Dear Joanna,
I hope this email finds you well. I am writing in connection with the proposed $240,000,000 permanent CMBS mortgage loan (the "Loan") from Clarendon Metropolitan Insurance Company ("Lender") to Fairwater Sun Belt I LLC through Fairwater Sun Belt XIV LLC (collectively, the "Borrower"), to be secured by the 14-property multifamily portfolio comprising approximately 4,200 units across Texas, Georgia, Florida, North Carolina, and Tennessee (the "Sun Belt Portfolio"). As you know, Calderwood & Harkness LLP represents Fairwater Real Estate Investment Trust (NYSE: FWTR) ("Fairwater REIT") and its affiliates, including the Borrower, in connection with this transaction.
Attached please find the Borrower's comments, in redline/tracked changes format, to the initial loan document drafts circulated by Ashworth McPhail on or about October 15, 2025. We have provided comments on the following four documents:
1. **Loan Agreement** — Redline of the Loan Agreement among Fairwater Sun Belt I LLC through Fairwater Sun Belt XIV LLC, as co-borrowers (each a Delaware LLC wholly owned by Fairwater Operating Partnership, L.P.), and Clarendon Metropolitan Insurance Company, as lender. Principal amount: $240,000,000; fixed interest rate of 6.25% per annum; 10-year term; 30-year amortization schedule; monthly P&I payments of approximately $1,477,846. New York governing law.
2. **Non-Recourse Carve-Out Guaranty Agreement** — Redline of the Non-Recourse Carve-Out Guaranty Agreement by Fairwater Real Estate Investment Trust, a Maryland real estate investment trust, as guarantor, in favor of Clarendon Metropolitan Insurance Company.
3. **Environmental Indemnity Agreement** — Redline of the Environmental Indemnity Agreement by the SPE co-borrowers and Fairwater Real Estate Investment Trust, as guarantor, in favor of Clarendon Metropolitan Insurance Company.
4. **Cash Management Agreement** — Redline of the Cash Management Agreement among the SPE co-borrowers, Clarendon Metropolitan Insurance Company, and the cash management bank.
**Summary of Principal Revisions**
Detailed comments appear in the margin annotations of each redline document. For ease of review, I have summarized the principal areas of revision below, organized by topic:
1. **Non-Recourse Carve-Out Scope (Guaranty Agreement & Loan Agreement).** The Borrower proposes narrowing certain recourse carve-out triggers, particularly with respect to representations that, as currently drafted, could inadvertently trigger full recourse liability. We have proposed qualifying the full recourse triggers—specifically, voluntary bankruptcy and collusive involuntary bankruptcy—with appropriate knowledge and intent qualifiers. Additionally, we request that the scope of the "misapplication of rents and insurance/condemnation proceeds" carve-out be limited to *intentional* misapplication, which is consistent with market CMBS precedent.
2. **Cash Management — Springing vs. Hard Lockbox (Cash Management Agreement & Loan Agreement).** The Borrower's position is that the lockbox should be springing rather than a hard lockbox in effect from the closing date. We propose that the Cash Management Period be triggered only upon (a) DSCR falling below a specified threshold (the Borrower proposes 1.15x, subject to further negotiation) or (b) the occurrence and continuance of an Event of Default. A springing structure is consistent with the Borrower's REIT operating requirements and is well supported by the portfolio's current performance: trailing-twelve-month NOI of approximately $26,180,000, yielding a current DSCR of approximately 1.476x against projected annual debt service of approximately $17,734,152. We believe this provides substantial cushion above any reasonable trigger threshold.
3. **Transfer Restrictions and Permitted Transfers (Loan Agreement).** The Borrower requests customary REIT carve-outs permitting transfers of interests at the REIT and parent-entity level—including transfers of Fairwater REIT shares on the NYSE—without lender consent. We also request that intra-REIT restructuring transfers (e.g., between Fairwater REIT, Fairwater Operating Partnership, L.P., and the SPE subsidiaries) be expressly permitted, and that the definition of "Change of Control" be appropriately tailored to reflect Fairwater's publicly traded REIT structure.
4. **SPE Covenants — REIT Distribution Exception (Loan Agreement).** The Borrower proposes a carve-out from the SPE distribution restrictions to expressly permit distributions necessary for Fairwater REIT to satisfy its obligation to distribute at least 90% of its taxable income in order to maintain its REIT status for federal income tax purposes. This is a fundamental structural requirement for REIT borrowers and a standard accommodation in CMBS lending to REIT-affiliated entities.
5. **Casualty and Condemnation Thresholds (Loan Agreement).** The Borrower proposes increasing the threshold below which insurance and condemnation proceeds are applied to restoration of the affected property rather than to prepayment of the Loan. Specific proposed threshold amounts are set forth in the redline.
6. **Reserve Requirements (Loan Agreement & Cash Management Agreement).** The Borrower requests a reduction in the proposed capital expenditure reserve amounts, given the relatively recent vintage of the portfolio properties (all 14 properties were built between 2014 and 2021) and their current condition, as reflected in the engineering reports previously delivered. We also propose that tax and insurance reserves be waived so long as no Cash Management Period is in effect, which is consistent with our springing lockbox position.
7. **Defeasance Mechanics (Loan Agreement).** The Borrower's comments are generally conforming. We propose clarifications to the defeasance process—including timing requirements, approved defeasance securities, and successor borrower mechanics—to align with current market practice. We note that the 2-year lockout period prior to defeasance eligibility is acceptable.
8. **Reporting Requirements and Lender Approval Rights (Loan Agreement).** The Borrower proposes narrowing certain lender consent and approval rights to commercially reasonable standards. We also request that annual reporting obligations be aligned with Fairwater's existing SEC reporting cycle (fiscal year ending December 31), to avoid duplicative preparation of financial information on a different timetable.
9. **Environmental Indemnity (Environmental Indemnity Agreement).** The Borrower's comments on the Environmental Indemnity Agreement are limited. We propose standard carve-outs for (a) pre-existing conditions disclosed in the Phase I environmental site assessments delivered to Lender and (b) environmental conditions caused by migration from off-site sources not under the Borrower's control. The Borrower confirms that the indemnity will survive loan repayment.
**Documents to Follow**
The Borrower's comments on the following documents are still being finalized and will be transmitted separately in the coming days:
- Form Amended and Restated LLC Agreements for each of the 14 SPE borrowers (Fairwater Sun Belt I LLC through Fairwater Sun Belt XIV LLC), incorporating CMBS separateness covenants and independent director requirements. - Mortgage, Assignment of Leases and Rents, and Security Agreement forms for each applicable state jurisdiction (Texas, Georgia, Florida, North Carolina, and Tennessee). - Assignment of Leases and Rents forms. - Promissory Note comments, if any (we expect the Borrower's comments on the Note to be minimal).
**Proposed Call to Discuss Open Points**
Given the number of substantive comments, we believe it would be productive to schedule a call during the week of October 20 among counsel and principals to walk through the principal open points and work toward resolution. As you are aware, the parties are targeting execution of the permanent loan documents by November 14, 2025, with closing targeted for November 28, 2025. Timely resolution of these comments is particularly important in light of the maturity of the existing bridge credit facility with Kensington National Bank, N.A. on December 31, 2025. Would you have availability on Tuesday, October 21 or Wednesday, October 22, ideally in the late morning or early afternoon (Eastern)? I am happy to coordinate through assistants if that is easier.
Thank you to you and the Ashworth McPhail team for the thorough initial drafts—they provided a very useful starting point for the Borrower's review. Please do not hesitate to reach out if you have any questions in advance of the call. Philip Hartmann is also available for any partner-level discussions as needed.
Best regards,
Lisa Morrow Associate, Banking & Finance Calderwood & Harkness LLP 425 Park Avenue New York, NY 10022 T: (212) 554-7138 E: lmorrow@calderwoodharkness.com Matter No. 1036-00001
Attachments: 1. Redline — Loan Agreement ($240,000,000 Mortgage Loan) [Word, tracked changes] 2. Redline — Non-Recourse Carve-Out Guaranty Agreement [Word, tracked changes] 3. Redline — Environmental Indemnity Agreement [Word, tracked changes] 4. Redline — Cash Management Agreement [Word, tracked changes]