Sam,
Thank you for circulating Whitmore Calder Briggs's mark-up of the Joint Venture Agreement and the Amended and Restated Operating Agreement for Harbor Point Development JV, LLC on behalf of Prescott Capital Partners, LP and Prescott HP Investor, LLC. We have reviewed WCB's comments carefully with Fairwater's deal team, including Theresa Calloway (General Counsel) and Marcus Okonkwo (EVP, Development).
Attached please find: (1) our revised redline of the Joint Venture Agreement (Word, tracked changes); (2) our revised redline of the Amended and Restated Operating Agreement (Word, tracked changes); and (3) a comparison chart summarizing the remaining open issues together with Fairwater's positions on each. We have accepted many of WCB's proposed revisions, and we appreciate the thoughtful and constructive approach reflected in your mark-up. That said, we do have comments on several significant points, which I have summarized below for ease of reference.
As context for the discussion that follows, this transaction involves the formation of Harbor Point Development JV, LLC, a Delaware limited liability company, between Fairwater HP Manager, LLC (30% interest / Managing Member) and Prescott HP Investor, LLC (70% interest / non-managing member), for the ground-up development of Harbor Point Towers at 1500–1580 Wills Street, Baltimore, MD 21231 (Block 7419, Lots 1–6, Baltimore City).
**1. Distribution Waterfall / Promote Structure (Operating Agreement)**
We acknowledge WCB's proposed revisions to the distribution waterfall provisions of the Operating Agreement, and we are largely aligned. Specifically:
*Return of Capital.* We confirm agreement on return of capital pro rata (30/70) to the Members on their respective unreturned capital contributions. No open issue here.
*Preferred Return.* We confirm agreement on a 9.0% IRR preferred return, compounded quarterly, payable to the Members pro rata (30/70) on unreturned capital contributions.
*Catch-Up.* We note that WCB proposed narrowing the catch-up tranche to a 50/50 split between Fairwater and Prescott. Fairwater's position remains that the catch-up should be allocated 60% to Fairwater HP Manager, LLC and 40% to Prescott HP Investor, LLC, continuing until Fairwater has received 20% of cumulative distributions above return of capital. This allocation was the economics agreed to by the parties in the Letter of Intent executed September 22, 2025, and Fairwater views this as a fundamental deal point that is not subject to renegotiation at the definitive documentation stage. Our redline restores the 60/40 catch-up formulation.
*Base Residual Split.* We confirm agreement on a base residual split of 20% to Fairwater / 80% to Prescott. No open issue.
*Second Promote Tier.* We appreciate WCB's acceptance in principle of a second promote tier. However, WCB proposed that this tier be triggered at a project-level IRR threshold of 18%. Fairwater's position is that the second tier should kick in at a 15% project-level IRR, at which point the residual split would shift to 30% Fairwater / 70% Prescott. We believe the 15% threshold more accurately reflects the risk-adjusted returns expected on a ground-up development of this scale — the total project cost is approximately $576,000,000 — and is consistent with the investment parameters reflected in Prescott's investment committee approval received November 5, 2025. I have prepared a waterfall modeling analysis at various IRR scenarios (9%, 12%, 15%, 18%, and 22%) that confirms the promote economics under both formulations; I am happy to share this with your team if it would be useful for Prescott's internal analysis.
Finally, we note that our redline retains the promote forfeiture provision upon removal for cause, while preserving accrued and unpaid promote upon removal without cause. This distinction is discussed further in Section 5 below.
**2. Capital Contributions and Default Remedies (JV Agreement / Capital Contribution Agreement)**
We are in general agreement on the capital structure: total JV equity of $240,000,000 (Fairwater: $72,000,000; Prescott: $168,000,000). We also confirm agreement on the following:
- Initial capital call at closing of 25% of total equity ($60,000,000 total; Fairwater: $18,000,000; Prescott: $42,000,000). - Subsequent capital calls pro rata on 15 business days' written notice, in accordance with the JV-approved budget.
We note that WCB proposed expanding the dilution remedies available to the non-defaulting Member in the event of a capital call default. Fairwater can accept enhanced dilution mechanics in principle, but we have revised the relevant provisions to: (a) include a cure period consistent with the general default cure framework discussed below in Section 5; and (b) cap punitive dilution at 1.5x the defaulted amount, rather than the 2.0x multiple proposed by WCB. We believe the 1.5x cap provides meaningful incentive for timely capital contributions while avoiding an unduly punitive result that could create perverse incentives for the non-defaulting Member. Our redline reflects these revisions at Sections 4.3 and 4.4 of the JV Agreement.
**3. Governance / Major Decision Consent Rights (Operating Agreement)**
We acknowledge that Prescott, as the 70% capital partner, holds extensive protective consent rights over major decisions, and Fairwater has accepted the substantial majority of WCB's proposed consent categories as drafted. We have comments on the following:
*Budget Variance Threshold.* WCB proposed that any amendment to the approved annual budget exceeding 3% of a budgeted line item would require Prescott consent. Fairwater's position is that the threshold should be 5% per line item, to provide the Managing Member with reasonable operational flexibility on a project of this scale and complexity. Amendments exceeding 5% of any budgeted line item would require Prescott consent. A 5% threshold is standard for institutional joint venture operating agreements involving ground-up development, and we believe it strikes the appropriate balance between Prescott's oversight rights and Fairwater's ability to manage day-to-day operations without undue administrative burden. Our redline reflects this revision at Section 7.2(b) of the Operating Agreement.
*Unbudgeted Expenditure Threshold.* We confirm agreement that any single expenditure exceeding $500,000 not included in the approved budget requires Prescott consent.
*Financing Decisions.* We confirm that Prescott consent is required for any financing, refinancing, or modification of the construction loan — currently the $336,000,000 facility from Meridian National Bank, N.A. (anticipated at Term SOFR + 275 bps) — and for any additional indebtedness of the JV.
*Litigation Settlement Threshold.* We confirm agreement on a $250,000 threshold for Prescott consent on litigation settlements.
*Other Major Decisions.* We confirm Prescott consent for sale, transfer, or encumbrance of the Property or JV interests; admission of additional Members; casualty and condemnation elections; and voluntary bankruptcy or dissolution. We have no changes to WCB's formulations on these items.
**4. Removal of Managing Member / Default Provisions (Operating Agreement)**
This section generated the most substantive revisions from WCB, and we have responded carefully in our redline.
*Material Default Cure Period.* WCB proposed a 15-day cure period for material defaults. Fairwater's position is that 30 days is the appropriate cure period for this transaction, consistent with industry practice for institutional joint venture arrangements involving ground-up development. The complexity of a $576,000,000 mixed-use project encompassing two 28-story towers and 610 residential units necessitates a reasonable period for the Managing Member to investigate and cure alleged defaults. A 15-day period is simply insufficient to assess and remediate the types of complex issues that may arise during the construction and lease-up phases. Our redline restores the 30-day cure period at Section 9.1(a) of the Operating Agreement.
*Grounds for Removal for Cause.* We confirm agreement on the following grounds for removal of the Managing Member for cause: (a) uncured material default (subject to the 30-day cure period); (b) fraud or willful misconduct by the Managing Member or its principals; and (c) bankruptcy of Fairwater HP Manager, LLC or Fairwater Real Estate Investment Trust. These are standard.
*Key-Person Clause.* WCB proposed a key-person provision triggered by the departure of Marcus Okonkwo alone. Fairwater respectfully disagrees with this formulation. Fairwater's counter-position is that the key-person event should be triggered only upon the departure of *both* Harold K. Brennan (CEO & Chairman) and Marcus D. Okonkwo (EVP, Development) without the appointment of approved replacement key persons. The departure of a single executive should not constitute a removal trigger given the depth and experience of Fairwater's management team and its track record across a 38-property portfolio in the Mid-Atlantic region. Furthermore, Fairwater requires a 90-day period following a key-person event to propose replacement key persons for Prescott's approval, such approval not to be unreasonably withheld, conditioned, or delayed. Our redline reflects this formulation at Section 9.3 of the Operating Agreement.
*Promote Consequences on Removal.* WCB proposed forfeiture of the Managing Member's promote in both removal-for-cause and removal-without-cause scenarios. Fairwater cannot accept this. Our position, which we view as essential to the economics of the Managing Member role, is as follows: upon removal for cause, Fairwater's promote interest is forfeited in its entirety; upon removal without cause, Fairwater retains all accrued but unpaid promote as of the effective date of removal. The distinction between for-cause and without-cause removal is fundamental, and a forfeiture provision applicable to removal without cause would effectively render the promote illusory by permitting the capital partner to capture the promote economics through a unilateral no-fault removal. Our redline reflects this distinction at Sections 9.4(a) and 9.4(b) of the Operating Agreement.
**5. REIT Compliance Provisions (Operating Agreement and Side Letter)**
As you know, Fairwater Real Estate Investment Trust (NYSE: FWT) is a publicly traded Maryland REIT, and compliance with REIT requirements under the Internal Revenue Code is non-negotiable for Fairwater. We have revised the REIT savings provisions in the Operating Agreement to include the following:
(a) A prohibition on any action that would cause Fairwater to be treated as a "closely held" REIT within the meaning of Section 856(h) of the Code.
(b) A gross income testing cooperation covenant — requiring Prescott HP Investor, LLC to cooperate with Fairwater's REIT income testing requirements and to provide such information as is reasonably necessary for Fairwater's tax compliance.
(c) A covenant by Prescott not to take or permit any action that would cause the JV's income to fail the REIT gross income tests (the 75% gross income test and the 95% gross income test under Section 856(c) of the Code).
(d) Fairwater's right to force distribution of at least 100% of REIT taxable income attributable to Fairwater's JV interest, to enable Fairwater to satisfy its REIT distribution requirements under Section 857(a) of the Code.
We are preparing a separate REIT Compliance Side Letter as a companion document to the Operating Agreement, which will elaborate on the mechanics of the foregoing provisions. We expect to circulate the side letter shortly.
With respect to WCB's concern — which we understand and appreciate — that the forced distribution right could conflict with construction-period cash management, we propose the following compromise: the forced distribution right would be limited to distributable cash on hand, and if distributable cash is insufficient, the JV will use commercially reasonable efforts to make available funds to meet Fairwater's REIT distribution obligation, in each case subject to lender consent requirements and cash management restrictions under the construction loan documents. We believe this approach appropriately balances Fairwater's REIT compliance needs against the JV's liquidity requirements during the construction period. Our redline reflects this formulation at Section 6.5 of the Operating Agreement.
I would also note that Sylvia Hartwell of our Tax Practice Group is available to discuss tax structure and REIT compliance matters directly with WCB's tax advisors at your convenience.
**6. Development Management and Property Management Fees**
*Development Management Fee.* We confirm agreement on a development management fee of 3.5% of hard costs ($432,000,000 × 3.5% = $15,120,000). We note, however, that WCB proposed quarterly (rather than monthly) payment of this fee. Fairwater prefers monthly payment, which aligns with the JV's anticipated monthly draw schedule under the Meridian National Bank construction facility and with Fairwater's internal cost accounting practices. We do not believe quarterly payment is warranted here and note that monthly payment of the development management fee is customary in transactions of this type. Our redline retains monthly payment at Section 10.1 of the Operating Agreement.
*Property Management Fee.* We confirm agreement on a post-stabilization property management fee of 3.0% of Effective Gross Revenue, to be documented in a separate Property Management Agreement, the form of which is attached as Exhibit F to the Operating Agreement.
*Disposition Fee.* We confirm agreement on a disposition fee of 1.0% of gross sale price, payable to Fairwater at the closing of any disposition.
**7. Buy-Sell / ROFO Provisions (Operating Agreement)**
We are largely aligned on the buy-sell and ROFO mechanics. We confirm:
- Neither Member may initiate the buy-sell until after the 5th anniversary of closing (i.e., after January 12, 2031, assuming a signing date of January 12, 2026). - The non-initiating Member has a 60-day ROFO response period to match the initiating Member's offer or elect to sell its interest. - The appraisal mechanism provides that each party selects one MAI-certified appraiser; if the two appraised values differ by more than 10%, a third appraiser is appointed by mutual agreement; and fair market value equals the average of the two closest appraisals.
Our one comment relates to appraisal costs: WCB proposed that the initiating Member bear the costs of all appraisals. Our position is that each party should bear the cost of its own appraiser, with the cost of any third appraiser shared equally. This is the standard market approach and avoids creating a disincentive for the initiating Member. Our redline reflects this revision at Section 12.4(e) of the Operating Agreement.
**8. Tax Matters (Operating Agreement)**
We confirm agreement on the following:
- The JV will be taxed as a partnership for federal income tax purposes (no entity-level election under Section 301.7701-3). - Fairwater HP Manager, LLC will serve as Partnership Representative under Section 6223 of the Code and as Tax Matters Partner. - Allocations will follow Sections 704(b) and 704(c) principles, with qualified income offset and minimum gain chargeback provisions as set forth in the Operating Agreement.
The Tax Protection Agreement and provisions relating to the Maryland pass-through entity tax election are being finalized by Sylvia Hartwell and will be circulated separately in the near term.
Additionally, we note that Alderman & Fields, CPAs, LLP (engagement partner: Robert E. Alderman) has been engaged as the JV-level accountant and tax return preparer. We would appreciate WCB's confirmation of Prescott's acceptance of this engagement at your earliest convenience.
**9. Insurance Requirements**
We confirm agreement on the insurance requirements as follows: builder's risk coverage at full replacement cost during the construction period (carrier: Greystone Mutual Insurance Company); commercial general liability at $10,000,000 per occurrence / $20,000,000 aggregate; and umbrella/excess liability at $50,000,000.
We note that WCB proposed adding Prescott HP Investor, LLC as an additional insured on all JV-level policies. Fairwater can accept this, and we have revised the insurance provisions at Section 11.2 of the Operating Agreement accordingly.
**10. Diligence Status Update**
For WCB's awareness, below is a brief status update on third-party diligence deliverables as of today's date:
- *Phase I ESA:* Bayline Environmental Consultants, LLC has been engaged and we expect delivery of the Phase I Environmental Site Assessment by late November. - *ALTA/NSPS Survey:* Calvert Surveying & Engineering, Inc. has been engaged; the survey is expected in early December. - *Title Commitment:* We expect to receive the title commitment from Tidewater Insurance Group, Inc. in early December. - *Construction Loan Term Sheet:* We expect the term sheet from Meridian National Bank, N.A. shortly; once received, C&H will prepare a review memorandum for the deal team. - *Appraisal:* Stonebridge Appraisal Associates, LLC has been engaged; the appraisal is expected by mid-December. - *GMP Contract:* The guaranteed maximum price contract with Pinnacle General Contractors, Inc. (CEO: Raymond S. Muñoz) is in final negotiation, with a targeted execution date of late December.
We also wish to acknowledge receipt of confirmation of Prescott's investment committee approval on November 5, 2025, and we appreciate the committee's timely consideration.
**11. Next Steps**
We would appreciate receiving WCB's comments on the attached redlines by no later than the week of December 1, 2025, so that we can keep this transaction on track for signing in early January 2026.
Doug Fairchild and I are available for a call with you and Megan to discuss any of the foregoing at your convenience — please let us know what works with your schedules and we will coordinate.
We would also suggest scheduling a principals' meeting between Harold Brennan and Marcus Okonkwo on the Fairwater side and Jonathan Whitfield and Andrew Castellano on the Prescott side in early January to resolve any remaining open items prior to execution. If that timing works for Prescott, we are happy to coordinate with Theresa and Marcus on Fairwater's availability.
Thank you again, Sam. We look forward to your response and to continuing to move this transaction forward efficiently.
Best regards,
Cynthia Ho Calderwood & Harkness LLP 100 International Drive, Suite 2600 Baltimore, MD 21202 T: (410) 555-3184
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