1036-00004 · Client 1036 · Tax

purchase-price-allocation-memorandum.docx DOCUMENT Real Estate

128 / 172 ← → ✕

MEMORANDUM ATTORNEY WORK PRODUCT / PRIVILEGED & CONFIDENTIAL

FROM: Sylvia Hartwell, Partner (Tax) Calderwood & Harkness LLP 1700 K Street NW, Suite 900 Washington, DC 20006

TO: Douglas Fairchild, Partner (Real Estate) Calderwood & Harkness LLP 450 Park Avenue, 28th Floor New York, NY 10022

CC: Angela Fontaine, Partner (Real Estate), Calderwood & Harkness LLP Grace Nakamura, Associate (Real Estate), Calderwood & Harkness LLP Rafael Dominguez, Associate (Real Estate), Calderwood & Harkness LLP David Elgin Park, General Counsel, Fairwater Real Estate Investment Trust Camille Oduya, In-House Real Estate Counsel, Fairwater Real Estate Investment Trust Naomi Ikeda, CPA, Tax Partner, Ashford Prewitt LLP

DATE: April 18, 2024

RE: Purchase Price Allocation — Fairwater Real Estate Investment Trust Acquisition of 14-Property Sun Belt Logistics and Office Portfolio from Greystone Meridian Partners Fund III, L.P.

MATTER NO.: 1036-00004

Right-click to update Table of Contents

I. EXECUTIVE SUMMARY

This memorandum analyzes the purchase price allocation methodology applicable to Fairwater Real Estate Investment Trust's ("Fairwater" or "Buyer") acquisition of 100% of the membership interests in 14 single-purpose, property-owning Delaware limited liability companies (collectively, the "Target Entities") from Greystone Meridian Partners Fund III, L.P. ("GMP Fund III" or "Seller") for a total aggregate purchase price of $1,100,000,000 (the "Purchase Price"). The acquisition is governed by that certain Purchase and Sale Agreement dated February 28, 2024 (as amended, the "PSA"), by and between Buyer and Seller, with an anticipated closing date of June 6, 2024.

Although the transaction is structured as an entity-level acquisition — i.e., a purchase of the membership interests in each Target Entity — for federal income tax purposes the transaction is treated as a direct purchase of the underlying assets of each Target Entity. This treatment follows from the fact that each Target Entity is a single-member Delaware limited liability company that has not elected to be classified as a corporation and is therefore treated as a "disregarded entity" for federal income tax purposes under Treasury Regulation Section 301.7701-3. Accordingly, the transfer of 100% of the membership interests in each Target Entity is disregarded, and the transaction is instead treated as a purchase by Fairwater of the real property and other assets owned by each such entity. This characterization implicates the allocation requirements of Internal Revenue Code ("IRC") Section 1060, which governs applicable asset acquisitions.

The agreed-upon allocation of the Purchase Price among the 14 properties is reflected in Exhibit K to the PSA (the "Allocation Schedule"). The Allocation Schedule is based on independent appraisals prepared by Stonebridge Valuation Advisors, LLC ("Stonebridge"), under the direction of Maureen Alcott, MAI, Lead Appraiser, with offices located at 227 West Trade Street, Suite 1010, Charlotte, North Carolina 28202. The Stonebridge appraisals provide property-level fair market value determinations as of December 31, 2023, and form the evidentiary foundation for the agreed allocation.

Under the terms of the PSA, both Buyer and Seller have covenanted to report the allocation consistently on IRS Form 8594 (Asset Acquisition Statement under Section 1060) and on all applicable state income, franchise, and transfer tax returns. This covenant is binding on both parties and is designed to ensure compliance with the consistency requirements imposed by Section 1060(a) and the regulations thereunder.

The aggregate adjusted purchase price for allocation purposes is $1,098,930,000, reflecting a property condition assessment ("PCA") credit of $1,070,000 negotiated by the parties. The PCA credit represents 50% of the $2,140,000 in aggregate estimated immediate repair costs identified by the buyer's property condition consultant during the due diligence period. This credit was formalized in the First Amendment to the PSA, dated April 12, 2024.

For allocation purposes, total consideration includes assumed mortgage indebtedness of $612,000,000, which is part of the aggregate consideration paid by Buyer. The assumed debt is held by three lenders: (i) Pinnacle Federal Bank, N.A. ($421,600,000); (ii) Veltrano Capital Lending Corp. ($142,300,000); and (iii) Sycamore Life Insurance Company ($48,100,000). The cash equity component payable at closing is $488,000,000, which, together with the assumed debt of $612,000,000, yields the gross purchase price of $1,100,000,000.

This memorandum sets forth the legal framework governing the allocation, describes the appraisal methodology employed by Stonebridge, presents the agreed property-by-property allocation, discusses the intra-property allocation among Section 1060 asset classes, addresses state-level considerations, outlines the IRS Form 8594 filing requirements, identifies specific allocation issues that were the subject of negotiation between the parties, and concludes with recommendations and next steps.

II. TRANSACTION OVERVIEW

A. Parties

Buyer. Fairwater Real Estate Investment Trust is a Maryland real estate investment trust headquartered at 7200 Chesapeake Parkway, Suite 1100, Columbia, Maryland 21044. Fairwater's common shares of beneficial interest are listed on the New York Stock Exchange under the ticker symbol "FREIT." As of the fourth quarter of 2023, Fairwater's market capitalization was approximately $4.8 billion. Fairwater is a publicly traded REIT focused on the acquisition, ownership, and management of logistics, industrial, and office properties in major metropolitan markets throughout the United States, with a particular focus on Sun Belt markets characterized by strong demographic growth, favorable business climates, and robust demand for industrial and logistics space. The acquisition of the Greystone Meridian portfolio represents a significant strategic expansion of Fairwater's Sun Belt footprint.

Seller. Greystone Meridian Partners Fund III, L.P. is a Delaware limited partnership with its principal office at 3300 Peachtree Road NE, Suite 2200, Atlanta, Georgia 30326. The general partner of GMP Fund III is Greystone Meridian Capital LLC, an Atlanta-based real estate private equity firm co-founded and co-managed by Victor Lansdell and Elise Rathborne, who serve as Co-Founders and Managing Partners. GMP Fund III is a 2018-vintage value-add and core-plus real estate fund with a total fund size of approximately $2.4 billion. The 14 properties comprising the portfolio were acquired by GMP Fund III between 2019 and 2021 at an aggregate cost basis of approximately $845,000,000. Seller's realization of the portfolio at the negotiated Purchase Price of $1,100,000,000 reflects a meaningful gain at the fund level.

Seller's Accountants. Caldwell Murray & Oakes LLP, with offices at 3344 Peachtree Road NE, Suite 1800, Atlanta, Georgia 30326. William Oakes, CPA, serves as the Engagement Partner responsible for GMP Fund III's tax and audit matters.

Buyer's Accountants. Ashford Prewitt LLP, with offices at 1 South Street, Suite 2700, Baltimore, Maryland 21202. Martin Ashford, CPA, serves as the Engagement Partner for Fairwater's annual audit, and Naomi Ikeda, CPA, Tax Partner, leads the tax advisory team for this transaction.

Seller's Counsel. Blackridge Hayes LLP, with offices at 1285 Avenue of the Americas, 34th Floor, New York, New York 10019. Nathaniel Pryce serves as lead transaction counsel for Seller, and Ingrid Solberg serves as Seller's tax counsel. Both Ms. Solberg and Mr. Pryce have been instrumental in negotiating the allocation provisions of the PSA and Exhibit K.

B. Transaction Structure

The transaction is structured as an entity-level acquisition in which Fairwater acquires 100% of the outstanding membership interests in each of the 14 Target Entities. Each Target Entity is a single-purpose Delaware limited liability company that was formed by GMP Fund III (or its affiliates) for the sole purpose of holding title to one of the 14 properties in the portfolio. Each Target Entity is wholly owned by GMP Fund III and has at all times been treated as a disregarded entity for federal income tax purposes under the default classification rules of Treasury Regulation Section 301.7701-3.

The PSA was executed on February 28, 2024, and is governed by the laws of the State of New York. The PSA provides for a total purchase price of $1,100,000,000, consisting of (i) cash equity of $488,000,000 payable at closing and (ii) the assumption by Buyer of $612,000,000 in aggregate outstanding mortgage indebtedness secured by the properties. As discussed in greater detail below, the three assumed mortgage loans are held by Pinnacle Federal Bank, N.A., Veltrano Capital Lending Corp., and Sycamore Life Insurance Company.

Subsequent to execution of the PSA, the parties negotiated a PCA credit of $1,070,000 in connection with certain immediate repair costs identified during Buyer's due diligence investigation. This credit was formalized in the First Amendment to the PSA, executed on April 12, 2024. The PCA credit of $1,070,000 represents 50% of the $2,140,000 in aggregate estimated immediate repair costs and is applied as a reduction to the purchase price at closing, resulting in an adjusted purchase price of $1,098,930,000 for allocation purposes.

The closing of the transaction is scheduled for June 6, 2024. At closing, GMP Fund III will transfer to Fairwater (or its designated acquisition subsidiaries) all of its right, title, and interest in and to the membership interests in each Target Entity, and Fairwater will assume the obligations of GMP Fund III with respect to the assumed mortgage indebtedness.

Seller's aggregate cost basis in the 14 properties is approximately $845,000,000, reflecting the original acquisition prices paid by GMP Fund III between 2019 and 2021, plus capitalized improvements and acquisition costs, less accumulated depreciation and amortization.

C. Portfolio Summary

The portfolio comprises 14 properties located across five states in the southeastern United States — Georgia (4 properties), Texas (3 properties), Florida (3 properties), Tennessee (3 properties), and North Carolina (1 property). The portfolio is diversified by property type, geographic market, and tenant base, and is generally stabilized with strong in-place occupancy.

Property Type Composition. The portfolio consists of 10 logistics/industrial properties and 4 office properties. The 10 logistics properties comprise approximately 4,373,000 rentable square feet ("RSF"), representing approximately 83.7% of the total portfolio square footage. The 4 office properties comprise approximately 851,000 RSF, representing approximately 16.3% of the total portfolio square footage. The total portfolio encompasses approximately 5,224,000 RSF across all 14 properties.

Occupancy. As of the effective date of the Stonebridge appraisals (December 31, 2023), the portfolio was subject to 87 leases with a weighted-average occupancy rate of 93.2%. The logistics subportfolio exhibited stronger occupancy at 96.1%, reflecting the robust demand for industrial and logistics space in the Sun Belt markets. The office subportfolio had a weighted-average occupancy rate of 82.7%, reflecting the more challenging leasing environment for office properties in the current market.

Income. Annual in-place base rent across the portfolio totals approximately $74,800,000, resulting in an in-place capitalization rate of approximately 6.80% based on the aggregate Purchase Price. The weighted-average remaining lease term across the portfolio is approximately 5.8 years, providing a reasonable degree of income stability during the initial years of Fairwater's ownership.

III. LEGAL FRAMEWORK — SECTION 1060 AND APPLICABLE TAX PRINCIPLES

A. Treatment of Entity Purchase as Asset Acquisition

The transaction is structured as a purchase of membership interests rather than a direct purchase of real property. However, because each Target Entity is a single-member LLC that has not elected to be treated as a corporation for federal income tax purposes, each Target Entity is classified as a "disregarded entity" under the default classification rules of Treasury Regulation Section 301.7701-3. Specifically, Treasury Regulation Section 301.7701-3(b)(1)(ii) provides that a domestic eligible entity with a single owner is disregarded as an entity separate from its owner unless it affirmatively elects to be classified as an association taxable as a corporation.

Because each Target Entity is disregarded for federal income tax purposes, the transfer by GMP Fund III of 100% of its membership interests in each Target Entity is not treated as a transfer of partnership interests or corporate stock. Rather, the transaction is treated, for all federal income tax purposes, as a direct transfer by GMP Fund III of the underlying assets held by each Target Entity — principally, the real property, tangible personal property, and intangible assets associated with each property.

This characterization has a critical consequence: the transaction constitutes an "applicable asset acquisition" within the meaning of IRC Section 1060(c). An applicable asset acquisition is defined as any transfer (whether direct or indirect) of assets that constitute a trade or business, and with respect to which the transferee's basis in the transferred assets is determined wholly by reference to the consideration paid for such assets. Because the 14 properties and their associated leases, operations, and assets collectively constitute a trade or business — and because Fairwater's tax basis in the acquired assets will be determined by reference to the purchase price paid — the allocation requirements of Section 1060 are fully applicable.

Both GMP Fund III (as Seller) and Fairwater (as Buyer) have confirmed that no Target Entity has filed an IRS Form 8832 (Entity Classification Election) electing to be treated as a corporation, and each Target Entity has been consistently treated as a disregarded entity on all federal and state tax returns filed since its formation. Accordingly, the disregarded entity analysis is straightforward and does not present any classification ambiguity.

B. Section 1060 Residual Method

IRC Section 1060(a) provides that, in the case of an applicable asset acquisition, the transferee's aggregate consideration (i.e., the adjusted purchase price of $1,098,930,000) must be allocated among the acquired assets using the "residual method" prescribed by IRC Section 338(b)(5) and the regulations thereunder. The residual method, as set forth in Treasury Regulation Section 1.338-6(b), requires that the total consideration be allocated among seven classes of assets in a prescribed order of priority. Each class is "filled" with value before any residual consideration is allocated to the next class. The seven classes are as follows:

Class I — Cash and Cash Equivalents. This class includes cash, demand deposits, and similar items held by the Target Entities. The allocated amount equals the face value of such items.

Class II — Actively Traded Personal Property. This class includes certificates of deposit, U.S. government securities, readily marketable stock or securities, and foreign currency. For purposes of this transaction, no assets fall within Class II.

Class III — Accounts Receivable, Other Debt Instruments, and Assets Marked to Market. This class includes accounts receivable arising from the operation of the properties (e.g., tenant receivables for rents, common area maintenance charges, and operating expense reimbursements), as well as any debt instruments held by the Target Entities. These assets are allocated at their fair market value, which in most cases approximates face value for current receivables.

Class IV — Stock in Trade (Inventory-Type Property). This class includes property held for sale in the ordinary course of business. None of the Target Entities holds inventory or stock-in-trade, and no allocation to Class IV is anticipated.

Class V — All Other Tangible and Intangible Assets Not in Classes I Through IV, VI, or VII. This is the most significant class for purposes of this transaction. Class V includes all real property (land, buildings and improvements, and tenant improvements) and tangible personal property (furniture, fixtures, and equipment). The vast majority of the aggregate purchase price will be allocated to Class V assets, reflecting the fundamental nature of the transaction as a real estate acquisition.

Class VI — Section 197 Intangibles (Except Goodwill and Going Concern Value). This class includes intangible assets that are amortizable over 15 years under IRC Section 197. For purposes of this transaction, the primary Class VI intangibles are: (i) in-place lease values (the value attributable to having signed leases in place, as opposed to vacant space requiring lease-up); (ii) above-market and below-market lease adjustments (the present value of the difference between in-place contractual rents and current market rents over the remaining lease terms); (iii) absorbed leasing commissions (the value of leasing commissions that would otherwise need to be paid to lease the space); and (iv) tenant relationships (the value, if any, attributable to the probability of lease renewal by existing tenants). A limited but not insignificant allocation to Class VI intangibles is expected, particularly for properties with above-market rents or long remaining lease terms.

Class VII — Goodwill and Going Concern Value. This class captures any residual consideration not allocated to Classes I through VI. For a stabilized real estate portfolio such as the one at issue, the Class VII allocation is expected to be zero or nominal. Real estate portfolios of this nature generally do not carry goodwill or going concern value independent of the underlying real property and lease intangibles. No goodwill has been allocated in the agreed Exhibit K schedule.

The allocation to each class is limited to the fair market value of the assets within that class. If the total consideration exceeds the aggregate fair market value of all assets in Classes I through VI, the excess is allocated to Class VII (goodwill). Conversely, if the total consideration is less than the aggregate fair market value of assets in Classes I through VII (which is not the case here), the shortfall is allocated to reduce the basis of Class V through VII assets on a proportionate basis.

C. PSA Allocation Agreement — Exhibit K

Section 10.4 of the PSA (the "Allocation Provision") provides that Buyer and Seller shall allocate the aggregate Purchase Price (as adjusted for the PCA credit and any post-closing proration true-up) among the 14 Target Entities and their respective assets in accordance with the allocation schedule set forth on Exhibit K to the PSA. The Allocation Provision further provides that:

(a) Both parties shall file all federal, state, and local tax returns, including without limitation IRS Form 8594, in a manner consistent with the agreed allocation;

(b) Neither party shall take any position on any tax return, in any tax proceeding, or in any other filing or communication with any taxing authority that is inconsistent with the agreed allocation, unless such inconsistent position is required by a "final determination" within the meaning of IRC Section 1313(a); and

(c) The parties shall cooperate in good faith to resolve any dispute with respect to the allocation, including any adjustment required by the Internal Revenue Service or any state or local taxing authority.

The allocation methodology reflected in Exhibit K was developed through a collaborative process involving the tax advisors to both parties. On behalf of Buyer, the allocation was prepared and negotiated by the undersigned (Sylvia Hartwell, Calderwood & Harkness LLP) with substantive input from Naomi Ikeda, CPA, Tax Partner at Ashford Prewitt LLP. On behalf of Seller, the allocation was reviewed and negotiated by Ingrid Solberg, Tax Partner at Blackridge Hayes LLP, with input from William Oakes, CPA, Engagement Partner at Caldwell Murray & Oakes LLP. The negotiations focused principally on the property-by-property allocation (i.e., the allocation among the 14 Target Entities), with the intra-property allocation among asset classes being driven primarily by the Stonebridge appraisals and generally subject to less disagreement.

D. Binding Effect on Both Parties

The agreed allocation set forth in Exhibit K is binding on both Buyer and Seller under the terms of the PSA and under applicable federal tax law. IRC Section 1060(a) provides that, where the parties to an applicable asset acquisition enter into a written agreement establishing the allocation of consideration among the acquired assets, both the transferor and the transferee are bound by such allocation for all federal income tax purposes, provided the allocation is made in a manner consistent with the residual method prescribed by Section 338(b)(5).

The binding nature of the agreed allocation carries meaningful compliance consequences. Under IRC Section 6662, a taxpayer who takes a position on a tax return that is inconsistent with an agreed Section 1060 allocation may be subject to the accuracy-related penalty of 20% of the underpayment attributable to the inconsistency. This penalty applies unless the taxpayer can demonstrate reasonable cause and good faith for the inconsistent position. To mitigate this risk, both parties have affirmatively covenanted in the PSA to file all returns consistently with Exhibit K.

At the state level, each state in which the properties are located may impose its own allocation requirements for purposes of computing state income taxes, franchise taxes, and transfer taxes. While state taxing authorities are not formally bound by a federal Section 1060 allocation, as a practical matter the state-level allocations should be consistent with the federal allocation to avoid audit exposure and potential penalties. The state-level implications are discussed in greater detail in Part VII below and in the separate Transfer Tax Analysis memorandum that I am preparing concurrently.

IV. APPRAISAL METHODOLOGY — STONEBRIDGE VALUATION ADVISORS, LLC

A. Engagement and Scope

Fairwater REIT engaged Stonebridge Valuation Advisors, LLC to provide independent appraisals of each of the 14 properties in the portfolio. Stonebridge is a nationally recognized real estate valuation firm specializing in the appraisal of commercial, industrial, and institutional properties throughout the United States. The engagement was led by Maureen Alcott, MAI, a designated member of the Appraisal Institute with over 25 years of experience in the valuation of income-producing real estate, including logistics, distribution, and office properties in Sun Belt markets.

The Stonebridge appraisal reports are dated as of December 31, 2023 (the "Effective Date"), and were delivered to Fairwater and Calderwood & Harkness during the first quarter of 2024. Each appraisal was prepared in conformity with the Uniform Standards of Professional Appraisal Practice ("USPAP") as promulgated by The Appraisal Foundation, and each report complies with the requirements of Standards Rule 2-2(a) of USPAP for a self-contained appraisal report.

The scope of each appraisal includes the following components:

(i) Determination of the aggregate "as-is" fair market value of the fee simple interest in each property (or, where applicable, the leased fee interest, reflecting the value of the property subject to the existing lease encumbrances);

(ii) Allocation of the appraised value between land and improvements for each property, based on independent land value analyses;

(iii) Identification and valuation of tangible personal property (furniture, fixtures, and equipment), to the extent present at each property; and

(iv) Commentary on the in-place lease structure, tenant credit quality, remaining lease term, and rental rate comparisons to market, to support the identification and valuation of lease-related intangible assets.

The Stonebridge appraisals serve as the evidentiary foundation for the purchase price allocation reflected in Exhibit K. While the aggregate appraised values differ from the negotiated Purchase Price (as the Purchase Price is a function of arm's-length negotiation between the parties rather than a strict average of individual property appraisals), the relative appraised values of the 14 properties provide the basis for the pro rata allocation of the adjusted Purchase Price of $1,098,930,000 among the properties.

B. Valuation Approaches Used

Stonebridge employed three generally accepted appraisal methodologies in valuing each of the 14 properties, with the relative weight accorded to each approach varying based on the property type, data availability, and market conditions:

Income Capitalization Approach. This was the primary valuation approach for all 14 properties, each of which is a stabilized, income-producing asset. Under this approach, Stonebridge analyzed the in-place rental income from existing leases, applied market-derived vacancy and credit loss factors, deducted estimated operating expenses (including management fees, insurance, real property taxes, utilities, and repairs and maintenance), and capitalized the resulting net operating income using market-derived capitalization rates. Capitalization rates were derived from an analysis of comparable sales of similar property types in the relevant metropolitan markets, adjusted for property-specific factors such as age, condition, tenancy, lease term, and location quality. For the logistics properties, capitalization rates ranged from approximately 5.75% to 7.25%; for the office properties, capitalization rates ranged from approximately 7.00% to 8.50%, reflecting the generally higher risk profile and more uncertain income streams associated with office properties in the current market environment.

Sales Comparison Approach. This approach was used as a supplemental valuation methodology for all 14 properties. Stonebridge identified and analyzed recent sales of comparable logistics and office properties in each of the relevant Sun Belt markets, adjusting the comparable sale prices for differences in size, location, age, condition, tenant quality, lease term, and market conditions between the subject property and the comparable sale. The sales comparison approach served as a reasonableness check on the value conclusions derived from the income capitalization approach.

Cost Approach. The cost approach was employed primarily for two purposes: (i) to establish the land value component of each property using the sales comparison approach for comparable vacant land parcels; and (ii) as a general reasonableness check on the improvements component by estimating the replacement cost of the buildings and improvements (less physical deterioration, functional obsolescence, and external obsolescence) and adding the estimated land value. The cost approach was given the least weight in the final value reconciliation for the stabilized, income-producing properties, but it was instrumental in establishing the land-improvement split for allocation purposes.

Individual Property Valuation; No Portfolio Premium or discount. Each property was valued individually on a standalone basis. No portfolio premium (reflecting the incremental value of acquiring a diversified, multi-property portfolio in a single transaction) or portfolio discount (reflecting the reduced pool of potential buyers for a large portfolio) was applied. This individual-property-level valuation approach is consistent with the requirements of Section 1060, which requires allocation of consideration to individual assets based on their respective fair market values.

C. Key Assumptions and Limiting Conditions

The Stonebridge appraisals are subject to the following key assumptions and limiting conditions, which are standard for appraisals of this nature:

(i) Each property is assumed to have clear and marketable title, subject only to the permitted exceptions identified in the preliminary title commitments issued by Commonwealth National Title Insurance Company.

(ii) Each property is valued subject to its existing leases — that is, the appraisals reflect the leased fee interest rather than the fee simple interest. This distinction is important because the value attributable to in-place leases (including any above-market or below-market components) is reflected in the leased fee valuation.

(iii) The appraisals assume no material environmental contamination except as specifically noted. Extraordinary assumptions have been noted for two properties — the Westlake Distribution Hub (Houston, TX) and Lakeland Crossings Industrial (Lakeland, FL) — where Phase I Environmental Site Assessments identified de minimis recognized environmental conditions ("RECs"). In both cases, Stonebridge has concluded, based on the Phase I ESA reports and supplemental information provided by the Seller's environmental consultant, that the identified RECs are not expected to materially affect the fair market value of the properties. The Westlake REC relates to a former adjacent industrial operation, and the Lakeland REC relates to a historical dry-cleaning operation on a nearby parcel. Neither condition has been identified as requiring remediation at the subject properties.

(iv) The appraisals do not take into account any costs or savings associated with the portfolio-level transaction (e.g., transaction costs, financing costs, or economies of scale in property management), which are properly attributable to the buyer and seller rather than to the individual property values.

V. AGREED PURCHASE PRICE ALLOCATION — PROPERTY-BY-PROPERTY

A. Summary Allocation Table

The following table sets forth the agreed purchase price allocation among the 14 properties, as reflected in Exhibit K to the PSA and as adjusted for the $1,070,000 PCA credit. The allocation is based on the relative appraised values determined by Stonebridge Valuation Advisors, with adjustments for the PCA credit allocated to specific properties as discussed in Part V.B below. The aggregate appraised values serve as the basis for the pro rata allocation of the adjusted purchase price of $1,098,930,000. Because the negotiated Purchase Price differs from the sum of individual property appraisals, the allocated purchase price for each property reflects a proportional scaling of appraised values to the adjusted Purchase Price.

The aggregate appraised values determined by Stonebridge serve as the basis for the pro rata allocation set forth above. Because the negotiated adjusted Purchase Price of $1,098,930,000 is a product of arm's-length negotiation between sophisticated parties and differs slightly from the simple average of the individual Stonebridge appraisals, the allocated purchase price for each property has been scaled proportionally. That is, each property's allocated purchase price is equal to the product of (x) the adjusted Purchase Price ($1,098,930,000) multiplied by (y) a fraction, the numerator of which is the Stonebridge appraised value for that property and the denominator of which is the aggregate Stonebridge appraised value for all 14 properties, subject in each case to the specific PCA credit adjustments described in Part V.B below.

The allocated purchase prices set forth above are subject to final confirmation at or promptly following the closing date. To the extent that any post-closing proration true-up or other purchase price adjustment materially changes the total consideration, the allocated amounts will be adjusted proportionally and reflected in amended or supplemental Form 8594 filings as appropriate.

B. Adjustment for PCA Credit

The $1,070,000 PCA credit reflects 50% of the $2,140,000 in aggregate estimated immediate repair costs identified during Buyer's due diligence investigation. The PCA credit has been allocated to the four specific properties for which the property condition consultant identified immediate repair needs, consistent with the approach agreed upon in the First Amendment to the PSA dated April 12, 2024. The allocation of the PCA credit among the four affected properties is as follows:

During the negotiation of the First Amendment, a question arose as to whether the PCA credit should be treated as a reduction in the allocated purchase price attributable to each specific affected property, or whether it should instead be allocated pro rata across the entire 14-property portfolio. After discussion among the parties and their respective tax advisors, it was agreed that the PCA credit should be allocated to the specific properties for which repairs were identified, rather than spread across the portfolio. This approach is consistent with the economic substance of the credit — it was negotiated in direct response to identified deficiencies at specific properties — and is supported by the language of the First Amendment, which ties the credit to the specific repair items at each affected property. The allocated purchase prices set forth in the summary table above reflect this property-specific treatment of the PCA credit.

C. Allocation of Assumed Debt Among Properties

The total assumed mortgage indebtedness of $612,000,000 forms part of the aggregate consideration for the transaction and must be allocated among the properties secured by each respective loan facility. The three assumed loan facilities and their respective allocations are as follows:

Pinnacle Federal Bank, N.A. — $421,600,000 aggregate principal balance; fixed interest rate of 4.22% per annum; maturity date of July 1, 2028. This facility is a cross-collateralized and cross-defaulted loan secured by the eight logistics properties comprising Properties 1 through 8 in the portfolio (designated as Loans 1-A through 1-H). The $421,600,000 principal balance is allocated among the eight secured properties on the basis of the relative appraised values of such properties, consistent with the allocation methodology applied to the aggregate purchase price.

Veltrano Capital Lending Corp. — $142,300,000 aggregate principal balance; fixed interest rate of 4.68% per annum; maturity date of March 1, 2029. This facility is secured by the four office properties comprising Properties 9 through 12 in the portfolio (designated as Loans 2-A through 2-D). The $142,300,000 principal balance is allocated among the four secured properties on the basis of relative appraised values.

Sycamore Life Insurance Company — $48,100,000 aggregate principal balance; fixed interest rate of 3.95% per annum; maturity date of December 1, 2030. This facility is secured by the two remaining logistics properties comprising Properties 13 and 14 in the portfolio (designated as Loans 3-A and 3-B). The $48,100,000 principal balance is allocated between the two secured properties on the basis of relative appraised values.

It is important to note that the allocation of assumed debt among the properties does not change the overall purchase price or the aggregate amount of consideration subject to allocation under Section 1060. The debt allocation affects only the composition of consideration at the property level — i.e., the proportion of each property's allocated purchase price that is funded by assumed debt versus cash equity — but the total consideration for allocation purposes remains $1,098,930,000 regardless of how the assumed debt is allocated. The treatment of assumed debt as part of the buyer's acquisition cost is well established under general tax principles. See, e.g., Crane v. Commissioner, 331 U.S. 1 (1947); Commissioner v. Tufts, 461 U.S. 300 (1983).

VI. INTRA-PROPERTY ALLOCATION — ASSET CLASSES

A. Methodology for Allocating Within Each Property

For each of the 14 properties, the allocated purchase price determined on a property-level basis (as set forth in Part V above) must be further subdivided among the Section 1060 asset classes to establish the buyer's tax basis in each category of acquired assets. This intra-property allocation is critical because the depreciation and amortization treatment of each asset category differs significantly, and the allocation therefore directly affects Fairwater's taxable income and REIT distribution requirements in future years. The methodology for each asset class is described below.

Class I — Cash and Cash Equivalents. Each Target Entity maintains one or more operating accounts at Magnolia Commerce Bank, N.A. (225 Peachtree Street NE, Suite 100, Atlanta, Georgia 30303; contact: Linda Prescott, Vice President, Commercial Banking). At closing, the operating account balances in each Target Entity will be conveyed to Buyer as part of the membership interest transfer. In addition, each Target Entity holds tenant security deposits totaling $4,283,000 in the aggregate across the 87 leases in the portfolio. These security deposits are held in segregated accounts and constitute liabilities of the Target Entities (as they are refundable to tenants upon lease expiration, subject to permitted deductions). For allocation purposes, the cash and cash equivalents held in the operating accounts are allocated at face value to Class I. Tenant security deposits, while reflected as cash on the Target Entity balance sheets, are offset by corresponding security deposit liabilities and accordingly do not generate net value for Class I allocation purposes. The aggregate Class I allocation across all 14 Target Entities is estimated at approximately $2,650,000, representing the sum of operating account balances as of the anticipated closing date.

Class III — Accounts Receivable and Other Debt Instruments. Each Target Entity holds outstanding tenant receivables as of the closing date, consisting of accrued rents receivable, common area maintenance ("CAM") charge reimbursements, operating expense ("OpEx") reimbursements, and other miscellaneous tenant charges. These receivables are allocated at fair market value, which for current receivables is generally equal to face value less an appropriate reserve for doubtful accounts. The aggregate Class III allocation across all 14 Target Entities is estimated at approximately $1,840,000. The receivables have been analyzed property by property, and no material collection risk has been identified with respect to any individual tenant receivable balance.

Class V — Tangible Assets (Real Property and Personal Property). This is the dominant asset class for all 14 properties and receives the vast majority of the aggregate purchase price allocation. Within Class V, the following subcategories are identified and allocated separately:

Land. Land is allocated based on the land-improvement splits established in the Stonebridge appraisals. For each property, Stonebridge determined the value of the underlying land parcel using the sales comparison approach, analyzing recent sales of comparable vacant land parcels in the relevant submarket. Land is a non-depreciable asset, and therefore the allocation to land directly reduces the depreciable basis available to Fairwater. The land allocation is a critical variable in the overall allocation analysis, and the land values derived by Stonebridge are supported by detailed comparable land sale analyses included in each appraisal report.

Buildings and Improvements. The value of buildings and improvements for each property is allocated as the difference between the total real property value (as appraised by Stonebridge) and the separately determined land value. This category includes the structural components of each building (foundation, shell, roof, exterior walls), as well as site improvements (parking areas, landscaping, signage, fencing, and utility infrastructure). Buildings and improvements classified as nonresidential real property are depreciable over 39 years on a straight-line basis under IRC Section 168(c).

Tenant Improvements. To the extent identified in the Stonebridge appraisals or in the property-level records maintained by GMP Fund III's property management team, tenant improvements ("TIs") are allocated separately from the building shell. Tenant improvements include interior buildouts, specialized HVAC systems, demising walls, flooring, ceiling finishes, and other improvements installed for the benefit of specific tenants. Tenant improvements are depreciated over the shorter of their useful life or the remaining term of the lease to which they relate, which in many cases results in a significantly shorter depreciable life than the 39-year recovery period applicable to the building shell.

Tangible Personal Property (FF&E). Furniture, fixtures, equipment, and supplies located at each property are allocated separately as tangible personal property within Class V. For the logistics properties, the tangible personal property allocation is relatively de minimis, as logistics/distribution buildings are generally "warm shell" or "cold shell" properties with minimal landlord-furnished equipment. The primary items of personal property at the logistics properties consist of dock equipment (dock levelers, bumpers, and seals), HVAC units, and building management systems. For the office properties, the tangible personal property allocation is more significant, reflecting lobby furniture, common area furnishings, fitness center equipment, conference room equipment and audiovisual systems, security systems, and elevator control systems. The aggregate tangible personal property allocation across all 14 properties is estimated at approximately $8,120,000, of which approximately $5,460,000 is attributable to the four office properties and approximately $2,660,000 is attributable to the ten logistics properties.

Class VI — Section 197 Intangibles. A limited but meaningful portion of the aggregate purchase price is allocated to intangible assets amortizable under IRC Section 197. The principal categories of Class VI intangibles identified in the portfolio are:

In-Place Lease Value. The in-place lease value represents the economic benefit to the property owner of having leases in place with creditworthy tenants, as compared to the hypothetical scenario of owning vacant space that would need to be marketed and leased. The in-place lease value encompasses the avoided costs of tenant origination (including marketing costs, leasing commissions, legal fees, and tenant improvement allowances) and the avoided economic vacancy that would be incurred during the lease-up period. Stonebridge identified the in-place lease value for each property by estimating the hypothetical lease-up period and associated costs that would be required to bring each property to its current occupancy level from a vacant condition, discounted to present value. The aggregate in-place lease intangible allocation across all 14 properties is estimated at approximately $41,500,000.

Above-Market and Below-Market Lease Adjustments. For each lease, Stonebridge compared the in-place contractual rent to the estimated current market rent for comparable space in the relevant submarket. Where the in-place rent exceeds market rent, an above-market lease intangible (a wasting asset) is identified, which will be amortized (as a reduction in rental income) over the remaining lease term. Where the in-place rent is below market rent, a below-market lease liability is identified, which will be amortized (as an increase in rental income) over the remaining lease term, including any below-market-rate renewal option periods. The net aggregate above/below-market lease adjustment across the portfolio results in a net above-market intangible of approximately $3,780,000, reflecting the fact that a majority of the leases in the logistics subportfolio were executed at rents that now exceed current market levels due to the recent softening in certain Sun Belt logistics markets.

Leasing Commissions Absorbed. The value of leasing commissions that were previously paid by GMP Fund III or the Target Entities in connection with the existing leases and that would need to be replicated if the leases were not in place. This component is generally subsumed within the in-place lease value calculation but may be broken out separately for financial reporting purposes under ASC 805.

Tenant Relationships. The value, if any, attributable to the probability that existing tenants will renew their leases upon expiration. This intangible is difficult to quantify and is generally subsumed within the in-place lease value analysis. No separate allocation to tenant relationships has been made in the agreed Exhibit K schedule.

Class VII — Goodwill and Going Concern Value. As noted above, the Class VII allocation is expected to be zero for all 14 properties. Stabilized real estate portfolios do not typically generate goodwill or going concern value independent of the tangible real property and lease-related intangible assets. The agreed Exhibit K schedule allocates no consideration to Class VII for any property.

B. Depreciation Implications for Buyer (REIT Context)

The intra-property allocation among asset classes has direct and significant implications for Fairwater's tax depreciation and amortization deductions, which in turn affect its REIT taxable income and its ability to meet the distribution requirements of IRC Section 857. The key depreciation and amortization parameters are summarized below:

Land: Non-depreciable. The allocation to land permanently reduces Fairwater's depreciable basis in each property.

Buildings and Improvements: Depreciable over 39 years on a straight-line basis under IRC Section 168(c), as nonresidential real property placed in service after May 12, 1993. The 39-year recovery period applies to the structural components of the building as well as to site improvements that are classified as nonresidential real property (e.g., certain paving, fencing, and utility infrastructure).

Tenant Improvements: Depreciated over the shorter of the useful life of the improvement or the remaining term of the lease to which the improvement relates. For leases with relatively short remaining terms (e.g., 2–5 years), this results in a significantly accelerated depreciation schedule compared to the 39-year building recovery period. This is a favorable allocation from Buyer's perspective, as it generates larger near-term depreciation deductions.

Tangible Personal Property (Non-Real-Property Class V Assets): Classified as 5-year or 7-year MACRS property depending on the specific asset type. Under IRC Section 168(k), qualifying personal property may be eligible for bonus depreciation (100% immediate expensing for property placed in service before January 1, 2023, with the rate declining by 20 percentage points per year thereafter — 80% for 2023, 60% for 2024, 40% for 2025). For property placed in service in 2024 (the closing year), the applicable bonus depreciation rate is 60%. The availability of bonus depreciation makes the allocation to tangible personal property particularly valuable from a tax perspective.

Section 197 Intangibles (In-Place Leases, Above/Below-Market Leases): Amortized over 15 years on a straight-line basis under IRC Section 197. For financial reporting purposes (ASC 805), above-market and below-market lease intangibles are amortized over the remaining lease term rather than 15 years; however, for tax purposes, the 15-year amortization period governs. The 15-year amortization of in-place lease intangibles provides a meaningful deduction for Fairwater over the initial 15-year period following the acquisition.

The proper allocation of the purchase price among these categories is of critical importance to Fairwater's REIT taxable income calculations. Under IRC Section 857(a), a REIT is generally required to distribute at least 90% of its REIT taxable income to its shareholders each year. Depreciation and amortization deductions reduce REIT taxable income, which in turn reduces the minimum required distribution. Maximizing the allocation to shorter-lived depreciable and amortizable assets (tenant improvements, personal property, and Section 197 intangibles) therefore increases the spread between cash flow and taxable income, providing Fairwater with greater flexibility in its capital allocation and distribution policy.

C. Interaction with REIT Asset and Income Tests

The allocation of the purchase price among asset classes also has implications for Fairwater's compliance with the REIT asset and income tests set forth in IRC Section 856. A detailed analysis of these implications is set forth in the separate REIT Qualification Impact Memorandum being prepared by our firm, but the key points are summarized here for reference.

Under IRC Section 856(c)(4), at least 75% of a REIT's total assets at the close of each calendar quarter must consist of real estate assets, cash, cash items, and government securities. "Real estate assets" are defined in IRC Section 856(c)(5)(B) to include real property (including interests in real property and interests in mortgages on real property) and shares (or transferable certificates of beneficial interest) in other REITs. Importantly, for purposes of the REIT asset test, intangible assets that are ancillary to real property ownership and leasing — including in-place lease intangibles, above/below-market lease adjustments, and tenant relationship intangibles — are generally treated as "interests in real property" and therefore qualify as "real estate assets" under Section 856(c)(5)(B), as clarified by IRS guidance and subsequent statutory amendments.

The allocation of consideration to tangible personal property (FF&E) and to any non-real-property intangible assets (e.g., goodwill, if any) would not qualify as real estate assets for purposes of the 75% asset test. However, the aggregate allocation to non-real-estate assets in the portfolio is de minimis relative to Fairwater's total asset base, and is not expected to jeopardize compliance with the 75% test. Based on our analysis, the agreed allocation is not expected to adversely affect Fairwater's REIT qualification in any respect. This conclusion is subject to the more detailed analysis in the REIT Qualification Impact Memorandum.

VII. STATE-LEVEL ALLOCATION CONSIDERATIONS

A. Transfer Tax Implications

The allocation of the purchase price among the 14 properties has direct implications for the computation of transfer taxes payable in each state where properties are located. A detailed analysis of the applicable transfer tax regimes is set forth in the separate Transfer Tax Analysis — Five States memorandum that I am preparing concurrently. The following summary is provided for reference.

Because the transaction is structured as a transfer of membership interests rather than a direct conveyance of real property, the applicability of state transfer taxes depends on whether the relevant state imposes a "controlling interest transfer tax" — i.e., a tax on the transfer of a controlling interest in an entity that owns real property within the state. The analysis varies by state:

Georgia: Georgia imposes a real estate transfer tax on the transfer of a controlling interest in an entity that owns Georgia real property. Based on the allocated purchase prices for the four Georgia properties (Fairfield Logistics Center I, Fairfield Logistics Center II, Buckhead Place Office Tower, and Peachtree Corners Logistics Center), the estimated Georgia transfer tax is approximately $1,250,000.

Texas: Texas does not impose a state-level transfer tax on real property conveyances or controlling interest transfers. Accordingly, no transfer tax is due in connection with the three Texas properties (Westlake Distribution Hub, Katy Freeway Logistics Park, and Alliance Commerce Center). This is a meaningful tax benefit to both parties.

Florida: Florida imposes a documentary stamp tax on the transfer of a controlling interest in entities owning Florida real property. Based on the allocated purchase prices for the three Florida properties (Lakeland Crossings Industrial, Southport Logistics Park, and Brickell Bay Office Building), the estimated Florida documentary stamp tax is approximately $1,680,000.

Tennessee: Tennessee imposes a real estate transfer tax (including on controlling interest transfers) based on the greater of the consideration paid or the property value. Based on the allocated purchase prices for the three Tennessee properties (Murfreesboro Distribution Center, Cool Springs Office Park, and Mount Juliet Commerce Park), the estimated Tennessee transfer tax is approximately $740,000.

North Carolina: North Carolina imposes an excise tax on the transfer of real property, including controlling interest transfers. Based on the allocated purchase price for the one North Carolina property (SouthPark Corporate Center), the estimated North Carolina excise tax is approximately $180,000.

The total estimated transfer taxes across all five states are approximately $3,850,000. Under Section 8.3 of the PSA, transfer taxes are split equally between Buyer and Seller, resulting in an estimated cost of $1,925,000 to each party. The property-level allocated purchase prices set forth in Exhibit K form the basis for computing the transfer taxes in each state, and the parties have agreed that the allocation will be used consistently for transfer tax purposes.

B. State Income and Franchise Tax Allocation

Each of the five states in which properties are located imposes state-level income, franchise, or similar taxes that may be implicated by the transaction. A detailed analysis of the state income and franchise tax filing obligations is set forth in the separate State Income / Franchise Tax Filing Memorandum. The following summary is provided for reference.

The property-level allocation of the purchase price is directly relevant to state income and franchise tax filings because each state will require reporting of the gain or loss attributable to the sale of property located within that state (for Seller) and the establishment of tax basis in property located within that state (for Buyer). The allocated purchase prices must be used consistently across federal and state filings to avoid audit risk and potential penalties.

Texas: Texas imposes a franchise tax (margin tax) on entities doing business in Texas. Although each Target Entity is a Delaware LLC, the three Texas Target Entities (GMP Westlake LLC, GMP Katy LLC, and GMP Alliance LLC) are qualified to do business in Texas and are subject to the Texas franchise tax. Following the acquisition, Fairwater (through the Texas Target Entities) will be subject to the Texas franchise tax on the revenue generated by the Texas properties. The franchise tax implications of the transaction, including any step-up in tax basis for franchise tax purposes, should be coordinated with Ashford Prewitt LLP.

Georgia, Florida, Tennessee, and North Carolina: Each of these states imposes a corporate income tax (or, in the case of Tennessee, a franchise and excise tax) on entities doing business within the state. The state income/franchise tax filing obligations for each Target Entity, including any gain recognition by the Seller and basis establishment by the Buyer, should be analyzed state by state to ensure proper reporting.

C. Real Property Tax Assessment Implications

The purchase price allocation may have indirect consequences for local real property tax assessments. In many jurisdictions, county and municipal tax assessors monitor real property transfers and may use the recorded purchase price or allocated value as a basis for reassessing the property's assessed value for ad valorem tax purposes. To the extent the allocated purchase price for a given property exceeds its current assessed value, the assessor may initiate a reassessment that results in higher property taxes.

Estimated 2024 real property taxes across the 14-property portfolio total approximately $14,760,000 annually. This figure is based on current assessed values, which in several cases are significantly lower than the allocated purchase prices. Buyer should be prepared for the possibility of assessment increases in jurisdictions where local assessors routinely review recorded transfer documents and adjust assessed values to reflect recent transaction prices. In particular, the Georgia, Florida, and Tennessee properties may be subject to reassessment following the recording of controlling interest transfer tax returns, which in some jurisdictions must disclose the consideration paid.

Fairwater's internal real estate tax team should monitor assessment notices following the closing and should consider engaging local property tax counsel to file assessment appeals if reassessments result in materially above-market tax burdens. This issue is particularly relevant for the logistics properties, where rapid market appreciation in recent years may have created a disconnect between current assessed values and transaction-based values.

VIII. IRS FORM 8594 — FILING REQUIREMENTS

A. Filing Obligation

Both Buyer and Seller are required to file IRS Form 8594 (Asset Acquisition Statement under Section 1060) with their respective federal income tax returns for the taxable year in which the closing of the transaction occurs. As the closing is scheduled for June 6, 2024, both parties' Form 8594 filings will be due with their 2024 federal income tax returns (or extensions thereof).

Form 8594 must be filed for each "applicable asset acquisition" as defined in IRC Section 1060(c). Because the transaction involves 14 separate Target Entities, each of which is treated as a disregarded entity for federal income tax purposes, a question arises as to whether 14 separate Forms 8594 should be filed (one for each Target Entity treated as a separate applicable asset acquisition) or whether a single aggregated Form 8594 with a supporting schedule may be filed for the portfolio as a whole. As a practical matter, the IRS has accepted both approaches in prior transactions of similar structure. We recommend that the approach be coordinated between Ashford Prewitt LLP (Buyer's accountants) and Caldwell Murray & Oakes LLP (Seller's accountants) to ensure consistency. Our preliminary recommendation is to file a single Form 8594 for the aggregate transaction, accompanied by a detailed supporting schedule that provides the property-by-property and class-by-class allocation for each of the 14 Target Entities. This approach is administratively simpler while providing the IRS with full transparency into the allocation methodology.

B. Draft Form 8594

A draft Form 8594 has been prepared by Calderwood & Harkness in coordination with Naomi Ikeda, CPA, Tax Partner at Ashford Prewitt LLP. The draft is attached hereto as Attachment C and is available for review by all addressees of this memorandum. The draft Form 8594 reflects the agreed Exhibit K allocation as adjusted for the $1,070,000 PCA credit and incorporates the intra-property class-by-class allocation described in Part VI above.

The Form 8594 includes the following components:

Part I — General Information. This section identifies the parties to the transaction, including the names, addresses, and employer identification numbers ("EINs") of Buyer and Seller:

• Buyer: Fairwater Real Estate Investment Trust; EIN: 52-2198437

• Seller: Greystone Meridian Partners Fund III, L.P.; EIN: 83-1647205

Each Target Entity is also identified by name and EIN in the supporting schedule:

Part II — Assets Transferred. This section sets forth the aggregate consideration allocated to each of the seven asset classes (Class I through Class VII) under the residual method. The supporting schedule provides a breakdown of the class-by-class allocation for each individual Target En

MEMORANDUM ATTORNEY WORK PRODUCT / PRIVILEGED & CONFIDENTIAL
FROM: Sylvia Hartwell, Partner (Tax) Calderwood & Harkness LLP 1700 K Street NW, Suite 900 Washington, DC 20006
TO: Douglas Fairchild, Partner (Real Estate) Calderwood & Harkness LLP 450 Park Avenue, 28th Floor New York, NY 10022
CC: Angela Fontaine, Partner (Real Estate), Calderwood & Harkness LLP Grace Nakamura, Associate (Real Estate), Calderwood & Harkness LLP Rafael Dominguez, Associate (Real Estate), Calderwood & Harkness LLP David Elgin Park, General Counsel, Fairwater Real Estate Investment Trust Camille Oduya, In-House Real Estate Counsel, Fairwater Real Estate Investment Trust Naomi Ikeda, CPA, Tax Partner, Ashford Prewitt LLP
DATE: April 18, 2024
RE: Purchase Price Allocation — Fairwater Real Estate Investment Trust Acquisition of 14-Property Sun Belt Logistics and Office Portfolio from Greystone Meridian Partners Fund III, L.P.
MATTER NO.: 1036-00004
Right-click to update Table of Contents
I. EXECUTIVE SUMMARY
This memorandum analyzes the purchase price allocation methodology applicable to Fairwater Real Estate Investment Trust's ("Fairwater" or "Buyer") acquisition of 100% of the membership interests in 14 single-purpose, property-owning Delaware limited liability companies (collectively, the "Target Entities") from Greystone Meridian Partners Fund III, L.P. ("GMP Fund III" or "Seller") for a total aggregate purchase price of $1,100,000,000 (the "Purchase Price"). The acquisition is governed by that certain Purchase and Sale Agreement dated February 28, 2024 (as amended, the "PSA"), by and between Buyer and Seller, with an anticipated closing date of June 6, 2024.
Although the transaction is structured as an entity-level acquisition — i.e., a purchase of the membership interests in each Target Entity — for federal income tax purposes the transaction is treated as a direct purchase of the underlying assets of each Target Entity. This treatment follows from the fact that each Target Entity is a single-member Delaware limited liability company that has not elected to be classified as a corporation and is therefore treated as a "disregarded entity" for federal income tax purposes under Treasury Regulation Section 301.7701-3. Accordingly, the transfer of 100% of the membership interests in each Target Entity is disregarded, and the transaction is instead treated as a purchase by Fairwater of the real property and other assets owned by each such entity. This characterization implicates the allocation requirements of Internal Revenue Code ("IRC") Section 1060, which governs applicable asset acquisitions.
The agreed-upon allocation of the Purchase Price among the 14 properties is reflected in Exhibit K to the PSA (the "Allocation Schedule"). The Allocation Schedule is based on independent appraisals prepared by Stonebridge Valuation Advisors, LLC ("Stonebridge"), under the direction of Maureen Alcott, MAI, Lead Appraiser, with offices located at 227 West Trade Street, Suite 1010, Charlotte, North Carolina 28202. The Stonebridge appraisals provide property-level fair market value determinations as of December 31, 2023, and form the evidentiary foundation for the agreed allocation.
Under the terms of the PSA, both Buyer and Seller have covenanted to report the allocation consistently on IRS Form 8594 (Asset Acquisition Statement under Section 1060) and on all applicable state income, franchise, and transfer tax returns. This covenant is binding on both parties and is designed to ensure compliance with the consistency requirements imposed by Section 1060(a) and the regulations thereunder.
The aggregate adjusted purchase price for allocation purposes is $1,098,930,000, reflecting a property condition assessment ("PCA") credit of $1,070,000 negotiated by the parties. The PCA credit represents 50% of the $2,140,000 in aggregate estimated immediate repair costs identified by the buyer's property condition consultant during the due diligence period. This credit was formalized in the First Amendment to the PSA, dated April 12, 2024.
For allocation purposes, total consideration includes assumed mortgage indebtedness of $612,000,000, which is part of the aggregate consideration paid by Buyer. The assumed debt is held by three lenders: (i) Pinnacle Federal Bank, N.A. ($421,600,000); (ii) Veltrano Capital Lending Corp. ($142,300,000); and (iii) Sycamore Life Insurance Company ($48,100,000). The cash equity component payable at closing is $488,000,000, which, together with the assumed debt of $612,000,000, yields the gross purchase price of $1,100,000,000.
This memorandum sets forth the legal framework governing the allocation, describes the appraisal methodology employed by Stonebridge, presents the agreed property-by-property allocation, discusses the intra-property allocation among Section 1060 asset classes, addresses state-level considerations, outlines the IRS Form 8594 filing requirements, identifies specific allocation issues that were the subject of negotiation between the parties, and concludes with recommendations and next steps.
II. TRANSACTION OVERVIEW
A. Parties
Buyer. Fairwater Real Estate Investment Trust is a Maryland real estate investment trust headquartered at 7200 Chesapeake Parkway, Suite 1100, Columbia, Maryland 21044. Fairwater's common shares of beneficial interest are listed on the New York Stock Exchange under the ticker symbol "FREIT." As of the fourth quarter of 2023, Fairwater's market capitalization was approximately $4.8 billion. Fairwater is a publicly traded REIT focused on the acquisition, ownership, and management of logistics, industrial, and office properties in major metropolitan markets throughout the United States, with a particular focus on Sun Belt markets characterized by strong demographic growth, favorable business climates, and robust demand for industrial and logistics space. The acquisition of the Greystone Meridian portfolio represents a significant strategic expansion of Fairwater's Sun Belt footprint.
Seller. Greystone Meridian Partners Fund III, L.P. is a Delaware limited partnership with its principal office at 3300 Peachtree Road NE, Suite 2200, Atlanta, Georgia 30326. The general partner of GMP Fund III is Greystone Meridian Capital LLC, an Atlanta-based real estate private equity firm co-founded and co-managed by Victor Lansdell and Elise Rathborne, who serve as Co-Founders and Managing Partners. GMP Fund III is a 2018-vintage value-add and core-plus real estate fund with a total fund size of approximately $2.4 billion. The 14 properties comprising the portfolio were acquired by GMP Fund III between 2019 and 2021 at an aggregate cost basis of approximately $845,000,000. Seller's realization of the portfolio at the negotiated Purchase Price of $1,100,000,000 reflects a meaningful gain at the fund level.
Seller's Accountants. Caldwell Murray & Oakes LLP, with offices at 3344 Peachtree Road NE, Suite 1800, Atlanta, Georgia 30326. William Oakes, CPA, serves as the Engagement Partner responsible for GMP Fund III's tax and audit matters.
Buyer's Accountants. Ashford Prewitt LLP, with offices at 1 South Street, Suite 2700, Baltimore, Maryland 21202. Martin Ashford, CPA, serves as the Engagement Partner for Fairwater's annual audit, and Naomi Ikeda, CPA, Tax Partner, leads the tax advisory team for this transaction.
Seller's Counsel. Blackridge Hayes LLP, with offices at 1285 Avenue of the Americas, 34th Floor, New York, New York 10019. Nathaniel Pryce serves as lead transaction counsel for Seller, and Ingrid Solberg serves as Seller's tax counsel. Both Ms. Solberg and Mr. Pryce have been instrumental in negotiating the allocation provisions of the PSA and Exhibit K.
B. Transaction Structure
The transaction is structured as an entity-level acquisition in which Fairwater acquires 100% of the outstanding membership interests in each of the 14 Target Entities. Each Target Entity is a single-purpose Delaware limited liability company that was formed by GMP Fund III (or its affiliates) for the sole purpose of holding title to one of the 14 properties in the portfolio. Each Target Entity is wholly owned by GMP Fund III and has at all times been treated as a disregarded entity for federal income tax purposes under the default classification rules of Treasury Regulation Section 301.7701-3.
The PSA was executed on February 28, 2024, and is governed by the laws of the State of New York. The PSA provides for a total purchase price of $1,100,000,000, consisting of (i) cash equity of $488,000,000 payable at closing and (ii) the assumption by Buyer of $612,000,000 in aggregate outstanding mortgage indebtedness secured by the properties. As discussed in greater detail below, the three assumed mortgage loans are held by Pinnacle Federal Bank, N.A., Veltrano Capital Lending Corp., and Sycamore Life Insurance Company.
Subsequent to execution of the PSA, the parties negotiated a PCA credit of $1,070,000 in connection with certain immediate repair costs identified during Buyer's due diligence investigation. This credit was formalized in the First Amendment to the PSA, executed on April 12, 2024. The PCA credit of $1,070,000 represents 50% of the $2,140,000 in aggregate estimated immediate repair costs and is applied as a reduction to the purchase price at closing, resulting in an adjusted purchase price of $1,098,930,000 for allocation purposes.
The closing of the transaction is scheduled for June 6, 2024. At closing, GMP Fund III will transfer to Fairwater (or its designated acquisition subsidiaries) all of its right, title, and interest in and to the membership interests in each Target Entity, and Fairwater will assume the obligations of GMP Fund III with respect to the assumed mortgage indebtedness.
Seller's aggregate cost basis in the 14 properties is approximately $845,000,000, reflecting the original acquisition prices paid by GMP Fund III between 2019 and 2021, plus capitalized improvements and acquisition costs, less accumulated depreciation and amortization.
C. Portfolio Summary
The portfolio comprises 14 properties located across five states in the southeastern United States — Georgia (4 properties), Texas (3 properties), Florida (3 properties), Tennessee (3 properties), and North Carolina (1 property). The portfolio is diversified by property type, geographic market, and tenant base, and is generally stabilized with strong in-place occupancy.
Property Type Composition. The portfolio consists of 10 logistics/industrial properties and 4 office properties. The 10 logistics properties comprise approximately 4,373,000 rentable square feet ("RSF"), representing approximately 83.7% of the total portfolio square footage. The 4 office properties comprise approximately 851,000 RSF, representing approximately 16.3% of the total portfolio square footage. The total portfolio encompasses approximately 5,224,000 RSF across all 14 properties.
Occupancy. As of the effective date of the Stonebridge appraisals (December 31, 2023), the portfolio was subject to 87 leases with a weighted-average occupancy rate of 93.2%. The logistics subportfolio exhibited stronger occupancy at 96.1%, reflecting the robust demand for industrial and logistics space in the Sun Belt markets. The office subportfolio had a weighted-average occupancy rate of 82.7%, reflecting the more challenging leasing environment for office properties in the current market.
Income. Annual in-place base rent across the portfolio totals approximately $74,800,000, resulting in an in-place capitalization rate of approximately 6.80% based on the aggregate Purchase Price. The weighted-average remaining lease term across the portfolio is approximately 5.8 years, providing a reasonable degree of income stability during the initial years of Fairwater's ownership.
III. LEGAL FRAMEWORK — SECTION 1060 AND APPLICABLE TAX PRINCIPLES
A. Treatment of Entity Purchase as Asset Acquisition
The transaction is structured as a purchase of membership interests rather than a direct purchase of real property. However, because each Target Entity is a single-member LLC that has not elected to be treated as a corporation for federal income tax purposes, each Target Entity is classified as a "disregarded entity" under the default classification rules of Treasury Regulation Section 301.7701-3. Specifically, Treasury Regulation Section 301.7701-3(b)(1)(ii) provides that a domestic eligible entity with a single owner is disregarded as an entity separate from its owner unless it affirmatively elects to be classified as an association taxable as a corporation.
Because each Target Entity is disregarded for federal income tax purposes, the transfer by GMP Fund III of 100% of its membership interests in each Target Entity is not treated as a transfer of partnership interests or corporate stock. Rather, the transaction is treated, for all federal income tax purposes, as a direct transfer by GMP Fund III of the underlying assets held by each Target Entity — principally, the real property, tangible personal property, and intangible assets associated with each property.
This characterization has a critical consequence: the transaction constitutes an "applicable asset acquisition" within the meaning of IRC Section 1060(c). An applicable asset acquisition is defined as any transfer (whether direct or indirect) of assets that constitute a trade or business, and with respect to which the transferee's basis in the transferred assets is determined wholly by reference to the consideration paid for such assets. Because the 14 properties and their associated leases, operations, and assets collectively constitute a trade or business — and because Fairwater's tax basis in the acquired assets will be determined by reference to the purchase price paid — the allocation requirements of Section 1060 are fully applicable.
Both GMP Fund III (as Seller) and Fairwater (as Buyer) have confirmed that no Target Entity has filed an IRS Form 8832 (Entity Classification Election) electing to be treated as a corporation, and each Target Entity has been consistently treated as a disregarded entity on all federal and state tax returns filed since its formation. Accordingly, the disregarded entity analysis is straightforward and does not present any classification ambiguity.
B. Section 1060 Residual Method
IRC Section 1060(a) provides that, in the case of an applicable asset acquisition, the transferee's aggregate consideration (i.e., the adjusted purchase price of $1,098,930,000) must be allocated among the acquired assets using the "residual method" prescribed by IRC Section 338(b)(5) and the regulations thereunder. The residual method, as set forth in Treasury Regulation Section 1.338-6(b), requires that the total consideration be allocated among seven classes of assets in a prescribed order of priority. Each class is "filled" with value before any residual consideration is allocated to the next class. The seven classes are as follows:
Class I — Cash and Cash Equivalents. This class includes cash, demand deposits, and similar items held by the Target Entities. The allocated amount equals the face value of such items.
Class II — Actively Traded Personal Property. This class includes certificates of deposit, U.S. government securities, readily marketable stock or securities, and foreign currency. For purposes of this transaction, no assets fall within Class II.
Class III — Accounts Receivable, Other Debt Instruments, and Assets Marked to Market. This class includes accounts receivable arising from the operation of the properties (e.g., tenant receivables for rents, common area maintenance charges, and operating expense reimbursements), as well as any debt instruments held by the Target Entities. These assets are allocated at their fair market value, which in most cases approximates face value for current receivables.
Class IV — Stock in Trade (Inventory-Type Property). This class includes property held for sale in the ordinary course of business. None of the Target Entities holds inventory or stock-in-trade, and no allocation to Class IV is anticipated.
Class V — All Other Tangible and Intangible Assets Not in Classes I Through IV, VI, or VII. This is the most significant class for purposes of this transaction. Class V includes all real property (land, buildings and improvements, and tenant improvements) and tangible personal property (furniture, fixtures, and equipment). The vast majority of the aggregate purchase price will be allocated to Class V assets, reflecting the fundamental nature of the transaction as a real estate acquisition.
Class VI — Section 197 Intangibles (Except Goodwill and Going Concern Value). This class includes intangible assets that are amortizable over 15 years under IRC Section 197. For purposes of this transaction, the primary Class VI intangibles are: (i) in-place lease values (the value attributable to having signed leases in place, as opposed to vacant space requiring lease-up); (ii) above-market and below-market lease adjustments (the present value of the difference between in-place contractual rents and current market rents over the remaining lease terms); (iii) absorbed leasing commissions (the value of leasing commissions that would otherwise need to be paid to lease the space); and (iv) tenant relationships (the value, if any, attributable to the probability of lease renewal by existing tenants). A limited but not insignificant allocation to Class VI intangibles is expected, particularly for properties with above-market rents or long remaining lease terms.
Class VII — Goodwill and Going Concern Value. This class captures any residual consideration not allocated to Classes I through VI. For a stabilized real estate portfolio such as the one at issue, the Class VII allocation is expected to be zero or nominal. Real estate portfolios of this nature generally do not carry goodwill or going concern value independent of the underlying real property and lease intangibles. No goodwill has been allocated in the agreed Exhibit K schedule.
The allocation to each class is limited to the fair market value of the assets within that class. If the total consideration exceeds the aggregate fair market value of all assets in Classes I through VI, the excess is allocated to Class VII (goodwill). Conversely, if the total consideration is less than the aggregate fair market value of assets in Classes I through VII (which is not the case here), the shortfall is allocated to reduce the basis of Class V through VII assets on a proportionate basis.
C. PSA Allocation Agreement — Exhibit K
Section 10.4 of the PSA (the "Allocation Provision") provides that Buyer and Seller shall allocate the aggregate Purchase Price (as adjusted for the PCA credit and any post-closing proration true-up) among the 14 Target Entities and their respective assets in accordance with the allocation schedule set forth on Exhibit K to the PSA. The Allocation Provision further provides that:
(a) Both parties shall file all federal, state, and local tax returns, including without limitation IRS Form 8594, in a manner consistent with the agreed allocation;
(b) Neither party shall take any position on any tax return, in any tax proceeding, or in any other filing or communication with any taxing authority that is inconsistent with the agreed allocation, unless such inconsistent position is required by a "final determination" within the meaning of IRC Section 1313(a); and
(c) The parties shall cooperate in good faith to resolve any dispute with respect to the allocation, including any adjustment required by the Internal Revenue Service or any state or local taxing authority.
The allocation methodology reflected in Exhibit K was developed through a collaborative process involving the tax advisors to both parties. On behalf of Buyer, the allocation was prepared and negotiated by the undersigned (Sylvia Hartwell, Calderwood & Harkness LLP) with substantive input from Naomi Ikeda, CPA, Tax Partner at Ashford Prewitt LLP. On behalf of Seller, the allocation was reviewed and negotiated by Ingrid Solberg, Tax Partner at Blackridge Hayes LLP, with input from William Oakes, CPA, Engagement Partner at Caldwell Murray & Oakes LLP. The negotiations focused principally on the property-by-property allocation (i.e., the allocation among the 14 Target Entities), with the intra-property allocation among asset classes being driven primarily by the Stonebridge appraisals and generally subject to less disagreement.
D. Binding Effect on Both Parties
The agreed allocation set forth in Exhibit K is binding on both Buyer and Seller under the terms of the PSA and under applicable federal tax law. IRC Section 1060(a) provides that, where the parties to an applicable asset acquisition enter into a written agreement establishing the allocation of consideration among the acquired assets, both the transferor and the transferee are bound by such allocation for all federal income tax purposes, provided the allocation is made in a manner consistent with the residual method prescribed by Section 338(b)(5).
The binding nature of the agreed allocation carries meaningful compliance consequences. Under IRC Section 6662, a taxpayer who takes a position on a tax return that is inconsistent with an agreed Section 1060 allocation may be subject to the accuracy-related penalty of 20% of the underpayment attributable to the inconsistency. This penalty applies unless the taxpayer can demonstrate reasonable cause and good faith for the inconsistent position. To mitigate this risk, both parties have affirmatively covenanted in the PSA to file all returns consistently with Exhibit K.
At the state level, each state in which the properties are located may impose its own allocation requirements for purposes of computing state income taxes, franchise taxes, and transfer taxes. While state taxing authorities are not formally bound by a federal Section 1060 allocation, as a practical matter the state-level allocations should be consistent with the federal allocation to avoid audit exposure and potential penalties. The state-level implications are discussed in greater detail in Part VII below and in the separate Transfer Tax Analysis memorandum that I am preparing concurrently.
IV. APPRAISAL METHODOLOGY — STONEBRIDGE VALUATION ADVISORS, LLC
A. Engagement and Scope
Fairwater REIT engaged Stonebridge Valuation Advisors, LLC to provide independent appraisals of each of the 14 properties in the portfolio. Stonebridge is a nationally recognized real estate valuation firm specializing in the appraisal of commercial, industrial, and institutional properties throughout the United States. The engagement was led by Maureen Alcott, MAI, a designated member of the Appraisal Institute with over 25 years of experience in the valuation of income-producing real estate, including logistics, distribution, and office properties in Sun Belt markets.
The Stonebridge appraisal reports are dated as of December 31, 2023 (the "Effective Date"), and were delivered to Fairwater and Calderwood & Harkness during the first quarter of 2024. Each appraisal was prepared in conformity with the Uniform Standards of Professional Appraisal Practice ("USPAP") as promulgated by The Appraisal Foundation, and each report complies with the requirements of Standards Rule 2-2(a) of USPAP for a self-contained appraisal report.
The scope of each appraisal includes the following components:
(i) Determination of the aggregate "as-is" fair market value of the fee simple interest in each property (or, where applicable, the leased fee interest, reflecting the value of the property subject to the existing lease encumbrances);
(ii) Allocation of the appraised value between land and improvements for each property, based on independent land value analyses;
(iii) Identification and valuation of tangible personal property (furniture, fixtures, and equipment), to the extent present at each property; and
(iv) Commentary on the in-place lease structure, tenant credit quality, remaining lease term, and rental rate comparisons to market, to support the identification and valuation of lease-related intangible assets.
The Stonebridge appraisals serve as the evidentiary foundation for the purchase price allocation reflected in Exhibit K. While the aggregate appraised values differ from the negotiated Purchase Price (as the Purchase Price is a function of arm's-length negotiation between the parties rather than a strict average of individual property appraisals), the relative appraised values of the 14 properties provide the basis for the pro rata allocation of the adjusted Purchase Price of $1,098,930,000 among the properties.
B. Valuation Approaches Used
Stonebridge employed three generally accepted appraisal methodologies in valuing each of the 14 properties, with the relative weight accorded to each approach varying based on the property type, data availability, and market conditions:
Income Capitalization Approach. This was the primary valuation approach for all 14 properties, each of which is a stabilized, income-producing asset. Under this approach, Stonebridge analyzed the in-place rental income from existing leases, applied market-derived vacancy and credit loss factors, deducted estimated operating expenses (including management fees, insurance, real property taxes, utilities, and repairs and maintenance), and capitalized the resulting net operating income using market-derived capitalization rates. Capitalization rates were derived from an analysis of comparable sales of similar property types in the relevant metropolitan markets, adjusted for property-specific factors such as age, condition, tenancy, lease term, and location quality. For the logistics properties, capitalization rates ranged from approximately 5.75% to 7.25%; for the office properties, capitalization rates ranged from approximately 7.00% to 8.50%, reflecting the generally higher risk profile and more uncertain income streams associated with office properties in the current market environment.
Sales Comparison Approach. This approach was used as a supplemental valuation methodology for all 14 properties. Stonebridge identified and analyzed recent sales of comparable logistics and office properties in each of the relevant Sun Belt markets, adjusting the comparable sale prices for differences in size, location, age, condition, tenant quality, lease term, and market conditions between the subject property and the comparable sale. The sales comparison approach served as a reasonableness check on the value conclusions derived from the income capitalization approach.
Cost Approach. The cost approach was employed primarily for two purposes: (i) to establish the land value component of each property using the sales comparison approach for comparable vacant land parcels; and (ii) as a general reasonableness check on the improvements component by estimating the replacement cost of the buildings and improvements (less physical deterioration, functional obsolescence, and external obsolescence) and adding the estimated land value. The cost approach was given the least weight in the final value reconciliation for the stabilized, income-producing properties, but it was instrumental in establishing the land-improvement split for allocation purposes.
Individual Property Valuation; No Portfolio Premium or discount. Each property was valued individually on a standalone basis. No portfolio premium (reflecting the incremental value of acquiring a diversified, multi-property portfolio in a single transaction) or portfolio discount (reflecting the reduced pool of potential buyers for a large portfolio) was applied. This individual-property-level valuation approach is consistent with the requirements of Section 1060, which requires allocation of consideration to individual assets based on their respective fair market values.
C. Key Assumptions and Limiting Conditions
The Stonebridge appraisals are subject to the following key assumptions and limiting conditions, which are standard for appraisals of this nature:
(i) Each property is assumed to have clear and marketable title, subject only to the permitted exceptions identified in the preliminary title commitments issued by Commonwealth National Title Insurance Company.
(ii) Each property is valued subject to its existing leases — that is, the appraisals reflect the leased fee interest rather than the fee simple interest. This distinction is important because the value attributable to in-place leases (including any above-market or below-market components) is reflected in the leased fee valuation.
(iii) The appraisals assume no material environmental contamination except as specifically noted. Extraordinary assumptions have been noted for two properties — the Westlake Distribution Hub (Houston, TX) and Lakeland Crossings Industrial (Lakeland, FL) — where Phase I Environmental Site Assessments identified de minimis recognized environmental conditions ("RECs"). In both cases, Stonebridge has concluded, based on the Phase I ESA reports and supplemental information provided by the Seller's environmental consultant, that the identified RECs are not expected to materially affect the fair market value of the properties. The Westlake REC relates to a former adjacent industrial operation, and the Lakeland REC relates to a historical dry-cleaning operation on a nearby parcel. Neither condition has been identified as requiring remediation at the subject properties.
(iv) The appraisals do not take into account any costs or savings associated with the portfolio-level transaction (e.g., transaction costs, financing costs, or economies of scale in property management), which are properly attributable to the buyer and seller rather than to the individual property values.
V. AGREED PURCHASE PRICE ALLOCATION — PROPERTY-BY-PROPERTY
A. Summary Allocation Table
The following table sets forth the agreed purchase price allocation among the 14 properties, as reflected in Exhibit K to the PSA and as adjusted for the $1,070,000 PCA credit. The allocation is based on the relative appraised values determined by Stonebridge Valuation Advisors, with adjustments for the PCA credit allocated to specific properties as discussed in Part V.B below. The aggregate appraised values serve as the basis for the pro rata allocation of the adjusted purchase price of $1,098,930,000. Because the negotiated Purchase Price differs from the sum of individual property appraisals, the allocated purchase price for each property reflects a proportional scaling of appraised values to the adjusted Purchase Price.
The aggregate appraised values determined by Stonebridge serve as the basis for the pro rata allocation set forth above. Because the negotiated adjusted Purchase Price of $1,098,930,000 is a product of arm's-length negotiation between sophisticated parties and differs slightly from the simple average of the individual Stonebridge appraisals, the allocated purchase price for each property has been scaled proportionally. That is, each property's allocated purchase price is equal to the product of (x) the adjusted Purchase Price ($1,098,930,000) multiplied by (y) a fraction, the numerator of which is the Stonebridge appraised value for that property and the denominator of which is the aggregate Stonebridge appraised value for all 14 properties, subject in each case to the specific PCA credit adjustments described in Part V.B below.
The allocated purchase prices set forth above are subject to final confirmation at or promptly following the closing date. To the extent that any post-closing proration true-up or other purchase price adjustment materially changes the total consideration, the allocated amounts will be adjusted proportionally and reflected in amended or supplemental Form 8594 filings as appropriate.
B. Adjustment for PCA Credit
The $1,070,000 PCA credit reflects 50% of the $2,140,000 in aggregate estimated immediate repair costs identified during Buyer's due diligence investigation. The PCA credit has been allocated to the four specific properties for which the property condition consultant identified immediate repair needs, consistent with the approach agreed upon in the First Amendment to the PSA dated April 12, 2024. The allocation of the PCA credit among the four affected properties is as follows:
During the negotiation of the First Amendment, a question arose as to whether the PCA credit should be treated as a reduction in the allocated purchase price attributable to each specific affected property, or whether it should instead be allocated pro rata across the entire 14-property portfolio. After discussion among the parties and their respective tax advisors, it was agreed that the PCA credit should be allocated to the specific properties for which repairs were identified, rather than spread across the portfolio. This approach is consistent with the economic substance of the credit — it was negotiated in direct response to identified deficiencies at specific properties — and is supported by the language of the First Amendment, which ties the credit to the specific repair items at each affected property. The allocated purchase prices set forth in the summary table above reflect this property-specific treatment of the PCA credit.
C. Allocation of Assumed Debt Among Properties
The total assumed mortgage indebtedness of $612,000,000 forms part of the aggregate consideration for the transaction and must be allocated among the properties secured by each respective loan facility. The three assumed loan facilities and their respective allocations are as follows:
Pinnacle Federal Bank, N.A. — $421,600,000 aggregate principal balance; fixed interest rate of 4.22% per annum; maturity date of July 1, 2028. This facility is a cross-collateralized and cross-defaulted loan secured by the eight logistics properties comprising Properties 1 through 8 in the portfolio (designated as Loans 1-A through 1-H). The $421,600,000 principal balance is allocated among the eight secured properties on the basis of the relative appraised values of such properties, consistent with the allocation methodology applied to the aggregate purchase price.
Veltrano Capital Lending Corp. — $142,300,000 aggregate principal balance; fixed interest rate of 4.68% per annum; maturity date of March 1, 2029. This facility is secured by the four office properties comprising Properties 9 through 12 in the portfolio (designated as Loans 2-A through 2-D). The $142,300,000 principal balance is allocated among the four secured properties on the basis of relative appraised values.
Sycamore Life Insurance Company — $48,100,000 aggregate principal balance; fixed interest rate of 3.95% per annum; maturity date of December 1, 2030. This facility is secured by the two remaining logistics properties comprising Properties 13 and 14 in the portfolio (designated as Loans 3-A and 3-B). The $48,100,000 principal balance is allocated between the two secured properties on the basis of relative appraised values.
It is important to note that the allocation of assumed debt among the properties does not change the overall purchase price or the aggregate amount of consideration subject to allocation under Section 1060. The debt allocation affects only the composition of consideration at the property level — i.e., the proportion of each property's allocated purchase price that is funded by assumed debt versus cash equity — but the total consideration for allocation purposes remains $1,098,930,000 regardless of how the assumed debt is allocated. The treatment of assumed debt as part of the buyer's acquisition cost is well established under general tax principles. See, e.g., Crane v. Commissioner, 331 U.S. 1 (1947); Commissioner v. Tufts, 461 U.S. 300 (1983).
VI. INTRA-PROPERTY ALLOCATION — ASSET CLASSES
A. Methodology for Allocating Within Each Property
For each of the 14 properties, the allocated purchase price determined on a property-level basis (as set forth in Part V above) must be further subdivided among the Section 1060 asset classes to establish the buyer's tax basis in each category of acquired assets. This intra-property allocation is critical because the depreciation and amortization treatment of each asset category differs significantly, and the allocation therefore directly affects Fairwater's taxable income and REIT distribution requirements in future years. The methodology for each asset class is described below.
Class I — Cash and Cash Equivalents. Each Target Entity maintains one or more operating accounts at Magnolia Commerce Bank, N.A. (225 Peachtree Street NE, Suite 100, Atlanta, Georgia 30303; contact: Linda Prescott, Vice President, Commercial Banking). At closing, the operating account balances in each Target Entity will be conveyed to Buyer as part of the membership interest transfer. In addition, each Target Entity holds tenant security deposits totaling $4,283,000 in the aggregate across the 87 leases in the portfolio. These security deposits are held in segregated accounts and constitute liabilities of the Target Entities (as they are refundable to tenants upon lease expiration, subject to permitted deductions). For allocation purposes, the cash and cash equivalents held in the operating accounts are allocated at face value to Class I. Tenant security deposits, while reflected as cash on the Target Entity balance sheets, are offset by corresponding security deposit liabilities and accordingly do not generate net value for Class I allocation purposes. The aggregate Class I allocation across all 14 Target Entities is estimated at approximately $2,650,000, representing the sum of operating account balances as of the anticipated closing date.
Class III — Accounts Receivable and Other Debt Instruments. Each Target Entity holds outstanding tenant receivables as of the closing date, consisting of accrued rents receivable, common area maintenance ("CAM") charge reimbursements, operating expense ("OpEx") reimbursements, and other miscellaneous tenant charges. These receivables are allocated at fair market value, which for current receivables is generally equal to face value less an appropriate reserve for doubtful accounts. The aggregate Class III allocation across all 14 Target Entities is estimated at approximately $1,840,000. The receivables have been analyzed property by property, and no material collection risk has been identified with respect to any individual tenant receivable balance.
Class V — Tangible Assets (Real Property and Personal Property). This is the dominant asset class for all 14 properties and receives the vast majority of the aggregate purchase price allocation. Within Class V, the following subcategories are identified and allocated separately:
Land. Land is allocated based on the land-improvement splits established in the Stonebridge appraisals. For each property, Stonebridge determined the value of the underlying land parcel using the sales comparison approach, analyzing recent sales of comparable vacant land parcels in the relevant submarket. Land is a non-depreciable asset, and therefore the allocation to land directly reduces the depreciable basis available to Fairwater. The land allocation is a critical variable in the overall allocation analysis, and the land values derived by Stonebridge are supported by detailed comparable land sale analyses included in each appraisal report.
Buildings and Improvements. The value of buildings and improvements for each property is allocated as the difference between the total real property value (as appraised by Stonebridge) and the separately determined land value. This category includes the structural components of each building (foundation, shell, roof, exterior walls), as well as site improvements (parking areas, landscaping, signage, fencing, and utility infrastructure). Buildings and improvements classified as nonresidential real property are depreciable over 39 years on a straight-line basis under IRC Section 168(c).
Tenant Improvements. To the extent identified in the Stonebridge appraisals or in the property-level records maintained by GMP Fund III's property management team, tenant improvements ("TIs") are allocated separately from the building shell. Tenant improvements include interior buildouts, specialized HVAC systems, demising walls, flooring, ceiling finishes, and other improvements installed for the benefit of specific tenants. Tenant improvements are depreciated over the shorter of their useful life or the remaining term of the lease to which they relate, which in many cases results in a significantly shorter depreciable life than the 39-year recovery period applicable to the building shell.
Tangible Personal Property (FF&E). Furniture, fixtures, equipment, and supplies located at each property are allocated separately as tangible personal property within Class V. For the logistics properties, the tangible personal property allocation is relatively de minimis, as logistics/distribution buildings are generally "warm shell" or "cold shell" properties with minimal landlord-furnished equipment. The primary items of personal property at the logistics properties consist of dock equipment (dock levelers, bumpers, and seals), HVAC units, and building management systems. For the office properties, the tangible personal property allocation is more significant, reflecting lobby furniture, common area furnishings, fitness center equipment, conference room equipment and audiovisual systems, security systems, and elevator control systems. The aggregate tangible personal property allocation across all 14 properties is estimated at approximately $8,120,000, of which approximately $5,460,000 is attributable to the four office properties and approximately $2,660,000 is attributable to the ten logistics properties.
Class VI — Section 197 Intangibles. A limited but meaningful portion of the aggregate purchase price is allocated to intangible assets amortizable under IRC Section 197. The principal categories of Class VI intangibles identified in the portfolio are:
In-Place Lease Value. The in-place lease value represents the economic benefit to the property owner of having leases in place with creditworthy tenants, as compared to the hypothetical scenario of owning vacant space that would need to be marketed and leased. The in-place lease value encompasses the avoided costs of tenant origination (including marketing costs, leasing commissions, legal fees, and tenant improvement allowances) and the avoided economic vacancy that would be incurred during the lease-up period. Stonebridge identified the in-place lease value for each property by estimating the hypothetical lease-up period and associated costs that would be required to bring each property to its current occupancy level from a vacant condition, discounted to present value. The aggregate in-place lease intangible allocation across all 14 properties is estimated at approximately $41,500,000.
Above-Market and Below-Market Lease Adjustments. For each lease, Stonebridge compared the in-place contractual rent to the estimated current market rent for comparable space in the relevant submarket. Where the in-place rent exceeds market rent, an above-market lease intangible (a wasting asset) is identified, which will be amortized (as a reduction in rental income) over the remaining lease term. Where the in-place rent is below market rent, a below-market lease liability is identified, which will be amortized (as an increase in rental income) over the remaining lease term, including any below-market-rate renewal option periods. The net aggregate above/below-market lease adjustment across the portfolio results in a net above-market intangible of approximately $3,780,000, reflecting the fact that a majority of the leases in the logistics subportfolio were executed at rents that now exceed current market levels due to the recent softening in certain Sun Belt logistics markets.
Leasing Commissions Absorbed. The value of leasing commissions that were previously paid by GMP Fund III or the Target Entities in connection with the existing leases and that would need to be replicated if the leases were not in place. This component is generally subsumed within the in-place lease value calculation but may be broken out separately for financial reporting purposes under ASC 805.
Tenant Relationships. The value, if any, attributable to the probability that existing tenants will renew their leases upon expiration. This intangible is difficult to quantify and is generally subsumed within the in-place lease value analysis. No separate allocation to tenant relationships has been made in the agreed Exhibit K schedule.
Class VII — Goodwill and Going Concern Value. As noted above, the Class VII allocation is expected to be zero for all 14 properties. Stabilized real estate portfolios do not typically generate goodwill or going concern value independent of the tangible real property and lease-related intangible assets. The agreed Exhibit K schedule allocates no consideration to Class VII for any property.
B. Depreciation Implications for Buyer (REIT Context)
The intra-property allocation among asset classes has direct and significant implications for Fairwater's tax depreciation and amortization deductions, which in turn affect its REIT taxable income and its ability to meet the distribution requirements of IRC Section 857. The key depreciation and amortization parameters are summarized below:
Land: Non-depreciable. The allocation to land permanently reduces Fairwater's depreciable basis in each property.
Buildings and Improvements: Depreciable over 39 years on a straight-line basis under IRC Section 168(c), as nonresidential real property placed in service after May 12, 1993. The 39-year recovery period applies to the structural components of the building as well as to site improvements that are classified as nonresidential real property (e.g., certain paving, fencing, and utility infrastructure).
Tenant Improvements: Depreciated over the shorter of the useful life of the improvement or the remaining term of the lease to which the improvement relates. For leases with relatively short remaining terms (e.g., 2–5 years), this results in a significantly accelerated depreciation schedule compared to the 39-year building recovery period. This is a favorable allocation from Buyer's perspective, as it generates larger near-term depreciation deductions.
Tangible Personal Property (Non-Real-Property Class V Assets): Classified as 5-year or 7-year MACRS property depending on the specific asset type. Under IRC Section 168(k), qualifying personal property may be eligible for bonus depreciation (100% immediate expensing for property placed in service before January 1, 2023, with the rate declining by 20 percentage points per year thereafter — 80% for 2023, 60% for 2024, 40% for 2025). For property placed in service in 2024 (the closing year), the applicable bonus depreciation rate is 60%. The availability of bonus depreciation makes the allocation to tangible personal property particularly valuable from a tax perspective.
Section 197 Intangibles (In-Place Leases, Above/Below-Market Leases): Amortized over 15 years on a straight-line basis under IRC Section 197. For financial reporting purposes (ASC 805), above-market and below-market lease intangibles are amortized over the remaining lease term rather than 15 years; however, for tax purposes, the 15-year amortization period governs. The 15-year amortization of in-place lease intangibles provides a meaningful deduction for Fairwater over the initial 15-year period following the acquisition.
The proper allocation of the purchase price among these categories is of critical importance to Fairwater's REIT taxable income calculations. Under IRC Section 857(a), a REIT is generally required to distribute at least 90% of its REIT taxable income to its shareholders each year. Depreciation and amortization deductions reduce REIT taxable income, which in turn reduces the minimum required distribution. Maximizing the allocation to shorter-lived depreciable and amortizable assets (tenant improvements, personal property, and Section 197 intangibles) therefore increases the spread between cash flow and taxable income, providing Fairwater with greater flexibility in its capital allocation and distribution policy.
C. Interaction with REIT Asset and Income Tests
The allocation of the purchase price among asset classes also has implications for Fairwater's compliance with the REIT asset and income tests set forth in IRC Section 856. A detailed analysis of these implications is set forth in the separate REIT Qualification Impact Memorandum being prepared by our firm, but the key points are summarized here for reference.
Under IRC Section 856(c)(4), at least 75% of a REIT's total assets at the close of each calendar quarter must consist of real estate assets, cash, cash items, and government securities. "Real estate assets" are defined in IRC Section 856(c)(5)(B) to include real property (including interests in real property and interests in mortgages on real property) and shares (or transferable certificates of beneficial interest) in other REITs. Importantly, for purposes of the REIT asset test, intangible assets that are ancillary to real property ownership and leasing — including in-place lease intangibles, above/below-market lease adjustments, and tenant relationship intangibles — are generally treated as "interests in real property" and therefore qualify as "real estate assets" under Section 856(c)(5)(B), as clarified by IRS guidance and subsequent statutory amendments.
The allocation of consideration to tangible personal property (FF&E) and to any non-real-property intangible assets (e.g., goodwill, if any) would not qualify as real estate assets for purposes of the 75% asset test. However, the aggregate allocation to non-real-estate assets in the portfolio is de minimis relative to Fairwater's total asset base, and is not expected to jeopardize compliance with the 75% test. Based on our analysis, the agreed allocation is not expected to adversely affect Fairwater's REIT qualification in any respect. This conclusion is subject to the more detailed analysis in the REIT Qualification Impact Memorandum.
VII. STATE-LEVEL ALLOCATION CONSIDERATIONS
A. Transfer Tax Implications
The allocation of the purchase price among the 14 properties has direct implications for the computation of transfer taxes payable in each state where properties are located. A detailed analysis of the applicable transfer tax regimes is set forth in the separate Transfer Tax Analysis — Five States memorandum that I am preparing concurrently. The following summary is provided for reference.
Because the transaction is structured as a transfer of membership interests rather than a direct conveyance of real property, the applicability of state transfer taxes depends on whether the relevant state imposes a "controlling interest transfer tax" — i.e., a tax on the transfer of a controlling interest in an entity that owns real property within the state. The analysis varies by state:
Georgia: Georgia imposes a real estate transfer tax on the transfer of a controlling interest in an entity that owns Georgia real property. Based on the allocated purchase prices for the four Georgia properties (Fairfield Logistics Center I, Fairfield Logistics Center II, Buckhead Place Office Tower, and Peachtree Corners Logistics Center), the estimated Georgia transfer tax is approximately $1,250,000.
Texas: Texas does not impose a state-level transfer tax on real property conveyances or controlling interest transfers. Accordingly, no transfer tax is due in connection with the three Texas properties (Westlake Distribution Hub, Katy Freeway Logistics Park, and Alliance Commerce Center). This is a meaningful tax benefit to both parties.
Florida: Florida imposes a documentary stamp tax on the transfer of a controlling interest in entities owning Florida real property. Based on the allocated purchase prices for the three Florida properties (Lakeland Crossings Industrial, Southport Logistics Park, and Brickell Bay Office Building), the estimated Florida documentary stamp tax is approximately $1,680,000.
Tennessee: Tennessee imposes a real estate transfer tax (including on controlling interest transfers) based on the greater of the consideration paid or the property value. Based on the allocated purchase prices for the three Tennessee properties (Murfreesboro Distribution Center, Cool Springs Office Park, and Mount Juliet Commerce Park), the estimated Tennessee transfer tax is approximately $740,000.
North Carolina: North Carolina imposes an excise tax on the transfer of real property, including controlling interest transfers. Based on the allocated purchase price for the one North Carolina property (SouthPark Corporate Center), the estimated North Carolina excise tax is approximately $180,000.
The total estimated transfer taxes across all five states are approximately $3,850,000. Under Section 8.3 of the PSA, transfer taxes are split equally between Buyer and Seller, resulting in an estimated cost of $1,925,000 to each party. The property-level allocated purchase prices set forth in Exhibit K form the basis for computing the transfer taxes in each state, and the parties have agreed that the allocation will be used consistently for transfer tax purposes.
B. State Income and Franchise Tax Allocation
Each of the five states in which properties are located imposes state-level income, franchise, or similar taxes that may be implicated by the transaction. A detailed analysis of the state income and franchise tax filing obligations is set forth in the separate State Income / Franchise Tax Filing Memorandum. The following summary is provided for reference.
The property-level allocation of the purchase price is directly relevant to state income and franchise tax filings because each state will require reporting of the gain or loss attributable to the sale of property located within that state (for Seller) and the establishment of tax basis in property located within that state (for Buyer). The allocated purchase prices must be used consistently across federal and state filings to avoid audit risk and potential penalties.
Texas: Texas imposes a franchise tax (margin tax) on entities doing business in Texas. Although each Target Entity is a Delaware LLC, the three Texas Target Entities (GMP Westlake LLC, GMP Katy LLC, and GMP Alliance LLC) are qualified to do business in Texas and are subject to the Texas franchise tax. Following the acquisition, Fairwater (through the Texas Target Entities) will be subject to the Texas franchise tax on the revenue generated by the Texas properties. The franchise tax implications of the transaction, including any step-up in tax basis for franchise tax purposes, should be coordinated with Ashford Prewitt LLP.
Georgia, Florida, Tennessee, and North Carolina: Each of these states imposes a corporate income tax (or, in the case of Tennessee, a franchise and excise tax) on entities doing business within the state. The state income/franchise tax filing obligations for each Target Entity, including any gain recognition by the Seller and basis establishment by the Buyer, should be analyzed state by state to ensure proper reporting.
C. Real Property Tax Assessment Implications
The purchase price allocation may have indirect consequences for local real property tax assessments. In many jurisdictions, county and municipal tax assessors monitor real property transfers and may use the recorded purchase price or allocated value as a basis for reassessing the property's assessed value for ad valorem tax purposes. To the extent the allocated purchase price for a given property exceeds its current assessed value, the assessor may initiate a reassessment that results in higher property taxes.
Estimated 2024 real property taxes across the 14-property portfolio total approximately $14,760,000 annually. This figure is based on current assessed values, which in several cases are significantly lower than the allocated purchase prices. Buyer should be prepared for the possibility of assessment increases in jurisdictions where local assessors routinely review recorded transfer documents and adjust assessed values to reflect recent transaction prices. In particular, the Georgia, Florida, and Tennessee properties may be subject to reassessment following the recording of controlling interest transfer tax returns, which in some jurisdictions must disclose the consideration paid.
Fairwater's internal real estate tax team should monitor assessment notices following the closing and should consider engaging local property tax counsel to file assessment appeals if reassessments result in materially above-market tax burdens. This issue is particularly relevant for the logistics properties, where rapid market appreciation in recent years may have created a disconnect between current assessed values and transaction-based values.
VIII. IRS FORM 8594 — FILING REQUIREMENTS
A. Filing Obligation
Both Buyer and Seller are required to file IRS Form 8594 (Asset Acquisition Statement under Section 1060) with their respective federal income tax returns for the taxable year in which the closing of the transaction occurs. As the closing is scheduled for June 6, 2024, both parties' Form 8594 filings will be due with their 2024 federal income tax returns (or extensions thereof).
Form 8594 must be filed for each "applicable asset acquisition" as defined in IRC Section 1060(c). Because the transaction involves 14 separate Target Entities, each of which is treated as a disregarded entity for federal income tax purposes, a question arises as to whether 14 separate Forms 8594 should be filed (one for each Target Entity treated as a separate applicable asset acquisition) or whether a single aggregated Form 8594 with a supporting schedule may be filed for the portfolio as a whole. As a practical matter, the IRS has accepted both approaches in prior transactions of similar structure. We recommend that the approach be coordinated between Ashford Prewitt LLP (Buyer's accountants) and Caldwell Murray & Oakes LLP (Seller's accountants) to ensure consistency. Our preliminary recommendation is to file a single Form 8594 for the aggregate transaction, accompanied by a detailed supporting schedule that provides the property-by-property and class-by-class allocation for each of the 14 Target Entities. This approach is administratively simpler while providing the IRS with full transparency into the allocation methodology.
B. Draft Form 8594
A draft Form 8594 has been prepared by Calderwood & Harkness in coordination with Naomi Ikeda, CPA, Tax Partner at Ashford Prewitt LLP. The draft is attached hereto as Attachment C and is available for review by all addressees of this memorandum. The draft Form 8594 reflects the agreed Exhibit K allocation as adjusted for the $1,070,000 PCA credit and incorporates the intra-property class-by-class allocation described in Part VI above.
The Form 8594 includes the following components:
Part I — General Information. This section identifies the parties to the transaction, including the names, addresses, and employer identification numbers ("EINs") of Buyer and Seller:
• Buyer: Fairwater Real Estate Investment Trust; EIN: 52-2198437
• Seller: Greystone Meridian Partners Fund III, L.P.; EIN: 83-1647205
Each Target Entity is also identified by name and EIN in the supporting schedule:
Part II — Assets Transferred. This section sets forth the aggregate consideration allocated to each of the seven asset classes (Class I through Class VII) under the residual method. The supporting schedule provides a breakdown of the class-by-class allocation for each individual Target En

MEMORANDUM ATTORNEY WORK PRODUCT / PRIVILEGED & CONFIDENTIAL

MATTER NO.: 1036-00004

I. EXECUTIVE SUMMARY

II. TRANSACTION OVERVIEW

VII. STATE-LEVEL ALLOCATION CONSIDERATIONS

Record

Parties

Dates

Amounts