1036-00001 · Banking & Finance practice group · Term Sheet & Commitment

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Calderwood & Harkness LLP

Counselors at Law

425 Park Avenue New York, New York 10022 Tel: (212) 549-6000

Fax: (212) 549-6001

www.calderwoodharkness.com

PRIVILEGED & CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION

MEMORANDUM

TO: David A. Whitfield, General Counsel, Fairwater Real Estate Investment Trust Naomi T. Sinclair, Chief Financial Officer, Fairwater Real Estate Investment Trust Rachel S. Donahue, Senior Vice President, Capital Markets, Fairwater Real Estate Investment Trust

FROM: Philip Hartmann, Partner, Banking & Finance, Calderwood & Harkness LLP

DATE: August 15, 2025

RE: Financing Alternatives Analysis — Permanent Take-Out of $240,000,000 Bridge Credit Facility (Sun Belt Portfolio)

Matter No.: 1036-00001

I. Executive Summary

The purpose of this memorandum is to present and analyze the permanent financing alternatives available to Fairwater Real Estate Investment Trust ("Fairwater" or the "Company") and Fairwater Operating Partnership, L.P. (the "Operating Partnership" or "Fairwater OP") for the $240,000,000 take-out of the existing bridge credit facility (the "Bridge Facility") provided by a syndicate of lenders led by Kensington National Bank, N.A., as administrative agent (the "Bridge Lenders"). This memorandum is intended to assist Fairwater's senior management and Board of Trustees in evaluating available permanent financing structures and making an informed decision regarding the optimal path forward.

As background, the Bridge Facility was fully funded on June 30, 2025 in connection with Fairwater's acquisition (the "Acquisition") of a portfolio of fourteen (14) multifamily residential communities comprising approximately 4,200 units located across Texas, Georgia, Florida, North Carolina, and Tennessee (the "Sun Belt Portfolio") from Meridian Sunstone Holdings LLC ("Meridian Sunstone") for an aggregate purchase price of $385,000,000. The Bridge Facility matures on December 31, 2025, with one six-month extension option available through June 30, 2026, subject to specified conditions. Fairwater's target date for closing the permanent financing is November 28, 2025, well in advance of the Bridge Facility's initial maturity date.

The Bridge Facility currently carries an interest rate of SOFR plus 500 basis points, resulting in a current all-in rate of approximately 9.33% per annum (based on 30-day Term SOFR of 4.33% as of August 11, 2025). At this rate, Fairwater's annual interest expense on the Bridge Facility is approximately $22,392,000, representing a significant drag on the Company's distributable cash flow and underscoring the urgency of transitioning to lower-cost, fixed-rate permanent financing.

This memorandum evaluates three permanent financing alternatives:

(i) a CMBS conduit loan originated by Clarendon Metropolitan Insurance Company ("Clarendon Metropolitan"), for which Fairwater has received a term sheet dated August 25, 2025;

(ii) agency multifamily loan programs offered through the Fannie Mae Delegated Underwriting and Servicing ("DUS") program and the Freddie Mac Optigo multifamily lending program; and

(iii) a traditional bank permanent mortgage loan, which could potentially be structured with members of the existing Bridge Facility syndicate or new bank lenders.

Beacon Ridge Capital Advisors LLC ("Beacon Ridge"), Fairwater's financial advisor in connection with the permanent financing, has assisted in sourcing and evaluating the proposals summarized herein. Dennis P. Nakamura, Partner at Beacon Ridge, has been the principal point of contact for this engagement.

Based on our analysis of the available alternatives, and subject to our discussion of the relevant risks and trade-offs in the body of this memorandum, we preliminarily recommend that Fairwater proceed with the Clarendon Metropolitan CMBS structure. The CMBS proposal offers the most favorable combination of interest rate, loan term, and structural alignment with Fairwater's REIT capital stack and long-term hold strategy for the Sun Belt Portfolio. This recommendation is subject to Fairwater's successful negotiation of certain key terms in the Clarendon Metropolitan term sheet, which we will address in a separate detailed term sheet review and commentary memorandum.

This memorandum has been prepared in coordination with Crestline & Alderman LLP (Patricia S. Keene, Partner) with respect to REIT tax compliance aspects of the proposed financing structures. Certain REIT-specific considerations, including distribution requirements, prohibited transaction rules, and the impact of SPE covenant restrictions on REIT distributions, are noted herein and will be addressed more fully in a supplemental memorandum from Crestline & Alderman.

II. Background and Current Financing Profile

A. Sun Belt Portfolio Overview

The Sun Belt Portfolio consists of fourteen (14) multifamily residential communities comprising approximately 4,200 apartment units, distributed across five states in the southeastern United States. The portfolio was acquired from Meridian Sunstone Holdings LLC, a Delaware limited liability company owned by Victor L. Castaneda (51% membership interest) and Brenda K. Yung (49% membership interest). The Acquisition closed on June 30, 2025, at an aggregate purchase price of $385,000,000.

The geographic distribution of the Sun Belt Portfolio is as follows:

The trailing-twelve-month net operating income ("NOI") of the Sun Belt Portfolio at the time of the Acquisition was $26,180,000, representing an acquisition capitalization rate of approximately 6.80% ($26,180,000 ÷ $385,000,000). The weighted average physical occupancy across all fourteen properties at the time of the Acquisition was 93.7%.

The properties are vintage 2014 through 2021 construction and are generally Class B+ to A- multifamily communities with amenity packages typical of institutional-quality Sun Belt apartment communities. Each property is located in a metropolitan statistical area demonstrating favorable population growth, employment trends, and household formation dynamics.

Each of the fourteen properties is held by a separate Delaware limited liability company, designated Fairwater Sun Belt I LLC through Fairwater Sun Belt XIV LLC (collectively, the "SPE Borrowers"), each of which is a wholly owned subsidiary of Fairwater Operating Partnership, L.P. The SPE structure was established at the time of the Acquisition in contemplation of permanent financing requirements. Property management for all fourteen communities is provided by Fairwater Residential Management LLC, an affiliate of the Company, pursuant to property management agreements effective July 1, 2025.

B. Existing Bridge Credit Facility Summary

The principal terms of the existing Bridge Facility are summarized below:

We note an important constraint with respect to the Bridge Facility extension option: the DSCR threshold for extension is 1.20x, whereas the current DSCR on the Bridge Facility is only 1.169x. As of the date of this memorandum, the Sun Belt Portfolio's trailing NOI does not satisfy the DSCR extension condition. If the permanent financing closing extends beyond the December 31, 2025 maturity date, Fairwater will need to either (a) improve NOI to a level sufficient to produce a DSCR of at least 1.20x (requiring annual NOI of approximately $26,870,400 at the current interest rate, an increase of approximately $690,400 over the trailing figure), (b) make a partial principal paydown to reduce the loan balance and corresponding debt service, or (c) negotiate a waiver from the Bridge Lenders. This DSCR shortfall further underscores the importance of closing the permanent financing on or before the target date of November 28, 2025.

C. Fairwater's Capital Structure Context

Fairwater Real Estate Investment Trust is a Maryland real estate investment trust that has elected REIT status for federal income tax purposes. The Company's shares of beneficial interest are listed on the New York Stock Exchange under the ticker symbol "FWTR." The Company conducts substantially all of its operations through the Operating Partnership, for which Fairwater REIT serves as general partner. Key capital structure metrics are summarized below:

A critical constraint in evaluating permanent financing alternatives is Fairwater's obligation, as a REIT, to distribute at least 90% of its taxable income annually to its shareholders in order to maintain its REIT status and avoid entity-level federal income taxation. This distribution requirement limits the Company's ability to retain earnings for debt service or capital reserves and strongly favors permanent financing structures that minimize annual debt service costs and maximize distributable cash flow. As discussed in greater detail in Sections III and V below, this consideration is a significant factor in our recommendation of the CMBS structure.

D. Funding Sources for Acquisition

The Acquisition was funded from the following sources:

(a) Bridge Facility proceeds: $240,000,000, representing approximately 62.34% of the $385,000,000 purchase price; and

(b) Cash equity from Fairwater's balance sheet and OP unit issuance: $145,000,000, representing approximately 37.66% of the purchase price.

The permanent financing is intended to replace the Bridge Facility proceeds on a dollar-for-dollar basis. No additional equity contribution is anticipated in connection with the permanent take-out.

III. Financing Alternatives Analyzed

A. Alternative 1: CMBS Conduit — Clarendon Metropolitan Insurance Company

1. Overview of Proposal. Clarendon Metropolitan Insurance Company (NAIC No. 38921) is a New York-domiciled insurance company with its principal office at 1 MetroTech Center, Brooklyn, New York 11201. Clarendon Metropolitan is an active originator of commercial real estate mortgage loans for securitization through its CMBS conduit program. Garrett W. Hollister, Head of CMBS Originations, is the designated contact for this transaction.

Clarendon Metropolitan has delivered to Fairwater, through Beacon Ridge Capital Advisors LLC, a term sheet dated August 25, 2025 setting forth the proposed terms of a $240,000,000 fixed-rate mortgage loan to be originated by Clarendon Metropolitan and securitized through its CMBS conduit. The anticipated securitization vehicle for this loan is CLRN 2025-C14, although final pooling and securitization allocation is subject to Clarendon Metropolitan's discretion and market conditions at the time of securitization.

Clarendon Metropolitan's outside counsel for this transaction is Ashworth McPhail LLP (Joanna C. Wexler, Partner), located at 51 Madison Avenue, 24th Floor, New York, New York 10010. A detailed analysis and mark-up of the Clarendon Metropolitan term sheet will be provided in a separate memorandum following the completion of our initial review.

2. Key Economic Terms. The key economic terms of the Clarendon Metropolitan CMBS proposal are as follows:

The DSCR of 1.476x under the CMBS proposal represents a significant improvement over the current Bridge Facility DSCR of 1.169x and provides substantial cushion above typical CMBS minimum debt service coverage thresholds (generally 1.20x to 1.25x for multifamily assets). This improvement is attributable to both the lower fixed interest rate (6.25% versus 9.33%) and the transition from an interest-only payment structure to a fully amortizing structure with a 30-year amortization schedule.

3. Structural Features. The Clarendon Metropolitan CMBS loan would be structured as a non-recourse mortgage loan with a standard CMBS carve-out guaranty. The principal structural features are as follows:

Recourse. The loan will be non-recourse to the borrowers, with liability limited to the collateral securing the loan, except with respect to certain standard CMBS carve-out exceptions. Fairwater Real Estate Investment Trust will serve as the carve-out guarantor. The carve-out guaranty covers the following categories of loss:

(a) fraud or intentional misrepresentation by the borrowers or guarantor;

(b) voluntary filing of a petition in bankruptcy by any borrower, or collusive involuntary bankruptcy filing;

(d) environmental liability arising from the presence of hazardous substances at the mortgaged properties; and

(e) violation of the SPE/separateness covenants in the borrower organizational documents.

Importantly, a voluntary bankruptcy filing by any borrower, or a collusive involuntary bankruptcy filing, would trigger full recourse liability against the carve-out guarantor for the entire outstanding loan balance. The scope and drafting of the carve-out guaranty is a critical negotiation point, and Calderwood & Harkness will review the proposed language carefully to ensure that the recourse triggers are appropriately limited and that the guaranty obligations are consistent with market standards and Fairwater's risk tolerance.

Borrower Structure. The borrower under the CMBS loan will be the fourteen SPE co-borrowers (Fairwater Sun Belt I LLC through Fairwater Sun Belt XIV LLC), replacing the Operating Partnership as borrower under the Bridge Facility. This restructuring is required by CMBS underwriting standards, which mandate that the borrowing entities be bankruptcy-remote, single-purpose entities satisfying certain organizational and operational requirements.

SPE Requirements. The SPE Borrowers will be required to comply with customary CMBS separateness covenants, including restrictions on additional indebtedness, maintaining their own books and records, refraining from commingling assets with those of affiliates, and complying with independent director requirements. Each SPE Borrower's organizational documents will include provisions requiring the consent of an independent director (or independent manager) before the entity may file a voluntary bankruptcy petition or consent to an involuntary bankruptcy filing. The independent directors will be provided by a nationally recognized provider of independent directors for securitized transactions.

Collateral. The loan will be secured by first-priority mortgage liens on all fourteen Sun Belt Portfolio properties, equity pledges in the SPE Borrowers, assignments of leases and rents, and assignments of the property management agreements between the SPE Borrowers and Fairwater Residential Management LLC.

Cash Management. The term sheet contemplates a lockbox arrangement for the collection and application of property-level rents and other income. Whether the lockbox will be "hard" (rents flow directly into a lender-controlled account at all times) or "springing" (rents are directed to a lender-controlled account only upon the occurrence of specified trigger events, such as a DSCR decline below a threshold level) is a significant negotiation point. We will recommend that Fairwater negotiate for a springing lockbox with reasonable trigger thresholds.

Prepayment. The loan is subject to a two-year lockout period commencing from the date of the securitization. No prepayment of any kind is permitted during the lockout period (anticipated to be approximately November 2025 through November 2027). Following the lockout period, prepayment is permitted through defeasance — that is, the substitution of U.S. Treasury obligations or other approved securities sufficient to generate cash flows equal to the remaining scheduled loan payments. Defeasance is operationally complex and requires the engagement of a defeasance consultant and the purchase of a portfolio of Treasury securities, the cost of which depends on prevailing Treasury rates relative to the note rate at the time of defeasance. In the final ninety (90) days of the loan term (approximately August 2035 through November 2035), the loan is open for prepayment at par without penalty.

Governing Law. The loan documentation will be governed by New York law.

4. Advantages. The Clarendon Metropolitan CMBS structure offers the following advantages relative to the other alternatives under consideration:

(a) Lowest fixed rate. The 6.25% fixed rate is the lowest among the three alternatives, providing certainty of debt service cost for the full ten-year loan term and eliminating interest rate risk. This rate compares favorably to the estimated agency rate of 5.85%–6.15% (for which no term sheet is currently in hand) and the estimated bank permanent rate of 6.50%–7.00% (fixed via swap).

(b) Annual interest savings versus Bridge Facility. The annual interest expense under the CMBS loan (on the interest component alone) is approximately $15,000,000 ($240,000,000 × 6.25%), compared to $22,392,000 under the Bridge Facility ($240,000,000 × 9.33%), representing annual interest savings of approximately $7,392,000. We note that the total annual debt service under the CMBS loan ($17,734,152, inclusive of principal amortization) differs from the interest-only component, but the monthly payment obligation under the CMBS loan ($1,477,846) is still approximately $388,154 per month lower than the interest-only monthly payment under the Bridge Facility ($1,866,000), notwithstanding the inclusion of principal amortization in the CMBS payment.

(c) Longest available term. The ten-year term is the longest available among the three alternatives and provides Fairwater with balance sheet stability and protection against refinancing risk through November 2035. This is in contrast to the five-to-seven-year terms typically available from bank lenders for portfolio mortgage loans.

(d) Non-recourse structure. The non-recourse structure (limited to carve-out exceptions) significantly reduces Fairwater REIT's exposure as guarantor compared to the full recourse guaranty under the Bridge Facility and the partial or full recourse that bank lenders would likely require.

(e) 30-year amortization. The thirty-year amortization schedule reduces the near-term principal repayment burden compared to shorter amortization periods (e.g., 25-year) that may be required under bank permanent loan alternatives, thereby preserving cash flow for distributions.

(f) Asset class suitability. CMBS conduit execution is well-suited to stabilized multifamily assets with predictable cash flows, and Clarendon Metropolitan has expressed a strong appetite for the Sun Belt Portfolio given its favorable occupancy levels, geographic diversification, and modern vintage.

(g) Consistency with Fairwater's existing financing strategy. Fairwater has utilized CMBS execution for portions of its existing 62-community portfolio, and the Company's management team and legal advisors are familiar with the CMBS documentation process and post-closing servicing requirements.

(h) Strong DSCR. The projected DSCR of 1.476x provides substantial cushion above typical CMBS minimum thresholds of 1.20x–1.25x, reducing the risk of cash management triggers and special servicer intervention during the loan term.

(i) Bridge exit fee waiver. The Bridge Facility exit fee of 0.50% ($1,200,000) is waived if the Bridge Facility is repaid from the proceeds of a permanent CMBS financing by March 31, 2026. A permanent loan closing date of November 28, 2025 is well within this window, and proceeding with the CMBS structure allows Fairwater to capture this $1,200,000 savings.

5. Disadvantages / Risks. Notwithstanding the significant advantages of the CMBS structure, the following disadvantages and risks should be carefully considered:

(a) Limited prepayment flexibility. The two-year lockout period (through approximately November 2027) followed by defeasance-only prepayment is the most restrictive prepayment regime among the three alternatives. During the lockout period, no prepayment of any kind is permitted; Fairwater would be unable to prepay or refinance the CMBS loan regardless of changes in market interest rates or Fairwater's strategic objectives. Following the lockout period, defeasance is operationally complex, requiring engagement of a defeasance consultant, establishment of a defeasance collateral account, and purchase of a portfolio of U.S. Treasury securities. The cost of defeasance can be significant, particularly if prevailing Treasury rates at the time of defeasance are below the note rate of 6.25%, requiring the purchase of a larger portfolio of Treasury securities to generate sufficient cash flow to cover remaining debt service. Neither yield maintenance nor par prepayment is available as an alternative to defeasance during the loan term (other than in the final 90 days).

(b) Securitized servicing structure. Following securitization of the CMBS loan into the CLRN 2025-C14 trust, Fairwater will no longer interact directly with Clarendon Metropolitan as lender. Instead, day-to-day servicing will be performed by a master servicer designated in the pooling and servicing agreement, and any material default, workout, or modification requests will be handled by a special servicer. The master servicer and special servicer are appointed by the securitization trust and may change over the life of the loan. This intermediated servicing structure can be less responsive and more procedurally burdensome than a direct lender relationship, particularly in situations requiring lender consent for property-level transactions, casualty or condemnation events, or borrower requests.

(c) Extensive SPE/separateness covenant requirements. CMBS underwriting standards impose strict SPE organizational and operational requirements on the borrower entities, including the maintenance of separate books and records, restrictions on additional indebtedness, prohibitions on commingling of assets, and the requirement to obtain independent director consent before filing a voluntary bankruptcy petition. These requirements impose ongoing governance and compliance costs and may limit operational flexibility at the SPE level. The independent director requirement adds cost (typically $5,000–$10,000 per entity per year) and governance complexity.

(d) Cash management restrictions. Whether structured as a hard lockbox or a springing lockbox, the cash management arrangements under a CMBS loan will be more restrictive than those under a bank permanent loan. Under a hard lockbox, all rents and other property-level income flow directly into a lender-controlled deposit account, and distributions to the borrower are made only after satisfaction of debt service and reserve obligations. Even under a springing lockbox, the trigger events that cause the lockbox to spring are typically tied to DSCR thresholds or the occurrence of events of default, and once sprung, the lockbox may be difficult to reverse.

(e) Limited flexibility for property-level transactions. The CMBS loan documentation will impose restrictions on transfers of the mortgaged properties or interests in the borrower entities, subordinate financing, and significant property alterations or capital improvements. Lender consent for these transactions must be obtained from the master servicer or special servicer and may require rating agency confirmation, making the consent process time-consuming and uncertain. This inflexibility may be a constraint if Fairwater's strategic plans for the Sun Belt Portfolio evolve during the ten-year loan term.

(f) Longer documentation and closing timeline. CMBS loan documentation is typically more extensive and complex than bank loan documentation, requiring negotiation of mortgage loan agreements, promissory notes, guarantees, environmental indemnities, cash management agreements, and extensive borrower organizational document modifications. The documentation process may require six to eight weeks from commitment letter to closing, compared to four to six weeks for a bank permanent loan.

(g) REIT distribution carve-out. The SPE distribution restrictions imposed by CMBS separateness covenants may, if not properly drafted, conflict with Fairwater's REIT obligation to distribute at least 90% of its taxable income to shareholders. This issue requires careful coordination between Calderwood & Harkness and Crestline & Alderman LLP to ensure that the SPE organizational documents include appropriate carve-outs permitting distributions necessary to enable the Company to satisfy its REIT distribution requirements.

B. Alternative 2: Agency Multifamily — Fannie Mae DUS / Freddie Mac Optigo

1. Overview. The Thackeray Holdings ("Fannie Mae") Delegated Underwriting and Servicing ("DUS") program and the Harborview Partners LLC ("Freddie Mac") Optigo multifamily lending program are two government-sponsored enterprise programs designed specifically for the financing of multifamily residential properties. These programs offer competitive fixed-rate permanent financing for stabilized multifamily assets and represent a significant source of capital in the multifamily lending market.

Under the DUS program, Fannie Mae delegates underwriting authority to approved DUS lenders, which originate and service mortgage loans that are subsequently purchased by Fannie Mae and, in many cases, securitized through the issuance of Fannie Mae mortgage-backed securities. The DUS lender shares in the credit risk of the loan pursuant to a loss-sharing arrangement with Fannie Mae. Similarly, under the Freddie Mac Optigo program, approved Optigo seller/servicers originate and sell mortgage loans to Freddie Mac, which may securitize the loans through its K-Deal program or other structures.

Fairwater has not yet engaged a DUS lender or Freddie Mac Optigo seller/servicer to solicit formal proposals for the permanent financing of the Sun Belt Portfolio. Accordingly, no agency term sheet is currently in hand. The estimated terms discussed below are based on Beacon Ridge Capital Advisors LLC's assessment of current market conditions and its experience with recent comparable agency multifamily transactions.

2. Estimated Economic Terms.

The potentially lower interest rate range (5.85%–6.15%) reflects the generally tighter credit spreads available through agency multifamily programs, which benefit from the implicit government support of Fannie Mae and Freddie Mac and the deep liquidity of the agency mortgage-backed securities market. However, we emphasize that these are estimated rates and no formal rate quote or term sheet has been obtained. Actual rates will depend on market conditions at the time of application and rate lock, underwriting determinations, and property-level performance.

3. Structural Features. Agency multifamily loans share many structural features with CMBS loans but are generally considered to be somewhat less restrictive in several key respects:

Recourse. Agency multifamily loans are non-recourse to the borrower, with standard carve-out guaranty provisions similar to those in CMBS transactions. The scope of the carve-out guaranty is generally comparable to CMBS carve-outs, covering fraud, voluntary bankruptcy, misapplication of funds, environmental liability, and similar events.

SPE Requirements. While agency programs require the borrower to be a single-purpose entity, the SPE and separateness covenants are generally less onerous than those imposed in CMBS transactions. Agency programs typically do not require independent directors, which reduces governance complexity and cost.

Reserves. Agency loans require standard escrow and reserve accounts, including reserves for real estate taxes, insurance premiums, and capital replacement reserves. Replacement reserve requirements are typically calculated on a per-unit basis and are standard in the multifamily lending market.

Supplemental Financing. A distinctive advantage of agency programs is the availability of supplemental financing after a seasoning period (typically twelve months from the date of the original loan closing). Supplemental loans allow the borrower to obtain additional debt secured by the same property, subject to updated appraisal and underwriting, without refinancing the existing first-lien mortgage. This feature provides meaningful future capital access and can be an important tool for borrowers seeking to fund capital improvements, acquisitions, or other capital needs during the loan term.

Assumption. Agency loans are generally assumable with lender approval, subject to customary underwriting of the proposed transferee and payment of an assumption fee (typically 1.00% of the outstanding loan balance).

Reporting. Reporting requirements under agency programs are generally less burdensome than the reporting obligations imposed by CMBS special servicers, which can require detailed quarterly financial statements, rent rolls, and operating budgets.

4. Advantages.

(a) Potentially lower interest rate. The estimated agency rate of 5.85%–6.15% is potentially lower than the 6.25% CMBS rate, which would further reduce debt service costs and enhance distributable cash flow. If an agency rate at or below 6.00% could be achieved, the annual interest savings relative to the CMBS alternative would be approximately $600,000 or more.

(b) More flexible prepayment provisions. Fannie Mae DUS loans typically permit prepayment through a yield maintenance mechanism, which can be more economical than CMBS defeasance in certain interest rate environments. Yield maintenance calculates the prepayment premium based on the present value of the difference between the note rate and the Treasury rate for the remaining loan term, whereas defeasance requires the actual purchase of a portfolio of Treasury securities. In a rising-rate environment, yield maintenance can result in a lower prepayment cost than defeasance.

(c) Supplemental loan availability. The ability to obtain supplemental financing after a twelve-month seasoning period provides Fairwater with future flexibility to access additional capital secured by the Sun Belt Portfolio without refinancing the existing first-lien mortgage. This is a meaningful advantage that is not available under a CMBS structure, which typically prohibits additional indebtedness.

(d) Less restrictive SPE requirements. The absence of an independent director requirement and generally less stringent separateness covenants reduce governance complexity and operational cost at the borrower entity level.

(e) Streamlined servicer relationship. Under the DUS program, the originating DUS lender typically serves as both originator and ongoing servicer of the loan, providing a single point of contact for the borrower throughout the loan term. Similarly, under the Freddie Mac Optigo program, the Optigo seller/servicer serves as the ongoing servicer. This direct servicer relationship can be more responsive and efficient than the master servicer/special servicer structure in CMBS.

(f) Strong appetite for Sun Belt multifamily. Both Fannie Mae and Freddie Mac have demonstrated strong appetite for multifamily loans secured by properties in Sun Belt markets, reflecting the favorable demographic and economic trends in these geographies.

5. Disadvantages / Risks.

(a) No term sheet in hand. The most significant disadvantage of the agency alternative is that no formal proposal, term sheet, or rate indication has been obtained from a DUS lender or Freddie Mac Optigo seller/servicer. Pursuing the agency path would require Fairwater to initiate a new solicitation process, identify and engage an appropriate DUS lender or Optigo seller/servicer, submit a formal loan application, and undergo full underwriting. This process would likely add four to eight weeks or more to the financing timeline.

(b) Timeline risk. Given the Bridge Facility maturity of December 31, 2025 and the target permanent closing date of November 28, 2025, adding four to eight weeks to the timeline by pursuing agency solicitation presents a significant risk that the permanent closing will not occur before the bridge maturity date. The need to exercise the bridge extension option would be problematic, given that the current DSCR of 1.169x is below the 1.20x extension threshold. Even if the DSCR issue could be addressed, the extension fee of $600,000 (25 basis points on $240,000,000) would add unnecessary cost.

(c) Aggregate loan amount limitations. Agency programs may impose limitations on the aggregate loan amount that a single DUS lender can originate or hold for a single borrower or related group of borrowers. A $240,000,000 single-execution may exceed the delegated authority or risk appetite of any individual DUS lender, potentially requiring the loan to be split across multiple DUS lenders. This would add complexity to the origination, documentation, and closing process.

(d) Cross-collateralization restrictions. Agency programs may not permit cross-collateralized or cross-defaulted loans across multiple properties in a single loan pool. This could require the Sun Belt Portfolio financing to be structured as fourteen separate loans, each secured by a single property, with fourteen separate promissory notes, fourteen separate mortgage instruments, and potentially fourteen separate closing processes. The administrative burden, legal cost, and closing complexity of such a structure would be significantly greater than a single CMBS pool execution.

(e) DUS risk-sharing constraints. Under the DUS program, the originating DUS lender shares in the credit risk of the loan pursuant to a loss-sharing arrangement with Fannie Mae. The DUS lender's risk-sharing exposure may limit its willingness to originate the full $240,000,000 loan amount on a single-lender basis, particularly given that this would represent a significant concentration in a single borrower relationship.

(f) Green financing / energy requirements. Fannie Mae and Freddie Mac have increasingly emphasized green and energy-efficient lending programs, which may require energy audits, green certifications (such as ENERGY STAR or LEED), or implementation of energy and water efficiency improvements as a condition of loan eligibility or preferential pricing. The Sun Belt Portfolio properties, which were built between 2014 and 2021, may not currently hold the required green certifications, and obtaining such certifications could add time and cost to the underwriting process.

(g) Property-specific underwriting complexity. The Harpeth Valley property in Nashville, Tennessee (Fairwater Sun Belt XIV LLC), which was added to the Sun Belt Portfolio during the acquisition process, may require additional underwriting by the DUS lender or Optigo seller/servicer, potentially adding complexity and delay.

(h) Misalignment with single-closing preference. Fairwater has expressed a strong preference for a single-closing, single-lender execution to minimize administrative burden and transaction costs. The structural constraints of agency programs (per-property loan limits, cross-collateralization restrictions, DUS risk-sharing limitations) may prevent a single-closing execution and may not align with Fairwater's preferred transaction structure.

C. Alternative 3: Bank Permanent Loan

1. Overview. The third alternative under consideration is a traditional permanent mortgage loan from one or more commercial bank lenders. A bank permanent loan could potentially be structured with existing members of the Bridge Facility syndicate (Kensington National Bank, N.A., Pinnacle Trust Company, and Greystone Commerce Bank, each of which has an existing lending relationship with Fairwater) or with new bank lenders identified through a solicitation process. Beacon Ridge Capital Advisors LLC has informally sounded out several bank lending desks regarding their appetite for a $240,000,000 permanent multifamily portfolio loan, and the estimated terms discussed below reflect the preliminary indications received.

2. Estimated Economic Terms.

We note that the estimated fixed rate of 6.50%–7.00% assumes the execution of an interest rate swap to convert the floating rate to a synthetic fixed rate. The use of an interest rate swap adds complexity to the transaction structure, including swap counterparty credit risk, documentation of an ISDA Master Agreement and Credit Support Annex, ongoing swap valuation and collateral posting requirements, and the potential for negative mark-to-market exposure if interest rates decline during the swap term. Swap termination costs in a declining rate environment could be significant.

3. Structural Features. Recourse. Bank permanent mortgage loans typically carry some level of ongoing recourse to the borrower and guarantor. While the degree of recourse will be subject to negotiation, banks generally require at least partial recourse for portfolio loans of this size, and full recourse is not uncommon. The recourse structure under a bank permanent loan would represent a significant increase in guarantor exposure compared to the non-recourse CMBS structure (limited to carve-outs) and would be comparable to or potentially more favorable than the full recourse guaranty under the existing Bridge Facility.

Financial Covenants. A bank permanent loan would include ongoing entity-level financial covenants similar to those in the Bridge Facility, including consolidated leverage ratio, fixed charge coverage ratio, tangible net worth, and minimum liquidity requirements. It would also include portfolio-level covenants such as LTV and DSCR thresholds. Breach of these financial covenants would constitute an event of default, potentially triggering acceleration of the loan. The ongoing compliance burden of these covenants is greater than under a CMBS loan, which generally does not include entity-level financial covenants.

SPE Requirements. Bank permanent loans impose less restrictive SPE covenants than CMBS loans. Banks generally do not require independent directors, and the separateness covenants are typically less detailed and prescriptive. This reduces governance complexity and operational cost.

Cash Management. Cash management arrangements under a bank permanent loan are typically less restrictive than under a CMBS loan. Banks may require a deposit relationship or springing lockbox with higher trigger thresholds, but the overall cash management regime provides the borrower with greater flexibility in managing property-level cash flows.

Floating Rate Risk. Unless hedged through an interest rate swap, a floating rate bank permanent loan exposes Fairwater to interest rate risk. Given the current elevated interest rate environment and uncertainty regarding the direction of future Federal Reserve monetary policy, a floating rate structure introduces variability in debt service costs that is inconsistent with Fairwater's preference for predictable, fixed-rate financing. As noted above, hedging through a swap adds cost and complexity.

Transfer Provisions. Bank permanent loans generally include less restrictive transfer provisions than CMBS loans, allowing greater flexibility for intra-REIT transfers, restructurings, and other organizational changes.

4. Advantages.

(a) Maximum prepayment flexibility. Bank permanent loans offer the most flexible prepayment provisions among the three alternatives, with many bank loans permitting open prepayment at par or prepayment with a modest and declining premium. This flexibility is valuable if Fairwater wishes to refinance, recapitalize, or dispose of Sun Belt Portfolio properties during the loan term.

(b) Shorter documentation and closing timeline. Bank permanent loan documentation is generally less complex than CMBS documentation, and the closing process can typically be completed in four to six weeks from the execution of a commitment letter. This shorter timeline could be advantageous if Fairwater needs to close the permanent financing quickly.

(c) Direct lender relationship. Unlike the intermediated servicer structure in CMBS, a bank permanent loan provides Fairwater with a direct relationship with its lender. Requests for consent, modifications, waivers, and other borrower matters can be addressed directly with the lending bank's relationship manager, typically resulting in faster and more responsive service.

(d) Existing relationships. Fairwater has existing lending relationships with Kensington National Bank, Pinnacle Trust Company, and Greystone Commerce Bank through the Bridge Facility syndicate. These institutions are already familiar with Fairwater's credit profile, the Sun Belt Portfolio, and the Company's management team. Leveraging these existing relationships could facilitate a smoother underwriting and documentation process and potentially result in more favorable terms.

(e) Less restrictive SPE and operating covenants. The reduced SPE requirements and more flexible operating covenants under a bank permanent loan minimize governance complexity and operational constraints at the borrower entity level.

(f) Lower origination fees. Estimated origination fees of 0.25%–0.50% ($600,000–$1,200,000) are lower than the 0.75% ($1,800,000) origination fee under the CMBS proposal, resulting in lower upfront transaction costs.

5. Disadvantages / Risks.

(a) Higher all-in interest rate. The estimated fixed rate of 6.50%–7.00% (via swap) is 25 to 75 basis points higher than the CMBS rate of 6.25%, resulting in higher annual interest expense. At the midpoint estimate of 6.75%, the annual interest cost would be approximately $16,200,000, compared to $15,000,000 under the CMBS loan — a difference of $1,200,000 per year.

(b) Shorter term. Bank lenders are generally unwilling to provide ten-year terms for portfolio mortgage loans. The expected term of five to seven years would require Fairwater to refinance the Sun Belt Portfolio before the maturity of a CMBS loan (November 2035), reintroducing refinancing risk and exposing Fairwater to prevailing market conditions at the time of refinancing.

(c) Recourse exposure. The likely requirement for ongoing guaranty or partial recourse increases Fairwater REIT's contingent liability relative to the non-recourse CMBS structure. This recourse exposure is reflected on Fairwater's consolidated balance sheet and may impact credit ratings, borrowing capacity, and investor perception.

(d) Ongoing financial covenant compliance. Entity-level and portfolio-level financial covenants impose ongoing compliance obligations and introduce the risk of technical default if financial metrics deteriorate. This risk is particularly relevant in economic downturn scenarios, where occupancy declines, rent reductions, or operating expense increases could impair financial ratios even if the underlying properties continue to generate positive cash flow.

(e) Interest rate risk. If a floating rate structure is chosen without an interest rate swap, Fairwater would be exposed to interest rate fluctuations that could significantly increase debt service costs. SOFR has been volatile in recent years, and a further increase in short-term rates could meaningfully erode the cash flow advantage of the permanent financing relative to the Bridge Facility.

(f) Swap complexity and risk. If an interest rate swap is used to convert the floating rate to a synthetic fixed rate, Fairwater assumes swap counterparty credit risk, documentation complexity (ISDA Master Agreement, Credit Support Annex, and potentially a margin agreement), and the potential for negative mark-to-market exposure if rates decline during the swap term. Termination of the swap prior to its scheduled maturity could result in a significant termination payment to the swap counterparty.

(g) Shorter term inconsistent with strategy. A five-to-seven-year loan term is inconsistent with Fairwater's stated preference for long-term, fixed-rate debt to match the long-duration nature of its stabilized multifamily asset base. The Sun Belt Portfolio properties are core hold assets that Fairwater expects to own for ten years or longer. A shorter-term loan introduces maturity mismatches between the asset and liability sides of the Company's balance sheet.

(h) Suboptimal REIT capital structure. Fairwater's REIT distribution requirements (distribution of at least 90% of taxable income annually) are better served by the lowest-cost, longest-term fixed-rate financing available, which maximizes distributable cash flow and minimizes the risk of distribution shortfalls. A bank permanent loan with a higher interest rate, shorter term, and potential recourse exposure does not optimize the REIT capital structure as effectively as the CMBS alternative.

(i) Comparative annual cost. At the midpoint estimated rate of 6.75%, the annual interest cost under a bank permanent loan would be $16,200,000. While lower than the Bridge Facility interest cost of $22,392,000, this is $1,200,000 higher than the CMBS annual interest cost of $15,000,000. Over the life of a ten-year CMBS term, the cumulative interest savings of the CMBS alternative versus the bank alternative are estimated at approximately $12,000,000.

IV. Comparative Summary Table

The following table provides a side-by-side comparison of the three permanent financing alternatives:

V. Strategic Considerations for Fairwater

A. Timeline Constraints

The timeline for completing the permanent financing is a critical strategic consideration. The key dates and deadlines are as follows:

• Bridge Facility maturity date: December 31, 2025 (approximately 4.5 months from the date of this memorandum).

• Target permanent loan closing date: November 28, 2025 (approximately 3.5 months from the date of this memorandum).

• Clarendon Metropolitan term sheet: Received August 25, 2025. Fairwater is in a position to proceed immediately with the CMBS path.

• Application and rate lock deposit submission deadline: September 15, 2025 (to be submitted to Clarendon Metropolitan with the $2,400,000 rate lock deposit, reference CL-CMBS-2025-09-0347).

• Target commitment letter date: October 1, 2025.

• Agency or bank alternative solicitation: Would require initiation of a new solicitation process, adding approximately four to eight weeks to the timeline before even reaching the term sheet stage, plus additional time for underwriting, commitment, and documentation. This delay would make it difficult, if not impossible, to close by November 28, 2025, and would significantly increase the risk of failing to close before the December 31, 2025 bridge maturity.

The Bridge Facility extension option provides some degree of protection against a delayed permanent closing, but this protection is impaired by the current DSCR shortfall. As noted in Section II.B above, the extension condition requires a DSCR of at least 1.20x, whereas the current DSCR on the Bridge Facility is only 1.169x ($26,180,000 trailing NOI ÷ $22,392,000 annual interest expense). Satisfying the extension condition would require either an increase in trailing NOI to approximately $26,870,400 (an increase of $690,400 from the current level), a partial principal paydown to reduce debt service, or a waiver from the Bridge Lenders. Even if the extension could be obtained, the extension fee of $600,000 (25 basis points on the $240,000,000 commitment) represents an additional cost that should be avoided if possible.

The Clarendon Metropolitan CMBS path offers the most favorable timeline because a definitive term sheet is already in hand. Calderwood & Harkness can begin preparing a mark-up of the term sheet immediately, and the application and rate lock deposit can be submitted by September 15, 2025. Based on our experience with Clarendon Metropolitan's origination process, we believe a commitment letter can be obtained by October 1, 2025, with initial loan documents circulated by Ashworth McPhail LLP by approximately October 15, 2025, and closing achievable by the target date of November 28, 2025. This timeline provides approximately one month of cushion before the December 31, 2025 bridge maturity date.

B. Cost-of-Capital Analysis

The following table summarizes the comparative cost of capital across the Bridge Facility and the three permanent financing alternatives:

Key cost-of-capital observations:

(a) The CMBS alternative provides annual interest savings of approximately $7,392,000 relative to the Bridge Facility ($22,392,000 minus $15,000,000 in annual interest on the CMBS loan). This represents the interest-only savings; the total annual debt service under the CMBS loan ($17,734,152, inclusive of principal amortization) is still approximately $4,658,000 lower than the Bridge Facility interest cost, reflecting both the lower rate and the cash flow benefit of the reduced monthly payment.

(b) The CMBS alternative provides estimated annual interest savings of approximately $1,200,000 relative to the bank permanent loan at the midpoint estimated rate of 6.75% ($16,200,000 minus $15,000,000). Over the ten-year CMBS term, these cumulative interest savings are estimated at approximately $12,000,000.

(c) The agency alternative may offer a lower interest rate than the CMBS alternative (estimated 5.85%–6.15% versus 6.25%), but the absence of a firm proposal prevents a definitive comparison. Moreover, the timeline risk, structural complexity, and potential need for multiple closings under the agency path may offset any interest rate advantage through higher transaction costs and execution risk.

C. REIT Distribution Requirements

Fairwater's status as a REIT under Sections 856–860 of the Internal Revenue Code imposes a fundamental constraint on the Company's capital allocation: Fairwater must distribute at least 90% of its taxable income to its shareholders annually in order to maintain its REIT status and avoid entity-level federal income taxation. This distribution requirement significantly limits the Company's ability to retain earnings for debt service, capital reserves, or other corporate purposes.

The choice of permanent financing structure has a direct and material impact on the Company's ability to meet its REIT distribution requirements:

(a) Lower debt service preserves distributable cash flow. The CMBS alternative, with annual debt service of $17,734,152, preserves more cash flow for required distributions than the Bridge Facility ($22,392,000 annual interest expense) or a bank permanent loan (estimated $17,500,000–$18,500,000 annual debt service).

(b) Non-recourse structure enhances balance sheet presentation. The non-recourse CMBS structure limits Fairwater REIT's guarantor exposure to standard carve-out events, reducing contingent liability on the Company's consolidated balance sheet. This is important for REIT financial reporting and investor presentation, and may be relevant to credit rating considerations.

(c) SPE distribution restrictions must accommodate REIT requirements. The SPE separateness covenants in the CMBS loan documentation will include restrictions on distributions from the SPE Borrowers to the Operating Partnership. These restrictions must be carefully negotiated to include appropriate carve-outs permitting distributions necessary to enable the Company to satisfy its REIT distribution obligations. Calderwood & Harkness, in coordination with Crestline & Alderman LLP, will draft and negotiate appropriate REIT distribution carve-out language in the SPE organizational documents and ensure that the carve-out is accepted by Clarendon Metropolitan and Ashworth McPhail LLP. This is a standard negotiation point in CMBS transactions involving REIT borrowers and is routinely resolved, but the drafting of the carve-out must be precise to avoid inadvertent limitations on the Company's ability to make required distributions.

D. Portfolio and Capital Stack Alignment

The CMBS alternative is well-aligned with Fairwater's overall portfolio and capital structure strategy for the following reasons:

(a) Multifamily focus. Fairwater's total portfolio of 76 multifamily communities (including the Sun Belt Portfolio) is entirely multifamily, and the Company's experience with CMBS multifamily execution across its existing 62-community portfolio provides institutional familiarity with the CMBS origination process, documentation requirements, and post-closing servicing relationship.

(b) Fixed-rate maturity laddering. Fairwater's consolidated total debt of approximately $1.48 billion (pre-Bridge) is a mix of secured and unsecured facilities with varying maturities. Adding $240,000,000 of ten-year fixed-rate CMBS debt is consistent with the Company's strategy of maintaining a diversified and laddered maturity profile, reducing concentration of maturities in any single year and mitigating refinancing risk.

(c) Long-term hold strategy. The Sun Belt Portfolio represents a core strategic addition to Fairwater's platform in high-growth Sun Belt markets. Management has indicated that these are long-term hold assets with no current plans for disposition. The ten-year CMBS term is well-matched to this long-duration hold strategy, and the two-year defeasance lockout period (through approximately November 2027) is manageable in light of the stabilized nature of the portfolio and the absence of near-term disposition plans.

(d) Maturity profile extension. The ten-year CMBS maturity (November 2035) significantly extends Fairwater's overall debt maturity profile relative to a five-to-seven-year bank alternative (maturing in 2030–2032), providing greater balance sheet stability and reducing the frequency of required refinancing transactions.

E. Prepayment Flexibility Trade-Off

The CMBS defeasance-only prepayment regime is the most restrictive among the three alternatives analyzed, and this trade-off deserves careful consideration:

(a) Nature of the restriction. During the two-year lockout period (approximately November 2025 through November 2027), no prepayment of any kind is permitted under the CMBS loan. Fairwater would be unable to refinance, recapitalize, or repay the CMBS loan during this period, regardless of changes in market conditions or the Company's strategic direction. Following the lockout, prepayment is permitted only through defeasance, which requires the substitution of a portfolio of U.S. Treasury securities generating cash flows equal to the remaining scheduled loan payments. Defeasance is operationally complex, requiring engagement of a defeasance consultant, establishment of a defeasance collateral account with a qualified custodian, purchase and delivery of Treasury securities, and legal opinions. The economic cost of defeasance depends on the relationship between Treasury rates and the note rate at the time of defeasance; if Treasury rates are below the 6.25% note rate, the cost of purchasing the required Treasury portfolio can be significant.

(b) Mitigating factors. Several factors mitigate the impact of the prepayment restriction in Fairwater's circumstances. First, the Company's stated long-term hold strategy for the Sun Belt Portfolio significantly reduces the probability that prepayment will be needed during the lockout or even the defeasance period. Management has confirmed that there are no current plans to dispose of any Sun Belt Portfolio properties within the next several years. Second, the 6.25% fixed rate represents a favorable execution in the current interest rate environment, and the probability of interest rates declining sufficiently to make refinancing economically attractive during the lockout period is uncertain. Third, the rate savings of the CMBS alternative (approximately 25 to 50+ basis points versus alternative structures) over the full ten-year term provide substantial cumulative savings (estimated at $12,000,000+ versus the bank permanent loan alternative) that justify accepting the prepayment constraint.

(c) Scenario analysis. If Fairwater were to pursue a portfolio disposition strategy for any Sun Belt Portfolio properties within the two-year lockout period, the CMBS lockout would be highly problematic — the properties could not be released from the mortgage lien, and a sale could not proceed without Fairwater retaining the CMBS debt obligation. However, management has affirmatively indicated that no such plans exist. If disposition plans were to develop after the lockout period, defeasance would be available but should be modeled at the relevant time to assess costs.

(d) Comparison to alternatives. The yield maintenance option available under Fannie Mae DUS loans can be more economical than defeasance in certain interest rate environments, and the open prepayment available under bank permanent loans provides maximum flexibility. However, these prepayment advantages come at the cost of higher interest rates (agency rate advantage is uncertain and may be offset by structural complexity), shorter terms (bank loans at five to seven years), and/or recourse exposure. For a REIT with a long-duration hold strategy and a priority on rate minimization, the trade-off of accepting a more restrictive prepayment regime in exchange for the lowest available rate and longest available term is, in our view, appropriate and justified.

VI. Recommendation

Based on our comprehensive analysis of the three permanent financing alternatives, Calderwood & Harkness recommends that Fairwater proceed with the Clarendon Metropolitan Insurance Company CMBS structure for the permanent take-out of the $240,000,000 Bridge Facility. Our recommendation is based on the following principal reasons:

1. Lowest cost of capital. The 6.25% fixed interest rate offered by Clarendon Metropolitan is the most competitive available option with a definitive term sheet in hand. This rate results in annual interest expense of approximately $15,000,000, representing savings of approximately $7,392,000 per year relative to the Bridge Facility (interest-only at 9.33%) and estimated savings of approximately $1,200,000 per year relative to a bank permanent loan at the midpoint estimated rate of 6.75%. Over the ten-year CMBS term, cumulative interest savings versus the bank alternative are estimated at approximately $12,000,000.

2. Longest term. The ten-year term (November 2025 through November 2035) provides maximum maturity extension and eliminates refinancing risk for a full decade. This term is well-matched to Fairwater's long-term hold strategy for the Sun Belt Portfolio and is significantly longer than the five-to-seven-year terms available from bank lenders.

3. Non-recourse structure. The non-recourse structure, with Fairwater REIT's liability limited to standard carve-out events, significantly reduces the Company's guarantor exposure compared to the full recourse guaranty under the Bridge Facility and the ongoing recourse that bank lenders would likely require. This non-recourse feature improves Fairwater's balance sheet presentation, reduces contingent liability, and is beneficial for credit rating and investor relations purposes.

4. DSCR improvement. The projected DSCR under the CMBS loan is 1.476x, a substantial improvement from the current Bridge Facility DSCR of 1.169x. This DSCR level provides meaningful cushion above typical CMBS minimum thresholds (1.20x–1.25x), reducing the risk of cash management triggers, special servicer intervention, or other adverse consequences during the loan term. The DSCR improvement also enhances Fairwater's entity-level financial covenant compliance across its broader credit facilities.

5. Term sheet in hand. Clarendon Metropolitan has delivered a definitive term sheet dated August 25, 2025. This enables Fairwater to move immediately into the application, commitment, and documentation phases, with a realistic path to closing by the target date of November 28, 2025 — well in advance of the December 31, 2025 Bridge Facility maturity. The agency and bank alternatives would require new solicitation processes, adding significant time and creating material risk that the closing could not be completed before the bridge maturity date.

6. Exit fee waiver. Closing the CMBS permanent loan by November 28, 2025 would constitute repayment of the Bridge Facility from permanent CMBS financing proceeds within the timeframe specified in the Bridge Facility for

Calderwood & Harkness LLP
Counselors at Law
425 Park Avenue New York, New York 10022 Tel: (212) 549-6000
Fax: (212) 549-6001
www.calderwoodharkness.com
PRIVILEGED & CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION
MEMORANDUM
TO: David A. Whitfield, General Counsel, Fairwater Real Estate Investment Trust Naomi T. Sinclair, Chief Financial Officer, Fairwater Real Estate Investment Trust Rachel S. Donahue, Senior Vice President, Capital Markets, Fairwater Real Estate Investment Trust
FROM: Philip Hartmann, Partner, Banking & Finance, Calderwood & Harkness LLP
DATE: August 15, 2025
RE: Financing Alternatives Analysis — Permanent Take-Out of $240,000,000 Bridge Credit Facility (Sun Belt Portfolio)
Matter No.: 1036-00001
I. Executive Summary
The purpose of this memorandum is to present and analyze the permanent financing alternatives available to Fairwater Real Estate Investment Trust ("Fairwater" or the "Company") and Fairwater Operating Partnership, L.P. (the "Operating Partnership" or "Fairwater OP") for the $240,000,000 take-out of the existing bridge credit facility (the "Bridge Facility") provided by a syndicate of lenders led by Kensington National Bank, N.A., as administrative agent (the "Bridge Lenders"). This memorandum is intended to assist Fairwater's senior management and Board of Trustees in evaluating available permanent financing structures and making an informed decision regarding the optimal path forward.
As background, the Bridge Facility was fully funded on June 30, 2025 in connection with Fairwater's acquisition (the "Acquisition") of a portfolio of fourteen (14) multifamily residential communities comprising approximately 4,200 units located across Texas, Georgia, Florida, North Carolina, and Tennessee (the "Sun Belt Portfolio") from Meridian Sunstone Holdings LLC ("Meridian Sunstone") for an aggregate purchase price of $385,000,000. The Bridge Facility matures on December 31, 2025, with one six-month extension option available through June 30, 2026, subject to specified conditions. Fairwater's target date for closing the permanent financing is November 28, 2025, well in advance of the Bridge Facility's initial maturity date.
The Bridge Facility currently carries an interest rate of SOFR plus 500 basis points, resulting in a current all-in rate of approximately 9.33% per annum (based on 30-day Term SOFR of 4.33% as of August 11, 2025). At this rate, Fairwater's annual interest expense on the Bridge Facility is approximately $22,392,000, representing a significant drag on the Company's distributable cash flow and underscoring the urgency of transitioning to lower-cost, fixed-rate permanent financing.
This memorandum evaluates three permanent financing alternatives:
(i) a CMBS conduit loan originated by Clarendon Metropolitan Insurance Company ("Clarendon Metropolitan"), for which Fairwater has received a term sheet dated August 25, 2025;
(ii) agency multifamily loan programs offered through the Fannie Mae Delegated Underwriting and Servicing ("DUS") program and the Freddie Mac Optigo multifamily lending program; and
(iii) a traditional bank permanent mortgage loan, which could potentially be structured with members of the existing Bridge Facility syndicate or new bank lenders.
Beacon Ridge Capital Advisors LLC ("Beacon Ridge"), Fairwater's financial advisor in connection with the permanent financing, has assisted in sourcing and evaluating the proposals summarized herein. Dennis P. Nakamura, Partner at Beacon Ridge, has been the principal point of contact for this engagement.
Based on our analysis of the available alternatives, and subject to our discussion of the relevant risks and trade-offs in the body of this memorandum, we preliminarily recommend that Fairwater proceed with the Clarendon Metropolitan CMBS structure. The CMBS proposal offers the most favorable combination of interest rate, loan term, and structural alignment with Fairwater's REIT capital stack and long-term hold strategy for the Sun Belt Portfolio. This recommendation is subject to Fairwater's successful negotiation of certain key terms in the Clarendon Metropolitan term sheet, which we will address in a separate detailed term sheet review and commentary memorandum.
This memorandum has been prepared in coordination with Crestline & Alderman LLP (Patricia S. Keene, Partner) with respect to REIT tax compliance aspects of the proposed financing structures. Certain REIT-specific considerations, including distribution requirements, prohibited transaction rules, and the impact of SPE covenant restrictions on REIT distributions, are noted herein and will be addressed more fully in a supplemental memorandum from Crestline & Alderman.
II. Background and Current Financing Profile
A. Sun Belt Portfolio Overview
The Sun Belt Portfolio consists of fourteen (14) multifamily residential communities comprising approximately 4,200 apartment units, distributed across five states in the southeastern United States. The portfolio was acquired from Meridian Sunstone Holdings LLC, a Delaware limited liability company owned by Victor L. Castaneda (51% membership interest) and Brenda K. Yung (49% membership interest). The Acquisition closed on June 30, 2025, at an aggregate purchase price of $385,000,000.
The geographic distribution of the Sun Belt Portfolio is as follows:
The trailing-twelve-month net operating income ("NOI") of the Sun Belt Portfolio at the time of the Acquisition was $26,180,000, representing an acquisition capitalization rate of approximately 6.80% ($26,180,000 ÷ $385,000,000). The weighted average physical occupancy across all fourteen properties at the time of the Acquisition was 93.7%.
The properties are vintage 2014 through 2021 construction and are generally Class B+ to A- multifamily communities with amenity packages typical of institutional-quality Sun Belt apartment communities. Each property is located in a metropolitan statistical area demonstrating favorable population growth, employment trends, and household formation dynamics.
Each of the fourteen properties is held by a separate Delaware limited liability company, designated Fairwater Sun Belt I LLC through Fairwater Sun Belt XIV LLC (collectively, the "SPE Borrowers"), each of which is a wholly owned subsidiary of Fairwater Operating Partnership, L.P. The SPE structure was established at the time of the Acquisition in contemplation of permanent financing requirements. Property management for all fourteen communities is provided by Fairwater Residential Management LLC, an affiliate of the Company, pursuant to property management agreements effective July 1, 2025.
B. Existing Bridge Credit Facility Summary
The principal terms of the existing Bridge Facility are summarized below:
We note an important constraint with respect to the Bridge Facility extension option: the DSCR threshold for extension is 1.20x, whereas the current DSCR on the Bridge Facility is only 1.169x. As of the date of this memorandum, the Sun Belt Portfolio's trailing NOI does not satisfy the DSCR extension condition. If the permanent financing closing extends beyond the December 31, 2025 maturity date, Fairwater will need to either (a) improve NOI to a level sufficient to produce a DSCR of at least 1.20x (requiring annual NOI of approximately $26,870,400 at the current interest rate, an increase of approximately $690,400 over the trailing figure), (b) make a partial principal paydown to reduce the loan balance and corresponding debt service, or (c) negotiate a waiver from the Bridge Lenders. This DSCR shortfall further underscores the importance of closing the permanent financing on or before the target date of November 28, 2025.
C. Fairwater's Capital Structure Context
Fairwater Real Estate Investment Trust is a Maryland real estate investment trust that has elected REIT status for federal income tax purposes. The Company's shares of beneficial interest are listed on the New York Stock Exchange under the ticker symbol "FWTR." The Company conducts substantially all of its operations through the Operating Partnership, for which Fairwater REIT serves as general partner. Key capital structure metrics are summarized below:
A critical constraint in evaluating permanent financing alternatives is Fairwater's obligation, as a REIT, to distribute at least 90% of its taxable income annually to its shareholders in order to maintain its REIT status and avoid entity-level federal income taxation. This distribution requirement limits the Company's ability to retain earnings for debt service or capital reserves and strongly favors permanent financing structures that minimize annual debt service costs and maximize distributable cash flow. As discussed in greater detail in Sections III and V below, this consideration is a significant factor in our recommendation of the CMBS structure.
D. Funding Sources for Acquisition
The Acquisition was funded from the following sources:
(a) Bridge Facility proceeds: $240,000,000, representing approximately 62.34% of the $385,000,000 purchase price; and
(b) Cash equity from Fairwater's balance sheet and OP unit issuance: $145,000,000, representing approximately 37.66% of the purchase price.
The permanent financing is intended to replace the Bridge Facility proceeds on a dollar-for-dollar basis. No additional equity contribution is anticipated in connection with the permanent take-out.
III. Financing Alternatives Analyzed
A. Alternative 1: CMBS Conduit — Clarendon Metropolitan Insurance Company
1. Overview of Proposal. Clarendon Metropolitan Insurance Company (NAIC No. 38921) is a New York-domiciled insurance company with its principal office at 1 MetroTech Center, Brooklyn, New York 11201. Clarendon Metropolitan is an active originator of commercial real estate mortgage loans for securitization through its CMBS conduit program. Garrett W. Hollister, Head of CMBS Originations, is the designated contact for this transaction.
Clarendon Metropolitan has delivered to Fairwater, through Beacon Ridge Capital Advisors LLC, a term sheet dated August 25, 2025 setting forth the proposed terms of a $240,000,000 fixed-rate mortgage loan to be originated by Clarendon Metropolitan and securitized through its CMBS conduit. The anticipated securitization vehicle for this loan is CLRN 2025-C14, although final pooling and securitization allocation is subject to Clarendon Metropolitan's discretion and market conditions at the time of securitization.
Clarendon Metropolitan's outside counsel for this transaction is Ashworth McPhail LLP (Joanna C. Wexler, Partner), located at 51 Madison Avenue, 24th Floor, New York, New York 10010. A detailed analysis and mark-up of the Clarendon Metropolitan term sheet will be provided in a separate memorandum following the completion of our initial review.
2. Key Economic Terms. The key economic terms of the Clarendon Metropolitan CMBS proposal are as follows:
The DSCR of 1.476x under the CMBS proposal represents a significant improvement over the current Bridge Facility DSCR of 1.169x and provides substantial cushion above typical CMBS minimum debt service coverage thresholds (generally 1.20x to 1.25x for multifamily assets). This improvement is attributable to both the lower fixed interest rate (6.25% versus 9.33%) and the transition from an interest-only payment structure to a fully amortizing structure with a 30-year amortization schedule.
3. Structural Features. The Clarendon Metropolitan CMBS loan would be structured as a non-recourse mortgage loan with a standard CMBS carve-out guaranty. The principal structural features are as follows:
Recourse. The loan will be non-recourse to the borrowers, with liability limited to the collateral securing the loan, except with respect to certain standard CMBS carve-out exceptions. Fairwater Real Estate Investment Trust will serve as the carve-out guarantor. The carve-out guaranty covers the following categories of loss:
(a) fraud or intentional misrepresentation by the borrowers or guarantor;
(b) voluntary filing of a petition in bankruptcy by any borrower, or collusive involuntary bankruptcy filing;
(c) misapplication or misappropriation of rents, insurance proceeds, or condemnation awards;
(d) environmental liability arising from the presence of hazardous substances at the mortgaged properties; and
(e) violation of the SPE/separateness covenants in the borrower organizational documents.
Importantly, a voluntary bankruptcy filing by any borrower, or a collusive involuntary bankruptcy filing, would trigger full recourse liability against the carve-out guarantor for the entire outstanding loan balance. The scope and drafting of the carve-out guaranty is a critical negotiation point, and Calderwood & Harkness will review the proposed language carefully to ensure that the recourse triggers are appropriately limited and that the guaranty obligations are consistent with market standards and Fairwater's risk tolerance.
Borrower Structure. The borrower under the CMBS loan will be the fourteen SPE co-borrowers (Fairwater Sun Belt I LLC through Fairwater Sun Belt XIV LLC), replacing the Operating Partnership as borrower under the Bridge Facility. This restructuring is required by CMBS underwriting standards, which mandate that the borrowing entities be bankruptcy-remote, single-purpose entities satisfying certain organizational and operational requirements.
SPE Requirements. The SPE Borrowers will be required to comply with customary CMBS separateness covenants, including restrictions on additional indebtedness, maintaining their own books and records, refraining from commingling assets with those of affiliates, and complying with independent director requirements. Each SPE Borrower's organizational documents will include provisions requiring the consent of an independent director (or independent manager) before the entity may file a voluntary bankruptcy petition or consent to an involuntary bankruptcy filing. The independent directors will be provided by a nationally recognized provider of independent directors for securitized transactions.
Collateral. The loan will be secured by first-priority mortgage liens on all fourteen Sun Belt Portfolio properties, equity pledges in the SPE Borrowers, assignments of leases and rents, and assignments of the property management agreements between the SPE Borrowers and Fairwater Residential Management LLC.
Cash Management. The term sheet contemplates a lockbox arrangement for the collection and application of property-level rents and other income. Whether the lockbox will be "hard" (rents flow directly into a lender-controlled account at all times) or "springing" (rents are directed to a lender-controlled account only upon the occurrence of specified trigger events, such as a DSCR decline below a threshold level) is a significant negotiation point. We will recommend that Fairwater negotiate for a springing lockbox with reasonable trigger thresholds.
Prepayment. The loan is subject to a two-year lockout period commencing from the date of the securitization. No prepayment of any kind is permitted during the lockout period (anticipated to be approximately November 2025 through November 2027). Following the lockout period, prepayment is permitted through defeasance — that is, the substitution of U.S. Treasury obligations or other approved securities sufficient to generate cash flows equal to the remaining scheduled loan payments. Defeasance is operationally complex and requires the engagement of a defeasance consultant and the purchase of a portfolio of Treasury securities, the cost of which depends on prevailing Treasury rates relative to the note rate at the time of defeasance. In the final ninety (90) days of the loan term (approximately August 2035 through November 2035), the loan is open for prepayment at par without penalty.
Governing Law. The loan documentation will be governed by New York law.
4. Advantages. The Clarendon Metropolitan CMBS structure offers the following advantages relative to the other alternatives under consideration:
(a) Lowest fixed rate. The 6.25% fixed rate is the lowest among the three alternatives, providing certainty of debt service cost for the full ten-year loan term and eliminating interest rate risk. This rate compares favorably to the estimated agency rate of 5.85%–6.15% (for which no term sheet is currently in hand) and the estimated bank permanent rate of 6.50%–7.00% (fixed via swap).
(b) Annual interest savings versus Bridge Facility. The annual interest expense under the CMBS loan (on the interest component alone) is approximately $15,000,000 ($240,000,000 × 6.25%), compared to $22,392,000 under the Bridge Facility ($240,000,000 × 9.33%), representing annual interest savings of approximately $7,392,000. We note that the total annual debt service under the CMBS loan ($17,734,152, inclusive of principal amortization) differs from the interest-only component, but the monthly payment obligation under the CMBS loan ($1,477,846) is still approximately $388,154 per month lower than the interest-only monthly payment under the Bridge Facility ($1,866,000), notwithstanding the inclusion of principal amortization in the CMBS payment.
(c) Longest available term. The ten-year term is the longest available among the three alternatives and provides Fairwater with balance sheet stability and protection against refinancing risk through November 2035. This is in contrast to the five-to-seven-year terms typically available from bank lenders for portfolio mortgage loans.
(d) Non-recourse structure. The non-recourse structure (limited to carve-out exceptions) significantly reduces Fairwater REIT's exposure as guarantor compared to the full recourse guaranty under the Bridge Facility and the partial or full recourse that bank lenders would likely require.
(e) 30-year amortization. The thirty-year amortization schedule reduces the near-term principal repayment burden compared to shorter amortization periods (e.g., 25-year) that may be required under bank permanent loan alternatives, thereby preserving cash flow for distributions.
(f) Asset class suitability. CMBS conduit execution is well-suited to stabilized multifamily assets with predictable cash flows, and Clarendon Metropolitan has expressed a strong appetite for the Sun Belt Portfolio given its favorable occupancy levels, geographic diversification, and modern vintage.
(g) Consistency with Fairwater's existing financing strategy. Fairwater has utilized CMBS execution for portions of its existing 62-community portfolio, and the Company's management team and legal advisors are familiar with the CMBS documentation process and post-closing servicing requirements.
(h) Strong DSCR. The projected DSCR of 1.476x provides substantial cushion above typical CMBS minimum thresholds of 1.20x–1.25x, reducing the risk of cash management triggers and special servicer intervention during the loan term.
(i) Bridge exit fee waiver. The Bridge Facility exit fee of 0.50% ($1,200,000) is waived if the Bridge Facility is repaid from the proceeds of a permanent CMBS financing by March 31, 2026. A permanent loan closing date of November 28, 2025 is well within this window, and proceeding with the CMBS structure allows Fairwater to capture this $1,200,000 savings.
5. Disadvantages / Risks. Notwithstanding the significant advantages of the CMBS structure, the following disadvantages and risks should be carefully considered:
(a) Limited prepayment flexibility. The two-year lockout period (through approximately November 2027) followed by defeasance-only prepayment is the most restrictive prepayment regime among the three alternatives. During the lockout period, no prepayment of any kind is permitted; Fairwater would be unable to prepay or refinance the CMBS loan regardless of changes in market interest rates or Fairwater's strategic objectives. Following the lockout period, defeasance is operationally complex, requiring engagement of a defeasance consultant, establishment of a defeasance collateral account, and purchase of a portfolio of U.S. Treasury securities. The cost of defeasance can be significant, particularly if prevailing Treasury rates at the time of defeasance are below the note rate of 6.25%, requiring the purchase of a larger portfolio of Treasury securities to generate sufficient cash flow to cover remaining debt service. Neither yield maintenance nor par prepayment is available as an alternative to defeasance during the loan term (other than in the final 90 days).
(b) Securitized servicing structure. Following securitization of the CMBS loan into the CLRN 2025-C14 trust, Fairwater will no longer interact directly with Clarendon Metropolitan as lender. Instead, day-to-day servicing will be performed by a master servicer designated in the pooling and servicing agreement, and any material default, workout, or modification requests will be handled by a special servicer. The master servicer and special servicer are appointed by the securitization trust and may change over the life of the loan. This intermediated servicing structure can be less responsive and more procedurally burdensome than a direct lender relationship, particularly in situations requiring lender consent for property-level transactions, casualty or condemnation events, or borrower requests.
(c) Extensive SPE/separateness covenant requirements. CMBS underwriting standards impose strict SPE organizational and operational requirements on the borrower entities, including the maintenance of separate books and records, restrictions on additional indebtedness, prohibitions on commingling of assets, and the requirement to obtain independent director consent before filing a voluntary bankruptcy petition. These requirements impose ongoing governance and compliance costs and may limit operational flexibility at the SPE level. The independent director requirement adds cost (typically $5,000–$10,000 per entity per year) and governance complexity.
(d) Cash management restrictions. Whether structured as a hard lockbox or a springing lockbox, the cash management arrangements under a CMBS loan will be more restrictive than those under a bank permanent loan. Under a hard lockbox, all rents and other property-level income flow directly into a lender-controlled deposit account, and distributions to the borrower are made only after satisfaction of debt service and reserve obligations. Even under a springing lockbox, the trigger events that cause the lockbox to spring are typically tied to DSCR thresholds or the occurrence of events of default, and once sprung, the lockbox may be difficult to reverse.
(e) Limited flexibility for property-level transactions. The CMBS loan documentation will impose restrictions on transfers of the mortgaged properties or interests in the borrower entities, subordinate financing, and significant property alterations or capital improvements. Lender consent for these transactions must be obtained from the master servicer or special servicer and may require rating agency confirmation, making the consent process time-consuming and uncertain. This inflexibility may be a constraint if Fairwater's strategic plans for the Sun Belt Portfolio evolve during the ten-year loan term.
(f) Longer documentation and closing timeline. CMBS loan documentation is typically more extensive and complex than bank loan documentation, requiring negotiation of mortgage loan agreements, promissory notes, guarantees, environmental indemnities, cash management agreements, and extensive borrower organizational document modifications. The documentation process may require six to eight weeks from commitment letter to closing, compared to four to six weeks for a bank permanent loan.
(g) REIT distribution carve-out. The SPE distribution restrictions imposed by CMBS separateness covenants may, if not properly drafted, conflict with Fairwater's REIT obligation to distribute at least 90% of its taxable income to shareholders. This issue requires careful coordination between Calderwood & Harkness and Crestline & Alderman LLP to ensure that the SPE organizational documents include appropriate carve-outs permitting distributions necessary to enable the Company to satisfy its REIT distribution requirements.
B. Alternative 2: Agency Multifamily — Fannie Mae DUS / Freddie Mac Optigo
1. Overview. The Thackeray Holdings ("Fannie Mae") Delegated Underwriting and Servicing ("DUS") program and the Harborview Partners LLC ("Freddie Mac") Optigo multifamily lending program are two government-sponsored enterprise programs designed specifically for the financing of multifamily residential properties. These programs offer competitive fixed-rate permanent financing for stabilized multifamily assets and represent a significant source of capital in the multifamily lending market.
Under the DUS program, Fannie Mae delegates underwriting authority to approved DUS lenders, which originate and service mortgage loans that are subsequently purchased by Fannie Mae and, in many cases, securitized through the issuance of Fannie Mae mortgage-backed securities. The DUS lender shares in the credit risk of the loan pursuant to a loss-sharing arrangement with Fannie Mae. Similarly, under the Freddie Mac Optigo program, approved Optigo seller/servicers originate and sell mortgage loans to Freddie Mac, which may securitize the loans through its K-Deal program or other structures.
Fairwater has not yet engaged a DUS lender or Freddie Mac Optigo seller/servicer to solicit formal proposals for the permanent financing of the Sun Belt Portfolio. Accordingly, no agency term sheet is currently in hand. The estimated terms discussed below are based on Beacon Ridge Capital Advisors LLC's assessment of current market conditions and its experience with recent comparable agency multifamily transactions.
2. Estimated Economic Terms.
The potentially lower interest rate range (5.85%–6.15%) reflects the generally tighter credit spreads available through agency multifamily programs, which benefit from the implicit government support of Fannie Mae and Freddie Mac and the deep liquidity of the agency mortgage-backed securities market. However, we emphasize that these are estimated rates and no formal rate quote or term sheet has been obtained. Actual rates will depend on market conditions at the time of application and rate lock, underwriting determinations, and property-level performance.
3. Structural Features. Agency multifamily loans share many structural features with CMBS loans but are generally considered to be somewhat less restrictive in several key respects:
Recourse. Agency multifamily loans are non-recourse to the borrower, with standard carve-out guaranty provisions similar to those in CMBS transactions. The scope of the carve-out guaranty is generally comparable to CMBS carve-outs, covering fraud, voluntary bankruptcy, misapplication of funds, environmental liability, and similar events.
SPE Requirements. While agency programs require the borrower to be a single-purpose entity, the SPE and separateness covenants are generally less onerous than those imposed in CMBS transactions. Agency programs typically do not require independent directors, which reduces governance complexity and cost.
Reserves. Agency loans require standard escrow and reserve accounts, including reserves for real estate taxes, insurance premiums, and capital replacement reserves. Replacement reserve requirements are typically calculated on a per-unit basis and are standard in the multifamily lending market.
Supplemental Financing. A distinctive advantage of agency programs is the availability of supplemental financing after a seasoning period (typically twelve months from the date of the original loan closing). Supplemental loans allow the borrower to obtain additional debt secured by the same property, subject to updated appraisal and underwriting, without refinancing the existing first-lien mortgage. This feature provides meaningful future capital access and can be an important tool for borrowers seeking to fund capital improvements, acquisitions, or other capital needs during the loan term.
Assumption. Agency loans are generally assumable with lender approval, subject to customary underwriting of the proposed transferee and payment of an assumption fee (typically 1.00% of the outstanding loan balance).
Reporting. Reporting requirements under agency programs are generally less burdensome than the reporting obligations imposed by CMBS special servicers, which can require detailed quarterly financial statements, rent rolls, and operating budgets.
4. Advantages.
(a) Potentially lower interest rate. The estimated agency rate of 5.85%–6.15% is potentially lower than the 6.25% CMBS rate, which would further reduce debt service costs and enhance distributable cash flow. If an agency rate at or below 6.00% could be achieved, the annual interest savings relative to the CMBS alternative would be approximately $600,000 or more.
(b) More flexible prepayment provisions. Fannie Mae DUS loans typically permit prepayment through a yield maintenance mechanism, which can be more economical than CMBS defeasance in certain interest rate environments. Yield maintenance calculates the prepayment premium based on the present value of the difference between the note rate and the Treasury rate for the remaining loan term, whereas defeasance requires the actual purchase of a portfolio of Treasury securities. In a rising-rate environment, yield maintenance can result in a lower prepayment cost than defeasance.
(c) Supplemental loan availability. The ability to obtain supplemental financing after a twelve-month seasoning period provides Fairwater with future flexibility to access additional capital secured by the Sun Belt Portfolio without refinancing the existing first-lien mortgage. This is a meaningful advantage that is not available under a CMBS structure, which typically prohibits additional indebtedness.
(d) Less restrictive SPE requirements. The absence of an independent director requirement and generally less stringent separateness covenants reduce governance complexity and operational cost at the borrower entity level.
(e) Streamlined servicer relationship. Under the DUS program, the originating DUS lender typically serves as both originator and ongoing servicer of the loan, providing a single point of contact for the borrower throughout the loan term. Similarly, under the Freddie Mac Optigo program, the Optigo seller/servicer serves as the ongoing servicer. This direct servicer relationship can be more responsive and efficient than the master servicer/special servicer structure in CMBS.
(f) Strong appetite for Sun Belt multifamily. Both Fannie Mae and Freddie Mac have demonstrated strong appetite for multifamily loans secured by properties in Sun Belt markets, reflecting the favorable demographic and economic trends in these geographies.
5. Disadvantages / Risks.
(a) No term sheet in hand. The most significant disadvantage of the agency alternative is that no formal proposal, term sheet, or rate indication has been obtained from a DUS lender or Freddie Mac Optigo seller/servicer. Pursuing the agency path would require Fairwater to initiate a new solicitation process, identify and engage an appropriate DUS lender or Optigo seller/servicer, submit a formal loan application, and undergo full underwriting. This process would likely add four to eight weeks or more to the financing timeline.
(b) Timeline risk. Given the Bridge Facility maturity of December 31, 2025 and the target permanent closing date of November 28, 2025, adding four to eight weeks to the timeline by pursuing agency solicitation presents a significant risk that the permanent closing will not occur before the bridge maturity date. The need to exercise the bridge extension option would be problematic, given that the current DSCR of 1.169x is below the 1.20x extension threshold. Even if the DSCR issue could be addressed, the extension fee of $600,000 (25 basis points on $240,000,000) would add unnecessary cost.
(c) Aggregate loan amount limitations. Agency programs may impose limitations on the aggregate loan amount that a single DUS lender can originate or hold for a single borrower or related group of borrowers. A $240,000,000 single-execution may exceed the delegated authority or risk appetite of any individual DUS lender, potentially requiring the loan to be split across multiple DUS lenders. This would add complexity to the origination, documentation, and closing process.
(d) Cross-collateralization restrictions. Agency programs may not permit cross-collateralized or cross-defaulted loans across multiple properties in a single loan pool. This could require the Sun Belt Portfolio financing to be structured as fourteen separate loans, each secured by a single property, with fourteen separate promissory notes, fourteen separate mortgage instruments, and potentially fourteen separate closing processes. The administrative burden, legal cost, and closing complexity of such a structure would be significantly greater than a single CMBS pool execution.
(e) DUS risk-sharing constraints. Under the DUS program, the originating DUS lender shares in the credit risk of the loan pursuant to a loss-sharing arrangement with Fannie Mae. The DUS lender's risk-sharing exposure may limit its willingness to originate the full $240,000,000 loan amount on a single-lender basis, particularly given that this would represent a significant concentration in a single borrower relationship.
(f) Green financing / energy requirements. Fannie Mae and Freddie Mac have increasingly emphasized green and energy-efficient lending programs, which may require energy audits, green certifications (such as ENERGY STAR or LEED), or implementation of energy and water efficiency improvements as a condition of loan eligibility or preferential pricing. The Sun Belt Portfolio properties, which were built between 2014 and 2021, may not currently hold the required green certifications, and obtaining such certifications could add time and cost to the underwriting process.
(g) Property-specific underwriting complexity. The Harpeth Valley property in Nashville, Tennessee (Fairwater Sun Belt XIV LLC), which was added to the Sun Belt Portfolio during the acquisition process, may require additional underwriting by the DUS lender or Optigo seller/servicer, potentially adding complexity and delay.
(h) Misalignment with single-closing preference. Fairwater has expressed a strong preference for a single-closing, single-lender execution to minimize administrative burden and transaction costs. The structural constraints of agency programs (per-property loan limits, cross-collateralization restrictions, DUS risk-sharing limitations) may prevent a single-closing execution and may not align with Fairwater's preferred transaction structure.
C. Alternative 3: Bank Permanent Loan
1. Overview. The third alternative under consideration is a traditional permanent mortgage loan from one or more commercial bank lenders. A bank permanent loan could potentially be structured with existing members of the Bridge Facility syndicate (Kensington National Bank, N.A., Pinnacle Trust Company, and Greystone Commerce Bank, each of which has an existing lending relationship with Fairwater) or with new bank lenders identified through a solicitation process. Beacon Ridge Capital Advisors LLC has informally sounded out several bank lending desks regarding their appetite for a $240,000,000 permanent multifamily portfolio loan, and the estimated terms discussed below reflect the preliminary indications received.
2. Estimated Economic Terms.
We note that the estimated fixed rate of 6.50%–7.00% assumes the execution of an interest rate swap to convert the floating rate to a synthetic fixed rate. The use of an interest rate swap adds complexity to the transaction structure, including swap counterparty credit risk, documentation of an ISDA Master Agreement and Credit Support Annex, ongoing swap valuation and collateral posting requirements, and the potential for negative mark-to-market exposure if interest rates decline during the swap term. Swap termination costs in a declining rate environment could be significant.
3. Structural Features. Recourse. Bank permanent mortgage loans typically carry some level of ongoing recourse to the borrower and guarantor. While the degree of recourse will be subject to negotiation, banks generally require at least partial recourse for portfolio loans of this size, and full recourse is not uncommon. The recourse structure under a bank permanent loan would represent a significant increase in guarantor exposure compared to the non-recourse CMBS structure (limited to carve-outs) and would be comparable to or potentially more favorable than the full recourse guaranty under the existing Bridge Facility.
Financial Covenants. A bank permanent loan would include ongoing entity-level financial covenants similar to those in the Bridge Facility, including consolidated leverage ratio, fixed charge coverage ratio, tangible net worth, and minimum liquidity requirements. It would also include portfolio-level covenants such as LTV and DSCR thresholds. Breach of these financial covenants would constitute an event of default, potentially triggering acceleration of the loan. The ongoing compliance burden of these covenants is greater than under a CMBS loan, which generally does not include entity-level financial covenants.
SPE Requirements. Bank permanent loans impose less restrictive SPE covenants than CMBS loans. Banks generally do not require independent directors, and the separateness covenants are typically less detailed and prescriptive. This reduces governance complexity and operational cost.
Cash Management. Cash management arrangements under a bank permanent loan are typically less restrictive than under a CMBS loan. Banks may require a deposit relationship or springing lockbox with higher trigger thresholds, but the overall cash management regime provides the borrower with greater flexibility in managing property-level cash flows.
Floating Rate Risk. Unless hedged through an interest rate swap, a floating rate bank permanent loan exposes Fairwater to interest rate risk. Given the current elevated interest rate environment and uncertainty regarding the direction of future Federal Reserve monetary policy, a floating rate structure introduces variability in debt service costs that is inconsistent with Fairwater's preference for predictable, fixed-rate financing. As noted above, hedging through a swap adds cost and complexity.
Transfer Provisions. Bank permanent loans generally include less restrictive transfer provisions than CMBS loans, allowing greater flexibility for intra-REIT transfers, restructurings, and other organizational changes.
4. Advantages.
(a) Maximum prepayment flexibility. Bank permanent loans offer the most flexible prepayment provisions among the three alternatives, with many bank loans permitting open prepayment at par or prepayment with a modest and declining premium. This flexibility is valuable if Fairwater wishes to refinance, recapitalize, or dispose of Sun Belt Portfolio properties during the loan term.
(b) Shorter documentation and closing timeline. Bank permanent loan documentation is generally less complex than CMBS documentation, and the closing process can typically be completed in four to six weeks from the execution of a commitment letter. This shorter timeline could be advantageous if Fairwater needs to close the permanent financing quickly.
(c) Direct lender relationship. Unlike the intermediated servicer structure in CMBS, a bank permanent loan provides Fairwater with a direct relationship with its lender. Requests for consent, modifications, waivers, and other borrower matters can be addressed directly with the lending bank's relationship manager, typically resulting in faster and more responsive service.
(d) Existing relationships. Fairwater has existing lending relationships with Kensington National Bank, Pinnacle Trust Company, and Greystone Commerce Bank through the Bridge Facility syndicate. These institutions are already familiar with Fairwater's credit profile, the Sun Belt Portfolio, and the Company's management team. Leveraging these existing relationships could facilitate a smoother underwriting and documentation process and potentially result in more favorable terms.
(e) Less restrictive SPE and operating covenants. The reduced SPE requirements and more flexible operating covenants under a bank permanent loan minimize governance complexity and operational constraints at the borrower entity level.
(f) Lower origination fees. Estimated origination fees of 0.25%–0.50% ($600,000–$1,200,000) are lower than the 0.75% ($1,800,000) origination fee under the CMBS proposal, resulting in lower upfront transaction costs.
5. Disadvantages / Risks.
(a) Higher all-in interest rate. The estimated fixed rate of 6.50%–7.00% (via swap) is 25 to 75 basis points higher than the CMBS rate of 6.25%, resulting in higher annual interest expense. At the midpoint estimate of 6.75%, the annual interest cost would be approximately $16,200,000, compared to $15,000,000 under the CMBS loan — a difference of $1,200,000 per year.
(b) Shorter term. Bank lenders are generally unwilling to provide ten-year terms for portfolio mortgage loans. The expected term of five to seven years would require Fairwater to refinance the Sun Belt Portfolio before the maturity of a CMBS loan (November 2035), reintroducing refinancing risk and exposing Fairwater to prevailing market conditions at the time of refinancing.
(c) Recourse exposure. The likely requirement for ongoing guaranty or partial recourse increases Fairwater REIT's contingent liability relative to the non-recourse CMBS structure. This recourse exposure is reflected on Fairwater's consolidated balance sheet and may impact credit ratings, borrowing capacity, and investor perception.
(d) Ongoing financial covenant compliance. Entity-level and portfolio-level financial covenants impose ongoing compliance obligations and introduce the risk of technical default if financial metrics deteriorate. This risk is particularly relevant in economic downturn scenarios, where occupancy declines, rent reductions, or operating expense increases could impair financial ratios even if the underlying properties continue to generate positive cash flow.
(e) Interest rate risk. If a floating rate structure is chosen without an interest rate swap, Fairwater would be exposed to interest rate fluctuations that could significantly increase debt service costs. SOFR has been volatile in recent years, and a further increase in short-term rates could meaningfully erode the cash flow advantage of the permanent financing relative to the Bridge Facility.
(f) Swap complexity and risk. If an interest rate swap is used to convert the floating rate to a synthetic fixed rate, Fairwater assumes swap counterparty credit risk, documentation complexity (ISDA Master Agreement, Credit Support Annex, and potentially a margin agreement), and the potential for negative mark-to-market exposure if rates decline during the swap term. Termination of the swap prior to its scheduled maturity could result in a significant termination payment to the swap counterparty.
(g) Shorter term inconsistent with strategy. A five-to-seven-year loan term is inconsistent with Fairwater's stated preference for long-term, fixed-rate debt to match the long-duration nature of its stabilized multifamily asset base. The Sun Belt Portfolio properties are core hold assets that Fairwater expects to own for ten years or longer. A shorter-term loan introduces maturity mismatches between the asset and liability sides of the Company's balance sheet.
(h) Suboptimal REIT capital structure. Fairwater's REIT distribution requirements (distribution of at least 90% of taxable income annually) are better served by the lowest-cost, longest-term fixed-rate financing available, which maximizes distributable cash flow and minimizes the risk of distribution shortfalls. A bank permanent loan with a higher interest rate, shorter term, and potential recourse exposure does not optimize the REIT capital structure as effectively as the CMBS alternative.
(i) Comparative annual cost. At the midpoint estimated rate of 6.75%, the annual interest cost under a bank permanent loan would be $16,200,000. While lower than the Bridge Facility interest cost of $22,392,000, this is $1,200,000 higher than the CMBS annual interest cost of $15,000,000. Over the life of a ten-year CMBS term, the cumulative interest savings of the CMBS alternative versus the bank alternative are estimated at approximately $12,000,000.
IV. Comparative Summary Table
The following table provides a side-by-side comparison of the three permanent financing alternatives:
V. Strategic Considerations for Fairwater
A. Timeline Constraints
The timeline for completing the permanent financing is a critical strategic consideration. The key dates and deadlines are as follows:
• Bridge Facility maturity date: December 31, 2025 (approximately 4.5 months from the date of this memorandum).
• Target permanent loan closing date: November 28, 2025 (approximately 3.5 months from the date of this memorandum).
• Clarendon Metropolitan term sheet: Received August 25, 2025. Fairwater is in a position to proceed immediately with the CMBS path.
• Application and rate lock deposit submission deadline: September 15, 2025 (to be submitted to Clarendon Metropolitan with the $2,400,000 rate lock deposit, reference CL-CMBS-2025-09-0347).
• Target commitment letter date: October 1, 2025.
• Agency or bank alternative solicitation: Would require initiation of a new solicitation process, adding approximately four to eight weeks to the timeline before even reaching the term sheet stage, plus additional time for underwriting, commitment, and documentation. This delay would make it difficult, if not impossible, to close by November 28, 2025, and would significantly increase the risk of failing to close before the December 31, 2025 bridge maturity.
The Bridge Facility extension option provides some degree of protection against a delayed permanent closing, but this protection is impaired by the current DSCR shortfall. As noted in Section II.B above, the extension condition requires a DSCR of at least 1.20x, whereas the current DSCR on the Bridge Facility is only 1.169x ($26,180,000 trailing NOI ÷ $22,392,000 annual interest expense). Satisfying the extension condition would require either an increase in trailing NOI to approximately $26,870,400 (an increase of $690,400 from the current level), a partial principal paydown to reduce debt service, or a waiver from the Bridge Lenders. Even if the extension could be obtained, the extension fee of $600,000 (25 basis points on the $240,000,000 commitment) represents an additional cost that should be avoided if possible.
The Clarendon Metropolitan CMBS path offers the most favorable timeline because a definitive term sheet is already in hand. Calderwood & Harkness can begin preparing a mark-up of the term sheet immediately, and the application and rate lock deposit can be submitted by September 15, 2025. Based on our experience with Clarendon Metropolitan's origination process, we believe a commitment letter can be obtained by October 1, 2025, with initial loan documents circulated by Ashworth McPhail LLP by approximately October 15, 2025, and closing achievable by the target date of November 28, 2025. This timeline provides approximately one month of cushion before the December 31, 2025 bridge maturity date.
B. Cost-of-Capital Analysis
The following table summarizes the comparative cost of capital across the Bridge Facility and the three permanent financing alternatives:
Key cost-of-capital observations:
(a) The CMBS alternative provides annual interest savings of approximately $7,392,000 relative to the Bridge Facility ($22,392,000 minus $15,000,000 in annual interest on the CMBS loan). This represents the interest-only savings; the total annual debt service under the CMBS loan ($17,734,152, inclusive of principal amortization) is still approximately $4,658,000 lower than the Bridge Facility interest cost, reflecting both the lower rate and the cash flow benefit of the reduced monthly payment.
(b) The CMBS alternative provides estimated annual interest savings of approximately $1,200,000 relative to the bank permanent loan at the midpoint estimated rate of 6.75% ($16,200,000 minus $15,000,000). Over the ten-year CMBS term, these cumulative interest savings are estimated at approximately $12,000,000.
(c) The agency alternative may offer a lower interest rate than the CMBS alternative (estimated 5.85%–6.15% versus 6.25%), but the absence of a firm proposal prevents a definitive comparison. Moreover, the timeline risk, structural complexity, and potential need for multiple closings under the agency path may offset any interest rate advantage through higher transaction costs and execution risk.
C. REIT Distribution Requirements
Fairwater's status as a REIT under Sections 856–860 of the Internal Revenue Code imposes a fundamental constraint on the Company's capital allocation: Fairwater must distribute at least 90% of its taxable income to its shareholders annually in order to maintain its REIT status and avoid entity-level federal income taxation. This distribution requirement significantly limits the Company's ability to retain earnings for debt service, capital reserves, or other corporate purposes.
The choice of permanent financing structure has a direct and material impact on the Company's ability to meet its REIT distribution requirements:
(a) Lower debt service preserves distributable cash flow. The CMBS alternative, with annual debt service of $17,734,152, preserves more cash flow for required distributions than the Bridge Facility ($22,392,000 annual interest expense) or a bank permanent loan (estimated $17,500,000–$18,500,000 annual debt service).
(b) Non-recourse structure enhances balance sheet presentation. The non-recourse CMBS structure limits Fairwater REIT's guarantor exposure to standard carve-out events, reducing contingent liability on the Company's consolidated balance sheet. This is important for REIT financial reporting and investor presentation, and may be relevant to credit rating considerations.
(c) SPE distribution restrictions must accommodate REIT requirements. The SPE separateness covenants in the CMBS loan documentation will include restrictions on distributions from the SPE Borrowers to the Operating Partnership. These restrictions must be carefully negotiated to include appropriate carve-outs permitting distributions necessary to enable the Company to satisfy its REIT distribution obligations. Calderwood & Harkness, in coordination with Crestline & Alderman LLP, will draft and negotiate appropriate REIT distribution carve-out language in the SPE organizational documents and ensure that the carve-out is accepted by Clarendon Metropolitan and Ashworth McPhail LLP. This is a standard negotiation point in CMBS transactions involving REIT borrowers and is routinely resolved, but the drafting of the carve-out must be precise to avoid inadvertent limitations on the Company's ability to make required distributions.
D. Portfolio and Capital Stack Alignment
The CMBS alternative is well-aligned with Fairwater's overall portfolio and capital structure strategy for the following reasons:
(a) Multifamily focus. Fairwater's total portfolio of 76 multifamily communities (including the Sun Belt Portfolio) is entirely multifamily, and the Company's experience with CMBS multifamily execution across its existing 62-community portfolio provides institutional familiarity with the CMBS origination process, documentation requirements, and post-closing servicing relationship.
(b) Fixed-rate maturity laddering. Fairwater's consolidated total debt of approximately $1.48 billion (pre-Bridge) is a mix of secured and unsecured facilities with varying maturities. Adding $240,000,000 of ten-year fixed-rate CMBS debt is consistent with the Company's strategy of maintaining a diversified and laddered maturity profile, reducing concentration of maturities in any single year and mitigating refinancing risk.
(c) Long-term hold strategy. The Sun Belt Portfolio represents a core strategic addition to Fairwater's platform in high-growth Sun Belt markets. Management has indicated that these are long-term hold assets with no current plans for disposition. The ten-year CMBS term is well-matched to this long-duration hold strategy, and the two-year defeasance lockout period (through approximately November 2027) is manageable in light of the stabilized nature of the portfolio and the absence of near-term disposition plans.
(d) Maturity profile extension. The ten-year CMBS maturity (November 2035) significantly extends Fairwater's overall debt maturity profile relative to a five-to-seven-year bank alternative (maturing in 2030–2032), providing greater balance sheet stability and reducing the frequency of required refinancing transactions.
E. Prepayment Flexibility Trade-Off
The CMBS defeasance-only prepayment regime is the most restrictive among the three alternatives analyzed, and this trade-off deserves careful consideration:
(a) Nature of the restriction. During the two-year lockout period (approximately November 2025 through November 2027), no prepayment of any kind is permitted under the CMBS loan. Fairwater would be unable to refinance, recapitalize, or repay the CMBS loan during this period, regardless of changes in market conditions or the Company's strategic direction. Following the lockout, prepayment is permitted only through defeasance, which requires the substitution of a portfolio of U.S. Treasury securities generating cash flows equal to the remaining scheduled loan payments. Defeasance is operationally complex, requiring engagement of a defeasance consultant, establishment of a defeasance collateral account with a qualified custodian, purchase and delivery of Treasury securities, and legal opinions. The economic cost of defeasance depends on the relationship between Treasury rates and the note rate at the time of defeasance; if Treasury rates are below the 6.25% note rate, the cost of purchasing the required Treasury portfolio can be significant.
(b) Mitigating factors. Several factors mitigate the impact of the prepayment restriction in Fairwater's circumstances. First, the Company's stated long-term hold strategy for the Sun Belt Portfolio significantly reduces the probability that prepayment will be needed during the lockout or even the defeasance period. Management has confirmed that there are no current plans to dispose of any Sun Belt Portfolio properties within the next several years. Second, the 6.25% fixed rate represents a favorable execution in the current interest rate environment, and the probability of interest rates declining sufficiently to make refinancing economically attractive during the lockout period is uncertain. Third, the rate savings of the CMBS alternative (approximately 25 to 50+ basis points versus alternative structures) over the full ten-year term provide substantial cumulative savings (estimated at $12,000,000+ versus the bank permanent loan alternative) that justify accepting the prepayment constraint.
(c) Scenario analysis. If Fairwater were to pursue a portfolio disposition strategy for any Sun Belt Portfolio properties within the two-year lockout period, the CMBS lockout would be highly problematic — the properties could not be released from the mortgage lien, and a sale could not proceed without Fairwater retaining the CMBS debt obligation. However, management has affirmatively indicated that no such plans exist. If disposition plans were to develop after the lockout period, defeasance would be available but should be modeled at the relevant time to assess costs.
(d) Comparison to alternatives. The yield maintenance option available under Fannie Mae DUS loans can be more economical than defeasance in certain interest rate environments, and the open prepayment available under bank permanent loans provides maximum flexibility. However, these prepayment advantages come at the cost of higher interest rates (agency rate advantage is uncertain and may be offset by structural complexity), shorter terms (bank loans at five to seven years), and/or recourse exposure. For a REIT with a long-duration hold strategy and a priority on rate minimization, the trade-off of accepting a more restrictive prepayment regime in exchange for the lowest available rate and longest available term is, in our view, appropriate and justified.
VI. Recommendation
Based on our comprehensive analysis of the three permanent financing alternatives, Calderwood & Harkness recommends that Fairwater proceed with the Clarendon Metropolitan Insurance Company CMBS structure for the permanent take-out of the $240,000,000 Bridge Facility. Our recommendation is based on the following principal reasons:
1. Lowest cost of capital. The 6.25% fixed interest rate offered by Clarendon Metropolitan is the most competitive available option with a definitive term sheet in hand. This rate results in annual interest expense of approximately $15,000,000, representing savings of approximately $7,392,000 per year relative to the Bridge Facility (interest-only at 9.33%) and estimated savings of approximately $1,200,000 per year relative to a bank permanent loan at the midpoint estimated rate of 6.75%. Over the ten-year CMBS term, cumulative interest savings versus the bank alternative are estimated at approximately $12,000,000.
2. Longest term. The ten-year term (November 2025 through November 2035) provides maximum maturity extension and eliminates refinancing risk for a full decade. This term is well-matched to Fairwater's long-term hold strategy for the Sun Belt Portfolio and is significantly longer than the five-to-seven-year terms available from bank lenders.
3. Non-recourse structure. The non-recourse structure, with Fairwater REIT's liability limited to standard carve-out events, significantly reduces the Company's guarantor exposure compared to the full recourse guaranty under the Bridge Facility and the ongoing recourse that bank lenders would likely require. This non-recourse feature improves Fairwater's balance sheet presentation, reduces contingent liability, and is beneficial for credit rating and investor relations purposes.
4. DSCR improvement. The projected DSCR under the CMBS loan is 1.476x, a substantial improvement from the current Bridge Facility DSCR of 1.169x. This DSCR level provides meaningful cushion above typical CMBS minimum thresholds (1.20x–1.25x), reducing the risk of cash management triggers, special servicer intervention, or other adverse consequences during the loan term. The DSCR improvement also enhances Fairwater's entity-level financial covenant compliance across its broader credit facilities.
5. Term sheet in hand. Clarendon Metropolitan has delivered a definitive term sheet dated August 25, 2025. This enables Fairwater to move immediately into the application, commitment, and documentation phases, with a realistic path to closing by the target date of November 28, 2025 — well in advance of the December 31, 2025 Bridge Facility maturity. The agency and bank alternatives would require new solicitation processes, adding significant time and creating material risk that the closing could not be completed before the bridge maturity date.
6. Exit fee waiver. Closing the CMBS permanent loan by November 28, 2025 would constitute repayment of the Bridge Facility from permanent CMBS financing proceeds within the timeframe specified in the Bridge Facility for

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