MEMORANDUM
PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT
TO: Douglas Fairchild, Responsible Partner
FROM: Grace Nakamura, Lead Associate; Rafael Dominguez, Working Associate
DATE: March 18, 2024
RE: Loan Document Review — Sycamore Life Insurance Company Loans (Loans 3-A and 3-B); Fairwater REIT Acquisition of GMP Fund III Portfolio
MATTER NO.: 1036-00004
CLIENT: Fairwater Real Estate Investment Trust
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I. Executive Summary
This memorandum sets forth our analysis of the loan documents governing the two loans (designated herein as Loan 3-A and Loan 3-B) originated by Sycamore Life Insurance Company, a Connecticut stock life insurance company ("Sycamore" or the "Lender"), in connection with the proposed acquisition by Fairwater Real Estate Investment Trust ("Fairwater REIT" or the "Buyer") of one hundred percent (100%) of the membership interests in fourteen (14) property-owning Delaware limited liability companies (collectively, the "Property Entities") from Greystone Meridian Partners Fund III, L.P. ("GMP Fund III" or the "Seller"). This memorandum addresses only the Sycamore-secured loans; the Pinnacle Federal Bank and Veltrano Capital facilities are addressed in separate memoranda prepared concurrently by the deal team.
The Sycamore facility is governed by a Note Purchase Agreement dated November 22, 2019 (the "NPA"), entered into among Sycamore (as Purchaser/Lender), GMP Peachtree LLC and GMP Mount Juliet LLC (each, a "Borrower" and collectively, the "Borrowers"), and Greystone Meridian Partners Fund III, L.P. (as Guarantor). The NPA establishes a master framework under which two individual loan supplements were issued: Loan Supplement 3-A, pertaining to the Peachtree Corners Logistics Center in Peachtree Corners, Georgia, and Loan Supplement 3-B, pertaining to the Mount Juliet Commerce Park in Mount Juliet, Tennessee. Both properties are purpose-built logistics facilities constructed in 2020 and 2021, respectively.
As of February 28, 2024, the aggregate outstanding principal balance ("OPB") across both loan supplements is $48,100,000. The facility bears a fixed interest rate of 3.95% per annum and matures on December 1, 2030. The Sycamore facility thus carries the latest maturity date, the lowest interest rate, and the smallest outstanding balance of the three lender facilities in the portfolio.
The Lender's primary contact is Graham Hilliard, Vice President, Mortgage Investments, Sycamore Life Insurance Company, 100 Constitution Plaza, Hartford, Connecticut 06103. Sycamore's outside counsel for the facility is Partridge Wynn & Slater LLP, 100 Constitution Plaza, Suite 700, Hartford, CT 06103, with Claire Wynn, Partner, serving as lead counsel.
Key Finding: The proposed transfer of 100% of the membership interests in GMP Peachtree LLC and GMP Mount Juliet LLC from GMP Fund III (indirectly, through intermediate holding entities) to Fairwater REIT constitutes a "Transfer" and a change of control under the NPA. Such a Transfer requires Sycamore's prior written consent. The NPA provides that consent is in Sycamore's "sole and absolute discretion," although as a practical matter life insurance company lenders routinely grant consent upon satisfaction of specified conditions. A consent fee of 0.125% of the outstanding principal balance is payable upon the grant of consent, calculated as $48,100,000 × 0.00125 = $60,125. Under the terms of the Purchase and Sale Agreement dated January 15, 2024, as amended (the "PSA"), consent fees are allocated 50/50 between Buyer and Seller, resulting in a share of $30,062.50 for each party.
In addition to the consent fee, Sycamore will require the execution and delivery of a replacement carve-out guaranty (the "Replacement Guaranty") by Fairwater REIT, substituting Fairwater REIT for GMP Fund III as the guarantor of certain non-recourse carve-out obligations. The Replacement Guaranty must be in form and substance satisfactory to Sycamore.
Overall Risk Assessment: Low to Moderate. The Sycamore loan documents are institutional-quality life insurance company forms with standard covenants and provisions. The facility has the longest remaining term in the portfolio (approximately six years and eight months remaining), providing a substantial operational runway for Fairwater. The fixed interest rate of 3.95% is the lowest among the three lender facilities, providing favorable debt service characteristics. No material compliance issues, environmental concerns, or unusual covenant restrictions have been identified in our review. Both secured properties are modern logistics assets with strong occupancy and no recognized environmental conditions. The consent process is expected to proceed in a straightforward manner consistent with institutional life company practices.
II. Scope and Loan Documents Reviewed
The following documents were provided to us by Seller's counsel, Bellweather Pratt & Cummings LLP, through the virtual data room maintained on Thackeray Solutions (Project Atlas), and were reviewed in connection with the preparation of this memorandum.
A. Master Facility Document
1. Note Purchase Agreement dated November 22, 2019, by and among Sycamore Life Insurance Company (as Purchaser/Lender), GMP Peachtree LLC and GMP Mount Juliet LLC (as Borrowers), and Greystone Meridian Partners Fund III, L.P. (as Guarantor) (the "NPA").
2. First Amendment to Note Purchase Agreement dated March 15, 2021, modifying certain reserve escrow provisions and updating insurance requirements in connection with the completion of construction at the Mount Juliet Commerce Park property (the "First Amendment").
3. Second Amendment to Note Purchase Agreement dated August 10, 2022, modifying the annual financial reporting delivery schedule from 90 days to 120 days post-fiscal-year-end and updating certain notice addresses (the "Second Amendment").
No further amendments to the NPA were identified in the data room or disclosed by Seller's counsel. We have requested confirmation from Seller that the First Amendment and Second Amendment represent the only amendments or modifications to the NPA executed as of the date hereof, and such confirmation was received via email from Seller's counsel (M. Harrington) on March 12, 2024.
B. Individual Loan Supplements
1. Loan Supplement 3-A dated November 22, 2019, pertaining to GMP Peachtree LLC as Borrower, governing the loan secured by the Peachtree Corners Logistics Center, 5900 Peachtree Industrial Blvd, Peachtree Corners, GA 30071 (Gwinnett County).
2. Loan Supplement 3-B dated November 22, 2019, pertaining to GMP Mount Juliet LLC as Borrower, governing the loan secured by the Mount Juliet Commerce Park, 400 South Mount Juliet Road, Mount Juliet, TN 37122 (Wilson County).
C. Security Documents
1. Deed to Secure Debt, Assignment of Rents, and Security Agreement dated November 22, 2019, executed by GMP Peachtree LLC in favor of Sycamore Life Insurance Company, recorded in the Office of the Clerk of Superior Court of Gwinnett County, Georgia, at Deed Book 58412, Page 1247 — securing Loan 3-A with the Peachtree Corners Logistics Center property.
2. Deed of Trust, Assignment of Rents, and Security Agreement dated November 22, 2019, executed by GMP Mount Juliet LLC, as Grantor, to First Fidelity Title Company of Tennessee, as Trustee, for the benefit of Sycamore Life Insurance Company, as Beneficiary, recorded in the Register's Office of Wilson County, Tennessee, at Book 2104, Page 892 — securing Loan 3-B with the Mount Juliet Commerce Park property.
3. Assignment of Leases and Rents (Peachtree Corners Logistics Center) dated November 22, 2019, executed by GMP Peachtree LLC in favor of Sycamore Life Insurance Company, recorded in Gwinnett County, Georgia.
4. Assignment of Leases and Rents (Mount Juliet Commerce Park) dated November 22, 2019, executed by GMP Mount Juliet LLC in favor of Sycamore Life Insurance Company, recorded in Wilson County, Tennessee.
5. UCC-1 Financing Statement — GMP Peachtree LLC (as debtor), filed with the Delaware Secretary of State, File No. 2019-8421063 (entity-level filing covering personal property collateral of the Delaware LLC borrower).
6. UCC-1 Financing Statement — GMP Mount Juliet LLC (as debtor), filed with the Delaware Secretary of State, File No. 2019-8421070 (entity-level filing covering personal property collateral of the Delaware LLC borrower).
7. UCC-1 Financing Statement — Fixture Filing, filed in Gwinnett County, Georgia, with respect to fixtures located at the Peachtree Corners Logistics Center.
8. UCC-1 Financing Statement — Fixture Filing, filed in Wilson County, Tennessee, with respect to fixtures located at the Mount Juliet Commerce Park.
9. Environmental Indemnity Agreement dated November 22, 2019, executed by GMP Peachtree LLC and Greystone Meridian Partners Fund III, L.P. in favor of Sycamore Life Insurance Company (Peachtree Corners Logistics Center).
10. Environmental Indemnity Agreement dated November 22, 2019, executed by GMP Mount Juliet LLC and Greystone Meridian Partners Fund III, L.P. in favor of Sycamore Life Insurance Company (Mount Juliet Commerce Park).
D. Guaranty
1. Carve-Out Guaranty Agreement dated November 22, 2019 (the "Existing Guaranty"), executed by Greystone Meridian Partners Fund III, L.P., as Guarantor, in favor of Sycamore Life Insurance Company, guaranteeing certain non-recourse carve-out obligations of the Borrowers under the NPA and the Loan Supplements.
E. Other Documents Reviewed
1. Promissory Note (Loan 3-A) dated November 22, 2019, in the original principal amount of $27,500,000, executed by GMP Peachtree LLC in favor of Sycamore Life Insurance Company.
2. Promissory Note (Loan 3-B) dated November 22, 2019, in the original principal amount of $23,500,000, executed by GMP Mount Juliet LLC in favor of Sycamore Life Insurance Company.
3. Certificate of Formation and Limited Liability Company Agreement of GMP Peachtree LLC, as delivered at loan origination, together with all amendments thereto through the date hereof.
4. Certificate of Formation and Limited Liability Company Agreement of GMP Mount Juliet LLC, as delivered at loan origination, together with all amendments thereto through the date hereof.
5. Good standing certificates for each Borrower (Delaware and state of property location) delivered at loan origination.
6. Certificate of Insurance — Argyle Property Services LLC (as agent for borrowers), evidencing property, liability, and other coverages as required under the NPA.
7. Insurance Requirements Schedule annexed to the NPA as Exhibit F.
8. Lockbox Agreement dated November 22, 2019, by and among Magnolia Commerce Bank, N.A., GMP Peachtree LLC, and Sycamore Life Insurance Company, establishing a lockbox arrangement for tenant rent collections at the Peachtree Corners Logistics Center.
9. Lockbox Agreement dated November 22, 2019, by and among Magnolia Commerce Bank, N.A., GMP Mount Juliet LLC, and Sycamore Life Insurance Company, establishing a lockbox arrangement for tenant rent collections at the Mount Juliet Commerce Park.
10. Subordination, Non-Disturbance and Attornment Agreement (SNDA) — Sycamore Life Insurance Company and Brightwater & Co. (tenant at Peachtree Corners Logistics Center), dated January 15, 2020.
11. Subordination, Non-Disturbance and Attornment Agreement (SNDA) — Sycamore Life Insurance Company and Vireo & Co. (tenant at Mount Juliet Commerce Park), dated February 28, 2020.
12. Subordination, Non-Disturbance and Attornment Agreement (SNDA) — Sycamore Life Insurance Company and Ashgrove Group (tenant at Mount Juliet Commerce Park), dated March 10, 2020.
13. Lender's Policy of Title Insurance (ALTA Loan Policy) — Peachtree Corners Logistics Center, Policy No. TIG-2019-00847231, issued by Ashbury Mutual Insurance, in the amount of $27,500,000.
14. Lender's Policy of Title Insurance (ALTA Loan Policy) — Mount Juliet Commerce Park, Policy No. TIG-2019-00847245, issued by Ashbury Mutual Insurance, in the amount of $23,500,000.
15. Phase I Environmental Site Assessment — Peachtree Corners Logistics Center, prepared by Trident Environmental Group LLC (Rachel Kwan, Senior Environmental Scientist), dated October 15, 2019.
16. Phase I Environmental Site Assessment — Mount Juliet Commerce Park, prepared by Trident Environmental Group LLC (Rachel Kwan, Senior Environmental Scientist), dated October 22, 2019.
We note that no intercreditor agreement exists between Sycamore and either of the other portfolio lenders (Pinnacle Federal Bank or Veltrano Capital). The three lender facilities are documented independently, with separate collateral pools and no cross-collateralization across lender facilities. Cross-default provisions, to the extent they exist, are limited to defaults within each respective lender facility (i.e., cross-default between Loan 3-A and Loan 3-B within the Sycamore facility, but no cross-default to the Pinnacle or Veltrano facilities).
III. Loan Structure and Key Terms
A. Loan 3-A — GMP Peachtree LLC (Peachtree Corners Logistics Center)
The Peachtree Corners Logistics Center is a Class A logistics facility consisting of a single building with 345,000 rentable square feet, situated on approximately 28.5 acres in the Peachtree Corners submarket of the greater Atlanta, Georgia metropolitan statistical area. The property was constructed in 2020 and features 36-foot clear heights, cross-dock configuration with 72 dock-high doors, ESFR sprinkler systems, and 185 trailer parking stalls. The primary tenant is Brightwater & Co., occupying approximately 275,000 RSF under a lease expiring in 2032.
B. Loan 3-B — GMP Mount Juliet LLC (Mount Juliet Commerce Park)
The Mount Juliet Commerce Park is a Class A logistics facility consisting of two interconnected buildings totaling 298,000 rentable square feet, situated on approximately 22.3 acres in the Mount Juliet submarket of the greater Nashville, Tennessee metropolitan statistical area. The property was completed in 2021 and features 32-foot clear heights, rear-load configuration with 54 dock-high doors, ESFR sprinkler systems, and 140 trailer parking stalls. The two primary tenants are Vireo & Co. (approximately 180,000 RSF, lease expiring 2031) and Ashgrove Group (approximately 95,000 RSF, lease expiring 2029).
The aggregate outstanding principal balance across Loans 3-A and 3-B as of February 28, 2024 is $26,200,000 + $21,900,000 = $48,100,000, which is consistent with the figure provided in the Seller's closing deliverables and the most recent loan servicer statements obtained from the data room.
C. Cross-Default and Cross-Collateralization
The NPA governs both Loan Supplements 3-A and 3-B under a single master facility framework. Consistent with standard life insurance company practice, the two loans are structured as follows:
Cross-Default. Section 7.01(k) of the NPA provides that an Event of Default under any Loan Supplement shall constitute an Event of Default under all Loan Supplements issued pursuant to the NPA. Accordingly, a default by GMP Peachtree LLC under Loan 3-A would trigger a cross-default under Loan 3-B, and vice versa. This cross-default provision is absolute and is not subject to a separate cure period beyond the cure period (if any) applicable to the underlying default.
Separate Collateral Pools (No Cross-Collateralization). Notwithstanding the cross-default provision, each loan is separately secured by the real property, personal property, and lease interests associated with its respective Borrower and property. The Peachtree Corners Logistics Center secures only Loan 3-A, and the Mount Juliet Commerce Park secures only Loan 3-B. The NPA does not contain a cross-collateralization provision, and neither the Deed to Secure Debt (Georgia) nor the Deed of Trust (Tennessee) references or encumbers the other property as additional collateral. This is a typical structure for life insurance company multi-property facilities and is favorable from the perspective of potential future releases or separate dispositions of individual properties.
Practical Implication for the Transaction. Because of the cross-default provision, a failure to obtain Sycamore's consent to the transfer of membership interests in either Borrower entity would constitute an Event of Default affecting both loans. Accordingly, the consent request submitted on March 8, 2024 covers both Loan 3-A and Loan 3-B simultaneously, as is contemplated by the structure of the NPA.
IV. Change of Control Provisions — Detailed Analysis
A. Transfer Restrictions (Key Section)
The transfer restriction provisions are set forth in Article V of the NPA, specifically Section 5.01 (Restrictions on Transfers) and Section 5.02 (Conditions to Permitted Transfers). These provisions are central to the proposed transaction and are analyzed in detail below.
Section 5.01(a) of the NPA provides, in relevant part:
"No Borrower shall, without the prior written consent of Purchaser, directly or indirectly sell, convey, assign, transfer, pledge, hypothecate, encumber, or otherwise dispose of (collectively, a 'Transfer') all or any portion of the Property, or any legal, equitable, or beneficial interest therein, or permit any such Transfer."
Section 5.01(b) extends the transfer restriction to ownership interests in the Borrower entities and their upstream owners:
"No Borrower, Guarantor, or any direct or indirect owner of any Borrower shall, without the prior written consent of Purchaser, directly or indirectly cause, permit, or suffer any Transfer of any direct or indirect ownership interest in any Borrower, or any interest in any entity that directly or indirectly Controls any Borrower, if such Transfer would result in a change in the identity of any Person or Persons Controlling any Borrower."
The NPA defines "Transfer" broadly in Section 1.01 to include:
"Any direct or indirect sale, assignment, conveyance, transfer, pledge, hypothecation, mortgage, encumbrance, gift, or other disposition of any legal or beneficial interest, whether voluntary or involuntary, by operation of law or otherwise, and whether in a single transaction or in a series of related transactions."
The NPA further defines "Control" in Section 1.01 to mean:
"The possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of an entity, whether through ownership of voting interests, by contract, or otherwise."
Application to the Proposed Transaction. The proposed acquisition involves Fairwater REIT acquiring 100% of the membership interests in GMP Peachtree LLC and GMP Mount Juliet LLC (each a Borrower under the NPA). This transaction unambiguously constitutes a "Transfer" of ownership interests in the Borrower entities and results in a complete change in the identity of the Person Controlling each Borrower — from GMP Fund III (and its intermediate holding entities) to Fairwater REIT. Accordingly, Sycamore's prior written consent is required under both Sections 5.01(a) (to the extent the transfer of membership interests is viewed as a transfer of an interest in the Property) and 5.01(b) (transfer of ownership interests resulting in a change of control).
Section 5.01(c) expressly provides that any Transfer made without the required consent of Sycamore "shall constitute an Event of Default under this Agreement," entitling Sycamore to exercise all remedies available under Article VII of the NPA, including without limitation acceleration of the outstanding principal balance of all loans under the facility. There is no cure period for a Transfer-related Event of Default under the NPA.
B. Consent Requirements and Conditions
Section 5.02 of the NPA sets forth the conditions that must be satisfied to obtain Sycamore's consent to a Transfer constituting a change of control. The introductory clause of Section 5.02 provides that Sycamore's consent to any Transfer "shall be in Purchaser's sole and absolute discretion." While this language theoretically gives Sycamore unfettered discretion to withhold consent, as a practical matter institutional life insurance company lenders generally consent to ownership transfers provided that the conditions set forth in the loan documents are satisfied and the replacement ownership and guarantor are creditworthy. We have no reason to believe that Sycamore would withhold consent to the proposed transaction, particularly given Fairwater REIT's size, institutional profile, track record, and financial capacity.
The following conditions must be satisfied to obtain Sycamore's consent:
1. Replacement Guarantor Financial Qualifications. The proposed replacement guarantor (Fairwater REIT) must satisfy specified minimum financial requirements, including minimum tangible net worth of not less than $500,000,000 and minimum liquid assets of not less than $50,000,000. The replacement guarantor must demonstrate compliance with these thresholds by delivering current audited and unaudited financial statements to Sycamore. (See Section V below for detailed analysis.)
2. Payment of Consent/Transfer Fee. A consent fee equal to 0.125% of the then-outstanding principal balance shall be paid to Sycamore concurrently with the delivery of Sycamore's written consent. Based on the February 28, 2024 OPB of $48,100,000, the consent fee is $60,125.
3. Delivery of Replacement Guaranty. A replacement carve-out guaranty must be executed and delivered by the replacement guarantor in form and substance satisfactory to Sycamore, covering all obligations currently guaranteed by GMP Fund III under the Existing Guaranty. Concurrently, GMP Fund III is to be released from its obligations under the Existing Guaranty (subject to any surviving obligations that arose prior to the date of transfer).
4. Updated Borrower Organizational Documents. Amended and restated operating agreements (or amendments to existing operating agreements) for each Borrower, reflecting the new ownership structure and continuing compliance with the SPE covenants set forth in the NPA, must be delivered to Sycamore for review and approval.
5. Legal Opinions. Opinions of counsel to the transferee and the replacement guarantor, in form and substance satisfactory to Sycamore and its counsel, addressing (a) due organization and good standing; (b) due authorization, execution, and delivery of the transfer documents and the Replacement Guaranty; (c) enforceability of the Replacement Guaranty and the transfer documents; and (d) non-contravention of organizational documents, applicable law, and material agreements.
6. Updated Title Endorsements. If required by Sycamore, endorsements to the existing lender's title insurance policies (issued by Ashbury Mutual Insurance) reflecting the change in ownership of the Borrower entities and confirming continued validity and priority of the insured liens. We note that because the transaction is structured as a transfer of membership interests (rather than a conveyance of fee title), no new title policies should be required; however, endorsements (such as ALTA 15 or ALTA 15.1 non-imputation endorsements) may be requested.
7. Updated Insurance Certificates. Certificates of insurance evidencing all required coverages under the NPA, naming Sycamore as loss payee/mortgagee (as applicable) and as additional insured on general liability policies, reflecting any changes in the insurer, policyholder, or coverage terms arising from the change in ownership.
8. No Existing Event of Default. As a condition to Sycamore's consent, no Event of Default (or event that with the passage of time or the giving of notice, or both, would constitute an Event of Default) shall exist under the NPA or any Loan Supplement at the time of the Transfer. We have reviewed the loan servicer reports and Borrower compliance certificates available in the data room and have identified no indication of any existing or pending Event of Default.
9. Transferee Creditworthiness and Experience. Sycamore must be satisfied, in its sole discretion, with the financial condition, real estate investment experience, and creditworthiness of the proposed transferee (Fairwater REIT). This assessment is typically conducted by the lender's investment committee and may include a review of the transferee's annual reports, supplemental data packages, management team biographies, and portfolio performance metrics.
10. Execution of Assumption Agreement. The transferee must execute an assumption agreement (or joinder) in form satisfactory to Sycamore, pursuant to which the transferee expressly assumes all obligations of the Borrowers under the NPA, the Loan Supplements, and all related loan documents. Although the Borrower entities themselves do not change (the transaction is a membership interest transfer rather than a fee conveyance), Sycamore may require a formal acknowledgment by the new controlling member that the Borrower entities' obligations remain in full force and effect.
We have prepared a preliminary checklist of all anticipated consent deliverables, which has been circulated to the deal team and incorporated into the master closing checklist maintained by the transaction coordinator.
C. Consent Fee
The consent fee payable in connection with the transfer is calculated as follows:
• Consent Fee Rate: 0.125% of the outstanding principal balance
• Outstanding Principal Balance (as of 2/28/2024): $48,100,000
• Consent Fee Calculation: $48,100,000 × 0.00125 = $60,125
Under Section 8.4(b) of the PSA, all lender consent fees incurred in connection with the change of control are to be allocated equally (50/50) between Buyer and Seller. Accordingly:
• Buyer's Share (Fairwater REIT): $30,062.50
• Seller's Share (GMP Fund III): $30,062.50
For comparison, the Sycamore consent fee is the lowest of the three lender facilities in the portfolio, both in absolute dollar terms and as a percentage of the outstanding principal balance:
The aggregate consent fee across all three lender facilities is $1,825,625, of which the Sycamore consent fee represents only 3.3%.
D. Timeline and Process Considerations
The consent request package was submitted to Partridge Wynn & Slater LLP (attention: Claire Wynn, Partner) on March 8, 2024, via overnight courier and concurrent email transmission. The package included (i) a formal consent request letter executed by GMP Fund III as Seller, (ii) a description of the proposed transaction, (iii) preliminary financial information regarding Fairwater REIT (including the most recently filed annual report on Form 10-K and quarterly report on Form 10-Q), (iv) a draft of the proposed Replacement Guaranty (based on PSA Exhibit S), and (v) a summary of the proposed post-closing ownership structure for each Borrower entity.
The key dates governing the consent process are:
• Consent Request Submitted: March 8, 2024
• PSA Lender Consent Deadline: May 24, 2024 (Section 10.1(c) of the PSA)
• Scheduled Closing Date: May 31, 2024
• Outside Closing Date: June 7, 2024 (as extended by the Second Amendment to the PSA dated February 28, 2024)
The period from the submission of the consent request to the lender consent deadline is seventy-eight (78) days. Based on our experience with institutional life insurance company lenders, the typical processing time for a transfer consent is forty-five (45) to sixty (60) days, assuming all required documentation is submitted in complete form and the lender's internal investment committee cycle is favorable. Sycamore's investment committee is understood to meet bi-weekly, which should provide sufficient opportunity for review within the applicable timeframe.
We recommend proactive follow-up with Partridge Wynn & Slater LLP (Claire Wynn) at the thirty (30) day mark (approximately April 7, 2024) and the forty-five (45) day mark (approximately April 22, 2024) if no substantive response has been received. Our initial engagement with Ms. Wynn was constructive; she acknowledged receipt of the consent package on March 11, 2024 and indicated that she would begin her review promptly and coordinate with Mr. Hilliard at Sycamore regarding the investment committee submission timeline.
Receipt of Sycamore's written consent is a condition precedent to closing under Section 10.1(c) of the PSA. If Sycamore's consent is not received by the lender consent deadline, Buyer has the right (but not the obligation) to terminate the PSA and receive a return of its earnest money deposit. Alternatively, the parties may mutually agree to extend the consent deadline, subject to the limitations of the Outside Closing Date.
V. Guaranty Analysis — Replacement Guarantor Requirements
A. Existing Guarantor
The current carve-out guarantor under the Existing Guaranty is Greystone Meridian Partners Fund III, L.P. ("GMP Fund III"), a Delaware limited partnership organized in 2018 as a closed-end commingled real estate investment fund managed by Greystone Meridian Partners LLC. GMP Fund III has total committed capital of approximately $2.4 billion from institutional investors (primarily pension funds, endowments, and sovereign wealth funds). The fund is currently in its end-of-fund-life monetization stage, with the disposition of the subject portfolio representing one of the final asset realizations in the fund's investment program.
Upon the closing of the proposed transaction, GMP Fund III must be released from all prospective obligations under the Existing Guaranty, and Fairwater REIT must be substituted as the replacement guarantor. As noted above, this substitution requires the execution and delivery of the Replacement Guaranty in form and substance satisfactory to Sycamore. The release of GMP Fund III is typically documented through a written release executed by Sycamore concurrently with the delivery of the Replacement Guaranty, provided that GMP Fund III's obligations with respect to any matters arising prior to the date of transfer may survive (to the extent such matters are not assumed by Fairwater REIT under the terms of the PSA).
B. Scope of Carve-Out Guaranty
The Existing Guaranty is a non-recourse carve-out guaranty (commonly referred to in industry parlance as a "bad boy" guaranty) that guarantees the Borrowers' obligations under the NPA and the Loan Supplements solely with respect to certain specified acts, omissions, and events. The underlying loans are structured as non-recourse obligations of the Borrower entities, meaning that in the event of a default, Sycamore's recourse is generally limited to the collateral (the real property and associated personal property and lease interests). The carve-out guaranty provides the lender with limited personal recourse against the guarantor for losses arising from the following categories of conduct or events:
• Fraud or intentional misrepresentation by or on behalf of any Borrower or any Borrower's agents, officers, members, or managers;
• Misapplication or misappropriation of rents, revenues, insurance proceeds, or condemnation awards received by any Borrower that were required to be applied to Borrower's obligations under the loan documents or held in escrow or reserve;
• Commission of waste at or with respect to any Property;
• Breach of environmental covenants set forth in the NPA or the Environmental Indemnity Agreements, including any failure to remediate environmental contamination as required;
• Any voluntary bankruptcy, insolvency, reorganization, or similar filing by any Borrower, or any collusion by the Guarantor, any Borrower, or any affiliate in an involuntary bankruptcy filing against any Borrower;
• Violation of the single-purpose entity (SPE) covenants set forth in Section 4.15 of the NPA;
• Any unauthorized Transfer in violation of Article V of the NPA; and
• Removal or disposal of personal property collateral in violation of the loan documents.
Springing Full Recourse Events. In addition to the loss-based carve-outs described above, the Existing Guaranty contains provisions under which the guaranty "springs" to full recourse for the entire outstanding principal balance of all loans under the NPA (plus accrued interest, fees, and enforcement costs). The full recourse trigger events under Section 3(b) of the Existing Guaranty are as follows:
(i) Any Borrower files a voluntary petition in bankruptcy, or any Borrower consents to or fails to contest in a timely manner any involuntary petition in bankruptcy filed against it;
(ii) Any Borrower entity fails to maintain its status as a single-purpose entity in compliance with the SPE covenants set forth in Section 4.15 of the NPA, and such failure is not cured within the applicable cure period (if any); or
(iii) Any unauthorized Transfer occurs in violation of Section 5.01 of the NPA that constitutes a change of control of any Borrower.
Practical Significance. The springing full recourse provisions underscore the critical importance of obtaining Sycamore's consent prior to the closing of the proposed transaction. If the membership interests in either Borrower entity were transferred without Sycamore's prior written consent, such transfer would constitute (a) an unauthorized Transfer and an Event of Default under the NPA, and (b) a trigger event under the Existing Guaranty that would convert the guaranty from a limited carve-out guaranty to a full recourse guaranty for the entire outstanding balance of $48,100,000 (plus accrued interest and other amounts). This would expose GMP Fund III (as the current guarantor) to personal liability for the full loan amount, which is a result that neither party to the PSA contemplates or desires.
C. Replacement Guarantor Financial Covenants
Section 5.02(a)(i) of the NPA sets forth the following minimum financial requirements for any replacement guarantor:
• Minimum Tangible Net Worth: The replacement guarantor must maintain, as of the date of the Transfer and at all times thereafter during the term of the loans, a tangible net worth of not less than Five Hundred Million Dollars ($500,000,000). For purposes of this requirement, "tangible net worth" is defined as total assets (excluding goodwill, intangible assets, and intercompany receivables) minus total liabilities.
• Minimum Liquid Assets: The replacement guarantor must maintain, as of the date of the Transfer and at all times thereafter during the term of the loans, liquid assets of not less than Fifty Million Dollars ($50,000,000). For purposes of this requirement, "liquid assets" are defined as unencumbered cash, cash equivalents, and readily marketable securities.
Fairwater REIT's Financial Position. Based on publicly available financial information and information provided by the Buyer's deal team, Fairwater REIT's financial position substantially exceeds the minimum thresholds required by the NPA:
• Fairwater REIT's total equity market capitalization as of Q4 2023 was approximately $4,800,000,000.
• Based on Fairwater REIT's most recent audited financial statements (fiscal year ended December 31, 2023, as reported in its annual report on Form 10-K), Fairwater REIT's tangible net worth was approximately $3,200,000,000, well in excess of the $500,000,000 minimum.
• Fairwater REIT's liquid assets (cash and cash equivalents plus short-term investments) as of December 31, 2023 were approximately $215,000,000, well in excess of the $50,000,000 minimum.
Fairwater REIT should have no difficulty satisfying the replacement guarantor financial requirements, and we do not anticipate any objection from Sycamore on this basis.
Ongoing Reporting Obligations. The replacement guarantor is required to deliver the following financial statements to Sycamore on a continuing basis:
• Annual Audited Financial Statements: Within one hundred twenty (120) days following the end of each fiscal year (as modified by the Second Amendment to the NPA), audited financial statements prepared in accordance with GAAP, together with the auditor's report thereon. Given that Fairwater REIT is a publicly traded company that files annual reports on Form 10-K with the SEC, delivery of such filings should satisfy this requirement (subject to confirmation from Sycamore).
• Quarterly Unaudited Financial Statements: Within sixty (60) days following the end of each fiscal quarter (other than the fourth fiscal quarter), unaudited financial statements prepared in accordance with GAAP, subject to normal year-end adjustments. Fairwater REIT's quarterly reports on Form 10-Q should satisfy this requirement.
We note that these financial covenants and reporting obligations are identical to those required by Pinnacle Federal Bank and Veltrano Capital under their respective loan documents. The consistency across all three lender facilities simplifies post-closing compliance monitoring for Fairwater REIT and allows for a single set of financial deliverables to be distributed to all three lenders simultaneously.
D. Form of Replacement Guaranty
The Replacement Guaranty is to be in form and substance substantially similar to the Existing Guaranty, with modifications limited to (i) the identity of the guarantor (Fairwater REIT in place of GMP Fund III), (ii) updated representations and warranties reflecting Fairwater REIT's organizational form and jurisdiction (Maryland corporation versus Delaware limited partnership), (iii) updated notice information, and (iv) any other changes reasonably required by Sycamore and its counsel.
A draft of the proposed Replacement Guaranty has been prepared based on the form attached to the PSA as Exhibit S and was included in the consent request package submitted to Partridge Wynn & Slater LLP on March 8, 2024. We anticipate that Sycamore and its counsel will provide comments to the draft, although experience with life insurance company lenders suggests that such comments are typically limited to conforming changes and the insertion of lender-specific provisions that may differ from the generic form included in the PSA.
Upon receipt of Sycamore's comments, counsel will circulate a revised draft for Fairwater REIT's review and approval prior to execution. We recommend that Fairwater REIT's in-house counsel (Sarah Kim, SVP and Deputy General Counsel) review the final form of the Replacement Guaranty to confirm that the guaranty obligations are consistent with those described in the PSA and that no additional or expanded obligations have been introduced through the negotiation process.
VI. Borrower Covenants — Key Provisions
A. Single-Purpose Entity (SPE) Covenants
Section 4.15 of the NPA imposes comprehensive single-purpose entity requirements on each Borrower. These covenants are standard for institutional-quality real estate financings and are designed to ensure that each Borrower entity is insulated from the liabilities of its affiliates and maintains a separate, identifiable existence for the benefit of the lender. A breach of the SPE covenants is a serious event that could trigger full recourse under the carve-out guaranty (as discussed in Section V.B above).
The SPE covenants require each Borrower to comply with the following requirements at all times:
(a) Maintain separate books and records from those of any other Person, including any affiliate, member, manager, or parent entity;
(b) Not commingle its assets, funds, or accounts with those of any other Person;
(c) Maintain adequate capitalization in light of its contemplated business purpose and operations, and not transfer assets to any affiliate or other Person except in the ordinary course of business and for reasonably equivalent value;
(d) Conduct its business in its own name and hold itself out to creditors and the public as a separate and distinct entity from any other Person;
(e) Maintain separate bank accounts in its own name (the Borrowers currently maintain operating accounts at Magnolia Commerce Bank, N.A., Atlanta, Georgia);
(f) Maintain arm's-length relationships with its affiliates and not enter into any transaction with an affiliate except on terms that are commercially reasonable and on an arm's-length basis;
(g) Not assume, guarantee, become obligated for, or pay the debts or obligations of any other Person, and not permit any other Person to assume, guarantee, become obligated for, or pay its debts or obligations;
(h) Pay its own liabilities and expenses from its own separate assets and funds;
(i) Observe all organizational formalities required by its governing documents and the laws of its jurisdiction of formation;
(j) Not acquire or hold any ownership interest in any other entity;
(k) Not make any loans or advances to any Person;
(l) Not pledge its assets for the benefit of any other Person (other than as permitted under the loan documents);
(m) File its own tax returns separate from those of any other Person (unless required by applicable law to file consolidated returns, in which case the Borrower must maintain separate financial records); and
(n) Maintain at least one (1) independent manager or independent member (as defined in the NPA) who is not an affiliate, employee, officer, director, stockholder, or creditor of the Borrower, the Guarantor, or any affiliate thereof, and whose consent is required for certain material actions of the Borrower, including without limitation the filing of any bankruptcy petition.
Post-Closing Compliance. Upon the closing of the proposed transaction, the existing operating agreements for GMP Peachtree LLC and GMP Mount Juliet LLC will be amended and restated (or replaced in their entirety) to reflect the change in sole membership from GMP Fund III (and its intermediate holding entities) to Fairwater REIT. The amended and restated operating agreements must preserve, in all material respects, the SPE covenants set forth above. We have reviewed the draft forms of amended and restated operating agreements prepared by Fairwater REIT's in-house counsel and have confirmed that such drafts contain SPE covenant provisions that are consistent with the requirements of Section 4.15 of the NPA. The amended and restated operating agreements will be included in the consent deliverables submitted to Sycamore for review.
With respect to the independent manager/member requirement, each Borrower currently has an independent manager appointed through Corporate Solutions Group LLC, a Delaware-based provider of independent managers for special-purpose entities. Post-closing, Fairwater REIT may retain the existing independent managers or appoint replacements, provided that any replacement must meet the independence requirements set forth in the NPA.
B. Insurance Covenants
Section 4.09 of the NPA and Exhibit F thereto (the "Insurance Requirements Schedule") require the Borrowers to maintain, at all times during the term of the loans, the following categories of insurance coverage:
• Property Insurance (All-Risk). Replacement cost coverage for all improvements on the Properties, covering perils including but not limited to fire, windstorm, hail, explosion, vandalism, malicious mischief, and all other risks of physical loss or damage. Coverage amount must equal 100% of the full replacement cost of the improvements (exclusive of footings and foundations below the lowest basement floor).
• General Liability Insurance. Commercial general liability insurance with minimum limits of $2,000,000 per occurrence and $5,000,000 in the aggregate, covering bodily injury, property damage, and personal and advertising injury arising from the ownership, operation, or use of the Properties.
• Umbrella/Excess Liability Insurance. Umbrella or excess liability insurance with minimum limits of $25,000,000 per occurrence and in the aggregate, excess of the general liability, automobile liability, and employer's liability coverages.
• Business Interruption / Loss of Rents Insurance. Rental value insurance covering loss of rents for a period of not less than twelve (12) months, with a six (6) month extended period of indemnity.
• Flood Insurance. If any Property is located in a Special Flood Hazard Area (SFHA) as designated by FEMA, flood insurance in an amount equal to the lesser of the outstanding principal balance of the applicable loan and the maximum amount available under the National Flood Insurance Program (NFIP). Based on our review, neither the Peachtree Corners Logistics Center nor the Mount Juliet Commerce Park is located in an SFHA, and accordingly flood insurance is not currently required under the NPA. However, prudent practice may warrant maintaining such coverage.
• Terrorism Insurance. Terrorism risk insurance as may be required under the Terrorism Risk Insurance Act of 2002 (TRIA), as reauthorized, in amounts and with terms reasonably satisfactory to Sycamore.
• Builder's Risk Insurance. Not applicable post-construction completion.
Sycamore must be named as follows on all insurance policies:
• Property Insurance and Business Interruption Insurance: Named as "loss payee" and "mortgagee" pursuant to a standard mortgagee clause (non-contributory, without offset).
• General Liability and Umbrella/Excess Liability Insurance: Named as "additional insured."
Post-Closing Insurance Transition. Upon the closing of the proposed transaction, Fairwater REIT intends to transition the insurance coverages for the Sycamore-secured properties from the current policies maintained by Argyle Property Services LLC (as agent for the Borrowers) to new policies to be arranged through Fairwater's insurance broker, Hartwick Gunderson & Associates, Inc. (Peter Langford, Account Executive). The replacement policies will be issued by Ironclad Indemnity Insurance Company and must be bound effective as of the closing date. Certificates of insurance evidencing all required coverages and naming Sycamore as loss payee/mortgagee and additional insured must be delivered to Sycamore on or prior to the closing date. We recommend that draft certificates be submitted to Partridge Wynn & Slater LLP for pre-approval at least ten (10) business days prior to the anticipated closing date.
C. Debt Service Coverage Ratio (DSCR) Covenant
Section 4.12 of the NPA requires each Borrower to maintain a minimum debt service coverage ratio of not less than 1.25x (the "Minimum DSCR"), tested on a trailing twelve-month basis as of the end of each calendar quarter. For purposes of this covenant, "debt service coverage ratio" is defined as the ratio of (a) Net Operating Income (defined as gross revenues from the Property, less operating expenses, but excluding capital expenditures, depreciation, amortization, and debt service) for the applicable trailing twelve-month period, to (b) the aggregate scheduled debt service payments (principal and interest) for the same period.
If the DSCR for any Property falls below the Minimum DSCR for two (2) consecutive testing periods, the NPA provides that a cash sweep mechanism is triggered under which all excess cash flow from the affected Property (after payment of operating expenses, required reserves, and debt service) is swept into a lender-controlled cash management account and held as additional collateral. The cash sweep remains in effect until the DSCR for the affected Property equals or exceeds the Minimum DSCR for two (2) consecutive testing periods.
If the DSCR for any Property falls below 1.10x for any single testing period, such event constitutes an Event of Default under Section 7.01(h) of the NPA, subject to a sixty (60) day cure period.
Current DSCR Performance. Both Sycamore-secured properties are logistics assets with strong occupancy and stable cash flows. As of December 31, 2023, the portfolio-wide logistics occupancy rate was 96.1%. Based on the trailing twelve-month operating statements available in the data room:
• Peachtree Corners Logistics Center (Loan 3-A): Estimated DSCR of approximately 1.78x, substantially above the 1.25x minimum.
• Mount Juliet Commerce Park (Loan 3-B): Estimated DSCR of approximately 1.65x, substantially above the 1.25x minimum.
We do not anticipate any DSCR compliance issues with respect to either property in the near term, given the strong in-place tenancy (Strathmore Holdings, Amazon, and XPO Logistics), the long remaining lease terms, and the favorable fixed interest rate of 3.95%.
D. Financial Reporting Covenants
Section 4.11 of the NPA (as modified by the Second Amendment) requires each Borrower to deliver the following financial reports and information to Sycamore on a periodic basis:
1. Annual Property-Level Operating Statements: Within one hundred twenty (120) days following the end of each fiscal year, a detailed operating statement for each Property for the prior fiscal year, certified by the Borrower (or the property manager on behalf of the Borrower) as being true, correct, and complete in all material respects.
2. Annual Rent Rolls: Within one hundred twenty (120) days following the end of each fiscal year, a current rent roll for each Property, listing all tenants, lease commencement and expiration dates, base rent, percentage rent (if applicable), recoveries, and any concessions or free rent periods.
3. Annual Property Budgets: Within thirty (30) days prior to the commencement of each fiscal year, an annual operating budget and capital expenditure budget for each Property for the upcoming fiscal year, in form and detail reasonably satisfactory to Sycamore.
4. Guarantor Financial Statements: As described in Section V.C above (annual audited statements within 120 days; quarterly unaudited statements within 60 days).
5. Annual Compliance Certificates: Within one hundred twenty (120) days following the end of each fiscal year, a certificate from the Borrower (or the Guarantor) certifying that no Event of Default exists and that the Borrower is in compliance with all covenants under the NPA.