CALDERWOOD & HARKNESS LLP Attorneys at Law
1200 Avenue of the Americas, 42nd Floor New York, New York 10036
April 8, 2024
PRIVILEGED & CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT
MEMORANDUM
FROM: Grace Nakamura, Lead Associate, Calderwood & Harkness LLP
TO: Douglas Fairchild, Responsible Partner, Calderwood & Harkness LLP
CC: Angela Fontaine, Billing Partner, Calderwood & Harkness LLP Rafael Dominguez, Working Associate, Calderwood & Harkness LLP Camille Oduya, In-House Real Estate Counsel, Fairwater REIT
RE: Lease Audit Memorandum — Top 10 Tenants (Detailed Analysis)
MATTER: Fairwater Real Estate Investment Trust — Acquisition of 14-Property Sun Belt Logistics & Office Portfolio from Greystone Meridian Partners Fund III, L.P.
MATTER NUMBER: 1036-00004
This memorandum constitutes attorney work product and is protected by the attorney-client privilege and the work product doctrine. It is intended solely for the use of the addressees and persons copied herein in connection with the above-referenced matter. This memorandum contains the mental impressions, conclusions, opinions, and legal theories of the attorneys at Calderwood & Harkness LLP. No portion of this memorandum may be disclosed to any third party without the prior written consent of counsel.
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I. Executive Summary
This memorandum sets forth the results of our detailed analysis of the leases for the ten (10) largest tenants by annual base rent ("ABR") in the 14-property Sun Belt logistics and office portfolio (the "Portfolio") being acquired by Fairwater Real Estate Investment Trust ("Buyer" or "Fairwater REIT") from Greystone Meridian Partners Fund III, L.P. ("Seller" or "Greystone") for a purchase price of One Billion One Hundred Million Dollars ($1,100,000,000) (the "Purchase Price"), pursuant to the terms of that certain Purchase and Sale Agreement dated February 26, 2024, as amended by the First Amendment thereto dated April 12, 2024 (collectively, the "PSA").
The transaction is structured as an entity-level acquisition of 100% of the membership interests in fourteen (14) property-owning Delaware limited liability companies (each, a "Target Entity" and collectively, the "Target Entities"). Because the leases are between the Target Entities (as landlord) and the respective tenants, the leases will remain in place at the entity level upon the transfer of the membership interests, and no assignment or assumption of the leases by Buyer will be required. This structure, while efficient from a transfer-tax perspective, necessitates a thorough review of each lease to assess the obligations that Buyer will inherit upon acquiring the Target Entities.
The Top 10 tenants by ABR collectively represent approximately $54,218,000 of the Portfolio's $74,800,000 in total annual in-place base rent (as of the December 31, 2023 rent roll attached to the PSA as Exhibit H), constituting approximately 72.5% of total Portfolio ABR. The following summary table identifies each Top 10 tenant, its ABR, leased rentable square footage ("RSF"), property location, and percentage of total Portfolio ABR:
The following key themes emerged from our review of the Top 10 tenant leases:
• Generally Favorable Landlord Positions. The leases were drafted or negotiated by experienced institutional landlord counsel and, on the whole, contain provisions that are protective of the landlord's interests. The NNN lease structures applicable to the logistics tenants appropriately pass through real property taxes, insurance, and common area maintenance ("CAM") and operating expenses to the tenants, minimizing the landlord's net operating cost exposure.
• Renewal Options. Renewal options are present in nine (9) of the ten (10) Top 10 tenant leases. In most cases, renewal rent is determined by fair market value ("FMV") at the time of exercise, which provides Buyer with the opportunity to mark rents to market upon renewal. Several leases include a floor on renewal rent at the then-current rate, which provides downside protection. The details of each renewal option are set forth in the individual tenant analyses below and in the comparative analysis in Section XIV.
• Limited Purchase Options. Only one (1) of the Top 10 tenants holds a purchase option, and that option is structured as a right of first refusal ("ROFR") rather than a fixed-price option, reducing the risk to Buyer's fee ownership. The details are addressed in the analysis for the applicable tenant below.
• Co-Tenancy and Exclusivity Provisions. Several of the Top 10 tenant leases contain exclusivity provisions that restrict the landlord's ability to lease to competing tenants within the same property or park. These provisions are most relevant at the multi-tenant office properties and at Katy Freeway Logistics Park, which includes an adjacent development parcel. These provisions are discussed in detail below and are generally consistent with market practice for tenants of this size.
• Assignment and Subletting Restrictions. Assignment and subletting provisions across the Top 10 leases generally require landlord consent, with such consent not to be unreasonably withheld, conditioned, or delayed. Customary exceptions exist for transfers to affiliates and, in certain cases, transfers in connection with a merger, consolidation, or sale of all or substantially all of the tenant's assets. Recapture rights and excess rent sharing provisions are present in several leases and are detailed below.
• Estoppel Certificates. Estoppel certificates have been or are being collected from the Top 10 tenants. The PSA requires delivery of estoppel certificates from tenants representing at least 80% of in-place ABR ($59,840,000 of $74,800,000) and from every tenant occupying 25,000 RSF or more. At the time of this memorandum, estoppel certificate collection is tracking toward the 91.4% ABR coverage ultimately achieved at closing, with all Top 10 tenant estoppels either received or in active negotiation.
• SNDAs. All Top 10 tenants qualify as "Major Tenants" under the PSA (i.e., tenants with ABR of $1,500,000 or more per annum). Pursuant to Section 5.06(c) of the PSA, all Major Tenants are required to execute subordination, non-disturbance, and attornment agreements ("SNDAs") in the forms required by the applicable lenders. Thirty-eight (38) Major Tenant SNDAs are required in total across the Portfolio. The status of SNDA execution for each Top 10 tenant is addressed in the individual analyses below and in Section XV.
This memorandum should be read in conjunction with the Portfolio Summary Lease Audit Memorandum dated April 15, 2024 (the "Portfolio Summary Memo"), which provides a comprehensive analysis of all eighty-seven (87) leases across the fourteen (14) properties in the Portfolio. The Portfolio Summary Memo addresses portfolio-level trends, aggregate risk factors, and property-specific issues that are not repeated in detail here. Cross-references to the Portfolio Summary Memo are provided throughout this memorandum where relevant.
II. Scope and Methodology
A. Documents Reviewed
For each of the Top 10 tenants identified above, we reviewed the following categories of documents as provided in the Seller's electronic data room (Pemberton Systems platform, Room ID: GMP-FW-2024-DD):
(a) Executed lease agreements, including all amendments, letter agreements, side letters, and modifications;
(b) Guaranty agreements (where applicable), including any amendments thereto;
(c) Commencement date agreements and rent commencement certificates;
(d) Landlord work letters, construction rider agreements, and tenant improvement documentation;
(e) Security deposit documentation, including letters of credit and any related issuing bank agreements;
(f) Correspondence between landlord and tenant regarding defaults, notices, or material lease matters;
(g) Existing estoppel certificates and SNDAs from prior loan closings; and
(h) Tenant financial statements and credit information (to the extent made available in the data room).
B. Cross-Referencing and Verification
We cross-referenced the material terms of each Top 10 tenant lease against the rent roll attached to the PSA as Exhibit H (the "Rent Roll"), which is dated as of December 31, 2023. For each lease, we confirmed (or identified discrepancies with respect to) the following data points: (i) tenant legal name; (ii) leased premises and RSF; (iii) current annual base rent and per-RSF rate; (iv) rent escalation schedule and next escalation date; (v) lease commencement date; (vi) lease expiration date; (vii) renewal option terms; (viii) security deposit amount and form; and (ix) current default status.
C. Provisions of Particular Significance
Our review focused on the following categories of lease provisions that are of particular significance to Buyer in connection with the acquisition:
(a) Renewal Options — including the number of options, the term of each renewal, the notice requirements for exercise, the method of determining renewal rent (FMV, fixed escalation, CPI-based, or other formula), and any conditions precedent to exercise;
(b) Expansion Options — including rights of first offer ("ROFO"), rights of first refusal ("ROFR"), and must-take obligations with respect to additional space within the building or adjacent buildings;
(c) Purchase Options and Fee Interest Rights — including any purchase option, ROFO, or ROFR held by the tenant with respect to the fee interest in the property, and the pricing mechanism, exercise terms, and notice requirements applicable thereto;
(d) Co-Tenancy and Exclusivity — including any provisions restricting the landlord's ability to lease space in the property or adjacent properties to tenants engaged in the same or similar business as the subject tenant, as well as any co-tenancy provisions that condition the tenant's rent obligations or continued occupancy on the presence of other tenants;
(e) Assignment and Subletting — including whether landlord consent is required, whether such consent is subject to a reasonableness qualifier, the scope of permitted transfers (e.g., affiliate transfers, mergers, and asset sales), recapture rights, excess rent sharing provisions, and change-of-control provisions;
(f) Estoppel Obligations — including the tenant's obligation to deliver estoppel certificates upon landlord's request, the timeframe for delivery, and the deemed-consent consequences (if any) of a failure to respond;
(g) Default and Cure Provisions — including monetary and non-monetary default notice requirements, cure periods, landlord remedies (termination, acceleration, self-help), and any cross-default provisions;
(h) Tenant Improvement Allowances and Landlord Obligations — including any outstanding TI allowance amounts, remaining landlord construction or capital expenditure obligations, and the current status thereof;
(i) Guaranty Provisions — including the identity and creditworthiness of any guarantor, the scope of the guaranty (full recourse, limited, or "good guy" guaranty), and any guaranty burn-off or expiration provisions; and
(j) Miscellaneous Provisions — including insurance requirements, casualty and condemnation provisions, environmental indemnities, and any other unusual or non-standard provisions that could affect Buyer's rights or obligations as landlord.
D. Discrepancy Identification
Any discrepancies between the lease documents and the Rent Roll are identified in the individual tenant analyses below and have been communicated separately to Seller's counsel (Wakefield Croft LLP, attention: Martin Blackwell) for resolution. As of the date of this memorandum, four (4) discrepancies have been identified among the Top 10 tenant leases, all of which are characterized as minor and are described in the relevant tenant sections below.
E. Local Counsel Coordination
We coordinated with local counsel in each of the five (5) states in which the Portfolio properties are located for purposes of confirming state-specific enforceability matters, including the validity of remedies provisions, the enforceability of consent-to-jurisdiction clauses, and the applicability of any state-specific tenant protection statutes. Our local counsel contacts are as follows:
(a) Texas — Breckenridge Osgood LLP, Dallas, Texas (Attn: Margaret Ashworth, Partner);
(b) Georgia — Talmadge Beaumont LLP, Atlanta, Georgia (Attn: Charles Worthington, Partner);
(c) North Carolina — Haversham Cole PLLC, Charlotte, North Carolina (Attn: Patricia Langford, Partner);
(d) Tennessee — Ellsworth Ridley LLP, Nashville, Tennessee (Attn: James Hargrove, Partner); and
(e) Florida — Palmetto Strauss PA, Jacksonville, Florida (Attn: Diana Castellanos, Shareholder).
Local counsel memoranda have been received for the Texas, Georgia, and North Carolina properties. Memoranda from Tennessee and Florida local counsel are expected by April 15, 2024. No material enforceability issues have been identified to date.
III. Summary Table — Top 10 Tenants by ABR
The following table summarizes the key terms for each of the Top 10 tenants. A more detailed version of this table, including renewal option mechanics and security deposit information, is attached hereto as Exhibit A.
Key observations from the summary table:
The Top 5 tenants alone represent aggregate ABR of $33,446,000, or 44.7% of total Portfolio ABR of $74,800,000. The Top 10 tenants represent aggregate ABR of $54,218,000, or 72.5% of total Portfolio ABR. This concentration level is consistent with institutional logistics and office portfolios of this size and vintage but warrants attention in Buyer's portfolio management strategy.
Seven (7) of the Top 10 tenants are logistics tenants occupying entire single-tenant buildings, which is consistent with the Portfolio's logistics-heavy composition (10 logistics properties comprising approximately 83% of total Portfolio RSF). Three (3) of the Top 10 tenants are office tenants, occupying space at three of the Portfolio's four office properties.
The weighted-average remaining lease term for the Top 10 tenants, calculated from the anticipated closing date of June 6, 2024, is approximately 6.1 years, which slightly exceeds the Portfolio-wide weighted-average remaining lease term of 5.8 years. The shortest remaining term among the Top 10 tenants is Clearwater Data Solutions Inc. at Cool Springs Office Park (Tenant No. 10), with a remaining term of approximately 2.9 years from closing. This near-term expiration is discussed further in Sections XIII and XVI below.
All Top 10 tenants qualify as "Major Tenants" under the PSA, defined as tenants with ABR of $1,500,000 or more per annum. Pursuant to Section 5.06(c) of the PSA, all Major Tenants are required to execute SNDAs in the forms required by the applicable lenders (Pinnacle Federal Bank, N.A.; Veltrano Capital Lending Corp.; and Sycamore Life Insurance Company). Thirty-eight (38) Major Tenant SNDAs are required in total across the Portfolio, including ten (10) SNDAs for the Top 10 tenants.
IV. Detailed Lease Analysis — Tenant No. 1: Cascade Supply Chain Solutions Inc.
A. Lease Overview
The Cascade Supply Chain Solutions Inc. ("Cascade") lease is the largest single lease in the Portfolio by ABR and represents the single-largest tenant concentration risk. Cascade is a national third-party logistics ("3PL") provider headquartered in Seattle, Washington, with operations across 23 states. The Westlake Distribution Hub serves as Cascade's primary Gulf Coast regional distribution facility. The lease was executed contemporaneously with the completion of the building's construction in 2019 and appears to have been negotiated on an arm's-length basis between the tenant and a predecessor entity that conveyed the property to GMP Westlake LLC in connection with Greystone's formation of Fund III.
B. Rent and Escalations
The current ABR under the Cascade lease is $8,736,000, payable in equal monthly installments of $728,000. The lease provides for a NNN (triple-net) structure, under which the tenant is responsible for the payment of (i) all real property taxes and assessments, (ii) property and liability insurance premiums, and (iii) all common area maintenance and operating expenses, each as additional rent. The landlord retains a management fee equal to 3.0% of base rent, which is included within the definition of operating expenses reimbursable by the tenant.
Base rent escalates at a rate of 2.5% per annum on each anniversary of the Rent Commencement Date. The escalation schedule through the end of the lease term is as follows:
Discrepancy Note: The Rent Roll (PSA Exhibit H) lists the ABR for Cascade as $8,736,000 ($14.00/RSF), which corresponds to a figure between Year 4 and Year 5 of the escalation schedule. Based on our calculation using the 2.5% annual escalation formula from a Year 1 base of $12.00/RSF, the Year 5 ABR (i.e., the ABR as of January 1, 2024) should be $8,270,476 ($13.25/RSF). The Rent Roll appears to reflect a rounded figure of $14.00/RSF that would not become effective until a date in the middle of the lease term. We have flagged this discrepancy to Seller's counsel for reconciliation. Updated note: Seller's counsel has advised that the Rent Roll reflects the contractual rent as of the Rent Roll date of December 31, 2023, and that the lease was amended by an unrecorded letter agreement dated September 1, 2023, which reset the base rent to $14.00/RSF effective October 1, 2023, with 2.5% annual escalations continuing from that adjusted base. We have requested a copy of this letter agreement and will supplement this memorandum upon receipt and review.
There is no percentage rent component under this lease.
C. Security Deposit
The lease requires a security deposit in the amount of $1,456,000, equivalent to approximately two (2) months of base rent at the original Year 1 rate. The security deposit is held in the form of cash and is currently on deposit with the landlord. There is no letter of credit requirement.
The lease provides for a burn-down of the security deposit, as follows: provided that the tenant is not then in default and has not been in monetary default more than two (2) times during the preceding twenty-four (24) month period, the security deposit shall be reduced by $364,000 on each of the fifth (5th) and seventh (7th) anniversaries of the Rent Commencement Date, resulting in a final security deposit balance of $728,000 for the remainder of the lease term. As of the date of this memorandum, the first burn-down (January 1, 2025) has not yet occurred; accordingly, the full $1,456,000 remains on deposit. We have confirmed this amount against the security deposit schedule provided in the data room.
The security deposit shall be returned to the tenant within sixty (60) days following the expiration or earlier termination of the lease, less any amounts applied by the landlord to cure tenant defaults, and subject to a reasonable holdback for final operating expense reconciliation.
D. Renewal Options
The Cascade lease provides for two (2) successive renewal options, each for a term of five (5) years (i.e., an aggregate potential extension of ten (10) years through December 31, 2039).
Exercise and Notice Requirements. The tenant must exercise each renewal option by delivering written notice to the landlord no later than twelve (12) months prior to the expiration of the then-current term (i.e., by December 31, 2028, for the first renewal, and by December 31, 2033, for the second renewal, assuming the first renewal is exercised). Exercise of the first renewal option is not a condition precedent to exercise of the second renewal option.
Renewal Rent. Rent during each renewal term shall be the greater of (i) ninety-five percent (95%) of the then-prevailing fair market rental value for comparable industrial/logistics space in the West Houston submarket, as determined in accordance with the FMV determination procedures set forth in the lease (described below), or (ii) the base rent payable during the last month of the immediately preceding term. This floor provision provides meaningful downside protection for the landlord in a declining market.
FMV Determination Procedure. If the parties are unable to agree on FMV within thirty (30) days following the tenant's exercise of a renewal option, either party may initiate a "baseball arbitration" procedure in which each party selects one (1) MAI-certified appraiser with at least ten (10) years of experience in the Houston industrial market. The two appraisers shall each independently determine FMV within forty-five (45) days, and if the two determinations differ by ten percent (10%) or less, the FMV shall be the average of the two determinations. If the determinations differ by more than ten percent (10%), the two appraisers shall select a third appraiser, and the FMV shall be the average of the two closest determinations. Costs of the appraisal process shall be shared equally by the parties. We note that this baseball arbitration procedure is a well-established mechanism in institutional logistics leases and is generally enforceable under Texas law, as confirmed by Breckenridge Osgood LLP.
Conditions to Exercise. The tenant's right to exercise each renewal option is conditioned on (i) the tenant not being in monetary default at the time of exercise or at the commencement of the renewal term, and (ii) the tenant occupying at least seventy-five percent (75%) of the leased premises for its own use (i.e., the tenant may have sublet up to twenty-five percent (25%) and still exercise the renewal option). There is no requirement that the original named tenant (as opposed to a permitted assignee or successor) be in occupancy.
Assessment. The renewal options are generally favorable to the landlord. The FMV floor and the 95% FMV pricing structure provide downside protection while allowing for market-rate adjustments. The extended potential term (through 2039) provides Buyer with a long-duration income stream if the renewals are exercised. We note that Cascade has operated at the property since the building's completion and has invested in warehouse racking, conveyor systems, and other operational improvements that increase the likelihood of renewal.
E. Expansion Options / Right of First Offer / Right of First Refusal
The Cascade lease grants the tenant a right of first offer ("ROFO") with respect to any additional industrial/logistics building that the landlord may develop on the approximately 12-acre undeveloped parcel adjacent to the Westlake Distribution Hub (the "Adjacent Parcel"). If the landlord determines to develop a building on the Adjacent Parcel, the landlord must first offer the tenant the opportunity to lease such building on the terms and conditions that the landlord intends to offer to the market, and the tenant shall have fifteen (15) business days to accept or reject such offer. If the tenant rejects the offer or fails to respond, the landlord is free to lease the space to third parties on terms no more favorable than those offered to the tenant for a period of nine (9) months, after which the ROFO right reactivates.
Assessment. The Adjacent Parcel is currently unimproved and is not included in the Portfolio ABR calculations. The ROFO right is subordinate to any existing lease, amendment, or letter of intent as of the date of the Cascade lease (none are identified in the data room). This provision could limit Buyer's flexibility to speculatively develop the Adjacent Parcel and lease to other tenants, as the tenant would need to be offered the space first. However, if the tenant declines, the landlord's ability to proceed is only nominally constrained. We recommend that Buyer factor this ROFO right into its development plans for the Adjacent Parcel, if any.
F. Purchase Option
The Cascade lease does not contain a purchase option, right of first offer, or right of first refusal in favor of the tenant with respect to the fee interest in the property. We have confirmed this through a review of the lease and both amendments. This is a favorable result for Buyer, as any purchase option could create complications in connection with a future disposition of the property.
G. Co-Tenancy and Exclusivity
The Cascade lease does not contain any co-tenancy provisions, which is expected given that this is a single-tenant logistics building. The lease does contain a limited exclusivity provision, which provides that the landlord shall not lease any building developed on the Adjacent Parcel to a tenant whose primary business is third-party logistics services directly competitive with the tenant's core business line of consumer goods distribution. This exclusivity restriction is narrowly tailored (it does not extend to tenants engaged in manufacturing, cold storage, or e-commerce fulfillment) and applies only to the Adjacent Parcel, not to any other property owned by the landlord or its affiliates.
Assessment. The exclusivity provision is relatively narrow and should not materially impair Buyer's leasing flexibility for the Adjacent Parcel. We recommend that Buyer's leasing team be made aware of this restriction.
H. Assignment and Subletting
The Cascade lease contains standard assignment and subletting provisions. The tenant may not assign the lease or sublet all or any portion of the premises without the prior written consent of the landlord, which consent shall not be unreasonably withheld, conditioned, or delayed.
The following transfers are expressly permitted without landlord consent ("Permitted Transfers"):
(a) Transfers to any entity that controls, is controlled by, or is under common control with the tenant (an "Affiliate"), provided the tenant delivers written notice to the landlord within ten (10) business days of such transfer and the Affiliate assumes the tenant's obligations under the lease;
(b) Transfers in connection with a merger, consolidation, or reorganization of the tenant, or a sale of all or substantially all of the tenant's assets, provided that the surviving or acquiring entity has a tangible net worth equal to or greater than the tenant's tangible net worth as of the date of the lease; and
(c) A sublease of up to 25% of the premises to a single subtenant, provided the subtenant's use is consistent with the permitted use under the lease.
Recapture Rights. The landlord has the right, but not the obligation, to recapture the premises (or the applicable portion thereof) in the event the tenant seeks to assign the lease or sublet more than fifty percent (50%) of the premises to a third party (other than in connection with a Permitted Transfer). If the landlord exercises its recapture right, the lease shall terminate (or, in the case of a partial sublease, the subleased portion shall be removed from the premises) on the date specified in the landlord's recapture notice, which shall be no earlier than sixty (60) days following the date of such notice.
Excess Rent Sharing. In the event of any permitted assignment or subletting, the tenant shall pay to the landlord fifty percent (50%) of any "Excess Rent," defined as the amount by which the rent and other consideration received by the tenant from the assignee or subtenant exceeds the rent payable by the tenant under the lease (net of reasonable brokerage commissions, legal fees, and tenant improvement costs incurred in connection with such assignment or subletting).
Change of Control. The lease provides that a change of control of the tenant (defined as a transfer of more than fifty percent (50%) of the voting interests in the tenant in one or a series of related transactions) shall be deemed an assignment requiring landlord consent, unless such change of control results from a transaction described in clause (b) of the Permitted Transfers definition above.
Assessment. The assignment and subletting provisions are consistent with institutional market practice for logistics leases. The recapture right provides the landlord with meaningful protections against undesirable sublettings, and the excess rent sharing provision ensures that the landlord participates in any premium achieved through assignment or subletting. The change-of-control provision is typical and appropriately excludes transactions involving entities of comparable financial strength.
I. Tenant Improvements and Landlord Obligations
The original lease provided for a tenant improvement allowance of $6.00/RSF ($3,744,000 in total), which was fully drawn and expended as of August 2020 in connection with the initial build-out of the premises. The landlord has no remaining TI allowance obligations.
The Second Amendment (dated August 15, 2022) modified the HVAC maintenance obligations such that the landlord assumed responsibility for the maintenance and replacement of the building's four (4) rooftop HVAC units (each rated at 20 tons) for a period of five (5) years from the date of the Second Amendment (i.e., through August 15, 2027). This obligation represents an ongoing landlord maintenance commitment that Buyer will inherit. Based on the property condition assessment ("PCA") prepared by Rampart Building Sciences, Inc. dated March 15, 2024, the HVAC units are currently in good condition with an estimated remaining useful life of 8-12 years. No immediate capital expenditure is anticipated in connection with this obligation.
The Phase I Environmental Site Assessment ("ESA") prepared by Trident Environmental Group LLC dated February 28, 2024, identified a de minimis recognized environmental condition ("REC") at the Westlake Distribution Hub consisting of residual soil contamination from a prior agricultural use of the site (pre-development). The contamination has been characterized as a "controlled environmental condition" and is subject to a voluntary cleanup program ("VCP") with the Texas Commission on Environmental Quality ("TCEQ"). A Certificate of Completion under the VCP was issued on June 12, 2020, and no further remediation is required. This is not a lease-level risk, but we note it here for completeness.
J. Default and Remedies
Monetary Default. A failure by the tenant to pay base rent or additional rent when due constitutes a monetary default if not cured within five (5) business days following written notice from the landlord. The five-business-day cure period applies to the first two (2) monetary default notices in any twelve (12) month period; thereafter, no notice or cure period is required, and any failure to pay when due constitutes an immediate event of default.
Non-Monetary Default. A failure by the tenant to perform any other obligation under the lease constitutes a non-monetary default if not cured within thirty (30) days following written notice from the landlord, provided that if such default is of a nature that cannot reasonably be cured within thirty (30) days, the tenant shall not be in default if it commences the cure within the thirty-day period and thereafter diligently prosecutes the cure to completion within a reasonable period not to exceed ninety (90) days.
Landlord Remedies. Upon the occurrence of an event of default, the landlord may, at its option: (i) terminate the lease by written notice to the tenant, whereupon the tenant shall immediately surrender possession; (ii) terminate the tenant's right to possession without terminating the lease, re-enter the premises, and relet the premises on such terms as the landlord deems appropriate; or (iii) pursue any other remedies available at law or in equity. The lease provides for the landlord's right to accelerate rent, calculated as the present value (Discounted at the Federal Reserve Bank of Dallas discount rate plus 1%) of all base rent and estimated additional rent that would have been payable for the remainder of the term, less the present value of the fair rental value of the premises for such period.
Self-Help. The landlord has the right to cure any tenant default after the expiration of applicable notice and cure periods and to recover the cost of such cure from the tenant as additional rent.
Cross-Default. There are no cross-default provisions in the Cascade lease (i.e., a default under this lease does not constitute a default under any other lease or agreement).
Guaranty. The Cascade lease is guaranteed by Cascade Supply Chain Solutions Holdings Corp., a Washington corporation (the "Guarantor"), pursuant to a Guaranty of Lease dated November 15, 2019. The guaranty is a full recourse, unconditional guaranty of all of the tenant's obligations under the lease. There are no guaranty burn-off provisions. Based on publicly available financial information, the Guarantor reported annual revenues of approximately $4.2 billion for its most recently completed fiscal year and maintains an investment-grade credit rating of BBB from S&P Global Ratings. The Guarantor's creditworthiness is viewed as adequate to support the lease obligations.
K. Estoppel and SNDA Status
Estoppel Certificate. An estoppel certificate in the form required by Section 5.06(b) of the PSA was sent to Cascade on March 18, 2024. As of the date of this memorandum, we have received a draft response from the tenant's counsel (Harding Carlisle LLP, Seattle, Washington) dated April 3, 2024. The draft estoppel contains two (2) proposed modifications: (i) the tenant has revised the stated ABR to reflect the letter agreement dated September 1, 2023 (referenced in Section IV.B above), and (ii) the tenant has added a qualification regarding the landlord's HVAC maintenance obligation under the Second Amendment. Neither modification is substantively inconsistent with the lease terms; however, we are working with Seller's counsel to ensure that the final estoppel conforms to the PSA requirements. We anticipate execution by April 22, 2024.
SNDA. Cascade's ABR of $8,736,000 exceeds the $1,500,000 Major Tenant threshold, and an SNDA is required. The applicable lender is Pinnacle Federal Bank, N.A. ("Pinnacle"). An SNDA in the Pinnacle-required form was sent to the tenant on March 18, 2024. As of the date of this memorandum, the SNDA has not yet been returned. We have followed up with the tenant's counsel and expect execution by May 1, 2024, well within the May 15, 2024 delivery deadline under the PSA (as extended by the First Amendment).
L. Key Risk Factors and Observations
1. Concentration Risk. Cascade is the largest single tenant in the Portfolio, representing 11.7% of total ABR. The loss of this tenant upon lease expiration (or earlier default) would result in a vacancy of 624,000 RSF at a single-tenant building with no other income source. This concentration risk is partially mitigated by the tenant's strong credit profile (investment-grade guarantor), the 5.6 years of remaining term, and the two five-year renewal options.
2. Single-Tenant Building. The Westlake Distribution Hub is a purpose-built logistics facility designed for a single occupant. In the event of a vacancy, the building may require significant marketing time to re-tenant, although the West Houston industrial submarket has maintained healthy absorption and vacancy rates below 5% according to CBRE's Q4 2023 Houston Industrial Market Report.
3. HVAC Maintenance Obligation. The landlord's assumption of HVAC maintenance and replacement obligations through August 15, 2027, represents a modest ongoing capital obligation. Based on the PCA, no immediate expenditures are anticipated, but Buyer should budget for routine maintenance costs during the remaining obligation period.
4. Rent Roll Discrepancy. The discrepancy between the Rent Roll ABR and the escalation schedule ABR (discussed in Section IV.B) should be resolved through receipt and review of the September 1, 2023 letter agreement. This is not expected to be a material issue.
5. Environmental REC. The de minimis REC identified in the Phase I ESA is a controlled environmental condition with a TCEQ Certificate of Completion. This does not present a lease-level risk or a material environmental liability concern.
6. ROFO on Adjacent Parcel. Buyer should be aware of the tenant's ROFO right on any building developed on the Adjacent Parcel. This right may affect Buyer's speculative development plans, if any.
Overall Assessment. The Cascade lease is a well-documented, institutionally negotiated lease with terms that are generally favorable to the landlord. The tenant's creditworthiness, the NNN lease structure, and the built-in escalations provide a stable and growing income stream. We do not identify any material lease defects that would impede closing.
V. Detailed Lease Analysis — Tenant No. 2: Zynvaro Distribution Holdings LLC
A. Lease Overview
Zynvaro Distribution Holdings LLC ("Mercer") is a privately held regional distribution and light manufacturing company headquartered in Houston, Texas. The Katy Freeway Logistics Park is Mercer's primary distribution facility serving the greater Houston metropolitan area. The building was delivered in 2021 as a build-to-suit for the tenant, and the lease reflects the tenant's specifications for clear heights (36-foot minimum), column spacing, dock-high loading positions (72 total), and drive-in doors (4 total).
B. Rent and Escalations
The current ABR under the Mercer lease is $7,532,000 ($14.00/RSF), payable in equal monthly installments of $627,667. The lease is structured as a NNN (triple-net) lease, with the tenant responsible for all real property taxes, insurance, and operating expenses. The landlord retains a management fee of 2.5% of base rent.
Base rent escalates at a rate of 2.75% per annum on each anniversary of the Rent Commencement Date (December 1). As of the Rent Roll date of December 31, 2023, the tenant was in Lease Year 3 (December 1, 2023 through November 30, 2024). We have confirmed that the Rent Roll ABR of $7,532,000 is consistent with the Year 3 rent of $14.00/RSF, which represents the escalated rate from a Year 1 base of approximately $13.26/RSF.
The escalation schedule through the end of the current term is attached hereto as part of Exhibit E.
There is no percentage rent component.
C. Security Deposit
The lease requires a security deposit in the form of an irrevocable standby letter of credit in the initial amount of $2,258,000, equivalent to approximately three (3) months of Year 1 base rent. The letter of credit was issued by Greaves Bancorp and is currently in effect.
The lease provides for a burn-down of the letter of credit amount: the required amount shall be reduced by $376,333 on each of the third (3rd), fifth (5th), and seventh (7th) anniversaries of the Rent Commencement Date, provided the tenant is not then in default, resulting in a final required amount of $1,129,000. As of the date of this memorandum, the first burn-down (December 1, 2024) has not yet occurred, and the full $2,258,000 letter of credit remains in effect.
D. Renewal Options
The Mercer lease provides for two (2) successive renewal options, each for a term of five (5) years.
Notice Requirement. The tenant must exercise each renewal option by delivering written notice to the landlord no later than fifteen (15) months prior to the expiration of the then-current term.
Renewal Rent. Rent during each renewal term shall be the then-prevailing fair market rental value for comparable industrial/logistics space in the Katy/West Houston submarket, as determined in accordance with FMV procedures substantially similar to those described in the Cascade lease analysis above (Section IV.D), with the following distinction: there is no floor on the renewal rent (i.e., the renewal rent could theoretically be lower than the expiring rent if market conditions warrant). This is a somewhat less favorable provision for the landlord than the Cascade lease, as it does not provide downside protection in a declining market.
Conditions to Exercise. The tenant must not be in default at the time of exercise and must be occupying the premises for its own use or through a permitted sublease.
Assessment. The lack of a floor on renewal rent represents a potential downside risk for Buyer if market conditions in the Katy/West Houston submarket deteriorate. However, the 7.3 years of remaining term on the primary lease provide a substantial runway before this risk materializes.
E. Expansion Options / Right of First Offer / Right of First Refusal
The Mercer lease grants the tenant a right of first refusal ("ROFR") on any portion of the Katy Freeway Logistics Park that is offered for lease to a third party. The Katy Freeway Logistics Park is a multi-building park; however, the only existing building is the one currently leased by Mercer (Building A). The park master plan (included in the data room) contemplates the potential future development of two additional buildings (Building B — approximately 350,000 RSF and Building C — approximately 275,000 RSF) on adjacent parcels owned by GMP Katy LLC.
If the landlord receives a bona fide third-party offer to lease space in any future building at the park, the landlord must provide the tenant with written notice of the material terms of such offer, and the tenant shall have ten (10) business days to elect to lease such space on the same terms. If the tenant does not exercise the ROFR, the landlord may lease the space to the third party on substantially the same terms for a period of twelve (12) months.
Assessment. This ROFR right is broader than the ROFO right in the Cascade lease, as it applies to all future buildings in the park (rather than a single adjacent parcel) and is triggered by actual third-party offers (rather than the landlord's decision to develop). This provision could limit Buyer's leasing flexibility at the Katy Freeway Logistics Park, particularly if Buyer elects to develop Buildings B and C. However, the ROFR is a right to match, not a right to receive preferential terms, so the economic impact should be neutral provided that the tenant is required to match the actual third-party offer terms.
F. Purchase Option
The Mercer lease contains a right of first refusal in favor of the tenant with respect to the fee interest in the property (the "Fee ROFR"). If the landlord intends to sell the property (or the membership interests in GMP Katy LLC) to a third-party purchaser, the landlord must provide the tenant with written notice of the material terms of the proposed sale, and the tenant shall have thirty (30) days to elect to purchase the property on the same terms and conditions. If the tenant does not exercise the Fee ROFR, the landlord may proceed with the sale to the third-party purchaser on substantially the same terms for a period of twelve (12) months, after which the ROFR reactivates.
The Fee ROFR contains the following exceptions:
(a) Transfers to affiliates of the landlord or among members or equity holders of the landlord;
(b) Transfers in connection with a portfolio sale involving four (4) or more properties (including the subject property); and
(c) Transfers to the landlord's existing lenders in connection with a foreclosure or deed-in-lieu of foreclosure.
Assessment. The portfolio sale exception in clause (b) above is critical to the current transaction. The acquisition of the 14-property Portfolio by Fairwater REIT constitutes a "portfolio sale involving four (4) or more properties" within the meaning of the exception, and therefore the tenant's Fee ROFR is not triggered by this transaction. We have confirmed this interpretation with Seller's counsel. However, if Buyer were to dispose of the Katy Freeway Logistics Park on a standalone basis in the future (i.e., not as part of a portfolio sale of four or more properties), the tenant's Fee ROFR would be triggered. This is a material consideration for Buyer's future disposition planning. We have flagged this to Camille Oduya for inclusion in Buyer's asset management records.
G. Co-Tenancy and Exclusivity
The Mercer lease does not contain co-tenancy provisions. The lease does contain an exclusivity provision substantially similar to the Cascade lease exclusivity (Section IV.G above), restricting the landlord from leasing space in any building at the Katy Freeway Logistics Park to a tenant whose primary business is regional consumer goods distribution directly competitive with Mercer's core business operations. This restriction is narrowly defined and would not preclude leasing to e-commerce, cold storage, or manufacturing tenants.
H. Assignment and Subletting
The assignment and subletting provisions in the Mercer lease are substantially similar to those in the Cascade lease, with the following notable differences:
(a) Affiliate Transfer Carve-Out. Permitted affiliate transfers include transfers to any entity in which the tenant's current members hold at least a majority (i.e., 50% or more) of the equity interests, which is a somewhat broader definition than the "control" standard used in the Cascade lease;
(b) Recapture Rights. The landlord's recapture right is triggered upon any proposed assignment of the lease (but not upon a proposed sublease), which is a narrower recapture right than the Cascade lease (which is triggered by subleases of more than 50% of the premises as well as assignments); and
(c) Excess Rent Sharing. The tenant shall pay to the landlord fifty percent (50%) of Excess Rent, consistent with the Cascade lease.
Assessment. The assignment and subletting provisions are within market norms for institutional logistics leases in Texas. The broader affiliate transfer carve-out reflects the tenant's privately held status, where ownership changes among existing members are more common. Texas local counsel (Breckenridge Osgood LLP) has confirmed enforceability of these provisions under Texas law.
I. Tenant Improvements and Landlord Obligations
The original lease provided for a tenant improvement allowance of $8.00/RSF ($4,304,000 in total), reflecting the build-to-suit nature of the transaction. The full TI allowance was drawn and expended as of March 2022, and no outstanding landlord TI obligations remain.
The landlord has an ongoing obligation to maintain the structural components of the building (roof structure, foundation, and load-bearing walls) during the lease term. All other maintenance obligations, including roof membrane, HVAC, and parking areas, are the tenant's responsibility. The PCA by Rampart Building Sciences, Inc. identified no immediate repair needs at this property; all building systems were rated in good condition with an estimated remaining useful life exceeding the lease term.
J. Default and Remedies
The default and remedies provisions are substantially similar to those in the Cascade lease (Section IV.J above), with the following distinction: the monetary default cure period is seven (7) days (compared to five (5) business days in the Cascade lease), and the non-monetary default cure period is thirty (30) days, with an extension to ninety (90) days for defaults that cannot reasonably be cured within thirty (30) days.
Guaranty. The Mercer lease is guaranteed by Ronald J. Mercer, an individual resident of Texas, and Sandra K. Mercer, an individual resident of Texas, jointly and severally (collectively, the "Mercer Guarantors"), pursuant to a Guaranty of Lease dated June 1, 2021. The guaranty is a limited guaranty, capping the Mercer Guarantors' aggregate liability at $7,532,000 (one year of ABR). The limited nature of this guaranty is somewhat atypical for a lease of this size; however, we note that Zynvaro Distribution Holdings LLC is a privately held company, and personal guaranties from the principals are common in leases with privately held tenants. Based on financial information provided in the data room (personal financial statements dated September 30, 2023), the Mercer Guarantors have a combined net worth of approximately $85,000,000, which we view as adequate to support the guaranty.
The guaranty contains a burn-off provision: the guaranty shall automatically terminate and be of no further force or effect upon the earlier of (i) the seventh (7th) anniversary of the Rent Commencement Date (December 1, 2028), provided no event of default exists at such time, or (ii) the date on which the tenant demonstrates a tangible net worth of $50,000,000 or more for two (2) consecutive fiscal years. As of the date of this memorandum, neither condition has been satisfied. The guaranty burn-off on December 1, 2028 is approximately 4.5 years from the anticipated closing date.
Assessment. The guaranty burn-off provision is a notable risk factor. After December 1, 2028, the lease will be unsecured by any personal guaranty, and Buyer will be relying solely on the creditworthiness of Zynvaro Distribution Holdings LLC. Buyer should monitor the tenant's financial condition on an ongoing basis, particularly as the burn-off date approaches.
K. Estoppel and SNDA Status
Estoppel Certificate. An estoppel certificate was sent to Mercer on March 18, 2024. A fully executed estoppel certificate was received from the tenant on April 1, 2024. The estoppel confirms all material lease terms consistent with the Rent Roll, with no discrepancies noted. The estoppel has been reviewed and approved by our team.
SNDA. An SNDA in the Pinnacle-required form was sent to Mercer on March 18, 2024. A fully executed SNDA was received from the tenant on April 5, 2024. No modifications were requested by the tenant. The SNDA has been delivered to Pinnacle's loan servicer.
L. Key Risk Factors and Observations
1. Concentration Risk. Mercer is the second-largest tenant in the Portfolio, representing 10.1% of total ABR. Together with Cascade (11.7%), the top two tenants represent 21.8% of total ABR. This is a meaningful concentration that warrants ongoing monitoring.
2. Fee ROFR. The tenant's right of first refusal on the fee interest is the only purchase-related right among the Top 10 tenants. While the portfolio sale exception applies to the current transaction, the Fee ROFR would be triggered by a future standalone disposition. This is a material consideration.
3. Space ROFR. The tenant's right of first refusal on future buildings at the Katy Freeway Logistics Park could limit Buyer's pre-leasing flexibility for speculative development.
4. Guaranty Burn-Off. The personal guaranty will burn off on December 1, 2028, leaving the lease unsecured. Buyer should assess the tenant's standalone creditworthiness in advance of this date.
5. No Renewal Rent Floor. The absence of a floor on renewal rent is a less favorable provision for the landlord compared to other Top 10 leases.
6. Privately Held Tenant. As a privately held company, Mercer does not file public financial statements, and Buyer's ability to monitor tenant creditworthiness will depend on the financial reporting provisions of the lease (which require annual delivery of financial statements within 120 days of the tenant's fiscal year end).
Overall Assessment. The Mercer lease is a well-structured build-to-suit lease with a strong economic profile. The primary risk factors relate to the Fee ROFR (which constrains future disposition flexibility), the guaranty burn-off, and the tenant's privately held status. Subject to monitoring of these issues, we do not identify any material lease defects that would impede closing. Texas local counsel (Breckenridge Osgood LLP) has confirmed enforceability of the lease under Texas law.
VI. Detailed Lease Analysis — Tenant No. 3: Thornton-Whitaker Pharmaceuticals Corp.
A. Lease Overview
Thornton-Whitaker Pharmaceuticals Corp. ("Thornton-Whitaker") is a mid-cap pharmaceutical manufacturing and distribution company headquartered in Atlanta, Georgia, with annual revenues of approximately $1.8 billion (based on publicly available information). The company specializes in generic pharmaceutical products and over-the-counter health products. The Fairfield Logistics Center I serves as Thornton-Whitaker's primary Southeast distribution hub for pharmaceutical products, including temperature-sensitive medications requiring controlled environment storage.
B. Rent and Escalations
The current ABR is $6,180,000 ($15.00/RSF), payable monthly. The lease is structured as a NNN lease, with the tenant responsible for all real property taxes, insurance, and operating expenses. The higher per-RSF rent ($15.00/RSF vs. $14.00/RSF for the Texas logistics tenants) reflects the specialized nature of the premises, including temperature-controlled zones and clean-room areas, as well as the generally higher industrial rents in the South Atlanta submarket.
Base rent escalates at a rate of 3.0% per annum on each anniversary of the Rent Commencement Date (July 1). The 3.0% escalation rate is the highest among the Top 10 logistics tenants and provides Buyer with meaningful rent growth over the remaining term. The current Year 4 rent of $15.00/RSF reflects escalation from a Year 1 base of approximately $13.74/RSF. This is consistent with the Rent Roll. No discrepancies were identified.
There is no percentage rent component.
C. Security Deposit
The lease requires a security deposit of $1,030,000, equivalent to approximately two (2) months of Year 1 base rent, held in cash. There are no burn-down provisions; the full amount remains on deposit throughout the lease term and the renewal terms (if exercised). The security deposit shall be returned within ninety (90) days following the expiration or earlier termination of the lease.
D. Renewal Options
The Thornton-Whitaker lease provides for two (2) successive renewal options, each for a term of five (5) years (aggregate potential extension through March 31, 2040).
Notice Requirement. Eighteen (18) months prior to expiration of the then-current term. This is the longest notice period among the Top 10 tenants and provides the landlord with substantial advance planning time.
Renewal Rent. The greater of (i) fair market rental value, as determined through a three-appraiser arbitration process, or (ii) one hundred percent (100%) of the base rent payable during the last month of the expiring term. The FMV floor is set at 100% of the expiring rent (compared to 95% in the Cascade lease), providing even stronger downside protection for the landlord.
Conditions to Exercise. No default, and the tenant must not have sublet more than twenty percent (20%) of the premises at the time of exercise.
Assessment. These are among the most landlord-favorable renewal provisions in the Top 10 leases. The long notice period and strong FMV floor provide meaningful protections.
E. Expansion Options / Right of First Offer / Right of First Refusal
The Thornton-Whitaker lease grants the tenant a right of first offer on Building II at the Fairfield Logistics Center campus (approximately 280,000 RSF, currently under separate ownership by a third party and not part of the Portfolio). Because Building II is not owned by GMP Fairfield I LLC or any other Target Entity, this ROFO right does not currently affect Buyer. If Buyer were to acquire Building II in the future, this ROFO right would need to be honored. This is noted for informational purposes only.
F. Purchase Option