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CALDERWOOD & HARKNESS LLP

Attorneys at Law

1700 K Street NW, Suite 900 Washington, DC 20006 Telephone: (202) 555-7400 Facsimile: (202) 555-7401

450 Park Avenue, 28th Floor New York, NY 10022 Telephone: (212) 555-8200 Facsimile: (212) 555-8201

PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION ATTORNEY WORK PRODUCT

MEMORANDUM

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I. Executive Summary

Calderwood & Harkness LLP represents Fairwater Real Estate Investment Trust ("Fairwater" or "FREIT"), a Maryland Real Estate Investment Trust listed on the New York Stock Exchange under the ticker symbol FREIT. As of the fourth quarter of 2023, Fairwater maintains an approximate market capitalization of $4.8 billion. Fairwater is headquartered at 7200 Chesapeake Parkway, Suite 1100, Columbia, Maryland 21044, and is one of the leading publicly traded REITs focused on logistics, industrial, and select office properties in high-growth markets of the southeastern and south-central United States.

Fairwater proposes to acquire a 14-property Sun Belt logistics and office portfolio (the "Portfolio") valued at approximately $1,100,000,000 from Greystone Meridian Partners Fund III, L.P. ("GMP Fund III"), a Delaware limited partnership controlled by its general partner, Greystone Meridian Capital LLC. GMP Fund III is a private equity real estate fund with a 2018 vintage and approximately $2.4 billion in committed capital, and the disposition of the Portfolio represents a significant liquidity event for GMP Fund III and its limited partners.

The transaction is structured as an entity-level purchase: Fairwater will acquire 100% of the membership interests in each of 14 property-owning single-purpose Delaware limited liability companies (collectively, the "Target Entities"), rather than acquiring the underlying real property assets directly through the delivery of deeds, assignments, and bills of sale. This structural choice carries both practical advantages and certain risks, each of which is analyzed in detail below.

Approximately $612,000,000 of existing mortgage debt encumbering the Portfolio will be assumed by Fairwater in connection with the acquisition. The assumed debt is comprised of three separate loan facilities: (i) $421,600,000 from Pinnacle Federal Bank, N.A., bearing interest at 4.22% fixed, maturing July 1, 2028; (ii) $142,300,000 from Veltrano Capital Lending Corp., bearing interest at 4.68% fixed, maturing March 1, 2029; and (iii) $48,100,000 from Sycamore Life Insurance Company, bearing interest at 3.95% fixed, maturing December 1, 2030. The balance of the purchase price, approximately $488,000,000, will be paid in cash funded from Fairwater's existing $750,000,000 unsecured revolving credit facility with Aldgate National Bank, N.A. (currently priced at SOFR plus 130 basis points).

This memorandum analyzes the entity-purchase structure from a federal income tax perspective, with particular focus on the following areas:

(a) REIT qualification under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code"), including the gross income tests, asset tests, distribution requirements, and related provisions;

(b) prohibited transaction risk under Section 857(b)(6) of the Code;

(c) compliance with Section 856 income and asset tests, including analysis of "rents from real property" under Section 856(d);

(d) a comparative analysis of the entity-purchase structure against the alternative asset-purchase structure, including the application of Revenue Ruling 99-5 and related authorities;

(e) basis, depreciation, and purchase price allocation considerations under Sections 168, 1001, and 1060 of the Code;

(f) tax treatment of assumed debt, including debt modification analysis under Treasury Regulations Section 1.1001-3; and

(g) related structural considerations, including FIRPTA compliance and state and local tax matters.

Conclusion: Based on the analysis set forth in this memorandum, it is our opinion that the entity-purchase structure is supportable for REIT qualification purposes, provided that the Target Entities continue to be treated as disregarded entities for federal income tax purposes (which they are, as single-member LLCs wholly owned by a single member) and that Fairwater maintains compliance with the 75% gross income test, the 75% asset test, and related requirements following consummation of the acquisition. No prohibited transaction risk is presented on the acquisition side. The entity-purchase structure is tax-equivalent to an asset purchase under Revenue Ruling 99-5, Situation 2, and accordingly Fairwater will obtain a cost basis in the underlying assets. We recommend coordination with Ashford Prewitt LLP (Martin Ashford, CPA, Engagement Partner; Naomi Ikeda, CPA, Tax Partner) for ongoing REIT testing calculations, cost segregation analysis, and state tax filings.

This memorandum is intended solely for use by Calderwood & Harkness LLP attorneys working on this matter and by the client, and is subject to attorney-client privilege and the attorney work product doctrine. Additional memoranda addressing transfer taxes, state income and franchise taxes, FIRPTA, and purchase price allocation will follow as outlined in Section XI below.

II. Transaction Overview

A. Parties

Buyer. The buyer in the proposed transaction is Fairwater Real Estate Investment Trust, a Maryland real estate investment trust (Employer Identification Number: 52-2198437). Fairwater is a self-administered and self-managed REIT that has elected REIT status under the Code and has continuously maintained such status since its initial public offering in 2009. The principal officers and in-house counsel relevant to this transaction are as follows:

• Jonathan R. Whitmore, Chief Executive Officer

• Patricia Sung-Calloway, Chief Financial Officer

• Marcus Devereaux, Executive Vice President, Acquisitions

• David Elgin Park, General Counsel

• Camille Oduya, In-House Real Estate Counsel

Fairwater's current portfolio consists of 62 wholly owned properties aggregating approximately 18.4 million rentable square feet located principally in the southeastern and south-central United States. The company's investment strategy is focused on the acquisition, ownership, and management of logistics, industrial, and select office properties in high-growth Sun Belt metropolitan statistical areas.

Seller. The seller is Greystone Meridian Partners Fund III, L.P., a Delaware limited partnership (Employer Identification Number: 83-1647205). GMP Fund III is controlled by its general partner, Greystone Meridian Capital LLC, a Delaware limited liability company (Employer Identification Number: 83-1520984). Greystone Meridian Capital LLC is managed by its Co-Founders, Victor Lansdell and Elise Rathborne. GMP Fund III is a closed-end private equity real estate fund with a 2018 vintage and approximately $2.4 billion in committed capital from a diversified base of institutional limited partners. The fund's principal office is located at 3300 Peachtree Road NE, Suite 2200, Atlanta, Georgia 30326. GMP Fund III's registered agent in Delaware is located at 1209 Orange Street, Wilmington, Delaware 19801.

Seller's Counsel. GMP Fund III is represented by Blackridge Hayes LLP. The lead partner for the transaction is Nathaniel Pryce (Real Estate), and the tax partner is Ingrid Solberg. The firm's offices are located at 1285 Avenue of the Americas, 34th Floor, New York, New York 10019.

Seller's Accountants. GMP Fund III's accounting and tax advisory services are provided by Caldwell Murray & Oakes LLP, with William Oakes, CPA, serving as the engagement partner. The firm's offices are located at 3344 Peachtree Road NE, Suite 1800, Atlanta, Georgia 30326.

B. Portfolio Description

The Portfolio consists of 14 properties located across five states in the Sun Belt region of the United States: Georgia (4 properties), Texas (3 properties), Florida (3 properties), Tennessee (3 properties), and North Carolina (1 property).

The Portfolio is comprised of two asset classes. The logistics/industrial component consists of 10 properties totaling approximately 4,373,000 rentable square feet, representing approximately 83.7% of the total Portfolio by square footage. The office component consists of 4 properties totaling approximately 851,000 rentable square feet, representing approximately 16.3% of the total Portfolio by square footage. In aggregate, the Portfolio encompasses approximately 5,224,000 rentable square feet across both asset types.

As of December 31, 2023, the Portfolio is encumbered by 87 tenant leases and reflects a weighted-average occupancy rate of 93.2%. The logistics component demonstrates particularly strong occupancy at 96.1%, while the office component, reflecting broader market trends in the office sector, is currently occupied at 82.7%. Notwithstanding the relatively lower occupancy in the office segment, the blended occupancy across the Portfolio remains within Fairwater's target acquisition parameters.

The Portfolio generates annual in-place base rent of approximately $74,800,000, reflecting an in-place capitalization rate of approximately 6.80% on the $1,100,000,000 purchase price. The weighted-average remaining lease term across the Portfolio is 5.8 years, which is consistent with Fairwater's existing portfolio average of 6.2 years and supports long-term cash flow stability.

The Seller's aggregate cost basis in the Portfolio is approximately $845,000,000. The Portfolio was assembled by GMP Fund III during the period from 2019 through 2021, representing a hold period of approximately two to four years as of the anticipated closing date.

C. Transaction Structure Summary

The proposed transaction is structured as an entity-level purchase in which Fairwater will acquire 100% of the outstanding membership interests in each of the 14 single-purpose Delaware limited liability companies that own the Portfolio properties. Upon consummation of the acquisition, Fairwater will become the sole member of each Target Entity, and each Target Entity will continue to hold legal title to its respective property or properties.

The aggregate purchase price for the Portfolio is $1,100,000,000. The purchase price will be satisfied through a combination of (i) the assumption of approximately $612,000,000 of existing mortgage indebtedness and (ii) a cash payment of approximately $488,000,000 at closing.

The assumed mortgage debt is comprised of three separate loan facilities, as follows:

• Pinnacle Federal Bank, N.A.: $421,600,000 outstanding principal balance, bearing interest at a fixed rate of 4.22% per annum, with a stated maturity date of July 1, 2028. This loan is secured by first-priority mortgage liens on eight of the logistics properties (Loans 1-A through 1-H, as described in Section II.D below).

• Veltrano Capital Lending Corp.: $142,300,000 outstanding principal balance, bearing interest at a fixed rate of 4.68% per annum, with a stated maturity date of March 1, 2029. This loan is secured by first-priority mortgage liens on four of the office properties (Loans 2-A through 2-D).

• Sycamore Life Insurance Company: $48,100,000 outstanding principal balance, bearing interest at a fixed rate of 3.95% per annum, with a stated maturity date of December 1, 2030. This loan is secured by first-priority mortgage liens on two additional logistics properties (Loans 3-A and 3-B).

The cash equity portion of the purchase price, approximately $488,000,000, will be funded from Fairwater's existing $750,000,000 unsecured revolving credit facility with Aldgate National Bank, N.A. This facility currently bears interest at a rate equal to the Secured Overnight Financing Rate plus 130 basis points (SOFR + 130 bps).

The transfer of 100% of the membership interests in each Target Entity constitutes a "change of control" under each of the existing mortgage loan agreements, and accordingly, the consummation of the transaction is conditioned upon the receipt of affirmative written consent from each of the three lenders. Lender consent fees are estimated at $1,825,625 in the aggregate (Pinnacle: $1,054,000; Veltrano: $711,500; Sycamore: $60,125), to be split 50/50 between Buyer and Seller pursuant to the terms of the Purchase and Sale Agreement (the "PSA"). Additionally, each lender will require the delivery of a replacement carve-out guaranty from Fairwater (or a designated subsidiary), subject to minimum tangible net worth requirements of $500,000,000 and minimum liquid asset requirements of $50,000,000.

The PSA will be governed by New York law. Local real property law in each of the five portfolio states (Georgia, Texas, Florida, Tennessee, and North Carolina) will govern matters relating to title, recording, tenant rights, and real property transfer taxes, as applicable.

D. Listing of 14 Target Entities

The following table sets forth the complete listing of the 14 Target Entity LLCs, including each entity's Employer Identification Number, the property held by each entity, the property type, state, rentable square footage, and associated loan designation:

Each of the 14 Target Entities is organized as a Delaware limited liability company under the Delaware Limited Liability Company Act, 6 Del. C. §§ 18-101 et seq. Each Target Entity is a single-purpose entity formed by GMP Fund III for the sole purpose of holding, operating, and managing a single property (or, in the case of the two Fairfield entities, two adjacent but separately titled properties). Each Target Entity's operating agreement restricts its activities to ownership and operation of its respective property, consistent with customary single-purpose entity requirements imposed by commercial mortgage lenders.

As of the date of this memorandum, each Target Entity is wholly owned by GMP Fund III as its sole member. Each Target Entity is treated as a disregarded entity for federal income tax purposes under Treasury Regulations Section 301.7701-3(b)(1)(ii) by reason of being a domestic eligible entity with a single owner that has not elected to be classified as a corporation. None of the 14 Target Entities has filed a Form 8832 electing corporate classification.

III. Entity-Purchase vs. Asset-Purchase Structure: Comparative Tax Analysis

A. Overview of Structural Alternatives

In connection with the proposed acquisition, we have evaluated two principal structural alternatives for accomplishing the transfer of the Portfolio from GMP Fund III to Fairwater:

Option 1 — Entity Purchase (Selected Structure). Under the entity-purchase structure, Fairwater will acquire 100% of the outstanding membership interests in each of the 14 Target Entity LLCs. Because each Target Entity is a single-member LLC that has not elected to be classified as a corporation, each is treated as a "disregarded entity" for federal income tax purposes under Treasury Regulations Section 301.7701-3(b)(1)(ii). Upon Fairwater's acquisition of 100% of the membership interests, each Target Entity will continue to be disregarded, with Fairwater treated as its sole owner. The Target Entities will retain legal title to their respective properties, and Fairwater will hold those properties indirectly through the disregarded entities. No deeds, real property assignments, or bills of sale will be delivered to transfer title to the underlying assets.

Option 2 — Asset Purchase (Not Selected). Under the asset-purchase alternative, Fairwater would acquire the underlying real property, tangible personal property, leases, contracts, permits, licenses, and intangible assets directly from the Target Entities (or, in some formulations, from GMP Fund III as their sole member). This structure would require the delivery of individual deeds (warranty or special warranty), assignments of leases and contracts, bills of sale for personal property, and other transfer documents for each of the 14 properties across five states. Title insurance policies would be issued to Fairwater as the direct owner of each property, and all existing tenant leases and service contracts would need to be formally assigned to and assumed by Fairwater.

Each structural alternative presents distinct advantages, disadvantages, and tax consequences, which are analyzed below.

B. Tax Treatment of Entity-Level Purchase

The critical threshold question for the tax analysis of the selected entity-purchase structure is the federal income tax characterization of the transaction. Because the Target Entities are disregarded entities for federal income tax purposes, the purchase by Fairwater of 100% of the membership interests in each Target Entity is not treated as a purchase of "partnership interests" or "stock" for tax purposes. Rather, the transaction is governed by Revenue Ruling 99-5, Situation 2, and related authorities.

Under Revenue Ruling 99-5, Situation 2, when a purchaser acquires 100% of the membership interests in a single-member LLC that is treated as a disregarded entity, the transaction is treated for federal income tax purposes as if the following had occurred:

(i) the existing owner (here, GMP Fund III) sold the underlying assets of the LLC to the purchaser (Fairwater) in a fully taxable transaction; and

(ii) the purchaser then contributed those assets to a new disregarded entity (the same LLC, now owned by Fairwater as its sole member).

This deemed asset sale and contribution framework is a legal fiction that governs the tax consequences of the transaction notwithstanding the fact that, from a legal and practical standpoint, no transfer of the underlying assets actually occurs. The LLC continues to hold legal title to the property, the tenant leases remain in place at the entity level, and the existing mortgage debt remains outstanding.

The practical consequence of this characterization is that the entity-purchase structure is tax-equivalent to an asset purchase for federal income tax purposes. Fairwater will be treated as having acquired the underlying real property and other assets of each Target Entity in a taxable acquisition, and accordingly Fairwater will obtain a cost basis in the underlying assets equal to the purchase price allocated to each property (including allocated assumed debt), subject to the allocation agreed under PSA Exhibit K. This allocation will be based on the appraised values prepared by Stonebridge Valuation Advisors, LLC, under the direction of Maureen Alcott, MAI.

Because the transaction is treated as a deemed asset acquisition for federal tax purposes, the Section 1060 allocation methodology applies. Section 1060 of the Code requires that, in an "applicable asset acquisition" (i.e., an acquisition of a trade or business in which the purchaser's basis in the acquired assets is determined by reference to the consideration paid), the purchase price must be allocated among the acquired assets using the residual method prescribed in Treasury Regulations Section 1.338-6. Draft IRS Form 8594 (Asset Acquisition Statement Under Section 1060) must be prepared and filed by both the Buyer and the Seller with their respective federal income tax returns for the taxable year in which the acquisition occurs. We recommend that the preparation of IRS Form 8594 be coordinated with Ashford Prewitt LLP.

It is worth noting that if the Target Entities had been classified as corporations (rather than disregarded entities) for federal income tax purposes, the purchase of 100% of their "stock" would have been treated as a stock acquisition, and Fairwater would not have obtained a stepped-up cost basis in the underlying assets absent a Section 338(h)(10) election or a similar mechanism. The disregarded entity classification of the Target Entities is therefore essential to the favorable tax characterization of the transaction.

C. Advantages of Entity-Purchase Structure

The entity-purchase structure offers several significant advantages over the asset-purchase alternative. These advantages are both tax-related and operational in nature, and are summarized below.

1. Avoidance of Transfer Taxes (Partial). In several jurisdictions, transfers of membership interests in an entity holding real property, rather than transfers of the real property itself by deed, may reduce or eliminate state and local real property transfer taxes (also known as documentary stamp taxes or conveyance taxes). The theory underlying this potential benefit is that the transfer of a membership interest is the transfer of an intangible personal property right, not a transfer of real property, and therefore should not trigger real property transfer taxes.

However, this benefit is significantly limited in the context of the present transaction. Several of the states in which the Portfolio properties are located have enacted "controlling interest transfer tax" statutes that impose real property transfer taxes on transfers of controlling interests (typically defined as 50% or more of the ownership interests) in entities that own real property within the state. These statutes are specifically designed to close the so-called "entity transfer loophole" and to ensure that transfers of economic ownership of real property are taxed regardless of whether the transfer is accomplished by deed or by entity-level conveyance.

The transfer tax implications of the entity-purchase structure vary by state as follows:

• Texas: Texas does not impose a state real property transfer tax. Nominal local recording fees may apply, but these are minimal. This represents a clear advantage for the three Texas properties (GMP Westlake LLC, GMP Katy LLC, and GMP Alliance LLC).

• Georgia: Georgia imposes a real estate transfer tax on transfers of controlling interests in entities owning real property within the state, pursuant to O.C.G.A. § 48-6-1. This statute applies to the four Georgia properties (GMP Fairfield I LLC, GMP Fairfield II LLC, GMP Buckhead LLC, and GMP Peachtree LLC). The estimated transfer tax liability for the Georgia properties is approximately $1,250,000.

• Florida: Florida imposes documentary stamp tax on transfers of controlling interests in entities owning real property within the state, pursuant to Fla. Stat. § 201.02. This statute applies to the three Florida properties (GMP Lakeland LLC, GMP Southport LLC, and GMP Brickell LLC). The estimated transfer tax liability for the Florida properties is approximately $1,680,000.

• Tennessee: Tennessee imposes a controlling interest transfer tax under Tenn. Code Ann. § 67-4-409. This statute applies to the three Tennessee properties (GMP Murfreesboro LLC, GMP Cool Springs LLC, and GMP Mount Juliet LLC). The estimated transfer tax liability for the Tennessee properties is approximately $740,000.

• North Carolina: North Carolina imposes an excise tax on transfers of controlling interests in real property-owning entities under N.C. Gen. Stat. § 105-228.28 et seq. This statute applies to the one North Carolina property (GMP SouthPark LLC). The estimated transfer tax liability for the North Carolina property is approximately $180,000.

The aggregate estimated transfer tax liability across all five states is approximately $3,850,000. Pursuant to the terms anticipated to be reflected in the PSA, this amount will be split equally between Buyer and Seller, with each party bearing approximately $1,925,000. A separate Transfer Tax Analysis — Five States memorandum is being prepared and will follow under separate cover.

2. Assumption of Existing Debt In Place. The entity-level transfer structure facilitates the assumption of the approximately $612,000,000 of existing mortgage debt without the necessity of a formal loan payoff and subsequent refinancing. Because the mortgage loans were made to the Target Entities (as borrowers), and the Target Entities will continue to exist as the same legal entities after the transfer of their membership interests, the existing loan documents remain in force and the existing mortgage liens remain undisturbed. This avoids the significant transaction costs, prepayment penalties, and interest rate risk that would be associated with paying off and refinancing the existing debt in a rising rate environment.

It should be noted, however, that each of the three existing loan agreements treats a transfer of 100% of the membership interests in the borrower entity as a "change of control" event, which requires the affirmative written consent of the respective lender prior to closing. The relevant loan documents are as follows:

• Pinnacle Federal Bank, N.A.: Master Loan Agreement dated September 15, 2020, as amended

• Veltrano Capital Lending Corp.: Loan Agreement dated February 1, 2021, as amended

• Sycamore Life Insurance Company: Note Purchase Agreement dated November 22, 2019, as amended

The aggregate estimated lender consent fees are approximately $1,825,625 (Pinnacle: $1,054,000; Veltrano: $711,500; Sycamore: $60,125), to be split equally between Buyer and Seller pursuant to the PSA. In addition, each lender will require the delivery of a replacement carve-out guaranty from Fairwater (or a designated subsidiary), with minimum tangible net worth of $500,000,000 and minimum liquid assets of $50,000,000.

3. Continuity of Leases and Contracts. Because the Target Entities are the landlords under the 87 tenant leases and the counterparties to the 63 service contracts currently in effect across the Portfolio, the entity-level transfer allows these agreements to remain in place at the entity level without requiring formal assignment and assumption documentation for each individual lease and contract. The tenants' leasehold interests are unaffected by the change in ownership of the landlord entity, and the service contracts continue in accordance with their terms.

Notwithstanding this structural advantage, we recommend, as a belt-and-suspenders measure, that Fairwater prepare and obtain executed assignment and assumption agreements for each tenant lease and material service contract, to ensure that Fairwater has clear documentation of its rights and obligations under each agreement. This is particularly important in jurisdictions where the enforceability of a successor landlord's rights may be questioned absent a formal assignment, and in connection with any estoppel certificate or subordination, non-disturbance, and attornment agreement processes that may be required by the assumed lenders.

4. Preservation of Property-Level Permits and Licenses. The entity-level transfer preserves in place all property-level permits, licenses, certificates of occupancy, environmental clearances, and governmental approvals that have been issued to the Target Entities in their capacity as property owners and operators. Under an asset-purchase structure, these permits and licenses might need to be transferred or re-issued to Fairwater as the new direct owner, a process that can be time-consuming and uncertain in certain jurisdictions.

D. Disadvantages and Risks of Entity-Purchase Structure

1. Assumption of Unknown Liabilities. The principal risk of the entity-purchase structure is that Fairwater, as the new sole member of each Target Entity, assumes all liabilities within each Target Entity—both known and unknown. Unlike an asset purchase, in which the buyer can selectively acquire assets and exclude liabilities (subject to successor liability doctrines), the entity-level purchase means that Fairwater steps into the shoes of the existing sole member and acquires each Target Entity with its full complement of assets and liabilities.

These potential liabilities include, without limitation, unknown environmental liabilities (including contamination, remediation obligations, and violations of environmental laws), tax liabilities (including federal, state, and local tax deficiencies, interest, and penalties for pre-closing tax periods), contractual liabilities (including claims by tenants, vendors, contractors, and other counterparties), and tort liabilities (including personal injury and property damage claims arising from pre-closing events).

This risk is mitigated by the following protective measures, which are expected to be incorporated into the PSA:

(a) comprehensive due diligence, including environmental site assessments (Phase I and, where warranted, Phase II), title examinations, survey reviews, lease audits, financial audits, and entity-level diligence on each Target Entity;

(b) detailed Seller representations and warranties covering the condition, operation, and legal compliance of each property and each Target Entity;

(c) an indemnity escrow in the amount of $16,500,000, held by Continental Republic Trust Company, N.A. as escrow agent, to secure Seller's indemnification obligations under the PSA for a period of 18 months following closing (with a 24-month tail for fundamental representations);

(d) a representations and warranties insurance policy in the amount of $55,000,000, placed with Sentinel Specialty Insurance Company (the "R&W Policy"), providing Buyer-side coverage for losses arising from breaches of Seller's representations and warranties in excess of the deductible (expected to be approximately $5,500,000, corresponding to the tipping basket);

(e) a structured indemnification cap framework, consisting of a general indemnification cap of $55,000,000 (5% of purchase price), a fundamental representations cap of $110,000,000 (10% of purchase price), a tipping basket of $5,500,000 (0.5% of purchase price, applied on a first-dollar basis once the threshold is exceeded), and a per-claim de minimis threshold of $275,000.

2. Transfer Tax Exposure in Controlling-Interest States. As discussed in Section III.C.1 above, the entity-level structure does not avoid real property transfer taxes in Georgia, Florida, Tennessee, or North Carolina, each of which imposes controlling-interest transfer taxes on transfers of controlling interests in entities owning real property. The estimated aggregate transfer tax liability of approximately $3,850,000 ($1,925,000 to each party) represents a meaningful but manageable cost within the overall transaction economics.

3. Lender Consent Requirements. As noted in Section III.C.2 above, the transfer of membership interests triggers change-of-control provisions in each of the three existing loan agreements, requiring affirmative lender consent. The failure to obtain lender consent prior to closing would constitute an event of default under the applicable loan agreement and could result in the acceleration of the outstanding indebtedness. The estimated aggregate consent fees of $1,825,625 represent additional transaction costs, and there is a timing risk associated with the lender consent process, which could delay the closing.

E. Recommendation

Based on the foregoing analysis, we recommend proceeding with the entity-purchase structure. The net balance of advantages favors this approach, principally because:

(i) the entity-purchase structure is tax-equivalent to an asset purchase for federal income tax purposes under Revenue Ruling 99-5, Situation 2, ensuring that Fairwater obtains a stepped-up cost basis in the underlying assets;

(ii) the operational continuity benefits—including the ability to assume existing debt in place, maintain continuity of tenant leases and service contracts, and preserve property-level permits and licenses—are significant and reduce execution risk and transaction costs; and

(iii) the risks associated with the entity-level purchase, while real, are manageable through the comprehensive due diligence program, Seller representations and warranties, indemnity escrow, R&W insurance, and structured indemnification cap framework that are expected to be incorporated into the PSA.

The partial transfer tax exposure in four of the five portfolio states is an unavoidable cost of the entity-level structure in those jurisdictions, but does not alter the overall recommendation. The aggregate estimated transfer tax liability of approximately $3,850,000 represents approximately 0.35% of the $1,100,000,000 purchase price and is within the range of customary transaction costs for a portfolio acquisition of this size.

IV. REIT Qualification Analysis Under Sections 856–860

A. Overview of Applicable REIT Requirements

Fairwater has elected to be treated as a REIT under Sections 856 through 860 of the Code and has continuously maintained its REIT status since its initial public offering in 2009. As a REIT, Fairwater is generally not subject to federal corporate income tax on its taxable income that is distributed to shareholders, provided that it satisfies the numerous organizational, operational, distribution, and asset composition requirements imposed by the Code.

In connection with the proposed acquisition of the Portfolio, we have analyzed the following key ongoing REIT qualification requirements:

1. Section 856(c)(2) — 95% Gross Income Test. At least 95% of a REIT's gross income (excluding gross income from prohibited transactions) for each taxable year must be derived from specified passive sources, including dividends, interest, rents from real property, gain from the sale or other disposition of stock, securities, and real property, and certain other categories of passive income enumerated in Section 856(c)(2). This test is broader than the 75% gross income test discussed below and encompasses a wider range of qualifying income sources.

2. Section 856(c)(3) — 75% Gross Income Test. At least 75% of a REIT's gross income (excluding gross income from prohibited transactions) for each taxable year must be derived from real estate-related sources, including rents from real property, interest on obligations secured by mortgages on real property or on interests in real property, gain from the sale or other disposition of real property (including interests in real property and interests in mortgages on real property) that is not property held primarily for sale, dividends or other distributions from other REITs, and certain other categories of real estate-related income enumerated in Section 856(c)(3).

3. Section 856(c)(4) — 75% Asset Test. At the close of each calendar quarter, at least 75% of the value of a REIT's total assets must consist of real estate assets (as defined in Section 856(c)(5)(B)), cash and cash items (including receivables), and government securities. Real estate assets include real property (or interests in real property), interests in mortgages on real property, and shares (or transferable certificates of beneficial interest) in other qualifying REITs.

4. Section 856(c)(4)(B) — 5% / 10% Asset Tests (Securities). Subject to certain exceptions (including for qualified REIT subsidiaries and taxable REIT subsidiaries), (a) no more than 5% of the value of a REIT's total assets may consist of securities of any one issuer, and (b) a REIT may not hold (i) more than 10% of the outstanding voting securities of any one issuer or (ii) securities having a value of more than 10% of the total value of the outstanding securities of any one issuer. These tests are designed to prevent a REIT from concentrating its investments in the securities of a small number of non-real-estate issuers.

5. Section 856(d) — Definition of Rents from Real Property. Section 856(d) provides a detailed definition of "rents from real property" for purposes of the REIT income tests. This definition contains several exclusionary provisions that can cause amounts otherwise denominated as "rent" to be disqualified from treatment as REIT-qualifying income.

6. Section 856(l) — Qualified REIT Subsidiaries (QRS). Section 856(l) provides that a corporation that is a "qualified REIT subsidiary" (i.e., a corporation 100% of the stock of which is held by a REIT) is not treated as a separate corporation for purposes of the Code; all assets, liabilities, and items of income, deduction, and credit of such corporation are treated as assets, liabilities, and items of the REIT.

B. Disregarded Entity / Qualified REIT Subsidiary Analysis

Each of the 14 Target Entities is a single-member Delaware limited liability company. As described in Section II.D above, each Target Entity is currently wholly owned by GMP Fund III as its sole member and is treated as a disregarded entity for federal income tax purposes under Treasury Regulations Section 301.7701-3(b)(1)(ii).

Upon consummation of the acquisition, each Target Entity will be wholly owned by Fairwater as its sole member. The change in membership from GMP Fund III to Fairwater does not alter the Target Entities' classification as disregarded entities; each will continue to be treated as disregarded for federal income tax purposes, with all of its assets, liabilities, and items of income, deduction, and credit treated as belonging to Fairwater directly.

We note that the qualified REIT subsidiary ("QRS") provisions of Section 856(l) of the Code apply specifically to entities classified as corporations for federal tax purposes. Because the Target Entities are LLCs that are classified as disregarded entities (and not as corporations), Section 856(l) does not technically apply. However, the practical effect is the same: the assets, liabilities, and income of each Target Entity are attributed directly to Fairwater for all purposes, including the REIT qualification tests. The disregarded entity classification is, if anything, more favorable than QRS treatment because it avoids any potential ambiguity about whether the entity satisfies the QRS requirements.

If, however, Fairwater were to admit a second member to any Target Entity at any point after closing (for example, in connection with a joint venture or partial disposition), that Target Entity would cease to be disregarded and would instead be classified as a partnership for federal income tax purposes. In that event, a separate analysis would be required to determine the impact on Fairwater's REIT qualification, including the treatment of the REIT's pro rata share of partnership income and assets.

Conclusion: The Target Entities will be disregarded for federal income tax purposes upon Fairwater's acquisition of 100% of the membership interests. Their real property assets, rental income, and liabilities will be treated as Fairwater's own for purposes of all REIT qualification tests, including the income tests, asset tests, and distribution requirements described below.

C. 75% Gross Income Test — Section 856(c)(3)

The Portfolio generates annual in-place base rent of approximately $74,800,000 from 87 leases across 14 properties. For this rental income to qualify under the 75% gross income test, it must constitute "rents from real property" as defined in Section 856(d) of the Code. The following analysis examines each of the key requirements and exclusions applicable to this determination.

Rents Not Based on Income or Profits. Section 856(d)(2)(A) provides that rents from real property do not include any amount received or accrued, directly or indirectly, with respect to any real property, if the determination of such amount depends in whole or in part on the income or profits derived by any person from such property. An exception exists for amounts based on a fixed percentage of receipts or sales. Based on our review of the Letter of Intent term sheet executed on October 18, 2023, and the preliminary lease summaries provided by the Seller, the rental income under the 87 leases in the Portfolio appears to consist predominantly of fixed base rent with fixed annual escalations (typically ranging from 2.0% to 3.5% per annum). To the extent any leases contain percentage rent provisions, such provisions must be analyzed to confirm that they are based on a fixed percentage of gross receipts or sales (which would qualify) rather than on net income or profits (which would not qualify). The lease audit currently being conducted by Calderwood & Harkness will confirm the nature and structure of all rent provisions.

No Related-Party Tenant Rents. Section 856(d)(2)(B) provides that rents from real property do not include any amount received or accrued from any person in which the REIT (or certain related persons) owns, directly or indirectly, 10% or more of the total voting power, total value, assets, or net profits interest, as applicable. Based on our preliminary review, there is no indication that any of the 87 tenants in the Portfolio is a "related party" to Fairwater within the meaning of Section 856(d)(2)(B). The top five tenants by annual base rent are as follows:

None of these tenants, nor any other tenant in the Portfolio, is known to be owned by or affiliated with Fairwater, its officers, directors, or 10%-or-greater shareholders. This determination will be confirmed as part of the lease audit and entity-level due diligence.

Personal Property Rents. Section 856(d)(1)(C) provides that rents attributable to personal property leased in connection with a lease of real property are treated as "rents from real property" only if the rent attributable to the personal property for the taxable year does not exceed 15% of the total rent for the taxable year under, or in connection with, the lease. The tangible personal property at each of the 14 Portfolio properties (including furniture, fixtures, and equipment, building systems components, and similar items) is expected to be de minimis relative to the value of the real property at each location. The logistics/industrial properties in particular contain relatively little personal property beyond standard building systems. The office properties may contain additional tenant improvements and building system components, but these are generally classified as real property for purposes of Section 856(c)(5)(B) under the recently finalized Treasury Regulations (Treas. Reg. § 1.856-10). We do not anticipate that the 15% threshold will be exceeded at any property, but this determination should be confirmed through the due diligence process.

Services Furnished to Tenants. Section 856(d)(1)(B) provides that amounts received for services furnished or rendered to tenants are included in "rents from real property" only if such services are (i) "customarily furnished or rendered" in connection with the rental of real property of a similar type in the geographic area in which the property is located, or (ii) furnished through an independent contractor from whom the REIT does not derive or receive any income, or through a taxable REIT subsidiary.

Currently, property management services for the Portfolio are provided by Argyle Property Services LLC, a third-party property management firm retained by GMP Fund III. Following closing, Fairwater intends to transition property management to Fairwater Property Management LLC, Fairwater's wholly owned property management subsidiary. Services provided by Fairwater Property Management LLC (such as maintenance, repair, landscaping, janitorial, and security services) must be "customarily furnished or rendered" in connection with the rental of logistics, industrial, and office properties in the relevant Sun Belt markets. Based on our understanding of the services currently provided and anticipated to be provided, we expect that such services will satisfy the "customary services" standard. However, if any non-customary services are contemplated (such as specialized tenant amenities, concierge services, or other atypical services), those services should be furnished through an independent contractor or through a taxable REIT subsidiary to avoid the risk of disqualifying the associated rental income.

Conclusion: The $74,800,000 in annual base rent generated by the Portfolio is expected to qualify as "rents from real property" under Section 856(d) of the Code, and accordingly should constitute qualifying income under the 75% gross income test of Section 856(c)(3). This conclusion is subject to the completion of the lease audit (to confirm the absence of income-based rent provisions, related-party tenants, and excess personal property rents) and confirmation that property management services provided to tenants are customary in nature.

D. 95% Gross Income Test — Section 856(c)(2)

The 95% gross income test of Section 856(c)(2) is broader than the 75% gross income test, and encompasses all categories of income that qualify under the 75% test plus additional categories of passive income, including dividends (other than from TRSs), interest (other than amounts determined by income or profits), and gain from the sale or other disposition of stock or securities (other than property held primarily for sale).

Fairwater's existing portfolio of 62 properties generates substantial qualifying rental income that comfortably satisfies the 95% gross income test on a standalone basis. The addition of approximately $74,800,000 in qualifying rental income from the acquired Portfolio will only further strengthen compliance with this test, as the additional income is expected to be entirely composed of "rents from real property" qualifying under both the 75% test and the 95% test.

Conclusion: The proposed acquisition presents no risk to Fairwater's compliance with the 95% gross income test under Section 856(c)(2).

E. 75% Asset Test — Section 856(c)(4)

Following the acquisition, Fairwater will hold the underlying real property assets of the 14 Target Entities, treated as held directly by Fairwater through disregarded entities. The acquisition adds approximately $1,100,000,000 in real estate assets to Fairwater's balance sheet, based on the purchase price (with the allocation among asset classes to be confirmed based on the appraised values prepared by Stonebridge Valuation Advisors, LLC, under the direction of Maureen Alcott, MAI).

Fairwater's existing portfolio consists of 62 properties aggregating approximately 18.4 million rentable square feet, with a total enterprise value supported by a market capitalization of approximately $4.8 billion. The existing portfolio is heavily weighted toward real estate assets, and Fairwater has historically maintained compliance with the 75% asset test with a significant margin of safety.

The addition of $1,100,000,000 in real estate assets will increase the percentage of Fairwater's total assets that consist of "real estate assets" as defined in Section 856(c)(5)(B), thereby reinforcing and strengthening Fairwater's compliance with the 75% asset test. The $612,000,000 of assumed mortgage debt is secured by real property held within the disregarded entities and does not constitute a "security" of any issuer for purposes of the 5%/10% asset tests discussed in Section IV.F below.

It should be noted that the $488,000,000 draw on Fairwater's revolving credit facility with Aldgate National Bank, N.A. will increase Fairwater's total liabilities but will not adversely affect the asset test, because the proceeds of the borrowing will be applied to acquire real estate assets that are counted in the numerator of the 75% fraction.

Conclusion: The proposed acquisition is expected to strengthen Fairwater's compliance with the 75% asset test under Section 856(c)(4). The acquisition team should coordinate with Ashford Prewitt LLP to model the post-acquisition asset test calculations as of the end of the calendar quarter in which closing occurs.

F. 5% / 10% Securities Test — Section 856(c)(4)(B)

Because each of the 14 Target Entities is a disregarded entity for federal income tax purposes (and not a separate corporation or partnership), Fairwater's acquisition of 100% of the membership interests in the Target Entities does not result in Fairwater holding "securities" of those entities for purposes of the 5% and 10% asset tests under Section 856(c)(4)(B). Instead, the underlying real property assets held by each Target Entity are treated as held directly by Fairwater, and accordingly are characterized as "real estate assets" rather than "securities."

If any Target Entity were classified as a corporation for federal tax purposes and did not qualify as a "qualified REIT subsidiary" under Section 856(l) or a "taxable REIT subsidiary" under Section 856(l), Fairwater's interest in that entity would be treated as a "security" for purposes of the 5%/10% tests, which could create compliance concerns given the significant value of each property. The disregarded entity classification of each Target Entity avoids this issue entirely.

No taxable REIT subsidiary issues are presented by the acquisition. None of the Target Entities is a taxable REIT subsidiary, and none of the Target Entities holds any interest in a taxable REIT subsidiary.

Conclusion: The proposed acquisition presents no 5%/10% securities test concerns under Section 856(c)(4)(B).

G. Distribution Requirement — Section 857(a)

Section 857(a)(1) of the Code requires that a REIT distribute to its shareholders an amount at least equal to 90% of its REIT taxable income (determined without regard to the dividends paid deduction and excluding net capital gains) for each taxable year. Failure to satisfy this requirement results in the loss of REIT status, unless the failure is due to reasonable cause and not willful neglect and certain other conditions are met.

The acquisition of the Portfolio will increase Fairwater's gross rental income by approximately $74,800,000 on an annualized basis. This increase in gross income will be partially offset by the following items:

(i) Interest Expense on Assumed Debt: The aggregate annual interest expense on the assumed mortgage debt is estimated as follows:

• Pinnacle Federal Bank, N.A.: $421,600,000 × 4.22% = approximately $17,791,520

• Veltrano Capital Lending Corp.: $142,300,000 × 4.68% = approximately $6,659,640

• Sycamore Life Insurance Company: $48,100,000 × 3.95% = approximately $1,899,950

• Total estimated annual interest expense on assumed debt: approximately $26,351,110

(ii) Interest Expense on Revolving Credit Facility Draw: The approximately $488,000,000 draw on the Aldgate National Bank revolving credit facility at SOFR + 130 basis points will generate additional interest expense, the amount of which will depend on the prevailing SOFR rate at the time of drawing and thereafter.

(iii) Depreciation and Amortization: Depreciation expense on the acquired real property and personal property assets will further reduce REIT taxable income, as discussed in Section VI below.

The net additional REIT taxable income attributable to the acquired Portfolio, after deduction of interest expense and depreciation, will increase Fairwater's minimum required distribution under Section 857(a). Fairwater's CFO, Patricia Sung-Calloway, and its external accountants at Ashford Prewitt LLP (Martin Ashford and Naomi Ikeda) should model the updated distribution requirements to ensure that Fairwater's dividend policy remains consistent with the 90% distribution requirement.

Conclusion: The proposed acquisition does not present a structural impediment to Fairwater's compliance with the distribution requirement. The increased rental income will require corresponding increased distributions, which must be reflected in Fairwater's dividend planning for the taxable year of acquisition and subsequent years.

V. Prohibited Transaction Analysis — Section 857(b)(6)

A. Overview of Prohibited Transaction Tax

Section 857(b)(6) of the Code imposes a 100% excise tax on the "net income derived from prohibited transactions" of a REIT. A "prohibited transaction" is generally defined as a sale or other disposition of property described in Section 1221(a)(1) — that is, property held by the REIT primarily for sale to customers in the ordinary course of a trade or business. The prohibited transaction tax is designed to discourage REITs from engaging in the type of active "dealer" activity that is characteristic of a real property development or brokerage business, and to confine REITs to the passive holding and rental of real property.

The determination of whether property is held "primarily for sale to customers in the ordinary course of business" is a factual question that depends on the totality of the circumstances, including the taxpayer's purpose in acquiring and holding the property, the frequency and number of sales, the nature and extent of improvements made to the property, the duration of ownership, and other factors articulated by the courts.

Section 857(b)(6)(C) provides a statutory safe harbor from the prohibited transaction tax for sales that meet specified conditions, including (among other requirements) that the REIT has held the property for at least two years, that aggregate expenditures during the two-year period preceding the sale that are "includible in the basis of the property" do not exceed 30% of the net selling price, and that the REIT does not make more than seven sales during the taxable year (or, alternatively, that the aggregate adjusted bases or fair market values of properties sold do not exceed 20% of the aggregate adjusted bases or fair market values of all REIT assets at the beginning of the taxable year).

B. Application to Fairwater as Buyer

The prohibited transaction tax is most commonly a concern in connection with dispositions of property by a REIT, rather than acquisitions. On the acquisition side, the relevant question is whether Fairwater is acquiring the Portfolio properties with the intent to hold them as long-term investments (consistent with REIT investment objectives) or with the intent to "flip" or resell them to customers in the ordinary course of business.

Fairwater is acquiring the 14-property Portfolio as a long-term investment, consistent with its stated REIT investment strategy of expanding its Sun Belt logistics and industrial footprint, capturing attractive in-place yields (6.80% cap rate on the Portfolio), and acquiring properties at or below replacement cost. The following factors support the characterization of the acquisition as a long-term investment rather than a dealer acquisition:

(a) Fairwater's existing portfolio of 62 properties has a weighted-average remaining lease term of 6.2 years, demonstrating a hold-oriented investment strategy focused on long-term cash flow generation and capital appreciation.

(b) The acquired Portfolio has a weighted-average remaining lease term of 5.8 years, which is consistent with Fairwater's existing portfolio profile and supports a multi-year hold period.

(c) Fairwater has no present intention to sell or dispose of any of the acquired properties in the near term. The Portfolio is expected to be integrated into Fairwater's existing asset base and managed as part of the company's permanent portfolio.

(d) The acquisition is consistent with Fairwater's publicly stated investment thesis, as reflected in its most recent Annual Report on Form 10-K, quarterly investor presentations, and board-approved business plan, all of which emphasize the acquisition and long-term ownership of logistics and industrial assets in high-growth Sun Belt markets.

Conclusion: The proposed acquisition does not present prohibited transaction risk for Fairwater. The Portfolio is being acquired for long-term investment purposes, and there is no indication that Fairwater intends to hold the acquired properties primarily for sale to customers in the ordinary course of business. However, if Fairwater contemplates any future dispositions of the acquired properties, a prohibited transaction analysis should be conducted at that time, taking into account the applicable safe harbor requirements under Section 857(b)(6)(C), including (without limitation) the two-year minimum holding period, the 30% capital expenditure limitation, the seven-sale limitation (or alternative 20% test), and other relevant factors.

C. Seller Characterization (For Information Only)

For informational purposes, we note that GMP Fund III is not itself a REIT and is therefore not subject to the Section 857(b)(6) prohibited transaction tax. GMP Fund III is classified as a partnership for federal income tax purposes, and accordingly its disposition of the Portfolio will generate capital gain or ordinary income that is allocated to its partners (including its limited partners and its general partner, Greystone Meridian Capital LLC) in accordance with the terms of the Fund's limited partnership agreement.

The characterization of GMP Fund III's gain (as capital gain or ordinary income) will depend on the facts and circumstances of the disposition, including the Fund's holding period, the nature and extent of development activities, and the frequency and volume of sales by the Fund and its affiliates. This determination is the responsibility of GMP Fund III and its counsel (Blackridge Hayes LLP, Ingrid Solberg, Partner, Tax) and its accountants (Caldwell Murray & Oakes LLP, William Oakes, CPA).

The tax treatment of GMP Fund III's disposition does not affect Fairwater's REIT qualification in any respect.

VI. Basis and Depreciation Considerations

A. Buyer's Tax Basis in Acquired Assets

As discussed in Section III.B above, the entity-level purchase of 100% of the membership interests in the 14 Target Entities is treated, for federal income tax purposes, as an acquisition by Fairwater of the underlying assets of each Target Entity in a fully taxable transaction. This treatment is mandated by Revenue Ruling 99-5, Situation 2, and the principles of Treasury Regulations Section 301.7701-3.

As a result, Fairwater obtains a cost basis in each of the underlying real property and other assets equal to the portion of the total consideration (including both cash and assumed liabilities) allocated to each asset under the Section 1060 allocation methodology. The total consideration for purposes of determining Fairwater's aggregate basis is $1,100,000,000, consisting of:

• Cash equity at closing: approximately $488,000,000

• Assumed mortgage debt (treated as additional consideration): approximately $612,000,000

• Total consideration: approximately $1,100,000,000

This total consideration will be allocated among the 14 properties (and among asset categories within each property) in accordance with PSA Exhibit K, which is based on the appraised values prepared by Stonebridge Valuation Advisors, LLC, under the direction of Maureen Alcott, MAI. The allocation methodology will follow the residual method prescribed in Treasury Regulations Section 1.338-6, as applied to the applicable asset classes.

It is important to note that GMP Fund III's aggregate cost basis in the Portfolio of approximately $845,000,000 is irrelevant to the determination of Fairwater's basis. Because the transaction is treated as a taxable asset acquisition (rather than as a carryover-basis transaction), Fairwater obtains a fresh, stepped-up cost basis equal to the allocated purchase price. This stepped-up basis provides significant depreciation benefits going forward, as discussed below.

B. Depreciation

Following the acquisition, Fairwater will depreciate the acquired real property and personal property assets using the Modified Accelerated Cost Recovery System (MACRS) prescribed by Section 168 of the Code.

Real Property. The real property acquired in the transaction — including buildings, structural components, and certain improvements — is classified as "nonresidential real property" under Section 168(c) and is depreciable using the straight-line method over a 39-year recovery period. The depreciable basis of each property is the allocated purchase price less the portion allocated to land (which is not depreciable). The 39-year recovery period applies to nonresidential real property placed in service after May 13, 1993.

Tenant Improvements and Personal Property. Tenant improvements, furniture, fixtures, and equipment (FF&E), and other tangible personal property acquired in the transaction are depreciable over their applicable MACRS recovery periods, which vary depending on the asset class:

• 5-year property: Computers, office equipment, and certain technological assets

•

CALDERWOOD & HARKNESS LLP
Attorneys at Law
1700 K Street NW, Suite 900 Washington, DC 20006 Telephone: (202) 555-7400 Facsimile: (202) 555-7401
450 Park Avenue, 28th Floor New York, NY 10022 Telephone: (212) 555-8200 Facsimile: (212) 555-8201
PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION ATTORNEY WORK PRODUCT
MEMORANDUM
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I. Executive Summary
Calderwood & Harkness LLP represents Fairwater Real Estate Investment Trust ("Fairwater" or "FREIT"), a Maryland Real Estate Investment Trust listed on the New York Stock Exchange under the ticker symbol FREIT. As of the fourth quarter of 2023, Fairwater maintains an approximate market capitalization of $4.8 billion. Fairwater is headquartered at 7200 Chesapeake Parkway, Suite 1100, Columbia, Maryland 21044, and is one of the leading publicly traded REITs focused on logistics, industrial, and select office properties in high-growth markets of the southeastern and south-central United States.
Fairwater proposes to acquire a 14-property Sun Belt logistics and office portfolio (the "Portfolio") valued at approximately $1,100,000,000 from Greystone Meridian Partners Fund III, L.P. ("GMP Fund III"), a Delaware limited partnership controlled by its general partner, Greystone Meridian Capital LLC. GMP Fund III is a private equity real estate fund with a 2018 vintage and approximately $2.4 billion in committed capital, and the disposition of the Portfolio represents a significant liquidity event for GMP Fund III and its limited partners.
The transaction is structured as an entity-level purchase: Fairwater will acquire 100% of the membership interests in each of 14 property-owning single-purpose Delaware limited liability companies (collectively, the "Target Entities"), rather than acquiring the underlying real property assets directly through the delivery of deeds, assignments, and bills of sale. This structural choice carries both practical advantages and certain risks, each of which is analyzed in detail below.
Approximately $612,000,000 of existing mortgage debt encumbering the Portfolio will be assumed by Fairwater in connection with the acquisition. The assumed debt is comprised of three separate loan facilities: (i) $421,600,000 from Pinnacle Federal Bank, N.A., bearing interest at 4.22% fixed, maturing July 1, 2028; (ii) $142,300,000 from Veltrano Capital Lending Corp., bearing interest at 4.68% fixed, maturing March 1, 2029; and (iii) $48,100,000 from Sycamore Life Insurance Company, bearing interest at 3.95% fixed, maturing December 1, 2030. The balance of the purchase price, approximately $488,000,000, will be paid in cash funded from Fairwater's existing $750,000,000 unsecured revolving credit facility with Aldgate National Bank, N.A. (currently priced at SOFR plus 130 basis points).
This memorandum analyzes the entity-purchase structure from a federal income tax perspective, with particular focus on the following areas:
(a) REIT qualification under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code"), including the gross income tests, asset tests, distribution requirements, and related provisions;
(b) prohibited transaction risk under Section 857(b)(6) of the Code;
(c) compliance with Section 856 income and asset tests, including analysis of "rents from real property" under Section 856(d);
(d) a comparative analysis of the entity-purchase structure against the alternative asset-purchase structure, including the application of Revenue Ruling 99-5 and related authorities;
(e) basis, depreciation, and purchase price allocation considerations under Sections 168, 1001, and 1060 of the Code;
(f) tax treatment of assumed debt, including debt modification analysis under Treasury Regulations Section 1.1001-3; and
(g) related structural considerations, including FIRPTA compliance and state and local tax matters.
Conclusion: Based on the analysis set forth in this memorandum, it is our opinion that the entity-purchase structure is supportable for REIT qualification purposes, provided that the Target Entities continue to be treated as disregarded entities for federal income tax purposes (which they are, as single-member LLCs wholly owned by a single member) and that Fairwater maintains compliance with the 75% gross income test, the 75% asset test, and related requirements following consummation of the acquisition. No prohibited transaction risk is presented on the acquisition side. The entity-purchase structure is tax-equivalent to an asset purchase under Revenue Ruling 99-5, Situation 2, and accordingly Fairwater will obtain a cost basis in the underlying assets. We recommend coordination with Ashford Prewitt LLP (Martin Ashford, CPA, Engagement Partner; Naomi Ikeda, CPA, Tax Partner) for ongoing REIT testing calculations, cost segregation analysis, and state tax filings.
This memorandum is intended solely for use by Calderwood & Harkness LLP attorneys working on this matter and by the client, and is subject to attorney-client privilege and the attorney work product doctrine. Additional memoranda addressing transfer taxes, state income and franchise taxes, FIRPTA, and purchase price allocation will follow as outlined in Section XI below.
II. Transaction Overview
A. Parties
Buyer. The buyer in the proposed transaction is Fairwater Real Estate Investment Trust, a Maryland real estate investment trust (Employer Identification Number: 52-2198437). Fairwater is a self-administered and self-managed REIT that has elected REIT status under the Code and has continuously maintained such status since its initial public offering in 2009. The principal officers and in-house counsel relevant to this transaction are as follows:
• Jonathan R. Whitmore, Chief Executive Officer
• Patricia Sung-Calloway, Chief Financial Officer
• Marcus Devereaux, Executive Vice President, Acquisitions
• David Elgin Park, General Counsel
• Camille Oduya, In-House Real Estate Counsel
Fairwater's current portfolio consists of 62 wholly owned properties aggregating approximately 18.4 million rentable square feet located principally in the southeastern and south-central United States. The company's investment strategy is focused on the acquisition, ownership, and management of logistics, industrial, and select office properties in high-growth Sun Belt metropolitan statistical areas.
Seller. The seller is Greystone Meridian Partners Fund III, L.P., a Delaware limited partnership (Employer Identification Number: 83-1647205). GMP Fund III is controlled by its general partner, Greystone Meridian Capital LLC, a Delaware limited liability company (Employer Identification Number: 83-1520984). Greystone Meridian Capital LLC is managed by its Co-Founders, Victor Lansdell and Elise Rathborne. GMP Fund III is a closed-end private equity real estate fund with a 2018 vintage and approximately $2.4 billion in committed capital from a diversified base of institutional limited partners. The fund's principal office is located at 3300 Peachtree Road NE, Suite 2200, Atlanta, Georgia 30326. GMP Fund III's registered agent in Delaware is located at 1209 Orange Street, Wilmington, Delaware 19801.
Seller's Counsel. GMP Fund III is represented by Blackridge Hayes LLP. The lead partner for the transaction is Nathaniel Pryce (Real Estate), and the tax partner is Ingrid Solberg. The firm's offices are located at 1285 Avenue of the Americas, 34th Floor, New York, New York 10019.
Seller's Accountants. GMP Fund III's accounting and tax advisory services are provided by Caldwell Murray & Oakes LLP, with William Oakes, CPA, serving as the engagement partner. The firm's offices are located at 3344 Peachtree Road NE, Suite 1800, Atlanta, Georgia 30326.
B. Portfolio Description
The Portfolio consists of 14 properties located across five states in the Sun Belt region of the United States: Georgia (4 properties), Texas (3 properties), Florida (3 properties), Tennessee (3 properties), and North Carolina (1 property).
The Portfolio is comprised of two asset classes. The logistics/industrial component consists of 10 properties totaling approximately 4,373,000 rentable square feet, representing approximately 83.7% of the total Portfolio by square footage. The office component consists of 4 properties totaling approximately 851,000 rentable square feet, representing approximately 16.3% of the total Portfolio by square footage. In aggregate, the Portfolio encompasses approximately 5,224,000 rentable square feet across both asset types.
As of December 31, 2023, the Portfolio is encumbered by 87 tenant leases and reflects a weighted-average occupancy rate of 93.2%. The logistics component demonstrates particularly strong occupancy at 96.1%, while the office component, reflecting broader market trends in the office sector, is currently occupied at 82.7%. Notwithstanding the relatively lower occupancy in the office segment, the blended occupancy across the Portfolio remains within Fairwater's target acquisition parameters.
The Portfolio generates annual in-place base rent of approximately $74,800,000, reflecting an in-place capitalization rate of approximately 6.80% on the $1,100,000,000 purchase price. The weighted-average remaining lease term across the Portfolio is 5.8 years, which is consistent with Fairwater's existing portfolio average of 6.2 years and supports long-term cash flow stability.
The Seller's aggregate cost basis in the Portfolio is approximately $845,000,000. The Portfolio was assembled by GMP Fund III during the period from 2019 through 2021, representing a hold period of approximately two to four years as of the anticipated closing date.
C. Transaction Structure Summary
The proposed transaction is structured as an entity-level purchase in which Fairwater will acquire 100% of the outstanding membership interests in each of the 14 single-purpose Delaware limited liability companies that own the Portfolio properties. Upon consummation of the acquisition, Fairwater will become the sole member of each Target Entity, and each Target Entity will continue to hold legal title to its respective property or properties.
The aggregate purchase price for the Portfolio is $1,100,000,000. The purchase price will be satisfied through a combination of (i) the assumption of approximately $612,000,000 of existing mortgage indebtedness and (ii) a cash payment of approximately $488,000,000 at closing.
The assumed mortgage debt is comprised of three separate loan facilities, as follows:
• Pinnacle Federal Bank, N.A.: $421,600,000 outstanding principal balance, bearing interest at a fixed rate of 4.22% per annum, with a stated maturity date of July 1, 2028. This loan is secured by first-priority mortgage liens on eight of the logistics properties (Loans 1-A through 1-H, as described in Section II.D below).
• Veltrano Capital Lending Corp.: $142,300,000 outstanding principal balance, bearing interest at a fixed rate of 4.68% per annum, with a stated maturity date of March 1, 2029. This loan is secured by first-priority mortgage liens on four of the office properties (Loans 2-A through 2-D).
• Sycamore Life Insurance Company: $48,100,000 outstanding principal balance, bearing interest at a fixed rate of 3.95% per annum, with a stated maturity date of December 1, 2030. This loan is secured by first-priority mortgage liens on two additional logistics properties (Loans 3-A and 3-B).
The cash equity portion of the purchase price, approximately $488,000,000, will be funded from Fairwater's existing $750,000,000 unsecured revolving credit facility with Aldgate National Bank, N.A. This facility currently bears interest at a rate equal to the Secured Overnight Financing Rate plus 130 basis points (SOFR + 130 bps).
The transfer of 100% of the membership interests in each Target Entity constitutes a "change of control" under each of the existing mortgage loan agreements, and accordingly, the consummation of the transaction is conditioned upon the receipt of affirmative written consent from each of the three lenders. Lender consent fees are estimated at $1,825,625 in the aggregate (Pinnacle: $1,054,000; Veltrano: $711,500; Sycamore: $60,125), to be split 50/50 between Buyer and Seller pursuant to the terms of the Purchase and Sale Agreement (the "PSA"). Additionally, each lender will require the delivery of a replacement carve-out guaranty from Fairwater (or a designated subsidiary), subject to minimum tangible net worth requirements of $500,000,000 and minimum liquid asset requirements of $50,000,000.
The PSA will be governed by New York law. Local real property law in each of the five portfolio states (Georgia, Texas, Florida, Tennessee, and North Carolina) will govern matters relating to title, recording, tenant rights, and real property transfer taxes, as applicable.
D. Listing of 14 Target Entities
The following table sets forth the complete listing of the 14 Target Entity LLCs, including each entity's Employer Identification Number, the property held by each entity, the property type, state, rentable square footage, and associated loan designation:
Each of the 14 Target Entities is organized as a Delaware limited liability company under the Delaware Limited Liability Company Act, 6 Del. C. §§ 18-101 et seq. Each Target Entity is a single-purpose entity formed by GMP Fund III for the sole purpose of holding, operating, and managing a single property (or, in the case of the two Fairfield entities, two adjacent but separately titled properties). Each Target Entity's operating agreement restricts its activities to ownership and operation of its respective property, consistent with customary single-purpose entity requirements imposed by commercial mortgage lenders.
As of the date of this memorandum, each Target Entity is wholly owned by GMP Fund III as its sole member. Each Target Entity is treated as a disregarded entity for federal income tax purposes under Treasury Regulations Section 301.7701-3(b)(1)(ii) by reason of being a domestic eligible entity with a single owner that has not elected to be classified as a corporation. None of the 14 Target Entities has filed a Form 8832 electing corporate classification.
III. Entity-Purchase vs. Asset-Purchase Structure: Comparative Tax Analysis
A. Overview of Structural Alternatives
In connection with the proposed acquisition, we have evaluated two principal structural alternatives for accomplishing the transfer of the Portfolio from GMP Fund III to Fairwater:
Option 1 — Entity Purchase (Selected Structure). Under the entity-purchase structure, Fairwater will acquire 100% of the outstanding membership interests in each of the 14 Target Entity LLCs. Because each Target Entity is a single-member LLC that has not elected to be classified as a corporation, each is treated as a "disregarded entity" for federal income tax purposes under Treasury Regulations Section 301.7701-3(b)(1)(ii). Upon Fairwater's acquisition of 100% of the membership interests, each Target Entity will continue to be disregarded, with Fairwater treated as its sole owner. The Target Entities will retain legal title to their respective properties, and Fairwater will hold those properties indirectly through the disregarded entities. No deeds, real property assignments, or bills of sale will be delivered to transfer title to the underlying assets.
Option 2 — Asset Purchase (Not Selected). Under the asset-purchase alternative, Fairwater would acquire the underlying real property, tangible personal property, leases, contracts, permits, licenses, and intangible assets directly from the Target Entities (or, in some formulations, from GMP Fund III as their sole member). This structure would require the delivery of individual deeds (warranty or special warranty), assignments of leases and contracts, bills of sale for personal property, and other transfer documents for each of the 14 properties across five states. Title insurance policies would be issued to Fairwater as the direct owner of each property, and all existing tenant leases and service contracts would need to be formally assigned to and assumed by Fairwater.
Each structural alternative presents distinct advantages, disadvantages, and tax consequences, which are analyzed below.
B. Tax Treatment of Entity-Level Purchase
The critical threshold question for the tax analysis of the selected entity-purchase structure is the federal income tax characterization of the transaction. Because the Target Entities are disregarded entities for federal income tax purposes, the purchase by Fairwater of 100% of the membership interests in each Target Entity is not treated as a purchase of "partnership interests" or "stock" for tax purposes. Rather, the transaction is governed by Revenue Ruling 99-5, Situation 2, and related authorities.
Under Revenue Ruling 99-5, Situation 2, when a purchaser acquires 100% of the membership interests in a single-member LLC that is treated as a disregarded entity, the transaction is treated for federal income tax purposes as if the following had occurred:
(i) the existing owner (here, GMP Fund III) sold the underlying assets of the LLC to the purchaser (Fairwater) in a fully taxable transaction; and
(ii) the purchaser then contributed those assets to a new disregarded entity (the same LLC, now owned by Fairwater as its sole member).
This deemed asset sale and contribution framework is a legal fiction that governs the tax consequences of the transaction notwithstanding the fact that, from a legal and practical standpoint, no transfer of the underlying assets actually occurs. The LLC continues to hold legal title to the property, the tenant leases remain in place at the entity level, and the existing mortgage debt remains outstanding.
The practical consequence of this characterization is that the entity-purchase structure is tax-equivalent to an asset purchase for federal income tax purposes. Fairwater will be treated as having acquired the underlying real property and other assets of each Target Entity in a taxable acquisition, and accordingly Fairwater will obtain a cost basis in the underlying assets equal to the purchase price allocated to each property (including allocated assumed debt), subject to the allocation agreed under PSA Exhibit K. This allocation will be based on the appraised values prepared by Stonebridge Valuation Advisors, LLC, under the direction of Maureen Alcott, MAI.
Because the transaction is treated as a deemed asset acquisition for federal tax purposes, the Section 1060 allocation methodology applies. Section 1060 of the Code requires that, in an "applicable asset acquisition" (i.e., an acquisition of a trade or business in which the purchaser's basis in the acquired assets is determined by reference to the consideration paid), the purchase price must be allocated among the acquired assets using the residual method prescribed in Treasury Regulations Section 1.338-6. Draft IRS Form 8594 (Asset Acquisition Statement Under Section 1060) must be prepared and filed by both the Buyer and the Seller with their respective federal income tax returns for the taxable year in which the acquisition occurs. We recommend that the preparation of IRS Form 8594 be coordinated with Ashford Prewitt LLP.
It is worth noting that if the Target Entities had been classified as corporations (rather than disregarded entities) for federal income tax purposes, the purchase of 100% of their "stock" would have been treated as a stock acquisition, and Fairwater would not have obtained a stepped-up cost basis in the underlying assets absent a Section 338(h)(10) election or a similar mechanism. The disregarded entity classification of the Target Entities is therefore essential to the favorable tax characterization of the transaction.
C. Advantages of Entity-Purchase Structure
The entity-purchase structure offers several significant advantages over the asset-purchase alternative. These advantages are both tax-related and operational in nature, and are summarized below.
1. Avoidance of Transfer Taxes (Partial). In several jurisdictions, transfers of membership interests in an entity holding real property, rather than transfers of the real property itself by deed, may reduce or eliminate state and local real property transfer taxes (also known as documentary stamp taxes or conveyance taxes). The theory underlying this potential benefit is that the transfer of a membership interest is the transfer of an intangible personal property right, not a transfer of real property, and therefore should not trigger real property transfer taxes.
However, this benefit is significantly limited in the context of the present transaction. Several of the states in which the Portfolio properties are located have enacted "controlling interest transfer tax" statutes that impose real property transfer taxes on transfers of controlling interests (typically defined as 50% or more of the ownership interests) in entities that own real property within the state. These statutes are specifically designed to close the so-called "entity transfer loophole" and to ensure that transfers of economic ownership of real property are taxed regardless of whether the transfer is accomplished by deed or by entity-level conveyance.
The transfer tax implications of the entity-purchase structure vary by state as follows:
• Texas: Texas does not impose a state real property transfer tax. Nominal local recording fees may apply, but these are minimal. This represents a clear advantage for the three Texas properties (GMP Westlake LLC, GMP Katy LLC, and GMP Alliance LLC).
• Georgia: Georgia imposes a real estate transfer tax on transfers of controlling interests in entities owning real property within the state, pursuant to O.C.G.A. § 48-6-1. This statute applies to the four Georgia properties (GMP Fairfield I LLC, GMP Fairfield II LLC, GMP Buckhead LLC, and GMP Peachtree LLC). The estimated transfer tax liability for the Georgia properties is approximately $1,250,000.
• Florida: Florida imposes documentary stamp tax on transfers of controlling interests in entities owning real property within the state, pursuant to Fla. Stat. § 201.02. This statute applies to the three Florida properties (GMP Lakeland LLC, GMP Southport LLC, and GMP Brickell LLC). The estimated transfer tax liability for the Florida properties is approximately $1,680,000.
• Tennessee: Tennessee imposes a controlling interest transfer tax under Tenn. Code Ann. § 67-4-409. This statute applies to the three Tennessee properties (GMP Murfreesboro LLC, GMP Cool Springs LLC, and GMP Mount Juliet LLC). The estimated transfer tax liability for the Tennessee properties is approximately $740,000.
• North Carolina: North Carolina imposes an excise tax on transfers of controlling interests in real property-owning entities under N.C. Gen. Stat. § 105-228.28 et seq. This statute applies to the one North Carolina property (GMP SouthPark LLC). The estimated transfer tax liability for the North Carolina property is approximately $180,000.
The aggregate estimated transfer tax liability across all five states is approximately $3,850,000. Pursuant to the terms anticipated to be reflected in the PSA, this amount will be split equally between Buyer and Seller, with each party bearing approximately $1,925,000. A separate Transfer Tax Analysis — Five States memorandum is being prepared and will follow under separate cover.
2. Assumption of Existing Debt In Place. The entity-level transfer structure facilitates the assumption of the approximately $612,000,000 of existing mortgage debt without the necessity of a formal loan payoff and subsequent refinancing. Because the mortgage loans were made to the Target Entities (as borrowers), and the Target Entities will continue to exist as the same legal entities after the transfer of their membership interests, the existing loan documents remain in force and the existing mortgage liens remain undisturbed. This avoids the significant transaction costs, prepayment penalties, and interest rate risk that would be associated with paying off and refinancing the existing debt in a rising rate environment.
It should be noted, however, that each of the three existing loan agreements treats a transfer of 100% of the membership interests in the borrower entity as a "change of control" event, which requires the affirmative written consent of the respective lender prior to closing. The relevant loan documents are as follows:
• Pinnacle Federal Bank, N.A.: Master Loan Agreement dated September 15, 2020, as amended
• Veltrano Capital Lending Corp.: Loan Agreement dated February 1, 2021, as amended
• Sycamore Life Insurance Company: Note Purchase Agreement dated November 22, 2019, as amended
The aggregate estimated lender consent fees are approximately $1,825,625 (Pinnacle: $1,054,000; Veltrano: $711,500; Sycamore: $60,125), to be split equally between Buyer and Seller pursuant to the PSA. In addition, each lender will require the delivery of a replacement carve-out guaranty from Fairwater (or a designated subsidiary), with minimum tangible net worth of $500,000,000 and minimum liquid assets of $50,000,000.
3. Continuity of Leases and Contracts. Because the Target Entities are the landlords under the 87 tenant leases and the counterparties to the 63 service contracts currently in effect across the Portfolio, the entity-level transfer allows these agreements to remain in place at the entity level without requiring formal assignment and assumption documentation for each individual lease and contract. The tenants' leasehold interests are unaffected by the change in ownership of the landlord entity, and the service contracts continue in accordance with their terms.
Notwithstanding this structural advantage, we recommend, as a belt-and-suspenders measure, that Fairwater prepare and obtain executed assignment and assumption agreements for each tenant lease and material service contract, to ensure that Fairwater has clear documentation of its rights and obligations under each agreement. This is particularly important in jurisdictions where the enforceability of a successor landlord's rights may be questioned absent a formal assignment, and in connection with any estoppel certificate or subordination, non-disturbance, and attornment agreement processes that may be required by the assumed lenders.
4. Preservation of Property-Level Permits and Licenses. The entity-level transfer preserves in place all property-level permits, licenses, certificates of occupancy, environmental clearances, and governmental approvals that have been issued to the Target Entities in their capacity as property owners and operators. Under an asset-purchase structure, these permits and licenses might need to be transferred or re-issued to Fairwater as the new direct owner, a process that can be time-consuming and uncertain in certain jurisdictions.
D. Disadvantages and Risks of Entity-Purchase Structure
1. Assumption of Unknown Liabilities. The principal risk of the entity-purchase structure is that Fairwater, as the new sole member of each Target Entity, assumes all liabilities within each Target Entity—both known and unknown. Unlike an asset purchase, in which the buyer can selectively acquire assets and exclude liabilities (subject to successor liability doctrines), the entity-level purchase means that Fairwater steps into the shoes of the existing sole member and acquires each Target Entity with its full complement of assets and liabilities.
These potential liabilities include, without limitation, unknown environmental liabilities (including contamination, remediation obligations, and violations of environmental laws), tax liabilities (including federal, state, and local tax deficiencies, interest, and penalties for pre-closing tax periods), contractual liabilities (including claims by tenants, vendors, contractors, and other counterparties), and tort liabilities (including personal injury and property damage claims arising from pre-closing events).
This risk is mitigated by the following protective measures, which are expected to be incorporated into the PSA:
(a) comprehensive due diligence, including environmental site assessments (Phase I and, where warranted, Phase II), title examinations, survey reviews, lease audits, financial audits, and entity-level diligence on each Target Entity;
(b) detailed Seller representations and warranties covering the condition, operation, and legal compliance of each property and each Target Entity;
(c) an indemnity escrow in the amount of $16,500,000, held by Continental Republic Trust Company, N.A. as escrow agent, to secure Seller's indemnification obligations under the PSA for a period of 18 months following closing (with a 24-month tail for fundamental representations);
(d) a representations and warranties insurance policy in the amount of $55,000,000, placed with Sentinel Specialty Insurance Company (the "R&W Policy"), providing Buyer-side coverage for losses arising from breaches of Seller's representations and warranties in excess of the deductible (expected to be approximately $5,500,000, corresponding to the tipping basket);
(e) a structured indemnification cap framework, consisting of a general indemnification cap of $55,000,000 (5% of purchase price), a fundamental representations cap of $110,000,000 (10% of purchase price), a tipping basket of $5,500,000 (0.5% of purchase price, applied on a first-dollar basis once the threshold is exceeded), and a per-claim de minimis threshold of $275,000.
2. Transfer Tax Exposure in Controlling-Interest States. As discussed in Section III.C.1 above, the entity-level structure does not avoid real property transfer taxes in Georgia, Florida, Tennessee, or North Carolina, each of which imposes controlling-interest transfer taxes on transfers of controlling interests in entities owning real property. The estimated aggregate transfer tax liability of approximately $3,850,000 ($1,925,000 to each party) represents a meaningful but manageable cost within the overall transaction economics.
3. Lender Consent Requirements. As noted in Section III.C.2 above, the transfer of membership interests triggers change-of-control provisions in each of the three existing loan agreements, requiring affirmative lender consent. The failure to obtain lender consent prior to closing would constitute an event of default under the applicable loan agreement and could result in the acceleration of the outstanding indebtedness. The estimated aggregate consent fees of $1,825,625 represent additional transaction costs, and there is a timing risk associated with the lender consent process, which could delay the closing.
E. Recommendation
Based on the foregoing analysis, we recommend proceeding with the entity-purchase structure. The net balance of advantages favors this approach, principally because:
(i) the entity-purchase structure is tax-equivalent to an asset purchase for federal income tax purposes under Revenue Ruling 99-5, Situation 2, ensuring that Fairwater obtains a stepped-up cost basis in the underlying assets;
(ii) the operational continuity benefits—including the ability to assume existing debt in place, maintain continuity of tenant leases and service contracts, and preserve property-level permits and licenses—are significant and reduce execution risk and transaction costs; and
(iii) the risks associated with the entity-level purchase, while real, are manageable through the comprehensive due diligence program, Seller representations and warranties, indemnity escrow, R&W insurance, and structured indemnification cap framework that are expected to be incorporated into the PSA.
The partial transfer tax exposure in four of the five portfolio states is an unavoidable cost of the entity-level structure in those jurisdictions, but does not alter the overall recommendation. The aggregate estimated transfer tax liability of approximately $3,850,000 represents approximately 0.35% of the $1,100,000,000 purchase price and is within the range of customary transaction costs for a portfolio acquisition of this size.
IV. REIT Qualification Analysis Under Sections 856–860
A. Overview of Applicable REIT Requirements
Fairwater has elected to be treated as a REIT under Sections 856 through 860 of the Code and has continuously maintained its REIT status since its initial public offering in 2009. As a REIT, Fairwater is generally not subject to federal corporate income tax on its taxable income that is distributed to shareholders, provided that it satisfies the numerous organizational, operational, distribution, and asset composition requirements imposed by the Code.
In connection with the proposed acquisition of the Portfolio, we have analyzed the following key ongoing REIT qualification requirements:
1. Section 856(c)(2) — 95% Gross Income Test. At least 95% of a REIT's gross income (excluding gross income from prohibited transactions) for each taxable year must be derived from specified passive sources, including dividends, interest, rents from real property, gain from the sale or other disposition of stock, securities, and real property, and certain other categories of passive income enumerated in Section 856(c)(2). This test is broader than the 75% gross income test discussed below and encompasses a wider range of qualifying income sources.
2. Section 856(c)(3) — 75% Gross Income Test. At least 75% of a REIT's gross income (excluding gross income from prohibited transactions) for each taxable year must be derived from real estate-related sources, including rents from real property, interest on obligations secured by mortgages on real property or on interests in real property, gain from the sale or other disposition of real property (including interests in real property and interests in mortgages on real property) that is not property held primarily for sale, dividends or other distributions from other REITs, and certain other categories of real estate-related income enumerated in Section 856(c)(3).
3. Section 856(c)(4) — 75% Asset Test. At the close of each calendar quarter, at least 75% of the value of a REIT's total assets must consist of real estate assets (as defined in Section 856(c)(5)(B)), cash and cash items (including receivables), and government securities. Real estate assets include real property (or interests in real property), interests in mortgages on real property, and shares (or transferable certificates of beneficial interest) in other qualifying REITs.
4. Section 856(c)(4)(B) — 5% / 10% Asset Tests (Securities). Subject to certain exceptions (including for qualified REIT subsidiaries and taxable REIT subsidiaries), (a) no more than 5% of the value of a REIT's total assets may consist of securities of any one issuer, and (b) a REIT may not hold (i) more than 10% of the outstanding voting securities of any one issuer or (ii) securities having a value of more than 10% of the total value of the outstanding securities of any one issuer. These tests are designed to prevent a REIT from concentrating its investments in the securities of a small number of non-real-estate issuers.
5. Section 856(d) — Definition of Rents from Real Property. Section 856(d) provides a detailed definition of "rents from real property" for purposes of the REIT income tests. This definition contains several exclusionary provisions that can cause amounts otherwise denominated as "rent" to be disqualified from treatment as REIT-qualifying income.
6. Section 856(l) — Qualified REIT Subsidiaries (QRS). Section 856(l) provides that a corporation that is a "qualified REIT subsidiary" (i.e., a corporation 100% of the stock of which is held by a REIT) is not treated as a separate corporation for purposes of the Code; all assets, liabilities, and items of income, deduction, and credit of such corporation are treated as assets, liabilities, and items of the REIT.
B. Disregarded Entity / Qualified REIT Subsidiary Analysis
Each of the 14 Target Entities is a single-member Delaware limited liability company. As described in Section II.D above, each Target Entity is currently wholly owned by GMP Fund III as its sole member and is treated as a disregarded entity for federal income tax purposes under Treasury Regulations Section 301.7701-3(b)(1)(ii).
Upon consummation of the acquisition, each Target Entity will be wholly owned by Fairwater as its sole member. The change in membership from GMP Fund III to Fairwater does not alter the Target Entities' classification as disregarded entities; each will continue to be treated as disregarded for federal income tax purposes, with all of its assets, liabilities, and items of income, deduction, and credit treated as belonging to Fairwater directly.
We note that the qualified REIT subsidiary ("QRS") provisions of Section 856(l) of the Code apply specifically to entities classified as corporations for federal tax purposes. Because the Target Entities are LLCs that are classified as disregarded entities (and not as corporations), Section 856(l) does not technically apply. However, the practical effect is the same: the assets, liabilities, and income of each Target Entity are attributed directly to Fairwater for all purposes, including the REIT qualification tests. The disregarded entity classification is, if anything, more favorable than QRS treatment because it avoids any potential ambiguity about whether the entity satisfies the QRS requirements.
If, however, Fairwater were to admit a second member to any Target Entity at any point after closing (for example, in connection with a joint venture or partial disposition), that Target Entity would cease to be disregarded and would instead be classified as a partnership for federal income tax purposes. In that event, a separate analysis would be required to determine the impact on Fairwater's REIT qualification, including the treatment of the REIT's pro rata share of partnership income and assets.
Conclusion: The Target Entities will be disregarded for federal income tax purposes upon Fairwater's acquisition of 100% of the membership interests. Their real property assets, rental income, and liabilities will be treated as Fairwater's own for purposes of all REIT qualification tests, including the income tests, asset tests, and distribution requirements described below.
C. 75% Gross Income Test — Section 856(c)(3)
The Portfolio generates annual in-place base rent of approximately $74,800,000 from 87 leases across 14 properties. For this rental income to qualify under the 75% gross income test, it must constitute "rents from real property" as defined in Section 856(d) of the Code. The following analysis examines each of the key requirements and exclusions applicable to this determination.
Rents Not Based on Income or Profits. Section 856(d)(2)(A) provides that rents from real property do not include any amount received or accrued, directly or indirectly, with respect to any real property, if the determination of such amount depends in whole or in part on the income or profits derived by any person from such property. An exception exists for amounts based on a fixed percentage of receipts or sales. Based on our review of the Letter of Intent term sheet executed on October 18, 2023, and the preliminary lease summaries provided by the Seller, the rental income under the 87 leases in the Portfolio appears to consist predominantly of fixed base rent with fixed annual escalations (typically ranging from 2.0% to 3.5% per annum). To the extent any leases contain percentage rent provisions, such provisions must be analyzed to confirm that they are based on a fixed percentage of gross receipts or sales (which would qualify) rather than on net income or profits (which would not qualify). The lease audit currently being conducted by Calderwood & Harkness will confirm the nature and structure of all rent provisions.
No Related-Party Tenant Rents. Section 856(d)(2)(B) provides that rents from real property do not include any amount received or accrued from any person in which the REIT (or certain related persons) owns, directly or indirectly, 10% or more of the total voting power, total value, assets, or net profits interest, as applicable. Based on our preliminary review, there is no indication that any of the 87 tenants in the Portfolio is a "related party" to Fairwater within the meaning of Section 856(d)(2)(B). The top five tenants by annual base rent are as follows:
None of these tenants, nor any other tenant in the Portfolio, is known to be owned by or affiliated with Fairwater, its officers, directors, or 10%-or-greater shareholders. This determination will be confirmed as part of the lease audit and entity-level due diligence.
Personal Property Rents. Section 856(d)(1)(C) provides that rents attributable to personal property leased in connection with a lease of real property are treated as "rents from real property" only if the rent attributable to the personal property for the taxable year does not exceed 15% of the total rent for the taxable year under, or in connection with, the lease. The tangible personal property at each of the 14 Portfolio properties (including furniture, fixtures, and equipment, building systems components, and similar items) is expected to be de minimis relative to the value of the real property at each location. The logistics/industrial properties in particular contain relatively little personal property beyond standard building systems. The office properties may contain additional tenant improvements and building system components, but these are generally classified as real property for purposes of Section 856(c)(5)(B) under the recently finalized Treasury Regulations (Treas. Reg. § 1.856-10). We do not anticipate that the 15% threshold will be exceeded at any property, but this determination should be confirmed through the due diligence process.
Services Furnished to Tenants. Section 856(d)(1)(B) provides that amounts received for services furnished or rendered to tenants are included in "rents from real property" only if such services are (i) "customarily furnished or rendered" in connection with the rental of real property of a similar type in the geographic area in which the property is located, or (ii) furnished through an independent contractor from whom the REIT does not derive or receive any income, or through a taxable REIT subsidiary.
Currently, property management services for the Portfolio are provided by Argyle Property Services LLC, a third-party property management firm retained by GMP Fund III. Following closing, Fairwater intends to transition property management to Fairwater Property Management LLC, Fairwater's wholly owned property management subsidiary. Services provided by Fairwater Property Management LLC (such as maintenance, repair, landscaping, janitorial, and security services) must be "customarily furnished or rendered" in connection with the rental of logistics, industrial, and office properties in the relevant Sun Belt markets. Based on our understanding of the services currently provided and anticipated to be provided, we expect that such services will satisfy the "customary services" standard. However, if any non-customary services are contemplated (such as specialized tenant amenities, concierge services, or other atypical services), those services should be furnished through an independent contractor or through a taxable REIT subsidiary to avoid the risk of disqualifying the associated rental income.
Conclusion: The $74,800,000 in annual base rent generated by the Portfolio is expected to qualify as "rents from real property" under Section 856(d) of the Code, and accordingly should constitute qualifying income under the 75% gross income test of Section 856(c)(3). This conclusion is subject to the completion of the lease audit (to confirm the absence of income-based rent provisions, related-party tenants, and excess personal property rents) and confirmation that property management services provided to tenants are customary in nature.
D. 95% Gross Income Test — Section 856(c)(2)
The 95% gross income test of Section 856(c)(2) is broader than the 75% gross income test, and encompasses all categories of income that qualify under the 75% test plus additional categories of passive income, including dividends (other than from TRSs), interest (other than amounts determined by income or profits), and gain from the sale or other disposition of stock or securities (other than property held primarily for sale).
Fairwater's existing portfolio of 62 properties generates substantial qualifying rental income that comfortably satisfies the 95% gross income test on a standalone basis. The addition of approximately $74,800,000 in qualifying rental income from the acquired Portfolio will only further strengthen compliance with this test, as the additional income is expected to be entirely composed of "rents from real property" qualifying under both the 75% test and the 95% test.
Conclusion: The proposed acquisition presents no risk to Fairwater's compliance with the 95% gross income test under Section 856(c)(2).
E. 75% Asset Test — Section 856(c)(4)
Following the acquisition, Fairwater will hold the underlying real property assets of the 14 Target Entities, treated as held directly by Fairwater through disregarded entities. The acquisition adds approximately $1,100,000,000 in real estate assets to Fairwater's balance sheet, based on the purchase price (with the allocation among asset classes to be confirmed based on the appraised values prepared by Stonebridge Valuation Advisors, LLC, under the direction of Maureen Alcott, MAI).
Fairwater's existing portfolio consists of 62 properties aggregating approximately 18.4 million rentable square feet, with a total enterprise value supported by a market capitalization of approximately $4.8 billion. The existing portfolio is heavily weighted toward real estate assets, and Fairwater has historically maintained compliance with the 75% asset test with a significant margin of safety.
The addition of $1,100,000,000 in real estate assets will increase the percentage of Fairwater's total assets that consist of "real estate assets" as defined in Section 856(c)(5)(B), thereby reinforcing and strengthening Fairwater's compliance with the 75% asset test. The $612,000,000 of assumed mortgage debt is secured by real property held within the disregarded entities and does not constitute a "security" of any issuer for purposes of the 5%/10% asset tests discussed in Section IV.F below.
It should be noted that the $488,000,000 draw on Fairwater's revolving credit facility with Aldgate National Bank, N.A. will increase Fairwater's total liabilities but will not adversely affect the asset test, because the proceeds of the borrowing will be applied to acquire real estate assets that are counted in the numerator of the 75% fraction.
Conclusion: The proposed acquisition is expected to strengthen Fairwater's compliance with the 75% asset test under Section 856(c)(4). The acquisition team should coordinate with Ashford Prewitt LLP to model the post-acquisition asset test calculations as of the end of the calendar quarter in which closing occurs.
F. 5% / 10% Securities Test — Section 856(c)(4)(B)
Because each of the 14 Target Entities is a disregarded entity for federal income tax purposes (and not a separate corporation or partnership), Fairwater's acquisition of 100% of the membership interests in the Target Entities does not result in Fairwater holding "securities" of those entities for purposes of the 5% and 10% asset tests under Section 856(c)(4)(B). Instead, the underlying real property assets held by each Target Entity are treated as held directly by Fairwater, and accordingly are characterized as "real estate assets" rather than "securities."
If any Target Entity were classified as a corporation for federal tax purposes and did not qualify as a "qualified REIT subsidiary" under Section 856(l) or a "taxable REIT subsidiary" under Section 856(l), Fairwater's interest in that entity would be treated as a "security" for purposes of the 5%/10% tests, which could create compliance concerns given the significant value of each property. The disregarded entity classification of each Target Entity avoids this issue entirely.
No taxable REIT subsidiary issues are presented by the acquisition. None of the Target Entities is a taxable REIT subsidiary, and none of the Target Entities holds any interest in a taxable REIT subsidiary.
Conclusion: The proposed acquisition presents no 5%/10% securities test concerns under Section 856(c)(4)(B).
G. Distribution Requirement — Section 857(a)
Section 857(a)(1) of the Code requires that a REIT distribute to its shareholders an amount at least equal to 90% of its REIT taxable income (determined without regard to the dividends paid deduction and excluding net capital gains) for each taxable year. Failure to satisfy this requirement results in the loss of REIT status, unless the failure is due to reasonable cause and not willful neglect and certain other conditions are met.
The acquisition of the Portfolio will increase Fairwater's gross rental income by approximately $74,800,000 on an annualized basis. This increase in gross income will be partially offset by the following items:
(i) Interest Expense on Assumed Debt: The aggregate annual interest expense on the assumed mortgage debt is estimated as follows:
• Pinnacle Federal Bank, N.A.: $421,600,000 × 4.22% = approximately $17,791,520
• Veltrano Capital Lending Corp.: $142,300,000 × 4.68% = approximately $6,659,640
• Sycamore Life Insurance Company: $48,100,000 × 3.95% = approximately $1,899,950
• Total estimated annual interest expense on assumed debt: approximately $26,351,110
(ii) Interest Expense on Revolving Credit Facility Draw: The approximately $488,000,000 draw on the Aldgate National Bank revolving credit facility at SOFR + 130 basis points will generate additional interest expense, the amount of which will depend on the prevailing SOFR rate at the time of drawing and thereafter.
(iii) Depreciation and Amortization: Depreciation expense on the acquired real property and personal property assets will further reduce REIT taxable income, as discussed in Section VI below.
The net additional REIT taxable income attributable to the acquired Portfolio, after deduction of interest expense and depreciation, will increase Fairwater's minimum required distribution under Section 857(a). Fairwater's CFO, Patricia Sung-Calloway, and its external accountants at Ashford Prewitt LLP (Martin Ashford and Naomi Ikeda) should model the updated distribution requirements to ensure that Fairwater's dividend policy remains consistent with the 90% distribution requirement.
Conclusion: The proposed acquisition does not present a structural impediment to Fairwater's compliance with the distribution requirement. The increased rental income will require corresponding increased distributions, which must be reflected in Fairwater's dividend planning for the taxable year of acquisition and subsequent years.
V. Prohibited Transaction Analysis — Section 857(b)(6)
A. Overview of Prohibited Transaction Tax
Section 857(b)(6) of the Code imposes a 100% excise tax on the "net income derived from prohibited transactions" of a REIT. A "prohibited transaction" is generally defined as a sale or other disposition of property described in Section 1221(a)(1) — that is, property held by the REIT primarily for sale to customers in the ordinary course of a trade or business. The prohibited transaction tax is designed to discourage REITs from engaging in the type of active "dealer" activity that is characteristic of a real property development or brokerage business, and to confine REITs to the passive holding and rental of real property.
The determination of whether property is held "primarily for sale to customers in the ordinary course of business" is a factual question that depends on the totality of the circumstances, including the taxpayer's purpose in acquiring and holding the property, the frequency and number of sales, the nature and extent of improvements made to the property, the duration of ownership, and other factors articulated by the courts.
Section 857(b)(6)(C) provides a statutory safe harbor from the prohibited transaction tax for sales that meet specified conditions, including (among other requirements) that the REIT has held the property for at least two years, that aggregate expenditures during the two-year period preceding the sale that are "includible in the basis of the property" do not exceed 30% of the net selling price, and that the REIT does not make more than seven sales during the taxable year (or, alternatively, that the aggregate adjusted bases or fair market values of properties sold do not exceed 20% of the aggregate adjusted bases or fair market values of all REIT assets at the beginning of the taxable year).
B. Application to Fairwater as Buyer
The prohibited transaction tax is most commonly a concern in connection with dispositions of property by a REIT, rather than acquisitions. On the acquisition side, the relevant question is whether Fairwater is acquiring the Portfolio properties with the intent to hold them as long-term investments (consistent with REIT investment objectives) or with the intent to "flip" or resell them to customers in the ordinary course of business.
Fairwater is acquiring the 14-property Portfolio as a long-term investment, consistent with its stated REIT investment strategy of expanding its Sun Belt logistics and industrial footprint, capturing attractive in-place yields (6.80% cap rate on the Portfolio), and acquiring properties at or below replacement cost. The following factors support the characterization of the acquisition as a long-term investment rather than a dealer acquisition:
(a) Fairwater's existing portfolio of 62 properties has a weighted-average remaining lease term of 6.2 years, demonstrating a hold-oriented investment strategy focused on long-term cash flow generation and capital appreciation.
(b) The acquired Portfolio has a weighted-average remaining lease term of 5.8 years, which is consistent with Fairwater's existing portfolio profile and supports a multi-year hold period.
(c) Fairwater has no present intention to sell or dispose of any of the acquired properties in the near term. The Portfolio is expected to be integrated into Fairwater's existing asset base and managed as part of the company's permanent portfolio.
(d) The acquisition is consistent with Fairwater's publicly stated investment thesis, as reflected in its most recent Annual Report on Form 10-K, quarterly investor presentations, and board-approved business plan, all of which emphasize the acquisition and long-term ownership of logistics and industrial assets in high-growth Sun Belt markets.
Conclusion: The proposed acquisition does not present prohibited transaction risk for Fairwater. The Portfolio is being acquired for long-term investment purposes, and there is no indication that Fairwater intends to hold the acquired properties primarily for sale to customers in the ordinary course of business. However, if Fairwater contemplates any future dispositions of the acquired properties, a prohibited transaction analysis should be conducted at that time, taking into account the applicable safe harbor requirements under Section 857(b)(6)(C), including (without limitation) the two-year minimum holding period, the 30% capital expenditure limitation, the seven-sale limitation (or alternative 20% test), and other relevant factors.
C. Seller Characterization (For Information Only)
For informational purposes, we note that GMP Fund III is not itself a REIT and is therefore not subject to the Section 857(b)(6) prohibited transaction tax. GMP Fund III is classified as a partnership for federal income tax purposes, and accordingly its disposition of the Portfolio will generate capital gain or ordinary income that is allocated to its partners (including its limited partners and its general partner, Greystone Meridian Capital LLC) in accordance with the terms of the Fund's limited partnership agreement.
The characterization of GMP Fund III's gain (as capital gain or ordinary income) will depend on the facts and circumstances of the disposition, including the Fund's holding period, the nature and extent of development activities, and the frequency and volume of sales by the Fund and its affiliates. This determination is the responsibility of GMP Fund III and its counsel (Blackridge Hayes LLP, Ingrid Solberg, Partner, Tax) and its accountants (Caldwell Murray & Oakes LLP, William Oakes, CPA).
The tax treatment of GMP Fund III's disposition does not affect Fairwater's REIT qualification in any respect.
VI. Basis and Depreciation Considerations
A. Buyer's Tax Basis in Acquired Assets
As discussed in Section III.B above, the entity-level purchase of 100% of the membership interests in the 14 Target Entities is treated, for federal income tax purposes, as an acquisition by Fairwater of the underlying assets of each Target Entity in a fully taxable transaction. This treatment is mandated by Revenue Ruling 99-5, Situation 2, and the principles of Treasury Regulations Section 301.7701-3.
As a result, Fairwater obtains a cost basis in each of the underlying real property and other assets equal to the portion of the total consideration (including both cash and assumed liabilities) allocated to each asset under the Section 1060 allocation methodology. The total consideration for purposes of determining Fairwater's aggregate basis is $1,100,000,000, consisting of:
• Cash equity at closing: approximately $488,000,000
• Assumed mortgage debt (treated as additional consideration): approximately $612,000,000
• Total consideration: approximately $1,100,000,000
This total consideration will be allocated among the 14 properties (and among asset categories within each property) in accordance with PSA Exhibit K, which is based on the appraised values prepared by Stonebridge Valuation Advisors, LLC, under the direction of Maureen Alcott, MAI. The allocation methodology will follow the residual method prescribed in Treasury Regulations Section 1.338-6, as applied to the applicable asset classes.
It is important to note that GMP Fund III's aggregate cost basis in the Portfolio of approximately $845,000,000 is irrelevant to the determination of Fairwater's basis. Because the transaction is treated as a taxable asset acquisition (rather than as a carryover-basis transaction), Fairwater obtains a fresh, stepped-up cost basis equal to the allocated purchase price. This stepped-up basis provides significant depreciation benefits going forward, as discussed below.
B. Depreciation
Following the acquisition, Fairwater will depreciate the acquired real property and personal property assets using the Modified Accelerated Cost Recovery System (MACRS) prescribed by Section 168 of the Code.
Real Property. The real property acquired in the transaction — including buildings, structural components, and certain improvements — is classified as "nonresidential real property" under Section 168(c) and is depreciable using the straight-line method over a 39-year recovery period. The depreciable basis of each property is the allocated purchase price less the portion allocated to land (which is not depreciable). The 39-year recovery period applies to nonresidential real property placed in service after May 13, 1993.
Tenant Improvements and Personal Property. Tenant improvements, furniture, fixtures, and equipment (FF&E), and other tangible personal property acquired in the transaction are depreciable over their applicable MACRS recovery periods, which vary depending on the asset class:
• 5-year property: Computers, office equipment, and certain technological assets
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