforceability: That the Loan documents constitute legal, valid, and binding obligations of the Borrower, enforceable in accordance with their respective terms, subject to customary qualifications and exceptions (bankruptcy, equity, and public-policy limitations).
(d) No Conflicts: That the execution and delivery of the Loan documents and the performance of the Borrower's obligations thereunder do not violate the Borrower's organizational documents, any applicable law, or any material agreement to which the Borrower is a party.
We will review the specific opinion requirements set forth in the Lender's commitment letter and definitive loan documents when available, and advise the client of any non-standard or unusual opinion requests.
G. Other Conditions Precedent
In addition to the foregoing, we anticipate that the Lender will require satisfaction of the following additional conditions precedent:
• Borrower's Closing Certificate: A certificate of an authorized officer or manager of the Borrower, certifying as to the accuracy of the Borrower's representations and warranties, the satisfaction of all conditions precedent, and the absence of any default or event of default.
• Zoning Compliance: Evidence that the Property's current use as a hotel is in compliance with the applicable zoning designation. The Property is located in the CBD (Central Business District) zoning district of the City of Delray Beach. We will obtain a zoning verification letter or zoning compliance letter from the City of Delray Beach Community Development Department confirming that the hotel use is a permitted use within the CBD district and that the Property is in compliance with all applicable zoning regulations, including setback, height, density, and parking requirements.
• Estoppel Certificates: The Lender may request estoppel certificates from significant vendors, contract counterparties, or space tenants (if any) at the Property. Given that the Property is a hotel rather than a multi-tenant commercial building, the universe of applicable estoppels is more limited, but may include estoppels from the operator of any subleased spaces (e.g., the spa, the restaurant, or any retail tenants) and from any parties to material service contracts being assumed by the Borrower.
V. Key Negotiation Points and Recommendations
This Section sets forth our detailed analysis and negotiation recommendations for the provisions of the Term Sheet that we have identified as most significant to the Borrower's interests. We recommend that the Borrower's markup of the Term Sheet address each of the following points.
A. Interest-Rate Lock Timing
The Term Sheet does not appear to specify when or how the 6.35% fixed rate for Years 1–3 will be locked. This is a significant gap that creates material rate exposure for the Borrower. Given the timeline — the Term Sheet was received on July 10, 2025, the loan commitment deadline is August 28, 2025, and the targeted closing date is September 15, 2025 — there is a period of approximately nine weeks between today and closing during which interest rates could move. In the current interest-rate environment, even a modest increase in rates could have a meaningful impact on debt service and DSCR compliance.
Recommendation: We recommend negotiating a clear rate-lock mechanism with the following elements:
(a) Lock Date: The fixed rate of 6.35% should be locked no later than the date of the Lender's issuance of the formal loan commitment — i.e., no later than August 28, 2025. Ideally, the rate should be locked upon execution of the agreed-upon term sheet.
(b) Lock Duration: The rate lock should remain in effect for a minimum of thirty (30) days following the lock date, which would cover the period through the September 15, 2025, targeted closing date.
(c) Rate-Lock Extension: If closing is delayed beyond the initial lock period, the Borrower should have the right to extend the rate lock for an additional fifteen (15) to thirty (30) days, subject to payment of a reasonable extension fee (typically 0.125% to 0.25% of the Loan amount).
(d) Rate-Lock Cost: Clarify whether there is any separate cost for the initial rate lock, or whether the rate lock is included in the origination fee.
(e) Drop-Lock / Ratchet Provision: Negotiate for a "drop-lock" or "ratchet" provision that allows the Borrower to benefit from a decrease in the applicable benchmark rate between the lock date and the closing date — i.e., the Borrower locks in a ceiling but retains the ability to obtain a lower rate if market conditions improve. Lenders are often resistant to this provision, but it is worth requesting.
If the rate remains unlocked and floats until closing, the Borrower bears the full risk of any rate increase. An increase of even 25 basis points (from 6.35% to 6.60%) would increase annual debt service by approximately $48,000 and reduce the DSCR from 1.59x to approximately 1.55x. A 50-basis-point increase would have a more pronounced impact.
B. Replacement Reserve Requirements