Contract analysis

I. INTRODUCTION AND BACKGROUND This memorandum catalogues and analyzes all material open negotiation issues arising from the initial loan document package circulated by Ashworth McPhail LLP (Joanna C. Wexler, lead partner) on behalf of Clarendon Metropolitan Insurance Company on approximately October 15, 2025. The purpose of this memorandum is to provide a comprehensive road map for the negotiation of the permanent l

II. LOAN AGREEMENT — OPEN ISSUES The Loan Agreement is the principal operative document governing the rights and obligations of the Co-Borrowers and the Lender, and it contains the majority of the substantive negotiation points in this transaction. We have organized our comments on the Loan Agreement by subject matter, addressing each of the major areas of concern identified in our review of the Ashworth McPhail draf

1. Scope of Loss Carve-Outs (Lender's Position) The Lender's draft includes an expansive list of "loss" carve-outs, making the Co-Borrowers and the Guarantor liable for actual losses arising from the following events or circumstances: (a) Fraud or intentional misrepresentation by the borrower or any principal of the borrower in connection with the loan; (b) Misapplication or misappropriation of rents, issues, and pro

2. Full Recourse Triggers (Lender's Position) The Lender's draft provides that the entire outstanding loan balance becomes fully recourse to the Co-Borrowers and the Guarantor upon the occurrence of any of the following events: (a) A voluntary bankruptcy filing by any Co-Borrower; (b) A collusive involuntary bankruptcy filing (i.e., an involuntary filing that is solicited, procured, or consented to by the borrower or

3. Recommended Borrower Position We recommend the following positions on the non-recourse carve-out provisions: (a) Waste: Narrow the "waste" carve-out to intentional physical waste of the properties. The definition should expressly exclude the failure to make discretionary capital improvements or repairs to the extent that the borrower does not have available cash flow (after payment of debt service and required ope

1. Hard vs. Springing Lockbox Lender's Position. The Lender's draft imposes a hard lockbox from day one of the loan. Under this structure, all rents and other income from the fourteen properties would be deposited directly into a lender-controlled lockbox account, and the Lender would control the disbursement waterfall at all times throughout the loan term — not only during periods of financial distress or default bu

2. Definition of Cash Management Period / DSCR Trigger Lender's Position. The Lender's draft defines a "Cash Management Period" as commencing upon (i) the DSCR for the portfolio falling below 1.25x (tested on a quarterly basis), or (ii) the occurrence and continuance of an Event of Default under the Loan Agreement. The DSCR trigger of 1.25x is, in our view, set too high relative to the stabilized DSCR of 1.476x. The

3. Disbursement Waterfall Lender's Position. The Lender's draft specifies the following disbursement waterfall for funds in the lockbox account during a Cash Management Period: (i) Payment of monthly debt service (principal and interest); (ii) Deposit to the monthly tax and insurance escrow accounts; (iii) Deposit to the capital expenditure reserve; (iv) Deposit to the leasing commission/tenant improvement reserve; (

4. Recommended Position — Summary Our recommended position on the cash management provisions, in summary, is as follows: (a) Springing lockbox triggered upon DSCR falling below 1.10x (or at most 1.15x); Cash Management Period cures when DSCR is restored to 1.20x for two (2) consecutive calendar quarters; (b) REIT distribution carve-out in the disbursement waterfall, permitting distributions to Fairwater OP (and upstr

1. Threshold for Lender's Right to Apply Proceeds Lender's Position. The Lender's draft provides that the Lender may elect to apply casualty or condemnation proceeds to reduce the outstanding principal balance of the loan (rather than releasing such proceeds to the borrower for restoration of the damaged or taken property) if (i) any individual casualty or condemnation event results in loss or damage exceeding $500,0

2. Recommended Borrower Position We recommend the following modifications to the casualty and condemnation provisions: (a) Per-Event Threshold: Increase the per-event threshold from $500,000 to $2,500,000. This represents approximately 0.65% of the total appraised portfolio value of $385,000,000 and is a reasonable threshold that distinguishes between routine damage events (which should be restored by the borrower) a

1. Lender's Position The Lender's draft contains a broad prohibition on all direct and indirect transfers of interests in the Co-Borrower entities, the properties, or the Guarantor without the prior written consent of the Lender. As currently drafted, the transfer restrictions contain no exceptions for: (a) Transfers of publicly traded shares of Fairwater REIT on the New York Stock Exchange; (b) Intra-REIT organizati

2. Recommended Borrower Position We recommend the following carve-outs and modifications to the transfer restriction provisions: (a) Publicly Traded Shares. An express carve-out for transfers of publicly traded shares of Fairwater Real Estate Investment Trust (NYSE: FWTR) on a national securities exchange or in the over-the-counter market. This carve-out is essential for any publicly traded entity and is universally

3. Rationale. Fairwater is a publicly traded REIT on the NYSE. Restricting transfers of publicly traded equity interests is impractical, commercially unreasonable, and universally excluded from CMBS transfer restrictions for public REIT borrowers. The REIT organizational structure requires flexibility for intra-group transfers for tax planning, operational restructuring, and compliance purposes. The inability to make

1. Tax and Insurance Reserves Lender's Position. The Lender's draft requires monthly escrow deposits of one-twelfth (1/12) of estimated annual property taxes and insurance premiums from the closing date, regardless of whether a Cash Management Period is in effect. Borrower's Position. We recommend that the tax and insurance escrow requirement be structured as a springing reserve, consistent with the springing lockbox

2. Capital Expenditure Reserve Lender's Position. The Lender's draft requires a capital expenditure reserve funded at $300 per unit per year (4,200 units × $300 = $1,260,000 annually, or $105,000 per month). Borrower's Position. We recommend a capital expenditure reserve of $250 per unit per year ($1,050,000 annually, or $87,500 per month). The properties in the Sun Belt Portfolio are of relatively recent constructio

3. Leasing Commission / Tenant Improvement Reserve Lender's Position. The Lender's draft requires a leasing commission and tenant improvement reserve funded at $50 per unit per year ($210,000 annually). Borrower's Position. We recommend the elimination of the leasing commission reserve entirely. Multifamily properties incur minimal leasing commissions compared to commercial office or retail assets. Apartment leasing

4. Replacement Reserve Mechanics With respect to all reserve accounts, we recommend the following procedural provisions: (a) All reserve funds should be held in interest-bearing accounts at the cash management bank, with the borrower entitled to all interest earnings on the reserve accounts; (b) Disbursement from reserve accounts for expenditures below $100,000 per request should be made upon the borrower's certifica

1. Lockout Period Lender's Position. The Lender's draft imposes a two (2)-year hard lockout period from the closing date, during which no prepayment of the loan is permitted. The lockout period would expire on approximately November 28, 2027. Borrower's Position. A two-year hard lockout is generally consistent with market practice for ten-year CMBS loans. We have no objection to this provision.

2. Defeasance After Lockout Lender's Position. The Lender's draft permits defeasance of the loan from the expiration of the lockout period through the date that is ninety (90) days prior to the maturity date. The defeasance must be accomplished using U.S. Treasury obligations in amounts sufficient to generate payments equal to the scheduled principal and interest payments on the loan through the maturity date, plus a

3. Open Period The Lender's draft provides that during the last ninety (90) days of the ten-year loan term (approximately August through November 2035), prepayment is permitted without any prepayment premium or defeasance requirement. This is a standard "open period" provision, and we have no objection.

4. Recommended Borrower Positions on Defeasance We recommend the following modifications and additions to the defeasance provisions: (a) Partial Defeasance. The borrower should have the right to partial defeasance — that is, the right to defease a portion of the loan allocated to one or more individual properties and obtain a release of the mortgage lien on those properties. This is an important portfolio management

1. Financial Reporting Lender's Position. The Lender's draft imposes the following financial reporting requirements: (a) Monthly property-level operating statements, delivered within thirty (30) days after the end of each calendar month; (b) Quarterly consolidated financial statements of the Co-Borrowers and the Guarantor, delivered within forty-five (45) days after the end of each fiscal quarter; (c) Annual audited

2. Lender Approval Rights — Property Management Lender's Position. The Lender's draft requires prior written Lender approval for any replacement of the property management company managing the properties. Borrower's Position. The current property manager for the Sun Belt Portfolio is Fairwater Residential Management LLC, a wholly owned affiliate of Fairwater REIT, which assumed management of the properties effective

3. Lender Approval Rights — Material Leases and Modifications Lender's Position. The Lender's draft appears to require Lender approval for "material leases" without clearly distinguishing between standard residential apartment leases and any commercial or retail leases at the properties. Borrower's Position. For multifamily properties, individual residential apartment leases should not require Lender approval. The pr

III. GUARANTY AGREEMENT — OPEN ISSUES A. Scope of Non-Recourse Carve-Out Guaranty This section should be read in conjunction with Section II.A of this memorandum, which addresses the scope of the non-recourse carve-outs in the Loan Agreement. The Guaranty Agreement is the instrument through which Fairwater Real Estate Investment Trust (Maryland REIT, EIN 52-2847193) assumes liability for the enumerated carve-out obli

IV. ENVIRONMENTAL INDEMNITY AGREEMENT — OPEN ISSUES A. Scope of Indemnification Lender's Position. The Lender's draft Environmental Indemnity Agreement provides broad indemnification from the Co-Borrowers and the Guarantor for all "Environmental Losses," which are defined to include: (a) Costs and expenses of investigation, remediation, and cleanup of any hazardous materials on, under, or migrating from the propertie

V. CASH MANAGEMENT AGREEMENT — OPEN ISSUES This section addresses procedural and operational issues specific to the Cash Management Agreement, as distinct from the substantive issues regarding the lockbox structure, DSCR triggers, and waterfall that are addressed in Section II.B of this memorandum. The reader should cross-reference Section II.B for our positions on those substantive issues. A. Cash Management Bank Le