MEMORANDUM
PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT
This memorandum constitutes attorney work product prepared in anticipation of litigation and for the purpose of providing legal advice. It is protected from disclosure by the attorney-client privilege, the work product doctrine, and all other applicable privileges. Distribution is restricted to the named recipients. Do not copy, forward, or distribute without the express written authorization of Douglas Fairchild.
TO: Calderwood & Harkness LLP Deal Team:
Angela Fontaine — Billing Partner, Real Estate Practice Group
Cynthia Ho — Lead Associate, Real Estate Practice Group
Grace Nakamura — Working Associate, Real Estate Practice Group
Sylvia Hartwell — Specialist Partner, Tax Practice Group
FROM: Douglas Fairchild, Responsible Partner, Real Estate Practice Group
DATE: September 18, 2025
RE: Deal Summary and Risk Assessment — Fairwater Real Estate Investment Trust / Prescott Capital Partners, LP Joint Venture for Harbor Point Towers Development, Baltimore, MD
MATTER NO.: 1036-00005
CLIENT: Fairwater Real Estate Investment Trust (NYSE: FWT)
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I. PURPOSE AND SCOPE OF MEMORANDUM
The purpose of this memorandum is to provide the Calderwood & Harkness LLP deal team with a comprehensive overview of the proposed transaction between our client, Fairwater Real Estate Investment Trust ("Fairwater" or the "Client"), and Prescott Capital Partners, LP ("Prescott"), for the formation of an institutional joint venture to develop Harbor Point Towers, a two-tower, 610-unit luxury mixed-use residential development in Baltimore's Harbor Point district. This memorandum identifies the key commercial terms, legal risks, and negotiation points that the team should consider as we enter the documentation phase of the engagement, and it sets forth the Client's primary objectives so that all members of the deal team are aligned on strategy and priorities from the outset.
Calderwood & Harkness LLP, with offices at 100 International Drive, Suite 2600, Baltimore, MD 21202, was engaged by Fairwater on September 15, 2025 to serve as lead outside counsel in connection with the formation of the joint venture, the negotiation of all transaction documents, the review of third-party diligence materials, and the coordination of closing deliverables. The total capitalization of the joint venture is anticipated to be $240,000,000 in equity, with an additional $336,000,000 construction loan, for a total project cost of approximately $576,000,000. The Letter of Intent between the parties was executed on September 22, 2025, and the terms summarized herein are drawn from the executed LOI, supplemented by discussions with the Client's business team.
The matter is currently in the initial drafting phase. The first draft of the Joint Venture Agreement is targeted for circulation to Whitmore, Calder & Briggs LLP ("WCB"), counsel to Prescott Capital Partners, on October 10, 2025. The lead partner at WCB is Samuel T. Briggs III, and the lead associate is Megan R. Osterhaus. WCB's office is located at 51 West 52nd Street, New York, NY 10019. Following the JV Agreement, the first draft of the Operating Agreement is targeted for circulation on October 17, 2025. Accordingly, time is of the essence, and team members should familiarize themselves with the terms and risk profile described herein so that we can begin drafting immediately.
This memorandum is organized as follows: Section II provides a detailed transaction overview, including the parties, project description, capital structure, distribution waterfall, fee arrangements, governance provisions, buy-sell mechanics, removal provisions, key third parties, and insurance requirements. Section III presents the key timeline and milestones. Section IV addresses the tax structure at a high level. Section V discusses REIT compliance considerations specific to Fairwater. Section VI identifies key risks and mitigation strategies. Section VII articulates the Client's principal objectives. Section VIII contains the document list and work allocation. Section IX sets forth the immediate next steps. Section X provides concluding remarks and disclaimers.
Each team member should review this memorandum in its entirety and direct any questions, concerns, or comments to me directly. Supplemental memoranda on specific topics — including tax structure, waterfall modeling, construction loan review, and diligence matters — will be circulated as they are completed.
II. TRANSACTION OVERVIEW
A. The Parties
The following is a detailed summary of the parties to the proposed joint venture, including their organizational structures, key personnel, economic roles, and the entities through which they will hold their respective interests in the JV.
1. Fairwater Real Estate Investment Trust (Client)
Fairwater Real Estate Investment Trust is a Maryland-domiciled, publicly traded real estate investment trust listed on the New York Stock Exchange under the ticker symbol "FWT." Fairwater's principal executive offices are located at 7200 Pratt Street, Suite 1400, Baltimore, MD 21202. Its registered agent for service of process in Maryland is National Registered Agents of Maryland, Inc., located at 311 West Saratoga Street, Baltimore, MD 21201. Fairwater's Maryland State Department of Assessments and Taxation identification number is D19847321, and its federal employer identification number is 52-2198437.
Fairwater's senior leadership includes Harold K. Brennan, who serves as Chief Executive Officer and Chairman of the Board; Patricia S. Liang, Chief Financial Officer; Marcus D. Okonkwo, Executive Vice President, Development, who will serve as the primary business contact for the deal team throughout the transaction; and Theresa M. Calloway, General Counsel, who will serve as the primary legal contact and the recipient of all Calderwood & Harkness invoices and legal correspondence.
For the fiscal year ended December 31, 2024, Fairwater reported total assets of approximately $4.1 billion and total revenues of approximately $612 million. Its current portfolio consists of 38 mixed-use and multifamily properties located throughout the Mid-Atlantic region, with a concentration in the Baltimore, Washington, D.C., and Philadelphia metropolitan areas. Fairwater has significant experience as an operating partner in institutional joint ventures of this type, having completed seven prior JV developments in the Mid-Atlantic since 2017, though Harbor Point Towers would be its largest single project to date.
In the proposed joint venture, Fairwater will serve as the Managing Member and Operating Partner, responsible for day-to-day oversight and management of all aspects of the development, including construction management, leasing, and post-stabilization property management. Fairwater's equity commitment is $72,000,000, representing 30% of the total JV equity of $240,000,000.
Fairwater will hold its interest in the JV through Fairwater HP Manager, LLC, a wholly owned Maryland limited liability company subsidiary formed for the purpose of this transaction. Fairwater HP Manager, LLC has been assigned federal EIN 52-2201889. We should confirm that the formation documents for this subsidiary are in proper order and that it has been duly authorized by Fairwater's board of trustees to enter into the JV and make the contemplated equity commitment.
2. Prescott Capital Partners, LP (Institutional Partner / Counterparty)
Prescott Capital Partners, LP is a Delaware limited partnership that serves as an institutional real estate investment fund. Its general partner is Prescott Capital GP, LLC, a Delaware limited liability company. Prescott's principal office is located at 400 Lexington Avenue, 32nd Floor, New York, NY 10170, and its federal EIN is 13-4587612.
The investment in Harbor Point Towers will be made through Prescott Capital Partners Fund IV, LP, a 2023-vintage fund with total commitments of approximately $3.8 billion. Fund IV's investment mandate focuses on core-plus and value-add multifamily and mixed-use development in major East Coast metropolitan markets, and Harbor Point Towers falls squarely within that mandate.
Prescott's co-managing partners are Jonathan R. Whitfield and Diana L. Sutherland. The senior principal and deal lead responsible for the Harbor Point Towers investment is Andrew M. Castellano. Mr. Castellano will be the primary business counterpart for Marcus Okonkwo and the Calderwood & Harkness deal team during negotiations.
In the proposed joint venture, Prescott will serve as the Capital Partner and Non-Managing Member, contributing the majority of the equity capital but holding protective consent rights over major decisions in lieu of day-to-day management authority. Prescott's equity commitment is $168,000,000, representing 70% of the total JV equity of $240,000,000.
Prescott will hold its interest in the JV through Prescott HP Investor, LLC, a Delaware limited liability company formed for the purpose of this investment. Prescott HP Investor, LLC has been assigned federal EIN 13-4603217. We should expect WCB to provide representations regarding the due formation and authorization of this entity.
3. Harbor Point Development JV, LLC (Joint Venture Entity)
The joint venture entity through which the development will be conducted is Harbor Point Development JV, LLC (the "JV" or the "Company"), a Delaware limited liability company to be formed upon execution of the JV Agreement. The JV's registered agent in Delaware will be Incorporators & Associates, Inc., located at 1209 Orange Street, Wilmington, DE 19801. The JV has applied for federal EIN 84-6213950, which is pending IRS processing.
The members of the JV will be Fairwater HP Manager, LLC, holding a 30% membership interest as Managing Member, and Prescott HP Investor, LLC, holding a 70% membership interest as a Non-Managing Member. Fairwater HP Manager, LLC will serve as the Managing Member of the JV and will be delegated authority over day-to-day operations, subject to Prescott's protective consent rights over major decisions as described in Section II.F below.
The JV will be organized under the Delaware Limited Liability Company Act (6 Del. C. §§ 18-101 et seq.) and will qualify as a foreign limited liability company in the State of Maryland in order to conduct its development activities within Baltimore City. Grace Nakamura should ensure that the foreign qualification filing with the Maryland SDAT is prepared and ready for submission promptly upon formation.
4. Counsel
Calderwood & Harkness LLP represents Fairwater Real Estate Investment Trust and its subsidiary, Fairwater HP Manager, LLC, in all aspects of this transaction. Whitmore, Calder & Briggs LLP represents Prescott Capital Partners, LP and its subsidiary, Prescott HP Investor, LLC. No joint representation or common interest arrangements exist between the firms or the parties.
B. Project Description — Harbor Point Towers
Harbor Point Towers is a proposed Class A mixed-use residential development consisting of two 28-story towers with a total of 610 residential units (anticipated to consist of a mix of studio, one-bedroom, two-bedroom, and three-bedroom luxury rental apartments) and approximately 45,000 square feet of ground-floor retail space. The project is situated in Baltimore's rapidly developing Harbor Point district, which has emerged in recent years as one of the city's premier mixed-use waterfront neighborhoods.
The development site consists of approximately 8.2 acres located at 1500–1580 Wills Street, Baltimore, MD 21231, identified on the Baltimore City tax maps as Block 7419, Lots 1 through 6. The site is currently owned by Harbor East Land Holdings, LLC, whose sole member is Vincent A. DeLuca. The JV will acquire the land from Harbor East Land Holdings, LLC for a total purchase price of $54,000,000 pursuant to a purchase and sale agreement that has been negotiated between the parties at the LOI stage. Calderwood & Harkness will be responsible for reviewing and, as necessary, negotiating amendments to the existing PSA, and for preparing the assignment documentation necessary to transfer the purchaser's rights thereunder from Fairwater to the JV entity.
The project is fully entitled. The Baltimore City Council approved a Planned Unit Development ("PUD") for the site on June 14, 2024, pursuant to Ordinance No. 24-0417. The PUD approval authorizes the construction of the two residential towers and the associated ground-floor retail space as contemplated in the project plans. Building permits are expected to be issued in the first quarter of 2026. As discussed further in Section VI.G, while the zoning and entitlement risk on this project is relatively low given the existing PUD approval, the deal team should confirm the status of vested rights under Maryland law, review the conditions of approval, and verify that no appeal period issues remain outstanding.
C. Capital Structure
The capital structure for the Harbor Point Towers development is summarized below. The total project cost is estimated at $576,000,000, to be funded through a combination of JV equity and construction debt.
1. Total Project Cost: $576,000,000
The estimated total project cost of $576,000,000 is broken down as follows:
• Land Acquisition: $54,000,000 — representing the negotiated purchase price to be paid to Harbor East Land Holdings, LLC for the 8.2-acre site.
• Hard Costs (Construction): $432,000,000 — representing the cost of vertical construction, site work, and related construction activities to be performed by Pinnacle General Contractors, Inc. under a guaranteed maximum price ("GMP") contract. The GMP contract is expected to be executed on or about December 20, 2025.
• Soft Costs: $90,000,000 — representing design and architectural fees, permitting and impact fees, legal and accounting fees, construction-period interest carry, development management fees, insurance premiums, and miscellaneous pre-development and development-period expenses. This amount includes a dedicated interest reserve of $29,400,000, which will be funded within the soft cost budget and held by the construction lender or in a JV-controlled account to service construction loan interest payments during the construction period.
2. Total JV Equity: $240,000,000
The total equity capitalization of the joint venture is $240,000,000, which constitutes the aggregate equity commitment of the two members. This figure represents the "deal value" referenced in the LOI and serves as the basis for the distribution waterfall and promote calculations. The equity is allocated as follows:
• Fairwater (30%): $72,000,000 (calculated as $240,000,000 × 0.30)
• Prescott (70%): $168,000,000 (calculated as $240,000,000 × 0.70)
3. Construction Loan: $336,000,000
The balance of the total project cost will be funded through a senior secured construction loan in the amount of $336,000,000, to be provided by Meridian National Bank, N.A. The primary relationship contact at Meridian is Kevin P. Driscoll, Senior Vice President, Real Estate Finance, whose office is located at 200 South Charles Street, Baltimore, MD 21201.
The key terms of the construction loan, as discussed in preliminary conversations between Fairwater and Meridian and reflected in the LOI, are as follows:
• Loan Amount: $336,000,000
• Loan-to-Cost Ratio: 58.33% (calculated as $336,000,000 ÷ $576,000,000)
• Interest Rate: Term SOFR plus 275 basis points, with rate calculated on a 30/360 day count basis
• Term: 36 months from the construction loan closing date, plus two 6-month extension options (each subject to customary extension conditions including payment of an extension fee, no outstanding default, and satisfaction of specified construction milestones)
• Interest Reserve: $29,400,000, funded within the soft cost budget
• Collateral: First priority lien on the fee interest in the development site, assignment of leases and rents, security interest in all personal property, and assignment of the general contractor agreement, architect agreement, and other project contracts
• Guaranties: Completion Guaranty and Recourse Carve-Out Guaranty ("bad boy" guaranty) to be executed by Fairwater Real Estate Investment Trust (not merely the JV subsidiary), as well as an Environmental Indemnity Agreement from both the JV and Fairwater
• Term Sheet: Expected to be delivered by Meridian on November 18, 2025
The construction loan is a critical component of the capital structure, and Calderwood & Harkness's review of the term sheet and subsequent loan documentation will be a major workstream. As discussed in Section VI.E, the guaranty obligations imposed on Fairwater represent significant contingent liabilities, and we must negotiate the scope of these guaranties to the narrowest terms acceptable to the lender.
4. Equity Capital Call Schedule
The JV Operating Agreement will establish a capital call mechanism pursuant to which the members fund their equity commitments over time as needed for project costs. The initial and subsequent capital calls are structured as follows:
• Initial Capital Call at Closing: 25% of total equity = $60,000,000, to be funded on or before the land closing date (target: January 30, 2026). Fairwater's share of the initial call is $18,000,000 (calculated as $60,000,000 × 0.30), and Prescott's share is $42,000,000 (calculated as $60,000,000 × 0.70). This initial call will fund the land acquisition cost of $54,000,000 plus initial pre-development soft costs.
• Subsequent Capital Calls: Pro rata (30/70), on 15 business days' written notice from the Managing Member, as approved in accordance with the JV budget. Subsequent calls will fund the equity portion of hard costs and additional soft costs during the construction period, with construction loan draws funding the balance.
The 15-business-day notice period for subsequent capital calls is relatively standard for institutional joint ventures of this type, but the capital call default provisions — including dilution mechanics and forced sale rights — must be carefully drafted to protect the Client's interests in the event of a Prescott funding failure. This issue is discussed further in Section VI.B.
D. Distribution Waterfall
The distribution waterfall is the core economic mechanism of the joint venture and governs how cash distributions (from operations, refinancing, or disposition) are allocated between the members. The waterfall structure, as reflected in the LOI, consists of the following tiers:
Tier 1 — Return of Capital: 100% of distributable cash is distributed to the members pro rata in accordance with their respective membership percentages (30% to Fairwater / 70% to Prescott) until all contributed capital has been returned to each member.
Tier 2 — Preferred Return: After all contributed capital has been returned, 100% of distributable cash is distributed to the members pro rata (30% to Fairwater / 70% to Prescott) until each member has received a 9.0% internal rate of return (compounded quarterly) on its unreturned capital contributions.
Tier 3 — Catch-Up (First Promote Tier): After the preferred return has been satisfied, distributable cash is distributed 60% to Fairwater (as the promoted interest or "promote") and 40% to Prescott until Fairwater has received an aggregate amount equal to 20% of all cumulative distributions in excess of the return of capital (i.e., until Fairwater has "caught up" to a 20% share of the above-ROC profit).
Tier 4 — Residual Split (Base): After the catch-up is complete, distributable cash is distributed 20% to Fairwater and 80% to Prescott.
Tier 5 — Residual Split (Second Promote Tier): If the project-level internal rate of return exceeds 15%, the residual split for all distributions above the 15% IRR threshold changes to 30% to Fairwater and 70% to Prescott, reflecting an enhanced promote for Fairwater in recognition of outsized returns.
The promote structure is a critical economic driver for Fairwater and represents the Client's compensation as Operating Partner above and beyond its pro rata share of distributions and its management fees. As discussed in Section VII, one of the Client's highest priorities is protecting the two-tier promote structure against any dilution, clawback, or true-up provisions that Prescott may seek in negotiations. Cynthia Ho should prepare a Waterfall Modeling Memorandum at multiple IRR scenarios prior to circulating the first draft, so that we can confirm the promote economics and anticipate counterparty arguments. This is discussed further in Section IX.
E. Fees to Fairwater (Operating Partner)
In addition to the promote distributions described above, Fairwater will earn the following fees as the Operating Partner and Managing Member of the JV. These fees represent embedded economics for the Client and are a significant component of its total return on the transaction:
Development Management Fee: 3.5% of hard costs, calculated as $432,000,000 × 0.035 = $15,120,000. This fee will be paid monthly during the construction period on a pro rata basis relative to costs incurred, as verified by the construction draw process and the JV's third-party accounting firm. The development management fee compensates Fairwater for its oversight of the design, permitting, and construction process, including coordination with the architect, general contractor, and construction lender. No separate construction management oversight fee is payable, as Fairwater's construction management functions are included within the scope of the development management fee.
Property Management Fee (Post-Stabilization): 3.0% of Effective Gross Revenue ("EGR"), payable monthly following the achievement of stabilization (93% occupancy). This fee compensates Fairwater for ongoing property management services, including leasing administration, tenant relations, building maintenance, and financial reporting. The property management fee is consistent with market terms for institutional JVs involving Class A multifamily properties in the Baltimore metropolitan area.
Disposition Fee: 1.0% of the gross sale price, payable to Fairwater at the closing of any disposition of the property or the JV interests. This fee compensates Fairwater for its role in marketing, negotiating, and closing any sale transaction.
Asset Management Fee: No asset management fee is payable to Fairwater. Prescott charges its limited partners a separate fund-level asset management fee that is borne by the Fund IV investors and is not a cost to the JV. The absence of a JV-level asset management fee payable to Fairwater is typical for operating-partner JV structures where the operating partner's compensation is derived through the promote and the development/property management fees.
As discussed in Section VII, the protection of Fairwater's fee revenue is a key client objective. We should ensure that the development management fee, property management fee, and disposition fee are clearly defined in the Operating Agreement, are not subordinated to any return thresholds or Prescott consent rights, and cannot be unilaterally reduced or eliminated by the Capital Partner.
F. Governance and Major Decisions
The governance structure of the JV reflects a standard institutional joint venture framework in which the operating partner (Fairwater) retains day-to-day management authority while the capital partner (Prescott) holds protective consent rights over significant decisions that could materially affect its investment.
Fairwater, acting through Fairwater HP Manager, LLC as Managing Member, will have authority over day-to-day operations of the JV, including but not limited to the management and supervision of the development process, construction oversight, engagement and coordination of architects, engineers, and subcontractors (subject to GMP contract terms), marketing and leasing of residential and retail units, post-stabilization property management, preparation of annual budgets for submission to Prescott for approval, and ordinary-course financial and administrative management.
Prescott, acting through Prescott HP Investor, LLC as Non-Managing Member, will hold protective consent rights over the following categories of major decisions, each of which will require the prior written consent of Prescott before Fairwater may take or authorize such action on behalf of the JV:
(a) Approval of annual budgets and amendments to approved budgets where the proposed amendment would exceed 5% of any budgeted line item;
(b) Any single expenditure exceeding $500,000 that is not included in the approved budget;
(c) Any financing, refinancing, or material modification of the construction loan or any other indebtedness of the JV;
(d) Any sale, transfer, encumbrance, or other disposition of all or any material portion of the property or of any membership interest in the JV;
(e) Admission of any additional members to the JV;
(f) Any settlement of litigation, arbitration, or other legal proceedings involving the JV where the settlement amount exceeds $250,000;
(g) Elections regarding the rebuild or wind-down of the project following a casualty event or condemnation;
(h) Any voluntary filing for bankruptcy, insolvency, or dissolution of the JV.
As discussed in Section VI.D, several of these consent rights — particularly the $500,000 unbudgeted expenditure threshold and the 5% budget variance threshold — are relatively restrictive for a project of this scale and may constrain Fairwater's operational flexibility. Negotiating appropriate carve-outs, deemed-approval mechanisms, and emergency expenditure authorities will be a significant focus of the JV Agreement negotiations.
G. Buy-Sell and ROFO Provisions
The LOI contemplates buy-sell and right of first offer ("ROFO") provisions that will govern the parties' exit mechanics following an initial lockout period. The key terms are as follows:
Triggering Event: Either member may initiate the buy-sell process on or after the fifth anniversary of the JV closing date (i.e., on or after January 12, 2031). Prior to that date, neither party may trigger the buy-sell mechanism.
ROFO Period: Upon receipt of a buy-sell notice, the non-initiating member will have a period of 60 days in which to either (a) match the initiating member's proposed purchase price and elect to purchase the initiating member's interest, or (b) elect to sell its own interest at the proposed price.
Appraisal Mechanism: If the parties are unable to agree on a fair market value ("FMV") for the property or the JV interests, each party will select one MAI-certified appraiser to conduct an independent appraisal. If the two appraisals differ by more than 10%, a third MAI-certified appraiser will be jointly appointed (or, if the parties cannot agree, appointed by a designated arbitration body). The FMV will then be determined as the average of the two appraisals that are closest in value.
The buy-sell and ROFO provisions are discussed further in Section VI.I, which identifies the risks associated with the current structure and potential negotiation strategies.
H. Removal of Operating Partner
The LOI provides that Prescott may remove Fairwater as Managing Member of the JV under certain specified circumstances. The removal provisions are among the most commercially significant terms of the transaction from Fairwater's perspective and will require careful negotiation. The current terms are as follows:
For Cause Removal Events: Prescott may remove Fairwater as Managing Member upon the occurrence of any of the following events:
(a) Uncured Material Default: Fairwater commits a material default under the JV Agreement or Operating Agreement and fails to cure such default within 30 days after receipt of written notice from Prescott specifying the nature of the default.
(b) Fraud or Willful Misconduct: Fairwater (or any of its officers, directors, or employees acting within the scope of their authority) commits fraud or willful misconduct in connection with the JV's business or affairs.
(c) Bankruptcy: Fairwater (or Fairwater HP Manager, LLC) becomes the subject of a voluntary or involuntary bankruptcy proceeding, makes an assignment for the benefit of creditors, or is unable to pay its debts as they become due.
(d) Key-Person Event: Both Harold K. Brennan (CEO) and Marcus D. Okonkwo (EVP, Development) depart from Fairwater, and Fairwater fails to designate approved replacements acceptable to Prescott within 90 days after the second departure.
Consequences of Removal For Cause: Upon removal of Fairwater as Managing Member for cause, Fairwater's promote (i.e., the catch-up and enhanced residual split described in Section II.D above) is forfeited. Fairwater would retain its 30% pro rata interest in the JV and its right to a return of capital and preferred return, but would lose all promote economics prospectively and retroactively (to the extent not previously distributed).
Consequences of Removal Without Cause: If Prescott elects to remove Fairwater as Managing Member without cause (if such a right is included in the final documents), Fairwater would retain all accrued but unpaid promote distributions.
The removal provisions are discussed in detail in Section VI.C, which identifies the concentration risk inherent in the key-person clause, the ambiguity in the "material default" standard, and the need for meaningful protections in the event of any removal.
I. Key Third Parties
The following third parties are expected to play significant roles in the transaction. Calderwood & Harkness will interact directly with several of these parties during the documentation and diligence phases:
J. Insurance Requirements
The JV Operating Agreement and the construction loan documents will each contain detailed insurance requirements. Based on the LOI and preliminary discussions with the construction lender, the following minimum insurance coverages will be required:
Builder's Risk Insurance: Full replacement cost coverage during the construction period, to be placed with Greystone Mutual Insurance Company. The builder's risk policy must name the JV, Fairwater, Prescott, the general contractor, and the construction lender as additional insureds or loss payees, as applicable. Coverage must include protection against fire, wind, flood (if applicable given waterfront location), theft, vandalism, and other standard perils.
Commercial General Liability: $10,000,000 per occurrence and $20,000,000 in the aggregate. The CGL policy must be maintained throughout the construction period and into the operational period following completion.
Umbrella/Excess Liability: $50,000,000 in excess of the CGL policy limits. Given the scale and height of the construction project and the waterfront location, the umbrella limit may be subject to adjustment based on lender requirements and risk assessment.
Title Insurance: An owner's title insurance policy in the amount of $54,000,000 will be obtained at the land closing through Tidewater Insurance Group, Inc. The owner's policy will contain endorsements providing for an increase in coverage to the full project cost upon completion of construction, reflecting the added value of the improvements. A lender's title insurance policy in the amount of the construction loan ($336,000,000) will also be required by Meridian.
Additional insurance coverages — including workers' compensation, automobile liability, professional liability (for architects and engineers), and pollution liability — will be specified in the GMP contract, the construction loan documents, and the JV Operating Agreement. The deal team should coordinate with the Client's risk management department and the insurance broker to ensure that all required coverages are in place prior to the commencement of construction activities.
III. KEY TIMELINE AND MILESTONES
The following table sets forth the key dates and milestones for the transaction, as currently contemplated based on the LOI and discussions with the Client's business team. All dates are approximate and subject to change as negotiations and diligence progress. Cynthia Ho should maintain a running timeline and update it as dates are confirmed or adjusted.
The period between October 10, 2025 (first draft circulation) and January 12, 2026 (signing) provides approximately three months for document negotiation, which is compressed but manageable for a transaction of this type. The team should anticipate two to three rounds of redlines on the JV Agreement and Operating Agreement, with a final issues session at the principals level scheduled for January 6, 2026. The diligence workstreams (title, survey, environmental, zoning, appraisal) run concurrently during November and December 2025 and must be completed before signing.
Of particular note, the Prescott investment committee final approval is scheduled for November 5, 2025. While the LOI has been executed, the investment is not fully committed on Prescott's side until the investment committee vote. The deal team should be aware that Prescott may attempt to renegotiate certain LOI terms following the investment committee process, and we should be prepared to hold firm on the Client's key positions.
IV. TAX STRUCTURE OVERVIEW
The tax structure of the joint venture is summarized at a high level below. Sylvia Hartwell, Specialist Partner in the Tax Practice Group, will prepare a separate, detailed Tax Structure Memorandum addressing the full range of tax considerations. The Tax Structure Memorandum should be completed concurrently with the drafting of the Operating Agreement, as the tax provisions are integral to the Operating Agreement and must be coordinated with the economic terms.
Partnership Taxation: The JV will be treated as a partnership for federal income tax purposes. No entity-level tax election (such as an election to be taxed as an association or corporation) will be made. As a Delaware limited liability company with two members, the JV will default to partnership classification under the IRS check-the-box regulations (Treasury Regulation § 301.7701-3), and no Form 8832 election will be necessary.
Tax Matters Partner / Partnership Representative: Fairwater HP Manager, LLC will serve as the "Partnership Representative" of the JV within the meaning of Section 6223 of the Internal Revenue Code, as amended by the Bipartisan Budget Act of 2015. The Operating Agreement will contain detailed provisions governing the Partnership Representative's authority, including limitations on the Partnership Representative's ability to settle audits, make elections, or take positions that adversely affect Prescott without Prescott's prior written consent. The Operating Agreement will also include push-out election provisions to permit the JV to pass through any tax adjustments to the members rather than paying imputed underpayments at the entity level.
Allocations: Tax allocations will follow the principles of Sections 704(b) and 704(c) of the Internal Revenue Code and the Treasury Regulations thereunder. The Operating Agreement will contain the standard regulatory allocations required to maintain economic effect under Regulation § 1.704-1(b)(2), including a qualified income offset provision, a minimum gain chargeback provision, and a partner minimum gain chargeback provision. Section 704(c) allocations will be made using the traditional method (or such other method as agreed between the members), and the Tax Protection Agreement (described below) will address protections against taxable gain recognition.
Maryland State and Local Taxes: The members will negotiate and agree upon whether the JV will make a pass-through entity tax election for Maryland state and local income tax purposes. Maryland's pass-through entity tax provisions permit LLCs to elect to pay tax at the entity level, with members receiving a credit against their individual or entity-level state tax liabilities. The advisability of this election depends on the tax profiles of both members and should be analyzed by Sylvia Hartwell in the Tax Structure Memorandum.
Tax Protection Agreement: A separate Tax Protection Agreement will be negotiated between the members to address Section 704(c) allocations and to provide protections against taxable gain recognition to the members in connection with the JV's operations, refinancing, or disposition of the property. The Tax Protection Agreement is particularly important for Fairwater as a publicly traded REIT, as taxable gain recognition at the REIT level can have distribution and qualification implications. Sylvia Hartwell will take the lead on drafting and negotiating this agreement, with Cynthia Ho providing support.
JV-Level Accounting and Tax Compliance: Accounting and tax return preparation for the JV will be performed by Alderman & Fields, CPAs, LLP. The engagement partner at Alderman & Fields is Robert E. Alderman, and the firm's office is located at 1 South Street, Suite 1800, Baltimore, MD 21202. Alderman & Fields will prepare the JV's annual federal and state tax returns (Form 1065 and Maryland Form 510) and will provide quarterly financial statements and capital account reports to the members. The Operating Agreement should include provisions specifying the JV's fiscal year, accounting methods, reporting obligations, and audit rights.
V. REIT COMPLIANCE CONSIDERATIONS
Fairwater's status as a publicly traded real estate investment trust imposes a number of structural constraints on the JV that must be addressed in the Operating Agreement and, as appropriate, in a standalone REIT Compliance Side Letter. Failure to comply with the REIT qualification requirements could jeopardize Fairwater's tax-advantaged status and subject it to corporate-level taxation, with severe adverse consequences for the Client and its shareholders. The REIT compliance provisions are therefore among the highest-priority items in the transaction.
The principal REIT compliance issues are as follows:
"Closely Held" Violation Provisions: The Operating Agreement must contain provisions ensuring that the JV's activities do not cause Fairwater to violate the "closely held" restriction under Section 856(h) of the Internal Revenue Code, which prohibits more than 50% of the value of a REIT's outstanding shares from being owned by five or fewer individuals during the last half of any taxable year. While this restriction applies at the Fairwater entity level rather than the JV level, the Operating Agreement should include standard representations and covenants to prevent any indirect ownership concentration issues.
Gross Income Testing Cooperation: Fairwater is subject to annual gross income tests under Section 856(c) of the Internal Revenue Code, which require that at least 75% of its gross income be derived from specified real estate sources and that at least 95% of its gross income be derived from real estate sources plus passive income. The Operating Agreement must require Prescott to cooperate with Fairwater in providing information necessary for Fairwater to monitor its compliance with these tests, and Prescott must agree not to take any actions with respect to the JV that would cause the JV's income to fail the REIT income tests as applied to Fairwater's share.
Distribution-Forcing Rights: One of the most important REIT compliance provisions from Fairwater's perspective is the right to compel the JV to distribute at least 100% of the REIT taxable income attributable to Fairwater's JV interest. Under Section 857(a) of the Internal Revenue Code, a REIT must distribute at least 90% of its REIT taxable income to shareholders each year in order to maintain its REIT qualification. Fairwater must therefore have the ability to force distributions from the JV to the extent necessary to satisfy this requirement, even if the JV would otherwise retain cash for operational or construction purposes.
Anticipated Pushback from Prescott: We anticipate that Prescott will resist broad distribution-forcing rights, particularly during the construction period when the JV's cash flow will be negative and liquidity will be constrained. Prescott may argue that forced distributions during construction could impair the JV's ability to fund cost overruns, meet construction loan reserve requirements, or maintain adequate working capital. This is a legitimate concern, and we must negotiate appropriate carve-outs and limitations that balance Fairwater's REIT qualification needs against the JV's operational liquidity requirements. Possible compromises include limiting distribution-forcing rights to the minimum amount necessary for REIT qualification (net of Fairwater's other sources of income), providing for distributions in the form of promissory notes if cash is unavailable, or establishing a dedicated REIT distribution reserve within the JV budget.
Asset and Income Test Interactions: The interaction between the REIT asset tests (Section 856(c)(4)) and income tests and the JV's construction-phase activities requires careful analysis. During the construction period, the JV's primary assets will consist of land and construction work in progress, which should qualify as real estate assets for REIT asset test purposes. However, interest income on the interest reserve, construction management fees, and other ancillary income items must be analyzed to ensure they qualify under the REIT income tests. Sylvia Hartwell should address these issues in the Tax Structure Memorandum.
REIT Compliance Side Letter: In addition to the REIT savings provisions in the Operating Agreement, a standalone REIT Compliance Side Letter will be negotiated between Fairwater HP Manager, LLC and Prescott HP Investor, LLC. The Side Letter will contain more detailed representations, covenants, and undertakings regarding REIT compliance, including information-sharing obligations, cooperation covenants, and remedies in the event of a REIT compliance failure. The Side Letter approach is standard in institutional JV transactions involving publicly traded REITs and allows the REIT-specific provisions to be addressed in a focused document without cluttering the Operating Agreement.
VI. KEY RISKS AND MITIGATION STRATEGIES
The following section identifies the key legal, commercial, and structural risks associated with the proposed transaction and sets forth recommended mitigation strategies for each. This risk assessment is preliminary and will be updated and refined as diligence progresses and negotiations with WCB develop. Team members should flag any additional risks that come to their attention during the documentation and diligence process.
A. Construction Completion Risk
Construction completion risk is among the most significant risks in any ground-up development joint venture, and it is particularly acute in this transaction given the scale of the project (two 28-story towers with total hard costs of $432,000,000) and the approximately 30-month construction timeline (March 2026 to September 2028).
The GMP contract with Pinnacle General Contractors, Inc. provides a contractual cost cap, which represents the maximum price the JV will pay for the construction work absent approved change orders. However, the GMP is not a guarantee against all cost overruns. Change order risks — arising from design modifications, unforeseen site conditions, material price escalation, labor shortages, or scope changes — remain a significant exposure. Additionally, force majeure events (including extreme weather, supply chain disruptions, pandemics, or government-imposed shutdowns) could cause delays and corresponding cost increases that fall outside the scope of the GMP.
Meridian National Bank will require Fairwater to execute a Completion Guaranty in connection with the construction loan, guaranteeing lien-free completion of the project within the budgeted cost. The Completion Guaranty is a personal guaranty by Fairwater (at the REIT level, not merely the JV subsidiary), and it creates a significant contingent liability on Fairwater's balance sheet. Calderwood & Harkness must carefully negotiate the scope of the Completion Guaranty to distinguish between cost overruns (which should be addressed through additional equity contributions or capital calls within the JV, not through the guaranty) and true construction completion failures (such as abandonment or inability to complete). The Completion Guaranty should also include a mechanism for Fairwater to be released upon achievement of substantial completion and satisfaction of customary conditions.
Within the JV itself, the budget variance threshold of 5% per line item for Prescott consent creates a tight operational constraint during the construction period. Construction budgets for projects of this scale routinely experience line-item variances in excess of 5%, even when the overall project remains within budget. If Prescott's consent is required for every line-item variance above 5%, the approval process could create significant bottlenecks and delays, particularly if Prescott is unresponsive or uses the consent right as leverage on other issues.
Mitigation Strategies:
• Negotiate a robust change order protocol in the GMP contract that clearly allocates risk between the JV and the general contractor, limits the circumstances under which change orders can be approved, and establishes dispute resolution mechanisms for contested change orders.
• Ensure adequate contingency line items in the JV budget, including a hard cost contingency of not less than 5% of hard costs ($21,600,000) and a soft cost contingency appropriate for a project of this type.
• Commission a GMP contract review memorandum to identify risk allocation issues in the Pinnacle contract and to coordinate the GMP terms with the JV Operating Agreement and construction loan documents.
• Negotiate the Completion Guaranty scope to exclude cost overruns addressed through capital calls and to provide for release upon substantial completion.
• Consider a "total budget" variance threshold as an alternative or supplement to the line-item threshold, permitting reallocation between line items without Prescott consent so long as the total budget is not exceeded by more than a specified percentage.
B. Capital Call Default Risk
The risk that either member may fail to fund a required capital call is a structural concern in any institutional joint venture. Capital call defaults can destabilize the JV's development program, trigger lender defaults, and create disputes between the members.
Subsequent capital calls are made on 15 business days' written notice from the Managing Member, with each member funding its pro rata share (30/70). The Capital Contribution Agreement will specify the remedies available to the non-defaulting member in the event of a default, which typically include dilution of the defaulting member's interest, treatment of the unfunded amount as a loan bearing a punitive interest rate, and in extreme cases, forced sale of the defaulting member's interest.
While the default risk is theoretically bilateral, the practical concerns differ for each member. Prescott's larger commitment ($168,000,000) represents a larger absolute exposure, but Fund IV's $3.8 billion fund size provides substantial financial capacity to fund its obligations, and the risk of a Prescott default is generally viewed as low. For Fairwater, the $72,000,000 equity commitment represents a meaningful deployment of capital relative to its total asset base (approximately $4.1 billion) and annual revenue (approximately $612 million). The deal team should confirm that Fairwater's existing credit facility covenants — including any limitations on investments, restricted payments, or asset encumbrances — do not prevent or impair Fairwater's ability to fund its equity commitment. Theresa Calloway should be asked to provide copies of Fairwater's current credit facility agreements for review.
Mitigation Strategies:
• The Equity Funding Commitment Letter from Fairwater should be authorized by Fairwater's board of trustees, confirming the availability of funds and the absence of any impediment to funding.
• Default remedies should include dilution mechanics that protect the non-defaulting member, ensuring that if Prescott defaults, Fairwater's interest increases proportionally and its promote is preserved; and conversely, ensuring that if Fairwater defaults, the dilution mechanics are calibrated to reflect the actual economic harm to Prescott without resulting in disproportionate forfeiture.
• The Capital Contribution Agreement should include a cure period of not less than 10 business days following notice of default, a forced sale provision as an ultimate remedy, and a cross-default provision linking capital call defaults to the removal provisions.
• Review Fairwater's existing credit facility covenants to confirm no conflicts with the equity commitment.
C. Promote and Removal Mechanics
As discussed in Section II.D and Section II.H, Fairwater's promote — consisting of the catch-up at 60/40 and the two-tier residual split — is the most significant economic incentive in the transaction beyond Fairwater's pro rata returns and fees. The risk that Fairwater could lose its promote through the removal-for-cause provisions is a matter of serious concern.
The LOI provides that Fairwater's promote is forfeited upon removal for cause. This means that any of the four removal triggers — uncured material default, fraud or willful misconduct, bankruptcy, or key-person event — could result in the loss of millions of dollars in promote distributions. The potential promote value at various IRR levels is significant and should be quantified in the Waterfall Modeling Memorandum.
The key-person clause is particularly noteworthy. The departure of both Harold K. Brennan and Marcus D. Okonkwo — without approved replacements within 90 days — would trigger a key-person event and permit Prescott to remove Fairwater as Managing Member for cause. This creates concentration risk around two individuals. If Mr. Brennan (who is Fairwater's CEO and Chairman) were to retire, and Mr. Okonkwo were subsequently to leave Fairwater, the 90-day replacement period would begin to run, and Prescott would have significant leverage. The "approved replacement" standard is critical: if Prescott has an unreasonable veto over replacement candidates, the key-person clause effectively becomes a removal-at-will right.
The 30-day cure period for material defaults raises the question of how "material default" is defined. If the definition is overly broad — encompassing any breach of any provision of the Operating Agreement — then ordinary operational disagreements or minor administrative failures could be escalated into removal events. The cure period must also be adequate for the nature of the alleged default; some defaults (such as construction management failures) may take longer than 30 days to cure.
Mitigation Strategies:
• Resist any expansion of the "for cause" removal triggers beyond the four specified in the LOI. Prescott may attempt to add additional triggers (such as failure to meet construction milestones, failure to achieve stabilization by a specified date, or material adverse changes in Fairwater's financial condition); these should be rejected or, at minimum, subjected to extensive negotiation.
• Define "material default" narrowly and specifically, excluding ordinary operational disagreements, good-faith business judgment decisions, and minor or technical breaches. Consider requiring that the default be "material and adverse" to Prescott's economic interests.
• Ensure that the cure period is adequate for the nature of the default and includes notice requirements, an opportunity to be heard, and, where applicable, the right to commence cure within the 30-day period and diligently pursue cure to completion.
• Negotiate the key-person clause to require the departure of both Mr. Brennan and Mr. Okonkwo (not either individually) and to provide that the 90-day replacement period is triggered only upon the departure of the second key person. The "approved replacement" standard should specify that Prescott's approval shall not be unreasonably withheld, conditioned, or delayed, and should include objective criteria for replacement candidates (e.g., minimum years of development experience, senior management position at Fairwater).
• Ensure that Prescott cannot weaponize the budget-approval consent right to engineer a constructive default. If Prescott unreasonably withholds budget approval, causing the Managing Member to be unable to operate within approved budgets, this should not be treated as a default by Fairwater.
• Removal without cause should be subject to meaningful economic protections for Fairwater, including retention of all accrued but unpaid promote distributions, payment of a reasonable transition fee, and the right to continue receiving property management fees for a reasonable transition period.
D. Governance and Consent Rights
Prescott's extensive major decision consent rights, as summarized in Section II.F, reflect the standard tension in institutional joint ventures between the operating partner's need for operational flexibility and the capital partner's need for investment protection. While consent rights over truly material decisions are customary and expected, the specific thresholds and categories in this transaction raise several concerns.
The $500,000 unbudgeted expenditure threshold is relatively low for a $576,000,000 development project. During the construction period, unbudgeted expenditures of this magnitude can arise frequently — for example, emergency repairs, code compliance modifications, utility relocation costs, or acceleration costs to maintain the construction schedule. If each such expenditure requires Prescott's prior written consent, the approval process could slow down decision-making at critical junctures and expose Fairwater to liability for delays.
The annual budget approval requirement and the 5% variance threshold create an ongoing dependency on Prescott's timely review and consent. If Prescott fails to approve the annual budget in a timely manner, or if Prescott withholds consent to necessary budget amendments, Fairwater's ability to manage the development process could be materially impaired. The Operating Agreement should include a mechanism to address Prescott's failure to respond to budget submissions within a specified period.
The litigation settlement threshold of $250,000 is standard for institutional joint ventures but may complicate the resolution of time-sensitive disputes with subcontractors, material suppliers, or neighboring property owners during the construction period. Construction disputes frequently involve claims in excess of $250,000, and the inability to settle such claims without Prescott's consent could delay resolution and increase legal costs.
Mitigation Strategies:
• Negotiate a higher unbudgeted expenditure threshold — ideally $1,000,000 or $1,500,000 — or, alternatively, an aggregate annual unbudgeted expenditure authority (e.g., $2,500,000 per year) within which the Managing Member may act without Prescott consent.
• Include an emergency expenditure carve-out for life/safety matters, environmental compliance, and actions necessary to prevent imminent harm to the property, the project, or third parties, permitting the Managing Member to incur such expenditures without prior Prescott consent provided that notice is given promptly thereafter.
• Negotiate deemed-approval provisions for time-sensitive decisions, providing that if Prescott fails to respond to a consent request within a specified period (e.g., 10 business days for routine matters, 5 business days for time-sensitive matters), Prescott's consent shall be deemed granted.
• Establish a quarterly budget review process to minimize the frequency of ad hoc budget amendment requests and to give Prescott regular visibility into budget performance.
• Consider whether the litigation settlement threshold should be increased to $500,000 for construction-related disputes or whether a separate dispute resolution authority should be delegated to the Managing Member for subcontractor and supplier claims.
E. Construction Lender Requirements
The construction loan from Meridian National Bank is a critical component of the transaction's capital structure, and the lender's requirements will significantly affect the JV's governance, the members' respective obligations, and Fairwater's contingent liability exposure.
The Completion Guaranty and Recourse Carve-Out Guaranty ("bad boy" guaranty) are the most significant lender requirements from Fairwater's perspective. The Completion Guaranty, as discussed in Section VI.A, is a personal guaranty by Fairwater of the lien-free completion of the project. The Recourse Carve-Out Guaranty makes Fairwater personally liable for the entire loan amount upon the occurrence of specified "bad boy" acts, which typically include voluntary bankruptcy of the borrower, fraud, misapplication of funds, environmental contamination, and violations of transfer restrictions. These guaranties represent significant contingent liabilities on Fairwater's balance sheet and may affect Fairwater's financial covenants under its existing credit facilities.
The Environmental Indemnity Agreement will require both the JV (as borrower) and Fairwater (as guarantor) to indemnify the lender against environmental liabilities arising from the development site. Given the site's waterfront location and potential history of prior industrial use, this indemnification could be significant. The Phase I ESA to be completed by Bayline Environmental Consultants on November 25, 2025 will be critical in assessing the scope of potential environmental liabilities.
The construction lender will also require that all equity be funded before construction loan draws commence (the "equity in first" requirement). This means that the members' initial capital contributions (and possibly a portion of subsequent contributions) must be deposited in the JV account and used for initial project costs before the lender will fund any construction draws. The equity-in-first requirement affects the timing of capital calls and the cash management of the JV during the early stages of the project.
Mitigation Strategies:
• Calderwood & Harkness must prepare a comprehensive Construction Loan Commitment Letter Review Memorandum upon receipt of the term sheet (expected November 18, 2025) to identify all lender covenants that may conflict with the JV governance provisions, and to flag any terms that require negotiation.
• The Completion Guaranty should be negotiated to limit Fairwater's exposure to the narrowest scope acceptable to Meridian, including exclusion of cost overruns addressed through capital calls, release upon substantial completion and satisfaction of specified conditions (such as certificate of occupancy, permanent loan take-out, or achievement of minimum occupancy), and inclusion of a "cap" on guaranty liability to the extent Meridian will accept.