Contract analysis

I. Executive Summary The purpose of this memorandum is to summarize the federal and Maryland state tax structure for Harbor Point Development JV, LLC ("HP JV" or the "JV"), a Delaware limited liability company formed to develop the Harbor Point Towers project. Harbor Point Towers consists of two 28-story residential towers comprising approximately 610 residential rental units, together with approximately 45,000 squar

1. Partnership Classification — Confirmation of default partnership status and avoidance of entity-level tax.

2. Section 704(b) Allocations — Structuring allocations of income, gain, loss, deduction, and credit to satisfy the substantial economic effect safe harbor, including capital account maintenance, qualified income offset provisions, minimum gain chargeback requirements, and the treatment of the disproportionate promote allocations under a target capital account methodology.

3. Section 704(c) Considerations — Analysis of contributed property basis, revaluation events, and the recommended allocation method for any reverse Section 704(c) layers that may arise during the life of the JV.

4. Distribution Waterfall Tax Implications — Tax characterization of each tier of the distribution waterfall, including the return of capital, preferred return, catch-up promote, and residual split tiers, with particular focus on the interaction of the promote structure with Section 1061 of the Internal Revenue Code (the "carried interest" provision).

5. Partnership Representative Designation — Designation of Fairwater HP Manager, LLC as the Partnership Representative under the centralized partnership audit regime enacted by the Bipartisan Budget Act of 2015, together with recommended protective provisions for the Operating Agreement.

6. Maryland State and Local Tax Elections — Analysis of the Maryland pass-through entity ("PTE") tax election, Baltimore City local tax considerations, withholding requirements for nonresident members, and Delaware franchise tax obligations.

7. REIT Compliance — Interaction of the JV structure with Fairwater's status as a publicly traded Maryland REIT, including analysis under the gross income tests (75% and 95%), the asset tests (75% and 10%), the distribution requirements, the prohibited transaction safe harbor, and the closely held restrictions.

8. Fee Treatment — Tax characterization of the development management fee, property management fee, and disposition fee payable to Fairwater, including analysis under Sections 707(a) and 707(c) of the Internal Revenue Code.

9. Structuring Recommendations — Specific action items for the deal team with respect to Operating Agreement tax provisions, the Tax Protection Agreement, tax return preparation and reporting protocols, and ongoing monitoring obligations. This memorandum is intended for use by the Calderwood & Harkness LLP deal team, as well as Fairwater's General Counsel, Theresa M. Calloway, and Chief Financial Officer, Patricia S.

II. Transaction Overview and Parties A. Joint Venture Parties The HP JV involves two institutional participants, each investing through a special-purpose holding entity that is itself a single-member limited liability company disregarded for federal income tax purposes. The relevant entities are described below. Fairwater HP Manager, LLC. Fairwater HP Manager, LLC is a Maryland limited liability company whose sole me

III. Partnership Classification A. Default Classification Under Treasury Regulations HP JV is a domestic limited liability company organized under the Delaware Limited Liability Company Act (6 Del. C. § 18-101 et seq.) with two members — Fairwater HP Manager, LLC and Prescott HP Investor, LLC. Under the entity classification rules set forth in Treasury Regulation § 301.7701-3(b)(1), a domestic eligible entity (as def

IV. Section 704(b) Allocations — Economic Effect and Substantiality A. General Principles

Section 704(b) of the Internal Revenue Code provides that a partner's distributive share of income, gain, loss, deduction, or credit is determined by the partnership agreement if the allocation under the agreement has substantial economic effect. If an allocation lacks substantial economic effect, the partner's distributive share is determined in accordance with the partner's "interest in the partnership" — an inhere

V. Section 704(c) Considerations A. Applicability. Section 704(c) of the Internal Revenue Code requires that, when a partner contributes property to a partnership, and the fair market value of the contributed property differs from its adjusted tax basis at the time of contribution, the partnership must allocate income, gain, loss, and deduction with respect to such property so as to take account of the variation betw

VI. Partnership Representative Designation A. BBA Partnership Audit Rules Under the Bipartisan Budget Act of 2015 ("BBA"), the centralized partnership audit regime applies to partnership taxable years beginning after December 31, 2017. The BBA replaced the former TEFRA partnership audit procedures and introduced a streamlined regime under which the IRS audits and adjusts partnership items at the partnership level, ra

VII. Maryland State and Local Tax Considerations A. Maryland Pass-Through Entity Tax Election Maryland law provides an election for pass-through entities — including partnerships and limited liability companies classified as partnerships — to pay Maryland income tax at the entity level on behalf of their members. This election is authorized under Md. Code Ann., Tax-Gen. § 10-102.1 and was enacted in response to the f

VIII. REIT Compliance — Interaction with Fairwater's Tax Status A. Overview of REIT Requirements Fairwater Real Estate Investment Trust is a publicly traded Maryland real estate investment trust listed on the New York Stock Exchange under the ticker symbol "FWT" (EIN: 52-2198437; Maryland State Department of Assessments and Taxation ID: D19847321). As a REIT, Fairwater is entitled to a dividends-paid deduction for di