Contract analysis

I. Executive Summary Calderwood & Harkness LLP represents Fairwater Real Estate Investment Trust ("Fairwater" or "FREIT"), a Maryland Real Estate Investment Trust listed on the New York Stock Exchange under the ticker symbol FREIT. As of the fourth quarter of 2023, Fairwater maintains an approximate market capitalization of $4.8 billion. Fairwater is headquartered at 7200 Chesapeake Parkway, Suite 1100, Columbia, Mar

II. Transaction Overview A. Parties Buyer. The buyer in the proposed transaction is Fairwater Real Estate Investment Trust, a Maryland real estate investment trust (Employer Identification Number: 52-2198437). Fairwater is a self-administered and self-managed REIT that has elected REIT status under the Code and has continuously maintained such status since its initial public offering in 2009. The principal officers a

III. Entity-Purchase vs. Asset-Purchase Structure: Comparative Tax Analysis A. Overview of Structural Alternatives In connection with the proposed acquisition, we have evaluated two principal structural alternatives for accomplishing the transfer of the Portfolio from GMP Fund III to Fairwater: Option 1 — Entity Purchase (Selected Structure). Under the entity-purchase structure, Fairwater will acquire 100% of the out

1. Avoidance of Transfer Taxes (Partial). In several jurisdictions, transfers of membership interests in an entity holding real property, rather than transfers of the real property itself by deed, may reduce or eliminate state and local real property transfer taxes (also known as documentary stamp taxes or conveyance taxes). The theory underlying this potential benefit is that the transfer of a membership interest is

2. Assumption of Existing Debt In Place. The entity-level transfer structure facilitates the assumption of the approximately $612,000,000 of existing mortgage debt without the necessity of a formal loan payoff and subsequent refinancing. Because the mortgage loans were made to the Target Entities (as borrowers), and the Target Entities will continue to exist as the same legal entities after the transfer of their memb

3. Continuity of Leases and Contracts. Because the Target Entities are the landlords under the 87 tenant leases and the counterparties to the 63 service contracts currently in effect across the Portfolio, the entity-level transfer allows these agreements to remain in place at the entity level without requiring formal assignment and assumption documentation for each individual lease and contract. The tenants' leasehol

4. Preservation of Property-Level Permits and Licenses. The entity-level transfer preserves in place all property-level permits, licenses, certificates of occupancy, environmental clearances, and governmental approvals that have been issued to the Target Entities in their capacity as property owners and operators. Under an asset-purchase structure, these permits and licenses might need to be transferred or re-issued

1. Assumption of Unknown Liabilities. The principal risk of the entity-purchase structure is that Fairwater, as the new sole member of each Target Entity, assumes all liabilities within each Target Entity—both known and unknown. Unlike an asset purchase, in which the buyer can selectively acquire assets and exclude liabilities (subject to successor liability doctrines), the entity-level purchase means that Fairwater

2. Transfer Tax Exposure in Controlling-Interest States. As discussed in Section III.C.1 above, the entity-level structure does not avoid real property transfer taxes in Georgia, Florida, Tennessee, or North Carolina, each of which imposes controlling-interest transfer taxes on transfers of controlling interests in entities owning real property. The estimated aggregate transfer tax liability of approximately $3,850,0

3. Lender Consent Requirements. As noted in Section III.C.2 above, the transfer of membership interests triggers change-of-control provisions in each of the three existing loan agreements, requiring affirmative lender consent. The failure to obtain lender consent prior to closing would constitute an event of default under the applicable loan agreement and could result in the acceleration of the outstanding indebtedne

IV. REIT Qualification Analysis Under Sections 856–860 A. Overview of Applicable REIT Requirements Fairwater has elected to be treated as a REIT under Sections 856 through 860 of the Code and has continuously maintained its REIT status since its initial public offering in 2009. As a REIT, Fairwater is generally not subject to federal corporate income tax on its taxable income that is distributed to shareholders, prov

1. Section 856(c)(2) — 95% Gross Income Test. At least 95% of a REIT's gross income (excluding gross income from prohibited transactions) for each taxable year must be derived from specified passive sources, including dividends, interest, rents from real property, gain from the sale or other disposition of stock, securities, and real property, and certain other categories of passive income enumerated in Section 856(c

2. Section 856(c)(3) — 75% Gross Income Test. At least 75% of a REIT's gross income (excluding gross income from prohibited transactions) for each taxable year must be derived from real estate-related sources, including rents from real property, interest on obligations secured by mortgages on real property or on interests in real property, gain from the sale or other disposition of real property (including interests

3. Section 856(c)(4) — 75% Asset Test. At the close of each calendar quarter, at least 75% of the value of a REIT's total assets must consist of real estate assets (as defined in Section 856(c)(5)(B)), cash and cash items (including receivables), and government securities. Real estate assets include real property (or interests in real property), interests in mortgages on real property, and shares (or transferable cer

4. Section 856(c)(4)(B) — 5% / 10% Asset Tests (Securities). Subject to certain exceptions (including for qualified REIT subsidiaries and taxable REIT subsidiaries), (a) no more than 5% of the value of a REIT's total assets may consist of securities of any one issuer, and (b) a REIT may not hold (i) more than 10% of the outstanding voting securities of any one issuer or (ii) securities having a value of more than 10%

5. Section 856(d) — Definition of Rents from Real Property. Section 856(d) provides a detailed definition of "rents from real property" for purposes of the REIT income tests. This definition contains several exclusionary provisions that can cause amounts otherwise denominated as "rent" to be disqualified from treatment as REIT-qualifying income.

6. Section 856(l) — Qualified REIT Subsidiaries (QRS). Section 856(l) provides that a corporation that is a "qualified REIT subsidiary" (i.e., a corporation 100% of the stock of which is held by a REIT) is not treated as a separate corporation for purposes of the Code; all assets, liabilities, and items of income, deduction, and credit of such corporation are treated as assets, liabilities, and items of the REIT. B.

Section 857(a)(1) of the Code requires that a REIT distribute to its shareholders an amount at least equal to 90% of its REIT taxable income (determined without regard to the dividends paid deduction and excluding net capital gains) for each taxable year. Failure to satisfy this requirement results in the loss of REIT status, unless the failure is due to reasonable cause and not willful neglect and certain other cond

V. Prohibited Transaction Analysis — Section 857(b)(6) A. Overview of Prohibited Transaction Tax

Section 857(b)(6) of the Code imposes a 100% excise tax on the "net income derived from prohibited transactions" of a REIT. A "prohibited transaction" is generally defined as a sale or other disposition of property described in Section 1221(a)(1) — that is, property held by the REIT primarily for sale to customers in the ordinary course of a trade or business. The prohibited transaction tax is designed to discourage

Section 857(b)(6)(C) provides a statutory safe harbor from the prohibited transaction tax for sales that meet specified conditions, including (among other requirements) that the REIT has held the property for at least two years, that aggregate expenditures during the two-year period preceding the sale that are "includible in the basis of the property" do not exceed 30% of the net selling price, and that the REIT does

VI. Basis and Depreciation Considerations A. Buyer's Tax Basis in Acquired Assets As discussed in Section III.B above, the entity-level purchase of 100% of the membership interests in the 14 Target Entities is treated, for federal income tax purposes, as an acquisition by Fairwater of the underlying assets of each Target Entity in a fully taxable transaction. This treatment is mandated by Revenue Ruling 99-5, Situati