CALDERWOOD & HARKNESS LLP Attorneys at Law
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www.calderwoodharkness.com
PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT This memorandum and all enclosures hereto are protected by the attorney-client privilege and the work product doctrine. This memorandum has been prepared by Calderwood & Harkness LLP at the direction of its client, Fairwater Real Estate Investment Trust, and is furnished to Hartwick Gunderson & Associates, Inc. solely for the purpose of procuring representations and warranties insurance coverage in connection with the transaction described herein. Any unauthorized review, use, disclosure, or distribution is prohibited. If you have received this memorandum in error, please contact Calderwood & Harkness LLP immediately.
MEMORANDUM
TO: Peter Langford, Account Executive Hartwick Gunderson & Associates, Inc. 100 North Charles Street, Suite 1200 Baltimore, MD 21201
FROM: Douglas Fairchild, Partner, and Grace Nakamura, Associate Calderwood & Harkness LLP
DATE: February 5, 2024
RE: Representations & Warranties Insurance — Buyer-Side Policy Submission Fairwater Real Estate Investment Trust Acquisition of 14-Property Sun Belt Logistics and Office Portfolio from Greystone Meridian Partners Fund III, L.P. — $1,100,000,000
C&H Matter No.: 1036-00004
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I. Introduction and Purpose
Calderwood & Harkness LLP ("C&H") represents Fairwater Real Estate Investment Trust ("Fairwater" or "FREIT"), a Maryland Real Estate Investment Trust, as buyer's counsel in connection with the proposed acquisition (the "Transaction" or the "Acquisition") of a 14-property Sun Belt logistics and office portfolio (the "Portfolio") from Greystone Meridian Partners Fund III, L.P. ("GMP Fund III" or the "Seller"), a Delaware limited partnership. The Transaction is structured as an entity-level acquisition in which Fairwater will acquire 100% of the membership interests in each of 14 property-owning single-purpose Delaware limited liability companies (collectively, the "Target Entities"), for an aggregate purchase price of One Billion One Hundred Million Dollars ($1,100,000,000).
The purpose of this memorandum is to provide Hartwick Gunderson & Associates, Inc. ("HGA") with a comprehensive transaction summary and due diligence overview to support the placement of a buyer-side representations and warranties insurance policy (the "R&W Policy") in connection with the Transaction. This memorandum is intended to serve as the primary submission document and to enable HGA to present the Transaction to prospective carriers for underwriting consideration.
Our target carrier for the R&W Policy is Sentinel Specialty Insurance Company ("Sentinel Specialty"), although we understand that HGA may, in its discretion and upon consultation with C&H and Fairwater, approach additional carriers to obtain competitive quotes. The requested policy limit is Fifty-Five Million Dollars ($55,000,000), representing five percent (5%) of the aggregate purchase price of $1,100,000,000.
We anticipate binding the R&W Policy at or prior to closing of the Transaction, which is currently scheduled for May 31, 2024. The Purchase and Sale Agreement (the "PSA") governing the Transaction is in near-final form and is expected to be executed by the parties on or about February 28, 2024. A draft of the near-final PSA is enclosed herewith as Enclosure 5 and will be supplemented with the fully executed version (together with all exhibits and disclosure schedules) promptly upon execution.
We respectfully request that HGA confirm receipt of this submission and provide an initial market indication and proposed timeline for the placement process within one week of the date hereof. The following sections of this memorandum set forth, in detail, the transaction structure, key parties, portfolio characteristics, due diligence status, PSA indemnification framework, requested coverage terms, and identified risk areas for the underwriter's attention.
II. Transaction Overview
A. Parties. 1. Buyer
The Buyer is Fairwater Real Estate Investment Trust, a Maryland Real Estate Investment Trust organized and existing under Maryland law and listed on the New York Stock Exchange under the ticker symbol "FREIT." Fairwater maintains its principal executive offices at 7200 Chesapeake Parkway, Suite 1100, Columbia, Maryland 21044. As of the end of the fourth quarter of 2023 (Q4 2023), Fairwater had a market capitalization of approximately $4.8 billion and total enterprise value of approximately $7.2 billion.
Fairwater's senior management team includes the following key personnel relevant to the Transaction:
• Jonathan R. Whitmore, Chief Executive Officer
• Patricia Sung-Calloway, Chief Financial Officer
• Marcus Devereaux, Executive Vice President, Acquisitions
• David Elgin Park, Executive Vice President and General Counsel
Fairwater's existing portfolio comprises 62 logistics, industrial, and suburban office properties located across 11 states, totaling approximately 18.4 million rentable square feet ("RSF"). The portfolio generates stable, contractual cash flows supported by a diversified tenant roster. The weighted-average remaining lease term across Fairwater's existing portfolio is approximately 6.2 years as of December 31, 2023.
The strategic rationale for the Acquisition is multi-faceted. First, the Transaction enables Fairwater to meaningfully expand its Sun Belt logistics footprint, which management views as the most attractive growth market in its target sectors due to favorable population migration trends, business-friendly regulatory environments, and proximity to major transportation corridors. Second, the Portfolio is available at a basis that management believes is below replacement cost, creating embedded value for Fairwater's stockholders. Third, the Portfolio's weighted-average in-place capitalization rate of approximately 6.80% is accretive to Fairwater's existing portfolio yield, supporting immediate earnings growth on a per-share basis.
2. Seller
The Seller is Greystone Meridian Partners Fund III, L.P. ("GMP Fund III"), a Delaware limited partnership formed in 2018 with a committed fund size of $2.4 billion. GMP Fund III maintains its principal office at 3300 Peachtree Road NE, Suite 2200, Atlanta, Georgia 30326, and its registered agent is located at 1209 Orange Street, Wilmington, Delaware 19801, in care of Penmark Industries.
The general partner of GMP Fund III is Greystone Meridian Capital LLC ("GMC"), a Delaware limited liability company. GMC is led by Co-Founders and Managing Partners Victor Lansdell and Elise Rathborne, both of whom are named as Seller knowledge persons in the PSA and are expected to execute certificates and undertakings in connection with the Transaction.
GMP Fund III assembled the 14-property Portfolio between 2019 and 2021 for an aggregate cost basis of approximately $845,000,000. The Seller's disposition rationale is driven by end-of-fund-life monetization requirements and the fact that the fund has exceeded its targeted internal rate of return, making disposition at current pricing attractive to the fund's limited partners. We understand from Seller's counsel that GMP Fund III anticipates completing its wind-down within 18 months following the closing of the Transaction.
The Seller's legal counsel is Blackridge Hayes LLP, a New York-based law firm. The lead partner on the Transaction is Nathaniel Pryce, with tax matters handled by partner Ingrid Solberg and day-to-day deal execution led by senior associate Thomas Keating. The Seller's accounting firm is Caldwell Murray & Oakes LLP, based in Atlanta, Georgia, with engagement partner William Oakes, CPA, serving as the lead contact.
3. Buyer's Counsel
Calderwood & Harkness LLP serves as Buyer's outside counsel for the Transaction. The engagement team comprises:
• Douglas Fairchild — Responsible Partner, Real Estate Practice Group (New York)
• Angela Fontaine — Billing Partner, Real Estate Practice Group (New York)
• Grace Nakamura — Lead Associate, Real Estate Practice Group (New York)
• Rafael Dominguez — Working Associate, Real Estate Practice Group (Washington, DC)
• Sylvia Hartwell — Specialist Partner, Tax Practice Group (Washington, DC)
4. Buyer's Accounting and Tax Advisors
Ashford Prewitt LLP serves as Fairwater's outside accounting and tax advisory firm for the Transaction. The engagement partner is Martin Ashford, CPA, and the tax partner is Naomi Ikeda, CPA. Ashford Prewitt is coordinating with C&H's tax practice (Sylvia Hartwell) on all tax diligence matters, including REIT qualification analysis, transfer tax exposure, and purchase price allocation under Section 1060 of the Internal Revenue Code.
B. Transaction Structure
The Transaction is structured as an entity-level acquisition. Specifically, Fairwater (or a direct or indirect wholly owned subsidiary thereof to be designated prior to closing) will acquire 100% of the outstanding membership interests in each of the 14 Target Entities, each of which is a single-purpose Delaware limited liability company wholly owned by GMP Fund III. Each Target Entity holds fee simple title to one of the 14 real properties comprising the Portfolio. By acquiring the membership interests rather than the underlying real property directly, the Transaction avoids the need for individual deed transfers and reduces certain transfer tax obligations in select jurisdictions, although controlling-interest transfer taxes may apply as discussed in Section V.H below.
The PSA is governed by the laws of the State of New York, without regard to conflicts-of-law principles. Local real property law in each of the five states in which the Portfolio is located — Georgia, Texas, Florida, Tennessee, and North Carolina — governs title, recording, tenant matters, environmental compliance, and related issues.
The aggregate purchase price for the Transaction is One Billion One Hundred Million Dollars ($1,100,000,000), subject to customary prorations and working-capital adjustments. The consideration consists of the following components:
• Assumed Mortgage Debt: $612,000,000, representing the aggregate outstanding principal balance of three existing mortgage loan facilities as of the anticipated signing date of February 28, 2024. The assumed debt is described in further detail in Section II.D below.
• Cash Equity at Closing: $488,000,000, representing the difference between the aggregate purchase price and the assumed mortgage debt ($1,100,000,000 minus $612,000,000).
The PSA requires Fairwater to deposit earnest money in two tranches:
• Initial Deposit: $27,500,000 (representing 2.5% of the purchase price), to be deposited within two (2) business days of PSA execution with Commonwealth National Title Insurance Company ("CNTIC"), acting as escrow agent.
• Additional Deposit (Hard): $27,500,000, to be deposited upon the expiration of the due diligence period on April 15, 2024. This additional deposit becomes non-refundable (subject to limited exceptions) upon deposit, and together with the initial deposit, brings the total deposits to $55,000,000 (5.0% of the purchase price).
The transfer of membership interests in the Target Entities constitutes a change of control under each of the three existing mortgage loan agreements. Accordingly, the Transaction requires the prior written consent of each of the three mortgage lenders as a condition to closing. Lender consent is discussed in greater detail in Section V.F below.
The PSA includes a detailed proration and working-capital adjustment mechanism governing the allocation of rents, operating expenses, real property taxes, insurance premiums, utility charges, and other customary items between Buyer and Seller as of the closing date. A post-closing true-up of prorations is to be completed within 90 days following the closing.
C. Key Dates / Timeline
The following table summarizes the key dates and milestones for the Transaction:
The parties are operating under an aggressive but achievable timeline. C&H and its diligence consultants have been conducting preliminary due diligence since the LOI was executed in October 2023, which positions the parties to complete the formal due diligence process within the 46-day contractual period.
D. Purchase Price and Consideration
The fixed purchase price for the Transaction is One Billion One Hundred Million Dollars ($1,100,000,000). No portion of the purchase price is subject to any earn-out, contingent consideration, or post-closing adjustment (other than the customary proration mechanism described above).
As noted, Fairwater will assume three existing mortgage loan facilities with an aggregate outstanding principal balance of $612,000,000. The details of the assumed debt are as follows:
All three loan facilities bear fixed interest rates, eliminating interest rate risk during the remaining loan terms. The weighted-average interest rate across the three facilities is approximately 4.27% per annum. All loans are fully amortizing over their respective terms, although prepayment is permitted subject to yield maintenance or defeasance provisions.
Fairwater intends to fund the $488,000,000 cash equity portion of the purchase price from a combination of cash on hand and a draw on its existing $750,000,000 unsecured revolving credit facility with Aldgate National Bank, N.A. (dated August 14, 2022). The revolving credit facility bears interest at the Secured Overnight Financing Rate ("SOFR") plus 130 basis points and has substantial available capacity to fund the anticipated draw of approximately $488,000,000. Fairwater does not anticipate the need for any additional financing or capital raises to consummate the Transaction.
III. Portfolio Summary
A. Property Overview
The Portfolio consists of 14 commercial real properties located across five states in the Sun Belt region of the United States. The geographic distribution of the Portfolio is as follows:
• Georgia: 4 properties (2 logistics, 1 logistics, 1 office)
• Texas: 3 properties (all logistics)
• Florida: 3 properties (2 logistics, 1 office)
• Tennessee: 3 properties (1 logistics, 1 logistics, 1 office)
• North Carolina: 1 property (office)
The Portfolio contains a total of approximately 5,224,000 RSF. The asset composition by property type is as follows:
• Logistics Properties (10): 4,373,000 RSF, representing approximately 83.7% of total portfolio RSF
• Office Properties (4): 851,000 RSF, representing approximately 16.3% of total portfolio RSF
The logistics properties were constructed between 2019 and 2021 and represent modern, Class A distribution and warehouse facilities with institutional-quality specifications including 32- to 36-foot clear heights, ESFR sprinkler systems, cross-dock configurations, and ample trailer parking. The office properties were constructed between 2016 and 2019 and are located in established suburban and urban office submarkets across the Sun Belt.
B. Property Detail Table
The following table sets forth detailed information for each of the 14 properties comprising the Portfolio:
A more detailed property-level schedule, including site acreage, building dimensions, parking ratios, and construction specifications, is attached hereto as Enclosure 1.
C. Occupancy and Lease Data
The Portfolio is currently leased to 87 tenants under individual lease agreements. The occupancy and lease data summarized below is derived from the Seller's rent roll dated as of December 31, 2023, which is attached to the PSA as Exhibit H and enclosed herewith as Enclosure 6.
Occupancy:
• Weighted-average occupancy (as of 12/31/2023): 93.2%
• Logistics property occupancy: 96.1%
• Office property occupancy: 82.7%
The differential in occupancy between the logistics and office segments of the Portfolio is consistent with broader market trends in the Sun Belt, where logistics assets continue to benefit from strong demand driven by e-commerce fulfillment and nearshoring activity, while suburban and urban office assets have experienced more moderate leasing velocity in the post-pandemic environment. Fairwater's management team believes that the office vacancy presents a mark-to-market leasing opportunity over the medium term.
Lease Economics:
• Weighted-average remaining lease term: 5.8 years
• Annual in-place base rent ("ABR"): $74,800,000
• In-place capitalization rate: 6.80% ($74,800,000 ÷ $1,100,000,000)
Top 5 Tenants by Annual Base Rent:
The Top 5 tenants together represent approximately 44.8% of total ABR, which represents a moderate level of concentration. The concentration is mitigated by the credit quality of the Top 5 tenants, each of which is a well-capitalized institutional-quality company. The remaining 82 tenants are diversified across industry sectors and collectively account for approximately 55.2% of total ABR.
Tenant Security Deposits:
The aggregate amount of tenant security deposits held by the Target Entities across the Portfolio is $4,283,000. These deposits will transfer to Fairwater as part of the entity-level acquisition. The Seller has represented in the PSA that all security deposits are held in accordance with the terms of the applicable leases and in compliance with applicable state law.
D. Current Property Management
The Portfolio is currently managed by Argyle Property Services LLC ("Argyle"), an affiliate of Greystone Meridian Capital LLC. The day-to-day portfolio management is overseen by Sean Kilpatrick, who serves as the portfolio manager for Argyle with respect to the 14 properties. Mr. Kilpatrick is named as one of the Seller's knowledge persons in the PSA, reflecting his day-to-day operational familiarity with the properties, tenants, and service providers.
Following the closing of the Transaction, property management will transition from Argyle to Fairwater Property Management LLC ("FPM"), a wholly owned subsidiary of Fairwater. The transition will be overseen by Leah Torrance, Senior Vice President of Operations at FPM. The PSA provides for a 90-day transition services agreement (the "TSA") pursuant to which Argyle will continue to provide property management, accounting, and reporting services during the transition period at a fee of $375,000 per month (an aggregate of $1,125,000 for the 90-day term). The TSA is intended to ensure continuity of tenant services, vendor relationships, and property-level operations during the transition to Fairwater's management platform.
IV. PSA Seller Representations and Warranties — Summary for Underwriting
This section provides a summary of the Seller's representations and warranties as currently set forth in the near-final draft of the PSA. The representations and warranties are subject to the disclosure schedules to be delivered by Seller at or prior to execution. C&H will provide the final, executed version of the PSA together with all exhibits and disclosure schedules to HGA and the carrier promptly upon execution.
A. Scope of Seller Representations
The PSA contains a comprehensive set of Seller representations and warranties organized across the following categories, each of which is briefly summarized below:
Organization, Authority, and Enforceability. Seller represents that GMP Fund III is a duly formed and validly existing Delaware limited partnership and that it has full power and authority to execute, deliver, and perform its obligations under the PSA. Seller further represents that the execution and delivery of the PSA and the consummation of the transactions contemplated thereby have been duly authorized by all necessary limited partnership and general partner action, and that the PSA constitutes the legal, valid, and binding obligation of Seller, enforceable in accordance with its terms.
No Conflicts. Seller represents that the execution, delivery, and performance of the PSA and the consummation of the Transaction do not and will not (a) violate or conflict with the organizational documents of Seller or any Target Entity, (b) result in a breach of, or constitute a default under, any material agreement to which Seller or any Target Entity is a party (other than the loan agreements, which require lender consent as separately addressed), or (c) violate any applicable law, rule, regulation, judgment, order, or decree.
Title to Membership Interests. Seller represents that it is the sole and exclusive owner of 100% of the membership interests in each of the 14 Target Entities, free and clear of all liens, claims, encumbrances, pledges, security interests, and other adverse claims of any kind, other than the pledges granted to the mortgage lenders under the applicable loan documents.
No Undisclosed Liabilities. Seller represents that, to its knowledge, no Target Entity has any material liabilities or obligations (whether absolute, accrued, contingent, or otherwise) other than (a) liabilities reflected or reserved against in the financial statements provided to Buyer, (b) liabilities arising under the leases, service contracts, and loan documents disclosed to Buyer, and (c) liabilities incurred in the ordinary course of business since the date of the most recent financial statements.
Accuracy of Financial Statements. Seller represents that the historical operating statements for each property (covering the three fiscal years ended December 31, 2021, December 31, 2022, and December 31, 2023, respectively) have been prepared in accordance with the Seller's accounting practices consistently applied and present fairly, in all material respects, the results of operations of each property for the periods covered.
Real Property Condition. Seller represents that, to its knowledge, the properties are in a condition consistent with the age and use of the improvements, subject to ordinary wear and tear, and that there are no material structural defects or building system failures of which Seller has knowledge that have not been disclosed to Buyer. This representation is qualified by the property condition assessment reports to be delivered by Seller's consultant as part of the due diligence process.
Compliance with Zoning and Land Use. Seller represents that, to its knowledge, the current use of each property complies in all material respects with applicable zoning ordinances, land use regulations, and building codes, and that no Target Entity has received any written notice of any violation thereof.
Environmental Compliance. Seller represents that, to its knowledge, each property is in compliance in all material respects with all applicable Environmental Laws (as defined in the PSA), and that there are no hazardous materials present at, on, under, or migrating to or from any property in quantities or conditions that require investigation, remediation, or reporting under applicable Environmental Laws, except as disclosed in the environmental disclosure schedule (Exhibit K to the PSA).
No Pending Condemnation. Seller represents that it has received no written notice of any pending or threatened condemnation, eminent domain, or similar proceeding affecting any property or any portion thereof.
Lease Representations. Seller represents that the rent roll attached as Exhibit H to the PSA is accurate and complete in all material respects as of the date specified therein; that no tenant is in material default under its lease and no landlord is in material default under any lease; that the tenant security deposits listed on the rent roll represent all security deposits held by the Target Entities; and that there are no side letters, amendments, modifications, or other agreements affecting the leases other than those set forth in the lease files delivered to Buyer.
No Material Adverse Changes. Seller represents that, since the date of the most recent financial statements, there has been no material adverse change in the financial condition, results of operations, or physical condition of any property or any Target Entity.
Tax Compliance. Seller represents that each Target Entity has timely filed all required federal, state, and local tax returns and has paid all taxes due and payable, and that there are no pending or threatened tax audits, assessments, or deficiencies with respect to any Target Entity.
Litigation. Seller represents that there are no pending or, to Seller's knowledge, threatened lawsuits, claims, actions, arbitrations, or governmental investigations against or affecting any Target Entity or any property, except as set forth on the litigation disclosure schedule (Exhibit J to the PSA).
Employees. Seller represents that no Target Entity has any employees. All property management, leasing, maintenance, and related services are provided by third-party contractors, principally Argyle Property Services LLC.
Insurance. Seller represents that all insurance policies required under the loan documents and the leases are currently in full force and effect, that all premiums thereon are current, and that there are no pending insurance claims of a material nature.
Loan Representations. Seller represents that the loan document lists delivered to Buyer are accurate and complete, that no Target Entity is in default under any loan agreement, that all payments of principal and interest under the loan agreements are current, and that no lender has delivered any notice of default or notice of intention to accelerate.
Broker Claims. Seller represents that no broker, finder, or other intermediary is entitled to any commission, fee, or other compensation in connection with the Transaction, except for the disclosed advisors retained by Seller.
B. Seller's Knowledge Qualifiers
A number of the Seller's representations in the PSA are qualified by the phrase "to Seller's knowledge" or similar formulations. For purposes of the PSA, "Seller's knowledge" means the actual knowledge, without independent investigation or inquiry, of the following individuals:
• Victor Lansdell, Co-Founder and Managing Partner, Greystone Meridian Capital LLC (General Partner of GMP Fund III)
• Elise Rathborne, Co-Founder and Managing Partner, Greystone Meridian Capital LLC (General Partner of GMP Fund III)
• Sean Kilpatrick, Portfolio Manager, Argyle Property Services LLC
C&H notes for the underwriter's attention that the use of knowledge qualifiers is customary and typical in real estate portfolio transactions of this nature and size. Mr. Lansdell and Ms. Rathborne, as co-managing partners of the fund's general partner, have executive-level oversight of the Portfolio, while Mr. Kilpatrick, as the on-the-ground portfolio manager responsible for day-to-day operations, has the most direct operational knowledge of property conditions, tenant matters, and service provider relationships. The inclusion of Mr. Kilpatrick as a knowledge person provides meaningful comfort that the knowledge qualification is not unduly limiting.
C. Survival Periods
The representations and warranties of the Seller survive the closing of the Transaction for the following periods:
• General Representations: Eighteen (18) months from the closing date (anticipated expiration approximately November 30, 2025, assuming a May 31, 2024 closing).
• Tax Representations: Thirty-six (36) months from the closing date (anticipated expiration approximately May 31, 2027).
• Fundamental Representations (organization, authority, title to membership interests, and broker): Full survival through the applicable statute of limitations.
These survival periods are consistent with market norms for transactions of this type and size.
D. Indemnification Structure
The PSA establishes the following indemnification framework for breaches of the Seller's representations and warranties:
• General Representation Cap: $55,000,000 (5% of the purchase price)
• Fundamental Representation Cap: $110,000,000 (10% of the purchase price)
• Basket (Tipping): $5,500,000 (0.5% of the purchase price). The basket operates as a "tipping" basket, meaning that once the aggregate amount of qualifying losses exceeds the basket threshold, the Seller is liable for all losses from the first dollar — not merely the excess above the basket.
• De Minimis Threshold: $275,000 per individual claim. Individual claims for losses below the de minimis threshold are excluded from the basket calculation and from Seller's indemnification obligations.
• Indemnity Escrow: $16,500,000 (1.5% of the purchase price), to be held in escrow for 18 months following the closing date. The escrow agent is Commonwealth National Title Insurance Company. The escrow serves as a source of immediate recourse for indemnification claims during the survival period, although Seller's indemnification obligations are not limited to the escrow amount (subject to the caps described above).
The indemnification structure provides a meaningful, though time-limited, contractual backstop for Buyer. The R&W Policy is intended to supplement the contractual indemnification by providing additional coverage, longer duration (particularly with respect to fundamental and tax representations), and recourse to a rated insurance carrier rather than a liquidating fund vehicle.
V. Due Diligence Overview
Note: Due diligence is in progress as of the date of this memorandum. C&H expects to complete all diligence workstreams prior to the Due Diligence Period expiration on April 15, 2024. Supplemental diligence updates will be provided to HGA and the carrier as they become available. C&H anticipates delivering a comprehensive due diligence summary memorandum on or about April 10, 2024.
A. Title and Survey
Title Insurance. Commonwealth National Title Insurance Company ("CNTIC") is serving as the title insurer for the Transaction. The title officer is Kenneth Stanhope, Senior Vice President, and national counsel is Virginia Moorehead, Assistant Vice President. CNTIC will issue an ALTA Owner's Policy (2021 form) for each of the 14 properties, with aggregate insured amounts totaling $1,100,000,000, allocated among the properties in accordance with a purchase price allocation schedule to be agreed between Buyer and Seller prior to closing.
Title commitments have been ordered for all 14 properties, and preliminary title work is underway. C&H is reviewing all vesting deeds, recorded encumbrances, easements, restrictive covenants, and other matters of record disclosed in the preliminary title reports. To date, C&H has not identified any material title defects. The title objection deadline under the PSA is March 29, 2024 (30 days from the anticipated PSA execution date), and Seller has a 15-business-day cure period from receipt of any title objection notice. The PSA designates the following as mandatory cure items for which Seller must use commercially reasonable efforts to cure: monetary liens, mechanic's liens, delinquent real property taxes, judgments against the Target Entities, and any matters first appearing of record after the effective date of the applicable title commitment.
Surveys. ALTA/NSPS Land Title Surveys (2021 Minimum Standard Detail Requirements, including optional Table A items 1, 2, 3, 4, 6(a), 6(b), 7(a), 7(b)(1), 7(c), 8, 9, 10, 11(a), 13, 14, 16, 17, 18, and 19) have been ordered for all 14 properties from Meridian Land Surveying, Inc. The lead surveyor is Daniel Caulfield, PLS, PE. Surveys are expected to be completed and certified on or before March 15, 2024, and will be furnished to CNTIC and to HGA upon receipt.
B. Environmental. Phase I Environmental Site Assessments. Phase I ESAs have been ordered for all 14 properties from Trident Environmental Group LLC. The lead environmental scientist on the engagement is Rachel Kwan, Senior Environmental Scientist. The Phase I ESAs are being conducted in accordance with ASTM Standard Practice E 1527-21.
Based on preliminary desktop reviews and available regulatory database search reports, the majority of the properties in the Portfolio are expected to receive clean Phase I ESAs with no recognized environmental conditions ("RECs"), controlled recognized environmental conditions ("CRECs"), or historical recognized environmental conditions ("HRECs").
C&H notes, however, that two properties — the Westlake Distribution Hub (Houston, TX) and Lakeland Crossings Industrial (Lakeland, FL) — may present de minimis RECs based on prior historical uses of the sites. The Westlake property is situated in an area with a history of industrial and petrochemical activity, and the Lakeland property's prior use included a small-scale agricultural chemical storage operation. In both cases, preliminary indications suggest that any RECs identified are likely to be de minimis in nature and are not expected to require Phase II ESA investigation or remediation action. Final Phase I ESA reports will be provided to HGA and the carrier upon receipt from Trident Environmental Group LLC.
The environmental representations in the PSA cover compliance with Environmental Laws and disclosure of known environmental conditions, providing a contractual backstop to the Phase I ESA findings. The treatment of environmental coverage under the R&W Policy is addressed in Section VI.F and Section VII.A below.
C. Property Condition Assessments
Property Condition Assessments ("PCAs") have been ordered for all 14 properties from Rampart Building Sciences, Inc. The lead engineer on the engagement is Alan Westbrook, PE. The PCAs are being conducted in accordance with ASTM Standard Practice E 2018-15 and will include assessments of building structure, building envelope, mechanical systems (HVAC, plumbing, electrical, fire protection), roof condition, site improvements, and ADA accessibility.
PCA results are pending and will be provided to HGA and the carrier upon receipt. C&H notes that the four office properties, which were constructed between 2016 and 2019, may present higher levels of deferred maintenance relative to the logistics properties, which were constructed between 2019 and 2021. Any material immediate repair cost items identified by the PCAs will be quantified and addressed through a purchase price credit, escrow holdback, or PSA amendment, as appropriate.
D. Lease Review
C&H is conducting a comprehensive review of all 87 leases across the Portfolio. The lease review encompasses the following key focus areas:
• Tenant Creditworthiness: Credit analysis of major tenants (ABR ≥ $1,500,000 per annum), including review of available financial statements, credit ratings, and publicly available financial information.
• Renewal and Expansion Options: Identification and cataloguing of all tenant renewal options, expansion rights, and rights to contract space, including the terms and conditions applicable to each.
• Right of First Offer / Right of First Refusal (ROFO/ROFR) Provisions: Identification of any tenant ROFO or ROFR rights that may be triggered by the Transaction or by subsequent dispositions.
• Co-Tenancy and Exclusivity Clauses: Review for any co-tenancy provisions (particularly in multi-tenant logistics and office properties) that could result in rent reductions or termination rights in the event of co-tenant departures.
• Assignment and Subletting Restrictions: Confirmation that the transfer of membership interests in the Target Entities does not constitute an "assignment" or "transfer" requiring tenant consent under the leases.
• Landlord Obligations and Capital Expenditure Commitments: Identification of outstanding tenant improvement allowances, free rent periods, landlord construction obligations, and committed capital expenditures.
As noted in Section III.C above, the Top 5 tenants represent approximately 44.8% of total ABR ($33,446,000 of $74,800,000). C&H is devoting particular attention to the lease review for these tenants.
The PSA includes the following lease-related closing conditions:
• Estoppel Certificates: Seller is required to deliver tenant estoppel certificates covering at least 80% of in-place base rent ($59,840,000) and from every tenant occupying 25,000 RSF or more (each, a "Major Tenant"). The estoppel delivery deadline is May 15, 2024.
• Subordination, Non-Disturbance, and Attornment Agreements (SNDAs): Buyer is required to deliver SNDAs to all Major Tenants (defined for SNDA purposes as tenants with ABR of $1,500,000 or more per annum). The SNDA delivery deadline is May 15, 2024.
E. Entity-Level Diligence
C&H is conducting a comprehensive review of the organizational documents and corporate records of each of the 14 Target Entities and of GMP Fund III. The entity-level diligence includes review of the following:
• Certificates of formation and all amendments thereto
• Operating agreements and all amendments thereto
• Certificates of good standing from the Delaware Secretary of State (for each Target Entity and GMP Fund III) and from the Secretary of State of each state in which the applicable Target Entity is registered to do business
• UCC financing statement searches in Delaware and in the applicable state and county of each property
• Judgment and lien searches against each Target Entity
• Litigation searches against each Target Entity
• Review of SPE separateness covenants and compliance therewith
Each Target Entity is organized as a single-purpose Delaware limited liability company and operates under an operating agreement that contains standard separateness covenants, including restrictions on (a) commingling assets with any other entity, (b) incurring indebtedness other than the applicable mortgage loan, (c) maintaining separate books and records and bank accounts, and (d) holding itself out as a separate and distinct entity. No material entity-level issues have been identified to date.
F. Loan / Debt Assumption Diligence
As described in Section II.D above, the Transaction involves the assumption by Fairwater of three existing mortgage loan facilities with an aggregate outstanding principal balance of $612,000,000. Each facility contains a change of control provision requiring the prior written consent of the applicable lender to the transfer of the membership interests in the Target Entities. Lender consent is a condition precedent to closing under the PSA.
The consent process is underway. C&H, in coordination with Fairwater's treasury department and Ashford Prewitt LLP, has submitted preliminary consent applications to each of the three lenders and their respective counsel. The following table summarizes the consent fees and lender counsel:
The aggregate consent fees of $1,825,625 are to be split equally between Buyer and Seller pursuant to the PSA (each party paying approximately $912,813).
As a condition of the lender consents, Fairwater will replace GMP Fund III as the carve-out guarantor under each of the three loan facilities. The guarantor financial covenants applicable to Fairwater as replacement guarantor include (a) a minimum tangible net worth of $500,000,000 and (b) minimum liquid assets of $50,000,000. Fairwater currently satisfies both of these thresholds by a comfortable margin.
The lender consent deadline under the PSA is May 24, 2024, which is seven days prior to the scheduled closing date of May 31, 2024. If any lender fails to deliver its consent by the lender consent deadline, the closing date may be extended by up to 30 days to allow additional time for the consent to be obtained. If lender consent is ultimately not obtained, the Transaction will not close, and the PSA provides for a return of Buyer's deposits (less the hard additional deposit, the treatment of which is subject to negotiation in the final PSA).
C&H notes for the underwriter's attention that lender consent is a closing condition. Accordingly, if consent is not obtained, the Transaction will not close and the R&W Policy will not be triggered. Once the lender consents are obtained and closing occurs, the ongoing accuracy of the Seller's representations regarding the loan documents (including that the loan document lists are accurate and complete, that no Target Entity is in default, and that all payments are current) becomes the relevant coverage issue under the R&W Policy.
G. Zoning and Land Use
C&H is coordinating with local counsel in each of the five states to obtain zoning confirmation letters or zoning compliance certificates for all 14 properties. The local counsel retained in each jurisdiction are as follows:
• Texas: Breckenridge Osgood LLP (lead: James Breckenridge)
• Georgia: Talmadge Beaumont LLP (lead: Catherine Beaumont)
• North Carolina: Haversham Cole PLLC (lead: Marshall Haversham)
• Tennessee: Ellsworth Ridley LLP (lead: Diane Ellsworth)
• Florida: Palmetto Strauss PA (lead: Roberto Strauss)
Local counsel will confirm that each property's current use (whether logistics/warehouse or office) is a permitted use under the applicable zoning classification, that no variances or special use permits are required for the current operations, and that no pending or threatened rezoning actions affect the properties. Results of the zoning diligence will be reported to HGA and the carrier upon completion.
H. Tax Diligence
Tax diligence for the Transaction is being analyzed by Sylvia Hartwell of C&H's Tax Practice Group, in coordination with Naomi Ikeda, CPA, of Ashford Prewitt LLP. The key tax diligence areas under review include:
• REIT Qualification Impact: Analysis of the impact of the Acquisition on Fairwater's compliance with the asset and income tests applicable to REITs under Sections 856 through 860 of the Internal Revenue Code. Preliminary analysis confirms that the Portfolio assets and income streams are qualifying real estate assets and rents from real property, respectively, and that the Acquisition does not present a risk to Fairwater's REIT qualification.
• Transfer Tax Exposure: Because the Transaction is structured as an entity-level acquisition (transfer of membership interests rather than direct conveyance of real property), the applicability of real property transfer taxes varies by state. Controlling-interest transfer taxes may apply in certain jurisdictions. The estimated aggregate transfer tax exposure across the five states is approximately $3,850,000, allocated as follows:
• Georgia: approximately $1,250,000
• Texas: $0 (Texas does not impose a transfer tax on the transfer of controlling interests in entities holding real property)
• Florida: approximately $1,680,000
• Tennessee: approximately $740,000
• North Carolina: approximately $180,000
Transfer taxes are to be split 50/50 between Buyer and Seller pursuant to the PSA.
• Section 1060 Purchase Price Allocation: Ashford Prewitt is preparing a purchase price allocation among the 14 properties and associated tangible and intangible assets in accordance with Section 1060 of the Internal Revenue Code. The allocation will be agreed between Buyer and Seller prior to closing and will be binding on both parties for federal, state, and local tax reporting purposes.
• Depreciation Recapture: Analysis of potential depreciation recapture exposure resulting from the step-up in tax basis associated with the entity-level transfer.
• State Income and Franchise Tax Filing Obligations: Review of state income and franchise tax filing obligations of the Target Entities in each of the five states and assessment of any historical compliance issues.
No material tax risks have been identified to date. C&H and Ashford Prewitt will provide a supplemental tax diligence memorandum to HGA and the carrier if any material issues arise during the remaining diligence period.
I. Insurance Review