David and Naomi,
I wanted to provide you with a comprehensive update on the status of the loan document negotiations for the $240,000,000 permanent CMBS mortgage loan with Clarendon Metropolitan Insurance Company (the "Permanent Loan") to take out the existing bridge credit facility with Kensington National Bank. As you know, Joanna Wexler and her team at Ashworth McPhail LLP circulated initial drafts of the key loan documents on behalf of Clarendon Metropolitan on or about October 15, and Lisa Morrow transmitted Fairwater's redline/counter-draft of the Loan Agreement, Guaranty Agreement, Environmental Indemnity Agreement, and Cash Management Agreement to Ashworth McPhail on October 18. Comments to the SPE organizational document forms and the state-specific mortgage instruments are being finalized and will follow shortly.
By way of reminder on the key economic terms: $240,000,000 principal amount; fixed rate of 6.25%; 10-year term with 30-year amortization; the 14 Sun Belt Portfolio multifamily properties serving as collateral; Fairwater Sun Belt I LLC through Fairwater Sun Belt XIV LLC as co-borrowers; non-recourse with carve-out guaranty from Fairwater REIT.
Below is a summary of the key negotiation issues and their current status, followed by updates on title and due diligence matters, bridge payoff coordination, and proposed next steps.
**1. Non-Recourse Carve-Out Guaranty Scope — Substantial Agreement Reached**
We have made significant progress on this front. Clarendon Metropolitan and Ashworth McPhail have substantially agreed to Fairwater's position narrowing the scope of the non-recourse carve-out triggers in the Guaranty Agreement. Importantly, the full-recourse trigger is now limited to a voluntary bankruptcy filing by any borrower SPE and collusive involuntary bankruptcy — consistent with the position we articulated in Fairwater's marked-up term sheet. The standard CMBS carve-outs have been retained: fraud, misapplication of rents and insurance/condemnation proceeds, environmental liability, and violation of SPE covenants. Minor language refinements remain under negotiation with respect to the misapplication-of-proceeds carve-out — specifically the scope of what constitutes "misapplication" — but I expect resolution of this point shortly. Fairwater REIT remains the carve-out guarantor, as contemplated.
**2. Springing Lockbox / Cash Management Trigger — Still Under Negotiation**
This remains the most significant open business point in the negotiation, and we will need your input on the acceptable range for resolution.
Fairwater's position, which we have consistently maintained, is that the lockbox should be springing in nature — triggered only upon the commencement of a "Cash Management Period" defined as the DSCR falling below a specified threshold or the occurrence of an event of default — rather than a hard lockbox from day one. I am pleased to report that Clarendon Metropolitan has agreed in principle to a springing (not hard) lockbox structure, which is a positive development and is consistent with the term sheet markup.
The open issue is the DSCR trigger level. Ashworth McPhail's draft proposes that the Cash Management Period be triggered when portfolio DSCR falls below 1.25x. We have countered at 1.10x, which is consistent with the portfolio DSCR covenant under the existing bridge facility with Kensington National Bank. For context, the current portfolio DSCR is approximately 1.476x, based on trailing twelve-month NOI of approximately $26,180,000 and proposed annual debt service of approximately $17,734,152. There is therefore a comfortable margin above either proposed threshold, but the lower trigger level would afford Fairwater meaningfully more operational flexibility to manage through any temporary softness in individual property performance without triggering a cash sweep.
My recommendation would be to consider a compromise position in the range of approximately 1.15x to 1.20x. I would appreciate your guidance on the level that is acceptable to Fairwater so that we can respond to Ashworth McPhail with a focused counterproposal. Once a Cash Management Period is triggered, the standard CMBS cash management waterfall would apply — rent collections would be swept to the lockbox account and applied per the waterfall to debt service, required reserves, and then any excess released to the borrowers.
**3. Transfer Restrictions — Resolved Favorably**
We have achieved a favorable resolution on the transfer restriction provisions. Clarendon Metropolitan has agreed to permit intra-REIT transfers — that is, transfers of direct or indirect interests in the SPE borrowers among Fairwater REIT, Fairwater Operating Partnership, L.P., and their respective wholly-owned subsidiaries — without lender consent. Clarendon Metropolitan has also agreed to permit transfers of publicly traded shares of Fairwater REIT (NYSE: FWTR) without restriction, which is of course essential for a publicly traded REIT borrower.
The restriction on transfers of controlling interests in the borrower SPEs or the operating partnership remains in place, which is standard for CMBS transactions and should not present any practical concern.
One sub-issue remains open: we are working to refine the definition of "Change of Control" to ensure it does not inadvertently capture ordinary-course OP unit redemptions or issuances by Fairwater Operating Partnership. Marcus Leung on our team is drafting revised language for this provision, which we expect to circulate to Ashworth McPhail within the next several days.
**4. Reserve Requirements — Capital Expenditure Reserve Under Discussion**
Tax and insurance reserves have been agreed upon — standard impound/escrow structure with no open issues. Leasing commission and tenant improvement reserves are not applicable for a multifamily portfolio and have been confirmed waived.
The replacement/capital expenditure reserve remains under discussion. Ashworth McPhail's draft requires an initial deposit of $300 per unit ($300 × 4,200 units = $1,260,000) plus ongoing monthly deposits of $25 per unit per month ($25 × 4,200 units = $105,000 per month, or $1,260,000 annually). Fairwater's counter-position proposes an initial deposit of $250 per unit ($1,050,000) and monthly deposits of $20 per unit per month ($84,000 per month, or $1,008,000 annually). We believe our proposed levels are more consistent with the actual capital expenditure needs for a portfolio with a weighted average vintage of 2017.
I would recommend that Rachel coordinate with the property management team at Fairwater Residential Management LLC to compile historical capital expenditure data and near-term capital planning budgets for the portfolio. This data will be helpful in supporting our negotiating position with Ashworth McPhail and demonstrating that our proposed reserve levels are appropriate for the portfolio's age and condition.
**5. Independent Director Provisions / SPE Covenants**
Fairwater has agreed to the standard CMBS requirement for at least one independent director/manager in each SPE borrower LLC whose affirmative consent is required prior to any voluntary bankruptcy filing.
An important open point remains with respect to the REIT distribution carve-out. Fairwater has requested — and Ashworth McPhail is currently reviewing — a provision in the SPE LLC operating agreements that would expressly permit distributions from the SPE borrowers upstream through Fairwater Operating Partnership to Fairwater REIT as necessary to satisfy the REIT's requirement to distribute at least 90% of taxable income in order to maintain its REIT status under the Internal Revenue Code. This is a critical structural point. While it is standard in REIT/CMBS transactions, the specific drafting language requires careful attention, and discussions are ongoing with Ashworth McPhail on acceptable formulations. We are also coordinating with Patricia Keene at Crestline & Alderman LLP on the REIT tax compliance aspects of the separateness covenants to ensure they are fully compatible with Fairwater's distribution obligations.
**6. Other Items — Brief Status Notes**
*Casualty/Condemnation Thresholds:* Fairwater has proposed increasing the threshold below which insurance and condemnation proceeds must be applied to restoration of the affected property (rather than to loan paydown). Ashworth McPhail has not yet responded on this point, and we will follow up.
*Prepayment/Defeasance:* Confirmed as a 2-year lockout period followed by defeasance availability through 90 days prior to maturity, then open prepayment — consistent with the term sheet. No material disagreement.
*Reporting Requirements:* Largely agreed. Standard CMBS quarterly and annual reporting, including audited annual financial statements from Whitmore Hargrove & Co., P.C.
*Mortgage Instruments:* Calderwood & Harkness has prepared the Texas form deed of trust and is currently adapting forms for Georgia, Florida, North Carolina, and Tennessee. We expect to circulate these to Ashworth McPhail along with the SPE organizational document forms within the next week.
**Title, Survey, and Due Diligence Status**
Marcus Leung is reviewing pro forma title commitments from Marlowe Asset Management Title Insurance Group, Inc. and ALTA surveys for all 14 properties. We expect to have his preliminary title and survey review memorandum completed by the end of next week. Appraisals from Thornfield Appraisal Group LLC are in process, and all 14 property appraisals are expected to be delivered by early November. Good standing certificate requests have been submitted to the Secretary of State offices in Maryland, Delaware, Texas, Georgia, Florida, North Carolina, and Tennessee.
**Bridge Payoff Coordination**
Separately, I have sent a coordination letter to Kenneth Delacroix at Halcourt Briggs & Devlin LLP, counsel to Kensington National Bank as bridge lender, regarding bridge payoff logistics. The letter addresses the draft payoff letter, mortgage releases for all 14 properties across five states, and UCC-3 termination statements. We are awaiting their response and will update you as soon as we hear back.
As a reminder, the bridge facility matures on December 31, 2025. The bridge exit fee of $1,200,000 (0.50% of the $240,000,000 outstanding principal) is waived if repayment is made from permanent CMBS financing proceeds and occurs on or before March 31, 2026. Closing the Permanent Loan by the November 28 target date will comfortably ensure the waiver of this fee.
**Timeline and Next Steps**
Our target dates remain as follows:
- Target execution of permanent loan documents: **November 14, 2025** - Target permanent loan closing and simultaneous bridge repayment: **November 28, 2025**
To stay on track, the remaining open negotiation issues should be resolved by approximately **November 1, 2025**, in order to allow sufficient time for final document preparation, execution, and closing logistics.
I would propose the following next steps:
1. **Client call early next week:** Schedule a call with David, Naomi, and Rachel to discuss Fairwater's acceptable range on the DSCR lockbox trigger level and the capex reserve positions. Please let Lisa or me know your availability, and we will coordinate.
2. **SPE and mortgage documents:** Calderwood & Harkness will circulate the SPE organizational document forms and state-specific mortgage instruments to Ashworth McPhail by the end of next week.
3. **Follow-up with Ashworth McPhail:** We will follow up with Joanna Wexler on the casualty/condemnation threshold proposal and the remaining open items noted above.
4. **REIT distribution carve-out:** Continue coordinating with Patricia Keene at Crestline & Alderman on the drafting of the REIT distribution carve-out language for the SPE operating agreements.
5. **Title/survey and UCC review:** Marcus Leung will finalize the title and survey review memorandum and the UCC filing summary.
**Overall, the negotiations are progressing constructively. I do not see any issues that appear to be deal-breakers, and I remain confident that the November 28 closing target is achievable provided we maintain the current pace.**
I am happy to discuss any of the foregoing by phone at your convenience. On a day-to-day basis, Lisa Morrow remains the primary contact for this matter, and Marcus Leung is available for any factual or document-specific questions.
Best regards,
Philip Hartmann
Philip Hartmann Partner, Banking & Finance Calderwood & Harkness LLP 425 Park Avenue New York, NY 10022 Tel: (212) 506-7400 Email: phartmann@calderwoodharkness.com
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