David,
I hope this finds you well. I am writing in connection with C&H Matter No. 1036-00004 to transmit the attached Comprehensive Due Diligence Summary Memorandum dated April 10, 2024, prepared by Grace Nakamura under my supervision, covering all diligence workstreams for Fairwater's proposed acquisition of the 14-property Sun Belt logistics and office portfolio from Greystone Meridian Partners Fund III, L.P.
As you know, the Due Diligence Period under the Purchase and Sale Agreement dated February 28, 2024 expires on Monday, April 15, 2024 — five days from today. At that time, Fairwater must decide whether to waive the diligence contingency, which would trigger the Additional Deposit of $27,500,000 becoming due (and going hard) on April 16, 2024, bringing total deposits to $55,000,000. Given the significance of that decision, I wanted to provide you with a summary of our key findings across each workstream, together with our recommendation, in advance of circulating the full memorandum for your review.
**I. Title & Survey**
We have received and analyzed title commitments for all 14 properties from Commonwealth National Title Insurance Company (Kenneth Stanhope, SVP, Title Officer). ALTA/NSPS surveys complying with 2021 Minimum Standard Detail Requirements have been completed by Meridian Land Surveying, Inc. (Daniel Caulfield, PLS, PE) for all 14 properties.
C&H delivered our Title Objection Letter on March 27, 2024, two days ahead of the March 29 deadline, identifying 23 title objection items across the portfolio. Seller's counsel at Blackridge Hayes LLP (Nathaniel Pryce and Thomas Keating) responded on April 8, 2024 with proposed cures. Our acceptance and counter-response is in final stages and will be delivered tomorrow, April 11. The process is substantially agreed. All mandatory cure items — monetary liens, mechanic's liens, delinquent taxes, and judgments — are being addressed by Seller.
Pro forma ALTA Owner's Policies (2021 form) are under preparation with an aggregate insured amount of $1,100,000,000, allocated per the property schedule. We have identified no material title defects that cannot be cured or insured over.
**II. Environmental**
Phase I Environmental Site Assessments have been completed by Trident Environmental Group LLC (Rachel Kwan, Senior Environmental Scientist) for all 14 properties. Twelve of the 14 properties are clean, with no recognized environmental conditions. Two properties — Westlake Distribution Hub (11500 Westlake Parkway, Houston, TX) and Lakeland Crossings Industrial (7100 Drane Field Road, Lakeland, FL) — have de minimis RECs that are controlled and do not require further investigation. No Phase II ESA is required for any property. Environmental risk across the portfolio is well within acceptable parameters.
**III. Property Condition Assessments**
PCAs have been completed by Rampart Building Sciences, Inc. (Alan Westbrook, PE) for all 14 properties. Aggregate estimated immediate repair costs total $2,140,000, concentrated in four properties:
- Buckhead Place Office Tower (3380 Peachtree Road NE, Atlanta, GA): $890,000 - Cool Springs Office Park (5000 Virginia Way, Brentwood, TN): $620,000 - Lakeland Crossings Industrial (7100 Drane Field Road, Lakeland, FL): $380,000 - SouthPark Corporate Center (6200 Fairview Road, Charlotte, NC): $250,000
We have negotiated a PCA repair credit of $1,070,000 (50% of the aggregate $2,140,000), to be applied as a purchase price reduction at closing. This credit is reflected in the First Amendment to the PSA, a draft of which (dated April 12, 2024) is being circulated separately. The adjusted purchase price after the PCA credit is $1,098,930,000. The repair items are primarily deferred maintenance at the office properties — HVAC systems, roof membrane at Buckhead, and parking structure work at Cool Springs — all of which are manageable within Fairwater's capital plan.
**IV. Zoning and Land Use**
Zoning confirmation letters have been obtained for all 14 properties. C&H and our local counsel in each of the five states — Breckenridge Osgood LLP (Texas), Talmadge Beaumont LLP (Georgia), Haversham Cole PLLC (North Carolina), Ellsworth Ridley LLP (Tennessee), and Palmetto Strauss PA (Florida) — have confirmed zoning compliance and permitted uses for all properties. No non-conforming use or variance issues have been identified.
**V. Lease Audit**
C&H has completed a comprehensive review of all 87 leases across the portfolio. Key portfolio metrics as of December 31, 2023:
- Total RSF: 5,224,000 - Weighted-average occupancy: 93.2% (logistics: 96.1%; office: 82.7%) - Annual in-place base rent: $74,800,000 - In-place cap rate: 6.80% - Weighted-average remaining lease term: 5.8 years
The top five tenants by annual base rent are as follows:
| Tenant
We have not identified any material adverse lease terms or unusual provisions that would alter the investment thesis. Tenant option provisions — renewals, expansions, ROFOs, and ROFRs — are within market norms and detailed in the memorandum.
The estoppel process is underway. Form estoppel certificates (PSA Exhibit E) were transmitted to Seller and Blackridge Hayes on March 4, 2024, with a delivery deadline of May 15, 2024. The PSA requires estoppel coverage of at least 80% of in-place ABR ($59,840,000) and from every tenant occupying 25,000 RSF or more.
**VI. Entity-Level Diligence**
We have completed review of organizational documents, certificates of formation, good-standing certificates, operating agreements, UCC searches, judgment and lien searches, and litigation searches for all 14 Target Entities and GMP Fund III. All Target Entities are single-purpose Delaware LLCs, wholly owned by GMP Fund III. No material issues have been identified.
**VII. Loan Document Review**
C&H has completed a detailed review of all three mortgage loan facilities comprising $612,000,000 in total assumed debt:
- **Pinnacle Federal Bank, N.A.** — Master Loan Agreement dated September 15, 2020 (Loans 1-A through 1-H, 8 logistics properties): $421,600,000 OPB, 4.22% fixed, maturing July 1, 2028. - **Veltrano Capital Lending Corp.** — Loan Agreement dated February 1, 2021 (Loans 2-A through 2-D, 4 office properties): $142,300,000 OPB, 4.68% fixed, maturing March 1, 2029. - **Sycamore Life Insurance Company** — Note Purchase Agreement dated November 22, 2019 (Loans 3-A and 3-B, 2 logistics properties): $48,100,000 OPB, 3.95% fixed, maturing December 1, 2030.
Each loan agreement includes a change of control provision requiring lender consent to any direct or indirect transfer of ownership interests in the borrower entity, and this transaction triggers those provisions. Consent requests were sent to all three lenders' respective counsel — Whitfield & Archer LLP (Pinnacle), Cranford McCabe LLP (Veltrano), and Partridge Wynn & Slater LLP (Sycamore) — on March 8, 2024.
Replacement guaranty forms have been circulated, with Fairwater stepping in as replacement carve-out guarantor for GMP Fund III. The guarantor financial covenants require minimum tangible net worth of $500,000,000 and minimum liquid assets of $50,000,000; Fairwater satisfies both thresholds.
Aggregate consent fees total $1,825,625 (Pinnacle: $1,054,000 at 0.25% of OPB; Veltrano: $711,500 at 0.50%; Sycamore: $60,125 at 0.125%), split 50/50 between Buyer and Seller ($912,812.50 each). The lender consent deadline under the PSA is May 24, 2024. We have no red flags that would prevent consent from being obtained, though Pinnacle's process is the most involved given the size of its facility and we continue to monitor it closely.
**VIII. Tax**
Sylvia Hartwell has completed tax due diligence and structural analysis. The entity-purchase structure preserves favorable REIT qualification under Sections 856–860 of the Internal Revenue Code.
Transfer tax exposure is estimated at approximately $3,850,000 across the four taxable jurisdictions (Georgia: ~$1,250,000; Florida: ~$1,680,000; Tennessee: ~$740,000; North Carolina: ~$180,000; Texas: $0), split 50/50 per the PSA.
With respect to FIRPTA, Seller is a domestic limited partnership and no FIRPTA withholding is required. A belt-and-suspenders FIRPTA affidavit will be delivered at closing. Purchase price allocation per Section 1060 methodology is reflected in PSA Exhibit K, based on appraised values from Stonebridge Valuation Advisors.
**IX. Insurance**
Existing coverage has been reviewed. Replacement property and casualty policies will be bound with Ironclad Indemnity Insurance Company through Hartwick Gunderson & Associates, Inc. (Peter Langford, Account Executive), effective at closing.
The representations and warranties insurance application was submitted to Sentinel Specialty Insurance Company via Hartwick Gunderson on February 5, 2024. Policy terms are as follows: $55,000,000 limit (5% of purchase price); $11,000,000 retention (1% of purchase price, dropping to $5,500,000 at 12 months post-closing); premium of $1,402,500 (2.55% of policy limit). Underwriting is proceeding based on our diligence findings, and Sentinel has not flagged any issues to date.
**X. Service Contracts**
We have identified and reviewed 63 service contracts across the portfolio, including assignability and termination provisions. Twelve contracts are recommended for termination post-closing. No material issues exist with respect to assignment of the remaining contracts in connection with the entity-level transfer structure.
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**Recommendation on Diligence Contingency**
Based on our comprehensive findings across all workstreams, it is my recommendation that Fairwater waive the diligence contingency and allow the Due Diligence Period to expire on April 15, 2024.
The portfolio is substantially as represented by Seller. We have identified no material adverse findings. The two de minimis environmental conditions at Westlake Distribution Hub and Lakeland Crossings Industrial, and the $2,140,000 in PCA repairs (for which a $1,070,000 credit has been negotiated), are within acceptable risk tolerances and do not alter the investment thesis.
Upon expiration of the Due Diligence Period, the Additional Deposit of $27,500,000 becomes due on April 16, 2024, bringing total deposits held by Commonwealth National Title Insurance Company, as escrow agent, to $55,000,000. Please note that the Additional Deposit will be non-refundable (i.e., "hard"), subject to the terms of the PSA.
I want to emphasize that this is ultimately a business decision for the Fairwater team, and I would recommend discussing it with Marcus and Patricia Sung-Calloway. From a legal diligence standpoint, however, C&H is comfortable recommending that Fairwater proceed.
**Outstanding Items and Next Steps**
The following items remain open and will continue to be advanced toward the scheduled closing date of May 31, 2024:
1. Title objection cure process — substantially resolved; finalization expected April 11–12, 2024. 2. First Amendment to PSA — being circulated to extend the estoppel delivery deadline to May 15, 2024 and memorialize the PCA credit mechanics. 3. Estoppel and SNDA delivery — ongoing; deadline May 15, 2024. 4. Lender consent process — continuing across all three facilities; deadline May 24, 2024. 5. Closing — scheduled May 31, 2024.
I would like to suggest that we schedule a call with you, Marcus, Camille, and Patricia before the April 15 expiration to walk through the attached memorandum in detail and address any questions. The full C&H team — Angela, Grace, Sylvia, and I — are available at your convenience. Please let us know what works for the Fairwater team.
Best regards,
Douglas Fairchild Partner Calderwood & Harkness LLP 1700 K Street NW, Suite 1200 Washington, DC 20006 (202) 555-0184 (direct) dfairchild@calderwoodharkness.com
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*CONFIDENTIALITY NOTICE: This email and the attached Comprehensive Due Diligence Summary Memorandum dated April 10, 2024 constitute attorney-client privileged and attorney work product communications of Calderwood & Harkness LLP, prepared at the direction of and for the benefit of Fairwater Real Estate Investment Trust. This communication is intended solely for the use of the addressees and those individuals copied herein. Any unauthorized review, use, disclosure, or distribution is strictly prohibited. If you have received this communication in error, please notify the sender immediately and permanently delete all copies.*