1036-00004 · Client 1036 · Diligence/Leases

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MEMORANDUM

PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT

TO: Douglas Fairchild, Responsible Partner, Calderwood & Harkness LLP

FROM: Grace Nakamura, Lead Associate, Calderwood & Harkness LLP Rafael Dominguez, Working Associate, Calderwood & Harkness LLP

DATE: April 10, 2024

RE: Lease Audit Memorandum — Portfolio Summary; Fairwater Real Estate Investment Trust Acquisition of 14-Property Sun Belt Logistics and Office Portfolio from Greystone Meridian Partners Fund III, L.P.

MATTER NO.: 1036-00004

CLIENT: Fairwater Real Estate Investment Trust

This memorandum is prepared for the exclusive use of Calderwood & Harkness LLP attorneys and Fairwater Real Estate Investment Trust personnel involved in the captioned transaction. This memorandum constitutes attorney work product and is protected by the attorney-client privilege. Distribution outside of the authorized recipient list is strictly prohibited without prior written approval of the Responsible Partner.

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I. EXECUTIVE SUMMARY

1.1 Purpose and Scope

This memorandum summarizes Calderwood & Harkness LLP's ("C&H") comprehensive audit of all eighty-seven (87) leases across the fourteen (14)-property portfolio being acquired by Fairwater Real Estate Investment Trust ("Fairwater" or "FREIT") from Greystone Meridian Partners Fund III, L.P. ("GMP Fund III" or "Seller") pursuant to the Purchase and Sale Agreement dated February 28, 2024 (the "PSA"). The transaction involves the acquisition by Fairwater of a geographically diversified Sun Belt logistics and office portfolio encompassing approximately 5,224,000 rentable square feet ("RSF") across the states of Georgia, Texas, Florida, Tennessee, and North Carolina.

The transaction is structured as an entity-level purchase of one hundred percent (100%) of the membership interests in fourteen (14) single-purpose Delaware limited liability companies (each, a "Target Entity" and collectively, the "Target Entities"). Each Target Entity holds fee simple title to one property in the portfolio. Because the acquisition is structured at the entity level, the leases remain in place within the Target Entities and are not being assigned; rather, the transaction effects a change of indirect ownership of each Target Entity from GMP Fund III to Fairwater. This structural distinction has significant implications for the analysis of tenant consent requirements, ROFO/ROFR provisions, purchase options, and assignment restrictions, each of which is addressed in detail in this memorandum.

The aggregate purchase price for the portfolio is One Billion One Hundred Million Dollars ($1,100,000,000). The transaction contemplates assumption of existing mortgage indebtedness in the aggregate principal amount of approximately Six Hundred Twelve Million Dollars ($612,000,000), with cash equity at closing of approximately Four Hundred Eighty-Eight Million Dollars ($488,000,000). Mortgage indebtedness is held by three institutional lenders: Pinnacle Federal Bank, N.A., Veltrano Capital Lending Corp., and Sycamore Life Insurance Company, each of which must consent to the transfer of the membership interests as a condition to closing under the applicable loan documents.

The lease review was conducted using documents provided in the Seller's virtual data room (hosted on Thackeray Solutions, Project Sunstone), supplemented by information and clarifications provided by Argyle Property Services LLC ("Argyle"), the Seller-affiliated property manager for the portfolio. Our primary contact at Argyle has been Sean Kilpatrick, Portfolio Manager, who has been responsive to data requests and follow-up inquiries. We note, however, that certain information provided by Argyle has been provided verbally or through informal correspondence and has not been independently verified by C&H.

The scope of this audit encompasses the following categories of analysis for each of the 87 leases in the portfolio:

(a) Lease terms, including commencement dates, expiration dates, and remaining lease terms;

(b) Rent structures and escalation provisions, including base rent, percentage rent (if any), free rent and concession periods, and contractual rent escalation mechanisms;

(c) Landlord obligations, including tenant improvement allowances, maintenance and repair obligations, and common area maintenance and operating expense recovery provisions;

(d) Tenant options, including renewal options, expansion options, purchase options, rights of first offer ("ROFO"), and rights of first refusal ("ROFR");

(e) Co-tenancy clauses and their potential impact on rent obligations;

(f) Assignment and subletting provisions, including consent requirements, recapture rights, and profit-sharing provisions;

(g) Exclusive use provisions applicable to multi-tenant properties;

(h) Default and cure provisions, including monetary and non-monetary default triggers, cure periods, and available remedies;

(i) Security deposit provisions and forms of security;

(j) Insurance and indemnification requirements;

(k) Environmental and hazardous materials provisions;

(l) Change of control and transfer restriction provisions, with particular emphasis on the entity-level transfer structure; and

(m) Estoppel and SNDA compliance status under the PSA.

This portfolio-level summary memorandum is intended to provide a comprehensive overview of the lease portfolio's risk profile and key terms. A separate companion memorandum, titled Lease Audit Memorandum — Top 10 Tenants (Detailed), provides granular lease-by-lease analysis for each of the portfolio's ten largest tenants by annual base rent. That companion memorandum should be read in conjunction with this summary.

1.2 Key Portfolio Lease Statistics

The following table summarizes the key lease statistics for the portfolio as a whole, based on information contained in the Seller's rent roll (PSA Exhibit H) and the lease documents reviewed in the data room, in each case as of December 31, 2023 unless otherwise indicated:

The in-place cap rate of 6.80% is derived by dividing the annual in-place base rent of $74,800,000 by the aggregate purchase price of $1,100,000,000. This cap rate does not reflect additional income from tenant reimbursements, parking revenue, or other ancillary income sources, nor does it account for capital expenditure requirements, vacancy loss assumptions, or management fees. The Buyer's underwriting model (prepared by Fairwater's acquisitions team under the direction of Leah Torrance, SVP, Asset Management, and Marcus Devereaux, VP, Acquisitions) incorporates these additional factors.

Tenant security deposits totaling $4,283,000 are currently held in Target Entity operating accounts at Magnolia Commerce Bank, N.A., located at 225 Peachtree Street NE, Suite 100, Atlanta, Georgia 30303. The primary banking relationship contact is Linda Prescott, Vice President, Commercial Banking. Because the transaction is structured as an entity-level transfer, the security deposits will transfer as assets of the Target Entities at closing without the need for separate assignment or transfer documentation. However, post-closing coordination will be required to update the authorized signatories and banking instructions on these accounts.

1.3 High-Level Findings and Recommendations

Based on our comprehensive review of the 87 leases in the portfolio, we offer the following high-level findings and recommendations:

Overall Portfolio Quality. The lease portfolio is institutional-quality, utilizing standard commercial lease forms that are consistent with market practice for properties of this type and class in the Sun Belt markets. The logistics leases are generally based on a triple-net ("NNN") lease form with landlord-favorable provisions, while the office leases employ modified gross or full-service gross structures with more complex landlord obligation provisions. We did not identify any material deviations from customary commercial lease terms that would present unusual risk to the Buyer.

Default Status. No material defaults by the landlord (any Target Entity) or by any tenant have been identified based on our review of the data room materials and the Seller's representations in Article V of the PSA. This conclusion is subject to confirmation through the estoppel certificate process, which is currently underway as discussed in Section XV below.

Key Risk Areas. We have identified the following risk areas that warrant particular attention by the Buyer:

(a) Below-Market Renewal Options. Certain tenant renewal options, particularly in the logistics portfolio, provide for renewal rents at fixed rates that may fall below projected market rental rates at the time of exercise. The potential annual base rent impact of these below-market renewal options is quantified in Section VII.1 and in the companion Top 10 Tenants memorandum.

(b) Co-Tenancy Clauses. Two (2) office leases contain co-tenancy provisions that impose occupancy threshold requirements or specified anchor tenant requirements as conditions to the tenant's full rent obligation. Given the office portfolio's current occupancy rate of 82.7%, these provisions require ongoing monitoring. Detailed analysis is provided in Section VIII.

(c) Tenant Purchase Option. One (1) lease contains a purchase option on the fee interest in the underlying property. We have analyzed whether the entity-level transfer structure triggers this purchase option and have concluded that it does not, based on the specific language of the option provision. This analysis is detailed in Section VII.3.

(d) ROFO/ROFR Provisions. Three (3) leases contain ROFO or ROFR provisions relating to the sale of the property. We have analyzed whether the entity-level transfer of membership interests triggers these rights and have concluded that, based on the specific language of each provision, the ROFO/ROFR rights are not triggered by the transaction. This analysis is provided in Section VII.4.

(e) Outstanding TI Obligations. Certain leases contain unfunded or partially unfunded tenant improvement allowance commitments that will remain obligations of the Target Entities following closing. These are quantified in Section VI.1.

(f) CAM Cap Exposure. Certain leases contain caps on tenant reimbursement obligations for common area maintenance expenses, which may limit the landlord's ability to fully recover operating expenses, particularly if operating expenses increase post-acquisition. This exposure is analyzed in Section VI.3.

Estoppel Certificate Status. As of the date of this memorandum, the estoppel delivery process is underway. An estoppel transmittal letter was sent to Seller's counsel, Blackridge Hayes LLP (Nathaniel Pryce, Partner; Thomas Keating, Senior Associate), on March 4, 2024, transmitting the form of estoppel certificate (PSA Exhibit E) and distribution instructions to tenants. The PSA requires delivery of tenant estoppel certificates from tenants representing at least eighty percent (80%) of in-place base rent ($59,840,000 of $74,800,000) and from every tenant occupying 25,000 or more RSF (each, a "Major Tenant"). As of the date of this memorandum, the distribution process is underway and tracking is maintained on the Estoppel Tracking Spreadsheet circulated to the deal team. We note, for completeness, that as of the actual closing date (June 6, 2024), estoppel certificates were received covering 91.4% of in-place ABR ($68,371,200 of $74,800,000), exceeding the 80% threshold. Seventy-nine (79) executed estoppel certificates were received. Six (6) estoppel certificates contained material discrepancies from the rent roll, all of which were identified by the deal team and resolved through Seller supplemental disclosure prior to closing.

SNDA Status. Thirty-eight (38) Major Tenant Subordination, Non-Disturbance and Attornment Agreements ("SNDAs") are required under the PSA. SNDA transmittal letters are being prepared and distributed to Major Tenants by C&H on behalf of Fairwater. The process is ongoing as of the date of this memorandum, and tracking is maintained on the SNDA Tracking Spreadsheet. Additional detail regarding SNDA status is provided in Section XVI.

Recommendations. We recommend that the Buyer's asset management team (Leah Torrance, SVP, Asset Management, and Marcus Devereaux, VP, Acquisitions) and in-house real estate counsel (Camille Oduya, Associate General Counsel — Real Estate) coordinate with C&H regarding the following matters: (i) renewal option pricing and its impact on long-term revenue projections; (ii) co-tenancy monitoring protocols for the office portfolio; (iii) post-closing tenant notification procedures; and (iv) operational transition matters in connection with the transition of property management from Argyle Property Services LLC to Fairwater Property Management LLC.

II. PORTFOLIO OVERVIEW — LEASE SUMMARY BY PROPERTY

2.1 Summary Table

The following table provides a summary of the 14 properties in the portfolio, organized by property type (logistics properties listed first, followed by office properties), with key lease and occupancy metrics for each property as of December 31, 2023:

Notes to Table:

(a) Fairfield Logistics Center I is a single-tenant building occupied entirely by Thornton-Whitaker Pharmaceuticals Corp. under a NNN lease with approximately 7.2 years of remaining term.

(b) Westlake Distribution Hub is a single-tenant building occupied entirely by Cascade Supply Chain Solutions Inc. under a NNN lease with approximately 8.1 years of remaining term, representing the longest remaining lease term among the single-tenant logistics properties.

(c) Katy Freeway Logistics Park is a single-tenant building occupied entirely by Zynvaro Distribution Holdings LLC under a NNN lease with approximately 6.9 years of remaining term.

(d) Southport Logistics Park is a single-tenant building occupied entirely by Atlas Freight Logistics Corp. under a NNN lease with approximately 6.3 years of remaining term.

(e) Mount Juliet Commerce Park exhibits the lowest occupancy among the logistics properties at 70.5%, driven by a 88,000 RSF vacancy resulting from the December 2023 expiration of a lease with Grandview Warehousing LLC. This vacancy is reflected in the Buyer's underwriting and represents a lease-up opportunity.

(f) The four office properties collectively exhibit a weighted-average occupancy of 82.7%, with Brickell Bay Office Building at 75.7% representing the lowest occupancy in the portfolio. The office portfolio's lower occupancy is consistent with broader Sun Belt office market conditions.

(g) SouthPark Corporate Center's primary tenant is Birchwood Technology Group Inc., which occupies the majority of the building and represents $5,668,000 in annual base rent.

2.2 Property Type Analysis

The portfolio is comprised of two distinct property types — logistics/industrial properties and office properties — each exhibiting different lease structural characteristics, risk profiles, and operational requirements.

Logistics Properties (10 properties). The ten logistics properties account for 4,373,000 RSF, representing 83.7% of the portfolio by rentable area. The logistics portfolio is 96.1% occupied as of December 31, 2023, reflecting strong demand for distribution and warehousing space in Sun Belt logistics corridors. The leases at the logistics properties are generally structured on a triple-net ("NNN") basis, under which the tenant is responsible for the payment of real property taxes, property insurance, and common area maintenance expenses (including structural reserves in certain leases) in addition to base rent. This NNN structure significantly reduces the landlord's operating expense burden and cash flow volatility. The logistics leases generally feature longer initial terms (typically 7–10 years at commencement), fewer and simpler tenant option provisions, and more straightforward landlord maintenance obligations (typically limited to structural elements and roof). Four of the ten logistics properties are single-tenant facilities occupied by investment-grade or near-investment-grade tenants under long-term leases, which represent the portfolio's most stable cash flow streams.

Office Properties (4 properties). The four office properties account for 851,000 RSF, representing 16.3% of the portfolio by rentable area. The office portfolio is 82.7% occupied as of December 31, 2023, reflecting the broader challenges facing the office sector in the post-pandemic environment, though the Sun Belt markets in which these properties are located have generally outperformed national office market averages. The leases at the office properties are generally structured on a modified gross basis (with base year expense stops for operating expenses and real property taxes) or, for certain smaller tenants, on a full-service gross basis. These structures impose greater landlord obligations with respect to building systems, common areas, and operating expenses. Office leases in the portfolio tend to feature shorter remaining terms, more complex tenant option suites (including renewal options, expansion options, and contraction rights), and more significant tenant improvement allowance commitments. The office leases also present the portfolio's only co-tenancy clause exposure, as discussed in Section VIII below.

The bifurcated nature of the portfolio creates a natural hedging effect: the logistics properties provide stable, long-duration cash flows with minimal landlord obligations, while the office properties offer potentially higher per-square-foot rents with greater operational complexity and rollover risk. The Buyer's underwriting model accounts for this differentiation through separate assumptions for each property type regarding vacancy, capital expenditures, and re-leasing costs.

III. TOP TENANTS — SUMMARY OF KEY LEASE TERMS

3.1 Top 5 Tenants by ABR — Summary Table

The following table identifies the five largest tenants in the portfolio by annual base rent, together with key lease metrics:

The Top 5 tenants collectively account for $33,446,000 in annual base rent, representing 44.8% of total portfolio ABR. This level of tenant concentration is within the range considered typical for a portfolio of this size and composition. Notably, the three largest tenants are all logistics tenants occupying single-tenant buildings under long-term NNN leases, which provides stability and predictability to a significant portion of the portfolio's cash flow.

Cascade Supply Chain Solutions Inc., the portfolio's largest tenant by both RSF and ABR, is a publicly traded third-party logistics ("3PL") provider headquartered in Dallas, Texas, with an investment-grade credit rating (BBB/Baa2). The lease at Westlake Distribution Hub has the longest remaining term among the Top 5 tenants at approximately 8.1 years, providing significant duration to the portfolio's cash flow profile.

Thornton-Whitaker Pharmaceuticals Corp. is a publicly traded pharmaceutical manufacturer and distributor with an investment-grade credit rating (BBB+/Baa1). The Fairfield Logistics Center I facility serves as a regional pharmaceutical distribution hub, and the lease reflects the specialized nature of the premises, including provisions relating to temperature-controlled storage, regulatory compliance, and hazardous materials handling.

A detailed lease-by-lease analysis of the Top 10 tenants by ABR is provided in the separate companion memorandum, Lease Audit Memorandum — Top 10 Tenants (Detailed), which should be reviewed in conjunction with this portfolio summary.

3.2 Tenant Concentration Analysis

Beyond the Top 5 tenants, the portfolio benefits from meaningful diversification across multiple dimensions:

Industry Diversification. The portfolio's tenant roster spans a range of industries, including logistics and distribution (Cascade Supply Chain Solutions Inc., Atlas Freight Logistics Corp., Zynvaro Distribution Holdings LLC), pharmaceutical manufacturing and distribution (Thornton-Whitaker Pharmaceuticals Corp.), technology (Birchwood Technology Group Inc.), e-commerce fulfillment, consumer products distribution, professional services, and financial services. This industry diversification mitigates the risk that a downturn in any single sector would have a disproportionate impact on portfolio-level occupancy or rental income.

Geographic Diversification. The portfolio is distributed across five Sun Belt states (Georgia, Texas, Florida, Tennessee, and North Carolina), which reduces exposure to any single state's economic conditions, tax policy changes, or real estate market dynamics. Texas contributes the largest share of portfolio ABR at approximately 30.6%, followed by Georgia at approximately 25.3%, Florida at approximately 17.2%, Tennessee at approximately 16.9%, and North Carolina at approximately 7.6%. No single metropolitan statistical area accounts for more than approximately 22% of portfolio ABR.

Tenant Size Distribution. No single tenant represents more than 11.7% of portfolio ABR, and the Top 10 tenants in aggregate represent approximately 72.3% of portfolio ABR. The remaining approximately 27.7% of ABR is distributed among 77 smaller tenants, primarily at the multi-tenant logistics and office properties.

Credit Quality. Among the Top 10 tenants, five maintain investment-grade or near-investment-grade credit ratings from at least one nationally recognized statistical rating organization. The remaining Top 10 tenants are privately held companies for which public credit ratings are not available; however, the Buyer's credit analysis team has reviewed available financial information provided in the data room for these tenants and has not identified material credit concerns. A detailed tenant credit analysis is beyond the scope of this lease audit memorandum.

IV. LEASE TERM AND EXPIRATION PROFILE

4.1 Lease Expiration Schedule

The lease expiration profile is a critical element of the portfolio's risk assessment, as it determines the timing and magnitude of rollover exposure and associated re-leasing costs. The following table presents the portfolio's lease expiration schedule by calendar year, showing the RSF and ABR expiring in each year:

Key Observations:

The portfolio's weighted-average remaining lease term ("WALT") of 5.8 years provides meaningful lease duration. However, the expiration profile is not evenly distributed:

(a) Near-Term Rollover (2024–2025): Fourteen (14) leases representing 428,000 RSF and $6,994,000 in ABR (9.3% of total ABR) expire within the first approximately 18 months following the scheduled closing date. The leases expiring in 2024 represent 142,000 RSF and $2,343,000 in ABR (3.1% of portfolio ABR). All five 2024 expirations are in the office portfolio, consistent with the office portfolio's shorter average lease terms. The Buyer's underwriting model incorporates specific assumptions regarding these near-term rollovers, including projected downtime, re-leasing costs, and market rental rates.

(b) 2031 Concentration: The year 2031 represents the single largest rollover year, with ten (10) leases representing 1,106,000 RSF and $15,624,000 in ABR (20.9% of total ABR) expiring. This concentration is driven in significant part by the expirations of the Zynvaro Distribution Holdings LLC lease at Katy Freeway Logistics Park (538,000 RSF, $7,532,000 ABR) and the Thornton-Whitaker Pharmaceuticals Corp. lease at Fairfield Logistics Center I (412,000 RSF, $6,180,000 ABR). The 2031 concentration presents a significant re-leasing event that should be factored into the Buyer's long-term hold analysis and capital planning.

(c) Logistics vs. Office: Logistics leases generally have longer remaining terms than office leases. The logistics portfolio's WALT is approximately 6.4 years, compared to approximately 4.2 years for the office portfolio. This differential reflects both the longer initial lease terms typical of logistics properties and the recent trend toward shorter-term renewals in the office sector.

A tabular and graphical representation of the lease expiration schedule is provided in Appendix B to this memorandum.

4.2 Early Termination Rights

Our review identified early termination rights in the following categories of leases:

Termination Options. Eleven (11) leases across the portfolio contain tenant termination options that permit the tenant to terminate the lease prior to its stated expiration date, subject to satisfaction of specified conditions. These conditions typically include: (i) delivery of written notice to the landlord within a specified notice window (ranging from 6 to 18 months prior to the proposed termination date); and (ii) payment of a termination fee, typically calculated as a multiple of monthly base rent (ranging from 3 to 12 months' rent) or as an unamortized balance of landlord improvement costs.

Of the eleven (11) leases containing termination options, three (3) have termination options exercisable within twelve (12) months of the scheduled closing date (May 31, 2024, as subsequently extended to June 6, 2024). These are summarized as follows:

The aggregate ABR at risk from these near-term termination options is $518,400 (0.7% of total portfolio ABR), which is not considered material. All three leases are in the office portfolio, and the associated termination fees, while modest, provide some compensation for early termination. The Buyer's asset management team should monitor these termination option deadlines and assess re-leasing prospects for the affected spaces.

Kick-Out Clauses. Two (2) leases contain co-tenancy-linked kick-out provisions, discussed in greater detail in Section VIII below, which provide the tenant with a right to terminate the lease if specified occupancy thresholds are not met.

Contraction Rights. Five (5) leases contain contraction rights that permit the tenant to reduce the size of the leased premises at specified points during the lease term, subject to notice requirements and, in most cases, payment of a contraction fee. These are discussed in Section VII.5 below.

V. RENT STRUCTURE AND ESCALATION ANALYSIS

5.1 Lease Type Breakdown

The portfolio's leases are structured across three primary lease types, with the distribution closely correlating to property type:

Triple Net (NNN) Leases. Fifty-four (54) leases across the ten logistics properties and two smaller office tenants are structured on a NNN basis. Under these leases, the tenant is responsible for the direct payment of, or reimbursement to the landlord for, real property taxes, property insurance premiums, and all common area maintenance expenses. In certain leases, the tenant is also responsible for contributing to a structural reserve fund for roof and structural repairs. NNN leases represent approximately 76.2% of portfolio ABR. This structure is favorable to the landlord because it passes through substantially all operating cost variability to the tenant, resulting in a more predictable net cash flow stream.

Modified Gross Leases. Twenty-two (22) leases, primarily in the office portfolio's larger tenant spaces, are structured on a modified gross basis. Under these leases, the landlord provides building services (including HVAC, janitorial, elevator maintenance, and common area maintenance) and covers operating expenses and real property taxes for a specified "base year" or "expense stop" amount. The tenant is responsible for its pro rata share of operating expenses and real property taxes in excess of the base year or stop amount. Modified gross leases represent approximately 18.4% of portfolio ABR. The base year or expense stop mechanism provides the landlord with a partial hedge against operating cost increases, though the landlord bears the risk of operating cost increases below the stop or within the base year amount.

Full-Service Gross Leases. Eleven (11) leases, all located in the office portfolio and generally attributable to smaller tenants (typically occupying less than 5,000 RSF), are structured on a full-service gross basis. Under these leases, the landlord provides all building services and absorbs all operating expenses and real property taxes within the stated base rent. Full-service gross leases represent approximately 5.4% of portfolio ABR. While this structure simplifies the tenant's cost structure, it exposes the landlord to the full risk of operating expense increases.

Ground Leases. We confirm that no ground leases are present in the portfolio. Each Target Entity holds fee simple title to its respective property, unencumbered by any ground lease or other leasehold interest.

5.2 Rent Escalation Provisions

The contractual rent escalation provisions embedded in the portfolio's leases are a critical driver of the Buyer's projected rental revenue growth. Our review identified the following escalation mechanisms:

Fixed Annual Escalations. The most common escalation mechanism in the portfolio is a fixed annual increase, appearing in sixty-seven (67) of the 87 leases (77.0%). Fixed escalations range from 1.5% to 3.5% per annum, with the majority falling in the 2.0% to 3.0% range. The weighted-average fixed annual escalation rate across the portfolio is approximately 2.6% per annum. Fixed escalations provide predictable rental revenue growth but do not adjust for actual changes in market conditions or inflation.

Among the Top 5 tenants by ABR, escalation provisions are as follows:

• Cascade Supply Chain Solutions Inc.: 2.5% fixed annual increase

• Zynvaro Distribution Holdings LLC: 2.75% fixed annual increase

• Thornton-Whitaker Pharmaceuticals Corp.: 2.0% fixed annual increase

• Birchwood Technology Group Inc.: 3.0% fixed annual increase

• Atlas Freight Logistics Corp.: 2.5% fixed annual increase

CPI-Based Escalations. Twelve (12) leases (13.8%) contain rent escalation provisions linked to the Consumer Price Index ("CPI"), typically the CPI-U (All Urban Consumers, U.S. City Average, All Items) published by the Bureau of Labor Statistics. CPI-linked escalations generally include a floor (most commonly 1.5% to 2.0% per annum) and a cap (most commonly 3.5% to 4.0% per annum), ensuring a minimum level of rental growth while protecting the tenant from extraordinary inflationary spikes. CPI-linked escalations are most common in the logistics portfolio's multi-tenant properties. Given the elevated CPI environment in recent years, CPI-linked escalations have tended to produce rental increases at or near the contractual cap.

Fair Market Value Resets. Three (3) leases (3.4%) contain provisions for periodic fair market value ("FMV") rent resets, under which the base rent is adjusted to FMV at specified intervals (typically every five years). FMV determination procedures vary by lease but generally provide for negotiation between landlord and tenant, followed by a three-appraiser arbitration process if the parties are unable to agree. FMV resets introduce uncertainty into the rental revenue projection but align rents with prevailing market conditions over time.

No Escalation / Flat Rent. Five (5) leases (5.7%) provide for flat rent with no contractual escalation during the lease term. All five are short-term leases (two years or less of remaining term) in the office portfolio, and the aggregate ABR represented by these flat-rent leases is $428,000 (0.6% of total portfolio ABR), which is not considered material.

The overall weighted-average contractual rent growth rate across the portfolio, based on the escalation mechanisms described above and current CPI assumptions, is approximately 2.5% per annum.

5.3 Percentage Rent

Percentage rent provisions, which require the tenant to pay additional rent based on a percentage of gross sales exceeding a specified breakpoint, are not common in logistics or traditional office properties. Our review confirmed that no leases in the logistics portfolio contain percentage rent provisions.

Two (2) leases in the office portfolio contain percentage rent provisions. Both are associated with small retail/food service tenants operating on the ground floor of Buckhead Place Office Tower: (i) a café operator (Ridgeline Coffee Co., 1,400 RSF, $56,000 ABR) with a 6.0% percentage rent provision on gross sales exceeding $500,000 per annum; and (ii) a convenience retail operator (Magnolia Sundry & News LLC, 900 RSF, $31,500 ABR) with a 5.0% percentage rent provision on gross sales exceeding $300,000 per annum. Historical percentage rent collections from these tenants have been negligible (aggregate $4,200 in fiscal year 2023). The impact of these provisions on proration mechanics under PSA Exhibit U is de minimis, and we do not anticipate any material issues in connection with the closing adjustment calculations.

5.4 Free Rent and Concession Analysis

Our review identified outstanding free rent periods and tenant concession obligations as follows:

Free Rent Periods. As of the scheduled closing date, four (4) tenants are in active free rent or rent abatement periods. The aggregate value of remaining free rent as of the closing date is approximately $312,000, summarized as follows:

Under PSA Exhibit U (Proration Schedule), free rent credits are prorated as of the closing date, and the Seller bears responsibility for the economic cost of free rent periods attributable to the pre-closing period. The Buyer assumes the obligation for any free rent periods extending beyond the closing date. The Buyer's closing statement will reflect a credit to the Buyer for free rent obligations attributable to the post-closing period.

Unfunded Tenant Improvement Allowances. See Section VI.1 for a discussion of outstanding landlord TI allowance commitments, which represent an additional form of tenant concession.

Rent Abatement Credits. Two (2) leases contain provisions granting the tenant a future rent abatement credit (as opposed to a fixed free rent period) in connection with specified landlord construction obligations. The aggregate value of these contingent credits is estimated at $84,000 and is contingent upon the landlord's failure to complete certain punch-list items within specified timeframes. As of the date of this memorandum, the relevant punch-list items are reported by Argyle Property Services LLC to be substantially complete.

VI. LANDLORD OBLIGATIONS

6.1 Tenant Improvement Obligations

A critical element of the lease audit is the identification of outstanding landlord tenant improvement ("TI") allowance commitments that will be assumed by the Buyer through the acquisition of the Target Entities. Unfunded TI allowances represent future cash obligations of the Target Entities that are not reflected in current operating cash flows and must be factored into the Buyer's acquisition economics.

Our review identified unfunded or partially unfunded TI allowance commitments in nine (9) leases across the portfolio. The aggregate unfunded TI liability as of the anticipated closing date is approximately $2,870,000, summarized as follows:

All unfunded TI commitments are in the office portfolio, consistent with market practice under which office landlords typically provide significant TI allowances to attract and retain tenants. The logistics portfolio's NNN lease structure does not generally involve landlord-funded TI allowances.

The Buyer's underwriting model should incorporate the $2,870,500 in unfunded TI obligations as a future capital requirement. We note that certain of these obligations are subject to the tenants' submission of TI construction draw requests and compliance with lease-specified construction requirements. The landlord's obligation to fund TI allowances is generally conditioned upon the tenant's completion of improvements in accordance with landlord-approved plans and specifications, delivery of lien waivers, and satisfaction of other customary conditions.

We recommend coordinating the TI obligation analysis with the PCA findings from Rampart Building Sciences, Inc. to ensure that there is no overlap between landlord TI obligations and building capital expenditure requirements.

6.2 Maintenance and Repair Obligations

The allocation of maintenance and repair responsibilities between landlord and tenant varies significantly by property type and lease structure:

Logistics Properties. Under the NNN lease structure employed at the logistics properties, the landlord's maintenance obligations are generally limited to structural elements (foundations, structural walls, load-bearing columns, and structural floors) and, in most leases, the roof membrane and roof structure. Tenants are responsible for all interior maintenance and repairs, including HVAC systems, plumbing, electrical systems (except base building electrical infrastructure), dock equipment, interior walls, flooring, and all tenant-installed fixtures and equipment. This allocation is consistent with market practice for logistics/industrial properties and results in a minimal landlord maintenance cost burden. Several leases at the multi-tenant logistics properties (Fairfield Logistics Center II, Alliance Commerce Center, Lakeland Crossings Industrial, Murfreesboro Distribution Center, Peachtree Corners Logistics Center, and Mount Juliet Commerce Park) require the landlord to maintain common areas, including parking lots, driveways, landscaping, and exterior lighting, with costs passed through to tenants as CAM expenses.

Office Properties. Under the modified gross and full-service gross lease structures at the office properties, the landlord's maintenance obligations are substantially more extensive. The landlord is typically responsible for maintaining and repairing HVAC systems (including rooftop units, air handling units, and ductwork), elevators and escalators, building electrical and plumbing systems, common area finishes, lobby and corridor improvements, restrooms, and building exterior (including façade, windows, and parking structures). These obligations require ongoing capital expenditure planning and reserves.

PCA Cross-Reference. The Property Condition Assessment reports prepared by Rampart Building Sciences, Inc. identified immediate repair items at four properties. These items, which relate to building systems and structural components that fall within the landlord's maintenance obligations, are summarized as follows:

The aggregate PCA-identified immediate repair cost of $2,140,000 was a negotiated item under the PSA. The parties agreed to a PCA credit of $1,070,000 (50% of estimated cost) to the Buyer, reflected as a reduction in the purchase price at closing. This credit allocation reflects the Seller's position that certain repair items are routine maintenance that would be addressed in the ordinary course, while the Buyer maintained that the items represent deferred maintenance requiring immediate capital investment. The $1,070,000 PCA credit is reflected in the closing statement as a reduction to the cash equity portion of the purchase price.

6.3 Common Area Maintenance (CAM) and Operating Expense Recovery

The portfolio's NNN and modified gross lease structures provide for varying degrees of operating expense recovery from tenants. The efficiency of the landlord's expense recovery mechanism directly impacts net operating income and cash flow.

NNN Lease Recovery. Under the NNN lease structure at the logistics properties, tenants reimburse their pro rata share (based on RSF occupied relative to total building RSF) of all operating expenses, real property taxes, and insurance premiums. The landlord typically incurs these costs directly and bills tenants on a monthly estimated basis, with an annual reconciliation to actual costs. The NNN recovery mechanism provides the landlord with near-complete pass-through of operating costs, subject to the limitations discussed below.

Estimated 2024 Real Property Taxes. Based on the most recent tax assessments and applicable millage rates, estimated 2024 real property taxes across the portfolio are approximately $14,760,000 annually. This estimate was prepared using the tax assessments and tax bills provided in the data room and verified against county assessor records obtained through the title and survey review process. Real property tax liabilities will be prorated between Seller and Buyer as of the closing date in accordance with PSA Exhibit U, using the most recent available tax bills (2023) as the basis for proration, with a post-closing true-up mechanism.

CAM/OpEx Reconciliation Reserve. Under the PSA, a CAM/OpEx reconciliation reserve of $1,850,000 will be held back at closing pending completion of the annual tenant reconciliation process for the 2024 calendar year. This holdback reflects the estimated difference between monthly estimated tenant reimbursement billings and actual operating expenses for the portion of 2024 prior to closing. The reconciliation reserve will be allocated between the Seller and Buyer based on the actual reconciliation results, in accordance with the adjustment procedures set forth in PSA Exhibit U, Section 5.

CAM Caps and Exclusions. Our review identified CAM caps in twenty-three (23) leases across the portfolio. These caps fall into two categories:

(a) Fixed Dollar CAM Caps: Seven (7) leases contain fixed dollar caps on the tenant's annual CAM reimbursement obligation (expressed as a maximum dollars-per-RSF amount). These caps range from $2.50 to $4.25 per RSF per annum. Because these caps are fixed (not adjustable for inflation), they may result in an increasing gap between actual operating expenses and recoverable amounts over time, particularly in an inflationary environment.

(b) CAM Escalation Caps: Sixteen (16) leases contain provisions that cap the annual increase in the tenant's CAM reimbursement obligation at a specified percentage (most commonly 3.0% to 5.0% per annum, calculated on a cumulative and compounding basis). These escalation caps are more favorable to the landlord than fixed dollar caps because they permit growth in the recovery amount, but they may still result in under-recovery if actual expense growth exceeds the cap percentage.

In addition, certain leases contain exclusions from the definition of "operating expenses" that limit the types of costs recoverable from tenants. Common exclusions include capital expenditures (except to the extent amortized over useful life), costs of correcting construction defects, management fees above a specified percentage (typically 3.0% to 5.0% of gross revenues), leasing commissions, costs of compliance with laws applicable to the base building (as opposed to tenant-specific compliance costs), and executive salaries above the level of property manager.

We recommend that the Buyer's asset management team model the impact of CAM caps and exclusions on projected net operating income, particularly for the office properties where operating expenses are expected to increase at rates that may exceed the contractual cap percentages.

Administrative Fee Limitations. Eighteen (18) NNN leases authorize the landlord to charge an administrative or management fee on CAM expenses, typically expressed as a percentage of total operating expenses (ranging from 3.0% to 15.0%). These fees supplement the property management fee and are intended to compensate the landlord for the overhead associated with operating expense administration. The weighted-average administrative fee across the NNN lease portfolio is approximately 5.8% of total operating expenses.

6.4 Insurance Obligations

Landlord-Maintained Insurance. Under the lease structures in the portfolio, the landlord (each Target Entity) is responsible for maintaining the following insurance coverages: (i) property/casualty insurance covering the building(s) and improvements at replacement cost; (ii) commercial general liability insurance for the common areas and building premises; (iii) umbrella/excess liability insurance; and (iv) such other coverages as may be required by the mortgage lenders (including flood insurance where properties are located in designated flood zones, earthquake insurance where applicable, and business interruption/rental loss insurance).

The existing landlord insurance program for the portfolio is maintained through Ironclad Indemnity Insurance Company and brokered by Hartwick Gunderson & Associates, Inc. In connection with the acquisition, Fairwater's risk management team is coordinating the placement of replacement insurance coverage through Ironclad Indemnity Insurance Company (or an alternative carrier to be selected by Fairwater), to be effective as of the closing date. The replacement program will need to satisfy the insurance requirements set forth in each of the three mortgage loan agreements, and evidence of insurance will need to be delivered to each lender prior to or concurrently with closing.

Tenant-Maintained Insurance. The leases generally require tenants to maintain the following insurance coverages at their own expense: (i) commercial general liability insurance (minimum limits ranging from $1,000,000 to $5,000,000 per occurrence, depending on tenant size and use); (ii) property insurance covering the tenant's personal property, fixtures, and improvements at replacement cost; (iii) workers' compensation insurance as required by applicable law; (iv) business automobile liability insurance; and (v) umbrella/excess liability insurance (for larger tenants). Most leases require the tenant to name the landlord (and in many cases, the landlord's lender and property manager) as an additional insured on the tenant's CGL policy and to provide a waiver of subrogation in favor of the landlord on the tenant's property insurance policy.

Our review identified six (6) leases with below-market tenant insurance requirements (i.e., minimum CGL limits below $1,000,000 per occurrence or the absence of umbrella/excess requirements for tenants occupying more than 10,000 RSF). These below-market provisions generally appear in older leases that have not been amended to reflect current insurance market norms. We recommend that the Buyer consider addressing these gaps at the time of lease renewal or amendment.

VII. TENANT OPTIONS

7.1 Renewal Options

Renewal options are the most prevalent form of tenant option in the portfolio. Our review identified renewal options in sixty-two (62) of the 87 leases (71.3%). The following summary table presents the aggregate renewal option profile:

Key characteristics of the renewal option provisions are as follows:

Number and Length of Renewal Terms. The weighted-average number of renewal terms per lease (among leases with renewal options) is 1.8, with individual leases providing between one (1) and four (4) renewal terms. Renewal term lengths range from two (2) to ten (10) years, with five (5)-year renewal terms being the most common (appearing in 41 of the 62 leases with renewal options). The aggregate renewal option RSF represents approximately 77.8% of occupied RSF and 81.1% of in-place ABR, indicating that the majority of the portfolio's rental income is associated with tenants holding renewal rights.

Notice Requirements. Renewal option exercise generally requires the tenant to deliver written notice to the landlord between six (6) and eighteen (18) months prior to the expiration of the then-current lease term. The most common notice period is twelve (12) months (appearing in 34 of the 62 leases with renewal options). Several logistics leases with larger tenants require fifteen (15) or eighteen (18) months' notice.

Below-Market Fixed Rate Renewal Options. Of particular concern are the twenty-four (24) leases with fixed rate or fixed percentage increase renewal options. Under these provisions, the renewal rental rate is determined by applying a specified fixed rate or a specified percentage increase to the then-current base rent, without regard to prevailing market conditions. In a rising rental rate environment, these provisions may result in below-market rents during the renewal term, reducing the Buyer's potential rental income relative to market rates.

We have identified seven (7) leases where the fixed renewal rate is projected to fall meaningfully below estimated market rates at the time of the earliest renewal option exercise date, based on the Buyer's market rent projections and current market data from CBRE Research and Cushman & Wakefield. The aggregate potential ABR impact — defined as the difference between the projected market rent and the fixed renewal rent for the first renewal term — is estimated at approximately $3,200,000 per annum, assuming all seven tenants exercise their renewal options at the fixed rates. The most significant individual exposure is the Cascade Supply Chain Solutions Inc. renewal option at Westlake Distribution Hub, which provides for two (2) five-year renewal terms at a fixed 2.0% annual increase over the then-current rent. Based on projected Houston industrial market rent growth, the renewal rent in the first renewal term (commencing March 2032) could be approximately $1.40 per RSF per annum below projected market rent, resulting in an annual ABR shortfall of approximately $873,600 for that single lease.

We recommend that the Buyer's asset management team develop a proactive renewal strategy for leases with below-market fixed renewal options, including early engagement with tenants to negotiate lease amendments that align renewal economics more closely with market conditions, potentially in exchange for lease term extensions or other mutually beneficial modifications.

7.2 Expansion Options

Expansion options and rights of first offer/refusal on adjacent or contiguous space were identified in fourteen (14) leases across the portfolio. Expansion options are most prevalent in the multi-tenant logistics properties and the office portfolio, where adjacent or contiguous space may become available during the lease term.

The expansion option provisions generally include the following terms:

(a) Identified Expansion Space: The lease specifies the suite(s) or area(s) constituting the expansion space, typically described by suite number or floor designation.

(b) Rental Rate: Expansion space is typically leased at the then-prevailing market rate (FMV), the tenant's then-current effective rental rate, or a specified fixed rate, depending on the lease.

(c) Notice and Exercise: The landlord is generally required to notify the tenant when expansion space becomes available (or will become available within a specified period, typically 6 to 12 months). The tenant then has a specified period (typically 15 to 30 days) to exercise the expansion right.

(d) Exercise Conditions: Exercise of expansion options is typically conditioned upon the tenant not being in default under its lease at the time of exercise and the tenant's continued occupancy of its existing premises.

The presence of expansion options in the portfolio has implications for the Buyer's ability to re-lease vacant space or manage its occupancy strategy at the multi-tenant properties. Specifically, if a tenant holds an expansion right over currently vacant space, the landlord may be restricted in its ability to lease that space to a third party without first offering it to the expansion option holder. We have identified three (3) expansion options that apply to currently vacant space in the portfolio: one at Fairfield Logistics Center II (12,000 RSF), one at Alliance Commerce Center (17,000 RSF), and one at Cool Springs Office Park (8,500 RSF). The Buyer's leasing team should be aware of these constraints when marketing vacant space at these properties.

7.3 Purchase Options

Our review identified one (1) lease containing a tenant purchase option on the fee interest in the underlying property. The purchase option is held by Atlas Freight Logistics Corp. in connection with its 410,000 RSF lease at Southport Logistics Park in Jacksonville, Florida. The key terms of the purchase option are as follows:

(a) Exercise Window: The purchase option is exercisable during the period commencing on the first day of the 60th month of the lease term and ending on the last day of the 72nd month of the lease term (i.e., approximately April 2028 through April 2029, based on the lease commencement date of April 1, 2024).

(b) Purchase Price: The purchase price is the greater of (i) the FMV of the property as determined by a three-appraiser process, and (ii) a fixed floor price of $52,000,000.

(c) Trigger Events: The purchase option is exercisable upon written notice from the tenant, subject to the tenant not being in default under the lease. Critically, the purchase option is triggered by a "sale or transfer of the Property," defined in the lease as "any conveyance, sale, transfer, or other disposition of all or any portion of the fee simple interest in the Property or any direct or indirect interest therein."

Entity-Level Transfer Analysis. The critical question for the current transaction is whether the transfer of 100% of the membership interests in the Target Entity that owns Southport Logistics Park (Greystone Meridian Southport LLC) constitutes a "sale or transfer of the Property" that triggers the purchase option.

We have analyzed this question in detail. The purchase option provision defines "Property" as the real property described in Exhibit A to the lease (the land and improvements constituting Southport Logistics Park). The transfer of membership interests in Greystone Meridian Southport LLC does not constitute a conveyance, sale, or transfer of the fee simple interest in the Property itself. The fee simple title to the Property will continue to be held by Greystone Meridian Southport LLC (which will be renamed following closing) as the same legal entity. What changes is the ownership of the equity interests in that entity, not the ownership of the real property by that entity.

The purchase option language refers to a transfer of "any direct or indirect interest" in the Property, which could potentially be construed to encompass an indirect transfer through the transfer of membership interests in the property-owning entity. However, under controlling Florida law (the jurisdiction governing the lease), courts have generally distinguished between a transfer of entity ownership interests and a transfer of the underlying real property for purposes of lease provisions, absent express language capturing entity-level transfers. See, e.g., Palm Beach Polo Holdings, Inc. v. Broward Marine, Inc., 928 So. 2d 1278 (Fla. 4th DCA 2006); Seawatch at Marathon Condo. Ass'n, Inc. v. CharleyTuna, Inc., 986 So. 2d 36 (Fla. 3d DCA 2008).

Conclusion. Based on our analysis of the purchase option language in the context of the entity-level transfer structure, and consistent with applicable Florida precedent, we conclude that the transfer of membership interests in Greystone Meridian Southport LLC does not constitute a "sale or transfer of the Property" triggering the tenant's purchase option. However, we note that this conclusion is based on a reasonable interpretation of the lease language and applicable law, and there is some residual risk that the tenant could assert a contrary position. We recommend that Buyer's counsel coordinate with local Florida counsel (Palmetto Strauss PA) to confirm this analysis and assess the litigation risk profile.

7.4 Right of First Offer / Right of First Refusal (ROFO/ROFR)

Our review identified three (3) leases containing ROFO or ROFR provisions relating to the sale of the property:

ROFR Provisions. The ROFR provisions held by Atlas Freight Logistics Corp. and Zynvaro Distribution Holdings LLC grant the tenant the right to match any bona fide third-party offer to purchase the property, subject to specified notice and matching procedures. Under each provision, the landlord is required to deliver written notice to the tenant of the material terms of any such third-party offer, and the tenant has a specified period (30 days in the Atlas lease; 45 days in the Mercer lease) to exercise the ROFR by agreeing to purchase the property on substantially the same terms.

ROFO Provision. The ROFO provision held by Thornton-Whitaker Pharmaceuticals Corp. requires the landlord, prior to offering the property for sale to any third party, to first offer the property to the tenant on terms specified by the landlord. The tenant has 30 days to accept or reject the offer. If the tenant rejects (or fails to respond), the landlord may proceed to market the property to third parties, provided that the landlord may not sell the property to a third party on terms materially more favorable than those offered to the tenant without first re-offering the property to the tenant.

Entity-Level Transfer Analysis. As with the purchase option analysis in Section VII.3, the critical question is whether the transfer of membership interests in the Target Entities triggers the ROFO/ROFR provisions. The relevant definitions and trigger language in each of the three leases are as follows:

(a) Atlas Freight Logistics Corp. (ROFR): Triggered by "any proposed sale, transfer, conveyance, or other disposition of the Property or any interest therein." The term "Property" is defined as the real property constituting Southport Logistics Park. The provision does not contain an express reference to entity-level transfers or transfers of ownership interests in the landlord entity.

(b) Thornton-Whitaker Pharmaceuticals Corp. (ROFO): Triggered by "any proposed sale of the Property." The term "sale" is not defined to include entity-level transfers or changes of ownership in the landlord entity.

(c) Zynvaro Distribution Holdings LLC (ROFR): Triggered by "any sale, assignment, transfer, or conveyance of all or any material portion of the Property." The term "Property" is defined as the real property constituting Katy Freeway Logistics Park. The provision contains a parenthetical noting that "transfers of direct or indirect ownership interests in Landlord shall not constitute a sale of the Property for purposes of this Section."

Conclusion. Based on our analysis:

(i) The Zynvaro Distribution Holdings LLC ROFR expressly excludes entity-level transfers from the definition of a "sale" and therefore is clearly not triggered by the transaction.

(ii) The Atlas Freight Logistics Corp. ROFR and the Thornton-Whitaker Pharmaceuticals Corp. ROFO do not contain express exclusions for entity-level transfers; however, neither provision contains express language capturing entity-level transfers. Applying the same analytical framework discussed in Section VII.3, we conclude that the transfer of membership interests in the respective Target Entities does not constitute a "sale, transfer, conveyance, or other disposition of the Property" within the meaning of either provision. This conclusion is supported by applicable case law in Florida (governing the Atlas lease) and Georgia (governing the Thornton-Whitaker lease), which generally requires express language to capture indirect transfers through entity-level transactions.

(iii) Accordingly, we conclude that no ROFO/ROFR notice obligations are triggered by the transaction with respect to any of the three identified leases.

We recommend that the Buyer's team coordinate with local counsel in Florida (Palmetto Strauss PA) and Georgia (Talmadge Beaumont LLP) to confirm these conclusions and assess the risk of tenant challenge.

7.5 Contraction Rights

Five (5) leases contain contraction rights that permit the tenant to reduce the size of the leased premises at specified points during the lease term. These provisions are concentrated in the office portfolio, where tenants have sought flexibility to adjust their space requirements in response to changing workforce and workplace strategies. The contraction rights are summarized as follows:

The aggregate contraction RSF across all five leases is 59,200 RSF, representing approximately 1.1% of total portfolio RSF. The most significant contraction right is held b

MEMORANDUM
PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT
TO: Douglas Fairchild, Responsible Partner, Calderwood & Harkness LLP
FROM: Grace Nakamura, Lead Associate, Calderwood & Harkness LLP Rafael Dominguez, Working Associate, Calderwood & Harkness LLP
DATE: April 10, 2024
RE: Lease Audit Memorandum — Portfolio Summary; Fairwater Real Estate Investment Trust Acquisition of 14-Property Sun Belt Logistics and Office Portfolio from Greystone Meridian Partners Fund III, L.P.
MATTER NO.: 1036-00004
CLIENT: Fairwater Real Estate Investment Trust
This memorandum is prepared for the exclusive use of Calderwood & Harkness LLP attorneys and Fairwater Real Estate Investment Trust personnel involved in the captioned transaction. This memorandum constitutes attorney work product and is protected by the attorney-client privilege. Distribution outside of the authorized recipient list is strictly prohibited without prior written approval of the Responsible Partner.
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I. EXECUTIVE SUMMARY
1.1 Purpose and Scope
This memorandum summarizes Calderwood & Harkness LLP's ("C&H") comprehensive audit of all eighty-seven (87) leases across the fourteen (14)-property portfolio being acquired by Fairwater Real Estate Investment Trust ("Fairwater" or "FREIT") from Greystone Meridian Partners Fund III, L.P. ("GMP Fund III" or "Seller") pursuant to the Purchase and Sale Agreement dated February 28, 2024 (the "PSA"). The transaction involves the acquisition by Fairwater of a geographically diversified Sun Belt logistics and office portfolio encompassing approximately 5,224,000 rentable square feet ("RSF") across the states of Georgia, Texas, Florida, Tennessee, and North Carolina.
The transaction is structured as an entity-level purchase of one hundred percent (100%) of the membership interests in fourteen (14) single-purpose Delaware limited liability companies (each, a "Target Entity" and collectively, the "Target Entities"). Each Target Entity holds fee simple title to one property in the portfolio. Because the acquisition is structured at the entity level, the leases remain in place within the Target Entities and are not being assigned; rather, the transaction effects a change of indirect ownership of each Target Entity from GMP Fund III to Fairwater. This structural distinction has significant implications for the analysis of tenant consent requirements, ROFO/ROFR provisions, purchase options, and assignment restrictions, each of which is addressed in detail in this memorandum.
The aggregate purchase price for the portfolio is One Billion One Hundred Million Dollars ($1,100,000,000). The transaction contemplates assumption of existing mortgage indebtedness in the aggregate principal amount of approximately Six Hundred Twelve Million Dollars ($612,000,000), with cash equity at closing of approximately Four Hundred Eighty-Eight Million Dollars ($488,000,000). Mortgage indebtedness is held by three institutional lenders: Pinnacle Federal Bank, N.A., Veltrano Capital Lending Corp., and Sycamore Life Insurance Company, each of which must consent to the transfer of the membership interests as a condition to closing under the applicable loan documents.
The lease review was conducted using documents provided in the Seller's virtual data room (hosted on Thackeray Solutions, Project Sunstone), supplemented by information and clarifications provided by Argyle Property Services LLC ("Argyle"), the Seller-affiliated property manager for the portfolio. Our primary contact at Argyle has been Sean Kilpatrick, Portfolio Manager, who has been responsive to data requests and follow-up inquiries. We note, however, that certain information provided by Argyle has been provided verbally or through informal correspondence and has not been independently verified by C&H.
The scope of this audit encompasses the following categories of analysis for each of the 87 leases in the portfolio:
(a) Lease terms, including commencement dates, expiration dates, and remaining lease terms;
(b) Rent structures and escalation provisions, including base rent, percentage rent (if any), free rent and concession periods, and contractual rent escalation mechanisms;
(c) Landlord obligations, including tenant improvement allowances, maintenance and repair obligations, and common area maintenance and operating expense recovery provisions;
(d) Tenant options, including renewal options, expansion options, purchase options, rights of first offer ("ROFO"), and rights of first refusal ("ROFR");
(e) Co-tenancy clauses and their potential impact on rent obligations;
(f) Assignment and subletting provisions, including consent requirements, recapture rights, and profit-sharing provisions;
(g) Exclusive use provisions applicable to multi-tenant properties;
(h) Default and cure provisions, including monetary and non-monetary default triggers, cure periods, and available remedies;
(i) Security deposit provisions and forms of security;
(j) Insurance and indemnification requirements;
(k) Environmental and hazardous materials provisions;
(l) Change of control and transfer restriction provisions, with particular emphasis on the entity-level transfer structure; and
(m) Estoppel and SNDA compliance status under the PSA.
This portfolio-level summary memorandum is intended to provide a comprehensive overview of the lease portfolio's risk profile and key terms. A separate companion memorandum, titled Lease Audit Memorandum — Top 10 Tenants (Detailed), provides granular lease-by-lease analysis for each of the portfolio's ten largest tenants by annual base rent. That companion memorandum should be read in conjunction with this summary.
1.2 Key Portfolio Lease Statistics
The following table summarizes the key lease statistics for the portfolio as a whole, based on information contained in the Seller's rent roll (PSA Exhibit H) and the lease documents reviewed in the data room, in each case as of December 31, 2023 unless otherwise indicated:
The in-place cap rate of 6.80% is derived by dividing the annual in-place base rent of $74,800,000 by the aggregate purchase price of $1,100,000,000. This cap rate does not reflect additional income from tenant reimbursements, parking revenue, or other ancillary income sources, nor does it account for capital expenditure requirements, vacancy loss assumptions, or management fees. The Buyer's underwriting model (prepared by Fairwater's acquisitions team under the direction of Leah Torrance, SVP, Asset Management, and Marcus Devereaux, VP, Acquisitions) incorporates these additional factors.
Tenant security deposits totaling $4,283,000 are currently held in Target Entity operating accounts at Magnolia Commerce Bank, N.A., located at 225 Peachtree Street NE, Suite 100, Atlanta, Georgia 30303. The primary banking relationship contact is Linda Prescott, Vice President, Commercial Banking. Because the transaction is structured as an entity-level transfer, the security deposits will transfer as assets of the Target Entities at closing without the need for separate assignment or transfer documentation. However, post-closing coordination will be required to update the authorized signatories and banking instructions on these accounts.
1.3 High-Level Findings and Recommendations
Based on our comprehensive review of the 87 leases in the portfolio, we offer the following high-level findings and recommendations:
Overall Portfolio Quality. The lease portfolio is institutional-quality, utilizing standard commercial lease forms that are consistent with market practice for properties of this type and class in the Sun Belt markets. The logistics leases are generally based on a triple-net ("NNN") lease form with landlord-favorable provisions, while the office leases employ modified gross or full-service gross structures with more complex landlord obligation provisions. We did not identify any material deviations from customary commercial lease terms that would present unusual risk to the Buyer.
Default Status. No material defaults by the landlord (any Target Entity) or by any tenant have been identified based on our review of the data room materials and the Seller's representations in Article V of the PSA. This conclusion is subject to confirmation through the estoppel certificate process, which is currently underway as discussed in Section XV below.
Key Risk Areas. We have identified the following risk areas that warrant particular attention by the Buyer:
(a) Below-Market Renewal Options. Certain tenant renewal options, particularly in the logistics portfolio, provide for renewal rents at fixed rates that may fall below projected market rental rates at the time of exercise. The potential annual base rent impact of these below-market renewal options is quantified in Section VII.1 and in the companion Top 10 Tenants memorandum.
(b) Co-Tenancy Clauses. Two (2) office leases contain co-tenancy provisions that impose occupancy threshold requirements or specified anchor tenant requirements as conditions to the tenant's full rent obligation. Given the office portfolio's current occupancy rate of 82.7%, these provisions require ongoing monitoring. Detailed analysis is provided in Section VIII.
(c) Tenant Purchase Option. One (1) lease contains a purchase option on the fee interest in the underlying property. We have analyzed whether the entity-level transfer structure triggers this purchase option and have concluded that it does not, based on the specific language of the option provision. This analysis is detailed in Section VII.3.
(d) ROFO/ROFR Provisions. Three (3) leases contain ROFO or ROFR provisions relating to the sale of the property. We have analyzed whether the entity-level transfer of membership interests triggers these rights and have concluded that, based on the specific language of each provision, the ROFO/ROFR rights are not triggered by the transaction. This analysis is provided in Section VII.4.
(e) Outstanding TI Obligations. Certain leases contain unfunded or partially unfunded tenant improvement allowance commitments that will remain obligations of the Target Entities following closing. These are quantified in Section VI.1.
(f) CAM Cap Exposure. Certain leases contain caps on tenant reimbursement obligations for common area maintenance expenses, which may limit the landlord's ability to fully recover operating expenses, particularly if operating expenses increase post-acquisition. This exposure is analyzed in Section VI.3.
Estoppel Certificate Status. As of the date of this memorandum, the estoppel delivery process is underway. An estoppel transmittal letter was sent to Seller's counsel, Blackridge Hayes LLP (Nathaniel Pryce, Partner; Thomas Keating, Senior Associate), on March 4, 2024, transmitting the form of estoppel certificate (PSA Exhibit E) and distribution instructions to tenants. The PSA requires delivery of tenant estoppel certificates from tenants representing at least eighty percent (80%) of in-place base rent ($59,840,000 of $74,800,000) and from every tenant occupying 25,000 or more RSF (each, a "Major Tenant"). As of the date of this memorandum, the distribution process is underway and tracking is maintained on the Estoppel Tracking Spreadsheet circulated to the deal team. We note, for completeness, that as of the actual closing date (June 6, 2024), estoppel certificates were received covering 91.4% of in-place ABR ($68,371,200 of $74,800,000), exceeding the 80% threshold. Seventy-nine (79) executed estoppel certificates were received. Six (6) estoppel certificates contained material discrepancies from the rent roll, all of which were identified by the deal team and resolved through Seller supplemental disclosure prior to closing.
SNDA Status. Thirty-eight (38) Major Tenant Subordination, Non-Disturbance and Attornment Agreements ("SNDAs") are required under the PSA. SNDA transmittal letters are being prepared and distributed to Major Tenants by C&H on behalf of Fairwater. The process is ongoing as of the date of this memorandum, and tracking is maintained on the SNDA Tracking Spreadsheet. Additional detail regarding SNDA status is provided in Section XVI.
Recommendations. We recommend that the Buyer's asset management team (Leah Torrance, SVP, Asset Management, and Marcus Devereaux, VP, Acquisitions) and in-house real estate counsel (Camille Oduya, Associate General Counsel — Real Estate) coordinate with C&H regarding the following matters: (i) renewal option pricing and its impact on long-term revenue projections; (ii) co-tenancy monitoring protocols for the office portfolio; (iii) post-closing tenant notification procedures; and (iv) operational transition matters in connection with the transition of property management from Argyle Property Services LLC to Fairwater Property Management LLC.
II. PORTFOLIO OVERVIEW — LEASE SUMMARY BY PROPERTY
2.1 Summary Table
The following table provides a summary of the 14 properties in the portfolio, organized by property type (logistics properties listed first, followed by office properties), with key lease and occupancy metrics for each property as of December 31, 2023:
Notes to Table:
(a) Fairfield Logistics Center I is a single-tenant building occupied entirely by Thornton-Whitaker Pharmaceuticals Corp. under a NNN lease with approximately 7.2 years of remaining term.
(b) Westlake Distribution Hub is a single-tenant building occupied entirely by Cascade Supply Chain Solutions Inc. under a NNN lease with approximately 8.1 years of remaining term, representing the longest remaining lease term among the single-tenant logistics properties.
(c) Katy Freeway Logistics Park is a single-tenant building occupied entirely by Zynvaro Distribution Holdings LLC under a NNN lease with approximately 6.9 years of remaining term.
(d) Southport Logistics Park is a single-tenant building occupied entirely by Atlas Freight Logistics Corp. under a NNN lease with approximately 6.3 years of remaining term.
(e) Mount Juliet Commerce Park exhibits the lowest occupancy among the logistics properties at 70.5%, driven by a 88,000 RSF vacancy resulting from the December 2023 expiration of a lease with Grandview Warehousing LLC. This vacancy is reflected in the Buyer's underwriting and represents a lease-up opportunity.
(f) The four office properties collectively exhibit a weighted-average occupancy of 82.7%, with Brickell Bay Office Building at 75.7% representing the lowest occupancy in the portfolio. The office portfolio's lower occupancy is consistent with broader Sun Belt office market conditions.
(g) SouthPark Corporate Center's primary tenant is Birchwood Technology Group Inc., which occupies the majority of the building and represents $5,668,000 in annual base rent.
2.2 Property Type Analysis
The portfolio is comprised of two distinct property types — logistics/industrial properties and office properties — each exhibiting different lease structural characteristics, risk profiles, and operational requirements.
Logistics Properties (10 properties). The ten logistics properties account for 4,373,000 RSF, representing 83.7% of the portfolio by rentable area. The logistics portfolio is 96.1% occupied as of December 31, 2023, reflecting strong demand for distribution and warehousing space in Sun Belt logistics corridors. The leases at the logistics properties are generally structured on a triple-net ("NNN") basis, under which the tenant is responsible for the payment of real property taxes, property insurance, and common area maintenance expenses (including structural reserves in certain leases) in addition to base rent. This NNN structure significantly reduces the landlord's operating expense burden and cash flow volatility. The logistics leases generally feature longer initial terms (typically 7–10 years at commencement), fewer and simpler tenant option provisions, and more straightforward landlord maintenance obligations (typically limited to structural elements and roof). Four of the ten logistics properties are single-tenant facilities occupied by investment-grade or near-investment-grade tenants under long-term leases, which represent the portfolio's most stable cash flow streams.
Office Properties (4 properties). The four office properties account for 851,000 RSF, representing 16.3% of the portfolio by rentable area. The office portfolio is 82.7% occupied as of December 31, 2023, reflecting the broader challenges facing the office sector in the post-pandemic environment, though the Sun Belt markets in which these properties are located have generally outperformed national office market averages. The leases at the office properties are generally structured on a modified gross basis (with base year expense stops for operating expenses and real property taxes) or, for certain smaller tenants, on a full-service gross basis. These structures impose greater landlord obligations with respect to building systems, common areas, and operating expenses. Office leases in the portfolio tend to feature shorter remaining terms, more complex tenant option suites (including renewal options, expansion options, and contraction rights), and more significant tenant improvement allowance commitments. The office leases also present the portfolio's only co-tenancy clause exposure, as discussed in Section VIII below.
The bifurcated nature of the portfolio creates a natural hedging effect: the logistics properties provide stable, long-duration cash flows with minimal landlord obligations, while the office properties offer potentially higher per-square-foot rents with greater operational complexity and rollover risk. The Buyer's underwriting model accounts for this differentiation through separate assumptions for each property type regarding vacancy, capital expenditures, and re-leasing costs.
III. TOP TENANTS — SUMMARY OF KEY LEASE TERMS
3.1 Top 5 Tenants by ABR — Summary Table
The following table identifies the five largest tenants in the portfolio by annual base rent, together with key lease metrics:
The Top 5 tenants collectively account for $33,446,000 in annual base rent, representing 44.8% of total portfolio ABR. This level of tenant concentration is within the range considered typical for a portfolio of this size and composition. Notably, the three largest tenants are all logistics tenants occupying single-tenant buildings under long-term NNN leases, which provides stability and predictability to a significant portion of the portfolio's cash flow.
Cascade Supply Chain Solutions Inc., the portfolio's largest tenant by both RSF and ABR, is a publicly traded third-party logistics ("3PL") provider headquartered in Dallas, Texas, with an investment-grade credit rating (BBB/Baa2). The lease at Westlake Distribution Hub has the longest remaining term among the Top 5 tenants at approximately 8.1 years, providing significant duration to the portfolio's cash flow profile.
Thornton-Whitaker Pharmaceuticals Corp. is a publicly traded pharmaceutical manufacturer and distributor with an investment-grade credit rating (BBB+/Baa1). The Fairfield Logistics Center I facility serves as a regional pharmaceutical distribution hub, and the lease reflects the specialized nature of the premises, including provisions relating to temperature-controlled storage, regulatory compliance, and hazardous materials handling.
A detailed lease-by-lease analysis of the Top 10 tenants by ABR is provided in the separate companion memorandum, Lease Audit Memorandum — Top 10 Tenants (Detailed), which should be reviewed in conjunction with this portfolio summary.
3.2 Tenant Concentration Analysis
Beyond the Top 5 tenants, the portfolio benefits from meaningful diversification across multiple dimensions:
Industry Diversification. The portfolio's tenant roster spans a range of industries, including logistics and distribution (Cascade Supply Chain Solutions Inc., Atlas Freight Logistics Corp., Zynvaro Distribution Holdings LLC), pharmaceutical manufacturing and distribution (Thornton-Whitaker Pharmaceuticals Corp.), technology (Birchwood Technology Group Inc.), e-commerce fulfillment, consumer products distribution, professional services, and financial services. This industry diversification mitigates the risk that a downturn in any single sector would have a disproportionate impact on portfolio-level occupancy or rental income.
Geographic Diversification. The portfolio is distributed across five Sun Belt states (Georgia, Texas, Florida, Tennessee, and North Carolina), which reduces exposure to any single state's economic conditions, tax policy changes, or real estate market dynamics. Texas contributes the largest share of portfolio ABR at approximately 30.6%, followed by Georgia at approximately 25.3%, Florida at approximately 17.2%, Tennessee at approximately 16.9%, and North Carolina at approximately 7.6%. No single metropolitan statistical area accounts for more than approximately 22% of portfolio ABR.
Tenant Size Distribution. No single tenant represents more than 11.7% of portfolio ABR, and the Top 10 tenants in aggregate represent approximately 72.3% of portfolio ABR. The remaining approximately 27.7% of ABR is distributed among 77 smaller tenants, primarily at the multi-tenant logistics and office properties.
Credit Quality. Among the Top 10 tenants, five maintain investment-grade or near-investment-grade credit ratings from at least one nationally recognized statistical rating organization. The remaining Top 10 tenants are privately held companies for which public credit ratings are not available; however, the Buyer's credit analysis team has reviewed available financial information provided in the data room for these tenants and has not identified material credit concerns. A detailed tenant credit analysis is beyond the scope of this lease audit memorandum.
IV. LEASE TERM AND EXPIRATION PROFILE
4.1 Lease Expiration Schedule
The lease expiration profile is a critical element of the portfolio's risk assessment, as it determines the timing and magnitude of rollover exposure and associated re-leasing costs. The following table presents the portfolio's lease expiration schedule by calendar year, showing the RSF and ABR expiring in each year:
Key Observations:
The portfolio's weighted-average remaining lease term ("WALT") of 5.8 years provides meaningful lease duration. However, the expiration profile is not evenly distributed:
(a) Near-Term Rollover (2024–2025): Fourteen (14) leases representing 428,000 RSF and $6,994,000 in ABR (9.3% of total ABR) expire within the first approximately 18 months following the scheduled closing date. The leases expiring in 2024 represent 142,000 RSF and $2,343,000 in ABR (3.1% of portfolio ABR). All five 2024 expirations are in the office portfolio, consistent with the office portfolio's shorter average lease terms. The Buyer's underwriting model incorporates specific assumptions regarding these near-term rollovers, including projected downtime, re-leasing costs, and market rental rates.
(b) 2031 Concentration: The year 2031 represents the single largest rollover year, with ten (10) leases representing 1,106,000 RSF and $15,624,000 in ABR (20.9% of total ABR) expiring. This concentration is driven in significant part by the expirations of the Zynvaro Distribution Holdings LLC lease at Katy Freeway Logistics Park (538,000 RSF, $7,532,000 ABR) and the Thornton-Whitaker Pharmaceuticals Corp. lease at Fairfield Logistics Center I (412,000 RSF, $6,180,000 ABR). The 2031 concentration presents a significant re-leasing event that should be factored into the Buyer's long-term hold analysis and capital planning.
(c) Logistics vs. Office: Logistics leases generally have longer remaining terms than office leases. The logistics portfolio's WALT is approximately 6.4 years, compared to approximately 4.2 years for the office portfolio. This differential reflects both the longer initial lease terms typical of logistics properties and the recent trend toward shorter-term renewals in the office sector.
A tabular and graphical representation of the lease expiration schedule is provided in Appendix B to this memorandum.
4.2 Early Termination Rights
Our review identified early termination rights in the following categories of leases:
Termination Options. Eleven (11) leases across the portfolio contain tenant termination options that permit the tenant to terminate the lease prior to its stated expiration date, subject to satisfaction of specified conditions. These conditions typically include: (i) delivery of written notice to the landlord within a specified notice window (ranging from 6 to 18 months prior to the proposed termination date); and (ii) payment of a termination fee, typically calculated as a multiple of monthly base rent (ranging from 3 to 12 months' rent) or as an unamortized balance of landlord improvement costs.
Of the eleven (11) leases containing termination options, three (3) have termination options exercisable within twelve (12) months of the scheduled closing date (May 31, 2024, as subsequently extended to June 6, 2024). These are summarized as follows:
The aggregate ABR at risk from these near-term termination options is $518,400 (0.7% of total portfolio ABR), which is not considered material. All three leases are in the office portfolio, and the associated termination fees, while modest, provide some compensation for early termination. The Buyer's asset management team should monitor these termination option deadlines and assess re-leasing prospects for the affected spaces.
Kick-Out Clauses. Two (2) leases contain co-tenancy-linked kick-out provisions, discussed in greater detail in Section VIII below, which provide the tenant with a right to terminate the lease if specified occupancy thresholds are not met.
Contraction Rights. Five (5) leases contain contraction rights that permit the tenant to reduce the size of the leased premises at specified points during the lease term, subject to notice requirements and, in most cases, payment of a contraction fee. These are discussed in Section VII.5 below.
V. RENT STRUCTURE AND ESCALATION ANALYSIS
5.1 Lease Type Breakdown
The portfolio's leases are structured across three primary lease types, with the distribution closely correlating to property type:
Triple Net (NNN) Leases. Fifty-four (54) leases across the ten logistics properties and two smaller office tenants are structured on a NNN basis. Under these leases, the tenant is responsible for the direct payment of, or reimbursement to the landlord for, real property taxes, property insurance premiums, and all common area maintenance expenses. In certain leases, the tenant is also responsible for contributing to a structural reserve fund for roof and structural repairs. NNN leases represent approximately 76.2% of portfolio ABR. This structure is favorable to the landlord because it passes through substantially all operating cost variability to the tenant, resulting in a more predictable net cash flow stream.
Modified Gross Leases. Twenty-two (22) leases, primarily in the office portfolio's larger tenant spaces, are structured on a modified gross basis. Under these leases, the landlord provides building services (including HVAC, janitorial, elevator maintenance, and common area maintenance) and covers operating expenses and real property taxes for a specified "base year" or "expense stop" amount. The tenant is responsible for its pro rata share of operating expenses and real property taxes in excess of the base year or stop amount. Modified gross leases represent approximately 18.4% of portfolio ABR. The base year or expense stop mechanism provides the landlord with a partial hedge against operating cost increases, though the landlord bears the risk of operating cost increases below the stop or within the base year amount.
Full-Service Gross Leases. Eleven (11) leases, all located in the office portfolio and generally attributable to smaller tenants (typically occupying less than 5,000 RSF), are structured on a full-service gross basis. Under these leases, the landlord provides all building services and absorbs all operating expenses and real property taxes within the stated base rent. Full-service gross leases represent approximately 5.4% of portfolio ABR. While this structure simplifies the tenant's cost structure, it exposes the landlord to the full risk of operating expense increases.
Ground Leases. We confirm that no ground leases are present in the portfolio. Each Target Entity holds fee simple title to its respective property, unencumbered by any ground lease or other leasehold interest.
5.2 Rent Escalation Provisions
The contractual rent escalation provisions embedded in the portfolio's leases are a critical driver of the Buyer's projected rental revenue growth. Our review identified the following escalation mechanisms:
Fixed Annual Escalations. The most common escalation mechanism in the portfolio is a fixed annual increase, appearing in sixty-seven (67) of the 87 leases (77.0%). Fixed escalations range from 1.5% to 3.5% per annum, with the majority falling in the 2.0% to 3.0% range. The weighted-average fixed annual escalation rate across the portfolio is approximately 2.6% per annum. Fixed escalations provide predictable rental revenue growth but do not adjust for actual changes in market conditions or inflation.
Among the Top 5 tenants by ABR, escalation provisions are as follows:
• Cascade Supply Chain Solutions Inc.: 2.5% fixed annual increase
• Zynvaro Distribution Holdings LLC: 2.75% fixed annual increase
• Thornton-Whitaker Pharmaceuticals Corp.: 2.0% fixed annual increase
• Birchwood Technology Group Inc.: 3.0% fixed annual increase
• Atlas Freight Logistics Corp.: 2.5% fixed annual increase
CPI-Based Escalations. Twelve (12) leases (13.8%) contain rent escalation provisions linked to the Consumer Price Index ("CPI"), typically the CPI-U (All Urban Consumers, U.S. City Average, All Items) published by the Bureau of Labor Statistics. CPI-linked escalations generally include a floor (most commonly 1.5% to 2.0% per annum) and a cap (most commonly 3.5% to 4.0% per annum), ensuring a minimum level of rental growth while protecting the tenant from extraordinary inflationary spikes. CPI-linked escalations are most common in the logistics portfolio's multi-tenant properties. Given the elevated CPI environment in recent years, CPI-linked escalations have tended to produce rental increases at or near the contractual cap.
Fair Market Value Resets. Three (3) leases (3.4%) contain provisions for periodic fair market value ("FMV") rent resets, under which the base rent is adjusted to FMV at specified intervals (typically every five years). FMV determination procedures vary by lease but generally provide for negotiation between landlord and tenant, followed by a three-appraiser arbitration process if the parties are unable to agree. FMV resets introduce uncertainty into the rental revenue projection but align rents with prevailing market conditions over time.
No Escalation / Flat Rent. Five (5) leases (5.7%) provide for flat rent with no contractual escalation during the lease term. All five are short-term leases (two years or less of remaining term) in the office portfolio, and the aggregate ABR represented by these flat-rent leases is $428,000 (0.6% of total portfolio ABR), which is not considered material.
The overall weighted-average contractual rent growth rate across the portfolio, based on the escalation mechanisms described above and current CPI assumptions, is approximately 2.5% per annum.
5.3 Percentage Rent
Percentage rent provisions, which require the tenant to pay additional rent based on a percentage of gross sales exceeding a specified breakpoint, are not common in logistics or traditional office properties. Our review confirmed that no leases in the logistics portfolio contain percentage rent provisions.
Two (2) leases in the office portfolio contain percentage rent provisions. Both are associated with small retail/food service tenants operating on the ground floor of Buckhead Place Office Tower: (i) a café operator (Ridgeline Coffee Co., 1,400 RSF, $56,000 ABR) with a 6.0% percentage rent provision on gross sales exceeding $500,000 per annum; and (ii) a convenience retail operator (Magnolia Sundry & News LLC, 900 RSF, $31,500 ABR) with a 5.0% percentage rent provision on gross sales exceeding $300,000 per annum. Historical percentage rent collections from these tenants have been negligible (aggregate $4,200 in fiscal year 2023). The impact of these provisions on proration mechanics under PSA Exhibit U is de minimis, and we do not anticipate any material issues in connection with the closing adjustment calculations.
5.4 Free Rent and Concession Analysis
Our review identified outstanding free rent periods and tenant concession obligations as follows:
Free Rent Periods. As of the scheduled closing date, four (4) tenants are in active free rent or rent abatement periods. The aggregate value of remaining free rent as of the closing date is approximately $312,000, summarized as follows:
Under PSA Exhibit U (Proration Schedule), free rent credits are prorated as of the closing date, and the Seller bears responsibility for the economic cost of free rent periods attributable to the pre-closing period. The Buyer assumes the obligation for any free rent periods extending beyond the closing date. The Buyer's closing statement will reflect a credit to the Buyer for free rent obligations attributable to the post-closing period.
Unfunded Tenant Improvement Allowances. See Section VI.1 for a discussion of outstanding landlord TI allowance commitments, which represent an additional form of tenant concession.
Rent Abatement Credits. Two (2) leases contain provisions granting the tenant a future rent abatement credit (as opposed to a fixed free rent period) in connection with specified landlord construction obligations. The aggregate value of these contingent credits is estimated at $84,000 and is contingent upon the landlord's failure to complete certain punch-list items within specified timeframes. As of the date of this memorandum, the relevant punch-list items are reported by Argyle Property Services LLC to be substantially complete.
VI. LANDLORD OBLIGATIONS
6.1 Tenant Improvement Obligations
A critical element of the lease audit is the identification of outstanding landlord tenant improvement ("TI") allowance commitments that will be assumed by the Buyer through the acquisition of the Target Entities. Unfunded TI allowances represent future cash obligations of the Target Entities that are not reflected in current operating cash flows and must be factored into the Buyer's acquisition economics.
Our review identified unfunded or partially unfunded TI allowance commitments in nine (9) leases across the portfolio. The aggregate unfunded TI liability as of the anticipated closing date is approximately $2,870,000, summarized as follows:
All unfunded TI commitments are in the office portfolio, consistent with market practice under which office landlords typically provide significant TI allowances to attract and retain tenants. The logistics portfolio's NNN lease structure does not generally involve landlord-funded TI allowances.
The Buyer's underwriting model should incorporate the $2,870,500 in unfunded TI obligations as a future capital requirement. We note that certain of these obligations are subject to the tenants' submission of TI construction draw requests and compliance with lease-specified construction requirements. The landlord's obligation to fund TI allowances is generally conditioned upon the tenant's completion of improvements in accordance with landlord-approved plans and specifications, delivery of lien waivers, and satisfaction of other customary conditions.
We recommend coordinating the TI obligation analysis with the PCA findings from Rampart Building Sciences, Inc. to ensure that there is no overlap between landlord TI obligations and building capital expenditure requirements.
6.2 Maintenance and Repair Obligations
The allocation of maintenance and repair responsibilities between landlord and tenant varies significantly by property type and lease structure:
Logistics Properties. Under the NNN lease structure employed at the logistics properties, the landlord's maintenance obligations are generally limited to structural elements (foundations, structural walls, load-bearing columns, and structural floors) and, in most leases, the roof membrane and roof structure. Tenants are responsible for all interior maintenance and repairs, including HVAC systems, plumbing, electrical systems (except base building electrical infrastructure), dock equipment, interior walls, flooring, and all tenant-installed fixtures and equipment. This allocation is consistent with market practice for logistics/industrial properties and results in a minimal landlord maintenance cost burden. Several leases at the multi-tenant logistics properties (Fairfield Logistics Center II, Alliance Commerce Center, Lakeland Crossings Industrial, Murfreesboro Distribution Center, Peachtree Corners Logistics Center, and Mount Juliet Commerce Park) require the landlord to maintain common areas, including parking lots, driveways, landscaping, and exterior lighting, with costs passed through to tenants as CAM expenses.
Office Properties. Under the modified gross and full-service gross lease structures at the office properties, the landlord's maintenance obligations are substantially more extensive. The landlord is typically responsible for maintaining and repairing HVAC systems (including rooftop units, air handling units, and ductwork), elevators and escalators, building electrical and plumbing systems, common area finishes, lobby and corridor improvements, restrooms, and building exterior (including façade, windows, and parking structures). These obligations require ongoing capital expenditure planning and reserves.
PCA Cross-Reference. The Property Condition Assessment reports prepared by Rampart Building Sciences, Inc. identified immediate repair items at four properties. These items, which relate to building systems and structural components that fall within the landlord's maintenance obligations, are summarized as follows:
The aggregate PCA-identified immediate repair cost of $2,140,000 was a negotiated item under the PSA. The parties agreed to a PCA credit of $1,070,000 (50% of estimated cost) to the Buyer, reflected as a reduction in the purchase price at closing. This credit allocation reflects the Seller's position that certain repair items are routine maintenance that would be addressed in the ordinary course, while the Buyer maintained that the items represent deferred maintenance requiring immediate capital investment. The $1,070,000 PCA credit is reflected in the closing statement as a reduction to the cash equity portion of the purchase price.
6.3 Common Area Maintenance (CAM) and Operating Expense Recovery
The portfolio's NNN and modified gross lease structures provide for varying degrees of operating expense recovery from tenants. The efficiency of the landlord's expense recovery mechanism directly impacts net operating income and cash flow.
NNN Lease Recovery. Under the NNN lease structure at the logistics properties, tenants reimburse their pro rata share (based on RSF occupied relative to total building RSF) of all operating expenses, real property taxes, and insurance premiums. The landlord typically incurs these costs directly and bills tenants on a monthly estimated basis, with an annual reconciliation to actual costs. The NNN recovery mechanism provides the landlord with near-complete pass-through of operating costs, subject to the limitations discussed below.
Estimated 2024 Real Property Taxes. Based on the most recent tax assessments and applicable millage rates, estimated 2024 real property taxes across the portfolio are approximately $14,760,000 annually. This estimate was prepared using the tax assessments and tax bills provided in the data room and verified against county assessor records obtained through the title and survey review process. Real property tax liabilities will be prorated between Seller and Buyer as of the closing date in accordance with PSA Exhibit U, using the most recent available tax bills (2023) as the basis for proration, with a post-closing true-up mechanism.
CAM/OpEx Reconciliation Reserve. Under the PSA, a CAM/OpEx reconciliation reserve of $1,850,000 will be held back at closing pending completion of the annual tenant reconciliation process for the 2024 calendar year. This holdback reflects the estimated difference between monthly estimated tenant reimbursement billings and actual operating expenses for the portion of 2024 prior to closing. The reconciliation reserve will be allocated between the Seller and Buyer based on the actual reconciliation results, in accordance with the adjustment procedures set forth in PSA Exhibit U, Section 5.
CAM Caps and Exclusions. Our review identified CAM caps in twenty-three (23) leases across the portfolio. These caps fall into two categories:
(a) Fixed Dollar CAM Caps: Seven (7) leases contain fixed dollar caps on the tenant's annual CAM reimbursement obligation (expressed as a maximum dollars-per-RSF amount). These caps range from $2.50 to $4.25 per RSF per annum. Because these caps are fixed (not adjustable for inflation), they may result in an increasing gap between actual operating expenses and recoverable amounts over time, particularly in an inflationary environment.
(b) CAM Escalation Caps: Sixteen (16) leases contain provisions that cap the annual increase in the tenant's CAM reimbursement obligation at a specified percentage (most commonly 3.0% to 5.0% per annum, calculated on a cumulative and compounding basis). These escalation caps are more favorable to the landlord than fixed dollar caps because they permit growth in the recovery amount, but they may still result in under-recovery if actual expense growth exceeds the cap percentage.
In addition, certain leases contain exclusions from the definition of "operating expenses" that limit the types of costs recoverable from tenants. Common exclusions include capital expenditures (except to the extent amortized over useful life), costs of correcting construction defects, management fees above a specified percentage (typically 3.0% to 5.0% of gross revenues), leasing commissions, costs of compliance with laws applicable to the base building (as opposed to tenant-specific compliance costs), and executive salaries above the level of property manager.
We recommend that the Buyer's asset management team model the impact of CAM caps and exclusions on projected net operating income, particularly for the office properties where operating expenses are expected to increase at rates that may exceed the contractual cap percentages.
Administrative Fee Limitations. Eighteen (18) NNN leases authorize the landlord to charge an administrative or management fee on CAM expenses, typically expressed as a percentage of total operating expenses (ranging from 3.0% to 15.0%). These fees supplement the property management fee and are intended to compensate the landlord for the overhead associated with operating expense administration. The weighted-average administrative fee across the NNN lease portfolio is approximately 5.8% of total operating expenses.
6.4 Insurance Obligations
Landlord-Maintained Insurance. Under the lease structures in the portfolio, the landlord (each Target Entity) is responsible for maintaining the following insurance coverages: (i) property/casualty insurance covering the building(s) and improvements at replacement cost; (ii) commercial general liability insurance for the common areas and building premises; (iii) umbrella/excess liability insurance; and (iv) such other coverages as may be required by the mortgage lenders (including flood insurance where properties are located in designated flood zones, earthquake insurance where applicable, and business interruption/rental loss insurance).
The existing landlord insurance program for the portfolio is maintained through Ironclad Indemnity Insurance Company and brokered by Hartwick Gunderson & Associates, Inc. In connection with the acquisition, Fairwater's risk management team is coordinating the placement of replacement insurance coverage through Ironclad Indemnity Insurance Company (or an alternative carrier to be selected by Fairwater), to be effective as of the closing date. The replacement program will need to satisfy the insurance requirements set forth in each of the three mortgage loan agreements, and evidence of insurance will need to be delivered to each lender prior to or concurrently with closing.
Tenant-Maintained Insurance. The leases generally require tenants to maintain the following insurance coverages at their own expense: (i) commercial general liability insurance (minimum limits ranging from $1,000,000 to $5,000,000 per occurrence, depending on tenant size and use); (ii) property insurance covering the tenant's personal property, fixtures, and improvements at replacement cost; (iii) workers' compensation insurance as required by applicable law; (iv) business automobile liability insurance; and (v) umbrella/excess liability insurance (for larger tenants). Most leases require the tenant to name the landlord (and in many cases, the landlord's lender and property manager) as an additional insured on the tenant's CGL policy and to provide a waiver of subrogation in favor of the landlord on the tenant's property insurance policy.
Our review identified six (6) leases with below-market tenant insurance requirements (i.e., minimum CGL limits below $1,000,000 per occurrence or the absence of umbrella/excess requirements for tenants occupying more than 10,000 RSF). These below-market provisions generally appear in older leases that have not been amended to reflect current insurance market norms. We recommend that the Buyer consider addressing these gaps at the time of lease renewal or amendment.
VII. TENANT OPTIONS
7.1 Renewal Options
Renewal options are the most prevalent form of tenant option in the portfolio. Our review identified renewal options in sixty-two (62) of the 87 leases (71.3%). The following summary table presents the aggregate renewal option profile:
Key characteristics of the renewal option provisions are as follows:
Number and Length of Renewal Terms. The weighted-average number of renewal terms per lease (among leases with renewal options) is 1.8, with individual leases providing between one (1) and four (4) renewal terms. Renewal term lengths range from two (2) to ten (10) years, with five (5)-year renewal terms being the most common (appearing in 41 of the 62 leases with renewal options). The aggregate renewal option RSF represents approximately 77.8% of occupied RSF and 81.1% of in-place ABR, indicating that the majority of the portfolio's rental income is associated with tenants holding renewal rights.
Notice Requirements. Renewal option exercise generally requires the tenant to deliver written notice to the landlord between six (6) and eighteen (18) months prior to the expiration of the then-current lease term. The most common notice period is twelve (12) months (appearing in 34 of the 62 leases with renewal options). Several logistics leases with larger tenants require fifteen (15) or eighteen (18) months' notice.
Below-Market Fixed Rate Renewal Options. Of particular concern are the twenty-four (24) leases with fixed rate or fixed percentage increase renewal options. Under these provisions, the renewal rental rate is determined by applying a specified fixed rate or a specified percentage increase to the then-current base rent, without regard to prevailing market conditions. In a rising rental rate environment, these provisions may result in below-market rents during the renewal term, reducing the Buyer's potential rental income relative to market rates.
We have identified seven (7) leases where the fixed renewal rate is projected to fall meaningfully below estimated market rates at the time of the earliest renewal option exercise date, based on the Buyer's market rent projections and current market data from CBRE Research and Cushman & Wakefield. The aggregate potential ABR impact — defined as the difference between the projected market rent and the fixed renewal rent for the first renewal term — is estimated at approximately $3,200,000 per annum, assuming all seven tenants exercise their renewal options at the fixed rates. The most significant individual exposure is the Cascade Supply Chain Solutions Inc. renewal option at Westlake Distribution Hub, which provides for two (2) five-year renewal terms at a fixed 2.0% annual increase over the then-current rent. Based on projected Houston industrial market rent growth, the renewal rent in the first renewal term (commencing March 2032) could be approximately $1.40 per RSF per annum below projected market rent, resulting in an annual ABR shortfall of approximately $873,600 for that single lease.
We recommend that the Buyer's asset management team develop a proactive renewal strategy for leases with below-market fixed renewal options, including early engagement with tenants to negotiate lease amendments that align renewal economics more closely with market conditions, potentially in exchange for lease term extensions or other mutually beneficial modifications.
7.2 Expansion Options
Expansion options and rights of first offer/refusal on adjacent or contiguous space were identified in fourteen (14) leases across the portfolio. Expansion options are most prevalent in the multi-tenant logistics properties and the office portfolio, where adjacent or contiguous space may become available during the lease term.
The expansion option provisions generally include the following terms:
(a) Identified Expansion Space: The lease specifies the suite(s) or area(s) constituting the expansion space, typically described by suite number or floor designation.
(b) Rental Rate: Expansion space is typically leased at the then-prevailing market rate (FMV), the tenant's then-current effective rental rate, or a specified fixed rate, depending on the lease.
(c) Notice and Exercise: The landlord is generally required to notify the tenant when expansion space becomes available (or will become available within a specified period, typically 6 to 12 months). The tenant then has a specified period (typically 15 to 30 days) to exercise the expansion right.
(d) Exercise Conditions: Exercise of expansion options is typically conditioned upon the tenant not being in default under its lease at the time of exercise and the tenant's continued occupancy of its existing premises.
The presence of expansion options in the portfolio has implications for the Buyer's ability to re-lease vacant space or manage its occupancy strategy at the multi-tenant properties. Specifically, if a tenant holds an expansion right over currently vacant space, the landlord may be restricted in its ability to lease that space to a third party without first offering it to the expansion option holder. We have identified three (3) expansion options that apply to currently vacant space in the portfolio: one at Fairfield Logistics Center II (12,000 RSF), one at Alliance Commerce Center (17,000 RSF), and one at Cool Springs Office Park (8,500 RSF). The Buyer's leasing team should be aware of these constraints when marketing vacant space at these properties.
7.3 Purchase Options
Our review identified one (1) lease containing a tenant purchase option on the fee interest in the underlying property. The purchase option is held by Atlas Freight Logistics Corp. in connection with its 410,000 RSF lease at Southport Logistics Park in Jacksonville, Florida. The key terms of the purchase option are as follows:
(a) Exercise Window: The purchase option is exercisable during the period commencing on the first day of the 60th month of the lease term and ending on the last day of the 72nd month of the lease term (i.e., approximately April 2028 through April 2029, based on the lease commencement date of April 1, 2024).
(b) Purchase Price: The purchase price is the greater of (i) the FMV of the property as determined by a three-appraiser process, and (ii) a fixed floor price of $52,000,000.
(c) Trigger Events: The purchase option is exercisable upon written notice from the tenant, subject to the tenant not being in default under the lease. Critically, the purchase option is triggered by a "sale or transfer of the Property," defined in the lease as "any conveyance, sale, transfer, or other disposition of all or any portion of the fee simple interest in the Property or any direct or indirect interest therein."
Entity-Level Transfer Analysis. The critical question for the current transaction is whether the transfer of 100% of the membership interests in the Target Entity that owns Southport Logistics Park (Greystone Meridian Southport LLC) constitutes a "sale or transfer of the Property" that triggers the purchase option.
We have analyzed this question in detail. The purchase option provision defines "Property" as the real property described in Exhibit A to the lease (the land and improvements constituting Southport Logistics Park). The transfer of membership interests in Greystone Meridian Southport LLC does not constitute a conveyance, sale, or transfer of the fee simple interest in the Property itself. The fee simple title to the Property will continue to be held by Greystone Meridian Southport LLC (which will be renamed following closing) as the same legal entity. What changes is the ownership of the equity interests in that entity, not the ownership of the real property by that entity.
The purchase option language refers to a transfer of "any direct or indirect interest" in the Property, which could potentially be construed to encompass an indirect transfer through the transfer of membership interests in the property-owning entity. However, under controlling Florida law (the jurisdiction governing the lease), courts have generally distinguished between a transfer of entity ownership interests and a transfer of the underlying real property for purposes of lease provisions, absent express language capturing entity-level transfers. See, e.g., Palm Beach Polo Holdings, Inc. v. Broward Marine, Inc., 928 So. 2d 1278 (Fla. 4th DCA 2006); Seawatch at Marathon Condo. Ass'n, Inc. v. CharleyTuna, Inc., 986 So. 2d 36 (Fla. 3d DCA 2008).
Conclusion. Based on our analysis of the purchase option language in the context of the entity-level transfer structure, and consistent with applicable Florida precedent, we conclude that the transfer of membership interests in Greystone Meridian Southport LLC does not constitute a "sale or transfer of the Property" triggering the tenant's purchase option. However, we note that this conclusion is based on a reasonable interpretation of the lease language and applicable law, and there is some residual risk that the tenant could assert a contrary position. We recommend that Buyer's counsel coordinate with local Florida counsel (Palmetto Strauss PA) to confirm this analysis and assess the litigation risk profile.
7.4 Right of First Offer / Right of First Refusal (ROFO/ROFR)
Our review identified three (3) leases containing ROFO or ROFR provisions relating to the sale of the property:
ROFR Provisions. The ROFR provisions held by Atlas Freight Logistics Corp. and Zynvaro Distribution Holdings LLC grant the tenant the right to match any bona fide third-party offer to purchase the property, subject to specified notice and matching procedures. Under each provision, the landlord is required to deliver written notice to the tenant of the material terms of any such third-party offer, and the tenant has a specified period (30 days in the Atlas lease; 45 days in the Mercer lease) to exercise the ROFR by agreeing to purchase the property on substantially the same terms.
ROFO Provision. The ROFO provision held by Thornton-Whitaker Pharmaceuticals Corp. requires the landlord, prior to offering the property for sale to any third party, to first offer the property to the tenant on terms specified by the landlord. The tenant has 30 days to accept or reject the offer. If the tenant rejects (or fails to respond), the landlord may proceed to market the property to third parties, provided that the landlord may not sell the property to a third party on terms materially more favorable than those offered to the tenant without first re-offering the property to the tenant.
Entity-Level Transfer Analysis. As with the purchase option analysis in Section VII.3, the critical question is whether the transfer of membership interests in the Target Entities triggers the ROFO/ROFR provisions. The relevant definitions and trigger language in each of the three leases are as follows:
(a) Atlas Freight Logistics Corp. (ROFR): Triggered by "any proposed sale, transfer, conveyance, or other disposition of the Property or any interest therein." The term "Property" is defined as the real property constituting Southport Logistics Park. The provision does not contain an express reference to entity-level transfers or transfers of ownership interests in the landlord entity.
(b) Thornton-Whitaker Pharmaceuticals Corp. (ROFO): Triggered by "any proposed sale of the Property." The term "sale" is not defined to include entity-level transfers or changes of ownership in the landlord entity.
(c) Zynvaro Distribution Holdings LLC (ROFR): Triggered by "any sale, assignment, transfer, or conveyance of all or any material portion of the Property." The term "Property" is defined as the real property constituting Katy Freeway Logistics Park. The provision contains a parenthetical noting that "transfers of direct or indirect ownership interests in Landlord shall not constitute a sale of the Property for purposes of this Section."
Conclusion. Based on our analysis:
(i) The Zynvaro Distribution Holdings LLC ROFR expressly excludes entity-level transfers from the definition of a "sale" and therefore is clearly not triggered by the transaction.
(ii) The Atlas Freight Logistics Corp. ROFR and the Thornton-Whitaker Pharmaceuticals Corp. ROFO do not contain express exclusions for entity-level transfers; however, neither provision contains express language capturing entity-level transfers. Applying the same analytical framework discussed in Section VII.3, we conclude that the transfer of membership interests in the respective Target Entities does not constitute a "sale, transfer, conveyance, or other disposition of the Property" within the meaning of either provision. This conclusion is supported by applicable case law in Florida (governing the Atlas lease) and Georgia (governing the Thornton-Whitaker lease), which generally requires express language to capture indirect transfers through entity-level transactions.
(iii) Accordingly, we conclude that no ROFO/ROFR notice obligations are triggered by the transaction with respect to any of the three identified leases.
We recommend that the Buyer's team coordinate with local counsel in Florida (Palmetto Strauss PA) and Georgia (Talmadge Beaumont LLP) to confirm these conclusions and assess the risk of tenant challenge.
7.5 Contraction Rights
Five (5) leases contain contraction rights that permit the tenant to reduce the size of the leased premises at specified points during the lease term. These provisions are concentrated in the office portfolio, where tenants have sought flexibility to adjust their space requirements in response to changing workforce and workplace strategies. The contraction rights are summarized as follows:
The aggregate contraction RSF across all five leases is 59,200 RSF, representing approximately 1.1% of total portfolio RSF. The most significant contraction right is held b

MEMORANDUM

MATTER NO.: 1036-00004

I. EXECUTIVE SUMMARY

IV. LEASE TERM AND EXPIRATION PROFILE

V. RENT STRUCTURE AND ESCALATION ANALYSIS

VI. LANDLORD OBLIGATIONS

VII. TENANT OPTIONS

Record

Parties

Dates

Amounts