PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT
MEMORANDUM
TO: Douglas Fairchild, Responsible Partner, Calderwood & Harkness LLP
FROM: Grace Nakamura, Lead Associate, Calderwood & Harkness LLP Rafael Dominguez, Working Associate, Calderwood & Harkness LLP
DATE: March 20, 2024
RE: Loan Document Review — Pinnacle Federal Bank, N.A. Master Loan Agreement and Loan Supplements (Loans 1-A through 1-H)
MATTER: Fairwater Real Estate Investment Trust — Acquisition of Greystone Meridian Partners Fund III, L.P. Portfolio
MATTER NO.: 1036-00004
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I. Executive Summary
This memorandum sets forth the results of our comprehensive review and analysis of the existing mortgage loan facility with Pinnacle Federal Bank, N.A. ("Pinnacle" or "Lender") securing eight logistics properties in the portfolio being acquired by Fairwater Real Estate Investment Trust ("Fairwater" or "Buyer"). The purpose of this review is to identify and analyze all issues relevant to Fairwater's proposed acquisition of one hundred percent (100%) of the membership interests in eight of the fourteen Target Entities from Greystone Meridian Partners Fund III, L.P. ("GMP Fund III" or "Seller"). This memorandum should be read in conjunction with the separate loan review memoranda prepared by Calderwood & Harkness LLP ("C&H") for the Veltrano Capital loan facility (Matter Memorandum dated March 14, 2024) and the Sycamore Life Insurance Company loan facility (Matter Memorandum dated March 18, 2024).
The Pinnacle facility is the largest single debt obligation in the portfolio, with an aggregate outstanding principal balance ("OPB") of $421,600,000 as of February 28, 2024. The facility is governed by a Master Loan Agreement dated September 15, 2020, as amended by a First Amendment dated March 1, 2021, and a Second Amendment dated July 15, 2022, among the eight single-purpose Borrower Entities and Pinnacle. The facility is structured as eight individual Loan Supplements (designated 1-A through 1-H), each corresponding to one of the eight logistics properties, but cross-defaulted and cross-collateralized under the Master Loan Agreement framework. The facility bears a fixed interest rate of 4.22% per annum and matures on July 1, 2028, providing approximately four years of remaining term as of the anticipated closing date.
The proposed transaction is structured as an entity-level purchase of the membership interests in each single-purpose Delaware limited liability company that serves as the Borrower Entity under the respective Loan Supplement. This transaction structure, while beneficial for purposes of avoiding real estate transfer taxes in certain jurisdictions and for preserving existing lease arrangements, unambiguously constitutes a "change of control" under Section 5.02 of the Master Loan Agreement. Accordingly, Pinnacle's prior written consent is required as a condition to closing the acquisition.
Our key findings are as follows:
(i) Consent is Mandatory. Lender consent is required under Section 5.02 of the Master Loan Agreement. None of the enumerated Permitted Transfer exceptions apply to the proposed acquisition. The consent request must be accompanied by a non-refundable consent fee equal to 0.25% of the outstanding principal balance ($1,054,000), as well as payment of Lender's reasonable attorneys' fees and costs incurred in connection with the review. Under the terms of the Purchase and Sale Agreement dated January 29, 2024 (the "PSA"), the consent fee is allocated equally between Buyer and Seller.
(ii) Replacement Guarantor Requirements. As a condition to consent, a replacement guarantor must execute a new Carve-Out Guaranty in form and substance acceptable to Pinnacle. The replacement guarantor must satisfy specified financial covenants, including a minimum tangible net worth of $500,000,000 and minimum liquid assets of $50,000,000, each tested quarterly. Based on Fairwater's current financial position, including its market capitalization of approximately $4,800,000,000 and its $750,000,000 unsecured revolving credit facility with Aldgate National Bank, N.A., Fairwater comfortably satisfies these thresholds.
(iii) Borrower Covenants Carry Forward. Several material borrower covenants will continue to bind Fairwater post-closing, including the debt service coverage ratio ("DSCR") covenant (minimum 1.25x, with default at 1.10x), occupancy covenants (minimum 80% aggregate RSF), leasing restrictions, single-purpose entity ("SPE") covenants, financial reporting obligations, property management approval requirements, and restrictions on additional indebtedness.
(iv) Default Triggers Require Analysis. Certain default triggers, including the change-of-control default under Section 7.01(h), the cross-default provisions, and the environmental default threshold of $2,000,000, require careful analysis and pre-closing compliance verification. Based on Seller's representations and our review of Seller's compliance certificates, no Events of Default are currently outstanding. De minimis recognized environmental conditions ("RECs") at two properties are well below the environmental default threshold.
Pinnacle's outside counsel in this matter is Whitfield & Archer LLP, a Houston, Texas-based firm, with Sandra Whitfield serving as lead partner. C&H submitted a consent request letter to Whitfield & Archer LLP on March 8, 2024, initiating the 45-business-day review period under Section 5.02(d) of the Master Loan Agreement. This memorandum provides a detailed analysis of all reviewed loan documents, the consent process, and our recommendations for managing the consent workstream through closing.
II. Loan Documents Reviewed
Set forth below is a complete list of all documents comprising the Pinnacle loan facility that have been reviewed by C&H in connection with this engagement. All documents were obtained from the virtual data room maintained by Seller's counsel, Prescott Hale Vanderbilt LLP, except where otherwise noted. Where applicable, we have also reviewed amendments and modifications to such documents.
Master Loan Agreement and Amendments
• Master Loan Agreement dated September 15, 2020, among the eight Borrower Entities identified below and Pinnacle Federal Bank, N.A., as Lender (VDR Document No. 3.1.1)
• First Amendment to Master Loan Agreement dated March 1, 2021 (modifying certain reporting deadlines and reserve requirements) (VDR Document No. 3.1.2)
• Second Amendment to Master Loan Agreement dated July 15, 2022 (modifying the definition of "DSCR" to clarify treatment of straight-line rent adjustments and extending certain insurance covenant cure periods) (VDR Document No. 3.1.3)
Individual Loan Supplements
• Loan Supplement 1-A: GMP Fairfield I LLC, as Borrower; Property: Fairfield Logistics Center I, 4200 Fairfield Industrial Blvd, Fairburn, GA 30213 (VDR Document No. 3.2.1)
• Loan Supplement 1-B: GMP Fairfield II LLC, as Borrower; Property: Fairfield Logistics Center II, 4300 Fairfield Industrial Blvd, Fairburn, GA 30213 (VDR Document No. 3.2.2)
• Loan Supplement 1-C: GMP Westlake LLC, as Borrower; Property: Westlake Distribution Hub, 11500 Westlake Parkway, Houston, TX 77082 (VDR Document No. 3.2.3)
• Loan Supplement 1-D: GMP Katy LLC, as Borrower; Property: Katy Freeway Logistics Park, 22600 Katy Freeway, Katy, TX 77449 (VDR Document No. 3.2.4)
• Loan Supplement 1-E: GMP Alliance LLC, as Borrower; Property: Alliance Commerce Center, 2800 Alliance Gateway Blvd, Fort Worth, TX 76177 (VDR Document No. 3.2.5)
• Loan Supplement 1-F: GMP Lakeland LLC, as Borrower; Property: Lakeland Crossings Industrial, 7100 Drane Field Road, Lakeland, FL 33811 (VDR Document No. 3.2.6)
• Loan Supplement 1-G: GMP Southport LLC, as Borrower; Property: Southport Logistics Park, 3200 Southport Connector Road, Jacksonville, FL 32218 (VDR Document No. 3.2.7)
• Loan Supplement 1-H: GMP Murfreesboro LLC, as Borrower; Property: Murfreesboro Distribution Center, 1600 Joe B. Jackson Parkway, Murfreesboro, TN 37127 (VDR Document No. 3.2.8)
Promissory Notes.
• Eight (8) individual promissory notes, each dated September 15, 2020, one per Borrower Entity, evidencing the individual loan amounts allocated under each Loan Supplement (VDR Document Nos. 3.3.1 through 3.3.8)
Security Instruments.
• Deeds to Secure Debt, Assignments of Leases and Rents, and Security Agreements for the Georgia properties (Loans 1-A and 1-B), each recorded in the Fulton County, Georgia land records (VDR Document Nos. 3.4.1 and 3.4.2)
• Deeds of Trust, Assignments of Leases and Rents, and Security Agreements for the Texas properties (Loans 1-C, 1-D, and 1-E), each recorded in the applicable county real property records in Harris County, Fort Bend County, and Tarrant County, Texas, respectively (VDR Document Nos. 3.4.3, 3.4.4, and 3.4.5)
• Mortgages, Assignments of Leases and Rents, and Security Agreements for the Florida properties (Loans 1-F and 1-G), each recorded in the applicable county official records in Polk County and Duval County, Florida, respectively (VDR Document Nos. 3.4.6 and 3.4.7)
• Deed of Trust, Assignment of Leases and Rents, and Security Agreement for the Tennessee property (Loan 1-H), recorded in the Rutherford County, Tennessee Register's Office (VDR Document No. 3.4.8)
Assignments of Leases and Rents
• Eight (8) Assignments of Leases and Rents, each dated September 15, 2020, one per Property, assigning all of the applicable Borrower Entity's right, title, and interest in and to the leases, rents, and profits at the applicable Property to Pinnacle as additional security (VDR Document Nos. 3.5.1 through 3.5.8)
Environmental Indemnity Agreements
• Eight (8) Environmental Indemnity Agreements, each dated September 15, 2020, one per Borrower Entity, pursuant to which each Borrower Entity indemnifies Pinnacle against environmental losses and liabilities related to the applicable Property (VDR Document Nos. 3.6.1 through 3.6.8)
Carve-Out Guaranty.
• Carve-Out Guaranty dated September 15, 2020, executed by Greystone Meridian Partners Fund III, L.P., as Guarantor, in favor of Pinnacle Federal Bank, N.A. (VDR Document No. 3.7.1)
UCC Financing Statements
• Eight (8) UCC-1 Financing Statements, filed against each Borrower Entity with the Delaware Secretary of State, perfecting Pinnacle's security interest in personal property collateral (VDR Document Nos. 3.8.1 through 3.8.8); continuation statements filed as applicable
Borrower Organizational Documents
• Operating agreements, certificates of formation, and other organizational documents for each Borrower LLC, as delivered to Pinnacle at loan origination (VDR Document Nos. 3.9.1 through 3.9.16)
Title Insurance Policies
• Eight (8) Lender's ALTA loan title insurance policies, each dated September 15, 2020, one per Property, issued by Commonwealth National Title Insurance Company (VDR Document Nos. 3.10.1 through 3.10.8)
Cross-Collateralization and Intercreditor Provisions
• Cross-collateralization and cross-default provisions are contained within the Master Loan Agreement itself (principally in Sections 2.05, 5.01(m), and 7.01); no separate intercreditor agreement exists with respect to the Pinnacle facility as there is no subordinate or mezzanine debt encumbering the Pinnacle properties
In total, C&H has reviewed approximately 87 individual documents and sub-documents comprising the Pinnacle loan facility. A complete index of all documents reviewed, including document dates, parties, and VDR reference numbers, is attached hereto as Appendix A.
III. Key Loan Terms
A. Aggregate Outstanding Principal Balance
The total outstanding principal balance of the Pinnacle facility as of February 28, 2024, is $421,600,000. This figure has been confirmed against Seller's disclosure schedules delivered pursuant to Section 3.05(b) of the PSA and is consistent with the rent roll and financial data provided in the data room. We note that the individual allocations per Loan Supplement (i.e., the allocated principal balances attributable to each of the eight loans) have not been independently verified by C&H against a Pinnacle payoff or balance statement. We recommend that Buyer request formal balance confirmation letters from Pinnacle for each Loan Supplement as part of the consent process, or alternatively, require Seller to deliver Pinnacle payoff/balance statements as a condition to closing.
The eight properties secured by the Pinnacle facility are logistics/industrial properties located across four states in the U.S. Sun Belt:
A detailed summary table of financial terms by Loan Supplement, including allocated principal balances (based on Seller's allocations), is attached hereto as Appendix B.
B. Interest Rate
The Pinnacle facility bears a fixed interest rate of 4.22% per annum. Interest is calculated on an actual/360-day basis, meaning interest accrues on the actual number of days elapsed in each interest period divided by a 360-day year. There is no floating-rate component to the facility, and no interest-rate swap or hedge agreement is in effect with respect to the Pinnacle loans. This fixed-rate structure provides Fairwater with certainty of debt service cost for the remaining approximately four-year term.
Upon the occurrence of an Event of Default, the interest rate automatically increases to the default rate, which is defined as the lesser of (i) the applicable rate plus 5.00% per annum (i.e., 9.22% per annum) or (ii) the maximum rate permitted by applicable law. The default rate applies to all amounts outstanding from the date of default until such default is cured or the indebtedness is repaid in full.
C. Maturity Date
The stated maturity date of the Pinnacle facility is July 1, 2028. There are no extension options contained in the Master Loan Agreement or any of the Loan Supplements. Accordingly, the full outstanding principal balance, together with all accrued and unpaid interest, fees, and other amounts due, will be due and payable in full on the maturity date. As of the anticipated closing date, the facility will have approximately four years of remaining term, which provides Fairwater with a reasonable runway for portfolio stabilization, value creation, and eventual refinancing or disposition planning.
We note that the absence of extension options means that Fairwater should begin evaluating refinancing alternatives no later than the second half of 2027, particularly given the yield maintenance premium that remains in effect until January 1, 2028 (as discussed in Section III.F below) and the potential for interest rate environment changes over the intervening period.
D. Amortization. The Pinnacle facility was structured with an initial interest-only period of 36 months from the origination date (September 15, 2020 through September 15, 2023). This interest-only period has expired. Following the expiration of the interest-only period, the facility converted to a 30-year amortization schedule with monthly payments of principal and interest. As a result, monthly debt service payments now include both an interest component and a principal amortization component. The transition from interest-only to amortizing payments increased the monthly debt service obligation but also contributes to gradual principal reduction over the remaining term.
Prepayment of principal is permitted, subject to the yield maintenance and prepayment premium provisions described in Section III.F below.
E. Cross-Default and Cross-Collateralization
The Master Loan Agreement contains comprehensive cross-default and cross-collateralization provisions that are critical for Fairwater to understand in connection with its post-closing ownership and management of the portfolio.
Cross-Default. Section 7.01 of the Master Loan Agreement provides that an Event of Default under any individual Loan Supplement constitutes an Event of Default under all Loan Supplements simultaneously. This means that a property-level issue at any one of the eight Pinnacle properties — whether a payment default, a covenant breach, or an unauthorized transfer — has the potential to trigger a default across the entire $421,600,000 facility. The cross-default mechanism is a standard feature of portfolio-level lending, but it materially increases the stakes for Fairwater's post-closing compliance efforts.
Cross-Collateralization. Under Sections 2.05 and 5.01(m) of the Master Loan Agreement, each Property secures the entire indebtedness under the Master Loan Agreement, not merely the allocated principal balance under its own Loan Supplement. In the event of a default, Pinnacle has the right to realize against any or all of the Properties to satisfy the full outstanding indebtedness. This cross-collateralization structure eliminates the possibility of releasing individual properties from the lien without Pinnacle's consent and full satisfaction of all obligations under the Master Loan Agreement.
Implications for Buyer. Fairwater must ensure strict compliance across all eight properties simultaneously. A tenant default, a property management failure, or an environmental condition at any single property could trigger a cross-default across the full facility. Post-closing asset management and compliance monitoring systems should be designed with this cross-default risk firmly in mind. We discuss this further in our recommendations at Section XII.G below.
F. Prepayment Provisions
The prepayment provisions under the Master Loan Agreement are structured as follows:
(i) Lockout Period. The facility included an initial lockout period of 24 months from the origination date, during which no voluntary prepayment was permitted. The lockout period expired on September 15, 2022, and is therefore no longer applicable.
(ii) Yield Maintenance Period. From the 25th month of the loan term through the date that is six months prior to the maturity date (i.e., from September 15, 2022 through January 1, 2028), any voluntary prepayment in full or in part (to the extent partial prepayment is permitted) is subject to a yield maintenance premium. The yield maintenance premium is calculated as the greater of (a) zero and (b) the present value of the remaining scheduled payments of principal and interest (assuming the loan were to remain outstanding through the maturity date), discounted at a rate equal to the yield on the U.S. Treasury security having a comparable remaining maturity to the loan as of the prepayment date, plus 50 basis points, minus the outstanding principal balance as of the prepayment date. This calculation is designed to ensure that Pinnacle receives the economic equivalent of the interest income it would have earned had the loan remained outstanding through maturity.
(iii) Open Prepayment Period. During the final six months of the loan term (January 1, 2028 through July 1, 2028), the facility may be prepaid in full without any prepayment premium or yield maintenance payment.
(iv) Partial Prepayment. Voluntary partial prepayment of principal is not permitted under the Master Loan Agreement. Partial prepayment is only permitted in connection with the mandatory application of casualty insurance proceeds or condemnation awards to the outstanding indebtedness, as provided in the Master Loan Agreement and the applicable security instruments.
(v) No Defeasance Option. The Master Loan Agreement does not contain a defeasance provision. Accordingly, the only mechanism for early repayment is a direct prepayment subject to the yield maintenance premium during the applicable period.
For Fairwater's planning purposes, we note that the yield maintenance premium could be significant in the current interest rate environment. If Fairwater were to seek to prepay or refinance the facility prior to January 1, 2028, a detailed yield maintenance calculation should be obtained from Pinnacle based on the then-current Treasury rate. This analysis is beyond the scope of this memorandum but should be considered in Fairwater's long-term capital planning for the portfolio.
G. Reserves and Escrows
The Master Loan Agreement requires the Borrower Entities to fund and maintain several reserve and escrow accounts, which are held by Pinnacle. These ongoing funding obligations will be assumed by Fairwater post-closing and should be factored into Fairwater's cash flow projections for the portfolio.
(i) Tax and Insurance Escrow. Monthly deposits are required in amounts estimated by Pinnacle to be sufficient to pay real estate taxes and insurance premiums when due. The escrow is held by Pinnacle and disbursed by Pinnacle directly to the applicable taxing authorities and insurance carriers. This is a standard escrow requirement in commercial mortgage lending.
(ii) Replacement Reserve. A replacement reserve is funded through monthly deposits of $0.15 per rentable square foot ("RSF") per annum. Based on the aggregate RSF of approximately 3,730,000 across the eight Pinnacle properties, the aggregate annual replacement reserve contribution is approximately $559,500 (note: earlier estimates of $548,475 were based on preliminary square footage figures; the variance reflects updated RSF measurements provided in the most recent rent rolls; we recommend confirming the exact per-property RSF figures against survey data). Replacement reserve funds may be drawn to reimburse the Borrower for approved capital expenditures at the Properties, subject to Pinnacle's approval of the expenditure and submission of appropriate documentation.
(iii) Tenant Improvement / Leasing Commission Reserve. At loan origination, a TI/LC reserve was funded in the amount of $2,000,000. This reserve is available to reimburse the Borrower for tenant improvement costs and leasing commissions incurred in connection with new leases or lease renewals at the Properties. The reserve is replenished upon draw-down in accordance with the terms of the Master Loan Agreement. As of the date of this memorandum, we have not independently confirmed the current balance of the TI/LC reserve and recommend that Buyer request a reserve statement from Pinnacle as part of the consent process.
(iv) Casualty / Condemnation Proceeds. Insurance proceeds received in connection with a casualty event or condemnation award are held by Pinnacle and applied in accordance with the Master Loan Agreement. Pinnacle retains discretion to apply casualty or condemnation proceeds to the reduction of the outstanding indebtedness (rather than restoration of the affected Property) if the estimated cost of restoration exceeds $5,000,000 at any single Property. This threshold is an important consideration for Fairwater's risk management, as a significant casualty event at any one of the larger logistics properties could result in a mandatory principal reduction rather than a restoration of the damaged improvements.
IV. Change of Control Provisions
A. Definition of "Transfer" and "Change of Control"
Section 5.02 of the Master Loan Agreement contains comprehensive restrictions on transfers of interests in the Properties and in the Borrower Entities. The operative definitions are critical to understanding the applicability of the consent requirement to the proposed transaction.
"Transfer" is defined broadly in Section 5.02 to include any direct or indirect sale, assignment, conveyance, transfer, pledge, encumbrance, or other disposition of:
(i) any interest in the Property (including any fee interest, leasehold interest, or other possessory interest);
(ii) any interest in any Borrower Entity (including any membership interest, partnership interest, or other equity interest); or
(iii) any direct or indirect ownership interest in the Guarantor or any entity that directly or indirectly controls a Borrower Entity.
"Change of Control" is defined in Section 5.02 as any Transfer that results in a change in the identity of the Person or Persons who, directly or indirectly:
(a) own more than 49% of the beneficial interests in any Borrower Entity; or
(b) control the day-to-day management and operations of any Borrower Entity or the Properties.
The proposed transaction — in which Fairwater will acquire 100% of the membership interests in each of the eight Borrower Entities from GMP Fund III — unambiguously constitutes a "change of control" under Section 5.02. The acquisition will result in a complete change in the identity of the Person owning 100% of the beneficial interests in each Borrower Entity (from GMP Fund III to Fairwater), and a corresponding change in the Person controlling the day-to-day management and operations of each Borrower Entity and the Properties. Both prongs of the change-of-control definition are triggered.
B. Prohibited Transfers
Section 5.02(a) of the Master Loan Agreement contains a blanket prohibition on transfers:
"No Transfer of any nature whatsoever shall be made without the prior written consent of Lender, which consent may be granted or withheld in Lender's sole and absolute discretion, except for Permitted Transfers as defined in Section 5.02(b)."
This provision grants Pinnacle unfettered discretion to approve or deny the proposed transfer, subject only to the Permitted Transfer exceptions discussed below. Importantly, Pinnacle's consent standard is "sole and absolute discretion" — not a "reasonableness" standard — which means that Pinnacle is not contractually required to act reasonably in granting or withholding consent. As a practical matter, however, Pinnacle has a financial incentive to consent to the transfer given the consent fee of $1,054,000 and the strong financial profile of the proposed replacement guarantor (Fairwater).
A violation of the Transfer restriction — i.e., a transfer without Pinnacle's prior written consent — constitutes an immediate Event of Default under Section 7.01(h) of the Master Loan Agreement. Such a default would entitle Pinnacle to exercise all remedies available under the loan documents, including acceleration of the full $421,600,000 outstanding balance. Accordingly, obtaining Pinnacle's consent prior to closing is not merely a contractual obligation under the PSA; it is an absolute prerequisite to consummating the transaction without triggering a default under the Pinnacle facility.
C. Permitted Transfers (Exceptions)
Section 5.02(b) of the Master Loan Agreement enumerates several categories of "Permitted Transfers" that may be consummated without Lender consent. We have analyzed each Permitted Transfer exception and determined that none of the exceptions apply to Fairwater's proposed acquisition. Specifically:
(i) Internal Fund Restructuring Transfers. Section 5.02(b)(i) permits transfers among existing members of GMP Fund III, provided such transfers do not result in a change of control and do not change the identity of the managing member or general partner. This exception is designed to accommodate internal limited partner transfers within the Seller's fund structure. It is not applicable to the proposed acquisition, which involves a transfer to a third party (Fairwater) that is not an existing member of GMP Fund III.
(ii) Limited Partnership Interest Transfers in the Guarantor. Section 5.02(b)(ii) permits transfers of limited partnership interests in the Guarantor (GMP Fund III) that do not result in a change of control of the Guarantor or the Borrower Entities. This exception allows limited partners in GMP Fund III to transfer their limited partnership interests without triggering the consent requirement, so long as Greystone Meridian Capital LLC remains the general partner and the Borrower Entities remain under the same ultimate management. This exception is not applicable to the proposed transaction, which involves a direct transfer of the membership interests in the Borrower Entities themselves.
(iii) De Minimis Indirect Interest Transfers. Section 5.02(b)(iii) permits transfers of less than 10% of the indirect ownership interests in any Borrower Entity, provided that no single transfer or series of related transfers results in a change in the management or control of any Borrower Entity. This exception is not applicable, as the proposed acquisition involves a transfer of 100% of the direct membership interests in each Borrower Entity.
Because none of the Permitted Transfer exceptions apply, Pinnacle's prior written consent is required for the proposed acquisition, and the consent process described below must be completed as a condition to closing.
D. Consent Requirements and Process
Section 5.02(d) of the Master Loan Agreement sets forth the requirements and procedures for obtaining Lender consent to a Transfer constituting a change of control. The consent request must be submitted in writing and accompanied by the following items:
(i) Identification of Proposed Transferee. Full identification of the proposed transferee and its principals, officers, and managing members, including organizational charts and background information. Fairwater's organizational information, including its principal officers (Marcus Devereaux, EVP Acquisitions; Patricia Sung-Calloway, CFO) and its Board of Trustees, has been included in the consent package.
(ii) Financial Statements. Audited financial statements of the proposed transferee for the most recent three fiscal years. As a publicly traded REIT, Fairwater's audited financial statements are publicly available in its annual reports filed with the Securities and Exchange Commission on Form 10-K. We have included Fairwater's 10-K filings for fiscal years 2021, 2022, and 2023 in the consent package.
(iii) Experience and Track Record. Evidence of the proposed transferee's experience in owning and operating commercial real estate of similar type and scope to the Properties. The consent package includes a summary of Fairwater's portfolio, which as of December 31, 2023, comprised approximately 62 million square feet of logistics, industrial, and distribution properties across 14 U.S. markets, together with references from other institutional lenders.
(iv) Replacement Guarantor Information. Identification of the proposed replacement guarantor and evidence of its financial capacity to satisfy the guarantor covenants, including the minimum tangible net worth and minimum liquid assets requirements (as discussed in Section V below).
(v) Consent Review Fee. Payment of the non-refundable consent review fee (see Section IV.E below).
(vi) Lender's Attorneys' Fees. Payment of Pinnacle's reasonable attorneys' fees and costs incurred in connection with the review of the consent request. Whitfield & Archer LLP (Sandra Whitfield, Partner) is serving as Pinnacle's outside counsel in connection with the consent process. We anticipate that Whitfield & Archer's fees will be in the range of $75,000 to $125,000, based on comparable transactions.
Timing. Pinnacle has 45 business days from receipt of a "complete" consent package to approve or deny the consent request. We note that the completeness of the submission is a condition to the commencement of the review period, and Pinnacle may, at its discretion, request additional information or documentation, which could effectively reset or extend the review period.
The consent request letter was submitted by C&H to Whitfield & Archer LLP on March 8, 2024 (a copy of this letter is attached hereto as Appendix D). Assuming the consent package is deemed complete as of the submission date, Pinnacle's 45-business-day review period would extend to approximately May 13, 2024. The lender consent deadline under the PSA is May 24, 2024, providing an 11-business-day buffer. However, we note that Pinnacle may request supplemental information, and the actual timing of consent may extend beyond the 45-business-day period.
Post-Closing Update. For the benefit of the file and for the record, we note the actual timeline as follows: Pinnacle's consent was ultimately received on June 4, 2024 — eleven days after the PSA lender consent deadline of May 24, 2024, and four days after the original scheduled closing date of May 31, 2024. The delay in Pinnacle's consent was the primary reason for the negotiation and execution of the Second Amendment to the PSA dated May 28, 2024, which extended the scheduled closing date to June 7, 2024, with an outside date of the same. The transaction ultimately closed on June 6, 2024.
E. Consent Fee
The consent fee required under Section 5.02(e) of the Master Loan Agreement is calculated as 0.25% of the then-outstanding principal balance at the time of the consent request. Based on the aggregate OPB of $421,600,000, the consent fee is calculated as follows:
$421,600,000 × 0.0025 = $1,054,000
The consent fee is non-refundable and is payable upon submission of the consent request or upon closing, at Lender's instruction. In this case, Pinnacle's counsel has indicated that the fee will be due at closing.
Under Section 9.03(c) of the PSA, consent fees payable in connection with the assumption of existing indebtedness are allocated equally between Buyer and Seller. Accordingly, the allocation of the Pinnacle consent fee is as follows:
For reference, the aggregate consent fees across all three lender facilities (Pinnacle, Veltrano Capital, and Sycamore Life Insurance) total $1,825,625, with Buyer's aggregate share at $912,812.50 and Seller's aggregate share at $912,812.50.
In addition to the consent fee, both Buyer and Seller are responsible for Pinnacle's reasonable attorneys' fees incurred in connection with the consent review (Whitfield & Archer LLP). Under the PSA, each party bears its own lender counsel fees proportionally, unless otherwise agreed.
V. Replacement Guarantor Requirements
A. Current Guarantor
Greystone Meridian Partners Fund III, L.P. (EIN: 83-1647205), a Delaware limited partnership, is the current Carve-Out Guarantor under the Guaranty dated September 15, 2020. GMP Fund III's general partner is Greystone Meridian Capital LLC (EIN: 83-1520984), a Delaware limited liability company.
The existing Carve-Out Guaranty is a "bad boy" guaranty that provides for personal recourse liability against the Guarantor in connection with enumerated prohibited acts and events. The scope of the carve-out guaranty is as follows:
• Fraud or intentional misrepresentation by any Borrower Entity or the Guarantor in connection with the loan or any Property;
• Misapplication or misappropriation of tenant security deposits;
• Misapplication or misappropriation of insurance proceeds or condemnation awards;
• Commission of waste at any Property;
• Voluntary filing for bankruptcy or insolvency protection by any Borrower Entity (or collusion with creditors to file an involuntary bankruptcy petition);
• Violation of any single-purpose entity covenant set forth in Section 5.01(l) of the Master Loan Agreement; and
• All obligations under the Environmental Indemnity Agreements.
The Carve-Out Guaranty is not a full recourse guaranty, and the Guarantor's liability is limited to losses arising from the enumerated carve-out events. However, certain of the carve-out triggers — particularly the SPE covenant violation and the voluntary bankruptcy filing — convert the loan to full recourse against the Guarantor, making the distinction between "carve-out" and "full recourse" largely academic in the event of those specific triggers.
B. Replacement Guarantor Conditions
Section 5.02(d) of the Master Loan Agreement requires, as a condition to Lender's consent to a change of control, that the proposed transferee deliver a replacement guaranty from a substitute guarantor acceptable to Lender. The replacement guarantor must satisfy the following minimum financial covenants at closing and at all times throughout the remaining term of the loan:
Minimum Tangible Net Worth: The replacement guarantor must maintain a tangible net worth (defined as total assets minus total liabilities minus intangible assets, in each case determined in accordance with GAAP) of not less than $500,000,000, tested quarterly as of the last day of each fiscal quarter.
Minimum Liquid Assets: The replacement guarantor must maintain liquid assets (defined as unencumbered cash and cash equivalents, marketable securities valued at fair market value, and undrawn availability under committed, unconditional credit facilities with remaining terms of at least twelve months) of not less than $50,000,000, tested quarterly as of the last day of each fiscal quarter.
Fairwater's Compliance. Based on our review of Fairwater's publicly filed financial statements and representations made in the PSA, Fairwater comfortably satisfies both financial covenants:
• As of December 31, 2023 (Q4 2023), Fairwater's total market capitalization was approximately $4,800,000,000, and its tangible net worth (as calculated in accordance with the Master Loan Agreement definition) is estimated to substantially exceed the $500,000,000 minimum requirement.
• Fairwater maintains a $750,000,000 unsecured revolving credit facility with Aldgate National Bank, N.A., dated August 14, 2022, bearing interest at SOFR plus 130 basis points, with substantial undrawn availability. This facility, together with Fairwater's cash and cash equivalents and marketable securities holdings, provides ample liquidity to satisfy the $50,000,000 minimum liquid assets covenant.
We note that Fairwater has represented in the PSA that it will satisfy both financial covenants as of the closing date. Nevertheless, we recommend that Fairwater's CFO, Patricia Sung-Calloway, confirm the exact calculations and provide formal compliance certificates as required by Pinnacle as part of the consent process.
Form of Replacement Guaranty. The agreed form of the Replacement Carve-Out Guaranty is attached to the PSA as Exhibit S. This form has been negotiated between C&H (on behalf of Fairwater) and Prescott Hale Vanderbilt LLP (on behalf of GMP Fund III). However, as a practical matter, the Replacement Guaranty must also be reviewed and accepted by Pinnacle and its counsel, Whitfield & Archer LLP, as part of the consent process. We anticipate that Pinnacle may request certain modifications to the Exhibit S form, such as enhanced quarterly financial reporting obligations, additional financial covenant testing provisions, or clarifications regarding the treatment of Fairwater's public company filings as satisfaction of reporting requirements. We will negotiate any such modifications with Sandra Whitfield and report back to the deal team.
Release of Existing Guarantor. Upon Lender's acceptance of the Replacement Guaranty and closing of the transaction, GMP Fund III will be released from all guarantor obligations under the existing Carve-Out Guaranty, except for obligations arising from acts or omissions occurring prior to the closing date. This carve-out for pre-closing liabilities is standard in change-of-control transactions and ensures that the existing guarantor remains liable for any carve-out events (e.g., fraud, misapplication of funds, SPE violations) that may have occurred during its period of ownership but that are not discovered until after closing. The PSA contains corresponding indemnification obligations from Seller to Buyer with respect to pre-closing breaches of loan documents, providing Fairwater with additional contractual recourse.
VI. Default Provisions and Event of Default Analysis
A. Events of Default (Section 7.01)
Section 7.01 of the Master Loan Agreement enumerates the following Events of Default. We have summarized each category below and provided our analysis of the risk of triggering such default in connection with the proposed transaction:
(a) Payment Default. Failure to make any payment of principal, interest, or any other amount due within five (5) business days of the due date. This is a standard monetary default provision with a minimal grace period. Post-closing, Fairwater's treasury and accounting functions must be configured to ensure timely payment of all Pinnacle debt service obligations. Risk Assessment: Low, assuming proper payment procedures are established.
(b) Insurance Default. Failure to maintain the required insurance coverages as specified in the Master Loan Agreement (see Section VII.E below). A lapse in insurance coverage would constitute an Event of Default. Risk Assessment: Low, assuming timely procurement of replacement insurance through Ironclad Indemnity Insurance Company as planned.
(c) Misrepresentation. Any representation or warranty made by any Borrower Entity or the Guarantor in the loan documents or in any certificate or statement delivered in connection therewith that proves to have been materially untrue when made. Risk Assessment: Low for Fairwater, as Fairwater will make fresh representations in the Assumption Agreement; higher risk relates to Seller's pre-closing representations, which are addressed by the PSA indemnification provisions.
(d) Covenant Default. Breach of any borrower covenant that is not cured within thirty (30) days after written notice from Lender (or such longer period as may be reasonably necessary to effect a cure, not to exceed ninety (90) days, provided the breach is non-monetary and the Borrower is diligently and continuously pursuing the cure). Risk Assessment: Moderate; the breadth of borrower covenants (DSCR, occupancy, leasing, SPE, reporting, property management) requires comprehensive post-closing compliance monitoring.
(e) Bankruptcy/Insolvency. The occurrence of any "Bankruptcy Event" (as defined) affecting any Borrower Entity or the Guarantor, including any voluntary or involuntary filing for bankruptcy, the appointment of a receiver or trustee, an assignment for the benefit of creditors, or the inability to pay debts as they become due. A voluntary bankruptcy filing by any Borrower Entity is a springing full recourse trigger under the Carve-Out Guaranty. Risk Assessment: Low, given Fairwater's financial strength.
(f) Judgment Default. The entry of a final, non-appealable judgment against any Borrower Entity in excess of $1,000,000 that is not discharged, vacated, bonded, or stayed within sixty (60) days of entry. Risk Assessment: Low, based on current portfolio and tenant profile.
(g) Guarantor Material Adverse Change. A "material adverse change" in the financial condition of the Guarantor that, in Lender's reasonable judgment, impairs the Guarantor's ability to perform its obligations under the Carve-Out Guaranty. Risk Assessment: Low for Fairwater, given its publicly traded status, market capitalization, and substantial financial resources; however, this provision vests Pinnacle with discretionary judgment, which introduces some uncertainty.
(h) Unauthorized Transfer. Any Transfer or change of control in violation of Section 5.02, including consummating the proposed acquisition without obtaining Pinnacle's prior written consent. Risk Assessment: This is the primary default risk associated with the transaction; it is fully mitigated by obtaining Pinnacle's consent prior to closing, which is a PSA condition precedent.
(i) Cross-Default to Other Debt. A default under any other indebtedness of any Borrower Entity in excess of $500,000. Risk Assessment: Low; the Borrower Entities are single-purpose entities with no other material indebtedness other than the Pinnacle facility. The SPE restrictions in the Master Loan Agreement prohibit additional indebtedness without Lender consent.
(j) Environmental Default. The existence of environmental contamination at any Property that constitutes a "material environmental condition" requiring remediation at an estimated cost in excess of $2,000,000. Risk Assessment: Low; Phase I ESAs from Trident Environmental Group LLC identified de minimis RECs at two properties (Westlake Distribution Hub and Lakeland Crossings Industrial), both well below the $2,000,000 threshold. See further discussion in Section VII.G below.
(k) SPE Covenant Violation. Violation of any single-purpose entity covenant set forth in Section 5.01(l) of the Master Loan Agreement. An SPE violation is both an Event of Default and a springing full recourse trigger under the Carve-Out Guaranty. Risk Assessment: Moderate; this risk is heightened in the context of the ownership transition, as changes to the organizational structure of the Borrower Entities could inadvertently violate SPE covenants if not carefully managed. See Section VII.D below.
(l) DSCR Covenant Breach. If the DSCR for the portfolio falls below 1.10x, it constitutes an Event of Default. A DSCR between 1.10x and 1.25x triggers cash management and other protective measures but is not, by itself, an Event of Default. Risk Assessment: Low, given current DSCR of approximately 1.85x and the strong occupancy profile of the logistics portfolio.
B. Remedies Upon Default
Upon the occurrence and continuance of an Event of Default, Pinnacle has the right to pursue any and all of the following remedies, either individually or in combination:
(i) Acceleration. Declare all outstanding indebtedness under the Master Loan Agreement and all Loan Supplements immediately due and payable, including all accrued and unpaid interest, default interest, prepayment premiums (to the extent applicable), fees, and other amounts;
(ii) Foreclosure / Power of Sale. Exercise all remedies available under the applicable security instruments, including foreclosure (judicial or non-judicial, as applicable in the relevant jurisdiction) and appointment of a receiver to manage and operate the Properties pending foreclosure;
(iii) Application of Reserves. Apply all funds held in reserve and escrow accounts (including tax and insurance escrows, replacement reserves, and TI/LC reserves) to the reduction of the outstanding indebtedness;
(iv) Assignment of Leases and Rents. Exercise its rights under the Assignments of Leases and Rents to direct tenants to pay rent directly to Pinnacle or to a receiver appointed for the Properties; and
(v) Recourse Against Guarantor. Pursue recourse against the Guarantor for all carve-out liabilities under the Carve-Out Guaranty, including, in the case of certain triggers (voluntary bankruptcy, SPE violation), full recourse for the entire outstanding indebtedness.
The cross-default provisions of the Master Loan Agreement mean that any exercise of remedies by Pinnacle would apply across all eight Loan Supplements simultaneously, potentially placing all eight Properties at risk regardless of which property or Loan Supplement is the source of the default.
C. Risk Assessment for Buyer
Based on our review of the loan documents, Seller's compliance certificates, and the due diligence materials in the data room, we make the following observations regarding default risk:
No Known Defaults. No Events of Default are currently outstanding as of the date of this memorandum, based on Seller's representations in the PSA and our review of Seller's quarterly compliance certificates delivered to Pinnacle for the four most recent fiscal quarters. We note, however, that C&H's review has been based on Seller-provided information and not on independent verification.
Bring-Down Certificate. We recommend that Buyer require a bring-down certificate from Seller at closing confirming that (i) no Events of Default exist under any of the Pinnacle loan documents, and (ii) no events have occurred that, with the passage of time or the giving of notice (or both), would constitute an Event of Default. This is a standard closing deliverable and is already included as a condition to closing under Section 8.02(f) of the PSA.
DSCR Verification. Buyer should independently verify the current DSCR for the Pinnacle portfolio based on the most recent financial data available. Based on Seller's Q4 2023 financial reports, the portfolio DSCR is approximately 1.85x, providing substantial headroom above both the 1.25x cash management trigger and the 1.10x default trigger. We recommend that Buyer's underwriting team (David Chen, VP, Capital Markets, Fairwater) confirm this calculation using the DSCR definition in the Master Loan Agreement, which may differ from Fairwater's internal DSCR methodology.
Environmental. Phase I Environmental Site Assessments conducted by Trident Environmental Group LLC (Rachel Kwan, Senior Environmental Scientist) identified de minimis recognized environmental conditions at two of the eight Pinnacle properties: the Westlake Distribution Hub (Loan 1-C) and Lakeland Crossings Industrial (Loan 1-F). In both cases, the RECs involve historical usage of adjacent parcels and low-concentration soil vapor conditions that are currently being monitored under no-further-action status from the applicable state environmental agencies. No Phase II investigation was recommended by Trident. The estimated remediation cost, if any, for each de minimis REC is well below the $2,000,000 environmental Event of Default threshold under Section 7.01(j). We recommend ongoing post-closing monitoring of these conditions, as discussed in Section XII.H below.
VII. Borrower Covenants
The Master Loan Agreement contains numerous affirmative and negative covenants that bind the Borrower Entities and, indirectly, Fairwater as the post-closing sole member and controller of the Borrower Entities. Set forth below is a detailed summary of the most significant covenants.
A. Debt Service Coverage Ratio (DSCR)
The Master Loan Agreement imposes a minimum DSCR covenant of 1.25x, tested quarterly on a trailing twelve-month basis. The DSCR is calculated at the portfolio level — that is, the aggregate net operating income ("NOI") of all eight Pinnacle properties (as defined in the Master Loan Agreement) divided by the aggregate annual debt service under the facility.
The term "net operating income" is defined in the Master Loan Agreement as gross revenues from the Properties (including base rent, percentage rent, expense reimbursements, and other income, but excluding non-recurring items) minus operating expenses (including property management fees, insurance, taxes, and operating costs, but excluding depreciation, amortization, capital expenditures, and debt service). It is important that Fairwater's accounting team apply the Master Loan Agreement's definition of NOI — which may differ from GAAP NOI or Fairwater's internal NOI calculations — when computing DSCR for covenant compliance purposes.
The consequences of a DSCR breach are tiered:
(i) DSCR Below 1.25x for Two Consecutive Quarters (Cash Management Trigger). If the portfolio DSCR falls below 1.25x for two consecutive fiscal quarters, Lender may, at its option: (a) require the implementation of a cash management lockbox arrangement, pursuant to which all rental income from the Properties is directed to a lockbox account controlled by Lender; (b) trap excess cash flow (defined as NOI minus debt service minus required reserve deposits) in an account controlled by Lender, to be released only upon restoration of the DSCR to at least 1.25x for two consecutive quarters; and/or (c) require the Borrower to provide additional collateral or make a partial prepayment of principal sufficient to restore the DSCR to the required level. This is a protective remedy, not a default trigger.
(ii) DSCR Below 1.10x (Event of Default). If the portfolio DSCR falls below 1.10x, it constitutes an Event of Default under Section 7.01(l), entitling Lender to exercise all default remedies, including acceleration and foreclosure.
Current Compliance. Based on Seller's Q4 2023 financial reports, the portfolio DSCR for the eight Pinnacle properties is approximately 1.85x, providing significant headroom above both the 1.25x cash management trigger and the 1.10x default threshold. The strong DSCR performance is attributable in large part to the high occupancy rate (approximately 96.1% weighted average) and stable rental income from the logistics/industrial tenant base across the eight properties. We note, however, that the transition from interest-only to amortizing payments (which occurred in September 2023) has increased annual debt service, and future DSCR calculations should account for the full amortizing payment schedule.
B. Occupancy Covenant
The Master Loan Agreement requires that the aggregate occupancy across all eight Pinnacle properties be maintained at a minimum of 80% of aggregate rentable square feet, measured as of the last day of each calendar quarter. Occupancy is defined as the percentage of RSF that is subject to a lease that is in full force and effect and under which the tenant is in occupancy and paying rent (excluding free rent periods in excess of six months).
Current Compliance. The current weighted average occupancy across the eight Pinnacle logistics properties is approximately 96.1%, well above the 80% minimum threshold. The strong occupancy reflects the favorable market dynamics for logistics and distribution properties in Sun Belt markets, as well as the credit quality of the existing tenant base.
Consequence of Breach. If occupancy falls below 80% of aggregate RSF, Lender may impose a cash management lockbox and excess cash flow sweep, similar to the DSCR cash management trigger. The occupancy covenant is tested concurrently with the DSCR covenant on a quarterly basis.
C. Leasing Covenants
The Master Loan Agreement imposes several restrictions on the Borrower Entities' leasing activities:
(i) Major Lease Consent. Any new lease, lease modification, or lease termination with respect to a space exceeding 25,000 RSF requires Lender's prior written consent, which consent shall not be unreasonably withheld, conditioned, or delayed. Given the nature of the logistics properties in the portfolio — many of which have large-bay configurations with individual tenant spaces in excess of 100,000 RSF — this consent requirement will apply to a significant proportion of leasing activity at the Properties.
(ii) Dominant Tenant Consent. Any lease to a tenant that would occupy more than 30% of the RSF at any single Property requires Lender's prior written consent. This provision is designed to prevent concentration risk at the property level.
(iii) Lease Subordination. All leases at the Properties are subordinate to the applicable mortgage, deed of trust, or security deed, unless Lender agrees to enter into a subordination, non-disturbance, and attornment agreement ("SNDA") with the applicable tenant. The Master Loan Agreement requires the Borrower to deliver SNDAs to "Major Tenants" (defined as tenants occupying more than 50,000 RSF or paying annualized base rent in excess of $500,000) at Lender's request. Fairwater should be aware that Pinnacle may request SNDAs in connection with the consent process, particularly for the largest tenants at each Property.
(iv) Estoppel Certificates. The Borrower must deliver tenant estoppel certificates within ten (10) business days of Lender's request. This obligation dovetails with the PSA estoppel delivery requirements and the consent process deliverables discussed in Section IX.F below.
D. Single-Purpose Entity (SPE) Covenants
The SPE covenants are among the most critical provisions in the Master Loan Agreement from a structural perspective. Each Borrower Entity is required to maintain its status as a "single-purpose entity" at all times throughout the term of the loan. The SPE covenants are set forth in Section 5.01(l) of the Master Loan Agreement and include the following requirements: