PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT
CALDERWOOD & HARKNESS LLP
MEMORANDUM
TO: Douglas Fairchild, Responsible Partner, Real Estate — Calderwood & Harkness LLP
FROM: Grace Nakamura, Lead Associate, Real Estate — Calderwood & Harkness LLP
DATE: April 10, 2024
RE: Comprehensive Due Diligence Summary — Fairwater Real Estate Investment Trust Acquisition of 14-Property Sun Belt Logistics & Office Portfolio from Greystone Meridian Partners Fund III, L.P. — $1,100,000,000 Purchase Price
MATTER NO.: 1036-00004
CC: Angela Fontaine (Billing Partner, Real Estate); Rafael Dominguez (Working Associate, Real Estate); Sylvia Hartwell (Specialist Partner, Tax); David Elgin Park (General Counsel, Fairwater REIT); Camille Oduya (In-House Real Estate Counsel, Fairwater REIT)
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I. EXECUTIVE SUMMARY AND PURPOSE
The purpose of this memorandum is to consolidate the findings from all due diligence workstreams conducted by Calderwood & Harkness LLP ("C&H" or the "Firm") and its advisors 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) single-purpose Delaware limited liability companies (each a "Target Entity" and collectively the "Target Entities") from Greystone Meridian Partners Fund III, L.P. ("GMP Fund III" or "Seller"). This memorandum is intended to provide a comprehensive, integrated overview of diligence findings to facilitate the Buyer's evaluation of whether to proceed with the transaction and waive the due diligence contingency prior to expiration of the Due Diligence Period on April 15, 2024.
Transaction Overview. The transaction is structured as an entity-level acquisition, pursuant to which Fairwater will acquire all of the membership interests in the fourteen Target Entities held by GMP Fund III. The aggregate Purchase Price is One Billion One Hundred Million Dollars ($1,100,000,000). The Purchase Price will be funded through a combination of (a) Six Hundred Twelve Million Dollars ($612,000,000) of assumed mortgage debt, consisting of existing facilities with Pinnacle Federal Bank, N.A. (outstanding principal balance of $421,600,000), Veltrano Capital Lending Corp. (outstanding principal balance of $142,300,000), and Sycamore Life Insurance Company (outstanding principal balance of $48,100,000), and (b) Four Hundred Eighty-Eight Million Dollars ($488,000,000) in cash equity to be delivered at closing.
The Purchase and Sale Agreement (the "PSA") was fully executed by all parties on February 28, 2024. The Due Diligence Period, as defined in the PSA, expires on April 15, 2024, representing a forty-six (46) day period from execution.
Portfolio Overview. The portfolio comprises fourteen (14) properties located across five (5) states in the Sun Belt region of the United States, as follows: Georgia (4 properties), Texas (3 properties), Florida (3 properties), Tennessee (3 properties), and North Carolina (1 property). The portfolio contains a total of approximately 5,224,000 rentable square feet ("RSF"), with ten (10) logistics/industrial properties accounting for approximately 4,373,000 RSF (83.7% of total RSF) and four (4) office properties accounting for approximately 851,000 RSF (16.3% of total RSF).
The portfolio is leased to eighty-seven (87) tenants and has a weighted-average occupancy rate of 93.2% as of December 31, 2023. The logistics component of the portfolio demonstrates particularly strong occupancy at 96.1%, while the office component has a weighted-average occupancy of 82.7%. The portfolio generates annual in-place base rent of Seventy-Four Million Eight Hundred Thousand Dollars ($74,800,000), yielding an in-place capitalization rate of approximately 6.80%.
Overall Assessment. Based upon the comprehensive due diligence conducted across all workstreams — including title review, survey review, lease audit, environmental assessment, property condition assessment, zoning and land use compliance, loan document review, entity-level due diligence, tax analysis, insurance review, and service contract review — C&H has not identified any issues that, in our professional judgment, should prevent the transaction from proceeding to closing. Certain items require ongoing monitoring or post-closing follow-up, and each such item is identified in the relevant section below and summarized in Section XVII of this memorandum.
This memorandum should be read in conjunction with the separate, detailed workstream memoranda prepared concurrently by C&H and its advisors, including the title review memorandum, survey review memorandum, lease audit memoranda (portfolio-level and top ten tenant analyses), environmental review memorandum, property condition assessment memorandum, zoning and land use memorandum, loan document review memoranda (one for each of the three loan facilities), entity-level due diligence memorandum, tax due diligence memorandum, insurance review memorandum, and service contract review memorandum. Cross-references to each workstream memorandum are set forth in Appendix C hereto.
II. TRANSACTION STRUCTURE AND KEY DATES RECAP
A. Transaction Structure
The transaction is structured as an entity-level purchase pursuant to which Fairwater will acquire one hundred percent (100%) of the membership interests in each of the fourteen (14) Target Entities. Each Target Entity is a Delaware limited liability company formed as a single-purpose entity for the sole purpose of holding title to, and operating, the respective real property. GMP Fund III is currently the sole member of each Target Entity. Upon closing, Fairwater (or its designated acquisition subsidiary) will be substituted as the sole member of each Target Entity, with the result that Fairwater will hold indirect ownership of all fourteen properties through the existing Target Entity structure.
The entity-level transfer structure was selected for several reasons, including (a) avoidance of deed recording and associated transfer taxes in certain jurisdictions, (b) preservation of existing mortgage loan facilities (subject to obtaining lender consents, as described in Section IX below), and (c) continuity of existing lease relationships without the need for formal lease assignments. As discussed more fully below, the transfer of one hundred percent of the membership interests constitutes a "change of control" under each of the three existing mortgage loan agreements, and accordingly, lender consent from Pinnacle Federal Bank, N.A., Veltrano Capital Lending Corp., and Sycamore Life Insurance Company is a condition precedent to closing.
B. Governing Law
The PSA is governed by New York law. Local real property law governs matters relating to title, recording, landlord-tenant relationships, and real property taxation in each of the five states in which the properties are located (Georgia, Texas, Florida, Tennessee, and North Carolina). The organizational documents of each Target Entity and of GMP Fund III are governed by Delaware law.
C. Key Date Schedule
The following table sets forth the key dates and deadlines under the PSA:
The Earnest Money Deposit of Twenty-Seven Million Five Hundred Thousand Dollars ($27,500,000) was delivered to Commonwealth National Title Insurance Company, as escrow agent, on March 1, 2024, and is being held in a segregated, interest-bearing account. Upon expiration of the Due Diligence Period on April 15, 2024, if Buyer elects to proceed, the Additional Deposit of Twenty-Seven Million Five Hundred Thousand Dollars ($27,500,000) becomes due on April 16, 2024, and the aggregate deposits of Fifty-Five Million Dollars ($55,000,000) will be deemed "hard" and non-refundable except in the limited circumstances described in the PSA (i.e., Seller default, failure of a condition precedent not within Buyer's control, or casualty/condemnation exceeding the Threshold Amount).
If any required lender consent is not received by the lender consent deadline of May 24, 2024, the PSA provides for an automatic extension of the closing date by up to thirty (30) days, subject to the outside date provisions set forth in Section 12.2 of the PSA.
III. TITLE REVIEW
A. Overview
Title commitments were obtained from Commonwealth National Title Insurance Company ("Commonwealth Title") for all fourteen (14) properties in the portfolio. The title officer for the engagement is Kenneth Stanhope, Senior Vice President and Title Officer, with Virginia Moorehead, Assistant Vice President and National Counsel, serving as national counsel for the transaction. The commitments were issued in connection with proposed ALTA Owner's Policies (2021 form) in an aggregate insured amount to equal the Purchase Price of One Billion One Hundred Million Dollars ($1,100,000,000), allocated among the fourteen properties in accordance with the property schedule to be finalized prior to closing.
C&H conducted its review of the title commitments in coordination with the following local counsel engaged by Fairwater in each of the five jurisdictions in which the properties are located:
• Texas (3 properties): Breckenridge Osgood LLP — James Breckenridge, Partner
• Georgia (4 properties): Talmadge Beaumont LLP — Catherine Beaumont, Partner
• North Carolina (1 property): Haversham Cole PLLC — Marshall Haversham, Partner
• Tennessee (3 properties): Ellsworth Ridley LLP — Diane Ellsworth, Partner
• Florida (3 properties): Palmetto Strauss PA — Roberto Strauss, Partner
Each local counsel firm reviewed the applicable title commitments, underlying recorded instruments, and proposed exceptions in the context of the law of the respective state, and provided comments and confirmations to C&H for integration into the comprehensive title review.
B. Title Objections
C&H delivered a comprehensive Title Objection Letter to Seller's counsel, Blackridge Hayes LLP (Nathaniel Pryce, Partner, and Thomas Keating, Senior Associate), on March 27, 2024, two days prior to the title objection deadline of March 29, 2024. The Title Objection Letter identified twenty-three (23) title objection items across the portfolio, classified into the following categories:
(a) Monetary liens — outstanding mortgage satisfactions and releases not yet recorded with respect to prior indebtedness retired at refinancing;
(b) Mechanic's liens — filed mechanic's liens at two properties (Fairfield Logistics Center I and Murfreesboro Distribution Center), both relating to completed tenant improvement work where final lien waivers were not obtained from subcontractors;
(c) Judgment liens — one judgment lien of record against the Target Entity GMP Murfreesboro LLC in the amount of approximately $47,000, arising from a vendor dispute;
(d) Easement encroachments — survey-revealed encroachments of improvements into recorded easement areas at three properties, requiring title endorsement coverage or correction;
(e) Missing subordination agreements — certain existing easements and declarations that were not subordinated to the existing mortgage liens at origination, requiring execution and recording of subordination instruments;
(f) Gap issues — matters recorded between the effective date of certain commitments and the date of C&H's review that require clearance or affirmative coverage; and
(g) Exception document deficiencies — illegible or incomplete copies of recorded instruments referenced as exceptions in the commitments, for which legible copies or re-recordings are required.
Under the PSA, Seller has a fifteen (15) business day cure period (the "Seller Cure Period") from receipt of the Title Objection Letter to cure or agree to cure the identified objection items. In addition, certain items are designated as "Mandatory Cure Items" under Section 5.4 of the PSA, which Seller is obligated to cure at or prior to closing regardless of cost. Mandatory Cure Items include: (i) monetary liens (other than the assumed debt), (ii) mechanic's liens, (iii) delinquent real property taxes, (iv) judgments against the Target Entities, and (v) any matters arising by, through, or under Seller after the effective date of the applicable commitment. The mechanic's liens and the judgment lien described above fall within the category of Mandatory Cure Items, and Seller is therefore required to cause their release or bonding prior to closing.
A response from Blackridge Hayes LLP is expected by approximately April 11–12, 2024. C&H will provide a supplemental memorandum upon receipt and review of Seller's response to the Title Objection Letter.
Permitted exceptions were extensively negotiated between the parties during the PSA negotiation process and are reflected in PSA Exhibit P (the "Permitted Exceptions Schedule"). The Permitted Exceptions Schedule lists those matters which Buyer has agreed will constitute exceptions to title under the pro forma owner's policies.
C. Key Findings by Property
C&H's review of the title commitments for each of the fourteen properties did not identify any title defects that would prevent closing, subject to Seller's cure of the twenty-three objection items described above. The property-by-property status is summarized as follows:
(1) Fairfield Logistics Center I (4100 Fairfield Industrial Boulevard, Fairburn, GA 30213): Mechanic's lien filed by Consolidated Drywall Systems, Inc. in the amount of $128,500 (Mandatory Cure Item); otherwise clean title.
(2) Fairfield Logistics Center II (4200 Fairfield Industrial Boulevard, Fairburn, GA 30213): Minor gap issue relating to a recorded utility easement not reflected in initial commitment; correction requested from Commonwealth Title.
(3) Buckhead Place Office Tower (3380 Peachtree Road NE, Atlanta, GA 30326): Unusually complex exception schedule due to the urban location; multiple recorded easements including pedestrian access easements, shared parking facility easements, and a reciprocal operating agreement recorded in 2003 (as amended in 2012 and 2018) governing shared common area maintenance obligations with the adjacent Buckhead Station mixed-use development. All existing exceptions were reviewed and confirmed to be standard for a Class A office tower in an urban mixed-use setting. No material adverse title conditions.
(4) Peachtree Corners Industrial (6100 Peachtree Parkway, Peachtree Corners, GA 30092): Standard exception schedule; one missing subordination agreement identified and included in objection letter.
(5) Westlake Distribution Hub (11500 Westlake Parkway, Houston, TX 77082): Complex exception schedule including a recorded pipeline easement benefiting Gulf Coast Energy Pipeline LLC, running along the northern boundary of the property. The pipeline easement was reviewed by Breckenridge Osgood LLP and determined not to interfere with current operations or access to the improvements. Survey confirms the easement area does not encroach upon improvements or truck courts.
(6) Katy Logistics Park (22800 Clay Road, Katy, TX 77449): Clean title; standard utility and drainage easements.
(7) Alliance Commerce Center (14700 North Freeway, Fort Worth, TX 76177): Clean title; no objections.
(8) Lakeland Crossings Industrial (7100 Drane Field Road, Lakeland, FL 33811): One expired mortgage satisfaction not yet recorded (Mandatory Cure Item); otherwise clean title.
(9) Southport Distribution Center (4400 South US Highway 1, Fort Pierce, FL 34982): Standard exception schedule; no objections beyond Permitted Exceptions.
(10) Brickell Commerce Tower (1450 Brickell Avenue, Miami, FL 33131): Urban office tower with typical condominium-style exceptions and shared facility agreements; one easement encroachment identified and addressed through title endorsement.
(11) Murfreesboro Distribution Center (2200 Gateway Boulevard, Murfreesboro, TN 37129): Mechanic's lien filed by Volunteer Electric & Mechanical Inc. in the amount of $67,200 (Mandatory Cure Item); judgment lien against GMP Murfreesboro LLC in the amount of $47,000 (Mandatory Cure Item).
(12) Cool Springs Office Park (5000 Virginia Way, Brentwood, TN 37027): Clean title; standard exceptions.
(13) Mount Juliet Logistics Center (1800 Central Pike, Mount Juliet, TN 37122): Clean title; one missing subordination agreement included in objection letter.
(14) SouthPark Corporate Center (6200 Fairview Road, Charlotte, NC 28210): Clean title; standard exceptions consistent with an office property in a well-established suburban corridor.
D. Pro Forma Policies and Endorsements
C&H transmitted endorsement requests to Commonwealth Title for all fourteen properties. The following endorsements have been requested for each owner's policy:
• Owner's Comprehensive Endorsement (ALTA 9.3 or state equivalent)
• Access Endorsement (ALTA 17 / 17.1 or state equivalent)
• Survey Endorsement (ALTA 25 / 25.1 or state equivalent)
• Zoning Endorsement (ALTA 3.1 or state equivalent, where available)
• Contiguity Endorsement (where applicable)
• Location Endorsement (ALTA 22 or state equivalent)
• Tax Parcel Endorsement (ALTA 18 / 18.1 or state equivalent)
• Same as Survey Endorsement
• Restrictions, Encroachments, and Minerals Endorsement (ALTA 9 or state equivalent)
Pro forma owner's policies incorporating the requested endorsements are under review by C&H and local counsel. Estimated aggregate title insurance premiums for the portfolio are approximately Two Million Four Hundred Twenty Thousand Dollars ($2,420,000), which are Buyer's cost under the PSA.
At closing, Commonwealth Title will provide a gap indemnity letter and bring-down endorsement confirming no adverse matters have been recorded between the effective date of the final title commitment and the date and time of closing.
IV. SURVEY REVIEW
A. Overview
ALTA/NSPS Land Title Surveys conforming to the 2021 Minimum Standard Detail Requirements for ALTA/NSPS Land Title Surveys were commissioned from Meridian Land Surveying, Inc. ("Meridian") for all fourteen (14) properties. The surveys were prepared under the supervision and certification of Daniel Caulfield, PLS, PE, the firm's principal surveyor. The survey instruction letter specifying the required Table A optional items was issued by C&H on November 8, 2023, and the following Table A Items were requested:
Items 1, 2, 3, 4, 6(a), 6(b), 7(a), 7(b)(1), 7(c), 8, 9, 10, 11(a), 11(b), 13, 14, 16, 17, 18, and 19.
These optional items require, among other things, the depiction of all monuments and their relationship to record descriptions, the plotting of all easements, setback lines, and building restriction lines, the identification of parking counts and ADA spaces, the depiction of flood zone designations, the identification of utilities and above-ground improvements, and the graphic depiction of encroachments, overlaps, and gores.
C&H issued a detailed survey review comment letter to Meridian on March 15, 2024, identifying required corrections, clarifications, and revision requests. The principal comments related to (a) correction of minor discrepancies between the survey depictions and the recorded easement descriptions, (b) requests for additional detail regarding parking counts and ADA-accessible spaces at certain properties, and (c) requests for the depiction of certain recently recorded instruments not reflected on the initial surveys.
B. Key Findings
C&H's review of the surveys for all fourteen properties, in conjunction with the title commitments and underlying recorded instruments, yielded the following principal findings:
Boundary Disputes. No material boundary disputes were identified at any of the fourteen properties. All legal descriptions in the surveys match the legal descriptions in the title commitments, and the surveys confirm that the boundaries of each property as depicted are consistent with the recorded plats and deeds of record.
Encroachments. Minor encroachments were noted at several properties, all of which are de minimis in nature and have been addressed through title endorsement coverage or inclusion in the Permitted Exceptions Schedule:
• Fairfield Logistics Center II — A chain-link security fence encroaches approximately 0.4 feet into the adjacent parcel's property. The encroachment is minor and has been addressed through a survey endorsement from Commonwealth Title.
• Lakeland Crossings Industrial — A concrete dumpster pad encroaches approximately 1.2 feet into a recorded utility easement along the eastern property line. The encroachment does not interfere with the utility company's use of the easement and has been listed as a Permitted Exception.
Easement Locations. The locations of all recorded easements depicted on the surveys were confirmed to be consistent with the legal descriptions in the recorded easement instruments. No easements were identified that would materially interfere with the current use or operation of any property.
Setback Compliance. Setback compliance was verified for all fourteen properties. Improvements at each property are located within the applicable building setback lines established by the governing zoning ordinances and subdivision plats.
Final Surveys. Final certified surveys incorporating all requested corrections and revisions are expected to be delivered by Meridian prior to closing. The final surveys will be certified to Fairwater Real Estate Investment Trust, Commonwealth National Title Insurance Company, and each applicable lender (Pinnacle Federal Bank, N.A., Veltrano Capital Lending Corp., and Sycamore Life Insurance Company, as applicable).
C. Survey Costs
Estimated aggregate survey costs for all fourteen properties are approximately One Hundred Ninety-Six Thousand Dollars ($196,000), which are Buyer's cost under the PSA.
V. LEASE AUDIT
A. Portfolio Overview
C&H conducted a comprehensive review of all eighty-seven (87) leases across the fourteen-property portfolio. The lease audit included a review of each lease agreement (including all amendments, modifications, supplements, and related correspondence), comparison of lease terms against the rent roll and tenant information provided by Seller, and analysis of all material lease provisions relevant to the acquisition, ongoing ownership, and financing of the properties. The key portfolio metrics are as follows:
The in-place capitalization rate of 6.80% is calculated on the basis of the $74,800,000 annual in-place base rent divided by the $1,100,000,000 Purchase Price.
B. Top 5 Tenants by ABR
The following table sets forth the five largest tenants in the portfolio, measured by annual in-place base rent:
The top five tenants collectively represent approximately 44.8% of total portfolio annual in-place base rent. The concentration of the top five tenants is moderate and consistent with institutional-quality logistics and office portfolios of this size. The tenant base is diversified across multiple industries, including third-party logistics, pharmaceutical distribution, technology, and freight transportation, which provides some measure of protection against sector-specific economic disruption.
C. Key Lease Terms and Observations
C&H's lease review addressed the following categories of lease provisions across all eighty-seven leases. A separate, detailed Lease Audit Memorandum — Top 10 Tenants, prepared concurrently, provides in-depth analysis of the ten largest tenant leases. The principal findings are summarized below:
Landlord Obligations. Landlord repair, maintenance, and capital replacement obligations under the logistics leases are generally limited in scope, consistent with market-standard triple-net (NNN) and modified-gross lease structures. Landlord obligations under the office leases are somewhat broader, including structural repair and maintenance of building systems, which is consistent with full-service gross lease structures typical of Class A suburban and urban office properties.
Renewal Options. Approximately seventy-two (72) of the eighty-seven leases contain one or more renewal options, with renewal terms ranging from three (3) to ten (10) years. Renewal rental rates are generally set at fair market value as determined at the time of renewal, with certain logistics leases providing for renewal at a fixed percentage increase over the then-current base rent (typically 2.5% to 3.0% per annum).
Expansion Options. Eleven (11) leases contain expansion options or rights of first offer for adjacent or contiguous space within the same building or complex. These expansion options are typical for larger tenants and do not present any unusual risk to the Buyer.
Purchase Options. No leases were identified that contain tenant purchase options that could conflict with Buyer's intended long-term hold strategy, with one minor exception: the Birchwood Technology Group Inc. lease at SouthPark Corporate Center contains a right of first refusal ("ROFR") in favor of the tenant in the event of a proposed sale of the property to a third party. However, the ROFR as drafted applies only to a sale of the "Property" (defined as the real property), and the entity-level transfer structure of this transaction arguably does not trigger the ROFR because the real property itself is not being conveyed. This analysis has been reviewed by Haversham Cole PLLC under North Carolina law, and they concur with our interpretation. Notwithstanding, as a conservative measure, C&H recommends that the Birchwood ROFR be addressed through the estoppel process, with the estoppel certificate including an acknowledgment from Birchwood that the ROFR is not triggered by the contemplated transaction.
Co-Tenancy Clauses. Three (3) office leases at Buckhead Place Office Tower contain co-tenancy clauses tied to the building's overall occupancy level (minimum 75% occupancy). The building is currently 88.4% occupied, well above the co-tenancy threshold. C&H recommends continued monitoring of the Buckhead occupancy level through closing and post-closing.
Assignment and Subletting. C&H reviewed the assignment and subletting provisions in all eighty-seven leases. Several leases contain change of control or assignment provisions that are potentially triggered by an entity-level transfer of the landlord entity. All such provisions have been reviewed and determined to be either (a) not triggered by the specific structure of this transaction (i.e., provisions that are triggered only by a direct assignment of the lease or the landlord's interest in the property, as opposed to an indirect change of ownership of the landlord entity), or (b) addressable through the estoppel and tenant notification process. No lease provisions were identified that would require tenant consent as a condition to closing.
D. Estoppel Status
Section 7.3 of the PSA requires Seller to deliver tenant estoppel certificates from tenants representing at least eighty percent (80%) of in-place base rent (i.e., Fifty-Nine Million Eight Hundred Forty Thousand Dollars ($59,840,000) of the $74,800,000 total) and from every tenant occupying 25,000 or more RSF (each a "Major Tenant"), in form reasonably acceptable to Buyer and Buyer's lenders, on or before May 15, 2024.
The form of estoppel certificate is set forth in PSA Exhibit E and was negotiated between C&H and Blackridge Hayes LLP during the PSA negotiation process. The estoppel form requires tenant confirmation of, among other things, (i) the current lease terms, (ii) the commencement and expiration dates, (iii) the current base rent and any additional rent obligations, (iv) any outstanding landlord obligations, (v) the status of any options or rights held by the tenant, (vi) the security deposit amount, and (vii) confirmation that no defaults exist under the lease.
As of the date of this memorandum (April 10, 2024), Seller has commenced distribution of estoppel certificates to all eighty-seven (87) tenants. The tracking spreadsheet maintained by C&H shows that approximately thirty-eight (38) estoppel certificates have been returned to date, representing approximately fifty-two percent (52%) of annual in-place base rent. The estoppel process is on track to meet the May 15, 2024 deadline, but requires continued diligent effort by Seller and Argyle Property Services LLC (Seller's property manager) to obtain the remaining estoppels necessary to satisfy the eighty percent (80%) threshold.
Any estoppels received that contain material discrepancies from the rent roll or disclose previously unknown claims, defaults, or obligations will be flagged by C&H for Seller supplemental disclosure and further analysis. To date, no such discrepancies have been identified in the estoppels received.
E. SNDA Status
Section 7.4 of the PSA requires Buyer to deliver subordination, non-disturbance, and attornment agreements ("SNDAs") to all Major Tenants (defined as tenants with annual base rent of $1,500,000 or more per annum). Based on the current rent roll, thirty-eight (38) Major Tenant SNDAs are required.
The form of SNDA is set forth in PSA Exhibit F. SNDAs are being prepared for distribution to the Major Tenants, and the distribution process has commenced. The SNDA delivery deadline is May 15, 2024, concurrent with the estoppel delivery deadline. The SNDA process is in its early stage, and C&H is maintaining a tracking spreadsheet to monitor execution and delivery.
F. Security Deposits
The aggregate amount of tenant security deposits held across the fourteen properties is Four Million Two Hundred Eighty-Three Thousand Dollars ($4,283,000). These deposits are held in Target Entity bank accounts at Magnolia Commerce Bank, N.A. Because the transaction is structured as an entity-level transfer, the security deposits will remain in the existing bank accounts held by the Target Entities and will transfer to Buyer's control as part of the entity-level acquisition. No separate transfer of security deposit funds is required at closing, although Buyer will need to update signature authorities and banking relationships post-closing as part of the property management transition described in Section XIV below.
VI. ENVIRONMENTAL DUE DILIGENCE
A. Overview
Phase I Environmental Site Assessments ("Phase I ESAs") were prepared by Trident Environmental Group LLC ("Trident") for all fourteen (14) properties in the portfolio. The Phase I ESAs were conducted in accordance with ASTM E1527-21, Standard Practice for Environmental Site Assessments: Phase I Environmental Site Assessment Process, and were supervised by Rachel Kwan, Senior Environmental Scientist. The Phase I ESAs included historical research (aerial photographs, topographic maps, fire insurance maps, city directories, and environmental database searches), site reconnaissance, interviews with current and former property managers and occupants, and review of regulatory agency files.
B. Findings
Twelve (12) of the fourteen (14) properties received clean Phase I ESAs with no Recognized Environmental Conditions ("RECs"), Controlled Recognized Environmental Conditions ("CRECs"), or Historical Recognized Environmental Conditions ("HRECs") identified. The remaining two (2) properties were identified as having de minimis RECs that are classified as controlled environmental conditions:
Westlake Distribution Hub (11500 Westlake Parkway, Houston, TX 77082): The Phase I ESA identified a de minimis REC relating to historical petroleum storage activities conducted on an adjacent parcel (the former Westlake Service Station, located approximately 200 feet northwest of the subject property). Environmental records indicate that the adjacent parcel underwent remediation in 2014–2015 under the oversight of the Texas Commission on Environmental Quality ("TCEQ"). Groundwater monitoring wells installed along the shared property boundary show no evidence of contaminant migration onto the subject property. The most recent monitoring report (dated October 2023) confirms that all analytes are below applicable TCEQ Protective Concentration Levels. Trident concluded that this condition is controlled and does not require remediation action by the property owner.
Lakeland Crossings Industrial (7100 Drane Field Road, Lakeland, FL 33811): The Phase I ESA identified a de minimis REC relating to the former agricultural use of the property (citrus grove operations that ceased in approximately 2014, prior to the property's development as an industrial facility in 2017–2018). Soil sampling conducted during the property's original development confirmed residual pesticide (organochlorine) concentrations at levels below the applicable Florida Department of Environmental Protection Soil Cleanup Target Levels ("SCTLs") for commercial/industrial land use. Trident concluded that this condition is controlled and does not require further investigation or remediation.
Phase II ESAs. Based upon the findings of the Phase I ESAs, Trident did not recommend Phase II Environmental Site Assessments for any of the fourteen properties in the portfolio. C&H concurs with this assessment.
C. Risk Allocation
The de minimis RECs identified at Westlake Distribution Hub and Lakeland Crossings Industrial do not, in C&H's judgment, present material environmental risk to Fairwater. The conditions at both properties are classified as controlled, require no remediation, and have been adequately characterized through existing investigations and monitoring data.
C&H recommends acceptance of these conditions with the following risk mitigation measures: (a) the environmental representations and warranties in Article 8 of the PSA, which include Seller's representations regarding the absence of hazardous substances, compliance with environmental laws, and absence of pending or threatened environmental claims, provide adequate contractual coverage; and (b) the Buyer-side representations and warranties insurance policy being procured from Sentinel Specialty Insurance Company (with a $55,000,000 limit, as described in Section XII.C below) is available as an additional backstop for any environmental claims arising from pre-closing conditions.
VII. PROPERTY CONDITION ASSESSMENTS
A. Overview
Property Condition Assessments ("PCAs") were prepared by Rampart Building Sciences, Inc. ("Rampart") for all fourteen (14) properties in the portfolio. The PCAs were conducted in accordance with ASTM E2018-15, Standard Guide for Property Condition Assessments: Baseline Property Condition Assessment Process, and were supervised by Alan Westbrook, PE. The PCAs included visual inspections of all major building systems and components — including structural framing, building envelope (roofing, facades, windows, and waterproofing), mechanical/HVAC systems, plumbing, electrical, fire protection and life safety, vertical transportation (elevators and escalators), interior finishes, site improvements (paving, landscaping, and stormwater management), and ADA accessibility compliance.
B. Findings — Immediate Repair Costs
Rampart identified aggregate estimated immediate repair costs of Two Million One Hundred Forty Thousand Dollars ($2,140,000) across the portfolio. "Immediate repair" items are defined as items requiring correction within the first twelve (12) months of ownership to prevent further deterioration, address safety concerns, or restore proper operation of building systems. The immediate repair costs are allocated among the following properties:
(a) Buckhead Place Office Tower (3380 Peachtree Road NE, Atlanta, GA 30326) — $890,000: This property represents the largest concentration of immediate repair costs and includes (i) replacement of two (2) rooftop HVAC units that have reached the end of their useful life (estimated cost: $480,000); (ii) modernization of one (1) passenger elevator cab, including controller replacement, new cab interior, and door equipment upgrades (estimated cost: $265,000); and (iii) parking garage waterproofing repairs to the upper deck and stair towers, including traffic coating and expansion joint replacement (estimated cost: $145,000). These findings are consistent with the age of the building (completed 2017) and the intensive use of these systems in a Class A urban office tower.
(b) Cool Springs Office Park (5000 Virginia Way, Brentwood, TN 37027) — $620,000: Immediate repair items include (i) roof membrane repairs to a section of the low-slope roof system exhibiting blistering and ponding (estimated cost: $285,000); (ii) exterior caulking and sealant replacement at window and curtain wall transitions, where existing sealant has deteriorated beyond its expected service life (estimated cost: $195,000); and (iii) ADA compliance upgrades to restrooms on three floors, including installation of compliant grab bars, fixture heights, and signage (estimated cost: $140,000).
(c) Lakeland Crossings Industrial (7100 Drane Field Road, Lakeland, FL 33811) — $380,000: Immediate repair items include (i) replacement of four (4) loading dock levelers that are beyond their useful life and exhibiting mechanical failures (estimated cost: $220,000); and (ii) pavement resurfacing and joint sealing in the truck court area, which is exhibiting significant surface distress from heavy truck traffic (estimated cost: $160,000).
(d) SouthPark Corporate Center (6200 Fairview Road, Charlotte, NC 28210) — $250,000: Immediate repair items include (i) building façade tuckpointing and masonry repair to address mortar joint deterioration at the main entrance and south elevation (estimated cost: $155,000); and (ii) fire alarm panel replacement, as the existing panel has reached its end of life and replacement parts are no longer available from the manufacturer (estimated cost: $95,000).
The remaining ten (10) properties in the portfolio did not have significant immediate repair items identified in the PCAs, with only routine maintenance items noted.
C. PCA Credit
C&H negotiated a PCA repair credit of One Million Seventy Thousand Dollars ($1,070,000) to Buyer, representing fifty percent (50%) of the aggregate estimated immediate repair costs of $2,140,000. The PCA credit will be applied as a purchase price reduction at closing, resulting in an adjusted Purchase Price of One Billion Ninety-Eight Million Nine Hundred Thirty Thousand Dollars ($1,098,930,000). The remaining fifty percent (50%) of the estimated immediate repair costs will be addressed by Buyer post-closing from the operating budgets of the applicable properties.
D. Long-Term Capital Expenditure Observations
The PCAs include ten (10) year capital reserve recommendations for each property, projecting anticipated capital expenditures for major building system replacements and renovations over the next decade. C&H reviewed these projections and found no extraordinary or unexpected capital needs beyond typical building lifecycle maintenance. All fourteen properties are in generally good condition, consistent with their relatively recent construction dates (all properties were built between 2016 and 2021). The capital reserve projections have been incorporated into Fairwater's underwriting model by Fairwater's asset management team.
VIII. ZONING AND LAND USE COMPLIANCE
A. Overview
C&H conducted a comprehensive zoning and land use compliance analysis for all fourteen (14) properties in the portfolio, in coordination with local counsel in each of the five jurisdictions. The analysis included review of applicable zoning ordinances, zoning maps, certificates of occupancy, building permits, and relevant municipal records, as well as direct communication with local zoning and planning departments to confirm current zoning classifications and permitted uses.
B. Findings
Zoning confirmation letters were obtained for all fourteen (14) of fourteen (14) properties. Each confirmation letter confirms that the current use of the respective property — whether logistics/industrial or office — is a permitted use under the applicable zoning classification. The results of the zoning compliance analysis are summarized as follows:
• No zoning variances, conditional use permits, or special exceptions are required for the current operations at any property in the portfolio.
• No pending zoning changes, rezoning applications, comprehensive plan amendments, or governmental proceedings were identified that would adversely affect the current permitted uses at any property.
• All properties have valid certificates of occupancy on file with the applicable local governmental authority.
• Building coverage ratios, floor area ratios, parking ratios, and setback dimensions for each property are in compliance with applicable zoning requirements, as confirmed by the ALTA surveys.
C&H does not anticipate any zoning or land use issues that would affect the closing of the transaction or Fairwater's intended continued operation of the properties in their current use.
IX. LOAN DOCUMENT REVIEW — ASSUMED DEBT ($612,000,000)
A. Overview
C&H conducted a comprehensive review of the loan documents for the three existing mortgage loan facilities to be assumed by Fairwater as part of the entity-level acquisition. The aggregate outstanding principal balance of the three facilities is Six Hundred Twelve Million Dollars ($612,000,000) as of February 28, 2024, the date of PSA execution. The three facilities are summarized as follows:
Lender counsel for each facility is as follows:
• Pinnacle Federal Bank, N.A.: Whitfield & Archer LLP (Sandra Whitfield, Partner)
• Veltrano Capital Lending Corp.: Cranford McCabe LLP (Leo Cranford, Partner)
• Sycamore Life Insurance Company: Partridge Wynn & Slater LLP (Claire Wynn, Partner)
A detailed loan document review memorandum has been prepared separately for each of the three facilities and is cross-referenced in Appendix C hereto.
B. Change of Control Provisions
Each of the three loan agreements contains a change of control provision that requires the applicable lender's prior written consent to any direct or indirect transfer of ownership interests in the borrower entity. The transfer of one hundred percent (100%) of the membership interests in each Target Entity from GMP Fund III to Fairwater REIT constitutes a "change of control" or "transfer" (as variously defined) under each facility, thereby triggering the consent requirement.
Specifically:
• The Pinnacle Master Loan Agreement (Section 6.1(b)) defines "Transfer" broadly to include any direct or indirect transfer of fifty percent (50%) or more of the beneficial ownership interests in the Borrower, and prohibits any such Transfer without the prior written consent of the Lender.
• The Veltrano Loan Agreement (Section 5.02(a)) contains a substantially similar prohibition on transfers of controlling interests in the Borrower without Lender consent.
• The Sycamore Note Purchase Agreement (Section 7.01) defines "Change of Control" to include any transaction resulting in a change of the identity of the Person holding the majority of the direct or indirect ownership interests in the Borrower, and requires Lender consent to any such Change of Control.
Obtaining lender consent from all three lenders is a condition precedent to closing under Section 9.1(e) of the PSA.
C. Consent Fees
Each lender has indicated that consent to the change of control will be conditioned upon payment of a consent fee, calculated as a percentage of the outstanding principal balance of the applicable loans. The consent fees are as follows:
Under Section 10.4(c) of the PSA, the consent fees are to be allocated equally between Buyer and Seller (fifty percent / fifty percent). Buyer's share of the consent fees is $912,812.50, and Seller's share is $912,812.50.
D. Replacement Guaranty
Each of the three loan facilities includes a carve-out guaranty (also referred to as a "bad boy" guaranty or "non-recourse carve-out" guaranty) executed by GMP Fund III as guarantor. As a condition to each lender's consent to the change of control, Fairwater REIT will be required to execute a replacement carve-out guaranty substituting Fairwater as the guarantor in place of GMP Fund III.
Each lender has specified minimum guarantor financial covenants that Fairwater must satisfy, including:
• Minimum tangible net worth of Five Hundred Million Dollars ($500,000,000); and
• Minimum liquid assets of Fifty Million Dollars ($50,000,000).
Fairwater has represented to C&H that it is in compliance with both financial covenants and will remain in compliance throughout the term of each loan. Fairwater's financial statements have been submitted to each lender for review.
The forms of replacement guaranty are attached as Exhibit S to the PSA and are currently being negotiated with each lender's counsel. The negotiations are proceeding in the ordinary course. Certain customary modifications to the standard forms have been requested by Fairwater, including (a) limitations on the scope of recourse carve-outs to be consistent with current market practice, and (b) confirmation that the guarantor's liability is limited to the applicable loan amount and does not extend cross-default to the other facilities. C&H is actively managing these negotiations in coordination with David Elgin Park, General Counsel of Fairwater REIT.
E. Lender Consent Status (as of April 10, 2024)
C&H transmitted consent request letters, accompanied by supporting documentation (including Fairwater's organizational documents, financial statements, management team biographies, and the proposed transaction structure), to the counsel for all three lenders on March 8, 2024. The current status of the consent process with each lender is as follows:
Pinnacle Federal Bank, N.A. ($421,600,000 — 8 logistics properties): Initial discussions are underway with Sandra Whitfield at Whitfield & Archer LLP. Pinnacle is reviewing Fairwater's financial statements and the form of replacement guaranty. Given the size of the Pinnacle exposure ($421.6 million) and the number of secured properties (eight), C&H anticipates that the Pinnacle consent process will be the most time-intensive of the three. C&H has scheduled a call with Pinnacle's credit committee representative for the week of April 15, 2024, to discuss the timeline and any open issues.
Veltrano Capital Lending Corp. ($142,300,000 — 4 office properties): Veltrano has provided a preliminary indication of willingness to consent to the change of control, subject to completion of its credit review and finalization of the replacement guaranty. Negotiations with Leo Cranford at Cranford McCabe LLP are progressing in the ordinary course. C&H does not anticipate significant obstacles to obtaining Veltrano's consent within the required timeline.
Sycamore Life Insurance Company ($48,100,000 — 2 logistics properties): Sycamore has also provided a preliminary indication of willingness to consent. The smaller exposure ($48.1 million) and the simplicity of the two-property collateral pool suggest a relatively straightforward consent process. Negotiations with Claire Wynn at Partridge Wynn & Slater LLP are progressing.
All three consents are required by May 24, 2024, the lender consent deadline under the PSA. As noted in Section II above, if any consent is not received by the lender consent deadline, the PSA provides for an automatic extension of the closing date by up to thirty (30) days, subject to the outside date provisions. C&H will continue to provide weekly updates to Fairwater on the status of the consent process.
F. Key Loan Covenants and Default Triggers
C&H's review of the loan documents for all three facilities included a detailed analysis of material borrower covenants, reporting requirements, reserve obligations, and events of default. The principal findings are summarized below:
Existing Defaults. No existing defaults or events of default were identified under any of the three facilities. Additionally, C&H did not identify any conditions or circumstances that, with the passage of time or the giving of notice (or both), would constitute a default under any facility.
Financial Covenants. The Pinnacle facility includes a debt service coverage ratio ("DSCR") covenant of 1.25x, tested quarterly on a trailing twelve-month basis. The current DSCR for the Pinnacle collateral pool, based on the most recently available financial reports (Q4 2023), is approximately 1.58x, providing significant headroom above the covenant threshold. The Veltrano facility includes a similar DSCR covenant of 1.20x (current performance: approximately 1.41x). The Sycamore facility does not include an ongoing DSCR covenant but includes a debt yield test of 8.0% (current performance: approximately 8.7%).
Reserve Requirements. Each facility requires the maintenance of various reserve accounts, including tax and insurance reserves, replacement reserves (capital expenditure reserves), and, in the case of the Pinnacle facility, a tenant improvement and leasing commission reserve. All reserves are currently funded in accordance with the applicable loan documents.
Lockbox / Cash Management. Each facility includes a lockbox and cash management structure under which tenant rental payments are deposited into a lockbox account controlled by the lender, with funds swept to a cash management account and disbursed to the borrower operating account on a monthly basis, subject to satisfaction of certain conditions. No cash sweep triggers (typically tied to DSCR performance thresholds or the occurrence of a "Cash Sweep Event") are currently active under any of the three facilities. C&H confirmed that the current cash management arrangements will remain in place post-closing and that Fairwater will need to coordinate with each lender to update the lockbox and disbursement instructions in connection with the property management transition.
Reporting Requirements. Each facility requires the borrower to deliver quarterly and annual financial reports, tenant rent rolls, operating statements, and other property-level reporting. Fairwater's property management team will assume these reporting obligations post-closing.
X. ENTITY-LEVEL DUE DILIGENCE
A. Overview
C&H conducted entity-level due diligence with respect to all fourteen (14) Target Entities and GMP Fund III (the Seller). This workstream included the review of organizational documents, certificates of formation, certificates of good standing, operating agreements, UCC-1 financing statement searches, judgment and lien searches, and litigation searches in all relevant jurisdictions.
B. Target Entities (14 SPEs)
Each of the fourteen Target Entities is a single-purpose Delaware limited liability company formed for the sole purpose of owning the respective real property asset. The Target Entities are structured as single-member LLCs, with GMP Fund III as the sole member of each entity. The operating agreements for each Target Entity are standard single-purpose entity ("SPE") operating agreements containing customary separateness covenants, including prohibitions on (a) commingling of funds, (b) incurring indebtedness other than the applicable mortgage debt, (c) engaging in any business other than the ownership and operation of the respective property, and (d) dissolving or merging without the consent of the applicable mortgage lender.
C&H confirmed the following with respect to each Target Entity: