EXHIBIT U
PRORATION AND WORKING-CAPITAL METHODOLOGY
This Exhibit U is attached to and forms a part of that certain Purchase and Sale Agreement dated as of February 28, 2024 (as amended by the First Amendment dated April 12, 2024, and the Second Amendment dated May 28, 2024, and as may be further amended, restated, supplemented, or otherwise modified from time to time, the "Agreement"), by and between Greystone Meridian Partners Fund III, L.P., a Delaware limited partnership ("Seller"), and Fairwater Real Estate Investment Trust, a Maryland real estate investment trust ("Buyer").
Capitalized terms used but not defined herein shall have the meanings ascribed to them in the Agreement. In the event of any conflict between the terms of this Exhibit U and the body of the Agreement, the terms of the Agreement shall control, except to the extent this Exhibit U provides a more specific methodology for a particular proration or adjustment, in which case the methodology set forth herein shall govern the calculation of such proration or adjustment.
Section 1. General Principles
1.1 Proration Date
The "Proration Date" shall be June 6, 2024, which is the actual closing date as determined under Section 10.1 of the Agreement, as amended by the Second Amendment dated May 28, 2024. All prorations contemplated by this Exhibit U shall be calculated as of 12:01 a.m. Eastern Time on the Proration Date, with the Proration Date being a day of Buyer's ownership. Accordingly, Seller shall be responsible for (and shall be entitled to all income attributable to) the period beginning on January 1, 2024, and ending at 11:59 p.m. Eastern Time on June 5, 2024, and Buyer shall be responsible for (and shall be entitled to all income attributable to) the period beginning at 12:01 a.m. Eastern Time on the Proration Date and continuing thereafter. For the avoidance of doubt, the day immediately preceding the Proration Date (i.e., June 5, 2024) shall be the final day of Seller's ownership period, and the Proration Date (i.e., June 6, 2024) shall be the first day of Buyer's ownership period.
1.2 Methodology — Calendar Year Basis
All prorations shall be made on a calendar year basis (January 1 through December 31), except where a different fiscal period is specified by a particular taxing authority, governmental agency, or in the express terms of a particular lease, service contract, or other agreement applicable to a Property. In any such case, the proration shall be made on the basis of the applicable fiscal period or contractual period, as the case may be.
For purposes of all proration calculations under this Exhibit U, the calendar year 2024 shall be treated as a 366-day year (leap year). Seller's share of any annual item shall equal the annual amount of such item multiplied by a fraction, the numerator of which is the number of days from and including January 1, 2024, through and including June 5, 2024 (a total of 157 days), and the denominator of which is 366. Buyer's share of any annual item shall be the remainder — that is, the annual amount multiplied by a fraction, the numerator of which is 209 days (from and including June 6, 2024, through and including December 31, 2024), and the denominator of which is 366. For items prorated on a monthly basis, a per-diem calculation shall be used for partial months, with the number of days in the applicable month used as the denominator.
1.3 Credits and Debits
The following general principles shall apply to all prorations:
(a) Items that represent income or revenue to the owner of a Property (including, without limitation, rents, tenant reimbursements, parking income, and other ancillary revenue) shall be credited to Seller for Seller's ownership period and credited to Buyer for Buyer's ownership period.
(b) Items that represent expenses or obligations of the owner of a Property (including, without limitation, real property taxes, utility charges, insurance premiums, debt service, and operating expenses) shall be debited to Seller for Seller's ownership period and debited to Buyer for Buyer's ownership period.
(c) Net credits to Buyer (i.e., amounts owed by Seller to Buyer on account of prorations) shall reduce the cash portion of the Purchase Price payable at Closing, and net credits to Seller (i.e., amounts owed by Buyer to Seller on account of prorations) shall increase the cash portion of the Purchase Price payable at Closing, in each case as reflected on the Closing Settlement Statements.
1.4 Applicability Across 14 Properties
Prorations shall be calculated separately for each of the 14 Properties held by the respective Target Entities, as identified below:
After prorations are calculated on a Property-by-Property basis, the net results for all 14 Properties shall be aggregated and reflected on a single Closing Settlement Statement for Buyer and a single Closing Settlement Statement for Seller, each prepared by Commonwealth National Title Insurance Company in its capacity as escrow agent.
Section 2. Real Property Taxes and Assessments
2.1 General Tax Proration
Real property taxes, general assessments, and ad valorem taxes for the tax year in which the Proration Date occurs shall be prorated between Seller and Buyer as of the Proration Date. For purposes of the Preliminary Closing Proration Statement, the estimated 2024 annual real property taxes for the entire 14-Property portfolio are $14,760,000. Based on this estimate, Seller's prorated share is calculated as follows:
Seller's Share = $14,760,000 × (157 / 366) = $6,332,951
Buyer's Share = $14,760,000 × (209 / 366) = $8,427,049
If 2024 tax bills have not been issued or are not yet due and payable as of the Proration Date, the amount of Seller's prorated share ($6,332,951, or such other amount as may be reflected on the agreed Preliminary Closing Proration Statement) shall be credited to Buyer on the Closing Settlement Statement. If 2024 tax bills have been issued and paid by Seller (or any Target Entity) prior to Closing, Buyer shall reimburse Seller for Buyer's proportionate share of such payments. If 2024 tax bills have been issued but remain unpaid as of the Proration Date, Seller shall receive a debit for Seller's prorated share, and Buyer shall assume responsibility for payment of the entire tax bill from funds available in the applicable Target Entity operating accounts (as supplemented by the Seller's prorated contribution).
2.2 Use of Estimates
If actual 2024 tax bills are not yet available as of the Proration Date, prorations shall be based on the most recently available assessed values and applicable millage rates or tax rates, using the 2023 actual tax bills as the baseline, subject to adjustment in the Post-Closing True-Up described in Section 15 below. The parties acknowledge that the 14 Properties are located across five states — Georgia (4 Properties), Texas (3 Properties), Florida (3 Properties), Tennessee (3 Properties), and North Carolina (1 Property) — and that each jurisdiction has different tax fiscal years, assessment calendars, and billing cycles. The following jurisdictional considerations shall apply:
(a) Georgia. Georgia operates on a calendar-year tax fiscal year. Fulton County and DeKalb County typically issue tax bills in the third quarter, with payment due in the fourth quarter. Tax prorations for the four Georgia Properties (Buckhead Place, Peachtree, and the two Fairfield Properties) shall be based on 2023 actual tax bills, adjusted for any known changes in assessed value or millage rate.
(b) Texas. Texas operates on a calendar-year tax fiscal year. Tax bills are typically issued in October and are due by January 31 of the following year. Prorations for the three Texas Properties (Katy, Alliance, and Westlake) shall be based on 2023 actual tax bills, with the understanding that 2024 assessments may not be finalized until late in the year.
(c) Florida. Florida operates on a calendar-year tax fiscal year. Tax bills are typically issued in November, with a discount for early payment. Prorations for the three Florida Properties (Lakeland Crossings, Southport, and Brickell) shall be based on 2023 actual tax bills, subject to adjustment upon receipt of 2024 truth-in-millage (TRIM) notices.
(d) Tennessee. Tennessee operates on a calendar-year tax fiscal year. Prorations for the three Tennessee Properties (Murfreesboro, Cool Springs, and Mount Juliet) shall be based on 2023 actual tax bills, subject to adjustment.
(e) North Carolina. Mecklenburg County, North Carolina, operates on a July 1 – June 30 tax fiscal year. Prorations for the SouthPark Corporate Center Property shall account for this fiscal year structure, with appropriate adjustments.
All estimated prorations shall be subject to final reconciliation and adjustment pursuant to the Post-Closing True-Up procedures set forth in Section 15.
2.3 Supplemental Taxes and Reassessments
If any supplemental tax bill, corrected tax bill, or reassessment notice is issued after the Proration Date but relates in whole or in part to a period prior to the Proration Date, Seller shall be responsible for Seller's pro rata share of such supplemental tax or reassessment, calculated in accordance with the methodology set forth in Section 1.2. Conversely, Buyer shall be responsible for Buyer's pro rata share of any such supplemental tax or reassessment. Any supplemental tax or reassessment relating solely to a period after the Proration Date shall be Buyer's sole responsibility.
Notwithstanding the foregoing, any reassessment of a Property that is triggered by or attributable to the change of control of the applicable Target Entity (where such change of control constitutes a taxable event or triggers a reassessment under applicable local law) shall be Buyer's sole responsibility and shall not be subject to proration under this Exhibit U.
2.4 Tax Appeals
A schedule of all pending real property tax appeals and assessment challenges as of the Proration Date shall be identified on a schedule delivered by Seller to Buyer at or prior to Closing. Any refunds, credits, or abatements resulting from such pending tax appeals shall be prorated between Seller and Buyer based on their respective ownership periods (i.e., based on the portion of the tax period to which the refund, credit, or abatement relates that falls within each party's ownership period), net of all legal fees, consulting fees, and costs of appeal incurred in connection with such proceedings (which costs shall be shared by Seller and Buyer in proportion to their respective shares of the refund or credit). Buyer agrees to cooperate reasonably with Seller in prosecuting any such pending tax appeals and shall not settle or dismiss any such appeal without Seller's prior written consent, which shall not be unreasonably withheld, conditioned, or delayed.
2.5 Allocation by Property
Tax prorations shall be calculated individually for each of the 14 Properties based on the specific tax parcel identification number(s) and jurisdictional requirements applicable to each Property. Certain Properties may encompass multiple tax parcels, and prorations shall be calculated for each parcel separately and then aggregated at the Property level. Detailed property-level tax proration calculations shall be set forth on the Closing Proration Statement and shall include, for each Property, the parcel identification number(s), the assessed value, the applicable tax rate or millage rate, the estimated annual tax liability, Seller's prorated share, and Buyer's prorated share.
Section 3. Rental Income
3.1 Base Rent
All fixed or base rent payable under the 87 leases in effect as of the Proration Date (collectively, the "In-Place Leases") shall be prorated as of the Proration Date. The aggregate annual in-place base rent for the entire portfolio is $74,800,000 (as reflected on the rent roll dated as of December 31, 2023, attached as Exhibit H to the Agreement, and as updated through the Proration Date). The proration of base rent shall be calculated on a lease-by-lease basis as follows:
(a) Rent collected by Seller (or any Target Entity) prior to Closing that is attributable to the period on and after the Proration Date (i.e., June 6, 2024, and thereafter) shall be credited to Buyer on the Closing Settlement Statement. For the avoidance of doubt, this includes any portion of June 2024 rent attributable to the period from June 6 through June 30, 2024.
(b) Rent collected by Seller (or any Target Entity) prior to Closing that is attributable to the period prior to the Proration Date (i.e., January 1, 2024, through June 5, 2024) shall be retained by Seller and shall not be credited to Buyer.
(c) For any lease under which rent is payable other than monthly in advance (e.g., quarterly, semi-annually, or annually), rent shall be prorated on a per-diem basis for the applicable rental period.
3.2 Delinquent Rent
No credit shall be given to Seller at Closing for any rent that is delinquent or uncollected as of the Proration Date. For purposes of this Section 3.2, "delinquent rent" means any rent that was due and payable under a lease prior to the Proration Date and that remains unpaid as of the Proration Date.
Following Closing, Buyer shall use commercially reasonable efforts to collect delinquent rents from tenants who remain tenants of the Properties after Closing; provided, however, that Buyer shall not be required to commence litigation or legal proceedings, engage collection agencies, or incur material out-of-pocket expense in connection with such collection efforts.
Any rent received by Buyer after Closing from a tenant whose rent was delinquent as of the Proration Date shall be applied in the following order of priority:
(a) First, to current amounts owed to Buyer by such tenant for rental periods on or after the Proration Date (i.e., amounts that became due and payable during Buyer's ownership period);
(b) Second, to delinquent amounts owed by such tenant for rental periods prior to the Proration Date, which amounts Buyer shall promptly remit to Seller (and in no event later than 30 days following receipt thereof by Buyer).
Seller retains the right to pursue collection of pre-Closing delinquent rent directly against former tenants who are no longer tenants of the Properties as of the Proration Date; provided, however, that Seller shall not commence eviction proceedings, terminate any lease, or take any action that would interfere with Buyer's ongoing landlord-tenant relationship with any current tenant of the Properties.
3.3 Prepaid Rent
Any rent received by Seller (or any Target Entity) prior to Closing that is attributable to periods on or after the Proration Date shall be credited to Buyer on the Closing Settlement Statement. This includes, without limitation, any rent payments received in advance for the full month of June 2024, to the extent attributable to the period from June 6 through June 30, 2024 (25 days out of 30 days in June, i.e., 83.33% of monthly rent for each applicable lease), as well as any rent received in advance for July 2024 or subsequent months.
3.4 Free Rent and Abatement Periods
If any tenant is in a free rent period, rent abatement period, or other concession period as of the Proration Date under the terms of its lease, no rent proration shall be made with respect to such tenant for the duration of such abatement period. The economic burden of the free rent period shall be allocated based on the party who benefited from the leasing transaction that gave rise to such concession. As a general matter, Seller shall bear the economic cost of free rent periods that commenced and are scheduled to expire prior to the Proration Date, and Buyer shall bear the economic cost of free rent periods that commence on or after the Proration Date. For free rent periods that straddle the Proration Date, the economic burden shall be allocated on a per-diem basis unless a different allocation is specified on a lease-by-lease basis in the rent roll attached as Exhibit H.
Section 4. Percentage Rent
4.1 Proration of Percentage Rent
Percentage rent, if any, payable under any In-Place Lease shall be prorated based on the percentage rent calculation period applicable under each such lease. For leases under which the percentage rent calculation period is the calendar year (January 1 through December 31), percentage rent shall be prorated between Seller and Buyer based on their respective ownership periods within such calendar year, using the methodology set forth in Section 1.2. For leases under which the percentage rent calculation period is a different fiscal period that straddles the Proration Date, percentage rent shall be prorated on a per-diem basis within the applicable calculation period.
Seller shall provide Buyer, at or prior to Closing, with copies of all tenant sales reports, gross sales certifications, and percentage rent calculations received by Seller or the applicable Target Entity within the 12-month period immediately preceding the Proration Date. Buyer shall have the right to audit tenant sales records for the applicable percentage rent calculation period to the extent such right exists under the applicable lease.
4.2 Reconciliation. Following the end of each applicable percentage rent calculation period that straddles the Proration Date, Buyer and Seller shall reconcile actual percentage rent received against the prorated estimates used at Closing. Any adjustments resulting from such reconciliation — whether amounts are owed by Seller to Buyer or by Buyer to Seller — shall be included in the Post-Closing True-Up described in Section 15 below.
Section 5. Tenant Reimbursements — CAM, Operating Expenses, and Tax Escalations
5.1 Reconciliation of Tenant Reimbursements
Common area maintenance ("CAM") charges, operating expense ("OpEx") reimbursements, and real property tax escalation payments payable by tenants under the In-Place Leases shall be prorated as of the Proration Date. The proration of tenant reimbursements shall take into account the following principles:
(a) Estimated monthly reimbursement payments collected from tenants by Seller (or the applicable Target Entity) prior to Closing that are attributable to periods on or after the Proration Date shall be credited to Buyer on the Closing Settlement Statement.
(b) Estimated monthly reimbursement payments collected from tenants by Seller (or the applicable Target Entity) prior to Closing that are attributable to periods prior to the Proration Date shall be retained by Seller.
(c) Estimated monthly reimbursement payments shall be reconciled against actual expenses incurred during the applicable calendar year (or other applicable reconciliation period) as described in Section 5.2 below.
5.2 CAM/OpEx Reconciliation Reserve
At Closing, Seller shall fund a holdback and reserve in the amount of $1,850,000 (the "Reconciliation Reserve") to cover the estimated shortfall, if any, between (i) estimated tenant reimbursements collected during Seller's ownership period (January 1, 2024, through June 5, 2024) and (ii) actual reconciled expenses for Seller's ownership period. The Reconciliation Reserve shall be deposited with Commonwealth National Title Insurance Company, in its capacity as escrow agent, and shall be held and disbursed pursuant to the terms of the Escrow Agreement attached to the Agreement as Exhibit G.
The annual CAM/OpEx reconciliation for calendar year 2024 shall be prepared by Buyer and delivered to Seller no later than April 30, 2025. The reconciliation shall be prepared on a Property-by-Property and lease-by-lease basis in accordance with the reconciliation methodologies required under each lease and shall include reasonable supporting documentation. Upon completion of the reconciliation, the Reconciliation Reserve shall be disbursed as follows:
(a) If actual Seller-period expenses exceed estimated reimbursements collected during Seller's period, the shortfall shall be paid to Buyer from the Reconciliation Reserve.
(b) If estimated reimbursements collected during Seller's period exceed actual Seller-period expenses, Seller shall be entitled to a return of the excess from the Reconciliation Reserve.
(c) Any remaining balance of the Reconciliation Reserve after settlement of all amounts due under this Section 5.2 shall be released to Seller.
(d) If the Reconciliation Reserve is insufficient to cover the shortfall described in clause (a) above, Seller shall pay such deficiency to Buyer within 10 business days of demand therefor, accompanied by reasonable documentation of the shortfall.
5.3 Base Year / Expense Stop Adjustments
For leases that use a base year or expense stop methodology (rather than a triple-net or pro rata share methodology) to determine tenant reimbursement obligations, prorations shall account for the tenant's proportionate share obligation as specifically determined under the terms of each such lease. Seller shall cooperate with Buyer in providing historical expense data (including base year expense calculations, expense stop levels, and prior-year reconciliation statements) necessary for Buyer to perform accurate reconciliations for calendar year 2024.
5.4 Controllable Expense Caps
Where leases contain caps on controllable operating expense increases (whether stated as a percentage cap, a dollar cap, or a CPI-based cap), prorations and reconciliations shall take into account such caps in estimating and finalizing tenant reimbursement obligations. To the extent a controllable expense cap limits the amount a tenant is required to reimburse in a given year, the resulting shortfall between actual expenses and capped reimbursement shall be allocated between Seller and Buyer based on their respective ownership periods.
Section 6. Utility Charges
6.1 Proration of Utility Charges
All utility charges (including, without limitation, electricity, natural gas, water, sewer, stormwater, telecommunications, and similar services) for each Property shall be prorated as of the Proration Date. To the extent possible, Seller shall arrange for final meter readings for all utility accounts maintained in the name of the applicable Target Entity as of the day immediately preceding the Proration Date (i.e., June 5, 2024), and Seller shall be responsible for all utility charges accrued through and including such reading date.
If final meter readings cannot be obtained as of the day immediately preceding the Proration Date (due to the utility provider's scheduling limitations or other practical considerations), utility charges shall be prorated based on the most recent billing period available for each utility account, on a per-diem basis, and such estimated prorations shall be subject to adjustment in the Post-Closing True-Up described in Section 15.
6.2 Utility Deposits
Any utility deposits held by utility providers in connection with utility service to the Properties that are transferred to or remain available for the benefit of Buyer (or the applicable Target Entity under Buyer's control) shall be credited to Seller on the Closing Settlement Statement. If any utility provider refunds a utility deposit directly to Seller following Closing, Seller shall promptly remit such refunded amount to Buyer, and Buyer shall be responsible for posting any replacement deposit required by the utility provider to maintain uninterrupted service.
6.3 Tenant-Direct Utilities
Where tenants pay utilities directly to the applicable utility provider pursuant to the terms of their lease (and the landlord or Target Entity is not responsible for payment or reimbursement of such utility charges), no proration shall be required for such tenant-direct utility accounts under this Exhibit U. Seller shall provide Buyer with a schedule identifying all tenant-direct utility accounts known to Seller as of the Proration Date.
Section 7. Insurance Premiums
7.1 Existing Policies
The existing property and casualty insurance policies maintained by or on behalf of the Target Entities through Argyle Property Services LLC, as Seller's property manager, are not being assigned to or assumed by Buyer in connection with the transactions contemplated by the Agreement. Buyer shall obtain replacement insurance policies through Ironclad Indemnity Insurance Company, brokered by Hartwick Gunderson & Associates, Inc., effective as of 12:01 a.m. Eastern Time on the Proration Date.
There shall be no proration of insurance premiums for existing policies. Seller shall cancel or retain such existing policies at Seller's sole expense, and any refunded premiums for unearned periods under such existing policies shall belong to Seller. Seller shall remain responsible for any deductibles, self-insured retentions, or uninsured losses with respect to insured events occurring prior to the Proration Date under such existing policies.
7.2 Buyer's New Policies
Premiums for Buyer's new insurance policies obtained through Ironclad Indemnity Insurance Company shall be Buyer's sole responsibility and shall not be subject to proration under this Exhibit U. Buyer shall provide Seller with evidence of such replacement coverage prior to or at Closing.
Section 8. Security Deposits
8.1 Transfer of Security Deposits
Aggregate tenant security deposits in the amount of $4,283,000 (as reflected on the rent roll attached as Exhibit H to the Agreement) are held in the operating accounts of the 14 Target Entities maintained at Magnolia Commerce Bank, N.A. As a result of the entity-level transfer structure contemplated by the Agreement (i.e., Buyer is acquiring 100% of the membership interests in each Target Entity), such security deposits shall be transferred to Buyer's ownership and control at Closing by operation of the entity-level transfer, without the need for a separate transfer or assignment of the deposit funds.
Seller shall deliver to Buyer at or prior to Closing a schedule listing each tenant security deposit, including (i) the name of the tenant, (ii) the lease under which the security deposit was made, (iii) the amount of the deposit held, (iv) the form of the deposit (cash, letter of credit, or other instrument), and (v) the bank account in which each cash deposit is held.
No proration of security deposits is required under this Exhibit U. Security deposits transfer with the Target Entities, and Buyer assumes all obligations with respect to such security deposits from and after the Proration Date, including, without limitation, the obligation to hold, return, and account for such deposits in accordance with applicable law and the terms of the applicable leases.
8.2 Letters of Credit
To the extent any tenant security deposit is in the form of a letter of credit, Seller shall cooperate with Buyer (and Buyer shall cooperate with Seller) to cause such letter of credit to be re-issued, amended, or transferred so as to name Buyer (or the applicable Target Entity under Buyer's control) as the beneficiary thereof. Any transfer fees, amendment fees, or re-issuance fees charged by the issuing bank in connection with such re-issuance or transfer shall be borne by Buyer.
8.3 Security Deposit Interest
To the extent applicable law or the terms of any lease require that interest accrue on tenant security deposits, such accrued interest shall be prorated as of the Proration Date. Interest accrued through June 5, 2024, shall be allocated to Seller (or retained in the applicable Target Entity account), and interest accruing on and after June 6, 2024, shall be allocated to Buyer.
Section 9. Leasing Costs
9.1 Tenant Improvement Allowances and Leasing Commissions
Seller shall be responsible for all unpaid tenant improvement allowances ("TI Allowances") and leasing commissions with respect to leases executed prior to the Proration Date, to the extent such amounts are due and payable on or before the Proration Date. For the avoidance of doubt, this includes any TI Allowance installments that have been earned by the tenant and are payable as of the Proration Date, as well as any leasing commissions that have become due and payable to leasing brokers on or before the Proration Date.
Buyer shall be responsible for:
(a) Any TI Allowances and leasing commissions that become due and payable after the Proration Date under leases executed prior to the Proration Date, but only to the extent such obligations have been disclosed on the Disclosure Schedules delivered by Seller pursuant to the Agreement; and
(b) All leasing costs (including TI Allowances, leasing commissions, legal fees, and other costs of leasing) for leases executed by Buyer on or after the Proration Date.
9.2 Pending Lease Proposals
Seller shall deliver to Buyer at or prior to Closing a schedule of any pending lease proposals, lease renewals, lease expansions, or lease modifications that are under active negotiation as of the Proration Date, including (i) the identity of the prospective tenant, (ii) the proposed terms, and (iii) estimated leasing costs (TI Allowances, commissions, and other incentives). Costs for leases executed by Seller between the date of the Agreement and the Proration Date in accordance with Section 7.3 of the Agreement (Interim Operating Covenants) shall be allocated as specified in such Section, and the applicable costs shall be reflected on the Closing Settlement Statement.
Section 10. Service Contracts
10.1 Proration of Prepaid and Accrued Amounts
Amounts prepaid or accrued under service contracts that are assumed by Buyer pursuant to the terms of the Agreement (as identified on the schedule of assumed service contracts attached as Exhibit I to the Agreement) shall be prorated as of the Proration Date. The following principles shall apply:
(a) If Seller (or any Target Entity) has prepaid any amounts under an assumed service contract for services to be rendered during any period on or after the Proration Date, Buyer shall reimburse Seller for the prorated portion of such prepaid amount attributable to the period on or after the Proration Date, and such reimbursement shall be reflected as a credit to Seller on the Closing Settlement Statement.
(b) If amounts are accrued but unpaid under an assumed service contract for services rendered during any period prior to the Proration Date, Seller shall be debited for such accrued and unpaid amounts, and such debit shall be reflected on the Closing Settlement Statement.
10.2 Terminated Contracts
For service contracts that are terminated at or prior to Closing in accordance with the terms of the Agreement and this Exhibit U (i.e., service contracts not listed on the schedule of assumed contracts), any termination fees, early termination penalties, or similar charges shall be Seller's responsibility, and no proration shall be required for such terminated contracts. Seller shall indemnify Buyer against any claims by service providers under terminated contracts arising out of Seller's termination thereof.
Section 11. Mortgage Debt Service
11.1 Interest on Assumed Debt
Interest on the assumed mortgage debt shall be prorated as of the Proration Date. The aggregate outstanding principal balance of the assumed mortgage debt is $612,000,000, consisting of the following tranches:
Interest for each loan shall be calculated on an actual/360 or 30/360 basis, as specified in the applicable loan documents and as set forth in the table above. Seller shall be responsible for all interest accrued through and including June 5, 2024; Buyer shall be responsible for all interest accruing on and after June 6, 2024.
If any scheduled interest payment due date falls on or after the Proration Date and includes interest accrued during Seller's ownership period (i.e., interest for any portion of the period prior to June 6, 2024), Seller shall credit Buyer for Seller's share of such interest payment on the Closing Settlement Statement, so that Buyer is made whole for the portion of such payment attributable to Seller's ownership period.
11.2 Escrow and Reserve Accounts
All amounts held in lender-required escrow accounts and reserve accounts under the assumed loan documents — including, without limitation, tax escrow accounts, insurance escrow accounts, capital replacement reserve accounts, and tenant improvement reserve accounts — shall be transferred to Buyer's benefit at Closing by virtue of the entity-level transfer structure (i.e., such accounts are held in the name of the applicable Target Entity and shall continue to be held for Buyer's benefit following the transfer of membership interests).
Seller shall be credited on the Closing Settlement Statement for the aggregate balance of all such lender-held escrow and reserve accounts as of the Proration Date. The balance of each escrow and reserve account shall be confirmed by written statements obtained from each lender (Pinnacle Federal Bank, N.A.; Veltrano Capital Lending Corp.; and Sycamore Life Insurance Company) no later than three (3) business days prior to the Closing.
11.3 Consent Fees
Consent fees payable to the lenders in connection with their respective consents to the change of control of the Target Entities are as follows:
As specified in Section 12.4 of the Agreement, consent fees shall be borne 50% by Buyer ($912,812.50) and 50% by Seller ($912,812.50). Such amounts are not subject to proration and shall be reflected on the Closing Settlement Statements as a debit to each party in the applicable amount. Payment of consent fees shall be made at Closing through the escrow established with Commonwealth National Title Insurance Company.
Section 12. Transfer Taxes and Recording Charges
12.1 Transfer Taxes
Estimated transfer taxes, documentary stamp taxes, and similar conveyance taxes across all applicable jurisdictions in connection with the transactions contemplated by the Agreement are as follows:
Transfer taxes shall be borne equally by Buyer and Seller (50/50 split), resulting in:
Buyer's Share: $1,925,000
Seller's Share: $1,925,000
Transfer taxes are not subject to proration and shall be debited to each party on the applicable Closing Settlement Statement. The specific amount of transfer taxes applicable to each Property shall be determined based on the allocation of the Purchase Price to each Target Entity as set forth in the Purchase Price Allocation (Exhibit T to the Agreement) and the applicable statutory tax rate in each jurisdiction. The parties acknowledge that Texas does not currently impose a transfer tax or documentary stamp tax on the transfer of membership interests or the conveyance of real property.
12.2 Recording Charges
Any recording charges for recordable instruments delivered at Closing (if any, given the entity-level transfer structure, which generally does not require recording of deeds) shall be borne by Buyer unless otherwise specified in the Agreement. To the extent any memoranda of assignment, assignment and assumption agreements, or similar instruments require recording in the real property records of any jurisdiction, the recording fees and charges shall be Buyer's responsibility.
Section 13. Purchase Price Adjustment — PCA Credit
13.1 PCA Repair Credit
Pursuant to the negotiated terms of the Agreement (Section 6.5), Buyer shall receive a credit at Closing in the amount of $1,070,000 (the "PCA Credit"), representing 50% of the aggregate estimated immediate repair costs of $2,140,000 identified in the property condition assessments ("PCAs") prepared by Rampart Building Sciences, Inc. and delivered to the parties during the due diligence period. The PCA Credit is allocated among the following Properties:
The PCA Credit shall be applied as a reduction of the cash equity payable by Buyer at Closing. After application of the PCA Credit, the adjusted cash equity shall be:
$488,000,000 − $1,070,000 = $486,930,000 (before prorations and other adjustments)
The PCA Credit is a fixed credit and is not subject to further adjustment, proration, or reconciliation, regardless of the actual costs incurred by Buyer to complete the identified repairs.
Section 14. Preliminary Closing Proration Statement
14.1 Preparation and Delivery
No later than five (5) business days prior to the scheduled Closing, Seller, in consultation with its legal counsel, Caldwell Murray & Oakes LLP, shall prepare and deliver to Buyer a preliminary proration statement (the "Preliminary Closing Proration Statement") setting forth Seller's good-faith estimate of all prorations and adjustments described in this Exhibit U. The Preliminary Closing Proration Statement shall include, at a minimum, the following information for each prorated item: (i) the applicable annual or periodic amount, (ii) the basis for the estimate (e.g., 2023 actual bills, current budgets, or contractual amounts), (iii) Seller's prorated share, (iv) Buyer's prorated share, and (v) the resulting credit or debit to each party.
Buyer, in consultation with its legal counsel, Ashford Prewitt LLP, shall review the Preliminary Closing Proration Statement and the parties shall endeavor in good faith to agree upon all prorations prior to Closing. The parties' respective counsel and accountants shall communicate and cooperate in resolving any discrepancies or disputes regarding the Preliminary Closing Proration Statement.
14.2 Closing Adjustments
At Closing, all agreed prorations and adjustments shall be reflected on the Closing Settlement Statements prepared by Commonwealth National Title Insurance Company in its capacity as escrow agent. Any items that are not agreed upon by the parties prior to Closing shall be estimated in good faith based on the best information available, and such estimated items shall be subject to final adjustment pursuant to the Post-Closing True-Up procedures set forth in Section 15 below.
Section 15. Post-Closing Proration True-Up
15.1 True-Up Statement
Within ninety (90) days after the Proration Date (i.e., no later than September 4, 2024), Buyer shall prepare and deliver to Seller a final proration true-up statement (the "True-Up Statement") in substantially the form attached to the Agreement as Exhibit V. The True-Up Statement shall set forth the actual amounts for each prorated item identified in this Exhibit U and shall calculate the net adjustment payable by one party to the other based on the difference between the estimated prorations used at Closing and the actual amounts.
The True-Up Statement shall be accompanied by reasonable supporting documentation, including, without limitation, actual 2024 tax bills (to the extent then available), final utility invoices, rent collection records, CAM/OpEx reconciliation data, debt service statements, and such other documentation as is reasonably necessary to substantiate the actual amounts set forth therein.
15.2 Review and Dispute Resolution
Seller shall have thirty (30) days following receipt of the True-Up Statement to review the True-Up Statement and to provide Buyer with written notice of any objections thereto, together with a reasonably detailed description of the basis for each objection. If Seller does not deliver written objections within such 30-day period, the True-Up Statement shall be deemed accepted by Seller and shall be final and binding.
If Seller timely delivers written objections, the parties shall negotiate in good faith for a period of fifteen (15) days following delivery of Seller's objections to resolve any disputes. During such negotiation period, each party shall make available to the other party such books, records, and supporting documentation as may be reasonably requested in connection with the resolution of the disputed items.
If disputes remain unresolved following the expiration of the 15-day negotiation period, either party may submit the dispute to an independent certified public accountant mutually agreed upon by the parties (or, failing agreement within ten (10) business days, selected by the American Arbitration Association from among its panel of qualified accountants with experience in commercial real estate transactions). The independent accountant shall review the disputed items and render a written determination within thirty (30) days of his or her engagement. The determination of the independent accountant shall be final and binding on both parties, absent manifest error. The costs and fees of the independent accountant shall be borne by the non-prevailing party (i.e., the party whose position is furthest from the independent accountant's determination with respect to the aggregate disputed amount).
15.3 Payment. Any net adjustment shown on the agreed (or finally determined) True-Up Statement shall be paid by the owing party within ten (10) business days of the earlier of (a) mutual agreement on the True-Up Statement and (b) final determination by the independent accountant.
The parties confirm that the final post-closing true-up resulted in a net credit to Buyer in the amount of $347,218, which amount was agreed upon by the parties on August 28, 2024, and was paid by Seller to Buyer on September 5, 2024, by wire transfer of immediately available funds to an account designated by Buyer.
All payments under this Section 15 shall be made by wire transfer of immediately available funds to an account designated in writing by the receiving party.
15.4 Survival. The obligations of the parties under this Section 15 (including, without limitation, the obligation to prepare, review, and finalize the True-Up Statement, and the obligation to make any payment due thereunder) shall survive Closing and the delivery of the assignments of membership interests for a period of twelve (12) months following the Proration Date (i.e., through and including June 6, 2025). Any claim for adjustment or payment under this Section 15 that is not asserted or submitted within such 12-month period shall be deemed waived and forever barred.
Section 16. Operating Account Balances
16.1 Target Entity Bank Accounts
Operating accounts of the 14 Target Entities are maintained at Magnolia Commerce Bank, N.A. (225 Peachtree Street NE, Suite 100, Atlanta, GA 30303; relationship contact: Linda Prescott, Vice President, Commercial Banking). Cash balances in such operating accounts as of the Proration Date (exclusive of security deposits addressed in Section 8 and lender reserve accounts addressed in Section 11.2) shall be reconciled and treated as follows:
(a) Cash representing prepaid rent received from tenants for periods on or after the Proration Date shall be credited to Buyer (consistent with Section 3.3 above).
(b) Cash representing operating expense reimbursements collected from tenants for periods on or after the Proration Date shall be credited to Buyer (consistent with Section 5.1 above).
(c) Remaining operating cash in the Target Entity accounts (i.e., cash not otherwise allocated to a specific proration category under this Exhibit U) shall be retained by or credited to Seller, net of any outstanding accounts payable, accrued operating expenses, or other liabilities attributable to Seller's ownership period. A detailed reconciliation of each Target Entity's operating account balance shall be included in the Preliminary Closing Proration Statement.
16.2 Account Transition
Promptly following Closing, and in no event later than five (5) business days after the Proration Date, Buyer shall cause the authorized signatories on all Target Entity bank accounts at Magnolia Commerce Bank, N.A. to be updated to reflect personnel of Fairwater Property Management LLC (or such other persons as Buyer may designate), in coordination with the transition services provided under the Transition Services Agreement attached to the Agreement as Exhibit L. Seller shall cooperate reasonably with Buyer and Magnolia Commerce Bank in effecting such signatory changes, including providing any required corporate resolutions, certificates, or other documentation.
Section 17. Miscellaneous Proration Items
17.1 Licenses, Permits, and Fees
Prepaid or accrued amounts for business licenses, operating permits, elevator inspection fees, fire marshal permits, environmental permits, and similar governmental fees and charges shall be prorated as of the Proration Date where such items are transferable with the applicable Target Entity. If any such license, permit, or fee is non-transferable and must be obtained anew by Buyer, no proration shall be required, and the cost of obtaining such new license or permit shall be Buyer's responsibility.
17.2 Deposits Under Service Contracts
Deposits held by service providers (other than utility deposits addressed in Section 6.2) under assumed service contracts that inure to the benefit of Buyer (or the applicable Target Entity under Buyer's control) following Closing shall be credited to Seller on the Closing Settlement Statement. Such deposits include, without limitation, deposits for landscaping services, janitorial services, security services, and similar contracts.
17.3 Personal Property Taxes
Personal property taxes, if any, assessed against tangible personal property of the Target Entities that is transferred to Buyer pursuant to the Bill of Sale (or by virtue of the entity-level transfer) shall be prorated as of the Proration Date on the same basis as real property taxes are prorated under Section 2 of this Exhibit U.
17.4 Special Assessments
Any special assessments (including, without limitation, municipal improvement bonds, community development district assessments, business improvement district assessments, and similar charges) that are a lien on any Property as of the Proration Date, or that have been levied but are payable in installments, shall be allocated as follows:
(a) Installments due and payable prior to the Proration Date shall be Seller's responsibility.
(b) Installments due and payable on or after the Proration Date shall be Buyer's responsibility.
If any special assessment is payable in a lump sum and relates to a period that straddles the Proration Date, such assessment shall be prorated between Seller and Buyer on a per-diem basis.
Section 18. Transition Services Agreement — Fee Treatment
18.1 Transition Fees
Fees under the Transition Services Agreement entered into between Argyle Property Services LLC (as service provider) and Fairwater Property Management LLC (as service recipient), in the amount of $375,000 per month for a 90-day transition period (aggregate total: $1,125,000), are Buyer's sole responsibility and shall not be subject to proration under this Exhibit U. Such fees shall be paid by Buyer directly to Argyle Property Services LLC in accordance with the payment terms and schedule set forth in the Transition Services Agreement, and the obligation to pay such fees is independent of, and in addition to, the proration mechanism established under this Exhibit U.
Section 19. Title Insurance Premiums and Survey Costs
19.1 Title Premiums
Title insurance premiums for owner's title policies, loan title policies, and any endorsements thereto (estimated aggregate cost: $2,420,000 for all 14 Properties) are Buyer's sole responsibility and are not subject to proration under this Exhibit U. Title insurance is being provided by Commonwealth National Title Insurance Company.
19.2 Survey Costs
Survey costs for updated ALTA/NSPS land title surveys of the 14 Properties (estimated aggregate cost: $196,000, payable to Meridian Land Surveying, Inc.) are Buyer's sole responsibility and are not subject to proration under this Exhibit U.
Section 20. Definitions
As used in this Exhibit U, the following terms shall have the meanings set forth below. Capitalized terms used in this Exhibit U that are not defined in this Section 20 shall have the meanings ascribed to them in the Agreement.
"ABR" means annual base rent, as set forth in the applicable lease or on the rent roll.
"CAM" means common area maintenance, as defined in the applicable lease.
"Closing" has the meaning set forth in the Agreement.
"Closing Settlement Statement" means the settlement statement prepared by Commonwealth National Title Insurance Company, in its capacity as escrow agent under the Agreement, reflecting all credits, debits, prorations, and adjustments at Closing, as between Buyer and Seller.
"OpEx" means operating expenses, as defined in the applicable lease and including, without limitation, common area utilities, management fees, landscaping, janitorial services, repairs and maintenance, and other customary operating costs.
"Proration Date" means June 6, 2024.
"Properties" means, collectively, the 14 real properties owned by the 14 Target Entities, as more particularly described in Exhibit A to the Agreement.
"Reconciliation Reserve" has the meaning set forth in Section 5.2 of this Exhibit U.
"Target Entities" means, collectively, the 14 property-owning Delaware limited liability companies identified in the recitals of the Agreement, each of which is a direct or indirect subsidiary of Seller.
"True-Up Statement" has the meaning set forth in Section 15.1 of this Exhibit U.