MEMORANDUM
PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT
To: Douglas Fairchild, Responsible Partner, Calderwood & Harkness LLP Marcus Devereaux, Executive Vice President, Acquisitions, Fairwater Real Estate Investment Trust Camille Oduya, In-House Real Estate Counsel, Fairwater Real Estate Investment Trust
From: Rafael Dominguez, Working Associate, Calderwood & Harkness LLP
Date: April 10, 2024
Re: Insurance Coverage Review — Sun Belt Logistics & Office Portfolio (14 Properties); Fairwater Real Estate Investment Trust Acquisition from Greystone Meridian Partners Fund III, L.P.
Matter No.: 1036-00004
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I. Executive Summary
This memorandum presents a comprehensive review of the existing property and casualty, general liability, umbrella/excess liability, and other insurance policies currently maintained by or for the benefit of the fourteen Target Entities in connection with the proposed acquisition by Fairwater Real Estate Investment Trust ("Fairwater REIT" or "Buyer") of 100% of the membership interests in each of the fourteen single-purpose Delaware limited liability companies (collectively, the "Target Entities") from Greystone Meridian Partners Fund III, L.P. ("GMP Fund III" or "Seller"). This memorandum identifies coverage gaps in the existing insurance program, evaluates compliance with the insurance requirements contained in the Purchase and Sale Agreement (the "PSA"), the three applicable mortgage loan agreements, and tenant leases, and addresses coordination with Hartwick Gunderson & Associates, Inc. ("Hartwick Gunderson") (Peter Langford, Account Executive) for the binding of replacement policies with Ironclad Indemnity Insurance Company ("Ironclad Indemnity") effective as of the closing date, currently scheduled for May 31, 2024, subject to extension pursuant to the terms of the PSA.
Transaction Overview. As described more fully in the Transaction Summary Memorandum dated January 22, 2024, the transaction is structured as an entity-level acquisition in which Fairwater REIT will acquire 100% of the membership interests in each of the fourteen Target Entities. The aggregate purchase price is $1,100,000,000. In connection with the acquisition, Buyer will assume outstanding mortgage indebtedness of approximately $612,000,000 across three lenders:
• Pinnacle Federal Bank, N.A. — Outstanding principal balance of approximately $421,600,000 secured by eight logistics properties;
• Veltrano Capital Lending Corp. — Outstanding principal balance of approximately $142,300,000 secured by four office properties; and
• Sycamore Life Insurance Company — Outstanding principal balance of approximately $48,100,000 secured by two logistics properties.
Cash equity required at closing is approximately $488,000,000, subject to customary prorations, adjustments, and working capital calculations as specified in PSA Exhibit U.
Portfolio Overview. The portfolio consists of fourteen commercial properties located across five states in the southeastern United States, comprising a total of approximately 5,224,000 rentable square feet ("RSF"). The portfolio includes ten logistics/industrial properties totaling approximately 4,373,000 RSF and four Class A and Class B office properties totaling approximately 851,000 RSF. The geographic distribution is as follows: Georgia (4 properties), Texas (3 properties), Florida (3 properties), Tennessee (3 properties), and North Carolina (1 property).
Key Conclusion. The existing insurance policies, which are maintained by Argyle Property Services LLC ("Argyle"), a Seller affiliate and the current property manager for the portfolio, on behalf of the Target Entities under a blanket program, are generally adequate in scope and coverage limits for the current operations of the properties. However, these policies will not survive the change of control at closing. Specifically, the existing blanket program includes provisions that permit the carrier to cancel or non-renew coverage upon a transfer of the membership interests in the insured entities. Accordingly, replacement policies must be bound by Buyer with Ironclad Indemnity through Hartwick Gunderson, effective no later than the closing date, to ensure continuous insurance coverage and to comply with lender insurance requirements that are conditions precedent to the required lender consents for the assumption of the existing mortgage indebtedness.
In addition, this review has identified several specific coverage gaps in the existing program that should be addressed in the replacement policies, including: (i) the absence of standalone environmental impairment liability coverage; (ii) the absence of ordinance or law coverage required by Sycamore Life Insurance Company; (iii) the need for professional liability (errors and omissions) coverage for the replacement property manager, Fairwater Property Management LLC; (iv) the adequacy of the named windstorm deductible given the portfolio's concentration in Florida and coastal Texas; and (v) the need for a seamless transition of workers' compensation coverage from Argyle to Fairwater Property Management LLC.
Each of these gaps is discussed in detail in Section V of this memorandum, together with recommended remedial actions.
Note Regarding R&W Insurance. Separate representations and warranties insurance coverage in the amount of $55,000,000 (policy limit) has been placed with Sentinel Specialty Insurance Company and is addressed in separate memoranda, including the R&W Insurance Broker Submission Memorandum dated February 5, 2024, and the R&W Policy Review Memorandum dated March 18, 2024. The R&W policy is not addressed in this memorandum except insofar as coordination matters are noted in Section X below.
II. Scope and Methodology
Documents Reviewed. In preparing this memorandum, we have reviewed the following documents and materials:
1. Existing Insurance Policies and Certificates of Insurance. All property and casualty, general liability, umbrella/excess liability, workers' compensation, and ancillary insurance policies and certificates of insurance maintained for the benefit of each of the fourteen Target Entities, as uploaded by Seller to the virtual data room maintained by Blackridge Hayes LLP (Seller's counsel) at folders 4.7.1 through 4.7.14 (Insurance — Property Level) and folder 4.7.15 (Insurance — Portfolio/Blanket).
2. Purchase and Sale Agreement. The PSA dated January 15, 2024, between Greystone Meridian Partners Fund III, L.P., as Seller, and Fairwater Real Estate Investment Trust, as Buyer, including all exhibits and schedules thereto, with particular focus on Exhibit M (Insurance Requirements), Exhibit U (Proration and Working-Capital Methodology), and Section 7.3 (Insurance Covenants).
3. Mortgage Loan Agreements. The following loan documents, each of which contains insurance requirements applicable to the mortgaged properties:
(a) Master Loan Agreement dated September 15, 2020, by and among Pinnacle Federal Bank, N.A., as Lender, and the applicable Target Entity borrowers (Loans 1-A through 1-H; eight logistics properties; $421,600,000 outstanding principal balance; 4.22% fixed interest rate; maturing July 1, 2028), including all amendments, supplements, and side letters thereto;
(b) Loan Agreement dated February 1, 2021, by and among Veltrano Capital Lending Corp., as Lender, and the applicable Target Entity borrowers (Loans 2-A through 2-D; four office properties; $142,300,000 outstanding principal balance; 4.68% fixed interest rate; maturing March 1, 2029), including all amendments and supplements thereto; and
(c) Note Purchase Agreement dated November 22, 2019, by and among Sycamore Life Insurance Company, as Noteholder, and the applicable Target Entity borrowers (Loans 3-A and 3-B; two logistics properties; $48,100,000 outstanding principal balance; 3.95% fixed interest rate; maturing December 1, 2030), including all amendments and supplements thereto.
4. Tenant Leases. Insurance provisions contained in all eighty-seven (87) tenant leases across the fourteen properties, as reviewed in connection with the lease audit and as summarized in the Lease Audit Memorandum dated March 1, 2024.
5. Phase I Environmental Site Assessments. Phase I ESAs for all fourteen properties prepared by Trident Environmental Group LLC (Rachel Kwan, Senior Environmental Scientist), to the extent relevant to environmental and pollution liability insurance analysis.
6. Replacement Cost Appraisals. Replacement cost values for all fourteen properties as determined by Stonebridge Valuation Advisors, LLC (Maureen Alcott, MAI), for purposes of establishing total insured values under the replacement program.
7. FEMA Flood Zone Determinations. Federal Emergency Management Agency flood zone designations for each property, as reflected in the Standard Flood Hazard Determination Forms ordered through Pinnacle Federal Bank, N.A., and independently verified.
Coordination with Insurance Broker
This review has been prepared in coordination with Hartwick Gunderson & Associates, Inc. (Peter Langford, Account Executive), Buyer's insurance broker, which has been engaged to procure and bind replacement policies with Ironclad Indemnity Insurance Company. Mr. Langford has provided preliminary indications of carrier capacity, proposed coverage terms, and estimated premiums for the replacement program, and has confirmed the binding timeline necessary to ensure seamless coverage effective as of the closing date.
Cross-References. This memorandum should be read in conjunction with: (i) the PSA Review Memorandum dated January 29, 2024; (ii) the Lease Audit Memorandum dated March 1, 2024; (iii) the Title and Survey Review Memorandum dated February 22, 2024; (iv) the Loan Assumption and Lender Consent Memorandum dated March 8, 2024; (v) the Environmental Due Diligence Summary dated February 15, 2024; and (vi) the R&W Insurance Broker Submission Memorandum dated February 5, 2024.
Organizational Framework. The analysis in this memorandum is organized by the following coverage lines: (A) property/casualty (all-risk); (B) general liability; (C) umbrella/excess liability; (D) workers' compensation and employer's liability; (E) environmental/pollution liability; (F) earthquake; (G) flood insurance; (H) business income/rental value; (I) terrorism risk insurance (TRIA); and (J) additional coverages (boiler and machinery, crime/fidelity, and directors and officers liability). For each coverage line, we describe the existing coverage, identify applicable lender and PSA requirements, and note any gaps or recommendations.
III. Existing Insurance Program — Summary
A. Current Insurance Carrier and Broker
The existing insurance program for the portfolio is arranged and administered by Argyle Property Services LLC ("Argyle"), the Seller-affiliated property management company that currently manages all fourteen properties under a Portfolio Property Management Agreement dated January 1, 2020, between GMP Fund III and Argyle. The day-to-day insurance administration for the portfolio is overseen by Sean Kilpatrick, Portfolio Manager at Argyle, who has served as the primary point of contact for insurance matters in the data room and during due diligence.
The existing policies are maintained under a blanket insurance program placed through Seller's insurance broker (identified in the data room as Carrington Brooke Insurance Advisors, LLC, although we have not independently verified the broker relationship and the broker identity is not material for purposes of this review). The existing carrier for the blanket property, general liability, and umbrella program is Consolidated American Casualty Insurance Company, a nationally recognized property and casualty carrier. The existing policies are written on a blanket basis covering all fourteen properties and all Target Entities under a single program.
Critically, the existing policies will not survive the change of control at closing. The blanket program contains a change of control provision (Section 12(d) of the Master Policy Form) that permits the carrier to cancel coverage upon a transfer of more than 50% of the ownership interests in any named insured entity. Because the transaction involves a transfer of 100% of the membership interests in each Target Entity, the existing coverage will terminate at closing absent a specific waiver from the carrier, which has not been sought and is not expected. Accordingly, Buyer must procure its own replacement insurance program to be effective at closing.
Buyer's insurance broker for the replacement program is Hartwick Gunderson & Associates, Inc. ("Hartwick Gunderson"), with offices at 100 North Charles Street, Suite 1200, Baltimore, Maryland 21201. The designated Account Executive is Peter Langford. Mr. Langford has been engaged by Buyer since February 2024 and has been actively working to structure and place the replacement program with Ironclad Indemnity Insurance Company.
Policy Period. The existing blanket insurance program operates on an annual policy period of January 1, 2024 through January 1, 2025. Individual policies within the program (property, CGL, umbrella, etc.) share this common policy period. Given the anticipated closing date of May 31, 2024, approximately seven months of the existing policy period would remain at closing; however, as noted above, the change of control provision renders the remaining term moot.
Named Insureds and Interested Parties. The existing policies name Greystone Meridian Partners Fund III, L.P. and each of the fourteen Target Entity LLCs as named insureds. Argyle Property Services LLC is also named as an additional insured in its capacity as property manager. Pursuant to the requirements of the three mortgage loan agreements, the following parties are listed as mortgagee/loss payees and additional insureds on the applicable policies:
• Pinnacle Federal Bank, N.A., its successors and/or assigns (mortgagee and loss payee on eight logistics properties);
• Veltrano Capital Lending Corp., its successors and/or assigns (mortgagee and loss payee on four office properties); and
• Sycamore Life Insurance Company, its successors and/or assigns (mortgagee and loss payee on two logistics properties).
B. Property / Casualty Coverage (All-Risk)
Existing Coverage. The existing blanket all-risk property insurance policy covers all fourteen properties on a replacement cost basis. The policy provides coverage for direct physical loss or damage to the insured properties arising from all risks of direct physical loss, including but not limited to fire, wind, hail, lightning, explosion, vandalism, malicious mischief, water damage (subject to certain sublimits), and all other covered perils, except those specifically excluded by the policy terms.
Total Insured Value. The total insured value ("TIV") under the existing blanket property policy is approximately $1,400,000,000, based on replacement cost values for improvements at all fourteen properties. The TIV exceeds the aggregate purchase price of $1,100,000,000 because the purchase price includes a land value component (approximately $285,000,000 allocated to land across the portfolio) that is excluded from the insurable replacement cost, while the TIV reflects the full replacement cost of improvements, which in many cases exceeds the allocated improvement value used for purchase price purposes.
Deductibles. The existing policy provides for the following deductible structure:
• Standard Perils: $100,000 per occurrence for most covered perils, including fire, vandalism, water damage, and explosion.
• Named Windstorm: $250,000 per occurrence for named windstorm events (hurricanes and tropical storms), applicable to properties located in designated windstorm-exposed areas in Florida and Gulf Coast Texas.
The named windstorm deductible is a point of attention given the portfolio's concentration of properties in Florida (three properties) and Texas (three properties, including two in the Houston metropolitan area), as discussed further in Section V (Gap 5) below.
Coinsurance. The existing policy includes a 90% agreed amount endorsement, which effectively eliminates the coinsurance penalty that would otherwise apply if the insured values were understated relative to the replacement cost of the improvements. The agreed amount endorsement requires the insured to submit a signed statement of values annually, and the current statement of values on file appears to reflect replacement cost values consistent with the TIV reported.
Per-Property TIV Allocation. The existing blanket policy includes a schedule of insured values allocated to each of the fourteen properties. The following table summarizes the property-by-property allocation under the existing program:
Note: TIV figures are approximate and based on the statement of values schedule filed with the existing carrier. Final replacement cost values for the Ironclad Indemnity replacement program will be based on the appraisals prepared by Stonebridge Valuation Advisors, LLC (Maureen Alcott, MAI).
C. General Liability
Existing Coverage. The existing commercial general liability ("CGL") insurance policy provides coverage for bodily injury and property damage liability arising out of the ownership, maintenance, and operation of the fourteen properties. The policy is written on a standard ISO Commercial General Liability Coverage Form (CG 00 01) or its equivalent.
Limits. The existing CGL policy provides the following limits:
• $1,000,000 per occurrence
• $2,000,000 general aggregate per location
• $1,000,000 personal and advertising injury
• $100,000 fire legal liability (damage to rented premises)
• $10,000 medical expense (any one person)
Scope of Coverage. The CGL policy provides coverage for premises and operations liability, products and completed operations liability (relevant to any construction or tenant improvement work at the properties), personal and advertising injury, contractual liability (including the insured's assumption of liability under lease agreements and property management contracts), and fire legal liability. The policy is written on an occurrence basis.
Named Insureds. Each of the fourteen Target Entity LLCs is a named insured under the CGL policy. GMP Fund III is also a named insured. Argyle Property Services LLC is an additional insured in its capacity as property manager.
D. Umbrella / Excess Liability
Existing Coverage. The existing commercial umbrella liability policy provides excess coverage over the underlying CGL policy, any auto liability policy, and employer's liability coverage.
Limits. The umbrella policy provides $25,000,000 per occurrence and $25,000,000 in the aggregate, in excess of the scheduled underlying policies. The self-insured retention applicable to claims not covered by the underlying policies is $10,000.
The $25,000,000 umbrella limit is consistent with market standards for a commercial real estate portfolio of this size and provides adequate coverage for catastrophic liability events. The limit satisfies the requirements of all three mortgage loan agreements (Pinnacle requires a minimum of $10,000,000; Veltrano requires $15,000,000; and Sycamore requires $10,000,000).
E. Workers' Compensation and Employer's Liability
Existing Coverage. Workers' compensation and employer's liability insurance is maintained by Argyle Property Services LLC in its capacity as the employer of all on-site property management, maintenance, and engineering personnel across the fourteen properties. The workers' compensation coverage is provided at statutory limits as required by each applicable state (Georgia, Texas, Florida, Tennessee, and North Carolina), and employer's liability coverage is provided at limits of $1,000,000 per accident / $1,000,000 per employee (disease) / $1,000,000 policy limit (disease).
Post-Closing Transition. This coverage is maintained by Argyle in its capacity as employer and is not a property-level policy of the Target Entities. Upon closing, Argyle will continue to manage the properties and employ the on-site personnel during a 90-day transition services period pursuant to the Transition Services Agreement (Exhibit R to the PSA), which is anticipated to extend through approximately September 4, 2024 (assuming a May 31, 2024 closing, adjusted to June 6, 2024 if the closing slides to the first business day of June as currently anticipated). During the transition period, Argyle will remain the employer of record for on-site personnel and will maintain its workers' compensation coverage.
Following the transition period, Fairwater Property Management LLC ("Fairwater PM") (Leah Torrance, SVP Operations) will assume property management responsibilities and will employ or offer employment to the on-site personnel. Fairwater PM must ensure that its own workers' compensation coverage extends to all on-site employees at all fourteen properties across all five states, effective no later than the date on which Fairwater PM assumes employer responsibilities. This is addressed further in Section V (Gap 6) below.
F. Environmental / Pollution Liability
Existing Coverage. The existing insurance program includes only a limited pollution liability endorsement attached to the blanket all-risk property policy. This endorsement provides coverage solely for "sudden and accidental" pollution events — that is, pollution conditions that commence abruptly and unexpectedly during the policy period. The endorsement does not cover pre-existing contamination, gradual pollution conditions, or remediation costs arising from historical environmental contamination.
There is no standalone environmental impairment liability ("EIL") or pollution legal liability ("PLL") policy in place for any of the fourteen properties.
Environmental Due Diligence Findings. As noted in the Environmental Due Diligence Summary dated February 15, 2024, Phase I Environmental Site Assessments were completed by Trident Environmental Group LLC (Rachel Kwan, Senior Environmental Scientist) for all fourteen properties. The Phase I ESAs identified de minimis recognized environmental conditions ("RECs") at two properties:
(a) Westlake Distribution Hub (11500 Westlake Parkway, Houston, TX 77079) — The Phase I ESA identified a historical dry cleaning operation on an adjacent parcel as a de minimis REC. The dry cleaning facility was closed in 2008 and was subject to a voluntary cleanup under the Texas Commission on Environmental Quality's Voluntary Cleanup Program. A No Further Action letter was issued by TCEQ in 2012. The de minimis REC relates to the potential for residual chlorinated solvent contamination in shallow groundwater that could migrate onto the subject property, although no evidence of such migration was observed.
(b) Lakeland Crossings Industrial (7100 Drane Field Road, Lakeland, FL 33811) — The Phase I ESA identified a former agricultural chemical storage area on the southeastern portion of the property as a de minimis REC. The storage area was decommissioned prior to the construction of the current improvements in 2015. No staining, stressed vegetation, or other evidence of contamination was observed during the site reconnaissance.
No Phase II Environmental Site Assessments were recommended for either property. However, given the presence of these de minimis RECs, we recommend that Buyer consider procuring dedicated pollution legal liability coverage for at least these two properties, as discussed further in Section V (Gap 2) below.
G. Flood Insurance
Existing Coverage. Flood coverage for all fourteen properties is provided under the existing blanket all-risk property policy through a flood sublimit endorsement. The existing flood coverage is provided through private flood insurance (as opposed to policies through the National Flood Insurance Program), which is permitted under each of the three mortgage loan agreements provided that the private coverage meets or exceeds NFIP-equivalent coverage limits.
FEMA Flood Zone Designations. Based on our review of the Standard Flood Hazard Determination Forms and FEMA Flood Insurance Rate Maps (FIRMs), the flood zone designations for each property are as follows:
Properties in Special Flood Hazard Areas. Two properties are located in whole or in part within Special Flood Hazard Areas ("SFHAs") designated as Zone AE:
(a) Katy Freeway Logistics Park (Katy, TX) — Approximately 15% of the parcel falls within Zone AE, primarily along the western boundary adjacent to a drainage channel. The improvements (building footprint and loading areas) are located outside the Zone AE boundary on the elevated portion of the site, but the lender (Pinnacle Federal Bank, N.A.) requires flood insurance for the property given the partial SFHA designation.
(b) Brickell Bay Office Building (Miami, FL) — The entire parcel is located within Zone AE, which is consistent with the coastal location of the property in the Brickell district of downtown Miami. The lender (Veltrano Capital Lending Corp.) requires flood insurance at the maximum available NFIP limits or private equivalent.
For both properties, existing flood coverage under the blanket policy meets or exceeds the coverage required under the applicable loan agreements and NFIP requirements. The replacement program with Ironclad Indemnity should maintain equivalent or enhanced flood coverage for these properties.
H. Earthquake. Not Applicable. All fourteen properties in the portfolio are located in Sun Belt states (Georgia, Texas, Florida, Tennessee, and North Carolina) with low seismic risk. Earthquake coverage is excluded from the existing blanket property policy by endorsement. None of the three mortgage loan agreements requires earthquake coverage for any of the properties, and no earthquake coverage is required under PSA Exhibit M. This is consistent with market practice for commercial real estate portfolios in the southeastern United States.
We note that while certain portions of Tennessee (particularly the western part of the state near Memphis) are within the New Madrid Seismic Zone, the Memphis Intermodal Logistics property is classified as a low-to-moderate seismic risk zone under current USGS hazard mapping, and no lender has required earthquake coverage for this property. Buyer may wish to evaluate whether to procure earthquake coverage for the Memphis property as a discretionary measure, but we do not recommend this as a mandatory action item at this time.
I. Business Income / Rental Value
Existing Coverage. Business income and rental value coverage is included under the existing blanket all-risk property policy. This coverage provides indemnification for loss of rental income sustained by the insured during the period of restoration following a covered physical loss or damage to any of the insured properties.
Coverage Terms. The existing coverage provides for 12 months of actual loss sustained, subject to the blanket TIV. The annual in-place base rental income across the portfolio is approximately $74,800,000 (based on current rent rolls as of January 1, 2024), which represents the total base rent payable by all tenants under the eighty-seven leases in the portfolio. The 12-month actual loss sustained limit should be adequate to cover the projected rental income during any reasonably anticipated restoration period.
The policy also includes an extended period of indemnity of 180 days beyond the date of restoration, which provides coverage for the period during which the insured may experience reduced occupancy or rental income while re-tenanting space following completion of repairs. This extended period of indemnity is an important feature given the logistics and office property types in the portfolio, where re-tenanting following a significant casualty event could require an extended marketing period.
J. Terrorism Risk Insurance (TRIA)
Existing Coverage. Terrorism risk insurance coverage is provided under the existing insurance program pursuant to the Terrorism Risk Insurance Act of 2002, as reauthorized and amended (most recently by the Terrorism Risk Insurance Program Reauthorization Act of 2019) ("TRIA"). All fourteen properties are currently covered for certified acts of terrorism as defined under TRIA.
Lender Requirements. Each of the three mortgage loan agreements requires the borrower to maintain terrorism risk insurance if such coverage is "reasonably available at commercially reasonable rates" (or substantially similar language). TRIA-certified coverage is currently available and has been continuously maintained since the inception of the existing blanket program. The replacement program with Ironclad Indemnity must include TRIA coverage to comply with lender requirements. Hartwick Gunderson has confirmed that Ironclad Indemnity will include TRIA coverage in the proposed replacement program.
K. Additional Coverages Reviewed
Boiler and Machinery / Equipment Breakdown. Equipment breakdown coverage is included in the existing blanket property policy through an equipment breakdown endorsement. This coverage applies to sudden and accidental breakdown of covered equipment, including HVAC systems, elevators, electrical panels, transformers, and other mechanical and electrical equipment at the fourteen properties. The coverage is particularly relevant for the four office properties, which have significant mechanical systems, and for the logistics properties with dock levelers, conveyor systems, and other warehouse equipment.
Crime / Fidelity. A crime and fidelity insurance policy is maintained by Argyle Property Services LLC, covering employee dishonesty, forgery or alteration, theft of money and securities, and computer fraud. This policy covers acts of dishonesty by Argyle employees, including on-site property management personnel. Post-closing, Fairwater PM will need to ensure that its own crime and fidelity program extends to all employees at the fourteen properties.
Directors and Officers (D&O) Liability. Directors and officers liability insurance is maintained at the Fairwater REIT corporate level and is not a property-level or Target Entity-level coverage. The existing D&O program at Fairwater REIT is not within the scope of this review. We note, however, that no adjustments to the Fairwater D&O program are anticipated as a result of this acquisition.
IV. Lender Insurance Requirements — Comparison to Existing and Proposed Coverage
Each of the three mortgage loan agreements that will be assumed by Buyer in connection with the transaction contains detailed insurance requirements that must be satisfied as a condition precedent to the lenders' consent to the assumption. This section summarizes the insurance requirements of each lender and compares them to the existing and proposed coverage.
A. Pinnacle Federal Bank, N.A. Requirements
Loan Overview. Pursuant to the Master Loan Agreement dated September 15, 2020, Pinnacle Federal Bank, N.A. ("Pinnacle") has made loans designated as Loans 1-A through 1-H, secured by eight logistics properties in the portfolio, with an aggregate outstanding principal balance of approximately $421,600,000, bearing a fixed interest rate of 4.22% per annum, and maturing on July 1, 2028. Pinnacle's counsel is Whitfield & Archer LLP (Sandra Whitfield, partner).
Required Coverages. The Pinnacle Master Loan Agreement (Article IX, Section 9.03) requires the borrower to maintain the following minimum insurance coverages:
(a) All-Risk Property Insurance. Blanket or individual all-risk property insurance covering the mortgaged properties at full replacement cost, without deduction for depreciation, with a deductible not to exceed $100,000 per occurrence (or such higher amount as Pinnacle may approve in writing);
(b) Commercial General Liability. CGL insurance with a minimum limit of $1,000,000 per occurrence and $2,000,000 in the aggregate;
(c) Umbrella / Excess Liability. Umbrella or excess liability insurance with a minimum limit of $10,000,000 per occurrence;
(d) Flood Insurance. Flood insurance for any mortgaged property located in a Special Flood Hazard Area, in an amount not less than the lesser of (i) the maximum coverage available under the NFIP or private equivalent, and (ii) the outstanding principal balance of the loan allocated to such property;
(e) Terrorism Risk Insurance. TRIA coverage, if reasonably available at commercially reasonable rates;
(f) Business Income / Rental Value. Business income and rental value coverage for not less than 12 months of projected gross income; and
(g) Boiler and Machinery. Boiler and machinery or equipment breakdown coverage, if applicable.
Mortgagee and Additional Insured Requirements. All property policies must include a standard mortgagee clause naming "Pinnacle Federal Bank, N.A., its successors and/or assigns" as mortgagee and loss payee. All liability policies must name Pinnacle and its counsel (Whitfield & Archer LLP, Sandra Whitfield) as additional insureds. The policies must provide for 30 days' advance written notice to Pinnacle of cancellation or material change (10 days for cancellation due to non-payment of premium).
Carrier Rating. All insurance carriers must have a minimum A.M. Best rating of A- (Excellent) with a Financial Size Category of VII or larger, or such other rating as Pinnacle may approve in writing.
Compliance Status. The existing insurance program complies with all Pinnacle insurance requirements. The replacement policies with Ironclad Indemnity must carry forward Pinnacle as mortgagee, loss payee, and additional insured under the applicable policies, and must satisfy the carrier rating requirements, as a condition to Pinnacle's consent to the assumption of Loans 1-A through 1-H.
B. Veltrano Capital Lending Corp. Requirements
Loan Overview. Pursuant to the Loan Agreement dated February 1, 2021, Veltrano Capital Lending Corp. ("Veltrano") has made loans designated as Loans 2-A through 2-D, secured by the four office properties in the portfolio, with an aggregate outstanding principal balance of approximately $142,300,000, bearing a fixed interest rate of 4.68% per annum, and maturing on March 1, 2029. Veltrano's counsel is Cranford McCabe LLP (Leo Cranford, partner).
Required Coverages. The Veltrano Loan Agreement (Section 5.04) requires coverages substantially similar to those required by Pinnacle, including all-risk property insurance at full replacement cost, CGL, umbrella, flood (if applicable), TRIA, and business income coverage. In addition, the Veltrano Loan Agreement includes the following notable requirement:
Professional Liability / Errors and Omissions. Veltrano requires the property manager to maintain professional liability (errors and omissions) insurance with a minimum limit of $2,000,000 per claim and $5,000,000 in the aggregate. This requirement is unique among the three lenders and is attributable to the office property focus of the Veltrano loan, where property management professional liability exposure may be greater due to the complexity of office building management, tenant improvement coordination, and lease administration.
Compliance Status. The existing insurance program complies with Veltrano's standard property and liability insurance requirements. However, the professional liability (E&O) coverage is currently maintained by Argyle Property Services LLC in its capacity as property manager and will terminate at or after the conclusion of the 90-day transition services period. This is identified as a coverage gap (Gap 4) in Section V below, and Fairwater PM must procure its own professional liability coverage to comply with the Veltrano loan requirements.
Carrier Rating and Notice Requirements. Carrier rating requirements are substantially identical to Pinnacle's (A.M. Best A- / Financial Size Category VII minimum). Veltrano requires 30 days' advance written notice of cancellation or material change.
C. Sycamore Life Insurance Company Requirements
Loan Overview. Pursuant to the Note Purchase Agreement dated November 22, 2019, Sycamore Life Insurance Company ("Sycamore") has purchased notes designated as Loans 3-A and 3-B, secured by two logistics properties in the portfolio, with an aggregate outstanding principal balance of approximately $48,100,000, bearing a fixed interest rate of 3.95% per annum, and maturing on December 1, 2030. Sycamore's counsel is Partridge Wynn & Slater LLP (Claire Wynn, partner).
Required Coverages. The Sycamore Note Purchase Agreement (Section 6.07) requires coverages substantially similar to those required by Pinnacle and Veltrano. However, the Sycamore agreement includes one notable additional requirement not found in the other two loan agreements:
Ordinance or Law Coverage. Sycamore requires the borrower to maintain ordinance or law coverage, which provides coverage for: (i) the increased cost of construction arising from the enforcement of building codes, ordinances, or laws following a covered loss; (ii) demolition costs required by such building codes; and (iii) the loss of the undamaged portion of a building that must be demolished as a result of code enforcement following a covered loss. This coverage is particularly relevant for older buildings or buildings located in jurisdictions with stringent building code upgrade requirements, where a partial loss could trigger a code-mandated demolition or reconstruction requirement that exceeds the standard replacement cost coverage.
Compliance Status. The existing insurance program complies with all Sycamore requirements except for the ordinance or law coverage requirement. The existing blanket property policy does not include an ordinance or law endorsement. This is identified as a coverage gap (Gap 3) in Section V below and must be addressed in the replacement program.
Carrier Rating and Notice Requirements. Carrier rating requirements are substantially identical to those of Pinnacle and Veltrano. Sycamore requires 30 days' advance written notice of cancellation or material change.
V. Coverage Gaps Identified
Based on our review of the existing insurance program, the PSA requirements, the lender insurance requirements, and the proposed replacement program, we have identified the following six coverage gaps that require attention prior to or promptly following closing.
Gap 1: Termination of Existing Policies Upon Change of Control
Description. This is the most critical coverage gap. The existing blanket insurance program arranged by Argyle Property Services LLC on behalf of the Target Entities contains a change of control provision (Section 12(d) of the Master Policy Form) that permits the carrier to cancel or non-renew coverage upon a transfer of more than 50% of the ownership interests in any named insured entity. The acquisition of 100% of the membership interests in each Target Entity by Fairwater REIT will trigger this provision, and the existing coverage will terminate upon closing.
Risk. If replacement coverage is not in place at closing, the properties will be uninsured, which would (i) constitute a breach of the PSA closing conditions, (ii) constitute a default under each of the three mortgage loan agreements, (iii) prevent the lenders from granting consent to the assumption of the existing debt, and (iv) expose Buyer and the Target Entities to uninsured liability for any loss occurring after closing.
Action Required. Replacement policies with Ironclad Indemnity Insurance Company must be bound effective as of the closing date, with no gap in coverage. Coordination with Hartwick Gunderson & Associates (Peter Langford, Account Executive) is actively underway, and Mr. Langford has confirmed that Ironclad Indemnity has capacity to write the replacement program and is prepared to bind coverage upon receipt of final binding instructions from Buyer. The binding timeline is discussed in Section VII.D below.
Status. In progress. Targeted resolution: binding of replacement policies no later than 5 business days prior to closing.
Gap 2: Environmental / Pollution Liability
Description. The existing insurance program provides only limited pollution liability coverage through a "sudden and accidental" pollution endorsement attached to the blanket property policy. There is no standalone environmental impairment liability ("EIL") or pollution legal liability ("PLL") policy in place for any of the fourteen properties. The sudden and accidental endorsement does not cover pre-existing contamination, gradual pollution conditions, or third-party claims arising from historical environmental conditions.
Risk. Phase I Environmental Site Assessments prepared by Trident Environmental Group LLC (Rachel Kwan, Senior Environmental Scientist) identified de minimis recognized environmental conditions at two properties: (i) the Westlake Distribution Hub (Houston, TX), where a historical dry cleaning operation on an adjacent parcel presents a potential groundwater migration risk, and (ii) the Lakeland Crossings Industrial (Lakeland, FL), where a former agricultural chemical storage area on the property presents a potential soil contamination risk. While both RECs are classified as de minimis and no Phase II ESAs were recommended, the absence of dedicated pollution legal liability coverage leaves Buyer exposed to the cost of investigation and remediation in the event that these conditions are later determined to require further action, as well as to potential third-party bodily injury or property damage claims arising from pollution conditions.
Additionally, the Seller's representations regarding environmental matters in the PSA (Section 3.14) are subject to a material adverse effect qualifier, and the R&W insurance policy may exclude or limit coverage for environmental liabilities depending on the final policy terms. Accordingly, Buyer should not rely solely on the R&W policy for environmental risk mitigation.
Action Required. We recommend that Buyer procure a dedicated pollution legal liability policy for at least the Westlake Distribution Hub and Lakeland Crossings Industrial properties, with coverage for both first-party remediation costs and third-party bodily injury and property damage claims arising from pollution conditions at the covered properties. Buyer should also consider portfolio-wide PLL coverage, which may provide broader protection and more favorable pricing on a blanket basis.
Estimated Premium. Hartwick Gunderson has been asked to provide a quote for PLL coverage. Preliminary indications suggest that a 10-year PLL policy covering the two identified properties would carry an estimated premium in the range of $35,000 to $55,000 per year, or $175,000 to $275,000 for a 5-year prepaid policy. A portfolio-wide PLL policy covering all fourteen properties would be priced based on the environmental risk profiles of all properties and the desired coverage limits.
Status. Quote requested from Hartwick Gunderson. Targeted resolution: binding of PLL coverage at or prior to closing.
Gap 3: Ordinance or Law Coverage
Description. The existing blanket property policy does not include ordinance or law coverage (also referred to as "building code upgrade" coverage or "law and ordinance" coverage). This coverage provides protection for additional costs incurred when building codes, ordinances, or laws require upgrades, demolition, or reconstruction following a covered physical loss. Without this coverage, if a covered peril damages a portion of a property and local building codes require that the undamaged portion be demolished and the entire building be reconstructed to current code standards, the additional costs of demolition and code-compliant reconstruction would not be covered.
Lender Requirement. Sycamore Life Insurance Company's Note Purchase Agreement (Section 6.07(e)) specifically requires the borrower to maintain ordinance or law coverage. While Pinnacle and Veltrano do not explicitly require this coverage, it is a prudent and customary coverage for commercial real estate portfolios of this type.
Risk. The absence of ordinance or law coverage under the existing program constitutes non-compliance with the Sycamore loan requirements. Upon closing, if the replacement program also fails to include this coverage, Buyer would be in default of the Sycamore Note Purchase Agreement, which could trigger cross-default provisions under the other loan agreements.
Action Required. The replacement property policy with Ironclad Indemnity must include ordinance or law coverage. Hartwick Gunderson has confirmed that Ironclad Indemnity can include this coverage as an endorsement to the blanket property policy. We recommend ordinance or law coverage with a sublimit adequate to cover the increased cost of construction for the two Sycamore-collateral logistics properties (Nashville Crossroads Distribution and Memphis Intermodal Logistics, with a combined TIV of approximately $177,800,000) and, ideally, for all fourteen properties in the portfolio.
Status. Confirmed available from Ironclad Indemnity. To be included in the replacement program.
Gap 4: Property Manager Professional Liability
Description. The Veltrano Capital Lending Corp. Loan Agreement (Section 5.04(g)) requires the property manager to maintain professional liability (errors and omissions) insurance with a minimum limit of $2,000,000 per claim and $5,000,000 in the aggregate. The existing professional liability coverage is maintained by Argyle Property Services LLC in its capacity as property manager. This coverage will remain in effect during the 90-day transition services period but will terminate upon the conclusion of the transition period (approximately September 4, 2024), at which point Fairwater Property Management LLC will assume property management responsibilities.
Risk. If Fairwater PM does not maintain professional liability coverage meeting the Veltrano requirements, Buyer will be in default of the Veltrano Loan Agreement. Professional liability coverage for property managers covers claims arising from errors or omissions in the performance of property management duties, including lease administration errors, failure to maintain the property, negligent supervision of contractors, and errors in financial reporting.
Action Required. Fairwater PM (Leah Torrance, SVP Operations) must procure professional liability (errors and omissions) insurance with limits of at least $2,000,000 per claim and $5,000,000 in the aggregate, to be in place no later than the expiration of the 90-day transition services period. We recommend that Fairwater PM begin the procurement process immediately, as professional liability underwriting for property management companies can require 30 to 60 days.
Status. Notification provided to Leah Torrance (Fairwater PM) and David Elgin Park (Fairwater General Counsel). Procurement to be coordinated through Hartwick Gunderson or Fairwater PM's existing insurance broker.
Gap 5: Named Windstorm Deductible
Description. The existing blanket property policy includes a named windstorm deductible of $250,000 per occurrence, applicable to properties located in Florida and Gulf Coast Texas. This deductible is 2.5 times the standard all-perils deductible of $100,000 and represents a meaningful out-of-pocket exposure for the Target Entities in the event of a hurricane or tropical storm event.
Risk. Six of the fourteen properties in the portfolio (approximately 40% of portfolio RSF) are located in states with significant windstorm exposure:
• Florida (3 properties): Lakeland Crossings Industrial, Southport Logistics Park, and Brickell Bay Office Building;
• Texas (3 properties, 2 in Gulf Coast area): Westlake Distribution Hub (Houston), Katy Freeway Logistics Park (Katy/Houston), and Alliance Commerce Center (Fort Worth — inland, lower windstorm risk).
The combined TIV for the five properties subject to the named windstorm deductible (excluding Alliance Commerce Center, which is located inland) is approximately $554,600,000, representing approximately 40% of the total portfolio TIV. A significant named windstorm event could result in substantial losses, and the $250,000 per occurrence deductible, while within market norms, may be reducible through negotiation with Ironclad Indemnity.
Action Required. We recommend that Buyer evaluate whether a lower named windstorm deductible (e.g., $150,000 or $100,000 per occurrence) is available from Ironclad Indemnity at commercially reasonable rates. The cost-benefit analysis should consider the incremental premium for a lower deductible against the probability-weighted expected savings in deductible exposure. This analysis should be discussed with Peter Langford at Hartwick Gunderson.
Status. Analysis requested from Hartwick Gunderson. Pending quote comparison.
Gap 6: Workers' Compensation Transition
Description. Workers' compensation coverage for on-site property management employees at all fourteen properties is currently maintained by Argyle Property Services LLC in its capacity as employer. Upon the conclusion of the 90-day transition services period (approximately September 4, 2024), Fairwater PM will assume property management responsibilities and will become the employer of record for the on-site personnel.
Risk. If there is a gap in workers' compensation coverage during the transition from Argyle to Fairwater PM, Buyer and Fairwater PM would be exposed to significant liability for workplace injuries occurring during the gap period. In most states, failure to maintain workers' compensation coverage is a criminal offense and exposes the employer to direct liability for all medical costs and disability benefits without the protection of the workers' compensation system's exclusive remedy provisions.
Action Required. Fairwater PM must ensure that its workers' compensation coverage (including coverage in all five states — Georgia, Texas, Florida, Tennessee, and North Carolina) is in effect and extends to all on-site employees at the fourteen properties prior to or simultaneously with the date on which Fairwater PM assumes employer responsibilities. The transition should be carefully coordinated with Argyle to ensure no gap in coverage.
Status. Notification provided to Leah Torrance (Fairwater PM). Coordination with Argyle (Sean Kilpatrick) to be initiated during the transition planning process.
VI. PSA Insurance Requirements (Exhibit M) — Compliance Analysis
PSA Exhibit M specifies the minimum insurance coverages that Buyer is required to have in place at or prior to closing. These requirements are a condition precedent to closing under PSA Section 7.3, and Seller has the right to terminate the PSA if Buyer fails to deliver evidence of compliance with Exhibit M at closing.
The following table summarizes the PSA Exhibit M requirements and the compliance status of the proposed Ironclad Indemnity replacement program:
*Workers' compensation is maintained by Argyle during the transition services period and will be transitioned to Fairwater PM thereafter. Compliance is anticipated but requires Fairwater PM to complete procurement. See Gap 6.
In addition to the coverages specified in Exhibit M, all three lenders must be named as mortgagee/loss payee and additional insured on the replacement policies as a condition to the lender consents required for closing. The proposed Ironclad Indemnity program includes endorsements for all three lenders, and certificates of insurance reflecting these endorsements will be delivered to each lender and its counsel at or prior to closing.
Based on our analysis, the proposed Ironclad Indemnity replacement program, as currently structured, complies with all PSA Exhibit M insurance requirements, subject to the workers' compensation transition noted above. No areas requiring negotiation with Seller regarding Exhibit M compliance have been identified.
VII. Replacement Insurance Program — Ironclad Indemnity Insurance Company
A. Carrier Overview
The replacement insurance program will be placed with Ironclad Indemnity Insurance Company ("Ironclad Indemnity"), a well-established property and casualty insurer headquartered at 500 College Road East, Princeton, New Jersey 08540. Ironclad Indemnity is a member of the Ironclad Financial Group and has extensive experience insuring institutional-quality commercial real estate portfolios, including logistics and office properties in the southeastern United States.
Carrier Financial Strength Rating. The carrier's A.M. Best rating is to be confirmed by Hartwick Gunderson prior to binding. Each of the three mortgage loan agreements requires the insurance carrier to maintain a minimum A.M. Best rating of A- (Excellent) with a Financial Size Category of VII or larger. Based on preliminary discussions with Peter Langford at Hartwick Gunderson, Ironclad Indemnity is expected to meet or exceed these minimum rating requirements, but formal written confirmation of the carrier's current rating must be obtained and documented in the closing file prior to binding. This is identified as Action Item 9 in Section XI below.
Buyer's Insurance Broker. The replacement program is being placed through Hartwick Gunderson & Associates, Inc. ("Hartwick Gunderson"), Buyer's insurance broker, with offices at 100 North Charles Street, Suite 1200, Baltimore, Maryland 21201. The designated Account Executive is Peter Langford, who has been managing the placement process since February 2024.
B. Proposed Coverage Structure
The proposed replacement insurance program with Ironclad Indemnity is structured as follows:
Blanket All-Risk Property Insurance. The replacement property policy will be a blanket all-risk policy covering all fourteen properties on a replacement cost basis. Total insured values will be established based on the replacement cost appraisals prepared by Stonebridge Valuation Advisors, LLC (Maureen Alcott, MAI), which are expected to be finalized no later than May 10, 2024. The policy will include a 90% agreed amount endorsement (consistent with the existing program) and will cover all standard insured perils, including fire, wind, hail, lightning, explosion, vandalism, water damage, and other risks of direct physical loss, subject to standard exclusions.
Ordinance or Law Coverage. The replacement property policy will include an ordinance or law endorsement, which was absent from the existing program (Gap 3). This coverage will satisfy the Sycamore Life Insurance Company's requirement and will apply to all fourteen properties.
Commercial General Liability. The replacement CGL policy will provide limits of $1,000,000 per occurrence and $2,000,000 in the aggregate per location, on an occurrence basis, consistent with the existing coverage and the requirements of the PSA, the three mortgage loan agreements, and market standards. Coverage will include premises and operations, products and completed operations, personal and advertising injury, contractual liability, and fire legal liability.
Umbrella / Excess Liability. The replacement umbrella policy will provide limits of $25,000,000 per occurrence and $25,000,000 in the aggregate, in excess of the CGL, auto liability (if applicable), and employer's liability policies. The self-insured retention will be determined during the binding process but is expected to be $10,000, consistent with the existing program.
Business Income / Rental Value. The replacement policy will include business income and rental value coverage for 12 months of actual loss sustained, with an extended period of indemnity of 180 days beyond the date of restoration, consistent with the existing coverage.
Terrorism Risk Insurance (TRIA). TRIA coverage will be included in the replacement program, covering all fourteen properties for certified acts of terrorism.
Flood Insurance. Flood coverage will be included under the replacement blanket property policy for all fourteen properties, with enhanced coverage limits for the two properties located in Special Flood Hazard Areas (Katy Freeway Logistics Park and Brickell Bay Office Building), meeting or exceeding the requirements of the applicable mortgage loan agreements.
Boiler and Machinery / Equipment Breakdown. Equipment breakdown coverage will be included in the replacement property policy through an equipment breakdown endorsement, consistent with the existing coverage.
Named Insureds. The replacement policies will name the following parties as named insureds:
• Fairwater Real Estate Investment Trust;
• Each of the fourteen Target Entity LLCs (post-closing, as wholly owned subsidiaries of Fairwater REIT); and
• Fairwater Property Management LLC (as additional insured in its capacity as property manager, effective upon assumption of property management responsibilities).
Mortgagee / Loss Payee and Additional Insured Endorsements. The replacement policies will include endorsements naming the following parties as mortgagee, loss payee, and/or additional insured, as applicable:
• Pinnacle Federal Bank, N.A., its successors and/or assigns (mortgagee and loss payee — eight logistics properties);
• Veltrano Capital Lending Corp., its successors and/or assigns (mortgagee and loss payee — four office properties);
• Sycamore Life Insurance Company, its successors and/or assigns (mortgagee and loss payee — two logistics properties);
• Whitfield & Archer LLP (additional insured — Pinnacle counsel);
• Cranford McCabe LLP (additional insured — Veltrano counsel); and
• Partridge Wynn & Slater LLP (additional insured — Sycamore counsel).
Notice Requirements. The replacement policies will include provisions requiring 30 days' advance written notice to each lender of cancellation or material change (10 days' notice for cancellation due to non-payment of premium), consistent with the requirements of all three mortgage loan agreements.