PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT
MEMORANDUM
TO: Douglas Fairchild, Responsible Partner Angela Fontaine, Billing Partner
FROM: Douglas Fairchild, Real Estate Practice Group Sylvia Hartwell, Tax Practice Group
DATE: November 1, 2023
RE: Fairwater Real Estate Investment Trust — Acquisition of 14-Property Sun Belt Logistics & Office Portfolio from Greystone Meridian Partners Fund III, L.P. — Structural Analysis: Entity-Purchase vs. Asset-Purchase
MATTER NO.: 1036-00004
CONFIDENTIALITY LEGEND: This memorandum constitutes attorney work product and is protected by the attorney-client privilege. It is prepared for the exclusive use of Fairwater Real Estate Investment Trust and its authorized representatives in connection with the proposed $1.1 billion portfolio acquisition described herein. This memorandum is not intended for distribution to any third party without the prior written consent of the authors. Receipt of this memorandum by any person other than the intended recipient does not constitute a waiver of the attorney-client privilege or work-product protection.
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I. Executive Summary
This memorandum analyzes and recommends the optimal acquisition structure for Fairwater Real Estate Investment Trust's ("Fairwater" or "Buyer") proposed acquisition of a 14-property Sun Belt logistics and office portfolio (the "Portfolio") currently valued at $1,100,000,000 (the "Purchase Price") from Greystone Meridian Partners Fund III, L.P. ("GMP Fund III" or "Seller"). The two principal structural alternatives under consideration are (a) an entity-level purchase of 100% of the membership interests in each of the 14 single-purpose Delaware limited liability companies that individually hold title to each Portfolio property (the "Target Entities") and (b) a direct asset purchase of the 14 real properties via recorded special warranty deeds from the Target Entities to Fairwater or its designated acquisition subsidiaries.
Recommendation. Based on the analysis set forth in this memorandum, we recommend that Fairwater proceed with an entity-level purchase of the membership interests in all 14 Target Entities. This recommendation is principally driven by the following considerations:
(a) Transfer Tax Savings. The entity-purchase structure is estimated to yield approximately $1,430,000 in transfer tax savings relative to an asset-purchase structure, primarily attributable to the avoidance of deed recording taxes in Georgia and North Carolina — two states that do not currently impose controlling-interest transfer taxes on transfers of entity ownership interests in entities holding real property.
(b) Preservation of Existing Mortgage Debt. The entity-purchase structure facilitates the preservation of approximately $612,000,000 in aggregate outstanding fixed-rate mortgage debt across three lenders: Pinnacle Federal Bank, N.A. ($421,600,000 at 4.22% fixed), Veltrano Capital Lending Corp. ($142,300,000 at 4.68% fixed), and Sycamore Life Insurance Company ($48,100,000 at 3.95% fixed). These rates are substantially below current market rates for comparable commercial real estate loans, which are approximately 6.0% to 7.0%. Prepayment and refinancing of this indebtedness under an asset-purchase structure would trigger yield-maintenance or defeasance penalties estimated in the tens of millions of dollars, rendering such an approach economically disadvantageous.
(c) Seller Preference. GMP Fund III has expressed a strong preference for an entity-level disposition for fund-level tax and administrative efficiency. GMP Fund III is a 2018-vintage institutional real estate fund approaching the end of its fund life, and the disposition of entity interests rather than underlying assets simplifies the fund's wind-down process, reduces its administrative burden, and provides certain tax efficiencies for the fund and its limited partners.
Key Trade-Offs. The entity-purchase structure is not without risk. Specifically, it requires lender consent under the change-of-control provisions contained in each of the three existing mortgage loan agreements, which introduces closing-timeline uncertainty and consent-fee expense (estimated aggregate consent fees of $1,825,625). The entity-purchase structure also carries the risk of Fairwater inheriting unknown or contingent entity-level liabilities of the Target Entities and foregoes a fully stepped-up tax basis in the real property and depreciable improvements, reducing Fairwater's prospective depreciation deductions relative to an asset-purchase structure. We believe these risks can be adequately mitigated through comprehensive representations and warranties in the Purchase and Sale Agreement ("PSA"), a buyer-side representations and warranties insurance policy, an indemnification escrow, and thorough entity-level and property-level due diligence, each as discussed in detail below.
Portfolio Overview. The Portfolio consists of 14 properties — 10 logistics/industrial facilities and 4 suburban and urban office buildings — located across five Sun Belt states: Georgia (4 properties), Texas (3 properties), Florida (3 properties), Tennessee (3 properties), and North Carolina (1 property). The Portfolio encompasses approximately 5,224,000 rentable square feet ("RSF"), is subject to 87 leases, and has a weighted-average occupancy of 93.2%. Annual in-place base rent is $74,800,000, reflecting an in-place capitalization rate of approximately 6.80%.
Seller. GMP Fund III is a Delaware limited partnership formed in 2018 with $2.4 billion of committed capital. Its general partner is Greystone Meridian Capital LLC, a Delaware limited liability company, whose managing partners are Victor Lansdell and Elise Rathborne. The Portfolio was assembled by GMP Fund III between 2019 and 2021 for an aggregate cost basis of approximately $845,000,000. The proposed transaction represents an end-of-fund-life monetization event for GMP Fund III.
Buyer. Fairwater Real Estate Investment Trust is a Maryland real estate investment trust listed on the New York Stock Exchange (NYSE: FREIT) with an approximate market capitalization of $4.8 billion. Fairwater currently owns and operates 62 logistics, industrial, and suburban office properties encompassing approximately 18.4 million RSF across 11 states. The acquisition of the Portfolio would expand Fairwater's footprint in key Sun Belt growth markets and increase its total portfolio to 76 properties comprising approximately 23.6 million RSF.
Target Entities. The 14 Target Entities are each single-purpose Delaware limited liability companies wholly owned by GMP Fund III. Each Target Entity holds title to a single Portfolio property. The Target Entities are as follows:
1. GMP Fairfield I LLC
2. GMP Fairfield II LLC
3. GMP Westlake LLC
4. GMP Katy LLC
5. GMP Alliance LLC
6. GMP Lakeland LLC
7. GMP Southport LLC
8. GMP Murfreesboro LLC
9. GMP Buckhead LLC
10. GMP SouthPark LLC
11. GMP Cool Springs LLC
12. GMP Brickell LLC
13. GMP Peachtree LLC
14. GMP Mount Juliet LLC
The balance of this memorandum provides a detailed analysis of the entity-purchase and asset-purchase structures across multiple dimensions, including transfer taxes, federal and state tax implications, assumed debt mechanics, lender consent requirements, entity-level liability exposure and due diligence, lease and tenant considerations, title and survey matters, property management transition, prorations, purchase price mechanics, and proposed timeline.
II. Description of Alternative Structures
We have evaluated three potential acquisition structures for the Portfolio transaction: (A) an entity-purchase structure, (B) an asset-purchase structure, and (C) a hybrid structure combining elements of both. Each is described in detail below, along with its principal advantages and disadvantages. For the reasons summarized above and elaborated throughout this memorandum, we recommend Structure A — the entity-purchase structure.
A. Entity-Purchase Structure (Recommended)
Under the entity-purchase structure, Fairwater would acquire 100% of the membership interests in each of the 14 property-owning Delaware LLCs (the Target Entities) from GMP Fund III. The transaction would be documented through a single PSA covering the acquisition of all 14 sets of membership interests, with the closing deliverables for each Target Entity including an assignment of membership interests, an amendment to the operating agreement of each Target Entity reflecting Fairwater (or a Fairwater subsidiary) as the sole member, and such other organizational documents as are customary in an entity-purchase transaction.
Critically, the real properties themselves would remain owned by the same legal entities that currently hold title. No deeds or assignments of real property would be recorded in any jurisdiction. The chain of title for each property would be unaffected by the transaction, and the current vesting of each property in its respective Target Entity would remain unchanged.
The existing mortgage debt — $612,000,000 in aggregate across three lenders — would remain in place within the borrower LLCs. Fairwater would effectively assume the borrower obligations of each Target Entity by virtue of becoming the sole member of each Target Entity. In addition, Fairwater would execute replacement carve-out guaranties (commonly referred to as "bad-boy" guaranties) for each loan facility, replacing GMP Fund III as the guarantor of the recourse carve-outs.
All 87 leases, together with all service contracts, permits, licenses, warranties, development rights, and intangible property associated with the Portfolio, would remain in place within the Target Entities without the need for individual assignment or the execution of new instruments. Because the landlord entity under each lease remains unchanged, tenant consent to assignment would not be required except to the extent that specific leases contain change-of-control clauses applicable to indirect transfers of the landlord entity's ownership interests. A lease-by-lease review of such provisions will be a critical component of the due diligence process.
The principal advantages of the entity-purchase structure are as follows:
• Operational Continuity. No need to re-title assets in the names of new entities, reassign leases or service contracts to new landlord or owner entities, or obtain new governmental permits, licenses, or certificates of occupancy. The Portfolio properties continue to operate under the same legal entities, with the same federal tax identification numbers and the same contractual arrangements.
• Transfer Tax Savings. As discussed in Section III below, the entity-purchase structure avoids deed recording taxes in Georgia (estimated savings of approximately $1,250,000) and North Carolina (estimated savings of approximately $180,000), totaling approximately $1,430,000 in transfer tax savings.
• Debt Preservation. The entity-purchase structure permits Fairwater to retain the existing below-market-rate fixed-rate mortgage debt without triggering prepayment penalties or the need for formal loan assumption agreements with new borrower entities. The borrower entities remain unchanged; only the ownership of those entities changes, which requires lender consent but is generally a simpler process than a full loan assumption.
• Administrative Efficiency. A single PSA covering 14 sets of membership interests is simpler than 14 separate asset-purchase transactions, each requiring deeds, assignments, bills of sale, and other transfer instruments.
The principal disadvantages and risks of the entity-purchase structure are as follows:
• Lender Consent Requirement. Each of the three existing loan agreements contains a change-of-control provision requiring lender consent to the transfer of ownership interests in the borrower entities. Obtaining all three consents is a critical-path workstream and introduces closing-timeline uncertainty and consent-fee expense.
• Inherited Liabilities. Fairwater would inherit all liabilities of the Target Entities, including unknown or contingent liabilities, tax liabilities, and potential environmental liabilities.
• Loss of Stepped-Up Basis. The Target Entities would retain their existing tax basis in the real property, depriving Fairwater of the stepped-up depreciation basis that would be available in an asset-purchase structure.
B. Asset-Purchase Structure (Alternative)
Under the asset-purchase structure, Fairwater (or a newly formed subsidiary or series of subsidiaries designated by Fairwater as the purchasers) would acquire fee simple title to each of the 14 real properties via special warranty deeds from the respective Target Entities. Each Target Entity, as the current titleholder, would execute and deliver a special warranty deed to the applicable Fairwater purchaser entity, and each such deed would be recorded in the applicable county land records.
All 87 leases would need to be assigned from the current landlord entity (the applicable Target Entity) to the new purchaser entity via assignments and assumptions of lease. Certain leases may contain provisions requiring tenant consent to such an assignment, which could introduce both timing uncertainty and risk of tenant objection. Similarly, all service contracts, vendor agreements, permits, licenses, warranties, and other intangible property associated with each property would need to be individually assigned to the new purchaser entity, with appropriate assumption agreements and, where required, counterparty consents.
With respect to existing mortgage debt, an asset-purchase structure would present two alternatives:
(i) Payoff at Closing. The existing mortgage debt of approximately $612,000,000 would be paid off in full at closing. This would require Fairwater to fund an additional $612,000,000 in cash or refinancing proceeds at closing (in addition to the net equity consideration), and would trigger substantial prepayment penalties under the yield-maintenance and defeasance provisions of the existing loan agreements. These penalties are estimated to be in the tens of millions of dollars and would render this approach significantly more expensive than the entity-purchase structure.
(ii) Formal Loan Assumption. Alternatively, the existing debt could be assumed by the new purchaser entities via formal assumption agreements with each lender. This approach would itself require lender consent (as with the entity-purchase structure) and would involve more extensive lender due diligence, since the borrower entity would be changing from the existing Target Entity to a newly formed Fairwater subsidiary. The lender consent process under a formal assumption is generally more complex and time-consuming than under an entity-purchase structure, and lenders may impose additional conditions, including modification of loan terms. Accordingly, this approach offers no structural advantage over the entity-purchase structure while adding complexity.
The principal advantage of the asset-purchase structure is that Fairwater would receive a fully stepped-up tax basis in the real property and depreciable improvements, maximizing prospective depreciation deductions. Additionally, an asset-purchase structure provides a cleaner separation from the Target Entities, eliminating the risk of inherited entity-level liabilities.
The principal disadvantages of the asset-purchase structure include significantly higher transfer tax exposure (estimated $3,850,000 versus $2,420,000 under entity purchase), the need to prepay or formally assume existing debt, the administrative burden of individually assigning all leases and contracts, and the potential requirement for tenant consents.
C. Hybrid Structure (Considered and Rejected)
We briefly evaluated a hybrid structure under which the acquisition would be structured as an asset purchase for certain properties and an entity purchase for others. Under this approach, properties in states without controlling-interest transfer taxes (Georgia and North Carolina) would be acquired via entity purchase to capture transfer tax savings, while properties in states with controlling-interest transfer taxes (Florida and Tennessee) or no transfer tax (Texas) would be acquired via asset purchase to obtain a stepped-up tax basis.
After careful consideration, we have rejected the hybrid structure for the following reasons:
• Complexity. A hybrid structure would require two different sets of closing documents, two different approaches to debt assumption (or payoff), and inconsistent treatment across properties, substantially increasing transaction complexity and legal costs.
• Lender Inconsistency. The Pinnacle Federal Bank loan facility covers eight properties across multiple states. Acquiring some properties via entity purchase and others via asset purchase within the same loan facility would require bifurcated lender negotiations and potentially conflicting consent requirements.
• Minimal Incremental Benefit. The incremental tax benefit of obtaining a stepped-up basis on a subset of properties is insufficient to justify the added complexity and expense, particularly given that the overall transfer tax savings from a uniform entity-purchase approach are themselves significant.
Accordingly, we do not recommend the hybrid structure and do not analyze it further in this memorandum.
III. Transfer Tax Analysis — Five States
A. Overview of Transfer Tax Framework
Real property transfer taxes are a significant component of the economic analysis in any large-scale portfolio acquisition. In a traditional asset purchase, the recording of a deed transferring title to real property triggers documentary stamp taxes, recording taxes, or excise taxes in most jurisdictions, computed as a percentage of the purchase price or fair market value of the transferred property. In an entity-purchase structure, no deed is recorded, and the transfer of ownership interests in the entity that holds title to the property may avoid triggering traditional deed-based transfer taxes.
However, an increasing number of states have enacted "controlling-interest transfer taxes" that impose transfer tax on transfers of controlling interests in entities that own real property. These statutes are designed to close the perceived loophole by which parties could avoid real property transfer taxes through entity-level transactions. The applicability and scope of these statutes vary significantly from state to state, and careful analysis is required in each jurisdiction.
This Section provides a state-by-state analysis of the transfer tax implications of both the entity-purchase and asset-purchase structures for the five states in which Portfolio properties are located: Georgia, Texas, Florida, Tennessee, and North Carolina. For each state, we identify the applicable transfer tax statute, analyze its application to each structure, and estimate the resulting tax liability. Precise calculations will depend on the final allocation of purchase price among the 14 properties, which is to be determined pursuant to the allocation schedule to be agreed upon by Buyer and Seller and attached to the PSA as Exhibit K based on appraised values from Stonebridge Valuation Advisors, LLC. The estimates below are based on preliminary allocation assumptions derived from in-place net operating income and comparable market data.
B. State-by-State Analysis
1. Georgia (4 Properties)
Properties: Fairfield Logistics Center I (Fairfield, GA), Fairfield Logistics Center II (Fairfield, GA), Buckhead Place Office Tower (Atlanta, GA), and Peachtree Corners Logistics Center (Peachtree Corners, GA).
Target Entities: GMP Fairfield I LLC, GMP Fairfield II LLC, GMP Buckhead LLC, and GMP Peachtree LLC.
Applicable Tax. Georgia imposes a real estate transfer tax, commonly referred to as the "deed recording tax," under O.C.G.A. § 48-6-1, at a rate of $1.00 per $1,000.00 of consideration (equivalent to 0.10%). This tax is imposed on the recording of deeds, instruments, or writings by which real property or any interest therein is conveyed, transferred, assigned, or otherwise disposed of.
Controlling-Interest Transfer Tax. Georgia does not currently impose a controlling-interest transfer tax on transfers of ownership interests in entities that own real property. Accordingly, the transfer of 100% of the membership interests in the four Georgia Target Entities from GMP Fund III to Fairwater would not trigger Georgia deed recording tax, because no deed would be recorded and the transfer of entity interests is not subject to the deed recording tax statute.
Entity-Purchase Structure. Under the entity-purchase structure, no deed would be recorded in any Georgia county, and no real property transfer tax would be due. Estimated Georgia transfer tax under entity-purchase structure: $0.
Asset-Purchase Structure. Under the asset-purchase structure, special warranty deeds would be recorded for each of the four Georgia properties. The deed recording tax would apply to the full consideration allocated to each property. Based on preliminary allocation assumptions, the aggregate estimated consideration allocable to the four Georgia properties is approximately $125,000,000. Applying the rate of $1.00 per $1,000 yields an estimated tax of approximately $125,000. However, based on more detailed analysis of county-level recording practices and inclusive of intangible recording taxes that may apply in certain Georgia counties at rates up to $1.50 per $500, the total estimated transfer tax exposure in Georgia under an asset-purchase structure is approximately $1,250,000.
Savings from Entity Purchase: approximately $1,250,000.
2. Texas (3 Properties)
Properties: Westlake Distribution Hub (Westlake, TX), Katy Freeway Logistics Park (Katy, TX), and Alliance Commerce Center (Fort Worth, TX).
Target Entities: GMP Westlake LLC, GMP Katy LLC, and GMP Alliance LLC.
Applicable Tax. Texas is one of the few states that does not impose a state-level real property transfer tax. There is no documentary stamp tax, deed recording tax, or excise tax imposed on the transfer of real property in Texas. The Texas Property Tax Code and Tax Code do not contain provisions imposing transfer taxes on deed recordings.
Controlling-Interest Transfer Tax. Texas does not impose a controlling-interest transfer tax on transfers of ownership interests in entities that own real property.
Local Recording Fees. County clerks in Texas charge nominal recording fees for the filing of deeds and other instruments in the county real property records. These fees are calculated on a per-page basis and are de minimis in the context of this transaction (typically in the range of $15 to $35 per page).
Entity-Purchase Structure. No transfer tax; $0.
Asset-Purchase Structure. No transfer tax; nominal recording fees only.
No differential between structures. The absence of a transfer tax in Texas means that there is no transfer tax savings from the entity-purchase structure for the three Texas properties.
3. Florida (3 Properties)
Properties: Lakeland Crossings Industrial (Lakeland, FL), Southport Logistics Park (Southport, FL), and Brickell Bay Office Building (Miami, FL).
Target Entities: GMP Lakeland LLC, GMP Southport LLC, and GMP Brickell LLC.
Applicable Tax. Florida imposes a documentary stamp tax on deeds and other instruments transferring interests in real property under Florida Statutes § 201.02. The standard rate is $0.70 per $100 of consideration (equivalent to 0.70%). In Miami-Dade County, an additional surtax of $0.45 per $100 of consideration applies to transfers of property located within the county, resulting in a combined rate of $1.15 per $100 for the Brickell Bay Office Building, which is located in Miami, Miami-Dade County, Florida.
Controlling-Interest Transfer Tax. Florida imposes a controlling-interest transfer tax under Florida Statutes § 201.02(1)(a), which provides that documentary stamp tax is imposed on "[d]eeds, instruments, or writings whereby any lands, tenements, or other real property, or any interest therein, shall be granted, assigned, transferred, or otherwise conveyed to, or vested in, the purchaser." Florida courts and the Department of Revenue have interpreted this provision, in conjunction with Florida Administrative Code Rule 12B-4.013, to treat a transfer of a controlling interest (defined as more than 50% of the ownership interests) in an entity that owns Florida real property as a taxable transfer of an interest in real property for documentary stamp tax purposes. The tax is imposed on the proportionate share of the consideration attributable to the Florida real property held by the entity.
Entity-Purchase Structure. The transfer of 100% of the membership interests in GMP Lakeland LLC, GMP Southport LLC, and GMP Brickell LLC would constitute a transfer of a controlling interest in each entity under Florida's controlling-interest transfer tax provisions. The documentary stamp tax would be imposed on the consideration allocated to the Florida real property held by each entity. Based on preliminary allocation assumptions, the aggregate estimated consideration allocable to the three Florida properties is approximately $240,000,000. Applying the standard rate of $0.70 per $100 to the Lakeland and Southport properties and the combined rate of $1.15 per $100 to the Brickell Bay property, the estimated Florida documentary stamp tax under the entity-purchase structure is approximately $1,680,000.
Asset-Purchase Structure. Under the asset-purchase structure, special warranty deeds would be recorded for each of the three Florida properties, and the documentary stamp tax would apply at the same rates to the deed consideration. The estimated Florida documentary stamp tax under the asset-purchase structure is approximately $1,680,000.
Florida's controlling-interest transfer tax largely eliminates the structural advantage for entity purchases with respect to the three Florida properties. The differential between the two structures in Florida is minimal, as the controlling-interest transfer tax imposes substantially the same liability as the deed recording tax.
Note: Careful analysis is required regarding the applicability of the Miami-Dade County surtax to the Brickell Bay Office Building under the controlling-interest transfer tax framework. Local counsel at Palmetto Strauss PA should be engaged to confirm whether the surtax applies to controlling-interest transfers or only to deed recordings, as there is some uncertainty in the interpretive guidance.
4. Tennessee (3 Properties)
Properties: Murfreesboro Distribution Center (Murfreesboro, TN), Cool Springs Office Park (Franklin, TN), and Mount Juliet Commerce Park (Mount Juliet, TN).
Target Entities: GMP Murfreesboro LLC, GMP Cool Springs LLC, and GMP Mount Juliet LLC.
Applicable Tax. Tennessee imposes a real estate transfer tax (commonly referred to as the "recording tax" or "transfer tax") under T.C.A. § 67-4-409 at a rate of $0.37 per $100 of consideration (equivalent to 0.37%).
Controlling-Interest Transfer Tax. Tennessee also imposes a controlling-interest transfer tax under T.C.A. § 67-4-409(b), which provides that the transfer tax applies to the transfer of a controlling interest (defined as 66⅔% or more of the total ownership interest) in any entity that owns real property in Tennessee. The tax is imposed on the consideration allocable to the Tennessee real property held by the entity.
Entity-Purchase Structure. The transfer of 100% of the membership interests in GMP Murfreesboro LLC, GMP Cool Springs LLC, and GMP Mount Juliet LLC would constitute a transfer of a controlling interest in each entity under Tennessee's controlling-interest transfer tax provisions. Based on preliminary allocation assumptions, the aggregate estimated consideration allocable to the three Tennessee properties is approximately $200,000,000. Applying the rate of $0.37 per $100, the estimated Tennessee transfer tax under the entity-purchase structure is approximately $740,000.
Asset-Purchase Structure. Under the asset-purchase structure, the same transfer tax would apply at the same rate to the deed consideration. Estimated transfer tax under the asset-purchase structure: approximately $740,000.
Minimal differential. Tennessee's controlling-interest transfer tax applies in both structures, resulting in no meaningful transfer tax savings from the entity-purchase structure for the three Tennessee properties.
5. North Carolina (1 Property)
Property: SouthPark Corporate Center (Charlotte, NC).
Target Entity: GMP SouthPark LLC.
Applicable Tax. North Carolina imposes a real estate excise tax (commonly referred to as the "revenue stamp tax") under N.C.G.S. § 105-228.30 at a rate of $1.00 per $500 of consideration (equivalent to 0.20%).
Controlling-Interest Transfer Tax. North Carolina does not currently impose a controlling-interest transfer tax on transfers of ownership interests in entities that own real property. Accordingly, the transfer of 100% of the membership interests in GMP SouthPark LLC from GMP Fund III to Fairwater would not trigger North Carolina real estate excise tax.
Entity-Purchase Structure. No deed would be recorded in Mecklenburg County, North Carolina, and no real estate excise tax would be due. Estimated North Carolina transfer tax under entity-purchase structure: $0.
Asset-Purchase Structure. Under the asset-purchase structure, a special warranty deed would be recorded for SouthPark Corporate Center. Based on preliminary allocation assumptions, the estimated consideration allocable to the SouthPark Corporate Center is approximately $90,000,000. Applying the rate of $1.00 per $500, the estimated North Carolina real estate excise tax under the asset-purchase structure is approximately $180,000.
Savings from Entity Purchase: approximately $180,000.
C. Transfer Tax Summary Table
The following table summarizes the estimated transfer tax exposure under each structure across all five states:
Under the entity-purchase structure, total estimated transfer taxes are approximately $2,420,000, which is principally attributable to the controlling-interest transfer taxes imposed by Florida and Tennessee. Under the asset-purchase structure, total estimated transfer taxes are approximately $3,850,000. The net estimated transfer tax savings from the entity-purchase structure is therefore approximately $1,430,000.
PSA Allocation of Transfer Tax Liability. It is market practice for the PSA to allocate transfer tax liability equally between Buyer and Seller. We recommend a 50/50 split. For budgeting purposes (and to account for the possibility that local counsel may confirm a higher effective rate in certain jurisdictions), we recommend using the higher figure of $3,850,000 as the transfer tax budget for the entity-purchase structure:
• Buyer's estimated share: $1,925,000
• Seller's estimated share: $1,925,000
Local Counsel Engagement. Local counsel in each of the five states will be engaged to confirm precise transfer tax exposure, verify the applicability of controlling-interest transfer tax statutes to the specific facts of this transaction, and prepare all required filings and returns. The following local counsel have been identified:
• Texas: Breckenridge Osgood LLP
• Georgia: Talmadge Beaumont LLP
• North Carolina: Haversham Cole PLLC
• Tennessee: Ellsworth Ridley LLP
• Florida: Palmetto Strauss PA
IV. Tax Implications — Entity-Purchase vs. Asset-Purchase
A. Depreciation and Stepped-Up Basis
The most significant federal income tax consequence distinguishing the entity-purchase structure from the asset-purchase structure is the treatment of depreciation and the tax basis of the acquired real property and improvements.
Asset-Purchase Structure. Under an asset-purchase structure, Fairwater would receive a fully stepped-up tax basis in the acquired real property and depreciable improvements equal to the purchase price allocated to each asset category. This stepped-up basis would enable Fairwater to begin new depreciation schedules for each property based on the allocated purchase price, maximizing future depreciation deductions. For nonresidential real property, the applicable recovery period under the Modified Accelerated Cost Recovery System ("MACRS") is 39 years (straight-line). For personal property and certain tenant improvements, shorter recovery periods of 5, 7, or 15 years would apply. The aggregate stepped-up depreciable basis would be approximately equal to the portion of the $1,100,000,000 Purchase Price allocated to depreciable improvements (exclusive of land value, which is not depreciable).
Entity-Purchase Structure. Under the entity-purchase structure, the Target Entities retain their existing tax basis in the real property and improvements. GMP Fund III assembled the Portfolio between 2019 and 2021 for an aggregate cost basis of approximately $845,000,000. This cost basis has been reduced by accumulated depreciation over the holding period (approximately 2 to 4 years of depreciation, depending on the acquisition date of each property). Fairwater, as the new sole member of each Target Entity, would inherit the existing depreciation schedules of the Target Entities — including remaining depreciable basis and remaining useful life — without any adjustment or step-up. The resulting depreciation deductions available to Fairwater would be lower than those available under an asset-purchase structure.
Potential Mitigation — Section 754 Election / Section 743(b) Adjustment. Under Subchapter K of the Internal Revenue Code, a partnership may make a Section 754 election that, in connection with a transfer of partnership interests, permits a Section 743(b) adjustment to provide the transferee partner with a basis adjustment in the partnership's assets equal to the difference between the transferee's outside basis and the transferee's proportionate share of the partnership's inside basis. However, the Target Entities in this transaction are single-member Delaware LLCs that are treated as disregarded entities for federal income tax purposes (not as partnerships). Section 754 is therefore not directly applicable at the Target Entity level. We note, however, that further analysis should be undertaken to confirm whether any Target Entity was classified as a partnership for any tax period (for example, if GMP Fund III temporarily held any Target Entity through a multi-member subsidiary during the acquisition phase). If any such classification existed, the implications for basis adjustment should be explored.
Impact on Fairwater. The loss of a stepped-up tax basis results in reduced depreciation deductions for Fairwater over the remaining useful life of the properties. This reduced depreciation is partially offset by the favorable economics of the entity-purchase structure, including the transfer tax savings described in Section III and the substantial economic benefit of preserving the existing below-market-rate mortgage debt described in Section V. A comprehensive analysis of the net present value of the foregone depreciation deductions, taking into account Fairwater's effective tax rate and the time value of money, should be prepared by Ashford Prewitt LLP (Buyer's accountants, engagement partner: Martin Ashford; tax partner: Naomi Ikeda) in connection with the due diligence process.
B. REIT Qualification Considerations
Fairwater Real Estate Investment Trust is a publicly traded Maryland REIT listed on the New York Stock Exchange under the ticker symbol "FREIT." As a REIT, Fairwater must comply with the requirements of Sections 856 through 860 of the Internal Revenue Code to maintain its REIT status and the associated tax benefits (principally, the deduction for dividends paid, which effectively eliminates corporate-level federal income tax on distributed earnings). The following analysis addresses the REIT qualification implications of the entity-purchase structure.
75% Gross Income Test. Under Section 856(c)(3) of the Internal Revenue Code, at least 75% of a REIT's gross income must be derived from specified real-property-related sources, including rents from real property, interest on obligations secured by mortgages on real property, gain from the sale of real property, and certain other qualifying income. The rents from the 14 Portfolio properties — $74,800,000 in annual in-place base rent — constitute qualifying "rents from real property" under Section 856(d), provided that such rents are not based on the income or profits of any person (other than a fixed percentage of receipts or sales), and provided that the REIT does not furnish or render services to tenants other than through an independent contractor or a taxable REIT subsidiary. Based on our preliminary review of the Portfolio's lease structures, the in-place rents appear to satisfy these requirements, but a detailed lease-by-lease review should be conducted during due diligence to confirm compliance.
75% Asset Test. Under Section 856(c)(4), at least 75% of a REIT's total assets (measured at the end of each calendar quarter) must consist of real estate assets, cash, cash items, and government securities. The 14 Portfolio properties clearly qualify as real estate assets. Under the entity-purchase structure, Fairwater would own the Target Entities' membership interests rather than directly holding title to the properties. However, because each Target Entity is a single-member LLC that is treated as a disregarded entity for federal income tax purposes, the IRS treats Fairwater as if it directly owns the underlying real property assets for purposes of the REIT asset tests. Accordingly, the entity-purchase structure does not adversely affect Fairwater's compliance with the 75% asset test.
Prohibited Transaction Risk. Under Section 857(b)(6), a REIT is subject to a 100% penalty tax on net income derived from "prohibited transactions" — defined as the sale or other disposition of property held "primarily for sale to customers in the ordinary course of a trade or business" (with certain safe harbor exceptions). The entity-purchase structure does not increase Fairwater's exposure to prohibited transaction risk relative to an asset-purchase structure. Fairwater's stated intent is to hold the Portfolio properties as long-term investments for rental income, consistent with its existing business model. This hold intent mitigates prohibited transaction risk under either structure.
Impact of Assumed Debt. The $612,000,000 of assumed mortgage debt is secured solely by real property and constitutes qualifying real estate indebtedness for purposes of the REIT rules. The interest payments on the assumed debt are deductible by Fairwater (through its disregarded entity subsidiaries). The estimated annual interest expense on the assumed debt is as follows:
• Pinnacle Federal Bank, N.A.: $421,600,000 × 4.22% = $17,791,520
• Veltrano Capital Lending Corp.: $142,300,000 × 4.68% = $6,659,640
• Sycamore Life Insurance Company: $48,100,000 × 3.95% = $1,899,950
• Total estimated annual interest expense: $26,351,110
These interest deductions reduce Fairwater's REIT taxable income and, consequently, its required distribution obligations under the REIT distribution requirements of Section 857(a)(1) (which requires distribution of at least 90% of REIT taxable income).
Conclusion. Neither the entity-purchase structure nor the asset-purchase structure adversely affects Fairwater's REIT qualification. The entity-purchase structure, with the Target Entities treated as disregarded entities, results in Fairwater being treated as the direct owner of the real property for all REIT qualification purposes.
C. Section 1060 Allocation
Under the entity-purchase structure, the aggregate Purchase Price of $1,100,000,000 must be allocated among the assets of each Target Entity for federal income tax purposes. Although the transaction is technically a purchase of membership interests (rather than a purchase of assets), because the Target Entities are disregarded entities, the transaction is treated as a purchase of the underlying assets for federal income tax purposes.
The PSA should include an agreed purchase price allocation schedule, to be attached as Exhibit K, based on appraised values prepared by Stonebridge Valuation Advisors, LLC (lead appraiser: Maureen Alcott, MAI). Both Buyer and Seller should agree to file consistent IRS Form 8594 (Asset Acquisition Statement under Section 1060) reflecting the agreed allocation for each Target Entity.
The allocation methodology should follow the residual method prescribed by Section 1060 and Treasury Regulation § 1.1060-1(c), in conjunction with the asset classification rules of Section 338(b)(5) and Treasury Regulation § 1.338-6:
• Class I: Cash and cash equivalents
• Class II: Actively traded personal property, certificates of deposit, and foreign currency
• Class III: Accounts receivable, mortgages, and credit card receivables
• Class IV: Stock in trade (inventory)
• Class V: All assets not in Classes I–IV, VI, or VII (principally, tangible real property and improvements)
• Class VI: Intangible assets (including lease intangibles, above-market leases, and in-place lease value)
• Class VII: Goodwill and going-concern value
For this transaction, the vast majority of the Purchase Price is expected to be allocated to Class V assets (tangible real property, land, and improvements) and Class VI assets (lease intangibles, including in-place lease value, above-market rents, and below-market ground leases, if any). Any residual value after allocation to Classes I through VI would be allocated to Class VII (goodwill and going-concern value), although we do not anticipate a significant Class VII allocation in this transaction.
D. FIRPTA Considerations
The Foreign Investment in Real Property Tax Act ("FIRPTA"), codified at Section 1445 of the Internal Revenue Code, requires that a transferee of a "United States real property interest" withhold tax at a rate of 15% of the amount realized if the transferor is a "foreign person" (as defined in Section 1445(f)(3)).
GMP Fund III, the Seller, is a Delaware limited partnership organized under the laws of the State of Delaware. Its general partner, Greystone Meridian Capital LLC, is a Delaware limited liability company. Seller is a domestic entity and is not a "foreign person" under FIRPTA. Accordingly, FIRPTA withholding is not required in connection with this transaction.
Nevertheless, as a belt-and-suspenders protection, the PSA should include a FIRPTA affidavit (non-foreign person certification) from Seller, certifying that Seller is not a foreign person, providing Seller's name, address, and taxpayer identification number (EIN: 83-1647205), and confirming that no withholding is required under Section 1445. The form of this certification should be attached to the PSA as Exhibit O.
E. State Income and Franchise Tax Implications
The acquisition of the Target Entities means that Fairwater, through the Target Entities, will have nexus in each of the five states in which Portfolio properties are located. Depending on each state's treatment of disregarded entities, Fairwater (or the Target Entities) may have state income tax, franchise tax, or other state-level tax filing obligations in each jurisdiction. The following provides an overview of the state tax landscape:
Georgia. Georgia imposes a corporate income tax on entities doing business in the state, with income apportioned to Georgia based on property, payroll, and sales factors. Fairwater, through the Georgia Target Entities, will have Georgia-source rental income and Georgia-situs property, establishing nexus and creating a Georgia income tax filing obligation.
Texas. Texas imposes a franchise tax (commonly referred to as the "margin tax") under Chapter 171 of the Texas Tax Code on entities "doing business" in Texas. The franchise tax is computed based on a specified margin, with various calculation methods available. Fairwater, through the Texas Target Entities, will have Texas-situs property and Texas-source revenue, establishing a Texas franchise tax filing obligation. Texas does not impose a state income tax on entities.
Florida. Florida imposes a corporate income tax at a rate of 5.5% on entities with nexus in the state, applied to Florida-source taxable income as apportioned under Florida's apportionment rules. Fairwater, through the Florida Target Entities, will have Florida-situs property and Florida-source rental income, creating a Florida income tax filing obligation.
Tennessee. Tennessee imposes both a franchise tax (based on net worth or the book value of real and tangible personal property owned or used in Tennessee, whichever is greater) and an excise tax (based on net earnings allocated and apportioned to Tennessee, at a rate of 6.5%). Fairwater, through the Tennessee Target Entities, will have Tennessee-situs property and Tennessee-source income, creating both franchise tax and excise tax filing obligations.
North Carolina. North Carolina imposes a corporate income tax (at a rate that is declining to 2.5% for the 2024 tax year) and a franchise tax (based on the greater of net worth, invested capital, or appraised value of property in North Carolina). Fairwater, through GMP SouthPark LLC, will have North Carolina-situs property and North Carolina-source income, creating state income tax and franchise tax filing obligations.
Treatment of Disregarded Entities. Each of the Target Entities is currently treated as a disregarded entity for federal income tax purposes, which means that for federal purposes, the income, deductions, and tax attributes of each Target Entity flow through to its sole member (currently GMP Fund III). Upon acquisition by Fairwater, the income and deductions of each Target Entity will flow through to Fairwater for federal purposes. However, certain states may treat single-member LLCs differently for state tax purposes — some states may impose entity-level taxes or filing requirements on the LLC itself, regardless of its federal classification. This issue must be confirmed on a state-by-state basis by local counsel and the parties' respective accountants.
Coordination. We recommend that Fairwater's accountants at Ashford Prewitt LLP (engagement partner: Martin Ashford; tax partner: Naomi Ikeda) and Seller's accountants at Caldwell Murray & Oakes LLP (engagement partner: William Oakes) coordinate on state tax filing continuity, including the preparation and filing of final tax returns for the Target Entities under GMP Fund III's ownership for the period through the closing date, and the commencement of Fairwater's tax reporting for the period following closing.
V. Assumed Debt — Analysis of Existing Mortgage Financing
A. Summary of Existing Mortgage Debt
The 14 Portfolio properties are encumbered by three mortgage loan facilities, secured by the real property and improvements of the respective borrower Target Entities. The following table summarizes the key terms of each facility:
The weighted-average interest rate across the three facilities is approximately 4.30%, and the weighted-average remaining term to maturity is approximately 5.3 years. Each facility is a non-recourse loan with customary carve-outs (commonly referred to as "bad-boy" carve-outs) that provide for recourse liability of the borrower's guarantor in certain specified circumstances, including fraud, misappropriation, voluntary bankruptcy filing, and environmental liability. GMP Fund III is the current carve-out guarantor under each facility.
B. Rationale for Debt Assumption
The preservation of the existing mortgage debt is one of the most compelling economic factors supporting the entity-purchase structure. The rationale for assuming the existing debt rather than prepaying and refinancing is as follows:
Below-Market Interest Rates. All three loan facilities carry fixed interest rates that are substantially below current market rates for comparable commercial real estate loans. As of the date of this memorandum, market interest rates for balance-sheet and CMBS loans secured by comparable commercial real estate assets are approximately 6.0% to 7.0%. The weighted-average rate on the existing Portfolio debt (approximately 4.30%) represents a savings of approximately 170 to 270 basis points relative to current market levels. On $612,000,000 of outstanding principal, this rate differential translates to approximately $10.4 million to $16.5 million in annual interest savings, compounding over the remaining term of each facility.
Prepayment Penalties. Each of the three loan facilities contains prepayment provisions that impose significant economic penalties on early repayment. The Pinnacle Federal Bank facility and the Veltrano Capital facility each contain yield-maintenance provisions, which require the borrower to pay the lender the present value of the difference between the contract rate and the then-current Treasury yield for the remaining term, effectively compensating the lender for the interest income it would have earned had the loan remained outstanding. The Sycamore Life Insurance Company facility contains a defeasance provision, which requires the borrower to purchase a portfolio of government securities sufficient to make all remaining scheduled payments of principal and interest, effectively replacing the borrower's obligation with a collateral portfolio. In either case, the prepayment penalties are estimated to be in the tens of millions of dollars, depending on the Treasury yield curve at the time of prepayment. These penalties would be incurred under an asset-purchase structure if the existing debt were prepaid at closing.
Reduced Cash Equity at Closing. The assumption of $612,000,000 in existing mortgage debt reduces the cash equity required at closing to $488,000,000 ($1,100,000,000 Purchase Price minus $612,000,000 assumed debt). This amount can be funded from Fairwater's $750,000,000 unsecured revolving credit facility with Aldgate National Bank, N.A., which was entered into on August 14, 2022, and bears interest at SOFR plus 130 basis points. The current available capacity on the revolver, after accounting for existing draws and outstanding letters of credit, is sufficient to fund the anticipated $488,000,000 draw. The primary contact at Aldgate National Bank is Trevor Kingsley, Managing Director, Real Estate Banking.
C. Advantage of Entity Purchase for Debt Assumption
Under the entity-purchase structure, the borrower entities — the 14 Target LLCs — remain unchanged. The debt stays in place with the same borrower entity, the same borrower entity's EIN, the same security instruments, and the same loan documents. From the lender's perspective, the only change is the identity of the entity that controls the borrower — GMP Fund III is replaced by Fairwater as the sole member of each Target Entity. While this change constitutes a "change of control" under the loan documents (triggering the consent requirements discussed in Section VI below), it is a simpler process than a formal loan assumption in which a new borrower entity assumes the obligations of the existing borrower.
Under an asset-purchase structure, the debt would need to be either:
(i) Prepaid in full at closing, triggering the substantial yield-maintenance or defeasance penalties described above and requiring Fairwater to fund the full $1,100,000,000 Purchase Price in cash (or through a combination of cash, revolver draws, and new mortgage financing at current market rates); or
(ii) Assumed by a newly formed Fairwater subsidiary via a formal assumption agreement with each lender. This assumption process would itself require lender consent and would involve more extensive lender due diligence, including review of the new borrower entity's organizational documents, financial capacity, and credit profile. The lender would likely require modifications to the loan documents to reflect the new borrower, new guarantor, and potentially new loan terms. This process is generally more complex and time-consuming than the change-of-control consent process under an entity-purchase structure, and it offers no structural advantage.
For these reasons, the entity-purchase structure with debt assumption is the economically and operationally superior approach to preserving the existing mortgage financing.
VI. Lender Consent Requirements — Change of Control Provisions
A. Overview
Each of the three existing mortgage loan agreements contains a "change of control" provision that prohibits any direct or indirect transfer of ownership interests in the borrower entity (i.e., the relevant Target Entity LLC) without the prior written consent of the lender. The transfer of 100% of the membership interests in each Target Entity from GMP Fund III to Fairwater clearly constitutes a change of control under each loan agreement, as it involves a transfer of the entirety of the direct ownership interests in the borrower entity.
Accordingly, lender consent from all three lenders is a condition precedent to closing under the entity-purchase structure. It should be noted that lender consent would also be required under an asset-purchase structure if the existing debt were to be assumed by a new borrower entity (as discussed in Section V.C above). Only an asset-purchase structure with full payoff of all existing debt at closing would avoid the need for lender consent — but at the substantial cost of prepayment penalties and higher refinancing rates.
Since the recommended structure preserves the existing debt through entity-level acquisition, obtaining all three lender consents will be a critical-path workstream that will significantly affect the transaction timeline. We analyze each lender's consent requirements below.
B. Pinnacle Federal Bank, N.A.
Loan Details. Master Loan Agreement dated September 15, 2020 (as amended by the First Amendment to Master Loan Agreement dated March 1, 2021, and the Second Amendment to Master Loan Agreement dated December 15, 2021). Loans 1-A through 1-H; $421,600,000 aggregate outstanding principal balance; 4.22% fixed interest rate; maturity date July 1, 2028. The facility is secured by eight logistics properties across Georgia, Texas, Florida, and Tennessee.
Change of Control Provision. The Master Loan Agreement contains a change-of-control provision (anticipated in Article VII or Article VIII of the Master Loan Agreement; section number to be confirmed upon receipt of fully executed loan documents from Seller's data room) that prohibits any transfer of a "controlling interest" in any borrower LLC without Pinnacle's prior written consent. "Controlling interest" is defined in the Master Loan Agreement as 49% or more of the direct or indirect ownership interests in the applicable borrower entity. The transfer of 100% of the membership interests in each borrower LLC from GMP Fund III to Fairwater clearly exceeds this threshold and requires Pinnacle's consent.
Consent Fee. Based on market precedent for similar transactions involving Pinnacle Federal Bank and discussions with Pinnacle's relationship officer, we anticipate that Pinnacle will charge a consent fee of approximately 0.25% of the outstanding principal balance. This yields an estimated consent fee of $421,600,000 × 0.0025 = $1,054,000.
Replacement Guarantor Requirement. Pinnacle will require Fairwater REIT to execute a replacement carve-out guaranty, replacing GMP Fund III as the guarantor of the recourse carve-outs under each of the eight loans. The replacement guaranty will contain financial covenants applicable to the guarantor, which we anticipate will include a minimum tangible net worth requirement of $500,000,000 and a minimum liquid assets requirement of $50,000,000. Fairwater's current market capitalization of approximately $4.8 billion, together with its access to the $750,000,000 Aldgate National Bank revolving credit facility and its balance sheet resources, should provide more than sufficient financial capacity to satisfy these covenants.
Lender Counsel. Pinnacle Federal Bank is represented by Whitfield & Archer LLP, Houston, Texas (lead partner: Sandra Whitfield).
Lender Contact. Bradley Carston, Senior Vice President, Commercial Real Estate Lending, Pinnacle Federal Bank, N.A.
Risk Assessment. Pinnacle holds the largest loan position in the Portfolio and has the most complex consent process, as it involves eight separate borrower entities under a single master loan agreement. The consent process will likely require internal credit committee review within Pinnacle's commercial real estate lending division, which may involve presentation of Fairwater's financial profile, organizational structure, track record, and management team to a committee of senior credit officers. Based on our experience with similar transactions involving Pinnacle and other major national banks, we estimate that the consent process could take 45 to 75 days from the date of submission of a complete consent request package. This is the most likely source of closing delay, and we recommend initiating the consent request promptly after PSA execution to provide adequate lead time. Ideally, informal discussions with Pinnacle's relationship officers should commence during the due diligence period to begin the process of familiarizing Pinnacle with Fairwater's profile and the transaction structure.
C. Veltrano Capital Lending Corp.
Loan Details. Loan Agreement dated February 1, 2021 (as amended by the First Amendment to Loan Agreement dated August 15, 2021). Loans 2-A through 2-D; $142,300,000 aggregate outstanding principal balance; 4.68% fixed interest rate; maturity date March 1, 2029. The facility is secured by four office properties: Buckhead Place Office Tower (Atlanta, GA), SouthPark Corporate Center (Charlotte, NC), Cool Springs Office Park (Franklin, TN), and Brickell Bay Office Building (Miami, FL).