PRIVILEGED & CONFIDENTIAL — ATTORNEY WORK PRODUCT
CALDERWOOD & HARKNESS LLP
Internal Memorandum
March 5, 2024
TO: Douglas Fairchild, Responsible Partner, Real Estate Angela Fontaine, Billing Partner, Real Estate
FROM: Grace Nakamura, Lead Associate, Real Estate Rafael Dominguez, Working Associate, Real Estate
RE: Lender Consent Strategy — Fairwater Real Estate Investment Trust Acquisition of Greystone Meridian Partners Fund III, L.P. 14-Property Sun Belt Portfolio
MATTER NO.: 1036-00004
COPIES TO: Sylvia Hartwell, Specialist Partner, Tax Camille Oduya, In-House Real Estate Counsel, Fairwater REIT David Elgin Park, General Counsel, Fairwater REIT
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I. Executive Summary
This memorandum outlines the strategy for obtaining lender consents from three existing mortgage lenders as a condition precedent to closing the approximately $1,100,000,000 entity-level acquisition by Fairwater Real Estate Investment Trust ("Fairwater REIT" or "Buyer") of fourteen (14) property-owning 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"). The acquisition is governed by that certain Purchase and Sale Agreement dated as of February 28, 2024 (the "PSA"), by and among Fairwater REIT, as buyer, and GMP Fund III, as seller, with a scheduled closing date of May 31, 2024 (the "Closing Date").
The transaction is structured as a 100% membership interest acquisition. Fairwater REIT will acquire all of the outstanding membership interests in each of the fourteen Target Entities, each of which is organized as a single-purpose Delaware limited liability company and serves as the owner and borrower-level entity for one of the fourteen real properties comprising the portfolio. Because the transfer of 100% of the membership interests in each Target Entity constitutes a change of control under each of the three existing mortgage loan agreements encumbering the portfolio, prior written consent of each lender is required as a condition to closing.
The total outstanding principal balance of the assumed mortgage debt across the three lenders is approximately $612,000,000, distributed among three separate loan facilities originated by Pinnacle Federal Bank, N.A. ("Pinnacle"), Veltrano Capital Lending Corp. ("Veltrano"), and Sycamore Life Insurance Company ("Sycamore"). Each facility contains change of control provisions that are triggered by the proposed transaction, though the specific threshold and consent standard differs by lender.
Under the PSA, lender consent is a mutual condition to closing. The PSA establishes a lender consent deadline of May 24, 2024 — seven (7) calendar days prior to the scheduled Closing Date. Failure to obtain all three lender consents by the lender consent deadline could delay or, ultimately, prevent closing and would give either party the right to terminate the PSA.
In connection with the change of control consents, each lender will require payment of a consent fee. The total consent fees across all three lenders aggregate to $1,825,625, which amount is to be borne equally (50/50) by Buyer and Seller pursuant to the PSA, resulting in a cost of $912,812.50 to each party. In addition, each lender will require reimbursement of its outside counsel's legal fees and expenses, which fees are borne solely by Buyer under the PSA.
A central requirement of each consent is the delivery of a replacement guaranty. Fairwater REIT will replace GMP Fund III as the carve-out guarantor under each of the three loan facilities. The replacement guarantor is required to satisfy ongoing financial covenants, including a minimum tangible net worth of $500,000,000 and minimum liquid assets of $50,000,000 — both of which Fairwater REIT expects to satisfy comfortably based on its current financial position.
Recommendation: We recommend initiating the consent request process with all three lenders immediately, with a target date of March 8, 2024 for delivery of formal consent request letters and supporting documentation to each lender's outside counsel. Given the 8–10 week estimated processing timeline for the largest facility (Pinnacle), a March 8 initiation date provides approximately eleven (11) weeks of lead time before the May 24 lender consent deadline, which we believe is adequate but leaves limited margin for delay or unexpected complications.
II. Overview of Existing Mortgage Debt
A. Summary of Loan Facilities
The fourteen Target Entity LLCs are borrowers under three separate loan facilities with three different institutional lenders. The table below summarizes each loan facility, the number of loans and properties secured, the outstanding principal balance as of February 28, 2024, the applicable interest rate, and the maturity date.
As the table reflects, the Pinnacle facility represents the substantial majority of the assumed debt, accounting for approximately 68.9% of the total outstanding principal balance. The Veltrano facility accounts for approximately 23.2%, and the Sycamore facility accounts for approximately 7.9%. The concentration of debt with Pinnacle, as discussed in greater detail in Section VII.A below, makes the Pinnacle consent the highest-priority workstream.
All three facilities are fixed-rate, non-recourse mortgage loans (subject to standard carve-out guaranties), with remaining terms ranging from approximately four to six-and-a-half years. None of the loans are currently in default, and Seller has represented in the PSA that all payments are current as of the execution date.
B. Properties Secured by Each Facility
Set forth below is a detailed listing of the properties securing each loan facility, organized by lender, including the applicable borrower entity, property name, address, and approximate rentable square footage.
Pinnacle Federal Bank, N.A. (Loans 1-A through 1-H):
The Pinnacle facility is structured as a single Master Loan Agreement with individual loan supplements for each of the eight borrower entities and their corresponding properties. All eight properties are logistics and industrial distribution assets located across four Sun Belt states (Georgia, Texas, Florida, and Tennessee), totaling approximately 3,730,000 rentable square feet.
• Loan 1-A: GMP Fairfield I LLC — Fairfield Logistics Center I, 4200 Fairfield Industrial Blvd, Fairburn, GA 30213 (approximately 412,000 RSF)
• Loan 1-B: GMP Fairfield II LLC — Fairfield Logistics Center II, 4300 Fairfield Industrial Blvd, Fairburn, GA 30213 (approximately 387,000 RSF)
• Loan 1-C: GMP Westlake LLC — Westlake Distribution Hub, 11500 Westlake Parkway, Houston, TX 77082 (approximately 624,000 RSF)
• Loan 1-D: GMP Katy LLC — Katy Freeway Logistics Park, 22600 Katy Freeway, Katy, TX 77450 (approximately 538,000 RSF)
• Loan 1-E: GMP Alliance LLC — Alliance Commerce Center, 2800 Alliance Gateway Blvd, Fort Worth, TX 76177 (approximately 485,000 RSF)
• Loan 1-F: GMP Lakeland LLC — Lakeland Crossings Industrial, 7100 Drane Field Road, Lakeland, FL 33811 (approximately 372,000 RSF)
• Loan 1-G: GMP Southport LLC — Southport Logistics Park, 3200 Southport Connector Road, Jacksonville, FL 32218 (approximately 410,000 RSF)
• Loan 1-H: GMP Murfreesboro LLC — Murfreesboro Distribution Center, 1600 Joe B. Jackson Parkway, Murfreesboro, TN 37127 (approximately 502,000 RSF)
Veltrano Capital Lending Corp. (Loans 2-A through 2-D):
The Veltrano facility covers four office properties located across three Sun Belt markets (Atlanta, Charlotte, Brentwood/Nashville, and Miami), totaling approximately 851,000 rentable square feet. As discussed further in Section VII.B, the office assets present distinct underwriting considerations relative to the logistics properties, particularly with respect to current occupancy levels.
• Loan 2-A: GMP Buckhead LLC — Buckhead Place Office Tower, 3380 Peachtree Road NE, Atlanta, GA 30326 (approximately 285,000 RSF)
• Loan 2-B: GMP SouthPark LLC — SouthPark Corporate Center, 6200 Fairview Road, Charlotte, NC 28210 (approximately 218,000 RSF)
• Loan 2-C: GMP Cool Springs LLC — Cool Springs Office Park, 5000 Virginia Way, Brentwood, TN 37027 (approximately 196,000 RSF)
• Loan 2-D: GMP Brickell LLC — Brickell Bay Office Building, 1450 Brickell Avenue, Miami, FL 33131 (approximately 152,000 RSF)
Sycamore Life Insurance Company (Loans 3-A and 3-B):
The Sycamore facility covers two logistics properties located in the Atlanta and Nashville metropolitan areas, totaling approximately 643,000 rentable square feet. Both properties are well-occupied and are among the strongest-performing assets in the portfolio from a lease maturity and credit tenant perspective.
• Loan 3-A: GMP Peachtree LLC — Peachtree Corners Logistics Center, 5900 Peachtree Industrial Blvd, Peachtree Corners, GA 30092 (approximately 345,000 RSF)
• Loan 3-B: GMP Mount Juliet LLC — Mount Juliet Commerce Park, 400 South Mount Juliet Road, Mount Juliet, TN 37122 (approximately 298,000 RSF)
III. Change of Control Provisions — Analysis by Lender
Each of the three loan facilities contains provisions restricting the transfer of ownership interests in the borrower entities without the prior written consent of the applicable lender. Although the specific definitions, thresholds, and consent standards vary among the three facilities, the proposed transaction — a transfer of 100% of the membership interests in each Target Entity — unambiguously triggers the change of control provision under all three loan agreements. This section analyzes the change of control provisions on a lender-by-lender basis, identifies the applicable consent standard, and summarizes the conditions each lender is expected to impose.
A. Pinnacle Federal Bank, N.A.
Governing Document: Master Loan Agreement dated September 15, 2020, as amended by the First Amendment dated March 10, 2021, the Second Amendment dated June 15, 2022, and the Third Amendment dated October 1, 2023 (collectively, the "Pinnacle MLA"), Section 7.04 ("Restrictions on Transfer").
Change of Control Definition: Section 7.04(a) of the Pinnacle MLA defines a "change of control" broadly as any direct or indirect transfer, sale, conveyance, assignment, pledge, hypothecation, or other disposition of more than forty-nine percent (49%) of the ownership interests in any borrower entity (each Target Entity LLC) — whether in a single transaction or a series of related transactions — that results in any person or entity other than the existing guarantor or its affiliates acquiring a controlling interest in such borrower entity. The provision expressly encompasses transfers at all levels of the ownership chain, including indirect transfers accomplished through the transfer of interests in entities that directly or indirectly own the borrower.
Application to the Proposed Transaction: The proposed transaction contemplates the transfer of 100% of the membership interests in each of GMP Fairfield I LLC, GMP Fairfield II LLC, GMP Westlake LLC, GMP Katy LLC, GMP Alliance LLC, GMP Lakeland LLC, GMP Southport LLC, and GMP Murfreesboro LLC from GMP Fund III to Fairwater REIT. This transfer unambiguously exceeds the 49% threshold and constitutes a change of control requiring the prior written consent of Pinnacle under Section 7.04(a).
Consent Standard: Section 7.04(b) of the Pinnacle MLA provides that Pinnacle's consent to a change of control "shall not be unreasonably withheld, conditioned, or delayed," provided that the replacement guarantor meets the specified financial covenants set forth in the loan documents and the other conditions to consent are satisfied. This is the most favorable consent standard among the three lenders and provides Fairwater REIT with a reasonable basis for expecting that consent will be granted, assuming compliance with all specified requirements.
Consequences of Unconsented Transfer: An unconsented transfer of ownership interests that triggers the change of control provision constitutes an event of default under Section 8.01(h) of the Pinnacle MLA. Upon the occurrence of such an event of default, Pinnacle has the right, at its sole election, to accelerate all amounts outstanding under all eight loans (Loans 1-A through 1-H), declare all accrued and unpaid interest immediately due and payable, and exercise all other remedies available under the loan documents and applicable law, including foreclosure on the secured properties. The Pinnacle MLA does not provide for a post-closing cure period with respect to an unconsented transfer — consent must be received in writing prior to the closing of the change of control transaction.
Key Conditions Expected: Based on our review of the Pinnacle MLA and prior experience with Pinnacle and its outside counsel, Whitfield & Archer LLP, we anticipate that Pinnacle will condition its consent upon the following:
(i) Delivery and execution of a replacement guaranty by Fairwater REIT in form and substance reasonably satisfactory to Pinnacle, replacing GMP Fund III as the carve-out guarantor under each of Loans 1-A through 1-H;
(ii) Delivery of audited financial statements of Fairwater REIT for the most recently completed fiscal year, together with interim unaudited financial statements, demonstrating compliance with the minimum tangible net worth and minimum liquid assets covenants;
(iii) Delivery of organizational documents of Fairwater REIT, including the declaration of trust, bylaws, and board resolutions authorizing the acquisition and the execution of the replacement guaranty;
(iv) Delivery of a legal opinion from Buyer's counsel (Calderwood & Harkness LLP) addressing due authorization, enforceability, and no conflicts with respect to the replacement guaranty and related transaction documents;
(v) Payment of the consent fee in the amount of $1,054,000 (0.25% of the outstanding principal balance), together with reimbursement of Pinnacle's counsel fees and expenses.
B. Veltrano Capital Lending Corp.
Governing Document: Loan Agreement dated February 1, 2021, as amended by the First Amendment dated August 15, 2022 (collectively, the "Veltrano Loan Agreement"), Section 6.03 ("Prohibited Transfers").
Change of Control Definition: Section 6.03 of the Veltrano Loan Agreement prohibits the transfer of a "controlling interest" in any borrower entity without the prior written consent of Veltrano. A "controlling interest" is defined as (a) any direct or indirect transfer of fifty percent (50%) or more of the equity interests in the borrower entity, or (b) any transfer that results in a change in the identity of the managing member of the borrower entity. The provision captures both economic and governance-level transfers, ensuring that any change in management control is subject to lender approval regardless of the percentage of economic interests transferred.
Application to the Proposed Transaction: The proposed acquisition of 100% of the membership interests in each of GMP Buckhead LLC, GMP SouthPark LLC, GMP Cool Springs LLC, and GMP Brickell LLC satisfies both prongs of the "controlling interest" definition. Fairwater REIT will acquire all equity interests (exceeding the 50% threshold), and the managing member of each Target Entity will change from a GMP Fund III affiliate to a Fairwater REIT affiliate. Accordingly, the change of control provision under Section 6.03 is clearly triggered.
CMBS Considerations: Veltrano Capital is a non-bank lender and CMBS originator. We note that the loans secured by the four office properties may have been securitized and contributed to a commercial mortgage-backed securities trust subsequent to origination. If any of the Veltrano loans have been securitized, the consent process will likely involve additional parties — specifically, a master servicer and potentially a special servicer — each of which may have independent consent rights or review authority. The involvement of CMBS servicers typically adds significant complexity, time, and cost to the consent process. It is imperative that we confirm as promptly as possible whether any of the Veltrano loans have been securitized. Rafael Dominguez will contact Denise Alvarado at Veltrano by March 11, 2024 to determine the securitization status of each loan.
Consent Standard: Section 6.03(c) of the Veltrano Loan Agreement provides that consent is at Veltrano's "sole and absolute discretion." This is the most restrictive consent standard among the three loan facilities and places no obligation on Veltrano to act reasonably in evaluating the consent request. As a practical matter, while we do not anticipate that Veltrano will withhold consent without commercial justification — particularly given Fairwater REIT's strong credit profile — the "sole and absolute discretion" standard limits our client's ability to challenge a denial or impose a duty of good faith on the lender's decision-making process.
Consequences of Unconsented Transfer: An unconsented transfer constitutes an event of default under Section 7.01(d) of the Veltrano Loan Agreement, entitling Veltrano to accelerate all amounts outstanding under Loans 2-A through 2-D and to exercise all available remedies, including foreclosure.
Key Conditions Expected: Based on our review and prior experience with non-bank CMBS lenders, we anticipate that Veltrano will condition its consent upon the following:
(i) Delivery and execution of a replacement guaranty by Fairwater REIT;
(ii) Delivery of audited and interim financial statements of Fairwater REIT;
(iii) Delivery of organizational documents and evidence of authority;
(iv) Payment of the consent fee in the amount of $711,500 (0.50% of the outstanding principal balance), together with reimbursement of lender's counsel fees;
(v) Possible delivery of updated appraisals for one or more of the four office properties, particularly given current market conditions for office assets;
(vi) Possible delivery of updated property condition reports and/or environmental assessments, particularly for Buckhead Place Office Tower (which has approximately $890,000 in identified PCA repair costs) and Cool Springs Office Park (which has approximately $620,000 in identified PCA repair costs).
C. Sycamore Life Insurance Company
Governing Document: Note Purchase Agreement dated November 22, 2019, as amended by the First Amendment dated May 1, 2021 (collectively, the "Sycamore NPA"), Section 5.08 ("Restrictions on Transfer of Ownership Interests").
Change of Control Definition: Section 5.08 of the Sycamore NPA prohibits any transfer, directly or indirectly, of any ownership interest in the borrower entity without the prior written consent of Sycamore. This is the most restrictive formulation among the three loan facilities in terms of the transfer threshold. Unlike Pinnacle (which requires a transfer of more than 49%) and Veltrano (which requires a transfer of 50% or more), Sycamore's provision captures any transfer of any interest — even a de minimis transfer would technically require consent. This breadth of the restriction is consistent with the more conservative underwriting approach typically employed by institutional insurance company lenders.
Application to the Proposed Transaction: The transfer of 100% of the membership interests in GMP Peachtree LLC and GMP Mount Juliet LLC from GMP Fund III to Fairwater REIT clearly and unambiguously triggers the restriction under Section 5.08.
Consent Standard: Section 5.08(b) of the Sycamore NPA provides that Sycamore's consent is subject to Sycamore's "reasonable approval." This standard, while not as permissive as the "not to be unreasonably withheld" standard in the Pinnacle MLA, imposes a reasonableness obligation on Sycamore's decision-making process. As a practical matter, Sycamore is a Connecticut stock life insurance company with established internal procedures for evaluating and approving change of control transactions. Based on our prior experience with institutional insurance company lenders, we expect the consent process to be methodical and process-driven but ultimately reasonable, provided the replacement guarantor meets the applicable financial requirements.
Consequences of Unconsented Transfer: An unconsented transfer constitutes an event of default under Section 6.01(e) of the Sycamore NPA, with customary acceleration and enforcement remedies.
Key Conditions Expected: Based on our review and prior experience with insurance company lenders, we anticipate that Sycamore will condition its consent upon the following:
(i) Delivery and execution of a replacement guaranty by Fairwater REIT;
(ii) Delivery of audited financial statements of Fairwater REIT (Sycamore typically requires audited statements and is less likely to accept interim unaudited statements as the primary basis for its underwriting review);
(iii) Evidence of Fairwater REIT's status as a real estate investment trust, including the IRS determination letter (if available) or a tax opinion from qualified counsel, together with organizational documents (declaration of trust, bylaws, and authorizing resolutions);
(iv) Payment of the consent fee in the amount of $60,125 (0.125% of the outstanding principal balance), together with reimbursement of lender's counsel fees;
(v) Delivery of a compliance certificate executed by Fairwater REIT's CFO confirming satisfaction of the minimum tangible net worth and minimum liquid assets covenants.
IV. Consent Fee Analysis
A. Fee Calculation by Lender
Each of the three loan facilities specifies a consent fee payable to the lender in connection with the lender's review and approval of a change of control transaction. The consent fee is calculated as a percentage of the outstanding principal balance of the applicable loan or loans as of the date of the consent request. The applicable percentages and resulting fee amounts are as follows:
Pinnacle Federal Bank, N.A.: Consent fee of 0.25% of outstanding principal balance.
$421,600,000 × 0.0025 = $1,054,000
Veltrano Capital Lending Corp.: Consent fee of 0.50% of outstanding principal balance.
$142,300,000 × 0.005 = $711,500
Sycamore Life Insurance Company: Consent fee of 0.125% of outstanding principal balance.
$48,100,000 × 0.00125 = $60,125
Total Consent Fees: $1,054,000 + $711,500 + $60,125 = $1,825,625
We note that the Veltrano consent fee percentage (0.50%) is the highest among the three lenders, which is consistent with industry norms for non-bank and CMBS-originated loans. Despite Veltrano's loan balance being significantly smaller than Pinnacle's, the higher fee percentage results in a proportionally larger consent fee relative to the loan balance. The Sycamore consent fee, at 0.125%, is the lowest, reflecting both the smaller loan balance and the more conservative fee structure typical of institutional insurance company lenders.
B. Allocation Between Buyer and Seller
Pursuant to the consent fee allocation provision of the PSA, all consent fees payable to the lenders in connection with the change of control consents are to be borne equally (50/50) by Buyer and Seller. The allocation is as follows:
Buyer's share: $1,825,625 × 50% = $912,812.50
Seller's share: $1,825,625 × 50% = $912,812.50
The consent fees are payable at closing and will be included in the closing funds flow managed by Buyer's and Seller's respective counsel. Calderwood & Harkness LLP will coordinate with Blackridge Hayes LLP (Seller's counsel) to ensure proper allocation and payment of consent fees through the closing escrow. Wire instructions for each lender will be obtained from lender counsel in advance of closing and confirmed no later than five (5) business days prior to the scheduled Closing Date.
C. Lender's Counsel Fees
In addition to the consent fees payable directly to each lender, each loan facility requires the borrower (or, in the case of a change of control consent, the party requesting consent) to reimburse the lender for all reasonable legal fees and out-of-pocket expenses incurred by the lender's outside counsel in connection with the review, negotiation, and documentation of the consent. The identity and contact information for each lender's outside counsel is as follows:
Pinnacle's counsel: Whitfield & Archer LLP Sandra Whitfield, Partner 717 Texas Avenue, Suite 2500 Houston, TX 77002
Veltrano's counsel: Cranford McCabe LLP Leo Cranford, Partner 100 Southeast Second Street, Suite 3000 Miami, FL 33131
Sycamore's counsel: Partridge Wynn & Slater LLP Claire Wynn, Partner 100 Constitution Plaza, Suite 700 Hartford, CT 06103
Based on our experience with similar consent transactions and the complexity of the three facilities, we estimate that the combined legal fees and expenses for lender's counsel across all three lenders will range from approximately $150,000 to $250,000. The primary drivers of variation include: (i) the extent of mark-up to the form replacement guaranty required by each lender's counsel, (ii) whether Veltrano or its counsel requires CMBS servicer involvement (which typically generates additional legal costs), and (iii) the number of rounds of negotiation required to finalize the assumption agreements and related documentation.
Pursuant to the PSA, lender's counsel fees are borne solely by Buyer. The lender's counsel fee obligation is not subject to the 50/50 consent fee allocation that applies to the consent fees themselves. Accordingly, Fairwater REIT should anticipate a total lender-side legal cost of $150,000 to $250,000, in addition to its 50% share of the consent fees.
Each lender's counsel will likely require an engagement letter or fee agreement with Calderwood & Harkness LLP (on behalf of Fairwater REIT) setting forth the fee arrangement. We will coordinate the execution of these engagement letters promptly upon submission of the consent request packages.
V. Replacement Guaranty Requirements
A. Current Guarantor
The current carve-out guarantor under each of the three loan facilities is Greystone Meridian Partners Fund III, L.P. (EIN: 83-1647205), a Delaware limited partnership with its principal offices at 900 North Michigan Avenue, Suite 2400, Chicago, IL 60611. GMP Fund III executed a separate carve-out guaranty in favor of each lender at the time of the original loan origination, and such guaranties remain in full force and effect.
Under each loan facility, the carve-out guaranty is the mechanism by which the guarantor assumes personal liability for certain enumerated "bad act" events that carve out from the otherwise non-recourse nature of the mortgage loan. The guarantor's obligations under the carve-out guaranty survive any foreclosure, transfer, or other realization on the collateral, and the guarantor remains liable until expressly released in writing by the applicable lender.
Upon the consummation of the change of control transaction, each lender requires that GMP Fund III be released from its guarantor obligations and replaced with the new controlling entity — in this case, Fairwater REIT. The mechanics of the replacement are discussed below.
B. Replacement Guarantor — Fairwater REIT
Fairwater Real Estate Investment Trust (EIN: 52-2198437) will serve as the replacement carve-out guarantor under all three loan facilities. Fairwater REIT is organized as a Maryland real estate investment trust and is publicly traded on the New York Stock Exchange under the ticker symbol "FREIT." As of the end of the fourth quarter of 2023, Fairwater REIT reported a total market capitalization of approximately $4.8 billion, a total real estate portfolio comprising approximately 185 properties across 22 states, and an investment-grade credit rating.
Fairwater REIT's principal offices are located at 7200 Chesapeake Parkway, Suite 1100, Columbia, MD 21044. Fairwater REIT's executive leadership team, including General Counsel David Elgin Park and Chief Financial Officer Patricia Sung-Calloway, has been engaged in the acquisition process from the outset and is available to support the lender consent workstream as needed.
We anticipate that each lender will view Fairwater REIT as a creditworthy and suitable replacement guarantor, given its size, public company status, investment-grade credit profile, and established track record in the institutional real estate market. Fairwater REIT's financial profile is significantly stronger than that of a private fund vehicle such as GMP Fund III, which should facilitate the consent process.
C. Financial Covenant Requirements
Each of the three loan facilities requires the carve-out guarantor (and, by extension, any replacement guarantor) to satisfy specified ongoing financial covenants for the duration of the loan term. Although the specific covenant formulations differ slightly among the three facilities, the core financial requirements are substantially similar:
Minimum tangible net worth: The replacement guarantor must maintain, at all times during the term of the applicable loan, a tangible net worth of not less than $500,000,000. "Tangible net worth" is generally defined as total assets minus intangible assets and total liabilities, in each case as determined in accordance with generally accepted accounting principles (GAAP).
Minimum liquid assets: The replacement guarantor must maintain, at all times during the term of the applicable loan, liquid assets of not less than $50,000,000. "Liquid assets" is generally defined as unrestricted cash and cash equivalents, plus readily marketable securities that can be converted to cash within thirty (30) days, net of any amounts pledged, restricted, or encumbered.
Fairwater REIT has represented and warranted in the PSA that it is in compliance with both financial covenants as of the Closing Date and covenants that it will deliver evidence of such compliance to each lender in connection with the consent process. Based on Fairwater REIT's publicly available financial information and discussions with its CFO, Patricia Sung-Calloway, we have no reason to believe that Fairwater REIT will have any difficulty satisfying these financial covenants.
To support the consent process, Calderwood & Harkness LLP will coordinate with Ms. Sung-Calloway and with Fairwater REIT's independent auditors, Ashford Prewitt LLP (Martin Ashford, CPA, Engagement Partner), to prepare and deliver the following financial documentation to each lender's counsel:
(i) Audited financial statements of Fairwater REIT for the fiscal year ended December 31, 2023, together with the independent auditor's report thereon;
(ii) Interim unaudited financial statements of Fairwater REIT for the most recently completed fiscal quarter, prepared in accordance with GAAP and reviewed by management;
(iii) A compliance certificate executed by the Chief Financial Officer of Fairwater REIT, certifying that as of the date of the certificate (and after giving effect to the proposed acquisition), Fairwater REIT satisfies the minimum tangible net worth and minimum liquid assets covenants specified in each loan facility.
We note that Sycamore typically requires audited financial statements as the primary basis for its underwriting review and may not accept interim unaudited financials as a substitute. Accordingly, it is critical that the audited FY2023 financial statements be available for inclusion in the consent request package. Rafael Dominguez will confirm with Martin Ashford the expected date of availability of the audited financials.
D. Form of Replacement Guaranty
The PSA includes as Exhibit S an agreed-upon form of Replacement Guaranty (Carve-Out Guaranty), which was negotiated between Buyer's and Seller's counsel during the PSA negotiation process. The form guaranty covers the standard "bad boy" carve-outs that are customary in non-recourse commercial mortgage lending, including but not limited to the following:
(a) Fraud, intentional misrepresentation, or willful misconduct by the borrower or guarantor;
(b) Voluntary filing by the borrower of a petition under the United States Bankruptcy Code or any state insolvency law;
(c) Collusive involuntary bankruptcy filing;
(d) Misapplication or misappropriation of rents, insurance proceeds, or condemnation awards;
(e) Physical waste of the mortgaged property;
(f) Environmental liability arising from the presence, release, or threatened release of hazardous materials at, on, under, or from the mortgaged property;
(g) Violations of single-purpose entity (SPE) covenants;
(h) Material breach of the borrower's obligations under any property management agreement, ground lease, or other material agreement affecting the mortgaged property;
(i) Failure to maintain required insurance coverages.
Separate replacement guaranties will be executed for each of the three lenders. Specifically:
• One replacement guaranty in favor of Pinnacle Federal Bank, N.A., covering Loans 1-A through 1-H (aggregate OPB of $421,600,000);
• One replacement guaranty in favor of Veltrano Capital Lending Corp., covering Loans 2-A through 2-D (aggregate OPB of $142,300,000); and
• One replacement guaranty in favor of Sycamore Life Insurance Company, covering Loans 3-A and 3-B (aggregate OPB of $48,100,000).
Each lender may require modifications to the PSA Exhibit S form guaranty to conform to the specific requirements of its loan documents or internal policies. Calderwood & Harkness LLP will review and negotiate any mark-ups received from lender counsel, with the objective of minimizing deviations from the agreed PSA form while accommodating reasonable lender-specific requirements. Any material modifications proposed by a lender will be escalated to Douglas Fairchild and the Fairwater REIT team for review and approval prior to acceptance.
E. Release of Existing Guarantor
Concurrent with the delivery and execution of the replacement guaranty by Fairwater REIT, each lender must execute and deliver a written release of GMP Fund III from all obligations under the existing carve-out guaranty. The release must be effective as of the closing date and must be unconditional and irrevocable.
The form and substance of the release will be subject to negotiation with each lender's counsel. We will prepare initial drafts of the release instruments based on the applicable provisions of each loan facility and circulate them to lender counsel as part of the consent documentation package.
We have confirmed with Nathaniel Pryce of Blackridge Hayes LLP (Seller's counsel) that the Seller requires delivery of an executed written release from each lender as a Seller closing deliverable under the PSA. The absence of a written release would constitute a failure of a Seller closing condition and could prevent Seller from closing. Accordingly, it is important that we coordinate the timing and execution of the release instruments with the delivery of the replacement guaranties and the overall closing process.
VI. Consent Process and Timeline
A. Proposed Timeline
The following table sets forth the proposed timeline for the lender consent workstream, including key action items, target dates, and corresponding PSA deadlines where applicable. The timeline is designed to provide adequate lead time for the lender review and negotiation process while preserving the ability to close on the scheduled Closing Date of May 31, 2024.
The timeline above provides approximately eleven (11) weeks between the target date for submission of consent request letters (March 8, 2024) and the PSA lender consent deadline (May 24, 2024). Based on our assessment of each lender's expected processing time (as discussed in Section VII), this timeline should be sufficient for all three consents, but the margin is tightest with respect to Pinnacle, which is expected to require 8–10 weeks from submission of a complete package. Accordingly, we strongly recommend adherence to the March 8 initiation date and the March 15 delivery date for financial statements and draft documentation.
B. Consent Request Letter Package
Each consent request letter will be submitted on Calderwood & Harkness LLP letterhead and will be accompanied by a comprehensive supporting documentation package. The consent request package for each lender will include the following materials:
1. Cover letter from Calderwood & Harkness LLP formally requesting the lender's consent to the change of control transaction, identifying the applicable loan facility, the borrower entities, and the nature of the proposed transfer;
2. Copy of the Purchase and Sale Agreement (execution version), redacted as appropriate to protect commercially sensitive terms that are not relevant to the lender's consent review (such as purchase price allocation, earnest money provisions, and certain representations and warranties);
3. Organizational chart depicting the pre-closing and post-closing ownership structure of each borrower entity, including all direct and indirect ownership levels from Fairwater REIT through the applicable Target Entity LLC;
4. Fairwater REIT's audited financial statements for the fiscal year ended December 31, 2023, together with the independent auditor's report, and the most recent interim unaudited financial statements (expected to be for the quarter ended December 31, 2023, or March 31, 2024, if available);
5. Evidence of Fairwater REIT's status as a real estate investment trust, including the IRS determination letter (if available) or, alternatively, a tax opinion from qualified tax counsel confirming Fairwater's qualification as a REIT under Sections 856–860 of the Internal Revenue Code;
6. Organizational documents of Fairwater REIT, including the Declaration of Trust (as amended), bylaws, and certified copies of board resolutions authorizing the acquisition of the Target Entities and the execution and delivery of the replacement guaranties, assumption agreements, and related documents;
7. Draft replacement guaranty for each lender, prepared based on the form attached as Exhibit S to the PSA;
8. Draft assumption agreement for each lender, pursuant to which the applicable borrower entities (now controlled by Fairwater REIT) confirm their continued obligations under the loan documents and Fairwater REIT assumes the obligations of the new controlling entity;
9. Current rent rolls and occupancy reports for the properties securing each lender's facility, demonstrating current leasing activity, tenant credit quality, and occupancy levels;
10. Evidence of insurance coverage meeting the requirements of the applicable loan documents, including certificates of insurance naming the lender as mortgagee and additional insured, as applicable.
We will coordinate with Camille Oduya and David Elgin Park at Fairwater REIT to assemble items 4 through 6, and with Seller's counsel (Nathaniel Pryce at Blackridge Hayes LLP) to obtain the current rent rolls, occupancy reports, and insurance certificates for items 9 and 10. Draft replacement guaranties and assumption agreements (items 7 and 8) will be prepared by Calderwood & Harkness LLP.
C. Consent Request Addressees
Each consent request letter will be addressed to the applicable lender's outside counsel, with a courtesy copy to the designated loan officer at the lender. The specific addressees are as follows:
Pinnacle Federal Bank, N.A.:
Loan Officer: Bradley Carston, Senior Vice President Pinnacle Federal Bank, N.A. 600 Travis Street, Suite 4400 Houston, TX 77002
Counsel: Sandra Whitfield, Partner Whitfield & Archer LLP 717 Texas Avenue, Suite 2500 Houston, TX 77002
The consent request letter will be addressed to Whitfield & Archer LLP, Attn: Sandra Whitfield, with a copy to Bradley Carston at Pinnacle Federal Bank.
Veltrano Capital Lending Corp.:
Loan Officer: Denise Alvarado, Managing Director Veltrano Capital Lending Corp. 200 South Biscayne Boulevard, Suite 3100 Miami, FL 33131
Counsel: Leo Cranford, Partner Cranford McCabe LLP 100 Southeast Second Street, Suite 3000 Miami, FL 33131
The consent request letter will be addressed to Cranford McCabe LLP, Attn: Leo Cranford, with a copy to Denise Alvarado at Veltrano Capital.
Sycamore Life Insurance Company:
Loan Officer: Graham Hilliard, Vice President, Mortgage Investments Sycamore Life Insurance Company 100 Constitution Plaza Hartford, CT 06103
Counsel: Claire Wynn, Partner Partridge Wynn & Slater LLP 100 Constitution Plaza, Suite 700 Hartford, CT 06103
The consent request letter will be addressed to Partridge Wynn & Slater LLP, Attn: Claire Wynn, with a copy to Graham Hilliard at Sycamore Life Insurance Company.
VII. Lender-Specific Strategy and Risk Assessment
This section provides a lender-by-lender assessment of the risk profile, anticipated challenges, estimated processing timeline, and recommended mitigation strategies for each consent.
A. Pinnacle Federal Bank, N.A.
Risk Level: Moderate to High
Pinnacle holds the largest position in the assumed debt portfolio, with an outstanding principal balance of $421,600,000 representing approximately 68.9% of the total assumed mortgage debt. The Pinnacle facility is structured as a Master Loan Agreement with eight individual loan supplements, making it the most complex of the three facilities from a documentation and underwriting perspective. The size and complexity of the Pinnacle facility make it the single most important consent in the workstream, and any delay or complication with Pinnacle has the potential to jeopardize the entire transaction timeline.
The consent standard under the Pinnacle MLA — "not to be unreasonably withheld, conditioned, or delayed" — is favorable and provides a reasonable basis for expecting that consent will ultimately be granted, assuming Fairwater REIT satisfies all conditions. However, this standard does not mean that the consent process will be swift or without negotiation. Pinnacle's counsel, Whitfield & Archer LLP, led by partner Sandra Whitfield, is known to conduct thorough and detailed reviews of change of control consent requests, including a comprehensive analysis of the replacement guarantor's financial condition, the organizational structure of the new controlling entity, and the form and substance of the replacement guaranty and assumption agreements.
The Master Loan Agreement structure does offer one advantage: because all eight loans are governed by a single agreement, a single consent letter and a single replacement guaranty should suffice for the entire Pinnacle facility. This avoids the need for eight separate consent processes, though the replacement guaranty will cover the full $421,600,000 aggregate exposure.
Key Risk Factor: Pinnacle may request updated appraisals for some or all of the eight logistics properties securing its facility, particularly given current capital market conditions and recent fluctuations in cap rates for logistics and industrial assets. Updated appraisals would add time and cost to the consent process. To mitigate this risk, we recommend proactively offering to provide copies of the independent appraisals prepared by Stonebridge Valuation Advisors, LLC in connection with the transaction. These appraisals were prepared within the past 90 days and should satisfy Pinnacle's valuation requirements without the need for a separate appraisal process.
Estimated Processing Time: Based on prior experience with Pinnacle and Whitfield & Archer LLP, we estimate that the consent process will require approximately 8 to 10 weeks from submission of a complete package. Assuming submission of the complete consent request package by March 15, 2024, the earliest expected receipt of consent would be approximately May 10, 2024, with an outer range of approximately May 24, 2024 — coinciding with the PSA lender consent deadline.
Mitigation Strategies:
(i) Early engagement with Sandra Whitfield at Whitfield & Archer LLP: Grace Nakamura will place an introductory call to Ms. Whitfield on or before March 8, 2024 to preview the consent request and discuss the expected timeline;
(ii) Offer an introductory call between Fairwater REIT's Marcus Devereaux (EVP, Acquisitions) and Bradley Carston (SVP, Pinnacle Federal Bank) to establish a direct business relationship and demonstrate Fairwater's commitment to the portfolio;
(iii) Proactively include the Stonebridge Valuation Advisors appraisals in the consent request package to preempt any appraisal request;
(iv) Maintain weekly status calls with Whitfield & Archer LLP beginning March 18, 2024 to monitor progress and identify any issues early.
B. Veltrano Capital Lending Corp.
Risk Level: Moderate
The Veltrano facility presents a moderate risk profile. Although the outstanding principal balance ($142,300,000) is significantly smaller than Pinnacle's, two factors elevate the risk level: (i) the "sole and absolute discretion" consent standard, which is the most restrictive among the three facilities, and (ii) the potential for CMBS complications if any of the four Veltrano loans have been securitized.
CMBS Securitization Risk: Veltrano Capital is a non-bank lender and CMBS originator. If any of the four Veltrano loans have been contributed to a commercial mortgage-backed securities trust, the consent process will involve the master servicer and potentially the special servicer of the applicable CMBS trust. CMBS servicers have their own internal procedures, timeline requirements, and fee structures for evaluating change of control consent requests. The involvement of a CMBS servicer could add 4–6 weeks to the consent process and may involve additional fees (including a servicer consent fee and the servicer's counsel fees). It is imperative that we determine the securitization status of each Veltrano loan as promptly as possible. Rafael Dominguez will contact Denise Alvarado at Veltrano Capital by March 11, 2024 to obtain this information.
Office Asset Underwriting Risk: All four properties securing the Veltrano facility are office assets, which have experienced increased occupancy and valuation pressure across most U.S. markets. The weighted average occupancy across the four Veltrano-secured office properties is approximately 82.7%, which is below the underwriting occupancy assumptions at the time of loan origination. Veltrano may view the current occupancy levels with concern and may request updated appraisals, property condition reports, or environmental assessments, particularly for the following properties:
• Buckhead Place Office Tower (Loan 2-A): Approximately $890,000 in identified property condition assessment (PCA) repair costs. The building is a Class A office tower in the Buckhead submarket of Atlanta, but recent tenant departures have reduced occupancy to approximately 79%.
• Cool Springs Office Park (Loan 2-C): Approximately $620,000 in identified PCA repair costs. The property is a suburban office park in the Cool Springs/Brentwood submarket south of Nashville, with current occupancy of approximately 84%.