MEMORANDUM
PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT
TO: Douglas Fairchild, Partner, Calderwood & Harkness LLP
FROM: Grace Nakamura, Associate, Calderwood & Harkness LLP Rafael Dominguez, Associate, Calderwood & Harkness LLP
DATE: March 18, 2024
RE: Loan Document Review — Veltrano Capital Lending Corp. Loans 2-A through 2-D (Office Properties); Greystone Meridian Partners Fund III, L.P. Portfolio Acquisition
MATTER NO.: 1036-00004
CLIENT: Fairwater Real Estate Investment Trust
Right-click to update Table of Contents
I. Executive Summary
This memorandum summarizes the results of Calderwood & Harkness LLP's ("C&H") review of the loan documents executed by and between four property-owning Delaware limited liability companies and Veltrano Capital Lending Corp. ("Veltrano" or "Lender"), in connection with Fairwater Real Estate Investment Trust's ("Fairwater" or "Buyer") proposed acquisition of one hundred percent (100%) of the membership interests in fourteen (14) property-owning Delaware limited liability companies from Greystone Meridian Partners Fund III, L.P. ("GMP Fund III" or "Seller"), for a total purchase price of One Billion One Hundred Million Dollars ($1,100,000,000) (the "Transaction"). This memorandum specifically addresses the four loans designated as Loans 2-A through 2-D (collectively, the "Veltrano Loans"), which are secured by the four office properties included in the portfolio (collectively, the "Office Properties").
The Transaction is structured as an entity-level purchase of membership interests in the fourteen property-owning entities (collectively, the "Target Entities"), rather than a direct acquisition of the underlying real property assets. Notwithstanding the entity-level structure, the transfer of one hundred percent (100%) of the membership interests in each Target Entity constitutes a "change of control" under the Veltrano loan documents, as more fully described in Section IV below, and accordingly requires the prior written consent of Veltrano as a condition to closing.
The aggregate outstanding principal balance of the Veltrano Loans as of February 28, 2024, is One Hundred Forty-Two Million Three Hundred Thousand Dollars ($142,300,000). The Veltrano Loans bear interest at a fixed rate of 4.68% per annum, amortize on a thirty-year schedule, and mature on March 1, 2029. There are no extension options available under the governing loan documents.
Veltrano Capital Lending Corp. is a Delaware corporation operating as a non-bank lender and commercial mortgage-backed securities ("CMBS") originator, with its principal offices located at 200 South Biscayne Boulevard, Suite 3100, Miami, Florida 33131. The primary loan officer contact for the Veltrano Loans is Denise Alvarado, Managing Director. Veltrano is represented by the law firm of Cranford McCabe LLP, located at 100 Southeast Second Street, Suite 3000, Miami, Florida 33131, attention: Leo Cranford, Partner.
Set forth below is a summary of our key findings:
• Change of Control Consent Required. The Veltrano loan documents contain a strict prohibition on any direct or indirect transfer of ownership interests in the borrower entities without the Lender's prior written consent. The proposed Transaction unambiguously triggers this consent requirement, and closing cannot occur without Veltrano's consent.
• Consent Fee. The Loan Agreement provides for a consent and transfer fee equal to 0.50% of the outstanding principal balance, resulting in a fee of Seven Hundred Eleven Thousand Five Hundred Dollars ($711,500). Pursuant to the terms of the Purchase and Sale Agreement dated February 15, 2024 (the "PSA"), consent fees are allocated equally between Buyer and Seller, with each party responsible for Three Hundred Fifty-Five Thousand Seven Hundred Fifty Dollars ($355,750).
• Replacement Guarantor. The existing carve-out guaranty, currently executed by GMP Fund III, must be replaced at closing with a substitute guaranty executed by Fairwater (or another guarantor acceptable to Veltrano). The replacement guarantor must satisfy minimum tangible net worth and liquid asset thresholds as set forth in the Loan Agreement.
• Borrower Covenants. The Veltrano loan documents impose standard but rigorous covenants on the borrower entities with respect to single-purpose entity ("SPE") status, debt service coverage ratio ("DSCR") compliance, insurance, leasing restrictions, and financial reporting. Fairwater must be prepared to assume and comply with all such covenants immediately upon closing. In particular, the weighted-average occupancy of the Office Properties (82.7% as of December 31, 2023) warrants close attention with respect to any DSCR-based cash management triggers.
• Consent Timeline. The consent request was submitted by C&H to Cranford McCabe LLP on March 8, 2024. The PSA establishes May 24, 2024 as the lender consent deadline, with a scheduled closing date of May 31, 2024. We recommend regular follow-up with Veltrano's counsel to ensure timely processing.
This memorandum should be read in conjunction with C&H's separate memoranda addressing the Pinnacle Federal Bank loan documents (Loans 1-A through 1-H) and the Sycamore Life Insurance Company loan documents (Loans 3-A and 3-B), as well as the Lender Consent Strategy Memorandum dated March 5, 2024, which provides the overall coordination framework for all three lender consent workstreams.
II. Documents Reviewed
In connection with the preparation of this memorandum, we have reviewed the following documents (collectively, the "Veltrano Loan Documents"):
1. Loan Agreement dated as of February 1, 2021 (the "Loan Agreement"), by and among GMP Buckhead LLC, GMP SouthPark LLC, GMP Cool Springs LLC, and GMP Brickell LLC (each, a "Borrower" and collectively, the "Borrowers"), and Veltrano Capital Lending Corp., as Lender, as amended by that certain First Amendment to Loan Agreement dated as of September 15, 2022 (the "First Amendment"), and that certain Second Amendment to Loan Agreement dated as of April 1, 2023 (the "Second Amendment" and, together with the Loan Agreement and the First Amendment, the "Loan Agreement").
2. Loan 2-A Supplement to the Loan Agreement, dated as of February 1, 2021, pertaining to:
• Borrower: GMP Buckhead LLC, a Delaware limited liability company (EIN: 84-2639901)
• Property: Buckhead Place Office Tower, 3380 Peachtree Road NE, Atlanta, Georgia 30326
• Rentable square Footage: 285,000 RSF
• Year Built: 2018
3. Loan 2-B Supplement to the Loan Agreement, dated as of February 1, 2021, pertaining to:
• Borrower: GMP SouthPark LLC, a Delaware limited liability company (EIN: 84-2639918)
• Property: SouthPark Corporate Center, 6200 Fairview Road, Charlotte, North Carolina 28210
• Rentable square Footage: 218,000 RSF
• Year Built: 2017
4. Loan 2-C Supplement to the Loan Agreement, dated as of February 1, 2021, pertaining to:
• Borrower: GMP Cool Springs LLC, a Delaware limited liability company (EIN: 84-2639925)
• Property: Cool Springs Office Park, 5000 Virginia Way, Brentwood, Tennessee 37027
• Rentable square Footage: 196,000 RSF
• Year Built: 2016
5. Loan 2-D Supplement to the Loan Agreement, dated as of February 1, 2021, pertaining to:
• Borrower: GMP Brickell LLC, a Delaware limited liability company (EIN: 84-2639932)
• Property: Brickell Bay Office Building, 1450 Brickell Avenue, Miami, Florida 33131
• Rentable square Footage: 152,000 RSF
• Year Built: 2019
6. Promissory Notes — Four (4) separate Promissory Notes, each dated as of February 1, 2021, executed by the respective Borrower in favor of Veltrano Capital Lending Corp., corresponding to Loans 2-A, 2-B, 2-C, and 2-D, respectively.
7. Security Instruments:
• Loan 2-A (Georgia): Deed to Secure Debt, Assignment of Leases and Rents, Security Agreement and Fixture Filing (the "Security Deed"), dated as of February 1, 2021, from GMP Buckhead LLC to Veltrano Capital Lending Corp., recorded in the Fulton County, Georgia land records.
• Loan 2-B (North Carolina): Deed of Trust, Assignment of Leases and Rents, Security Agreement and Fixture Filing, dated as of February 1, 2021, from GMP SouthPark LLC to the trustee named therein for the benefit of Veltrano Capital Lending Corp., recorded in the Mecklenburg County, North Carolina land records.
• Loan 2-C (Tennessee): Deed of Trust, Assignment of Leases and Rents, Security Agreement and Fixture Filing, dated as of February 1, 2021, from GMP Cool Springs LLC to the trustee named therein for the benefit of Veltrano Capital Lending Corp., recorded in the Williamson County, Tennessee land records.
• Loan 2-D (Florida): Mortgage, Assignment of Leases and Rents, Security Agreement and Fixture Filing, dated as of February 1, 2021, from GMP Brickell LLC to Veltrano Capital Lending Corp., recorded in the Miami-Dade County, Florida official records.
8. Assignments of Leases and Rents — Four (4) separate Assignments of Leases and Rents, each dated as of February 1, 2021, one per Borrower, collaterally assigning all right, title, and interest in and to all leases and rents derived from the respective Property to Veltrano Capital Lending Corp.
9. Environmental Indemnity Agreements — Four (4) separate Environmental Indemnity Agreements, each dated as of February 1, 2021, executed by the respective Borrower and GMP Fund III in favor of Veltrano Capital Lending Corp.
10. Carve-Out Guaranty dated as of February 1, 2021, executed by Greystone Meridian Partners Fund III, L.P. as Guarantor, in favor of Veltrano Capital Lending Corp. (the "Carve-Out Guaranty").
11. UCC-1 Financing Statements:
• Four (4) UCC-1 Financing Statements filed with the Delaware Secretary of State, one per Borrower entity, as debtor, in favor of Veltrano Capital Lending Corp., as secured party, covering all personal property collateral described in the Loan Agreement.
• Four (4) UCC-1 Financing Statements filed as fixture filings in the applicable county land records in Georgia (Fulton County), North Carolina (Mecklenburg County), Tennessee (Williamson County), and Florida (Miami-Dade County), respectively.
12. Amendments, Modifications, and Waivers:
• First Amendment to Loan Agreement, dated as of September 15, 2022, which modified certain reserve requirements and updated the replacement reserve contribution schedule.
• Second Amendment to Loan Agreement, dated as of April 1, 2023, which updated the insurance requirements to conform to revised Lender guidelines and modified the reporting deadlines for quarterly financial statements from forty-five (45) days to sixty (60) days following each quarter-end.
• No other amendments, modifications, waivers, or side letters were identified during our review. We note that Seller's counsel has represented that the foregoing constitutes the complete set of Veltrano Loan Documents.
III. Key Loan Terms Summary
A. Principal and Interest
The aggregate outstanding principal balance of the Veltrano Loans as of February 28, 2024 is $142,300,000. The individual principal allocations for each Loan are set forth in the respective Loan Supplements and are summarized in Exhibit B hereto. We note that the original aggregate principal balance at origination on February 1, 2021 was approximately $155,000,000, with the balance having been reduced through scheduled amortization payments over the intervening thirty-seven (37) months.
The Veltrano Loans bear interest at a fixed rate of 4.68% per annum, calculated on the basis of a 360-day year consisting of twelve (12) thirty-day months. The fixed rate applies for the full term of the Loans through the maturity date, and there are no floating-rate components, interest rate caps, or rate adjustment mechanisms.
Payment terms require monthly payments of principal and interest in arrears, due on the first (1st) day of each calendar month. Principal amortization is calculated on a thirty (30)-year amortization schedule, with monthly principal and interest payments as set forth in each Loan Supplement. A balloon payment of the remaining outstanding principal balance, together with all accrued and unpaid interest, is due and payable on the maturity date. Monthly debt service payments across the four Loans (in the aggregate) are approximately $800,000, inclusive of both principal and interest.
The default interest rate under the Loan Agreement is the lesser of (a) the maximum rate permitted by applicable law, or (b) the contract rate plus five percent (5.00%) per annum (i.e., 9.68% per annum). Default interest accrues on all amounts past due from the date such amounts become due and payable until paid in full. In addition to default interest, the Loan Agreement provides for a late charge equal to five percent (5.00%) of any payment not received by Lender within five (5) business days of the applicable due date.
B. Maturity
The maturity date for all four Veltrano Loans is March 1, 2029. All four Loans were originated on the same date (February 1, 2021) and are co-terminus.
We have reviewed the Loan Agreement and each Loan Supplement and confirm that no extension options are available under the Veltrano Loan Documents. Accordingly, the full outstanding principal balance must be repaid or refinanced by the maturity date.
Prepayment. The Loan Agreement contains prepayment restrictions consistent with standard CMBS loan documentation. Specifically:
• Lockout Period. No voluntary prepayment of principal is permitted during the first twenty-four (24) months following the origination date (i.e., through January 31, 2023). This lockout period has now expired.
• Defeasance. Following the expiration of the lockout period and until three (3) months prior to the maturity date, prepayment is permitted only through defeasance of the applicable Loan with United States government obligations (as defined in the Loan Agreement) sufficient to satisfy all remaining scheduled payments of principal and interest through the maturity date. Defeasance is subject to compliance with detailed procedural requirements set forth in Article 9 of the Loan Agreement, including the engagement of a nationally recognized public accounting firm to verify the sufficiency of the defeasance collateral, execution of a defeasance security agreement, and payment of all costs and expenses associated with the defeasance transaction, including Lender's counsel fees.
• Yield Maintenance. The Loan Agreement does not provide for a yield maintenance prepayment premium as an alternative to defeasance. Defeasance is the exclusive method of voluntary prepayment prior to the open prepayment window.
• Open Prepayment Window. The Loan Agreement permits voluntary prepayment without penalty or premium during the final three (3) months of the Loan term (i.e., on or after December 1, 2028).
For purposes of the Transaction, prepayment of the Veltrano Loans is not contemplated. Fairwater intends to assume the Veltrano Loans through the entity-level acquisition, and the Loans will remain outstanding following closing.
C. Security
Each Veltrano Loan is secured by the following collateral:
• First-Priority Lien on Real Property. Each Loan is secured by a first-priority lien on the respective Property, created by the applicable security instrument—a Deed to Secure Debt in Georgia (Loan 2-A), a Deed of Trust in North Carolina (Loan 2-B) and Tennessee (Loan 2-C), and a Mortgage in Florida (Loan 2-D). Each security instrument encumbers the fee simple interest in the underlying real property, together with all improvements, fixtures, and appurtenances thereto.
• Assignment of Leases and Rents. Each Loan is further secured by a collateral assignment of all leases, subleases, licenses, and occupancy agreements affecting the respective Property, and all rents, issues, profits, and other income derived therefrom. The assignments are absolute assignments, subject to a revocable license granted to the Borrower to collect rents so long as no event of default exists.
• Security Interest in Personal Property and Fixtures. Each security instrument also creates a security interest under Article 9 of the Uniform Commercial Code in all personal property and fixtures located at or used in connection with the respective Property, including furniture, equipment, accounts, contract rights, and general intangibles.
• UCC-1 Financing Statements. UCC-1 Financing Statements have been filed with the Delaware Secretary of State (the state of organization for each Borrower LLC) perfecting Veltrano's security interest in personal property collateral. Fixture filings have been recorded in the applicable county land records in each Property's jurisdiction.
Cross-Collateralization and Cross-Default. We have reviewed the Loan Agreement and Loan Supplements to determine the extent of cross-collateralization and cross-default among the four Veltrano Loans.
• Cross-Default. The Loan Agreement contains a cross-default provision pursuant to which an event of default under any one of Loans 2-A through 2-D constitutes an event of default under all of Loans 2-A through 2-D. Accordingly, a default with respect to a single Property or Borrower entity could result in the acceleration of all four Veltrano Loans in the aggregate amount of $142,300,000. This cross-default provision is consistent with standard CMBS practice where multiple loans are originated simultaneously under a single loan agreement.
• Cross-Collateralization. Notwithstanding the cross-default provision, the Loan Agreement does not contain a cross-collateralization provision. Each Loan is secured solely by the respective Property and the assets of the respective Borrower entity. In the event of a foreclosure, Veltrano would enforce its security interest against each Property individually, and the collateral securing one Loan would not be available to satisfy the obligations under a different Loan. This is consistent with typical CMBS securitization structures, which generally require separate, non-cross-collateralized loan pools for rating agency purposes.
• No Cross-Default to Other Lender Facilities. The Veltrano Loan Documents do not contain any cross-default provision with respect to the Pinnacle Federal Bank loans (Loans 1-A through 1-H) or the Sycamore Life Insurance Company loans (Loans 3-A and 3-B). A default under the Veltrano facility would not, by its terms, trigger a default under either of the other two lender facilities, and vice versa. However, as a practical matter, certain triggering events (e.g., a bankruptcy filing by a guarantor that is common to multiple facilities) could give rise to defaults across multiple loan facilities.
D. Reserves and Escrows
The Loan Agreement and the respective Loan Supplements establish the following reserve and escrow accounts (collectively, the "Reserve Accounts"):
Real Estate Tax Escrow. Each Borrower is required to deposit monthly into a real estate tax escrow account an amount equal to one-twelfth (1/12th) of the annual estimated real estate taxes and assessments for the applicable Property. Lender applies the escrowed funds to the payment of real estate taxes as they become due and payable. The tax escrow requirement is a continuing obligation, and the balances in the tax escrow accounts transfer to the successor owner of the Borrower entities at closing. We have confirmed with Seller's counsel that the tax escrow accounts are current and fully funded as of the date of this memorandum.
Insurance Escrow. Each Borrower is required to deposit monthly into an insurance escrow account an amount equal to one-twelfth (1/12th) of the annual estimated insurance premiums for the required insurance coverages. As with the tax escrow, the insurance escrow balances transfer upon the change of control and will remain available for application to insurance premium payments. The Second Amendment updated the insurance escrow methodology to reflect revised Lender guidelines regarding coverage amounts.
Replacement Reserve. Each Borrower is required to make monthly deposits into a replacement reserve account for future capital expenditures. Pursuant to the First Amendment, the monthly replacement reserve contribution is $0.25 per RSF per annum, deposited in equal monthly installments. Based on the aggregate RSF for the four Office Properties (851,000 RSF), the total annual replacement reserve contribution across the four Loans is approximately $212,750 ($17,729 per month). Disbursements from the replacement reserve are available upon written request to Lender, subject to Lender's approval and the satisfaction of specified conditions, including delivery of paid invoices, lien waivers, and an inspection certification from a Lender-approved engineer (if the expenditure exceeds $100,000).
Tenant Improvement / Leasing Commission Reserve. The Loan Agreement requires each Borrower to maintain a tenant improvement and leasing commission ("TI/LC") reserve for costs associated with leasing vacant space and renewing expiring leases at the Office Properties. Monthly deposits into the TI/LC reserve are $0.50 per RSF per annum, deposited in equal monthly installments. The aggregate annual TI/LC reserve contribution across the four Loans is approximately $425,500 ($35,458 per month). Disbursements are subject to Lender approval, delivery of executed leases, and compliance with Lender's leasing guidelines. Given the current weighted-average occupancy of 82.7% for the Office Properties, the TI/LC reserve is a particularly important component of the reserve structure, as Fairwater will need to incur meaningful leasing costs to stabilize occupancy.
Transfer of Reserve Accounts. All existing balances in the Reserve Accounts will remain in place following the closing of the Transaction. The entity-level structure of the Transaction means that the Borrower entities—and, by extension, the Reserve Accounts maintained in their names—are unchanged. We recommend that Fairwater's asset management team obtain a current statement of all Reserve Account balances from Veltrano as of the closing date and confirm that all required deposits are current as a part of the closing process.
IV. Change of Control / Transfer Restrictions
A. Definition of "Transfer" and "Change of Control"
Article 7 of the Loan Agreement contains a comprehensive prohibition on transfers and changes of control. Section 7.01 provides, in relevant part:
"No Borrower shall, without the prior written consent of Lender, directly or indirectly sell, assign, convey, pledge, encumber, hypothecate, or otherwise transfer or dispose of (collectively, a 'Transfer') all or any portion of the Property, or any direct or indirect ownership interest in any Borrower, or permit any change in the identity of the managing member of any Borrower, or the identity of the Person or Persons exercising day-to-day management and control of any Borrower or any direct or indirect owner of any Borrower."
The definition of "Transfer" in Section 1.01 of the Loan Agreement is broadly drafted and encompasses:
(a) any sale, assignment, conveyance, gift, exchange, or other disposition of any direct or indirect ownership interest in any Borrower, whether voluntary or involuntary, by operation of law or otherwise;
(b) any pledge, encumbrance, hypothecation, or granting of a security interest in any direct or indirect ownership interest in any Borrower;
(c) any merger, consolidation, or reorganization of any Borrower or any direct or indirect owner of any Borrower;
(d) any change in the identity of the managing member of any Borrower, or the general partner or managing member of any entity that directly or indirectly owns an interest in any Borrower;
(e) any issuance of new ownership interests in any Borrower or any direct or indirect owner of any Borrower to any Person not already holding such interests; and
(f) any change in the identity of the Person exercising day-to-day control over the management and operations of any Borrower or any Property.
The proposed Transaction—in which Fairwater acquires 100% of the membership interests in each of GMP Buckhead LLC, GMP SouthPark LLC, GMP Cool Springs LLC, and GMP Brickell LLC from GMP Fund III, and in which Fairwater (through its property management subsidiary) will assume day-to-day management and control of the Borrowers and the Properties—constitutes a "Transfer" and a "change of control" under Section 7.01 of the Loan Agreement. This conclusion is unambiguous, and there is no credible argument that the Transaction falls outside the scope of the transfer restriction.
Exceptions to the Transfer Restriction. Section 7.02 of the Loan Agreement sets forth certain limited exceptions to the transfer restriction, including:
(a) Transfers of limited partnership interests in GMP Fund III that do not result in a change in the identity of the general partner of GMP Fund III or the managing member of any Borrower, provided that no single transferee (or group of related transferees) acquires more than forty-nine percent (49%) of the limited partnership interests in GMP Fund III;
(b) Transfers among affiliates of GMP Fund III's general partner, provided that the transferee is controlled by the same individual(s) who control the transferor, and further provided that the managing member of each Borrower remains unchanged;
(c) Transfers resulting from the death of a natural person who directly or indirectly holds an ownership interest in a Borrower, provided that the successor owner is a family member or family trust, and no change in the managing member occurs;
(d) The granting of a leasehold interest in the ordinary course of business in accordance with the leasing restrictions set forth in Section 6.08 of the Loan Agreement; and
(e) The encumbrance of the Property by Lender's security instruments as contemplated by the Loan Documents.
None of the foregoing exceptions is applicable to the proposed Transaction. The Transaction involves the transfer of 100% of the membership interests in each Borrower entity from GMP Fund III to Fairwater, which results in a complete change in the identity of the sole member and the Person exercising day-to-day control over each Borrower. Accordingly, Veltrano's prior written consent is required as a condition precedent to closing.
B. Consent Requirements and Process
As noted above, Lender consent is a mandatory condition precedent to the closing of the Transaction. Section 8.01(f) of the PSA expressly provides that the receipt of written consents from each of the three lenders (Pinnacle Federal Bank, Veltrano Capital Lending Corp., and Sycamore Life Insurance Company) is a condition to both Buyer's and Seller's obligation to close.
The PSA establishes May 24, 2024 as the deadline by which all lender consents must be obtained (the "Lender Consent Deadline"). If lender consents are not obtained by such date, either Buyer or Seller may extend the Lender Consent Deadline by up to thirty (30) days upon written notice to the other party, provided that the requesting party is using commercially reasonable efforts to obtain such consents. The scheduled closing date under the PSA is May 31, 2024. We note for the record that the actual closing of the Transaction occurred on June 6, 2024, following a brief extension necessitated by administrative delays in the Pinnacle consent process.
C&H submitted a formal consent request letter to Cranford McCabe LLP (attention: Leo Cranford) on March 8, 2024, together with an initial package of due diligence materials regarding Fairwater, including:
• Fairwater's organizational documents (Certificate of Incorporation, Bylaws, and certificates of good standing)
• Fairwater's most recent annual report on Form 10-K (fiscal year ended December 31, 2023) and quarterly report on Form 10-Q (quarter ended September 30, 2023)
• Fairwater's audited consolidated financial statements for fiscal years 2021, 2022, and 2023
• A narrative summary of Fairwater's management team, track record, and portfolio composition
• Pro forma organizational charts for each Borrower entity, reflecting Fairwater as the sole member following closing
• Draft forms of the Replacement Carve-Out Guaranty and Assumption Agreement
We anticipate that the consent process will involve Veltrano's review (and the review of Veltrano's CMBS master servicer and special servicer, if the Loans have been securitized) of the foregoing materials, followed by the negotiation of the assumption documentation, the Replacement Guaranty, and any consent conditions. Based on our prior experience with CMBS consent processes, the typical timeline from initial submission to receipt of consent is eight to twelve weeks, which is consistent with the timeline between our March 8, 2024 submission and the May 24, 2024 Lender Consent Deadline.
Veltrano's consent was ultimately received on May 17, 2024, seven (7) days ahead of the Lender Consent Deadline and fourteen (14) days prior to the originally scheduled closing date. The consent was delivered in the form of a Transfer Consent Letter executed by Veltrano Capital Lending Corp. and its CMBS master servicer, subject to the satisfaction of the conditions described in Section IV.D below.
C. Consent Fee
Section 7.03 of the Loan Agreement provides for the payment of a consent and transfer fee (the "Consent Fee") in connection with any Transfer for which Lender consent is obtained. The Consent Fee is calculated as follows:
Consent Fee = 0.50% × Outstanding Principal Balance as of the date of the Transfer
Based on the aggregate outstanding principal balance of the Veltrano Loans as of the anticipated closing date:
The Consent Fee is payable to Veltrano at or prior to closing as a condition to the effectiveness of the Transfer consent.
Pursuant to Section 10.03(c) of the PSA, all lender consent fees incurred in connection with the Transaction are allocated fifty percent (50%) to Buyer and fifty percent (50%) to Seller:
For context, the aggregate consent fees payable to all three lenders in connection with the Transaction are summarized below:
A detailed calculation of the Veltrano Consent Fee is set forth in Exhibit D hereto.
D. Conditions to Consent
Based on our review of the Loan Agreement (specifically Section 7.04 and related provisions) and standard CMBS market practice, we anticipate that Veltrano will impose the following conditions to the granting of its consent to the Transaction:
1. Institutional Quality Transferee. The transferee (Fairwater) must be an institutional-quality owner and operator of commercial real estate, with a demonstrated track record of owning and managing assets comparable to the Office Properties in terms of size, type, and geographic market. We believe Fairwater's status as a publicly traded REIT (NYSE: FREIT) with a market capitalization of approximately $4.8 billion and a diversified portfolio of office, industrial, and mixed-use properties satisfies this requirement.
2. No Material Adverse Change. There must be no material adverse change in the financial condition, operations, or prospects of the Borrower entities or the Properties between the date of the consent request and the closing date. Veltrano may require updated financial statements for the Borrowers and the Properties as of a recent date to confirm compliance.
3. Assumption Documentation. Fairwater must execute an Assumption Agreement (the "Assumption Agreement"), in form and substance satisfactory to Veltrano, pursuant to which Fairwater expressly assumes all obligations of the Borrowers under the Veltrano Loan Documents. The Assumption Agreement will be a tri-party agreement among the Borrowers, Fairwater, and Veltrano.
4. Replacement Carve-Out Guaranty. Fairwater (or an acceptable substitute guarantor) must execute a Replacement Carve-Out Guaranty in favor of Veltrano, in the form required by the Loan Agreement, replacing GMP Fund III as the guarantor under the Carve-Out Guaranty. The requirements of the Replacement Guaranty are discussed in detail in Section V below.
5. Payment of Consent Fee. Payment in full of the Consent Fee of $711,500 at or prior to closing.
6. Payment of Lender's Counsel Fees. Payment of all costs and expenses incurred by Veltrano in connection with the review of the Transfer request and the preparation and negotiation of the consent and assumption documentation, including the fees and disbursements of Cranford McCabe LLP. We do not have an estimate of Cranford McCabe's anticipated fees at this time but expect them to be in the range of $75,000 to $125,000 based on the scope and complexity of the consent process.
7. Updated Organizational Documents. Delivery to Veltrano of the amended and restated operating agreements for each Borrower entity, reflecting Fairwater as the sole member, together with certificates of good standing for each Borrower from the Delaware Secretary of State, and any required foreign qualification certificates from the applicable Property states.
8. Title Endorsements. Delivery of date-down endorsements to the existing lender's title insurance policies for each Property, issued by Commonwealth National Title Insurance Company, confirming that no intervening liens, encumbrances, or other title exceptions have been recorded since the date of the original policy, and that the security instruments remain valid, first-priority liens on the respective Properties.
9. Insurance Compliance. Delivery of evidence of continued insurance coverage satisfying the requirements of the Loan Agreement, including endorsements naming Veltrano Capital Lending Corp. (and/or its CMBS trustee, if applicable) as additional insured, loss payee, and mortgagee under all applicable policies.
10. Satisfactory Financial Review. Veltrano's satisfactory review and approval of Fairwater's financial condition, based on the financial statements and other materials submitted in connection with the consent request. In particular, Veltrano will confirm that Fairwater satisfies the replacement guarantor financial covenants described in Section V.B below.
V. Replacement Guarantor Requirements
A. Current Guarantor
The current carve-out guarantor under the Veltrano Loans is Greystone Meridian Partners Fund III, L.P., a Delaware limited partnership. GMP Fund III executed the Carve-Out Guaranty dated as of February 1, 2021, contemporaneously with the origination of the Veltrano Loans.
The Carve-Out Guaranty is a non-recourse carve-out guaranty—commonly referred to in the commercial real estate finance industry as a "bad boy" guaranty—pursuant to which GMP Fund III guarantees the full and timely performance by the Borrowers of certain specified obligations under the Loan Documents and indemnifies Veltrano against losses arising from certain enumerated "bad acts." The guaranteed obligations fall into two categories:
(i) Loss Carve-Outs (Indemnity Obligations). GMP Fund III is liable for actual losses and damages suffered by Veltrano as a result of any of the following acts or omissions by the Borrowers:
• Fraud or intentional misrepresentation in connection with the Loans
• Misapplication or misappropriation of rents, insurance proceeds, condemnation awards, or other amounts that should have been applied to the Property or to the obligations under the Loan Documents
• Waste of the Property
• Removal or disposal of any portion of the Property in violation of the Loan Documents
• Failure to pay real estate taxes, insurance premiums, or other charges that could give rise to a lien having priority over Veltrano's security instruments
• Breach of any environmental covenant under the Loan Documents or the Environmental Indemnity Agreements
• Modification of any lease or acceptance of a prepayment of rent in excess of one month, in each case without Lender's consent
(ii) Full Recourse Triggers (Springing Recourse). The Carve-Out Guaranty provides that the entire outstanding principal balance, together with all accrued interest and other amounts due under the Loan Documents, becomes fully recourse to GMP Fund III upon the occurrence of any of the following events:
• Any voluntary bankruptcy filing by any Borrower, or the acquiescence by any Borrower in any involuntary bankruptcy filing
• Any Transfer in violation of the Loan Agreement (i.e., any unauthorized change of control)
• Any violation of the SPE covenants set forth in Article 5 of the Loan Agreement that results in the substantive consolidation of the assets and liabilities of any Borrower with those of any other Person in a bankruptcy proceeding
The Carve-Out Guaranty is a continuing guaranty and remains in effect until all obligations under the Loan Documents have been satisfied in full. The guarantor's obligations are not subject to any cap or limitation (other than the distinction between loss carve-outs, which are limited to actual losses, and full recourse triggers, which expose the guarantor to the full amount of the indebtedness).
B. Replacement Guarantor
As a condition to Veltrano's consent to the Transaction, Fairwater Real Estate Investment Trust will execute a Replacement Carve-Out Guaranty (the "Replacement Guaranty") in favor of Veltrano, in substantially the same form as the existing Carve-Out Guaranty, replacing GMP Fund III as the guarantor. A form of the Replacement Guaranty is attached as Exhibit S to the PSA.
Upon delivery of the Replacement Guaranty and the satisfaction of all other conditions to consent, Veltrano will execute and deliver a release letter (the "Guarantor Release") releasing GMP Fund III from all obligations under the existing Carve-Out Guaranty, effective as of the closing date. We will coordinate with Cranford McCabe LLP on the form and delivery of the Guarantor Release.
Guarantor Financial Covenants. Section 7.04(e) of the Loan Agreement specifies minimum financial thresholds that must be satisfied by any replacement guarantor as a condition to the Lender's consent to a Transfer. These thresholds are as follows:
For purposes of these covenants:
• "Tangible Net Worth" is defined as the excess of total assets over total liabilities, excluding intangible assets such as goodwill, trademarks, patents, and other items classified as intangible under generally accepted accounting principles ("GAAP").
• "Liquid Assets" is defined as unencumbered and unrestricted cash, cash equivalents, and marketable securities readily convertible to cash within thirty (30) days.
Fairwater's Compliance. Based on our review of Fairwater's audited consolidated financial statements for the fiscal year ended December 31, 2023 (the "2023 Financial Statements"), Fairwater satisfies both financial covenants with substantial margin:
Fairwater's market capitalization as of the fourth quarter of 2023 was approximately $4,800,000,000 (NYSE: FREIT), which further underscores the strength of Fairwater's balance sheet and its ability to satisfy the replacement guarantor requirements. A detailed guarantor financial covenant compliance analysis is set forth in Exhibit E hereto.
Ongoing Reporting Obligations. The Replacement Guarantor will be subject to the following ongoing reporting and compliance obligations under the Replacement Guaranty and the Loan Agreement:
• Delivery to Lender of annual audited financial statements within one hundred twenty (120) days following the end of each fiscal year, prepared in accordance with GAAP by an independent certified public accounting firm of national or regional standing.
• Delivery to Lender of quarterly unaudited financial statements within sixty (60) days following the end of each fiscal quarter (as modified by the Second Amendment from the original forty-five (45) day deadline).
• Delivery of annual compliance certificates, signed by an authorized officer of Fairwater, certifying compliance with the tangible net worth and liquid assets covenants as of the end of each fiscal year.
• Prompt notification to Lender of any material adverse change in the financial condition of the Replacement Guarantor.
Fairwater's finance team should be aware of these reporting obligations and should establish a compliance calendar to ensure timely delivery of all required materials.
VI. Borrower Covenants
A. Single-Purpose Entity (SPE) Covenants
Article 5 of the Loan Agreement contains detailed covenants requiring each Borrower to maintain its status as a single-purpose, bankruptcy-remote entity throughout the term of the Loans. These covenants are standard for CMBS-originated loans and are designed to ensure that the assets and liabilities of each Borrower remain separate from those of any affiliate or other Person, thereby minimizing the risk of substantive consolidation in a bankruptcy proceeding.
The SPE covenants applicable to each Borrower include, without limitation, the following:
(a) Separate Books and Records. Each Borrower must maintain its own separate books, records, and accounts, apart from those of any other Person.
(b) No Commingling of Assets. Each Borrower must maintain its own separate bank accounts and must not commingle its funds or other assets with those of any other Person.
(c) Separate Identity. Each Borrower must hold itself out to the public as a separate and distinct entity, maintain its own stationery, invoices, and other business documents, and correct any known misunderstanding regarding its separate identity.
(d) Adequate Capitalization. Each Borrower must maintain adequate capital in light of its contemplated business operations, and must not enter into any transaction that would render it insolvent.
(e) No Additional Indebtedness. Each Borrower must not incur any indebtedness other than the applicable Veltrano Loan and trade payables incurred in the ordinary course of operating the Property.
(f) No Dissolution or Merger. Each Borrower must not dissolve, wind up, liquidate, merge, or consolidate with any other Person.
(g) Compliance with Organizational Documents. Each Borrower must comply in all material respects with the terms and conditions of its organizational documents, including any requirements regarding SPE status, independent managers, and separateness covenants.
(h) Independent Manager. Each Borrower must maintain at least one (1) independent manager (or independent member, as applicable) who is not an employee, officer, director, partner, or member of the Borrower or any of its affiliates, and who has not had any significant business or personal relationship with the Borrower or its affiliates. The consent of the independent manager is required for any voluntary bankruptcy filing by the Borrower, any dissolution or liquidation of the Borrower, or any amendment to the SPE provisions of the Borrower's organizational documents. Based on our review, the Loan Agreement requires a "hard" independent manager (i.e., an independent manager that is in place at all times, rather than a "springing" independent manager that is appointed only upon the occurrence of certain events).
Post-Closing SPE Compliance. Following the closing of the Transaction, Fairwater must ensure that the amended and restated operating agreements for each of the four Borrower LLCs maintain all of the foregoing SPE covenants. In particular:
• The amended and restated operating agreements must include the full text of the SPE covenants required by the Loan Agreement.
• Fairwater must appoint a qualifying independent manager for each Borrower entity. We recommend engaging a professional independent manager service provider (such as Pemberton Industries or Hollowell Technologies) to serve in this capacity.
• Fairwater must ensure that each Borrower's business operations continue to be conducted in a manner consistent with the SPE covenants, including the maintenance of separate books and records, separate bank accounts, and adequate capitalization.
A violation of the SPE covenants constitutes an event of default under the Loan Agreement and, if such violation results in the substantive consolidation of a Borrower with any other Person in a bankruptcy proceeding, triggers full recourse liability under the Carve-Out Guaranty (or, following closing, the Replacement Guaranty).
B. Debt Service Coverage Ratio (DSCR) Covenant
The Loan Agreement includes DSCR monitoring provisions that are typical of CMBS loan documentation. Rather than establishing a "hard" DSCR covenant that constitutes an event of default upon breach, the Loan Agreement employs a DSCR-based cash management trigger mechanism.
Specifically, Section 6.04 of the Loan Agreement provides:
"If, as of the last day of any calendar quarter, the Debt Service Coverage Ratio (calculated on a trailing twelve-month basis) for any Individual Property or for the Aggregate Properties falls below 1.25:1.00 (the 'Cash Sweep Trigger DSCR'), a 'Cash Management Period' shall commence. During a Cash Management Period, Borrower shall establish and maintain a lockbox account and cash management system as directed by Lender, and all rents and other revenues from the applicable Property or Properties shall be deposited directly into such lockbox account. Net operating income in excess of the amounts required for debt service, operating expenses, and required reserves shall be swept into a cash collateral account held by Lender as additional security for the Loan."
The Cash Management Period continues until the DSCR has been restored to at least 1.30:1.00 (the "Cash Sweep Cure DSCR") for two (2) consecutive calendar quarters.
Current DSCR Analysis. The current occupancy levels and DSCR performance of the four Office Properties warrant careful attention:
Based on the foregoing analysis, the aggregate DSCR of approximately 1.82x currently exceeds the Cash Sweep Trigger DSCR of 1.25x by a comfortable margin. Similarly, each individual property's estimated DSCR exceeds the 1.25x threshold.
However, we note the following risk factors: