Contract analysis

I. Executive Summary The purpose of this memorandum is to analyze the proposed formation of Fairwater Southgate TRS, Inc. ("Southgate TRS") as a Maryland corporation and wholly owned taxable REIT subsidiary ("TRS") of Fairwater Real Estate Investment Trust ("Fairwater" or "FREIT"), a Maryland real estate investment trust publicly traded on the New York Stock Exchange under the ticker symbol "FREIT." The formation of

II. Background A. Fairwater Real Estate Investment Trust Fairwater Real Estate Investment Trust is a Maryland real estate investment trust with its principal office and headquarters located at 2400 Harbor Promenade, Suite 1100, Baltimore, Maryland 21202. Fairwater's registered agent in the State of Maryland is Capitol Registered Agents, Inc., located at 7 Saint Paul Street, Suite 820, Baltimore, Maryland 21202. Fairw

1. Food-and-Beverage Operations. Several properties within the Southgate Portfolio include on-site restaurants, cafés, commissary kitchens, and catering services that are operated directly by Thornfield (or its affiliates) rather than leased to independent third-party restaurant operators. The income from these food-and-beverage operations constitutes non-qualifying income because it represents revenue from the provi

2. Parking Management Operations. Certain properties include active parking management operations, including staffed parking garages, valet services, and event parking coordination, that generate revenue beyond customary rent for the use of parking spaces. Where a REIT merely leases parking spaces to tenants, the resulting income generally qualifies as rents from real property. However, where the REIT (or its subsidi

3. Co-Working-Space Operations. Two properties include furnished, serviced co-working and flexible office spaces that offer bundled amenities including furniture, technology infrastructure, reception services, conference room access, printing and copying services, mail handling, and other concierge-style services. The income from these co-working operations is considered non-qualifying because the bundled services ar

III. Taxable REIT Subsidiary — Legal Framework A. Statutory Authority for TRS Formation The authority for the formation and operation of a taxable REIT subsidiary is found in IRC § 856(l), which was added to the Code by Section 542(a) of the REIT Improvement Act of 1999 (P.L. 106-170) and subsequently amended by the American Jobs Creation Act of 2004 and the Protecting Americans from Tax Hikes Act of 2015 (among othe

IV. Formation and Capitalization of Fairwater Southgate TRS, Inc. A. Entity Selection Southgate TRS will be formed as a Maryland corporation, consistent with the domicile of Fairwater itself. The selection of Maryland as the state of incorporation is driven by several considerations, including administrative convenience, consistency with Fairwater's existing corporate organizational structure (which utilizes Maryland

V. Compliance with REIT Asset Tests A. 20% TRS Asset Test — IRC § 856(c)(4)(B)(ii) The primary asset-test constraint on the proposed TRS structure is the 20% TRS asset test of IRC § 856(c)(4)(B)(ii), which provides that the value of the REIT's securities of one or more taxable REIT subsidiaries, in the aggregate, must not exceed 20% of the total value of the REIT's assets at the close of each calendar quarter. The fo

VI. Intercompany Lease Structure A. Overview. The intercompany lease structure is a foundational element of the proposed TRS arrangement. Under this structure, Fairwater (in its capacity as landlord) will lease the portions of the Southgate Portfolio properties dedicated to TRS-operated activities to Southgate TRS (in its capacity as tenant) under separate intercompany lease agreements. Each lease will cover the spec

VII. Treatment of TRS Revenue and the REIT Gross Income Tests A. Projected TRS Revenue Segregation As discussed in Section II.C above, Southgate TRS is projected to generate annual gross revenue of approximately $38,400,000 from its food-and-beverage, parking management, and co-working-space operations. This revenue will be earned by Southgate TRS in its capacity as a separate C corporation and will be reported on So

VIII. 100% Excise Tax Risk — IRC § 857(b)(7) IRC § 857(b)(7)(A) imposes a 100% excise tax on "redetermined rents," which are defined as rents from real property that are overstated as a result of services furnished or rendered by a TRS to tenants of its parent REIT, or as rents received by a REIT from a TRS to the extent such rents exceed the amounts that would have been charged if the parties were unrelated. The sta

IX. Risk Factors and Considerations A. Valuation Fluctuation Risk The 20% TRS asset test under IRC § 856(c)(4)(B)(ii) is measured based on the value of the REIT's assets at the close of each calendar quarter. Asset values are not static; they fluctuate over time in response to market conditions, capital expenditures, depreciation, and other factors. If the value of Southgate TRS's assets were to increase significantl