ATTORNEY-CLIENT PRIVILEGED & CONFIDENTIAL WORK PRODUCT — CALDERWOOD & HARKNESS LLP
DRAFT — IRS FORM 8594
ASSET ACQUISITION STATEMENT UNDER SECTION 1060
OF THE INTERNAL REVENUE CODE
Prepared by
Calderwood & Harkness LLP Tax Department 1700 K Street NW, Suite 900 Washington, DC 20006
Sylvia Hartwell Specialist Partner, Tax Tel: (202) 555-4100
Email: shartwell@calderwoodharkness.com
Prepared in Coordination with
Ashford Prewitt LLP Certified Public Accountants & Advisors 1 South Street, Suite 2700 Baltimore, MD 21202
Martin Ashford, CPA — Engagement Partner Naomi Ikeda, CPA — Tax Partner Tel: (410) 555-7800
Date of Draft: June 2024
Matter Number: 1036-00004
Client: Fairwater Real Estate Investment Trust EIN: 52-2198437
STATUS NOTATION
DRAFT — For review and discussion purposes only. Subject to final confirmation of closing adjustments and post-closing proration true-up. This draft reflects the agreed purchase price allocation per Exhibit K to the Purchase and Sale Agreement dated February 28, 2024, by and between Greystone Meridian Partners Fund III, L.P. (as Seller) and Fairwater Real Estate Investment Trust (as Buyer). This Form 8594 is to be filed with Fairwater's federal income tax return for the taxable year ending December 31, 2024. All figures remain subject to final reconciliation and confirmation by Ashford Prewitt LLP.
CONFIDENTIALITY LEGEND: This document and all attachments hereto constitute attorney-client privileged and confidential work product of Calderwood & Harkness LLP prepared at the direction of and for the sole benefit of Fairwater Real Estate Investment Trust. This document is not intended for distribution to any third party without the prior written consent of Calderwood & Harkness LLP and Fairwater Real Estate Investment Trust. Unauthorized disclosure, copying, or distribution is strictly prohibited.
TRANSMITTAL MEMORANDUM
MEMORANDUM
TO: Naomi Ikeda, CPA, Tax Partner, Ashford Prewitt LLP
CC: Douglas Fairchild, Partner, Calderwood & Harkness LLP David Elgin Park, General Counsel, Fairwater Real Estate Investment Trust Patricia Sung-Calloway, CFO, Fairwater Real Estate Investment Trust
FROM: Sylvia Hartwell, Specialist Partner, Tax, Calderwood & Harkness LLP
DATE: June 2024
RE: Draft IRS Form 8594 — Asset Acquisition Statement Under Section 1060 — Fairwater REIT Acquisition of GMP Fund III Portfolio (14 Properties; Matter No. 1036-00004)
Dear Naomi:
Enclosed for your review is the draft IRS Form 8594 (Asset Acquisition Statement Under Section 1060) required to be filed in connection with Fairwater Real Estate Investment Trust's ("Fairwater" or "Buyer") acquisition of one hundred percent (100%) of the membership interests in fourteen (14) single-purpose Delaware limited liability companies (collectively, the "Target Entities") from Greystone Meridian Partners Fund III, L.P. ("GMP Fund III" or "Seller"). The acquisition closed on June 6, 2024 (the "Closing Date"), pursuant to the terms of that certain Purchase and Sale Agreement dated February 28, 2024 (the "PSA").
Transaction Structure and Tax Treatment. Although the transaction was structured as an entity-level purchase of membership interests in the Target Entities, the acquisition is treated as an asset acquisition for federal income tax purposes under the applicable "check-the-box" regulations set forth in Treasury Regulations §§ 301.7701-1 through 301.7701-3. Each of the fourteen Target Entities is a single-member Delaware limited liability company that has not elected to be classified as a corporation for federal tax purposes. Following Fairwater's acquisition of 100% of the membership interests in each Target Entity, each Target Entity became a disregarded entity for federal income tax purposes, with Fairwater as the sole regarded owner. As a result, the transaction is properly treated as a direct acquisition by Fairwater of the underlying assets held by the Target Entities — principally, fourteen real properties comprising approximately 5,224,000 rentable square feet of logistics and office space located across five states in the southeastern United States.
Allocation Basis. The purchase price allocation reflected in this draft Form 8594 is based on the agreed allocation schedule set forth in Exhibit K to the PSA. That allocation schedule was developed from appraised values determined by Stonebridge Valuation Advisors, LLC ("Stonebridge"), under the direction of Maureen Alcott, MAI, who prepared individual appraisal reports for each of the fourteen properties. Both Buyer and Seller negotiated and agreed to the Exhibit K allocation as a binding element of the PSA. Pursuant to Section 10.4 of the PSA, each party is obligated to file its respective IRS Form 8594 and all federal, state, and local income tax returns on a basis consistent with the agreed allocation.
Seller's Corresponding Filing. Because the Form 8594 must be filed by both Buyer and Seller, Seller's accountants at Caldwell Murray & Oakes LLP (William Oakes, CPA, Engagement Partner) should prepare GMP Fund III's corresponding Form 8594 using the identical agreed allocation reflected in Exhibit K. We would appreciate your assistance in confirming with Mr. Oakes that Seller intends to file on a consistent basis, as required by the PSA.
Review Request. We request that Ashford Prewitt review and confirm all figures set forth in the enclosed draft for inclusion in Fairwater's 2024 federal income tax return. In particular, we have identified a number of open items requiring your team's input, which are detailed in the "Notes and Open Items for Ashford Prewitt Review" section of this memorandum. Your prompt attention to these items will facilitate timely completion of the final Form 8594 for filing.
Adjusted Purchase Price. The aggregate purchase price set forth in the PSA was $1,100,000,000 (One Billion One Hundred Million Dollars). At closing, the purchase price was reduced by a $1,070,000 credit for deferred physical condition assessment ("PCA") repairs, as negotiated between the parties and reflected in the closing settlement statements. This yielded an adjusted total consideration of $1,098,930,000 for initial allocation purposes. Subsequently, a post-closing proration true-up in the amount of $347,218 (a net credit to Buyer) was agreed upon by the parties on August 28, 2024, and paid by Seller to Buyer on September 5, 2024, pursuant to the terms of Section 8.3(b) of the PSA. This post-closing true-up amount further adjusts the total consideration for Form 8594 purposes. The draft enclosed reflects the adjusted purchase price of $1,098,930,000; the further reduction of $347,218 will be incorporated upon confirmation of final figures by Ashford Prewitt. We note that the characterization of the $347,218 true-up — whether as a purchase price adjustment or a separate proration settlement item — should be confirmed for Section 1060 purposes.
Please do not hesitate to contact me directly at (202) 555-4100 or shartwell@calderwoodharkness.com with any questions or comments regarding this draft. We look forward to your review.
Very truly yours,
Sylvia Hartwell Specialist Partner, Tax Calderwood & Harkness LLP
Enclosures: Draft IRS Form 8594 and supporting schedules
DRAFT — IRS FORM 8594
ASSET ACQUISITION STATEMENT UNDER SECTION 1060
(Prepared in the format of IRS Form 8594, Rev. November 2021) (Department of the Treasury — Internal Revenue Service)
PART I — GENERAL INFORMATION
Line 1 — Name of Transferee (Buyer) and Identifying Number
Name: Fairwater Real Estate Investment Trust
Employer Identification Number (EIN): 52-2198437
Address: 7200 Chesapeake Parkway, Suite 1100, Columbia, Maryland 21044
Entity Type: Real Estate Investment Trust (REIT) organized under the laws of the State of Maryland
Contact Person: Patricia Sung-Calloway, Chief Financial Officer; Tel: (410) 555-3200
Fairwater Real Estate Investment Trust is a publicly traded REIT listed on the New York Stock Exchange (ticker symbol: FWR) that acquires, owns, and operates logistics and office properties throughout the southeastern United States. Fairwater has elected to be taxed as a real estate investment trust under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code"), effective for its taxable year ended December 31, 2003, and has continuously maintained its REIT qualification since that date. Fairwater files its federal income tax returns on a calendar-year basis with the Internal Revenue Service Center in Ogden, Utah.
Line 2 — Name of Transferor (Seller) and Identifying Number
Name: Greystone Meridian Partners Fund III, L.P.
Employer Identification Number (EIN): 83-1647205
Address: 3300 Peachtree Road NE, Suite 2200, Atlanta, Georgia 30326
Entity Type: Delaware limited partnership
Registered Agent: Cobalt Ridge Technologies, 1209 Orange Street, Wilmington, Delaware 19801
General Partner: Greystone Meridian Capital LLC (EIN: 83-1520984), a Delaware limited liability company, with managing partners Victor Lansdell and Elise Rathborne
Contact Person for Tax Matters: William Oakes, CPA, Caldwell Murray & Oakes LLP, 3344 Peachtree Road NE, Suite 1800, Atlanta, Georgia 30326; Tel: (404) 555-6100
Greystone Meridian Partners Fund III, L.P. is a closed-end private equity real estate fund with a 2018 vintage year and aggregate committed capital of approximately $2.4 billion. The fund is managed by Greystone Meridian Capital LLC, an Atlanta-based real estate investment management firm. GMP Fund III acquired the fourteen properties comprising the portfolio between 2019 and 2021 at an aggregate cost basis of approximately $845,000,000. GMP Fund III is classified as a partnership for federal income tax purposes.
Line 3 — Date of Sale / Acquisition
Closing Date: June 6, 2024
The transaction closed on June 6, 2024, at the offices of Calderwood & Harkness LLP in Washington, DC, through an escrow closing conducted by Monument Title & Escrow Company, 1825 Connecticut Avenue NW, Suite 600, Washington, DC 20009 (Settlement Agent: Catherine Langford, Esq.). The effective date of the acquisition for purposes of proration adjustments was 12:01 a.m. Eastern Time on June 6, 2024, as specified in Section 8.3(a) of the PSA.
Line 4 — Total Sales Price (Total Consideration)
Aggregate Purchase Price (per PSA): $1,100,000,000
Less: PCA Repair Credit at Closing: ($1,070,000)
Adjusted Total Consideration at Closing: $1,098,930,000
Note Regarding Post-Closing Proration True-Up: The adjusted purchase price is subject to further adjustment for the post-closing proration true-up in the amount of $347,218, which represents a net credit to Buyer. The true-up was agreed upon by the parties on August 28, 2024, and paid by Seller to Buyer on September 5, 2024, in accordance with Section 8.3(b) of the PSA. Pending confirmation of the proper tax treatment of this amount (i.e., whether it constitutes a purchase price adjustment or a separate proration settlement), the final total consideration for purposes of the Form 8594 allocation is tentatively calculated as follows:
Final Total Consideration (tentative): $1,098,930,000 − $347,218 = $1,098,582,782
This figure is to be confirmed by Ashford Prewitt LLP prior to filing. All references to "total consideration" or "adjusted consideration" in this draft Form 8594 refer to the $1,098,930,000 figure unless otherwise specified, with the understanding that a further adjustment of $347,218 may be applied upon final confirmation.
Line 5 — Composition of Total Consideration
The total consideration paid or delivered by Buyer to Seller in connection with the acquisition consists of the following components:
a. Cash at Closing:
The cash portion of the purchase price was $488,000,000, as set forth in Section 2.2 of the PSA, representing the difference between the aggregate purchase price of $1,100,000,000 and the assumed debt of $612,000,000. At closing, the cash amount was reduced by the PCA repair credit of $1,070,000, yielding net cash at closing of $486,930,000. This amount was delivered by wire transfer of immediately available funds to the escrow account maintained by Monument Title & Escrow Company at Halcyon Savings Bank on June 6, 2024.
b. Assumed Debt:
In connection with the acquisition, Buyer assumed (or took title to properties subject to) aggregate outstanding mortgage indebtedness in the principal amount of $612,000,000, representing the outstanding principal balances as of February 28, 2024 (the date of the PSA), as follows:
The assumed debt constitutes part of the total consideration for purposes of the allocation under Section 1060, consistent with Treasury Regulations § 1.1060-1(c)(1). Lender consents for the assumption or transfer were obtained from Veltrano Capital Lending Corp. (dated May 17, 2024), Sycamore Life Insurance Company (dated May 22, 2024), and Pinnacle Federal Bank, N.A. (dated June 4, 2024). Additional details regarding the assumed debt are set forth in Attachment E hereto.
c. Other Consideration:
None. No stock, promissory notes, contingent consideration, earnout payments, or other non-cash consideration was paid or payable by Buyer to Seller in connection with the transaction. The purchase price is fixed and determinable, subject only to the post-closing proration true-up described above.
d. Note on Proration Adjustments:
Net proration adjustments at closing, including adjustments for rents, real estate taxes, insurance premiums, utility charges, service contracts, and other operating items, are reflected in the closing settlement statements (Attachment D). The post-closing proration true-up of $347,218 (net credit to Buyer), agreed August 28, 2024, and paid September 5, 2024, may further affect the total consideration allocable under Section 1060. The treatment of proration adjustments for purposes of the Section 1060 allocation is to be confirmed by Ashford Prewitt LLP.
Line 6 — Were the Transferee and Transferor Related?
Answer: No.
Fairwater Real Estate Investment Trust and Greystone Meridian Partners Fund III, L.P. are unrelated parties within the meaning of Section 267(b) and Section 707(b) of the Code. No direct or indirect ownership relationship, common control, or familial relationship exists between Buyer and Seller or their respective principals, officers, directors, partners, or members. The transaction was negotiated at arm's length between sophisticated, independently represented parties, and the purchase price was determined through a competitive marketing process conducted by Druvex Capital Markets (Michael Harrington, Executive Vice President) on behalf of Seller.
Line 7 — Was a Non-Compete or Similar Agreement Entered Into?
Answer: No.
No covenant not to compete, consulting agreement, management transition agreement, or other similar restrictive covenant or compensatory arrangement was entered into between Buyer and Seller (or any affiliate, principal, or employee of Seller) in connection with the transaction. No portion of the purchase price is allocable to any such agreement. The PSA does not contain any non-compete or similar provision.
PART II — ASSETS TRANSFERRED
ALLOCATION OF CONSIDERATION UNDER SECTION 1060
Methodology and Legal Framework
The allocation of the total consideration among the acquired assets follows the residual method prescribed by Section 1060 of the Internal Revenue Code and the regulations thereunder at Treasury Regulations § 1.1060-1. Under the residual method, the total consideration is allocated among the acquired assets in the same manner as amounts are allocated to assets under Section 338(b)(5) and Treasury Regulations § 1.338-6. Specifically, the total consideration is allocated among seven classes of assets, in order of priority, beginning with Class I assets and proceeding through Class VII assets. The consideration is first allocated to Class I assets (cash and cash equivalents) in an amount equal to their fair market value, then to Class II assets, and so on through the asset classes, with any residual amount allocated to Class VII assets (goodwill and going concern value).
The allocation set forth below is consistent with the agreed purchase price allocation schedule set forth in Exhibit K to the PSA, which was developed based on appraised values determined by Stonebridge Valuation Advisors, LLC, under the direction of Maureen Alcott, MAI, MRICS, a state-certified general real estate appraiser. The appraisals were prepared as of a valuation date of December 31, 2023, and were relied upon by both Buyer and Seller in negotiating the Exhibit K allocation. Both Buyer and Seller are contractually bound to file consistent Forms 8594 per Section 10.4 of the PSA, and neither party may take a position on any tax return that is inconsistent with the agreed allocation unless required to do so by a final determination of the Internal Revenue Service or a court of competent jurisdiction.
Asset Class I — Cash and Cash Equivalents.
Description: Cash held in Target Entity operating bank accounts maintained at Magnolia Commerce Bank, N.A. (225 Peachtree Street NE, Suite 100, Atlanta, Georgia 30303). Each of the fourteen Target Entities maintained a separate operating account at Magnolia Commerce Bank for the collection of rents and payment of operating expenses. Cash balances in these accounts were transferred to Buyer as part of the membership interest acquisition.
Allocated Amount: To be confirmed by Ashford Prewitt LLP based on closing-date bank statements obtained from Magnolia Commerce Bank, N.A. (Linda Prescott, Vice President, Commercial Banking; Tel: (404) 555-8200).
Estimated Amount: Nominal. The Target Entities were managed as special-purpose vehicles with cash sweeps to GMP Fund III's master operating account. Operating cash balances in the fourteen accounts at closing are expected to be de minimis in the aggregate, likely below $100,000 in total across all accounts.
Asset Class II — Actively Traded Personal Property, Certificates of Deposit, and U.S. Government Securities.
Description: None. No actively traded personal property (within the meaning of Section 1092(d)(1) of the Code), certificates of deposit, foreign currency, or U.S. government securities were held by any Target Entity at the time of the acquisition.
Allocated Amount: $0
Asset Class III — Accounts Receivable, Mortgages, and Similar Items (Marked to Market).
Description: This class includes the following categories of assets held by the Target Entities as of the Closing Date:
(a) Tenant Accounts Receivable (Rents Receivable). Amounts due and owing from tenants under their respective leases for base rent, additional rent (including tenant reimbursements for common area maintenance, operating expenses, and real estate taxes), and other lease charges. As of the Closing Date, tenant receivables were outstanding from various tenants across the fourteen-property portfolio.
(b) Prepaid Expenses. Prepaid insurance premiums, prepaid real estate taxes, and other prepaid items held by the Target Entities as of the Closing Date, to the extent such items constitute assets transferred as part of the acquisition.
(c) Tenant Security Deposits. Cash security deposits held by the Target Entities in segregated accounts at Magnolia Commerce Bank, N.A. on behalf of tenants under their respective leases. The aggregate amount of tenant security deposits transferred in connection with the acquisition was $4,283,000, representing deposits held under 87 leases across the portfolio. Buyer assumed the obligation to hold and, where applicable, return such deposits to tenants in accordance with the terms of the underlying leases and applicable state law.
(d) CAM/OpEx Reconciliation Receivables. Amounts representing estimated common area maintenance and operating expense reconciliation receivables, based on calendar year 2023 reconciliation estimates. An estimated holdback reserve of $1,850,000 was established at closing in connection with the pending completion of the 2023 tenant reconciliation process. The final reconciliation amounts are expected to be determined by October 2024.
(e) Accrued Rents. Straight-line rent receivables and accrued rental income recognized under GAAP but not yet billed or collected as of the Closing Date.
Allocated Amount: To be confirmed by Ashford Prewitt LLP. Under the Section 1060 methodology, accounts receivable and similar items in Class III are allocated at their fair market value, which generally approximates face value for receivables that are current and collectible. The primary components subject to confirmation are:
Ashford Prewitt should coordinate with Fairwater's property management team to obtain final closing-date receivable balances and confirm the fair market value of each component for purposes of the Class III allocation.
Asset Class IV — Inventory.
Description: Not applicable. None of the fourteen Target Entities held any inventory (within the meaning of Section 1221(a)(1) of the Code) at the time of the acquisition, nor were any of the Target Entities engaged in any trade or business involving the sale or disposition of inventory.
Allocated Amount: $0
Asset Class V — All Assets Not in Classes I, II, III, IV, VI, or VII.
Description: This class encompasses the principal assets acquired in the transaction — namely, real property (land and improvements), tangible personal property (furniture, fixtures, and equipment), and associated property-level intangibles (other than Section 197 intangibles allocated to Class VI). This is the primary allocation class for the transaction, and substantially all of the total consideration is allocable to Class V assets.
The fourteen properties comprising the portfolio consist of ten logistics/distribution facilities and four office buildings, with an aggregate rentable square footage of approximately 5,224,000 square feet. The properties are located across five states in the southeastern United States: Georgia (four properties), Texas (three properties), Florida (three properties), Tennessee (three properties), and North Carolina (one property).
Property-by-Property Allocation Table
The following table sets forth the property-by-property allocation of the total consideration to Class V assets, based on the agreed allocation schedule in Exhibit K to the PSA. The Exhibit K allocation was derived from individual appraised values determined by Stonebridge Valuation Advisors, LLC (Maureen Alcott, MAI), as of a valuation date of December 31, 2023.
Total Portfolio Rentable square Footage: 5,224,000 SF
Portfolio Composition:
• Logistics/Distribution: 4,373,000 RSF (83.7% of total portfolio)
• Office: 851,000 RSF (16.3% of total portfolio)
Geographic Distribution:
• Georgia: 4 properties (Fairfield I, Fairfield II, Buckhead Place, Peachtree Corners)
• Texas: 3 properties (Westlake, Katy Freeway, Alliance)
• Florida: 3 properties (Lakeland Crossings, Southport, Brickell Bay)
• Tennessee: 3 properties (Murfreesboro, Cool Springs, Mount Juliet)
• North Carolina: 1 property (SouthPark)
Sub-Allocation Requirement. Within each property's allocated value, the consideration must be further sub-allocated among the following categories for purposes of determining the applicable depreciation and cost recovery periods under Section 168 of the Code:
(a) Land. The fair market value of the underlying land at each property. Land is a non-depreciable asset and receives no cost recovery deduction under Section 168.
(b) Building and Improvements (Depreciable Real Property — Section 1250 Property). The fair market value of the building shell, structural components, and other improvements that constitute Section 1250 property. Nonresidential real property is depreciable over 39 years under the straight-line method pursuant to Section 168(b)(3)(A) and (c)(1).
(c) Land Improvements (Site Work, Parking, Landscaping). The fair market value of site improvements, including parking lots and surfaces, sidewalks, curbing, storm drainage, fencing, retaining walls, exterior lighting, and landscaping. Land improvements generally qualify as 15-year MACRS property under Section 168(e)(3)(D)(i).
(d) Tangible Personal Property (Furniture, Fixtures, and Equipment — Section 1245 Property). The fair market value of furniture, fixtures, equipment, and other tangible personal property that constitutes Section 1245 property. Such property generally qualifies for 5-year or 7-year MACRS depreciation, and may be eligible for bonus depreciation under Section 168(k) (subject to the phase-down schedule for property placed in service after December 31, 2022) or Section 179 expensing, to the extent applicable.
The sub-allocations described above are to be prepared by Ashford Prewitt LLP based on the detailed appraisal reports from Stonebridge Valuation Advisors, LLC, which include separate valuations for land and improvements at each property. If Fairwater elects to commission cost segregation studies for any or all of the acquired properties, the results of such studies should be coordinated with the sub-allocation analysis and incorporated into the final Form 8594 prior to filing. Naomi Ikeda at Ashford Prewitt should coordinate with Stonebridge and any cost segregation firm engaged by Fairwater to ensure consistency between the appraisal values, cost segregation studies, and the reported allocations.
PCA Repair Credit Allocation. The PCA repair credit of $1,070,000 was negotiated by the parties based on identified deferred maintenance items at four of the fourteen properties. The credit was applied as a dollar-for-dollar reduction to the cash portion of the purchase price at closing. For purposes of the Class V allocation, the PCA credit should be reflected as a reduction in the allocated values for the four affected properties, as follows:
The PCA credit was negotiated as 50% of the total estimated PCA repair costs at the four affected properties, with Buyer assuming responsibility for completing the identified repairs post-closing. The reduction should be applied to the building/improvements component of the allocated value for each affected property.
Aggregate Class V Allocated Amount: Substantially all of the adjusted total consideration — approximately $1,098,930,000 less the amounts allocated to Classes I, III, VI, and VII. The precise amount will be determined upon completion of the Class I, III, VI, and VII allocations by Ashford Prewitt LLP.
Asset Class VI — Section 197 Intangibles (Except Goodwill and Going Concern Value).
Description: This class includes intangible assets described in Section 197(d) of the Code (other than goodwill and going concern value), principally:
(a) In-Place Leases (Leasehold Intangibles / Lease Origination Costs). The value attributable to the existence of in-place leases at each property, including lease origination costs (leasing commissions, legal fees, and other costs that would be incurred to originate a lease with the same terms). The in-place lease value represents the avoided cost and lost rent associated with the time required to lease vacant space to a tenant.
(b) Above/Below-Market Lease Intangibles. The value (or liability) associated with contractual rental rates under existing leases that are above or below the prevailing market rates as of the acquisition date. Above-market leases generate an intangible asset; below-market leases generate an intangible liability. These intangibles are amortized over the remaining non-cancelable lease term (plus any bargain renewal periods for below-market leases).
(c) Tenant Relationship Intangibles. The value attributable to the probability of lease renewal and the established relationship with existing tenants, to the extent such value is identifiable and separately quantifiable.
Portfolio Lease Summary:
The leasehold intangible values — including lease origination cost intangibles, above/below-market lease intangibles, and tenant relationship intangibles — are to be determined by Ashford Prewitt LLP based on the individual property appraisal reports from Stonebridge Valuation Advisors, LLC and supplemental intangible valuation analysis. These intangibles are amortizable over the remaining non-cancelable terms of the underlying leases or, if Section 197 applies, over 15 years, whichever period is applicable under the relevant provisions of the Code and regulations. In the case of a real property acquisition of this nature, the in-place lease intangibles and above/below-market lease intangibles are generally amortized over the remaining lease terms rather than the 15-year Section 197 period, as they are closely related to the underlying real property and fall within the exception for self-created intangibles or intangibles associated with the acquisition of interests in a trade or business.
Allocated Amount: To be determined. This is a placeholder line item pending completion of the Ashford Prewitt intangible valuation analysis. Ashford Prewitt should coordinate with the rent roll (PSA Exhibit H, as of December 31, 2023) and the executed tenant estoppel certificates (91.4% of annual base rent, or $68,371,200, was confirmed through estoppel certificates delivered at or prior to closing) to support the lease intangible calculations.
Asset Class VII — Goodwill and Going Concern Value.
Description: Under the residual method prescribed by Section 1060, any amount of the total consideration remaining after allocation to Classes I through VI is allocable to Class VII, which encompasses goodwill and going concern value. Goodwill represents the value of a trade or business attributable to the expectancy of continued customer patronage, and going concern value represents the additional element of value in a trade or business that attaches to property by reason of its existence as an integral part of an ongoing business activity.
Expected Allocated Amount: Minimal or $0. The transaction was priced at a 6.80% in-place capitalization rate, which reflects the prevailing market capitalization rates for comparable logistics and office properties in the southeastern United States as of the date of the PSA. The portfolio was acquired on a below-replacement-cost basis, with the aggregate purchase price reflecting a discount to the estimated replacement cost of the improvements. Given the arm's-length nature of the transaction, the cap-rate-driven pricing methodology, and the absence of any premium above the appraised tangible and identifiable intangible asset values, no material residual amount is expected to be allocable to goodwill or going concern value.
Note: Any residual after allocation to Classes I through VI would be classified as Class VII goodwill/going concern value and would be amortized over 15 years under Section 197 of the Code. Ashford Prewitt should confirm whether any residual exists after completing the Class I through VI allocations. If a de minimis residual results from rounding or other computational adjustments, such amount should be reported in Class VII.
Total Allocation Summary. The following table summarizes the allocation of the total consideration among the seven asset classes:
Note: Total consideration of $1,098,930,000 is subject to further adjustment for the post-closing proration true-up of $347,218 (net credit to Buyer, agreed August 28, 2024, paid September 5, 2024). Final total consideration for Form 8594 purposes may be $1,098,582,782, pending confirmation by Ashford Prewitt LLP of the tax treatment of the true-up amount. The sum of all asset class allocations must equal the final total consideration.
PART III — SUPPLEMENTAL INFORMATION
Line 8 — Did the Buyer and Seller Provide Consistent Allocations?
Answer: Yes.
Pursuant to Section 10.4 of the Purchase and Sale Agreement dated February 28, 2024, Buyer and Seller negotiated and agreed upon a binding purchase price allocation, which is set forth in Exhibit K to the PSA. Section 10.4 provides, in relevant part:
"The parties agree that the aggregate Purchase Price shall be allocated among the Assets in accordance with the allocation set forth on Exhibit K attached hereto (the 'Agreed Allocation'). Each party shall file IRS Form 8594 (Asset Acquisition Statement Under Section 1060) and all federal, state, and local income tax returns on a basis consistent with the Agreed Allocation. Neither party shall take any position on any Tax Return, in any Tax Proceeding, or otherwise that is inconsistent with the Agreed Allocation, unless otherwise required by a Final Determination (as defined in Section 1313(a) of the Code) of the Internal Revenue Service or a court of competent jurisdiction."
Both Buyer and Seller are therefore contractually bound to report the transaction on a consistent basis, and each party's Form 8594 should reflect the identical allocation set forth in Exhibit K. Buyer's counsel (Calderwood & Harkness LLP) has communicated the allocation to Seller's counsel (Blackridge Hayes LLP) and Seller's accountants (Caldwell Murray & Oakes LLP), and has requested confirmation that GMP Fund III will file a consistent Form 8594 with its 2024 federal income tax return.
Line 9 — Additional Information
The following supplemental information is provided in connection with this Form 8594:
(a) Transaction Structure. The transaction was structured as an entity-level acquisition, pursuant to which Fairwater Real Estate Investment Trust acquired one hundred percent (100%) of the membership interests in each of the fourteen Target Entities listed in the property table above. Each Target Entity is a single-purpose Delaware limited liability company that was formed by GMP Fund III for the sole purpose of holding title to one of the fourteen properties comprising the portfolio. None of the Target Entities elected to be classified as a corporation for federal income tax purposes under Treasury Regulations § 301.7701-3. Following Fairwater's acquisition of all of the membership interests in each Target Entity, each Target Entity became a disregarded entity for federal income tax purposes (as a single-member LLC whose sole owner is Fairwater), and the transaction is accordingly treated as a direct asset acquisition by Fairwater for federal income tax purposes. The applicable Code section and regulations governing the allocation of the purchase price are Section 1060 and Treasury Regulations § 1.1060-1.
(b) Seller Information. Greystone Meridian Partners Fund III, L.P. is a Delaware limited partnership classified as a partnership for federal income tax purposes. Its general partner is Greystone Meridian Capital LLC (EIN: 83-1520984), a Delaware limited liability company. The managing partners of Greystone Meridian Capital LLC are Victor Lansdell and Elise Rathborne. GMP Fund III is a 2018-vintage closed-end private equity real estate fund with aggregate committed capital of approximately $2.4 billion. GMP Fund III acquired the fourteen properties comprising the portfolio between 2019 and 2021 at an aggregate cost basis of approximately $845,000,000. Seller's counsel in connection with the transaction was Blackridge Hayes LLP. Seller's independent accountants are Caldwell Murray & Oakes LLP (William Oakes, CPA, Engagement Partner; 3344 Peachtree Road NE, Suite 1800, Atlanta, Georgia 30326; Tel: (404) 555-6100).
(c) Assumed Mortgage Debt. As described in Line 5 above, aggregate outstanding mortgage indebtedness of $612,000,000 was assumed by Buyer (or taken subject to) in connection with the acquisition. This assumed debt is included in the total consideration for purposes of the Section 1060 allocation, consistent with Treasury Regulations § 1.1060-1(c)(1) and the general principle that assumed liabilities constitute part of the amount realized by the seller and part of the buyer's cost of acquisition. The assumed debt is allocated among the individual properties on a loan-by-loan basis as set forth in the assumed debt schedule (Attachment E).
(d) Representations and Warranties Insurance. In connection with the closing, Buyer obtained a buyer-side representations and warranties insurance policy from Sentinel Specialty Insurance Company (Policy No. SSI-2024-RW-07218) with a policy limit of $55,000,000 and a premium of $1,402,500 paid by Buyer. The R&W insurance premium constitutes a Buyer transaction cost and is not included in the purchase price consideration for purposes of the Section 1060 allocation. The premium may be capitalizable by Buyer as part of its acquisition costs, subject to applicable tax treatment.
(e) Transfer Taxes. State and local transfer taxes and recording fees in connection with the acquisition are estimated at $3,850,000 in the aggregate across the five states in which the properties are located. Pursuant to Section 8.7 of the PSA, transfer taxes are split equally (50/50) between Buyer and Seller. Transfer taxes are not included in the purchase price for purposes of the Section 1060 allocation but may be capitalizable by Buyer as part of the cost basis of the acquired real property assets, consistent with applicable provisions of the Code and Treasury Regulations.
(f) Lender Consent Fees. Consent and assumption fees totaling $1,825,625 were paid in connection with obtaining lender consents from the three mortgage lenders. Pursuant to Section 8.8 of the PSA, consent fees were split equally (50/50) between Buyer and Seller, with Buyer's share amounting to $912,812.50. Buyer's share of the consent fees constitutes a Buyer transaction cost and may be treated as either a cost of the assumed debt or a capitalizable acquisition cost, depending on the applicable tax characterization. These fees are not included in the purchase price for purposes of the Section 1060 allocation.
(g) Lender Consent Timeline. The following lender consents were obtained prior to or at closing: (i) Veltrano Capital Lending Corp. — consent dated May 17, 2024; (ii) Sycamore Life Insurance Company — consent dated May 22, 2024; and (iii) Pinnacle Federal Bank, N.A. — consent dated June 4, 2024.
(h) Marketing Process. The portfolio was marketed for sale by Druvex Capital Markets (Michael Harrington, Executive Vice President) on behalf of Seller through a broadly marketed, multi-round competitive bidding process. Fairwater was selected as the successful bidder following a best-and-final offer process. The arm's-length nature of the negotiation and pricing supports the allocation of the purchase price at fair market value among the acquired assets.
NOTES AND OPEN ITEMS FOR ASHFORD PREWITT REVIEW
The following items require review, confirmation, or completion by Ashford Prewitt LLP prior to finalization of the Form 8594 for filing with Fairwater's 2024 federal income tax return. We have numbered the items for ease of reference and tracking.
1. Confirm Final Total Consideration.
The adjusted purchase price at closing was $1,098,930,000 (the $1,100,000,000 aggregate purchase price less the $1,070,000 PCA repair credit). A post-closing proration true-up in the amount of $347,218 (net credit to Buyer) was agreed upon by the parties on August 28, 2024, and paid by Seller to Buyer on September 5, 2024. Ashford Prewitt should confirm whether the $347,218 true-up constitutes a purchase price adjustment (thereby reducing total consideration for Section 1060 purposes to $1,098,582,782) or whether it is properly characterized as a separate proration settlement item that does not affect the Section 1060 allocation. If the true-up is treated as a purchase price adjustment, the allocation schedule should be revised to reflect the reduced total consideration, and the adjustment should be allocated among the affected asset classes on a pro rata or other appropriate basis. Please advise on the proper treatment and revise the allocation accordingly.
2. Class I — Operating Cash.
Obtain closing-date bank statements from Magnolia Commerce Bank, N.A. (Linda Prescott, Vice President, Commercial Banking; Tel: (404) 555-8200) for all fourteen (14) Target Entity operating accounts to confirm the aggregate cash balance as of 12:01 a.m. Eastern Time on June 6, 2024. The cash balances are expected to be nominal but must be confirmed for inclusion in the Class I allocation.
3. Class III — Receivables and Deposits.
Confirm the face value of the following items as of the June 6, 2024 Closing Date: (a) tenant accounts receivable (rents receivable) for each of the fourteen properties; (b) CAM/OpEx reconciliation accruals and the $1,850,000 reconciliation reserve; (c) tenant security deposits of $4,283,000 (aggregate across 87 leases); and (d) any prepaid expenses or other items properly classified as Class III assets. Ashford Prewitt should prepare a property-by-property schedule of Class III items based on closing-date trial balances and supporting documentation.
4. Class V — Sub-Allocation Between Land and Depreciable Improvements.
Request the detailed appraisal reports from Stonebridge Valuation Advisors, LLC (Maureen Alcott, MAI) for each of the fourteen properties, with separate valuations for (a) land, (b) building/improvements (depreciable real property under Section 168), (c) land improvements (site work, parking, landscaping), and (d) tangible personal property (furniture, fixtures, and equipment). The sub-allocations are essential for determining the appropriate MACRS depreciation class and recovery period for each component. If Fairwater elects to commission cost segregation studies for any or all of the acquired properties, coordinate with Naomi Ikeda for proper classification of Section 1245 property and Section 1250 property, and ensure that the cost segregation results are consistent with the overall Exhibit K allocation and the Form 8594 filing.
5. Class V — PCA Credit Allocation.
Reduce the allocated values for the four affected properties by the negotiated PCA repair credit amounts, as follows: Buckhead Place Office Tower ($445,000), Cool Springs Office Park ($310,000), Lakeland Crossings Industrial ($190,000), and SouthPark Corporate Center ($125,000). Total PCA credit: $1,070,000. The reductions should be applied to the building/improvements (Section 1250 property) component of each affected property's allocated value, as the underlying PCA items relate to deferred building maintenance and capital repairs. Confirm the proper allocation of the credit amounts with Stonebridge.
6. Class VI — Lease Intangible Valuation.
Prepare a comprehensive analysis of leasehold intangible values for each of the 87 leases in the portfolio, including: (a) in-place lease intangibles (lease origination costs, including avoided leasing commissions, legal fees, and absorption period costs); (b) above-market lease intangibles (the present value of the excess of contractual rents over market rents over the remaining non-cancelable lease terms); (c) below-market lease intangibles (the present value of the shortfall of contractual rents below market rents over the remaining non-cancelable lease terms, plus any bargain renewal option periods); and (d) tenant relationship intangibles (to the extent identifiable and separately quantifiable). The analysis should be coordinated with: (i) the rent roll set forth in PSA Exhibit H (as of December 31, 2023); (ii) the executed tenant estoppel certificates (91.4% of annual base rent, or $68,371,200, was confirmed through estoppel certificates delivered at or prior to closing); and (iii) the Stonebridge appraisal reports and any supplemental intangible valuation analysis. Determine the appropriate amortization periods for each category of lease intangible (remaining lease terms vs. 15-year Section 197 period, as applicable).
7. Class VII — Goodwill Residual.
Confirm whether any residual consideration remains after allocation to Classes I through VI. Given the 6.80% in-place capitalization rate, the below-replacement-cost acquisition basis, and the arm's-length nature of the transaction, residual goodwill is expected to be minimal or $0. If any residual exists (including as a result of rounding or computational adjustments), it should be reported in Class VII and amortized over 15 years under Section 197 of the Code.
8. Seller's Corresponding Filing.
Confirm with Caldwell Murray & Oakes LLP (William Oakes, CPA, Engagement Partner; 3344 Peachtree Road NE, Suite 1800, Atlanta, Georgia 30326; Tel: (404) 555-6100) that Greystone Meridian Partners Fund III, L.P. will file a Form 8594 with its 2024 federal income tax return using the identical agreed allocation set forth in PSA Exhibit K. Pursuant to Section 10.4 of the PSA, both parties are contractually obligated to file consistent allocations. Any discrepancy between the Buyer's and Seller's Forms 8594 could trigger IRS scrutiny and should be avoided.
9. REIT Qualification Considerations.
Per the REIT Qualification Impact Memorandum previously prepared by Calderwood & Harkness LLP (Sylvia Hartwell, dated March 2024), confirm that the allocation of the purchase price between real property assets and other assets (including intangible assets, receivables, and cash) maintains Fairwater's compliance with the 75% asset test under Section 856(c)(4) of the Code. Specifically, at least 75% of Fairwater's total assets must consist of real estate assets, cash and cash items, and government securities at the close of each quarter of the taxable year. The allocation of consideration to Class VI lease intangibles should be analyzed to determine whether such intangibles qualify as "real estate assets" for purposes of the 75% asset test. Ashford Prewitt should coordinate with Calderwood & Harkness on this analysis and confirm that the Form 8594 allocation does not jeopardize Fairwater's REIT qualification.
10. Filing Deadline and Coordination.
IRS Form 8594 must be filed with Fairwater's 2024 federal income tax return (Form 1120-REIT) for the taxable year ending December 31, 2024. Assuming Fairwater files on an automatic extension, the extended due date would be October 15, 2025. Ashford Prewitt should confirm the filing timeline and ensure that the final Form 8594, incorporating all confirmed figures and allocations, is completed and reviewed in advance of the filing deadline. Calderwood & Harkness requests an opportunity to review the final Form 8594 prior to filing.
EXHIBITS AND ATTACHMENTS
Attachment A — PSA Exhibit K: Purchase Price Allocation Schedule
Reference Document. The agreed purchase price allocation schedule set forth as Exhibit K to the Purchase and Sale Agreement dated February 28, 2024, by and between Greystone Meridian Partners Fund III, L.P. (as Seller) and Fairwater Real Estate Investment Trust (as Buyer). Exhibit K reflects the property-by-property allocation of the aggregate purchase price among the fourteen Target Entities based on individual appraised values determined by Stonebridge Valuation Advisors, LLC (Maureen Alcott, MAI). The Exhibit K allocation was negotiated and agreed upon by the parties as a binding element of the PSA and governs the Form 8594 allocation for both Buyer and Seller.
Status: Executed with the PSA on February 28, 2024. A copy of the executed Exhibit K is maintained in the closing binder and is available from Calderwood & Harkness LLP upon request.
Attachment B — Stonebridge Valuation Advisors Summary Appraisal Data
Reference Document. Summary appraisal data prepared by Stonebridge Valuation Advisors, LLC (Maureen Alcott, MAI, MRICS; 2100 West End Avenue, Suite 1500, Nashville, Tennessee 37203; Tel: (615) 555-4400) for each of the fourteen properties in the portfolio. The appraisals were prepared as of a valuation date of December 31, 2023, in accordance with the Uniform Standards of Professional Appraisal Practice (USPAP) and the requirements of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA). The summary appraisal data includes, for each property: (a) the appraised fair market value; (b) the allocation between land and improvements; (c) the income capitalization approach, sales comparison approach, and cost approach analyses; and (d) supporting comparable sale and lease data.
Status: Final appraisal reports delivered to the parties in January 2024. Summary data to be provided to Ashford Prewitt for use in the sub-allocation analysis. Full appraisal reports are maintained in the closing binder.
Attachment C — Post-Closing Proration True-Up Statement (Final)
Reference Document. The final post-closing proration true-up statement signed by both Buyer and Seller on August 28, 2024, in accordance with Section 8.3(b) of the PSA. The true-up statement reflects the final reconciliation of operating prorations (including rents, real estate taxes, insurance premiums, utility charges, and service contract payments) for the period surrounding the June 6, 2024 Closing Date. The final true-up resulted in a net credit to Buyer of $347,218, which was paid by Seller to Buyer by wire transfer on September 5, 2024. The true-up statement was prepared jointly by Fairwater's asset management team and GMP Fund III's asset management team, with review by the parties' respective counsel.
Status: Fully executed August 28, 2024. Payment of $347,218 confirmed received by Buyer on September 5, 2024. A copy of the executed true-up statement and wire transfer confirmation is maintained in the post-closing file.
Attachment D — Closing Settlement Statements (Buyer and Seller)
Reference Document. The Buyer's closing settlement statement and the Seller's closing settlement statement prepared by Monument Title & Escrow Company (Catherine Langford, Esq., Settlement Agent; 1825 Connecticut Avenue NW, Suite 600, Washington, DC 20009; Tel: (202) 555-9300) in connection with the June 6, 2024 closing. The settlement statements reflect the adjusted purchase price of $1,098,930,000 (after the $1,070,000 PCA repair credit), the application of Buyer's $55,000,000 earnest money deposit (previously deposited with Monument Title & Escrow Company), the assumed debt of $612,000,000, the net cash due at closing of $431,930,000, and all closing costs, including: consent fees ($1,825,625, split 50/50), transfer taxes ($3,850,000 estimated, split 50/50), title insurance premiums ($2,175,000 for owner's policies; $1,340,000 for lender's policies), survey costs ($412,500), environmental report update fees ($87,000), recording fees, and proration adjustments effective as of the Closing Date.
Status: Executed by both parties at closing on June 6, 2024. Copies maintained in the closing binder.
Attachment E — Assumed Debt Schedule
The following schedule sets forth the details of the mortgage indebtedness assumed by Buyer (or taken subject to by Buyer) in connection with the acquisition:
Lender 1: Pinnacle Federal Bank, N.A.
• Loan Designation: Loans 1-A through 1-H
• Original Loan Agreement: Master Loan Agreement dated September 15, 2020