MEMORANDUM
PRIVILEGED & CONFIDENTIAL — ATTORNEY WORK PRODUCT This memorandum is protected by the attorney-client privilege and the work product doctrine. It is intended solely for the use of the individuals and entities identified herein. Any unauthorized disclosure, distribution, or copying is strictly prohibited.
TO: Douglas Fairchild, Responsible Partner, Real Estate Practice Group, Calderwood & Harkness LLP
CC: Angela Fontaine, Billing Partner, Calderwood & Harkness LLP Sylvia Hartwell, Specialist Partner, Tax, Calderwood & Harkness LLP Theresa M. Calloway, General Counsel, Fairwater Real Estate Investment Trust Marcus D. Okonkwo, Executive Vice President, Development, Fairwater Real Estate Investment Trust
FROM: Cynthia Ho, Lead Associate, Real Estate Practice Group, Calderwood & Harkness LLP Grace Nakamura, Working Associate, Real Estate Practice Group, Calderwood & Harkness LLP
DATE: December 22, 2025
RE: Review and Analysis of Guaranteed Maximum Price Contract between Harbor Point Development JV, LLC and Pinnacle General Contractors, Inc. — Harbor Point Towers Project, 1500–1580 Wills Street, Baltimore, MD 21231
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I. Executive Summary
This memorandum sets forth our analysis of the Guaranteed Maximum Price ("GMP") contract (the "GMP Contract" or the "Contract") executed on December 20, 2025, between Harbor Point Development JV, LLC ("HP JV" or the "Owner") and Pinnacle General Contractors, Inc. ("Pinnacle" or the "Contractor"), a Maryland corporation whose chief executive officer is Raymond S. Muñoz, for the construction of the Harbor Point Towers project (the "Project"). We have reviewed the GMP Contract in detail, together with the relevant ancillary documents described below, and have prepared this memorandum to identify areas of concern, highlight risks to the JV and to Fairwater Real Estate Investment Trust ("Fairwater" or the "REIT") in its capacity as Managing Member and operating partner, and recommend specific revisions for negotiation with Pinnacle and its counsel.
Project Scope. The Project encompasses the design and construction of two 28-story residential towers comprising a total of 610 residential units and approximately 45,000 square feet of ground-floor retail space, situated on an 8.2-acre waterfront site located at 1500–1580 Wills Street, Baltimore, MD 21231 (Block 7419, Lots 1–6, Baltimore City). The Project is one of the most significant mixed-use residential developments currently planned in the Baltimore metropolitan area and represents a substantial commitment of capital and reputational resources for both Fairwater and its joint venture partner, Prescott Capital Partners, LP ("Prescott").
GMP Amount and Total Project Cost. The GMP Contract establishes a guaranteed maximum price within the $432,000,000 hard cost budget for the Project. The total Project cost is budgeted at $576,000,000, composed of $54,000,000 in land costs, $432,000,000 in hard construction costs (the subject of the GMP Contract), and $90,000,000 in soft costs (including architectural and engineering design, permitting, legal, marketing, interest carry, and other development-related expenses). The magnitude of the hard cost commitment underscores the importance of ensuring that the GMP Contract adequately allocates risk and provides robust protections for the Owner.
Transaction Context. The GMP Contract is a critical deliverable for multiple upcoming milestones in the transaction timeline. First, the GMP Contract must be finalized and acceptable to all parties in advance of the signing of the JV Agreement and Operating Agreement on January 12, 2026. Second, the GMP Contract will be reviewed and approved by Meridian National Bank, N.A. ("Meridian" or the "Lender") as a condition precedent to closing the $336,000,000 construction loan facility, which is targeted for February 15, 2026. Third, the initial equity funding and land closing are targeted for January 30, 2026, by which date the principal commercial terms of the GMP Contract must be settled. Given these interdependencies, timely resolution of the issues identified in this memorandum is essential.
Overall Assessment. Based on our review, the GMP Contract is substantially in market form and is generally acceptable as a framework for the construction engagement. Pinnacle is a well-regarded general contractor with significant experience in the mid-Atlantic multifamily construction market, and the Contract reflects many industry-standard provisions. However, we have identified a number of areas where the GMP Contract requires revision to better protect the interests of the JV, Fairwater (in its dual capacity as Managing Member and Development Manager), and the Lender. These areas of concern are addressed in detail in the body of this memorandum and summarized in Section XIV.
Key Areas of Concern. Our principal areas of concern are as follows:
(a) Change Order Thresholds and Approval Process. The current change order approval thresholds in the GMP Contract do not align with the major decision consent rights granted to Prescott under the Operating Agreement. This misalignment creates a risk that Fairwater, acting as development manager on behalf of the JV, could approve change orders that trigger Prescott's consent rights without first obtaining such consent, potentially exposing Fairwater to claims of breach of fiduciary duty or breach of the Operating Agreement.
(b) Schedule Requirements and Liquidated Damages. The liquidated damages provisions require careful calibration to ensure that the per-diem delay damages adequately reflect the JV's actual carrying costs and that the cap on liquidated damages provides meaningful financial protection to Fairwater in light of its completion guaranty to Meridian National Bank.
(c) GMP Savings Sharing. The savings sharing mechanism must be clarified to ensure that the calculation is performed only after all punch list work and warranty claims have been resolved, and that appropriate clawback provisions are included.
(d) Insurance and Bonding Adequacy. The insurance requirements and performance bond provisions must be reviewed for adequacy and must include naming requirements for all JV members and the Lender, as well as a dual obligee rider on the performance bond.
(e) Coordination with Prescott Major Decision Consent Rights. As noted above, the GMP Contract procedures must be harmonized with the JV governance framework established under the Operating Agreement.
(f) Alignment with Meridian National Bank Construction Loan Requirements. The GMP Contract must include provisions for collateral assignment to the Lender, lender notice and cure rights, cooperation with the Lender's construction monitor, and other standard lender-required protections.
The balance of this memorandum addresses each of these areas in detail, together with additional observations and recommendations concerning scope of work, payment provisions, risk allocation, dispute resolution, termination provisions, and coordination with the JV governance structure and the Development Management Agreement.
II. Background and Transaction Context
A. Joint Venture Structure
Harbor Point Development JV, LLC ("HP JV") is a Delaware limited liability company organized for the purpose of acquiring, developing, constructing, leasing, and managing the Harbor Point Towers project. The JV is governed by an Operating Agreement that is expected to be executed concurrently with the JV Agreement on January 12, 2026.
The membership structure of HP JV is as follows:
The total JV equity commitment is $240,000,000. Fairwater's equity contribution of $72,000,000 represents 30% of the total equity and will be funded from the REIT's balance sheet and available credit facilities. Prescott's equity contribution of $168,000,000 represents 70% of the total equity and will be funded from Prescott Capital Partners Fund VI, LP, a dedicated real estate private equity fund.
Fairwater serves as the operating partner of the JV and is responsible for the day-to-day development, construction oversight, leasing, and property management activities of the Project. In its capacity as development manager, Fairwater will interact directly with Pinnacle and will serve as the primary Owner representative under the GMP Contract. Fairwater has designated Marcus D. Okonkwo, Executive Vice President, Development, as the senior officer responsible for construction oversight, and he will serve as the Owner's Authorized Representative under the GMP Contract.
Fairwater earns a development management fee of 3.5% of hard costs, calculated on the approved hard cost budget of $432,000,000, yielding a total development management fee of $15,120,000 payable over the construction period. The development management fee is paid monthly on a pro rata basis relative to hard costs incurred during the preceding month. This fee structure is relevant to the GMP Contract analysis because the fee calculation depends on the actual hard costs incurred, which are in turn affected by the GMP amount, change orders, savings sharing, and other provisions of the GMP Contract.
B. Prescott Major Decision Consent Rights
Under the Operating Agreement, Prescott HP Investor, LLC (as the non-managing member holding a 70% interest) has been granted consent rights over certain major decisions. These consent rights reflect the typical structure of a real estate joint venture in which a passive institutional investor contributes the majority of the equity and seeks to protect its investment through governance controls over significant expenditures and strategic decisions.
The major decisions requiring Prescott's prior written consent include, among others, the following categories that are relevant to the GMP Contract:
• Any single expenditure exceeding $500,000 that is not included in the then-current approved budget for the Project;
• Any amendment to the annual budget, or any reallocation of budget line items, that would result in a variance exceeding 5% of any budgeted line item;
• Any modification to the financing arrangements for the Project, including amendments to the construction loan agreement with Meridian National Bank;
• Any settlement of litigation or claims exceeding $250,000 in the aggregate.
The relevance of these consent rights to the GMP Contract cannot be overstated. Change orders under the GMP Contract are the mechanism by which project scope and costs are modified during construction. A single change order exceeding $500,000, or a series of change orders that cause a budget line item to increase by more than 5%, would trigger Prescott's consent rights under the Operating Agreement. If Fairwater, acting as development manager, were to approve such a change order under the GMP Contract without first obtaining Prescott's consent, Fairwater could face allegations of breach of the Operating Agreement and breach of its fiduciary duties as Managing Member.
Accordingly, the change order approval procedures in the GMP Contract must be harmonized with the JV governance framework. We address this issue in detail in Section IV below and in Section XIII, which discusses the recommended internal protocol for coordinating JV governance with GMP Contract administration.
C. Construction Financing
Meridian National Bank, N.A., through its Real Estate Finance division (contact: Kevin P. Driscoll, Senior Vice President), has issued a construction loan term sheet dated November 18, 2025, for a senior secured construction loan facility in the amount of $336,000,000. The principal terms of the construction loan are as follows:
• Loan Amount: $336,000,000
• Interest Rate: Term SOFR plus 275 basis points
• Loan Term: 36 months from initial funding, with two six-month extension options (subject to customary extension conditions including achievement of specified leasing milestones)
• Loan-to-Cost Ratio: 58.33% (based on total project cost of $576,000,000)
• Security: First priority deed of trust on the Project site and improvements; collateral assignment of the GMP Contract, Development Management Agreement, and all other material project contracts; assignment of rents and leases; pledge of JV membership interests
• Interest Reserve: $29,400,000 (included within the loan amount)
• Guaranty Requirements: Completion guaranty from Fairwater Real Estate Investment Trust (guaranteeing lien-free completion of the Project); recourse carve-out ("bad boy") guaranty from Fairwater REIT
The construction loan is a critical component of the Project's capital structure. The Lender will require review and approval of the GMP Contract as a condition to closing the construction facility. In our experience with Meridian National Bank on similar transactions, the Lender's counsel will focus on the following aspects of the GMP Contract: (i) adequacy of the GMP amount and contingency relative to the approved project budget; (ii) collateral assignment provisions permitting the Lender to step into the Owner's position under the GMP Contract upon an event of default under the loan; (iii) notice and cure rights for the Lender; (iv) cooperation requirements for the Lender's third-party construction monitor; (v) the performance bond, including a dual obligee rider naming the Lender; and (vi) insurance requirements, including additional insured status for the Lender.
Fairwater's completion guaranty is of particular importance to the analysis of the GMP Contract. Under the completion guaranty, Fairwater has guaranteed to Meridian National Bank that the Project will be completed lien-free in accordance with the approved plans and specifications, on or before the scheduled completion date (subject to certain force majeure extensions). If the Project is not completed, or if completion costs exceed the budgeted amount, Fairwater is obligated to fund any shortfall. This creates a direct financial linkage between the GMP Contract and Fairwater's balance sheet: any deficiency in the GMP Contract's risk allocation provisions—such as an inadequate liquidated damages cap, insufficient performance bond coverage, or overly broad force majeure provisions—translates directly into increased exposure for Fairwater under the completion guaranty.
D. Project Timeline
The anticipated Project timeline is as follows:
Zoning for the Project was approved by Baltimore City through a Planned Unit Development ("PUD") approved on June 14, 2024, under Ordinance No. 24-0417. Building permits are expected to be issued in the first quarter of 2026, and Fairwater's development team reports that the permit applications are substantially complete and on track for timely issuance.
The 30-month construction period from the target commencement date of March 1, 2026, to the target substantial completion date of September 2028 is aggressive but achievable for a project of this scale, assuming that Pinnacle deploys adequate resources and maintains an efficient construction schedule. The six-month period between substantial completion and estimated stabilization provides a compressed lease-up window, which underscores the importance of achieving substantial completion on schedule and avoiding construction delays that could push lease-up into less favorable market conditions.
III. Scope of Work and GMP Structure
A. Scope Definition
The GMP Contract encompasses all hard construction costs necessary for the construction of the Harbor Point Towers project, including the following principal categories of work:
• Site preparation, demolition, and earthwork on the 8.2-acre waterfront parcel, including environmental remediation to the extent identified in the Phase I Environmental Site Assessment and any subsequent Phase II investigation;
• Foundation work, including deep foundations as required by the geotechnical conditions of the waterfront site;
• Structural systems for both 28-story towers, including structural steel, reinforced concrete, and post-tensioned slabs;
• Mechanical, electrical, and plumbing ("MEP") systems, including HVAC, electrical distribution, plumbing, fire protection, and fire alarm systems;
• Vertical construction of both towers, including exterior envelope (curtain wall, glazing, masonry), interior build-out of all 610 residential units, and common area improvements on each floor;
• Ground-floor retail build-out to core and shell condition (approximately 45,000 square feet);
• Common areas and amenity spaces, including lobbies, fitness centers, pool areas, lounge spaces, co-working areas, and other amenities as specified in the approved plans and specifications;
• Structured parking facility;
• Site improvements, including landscaping, hardscaping, utility connections, stormwater management facilities, and streetscape improvements required under the PUD approval.
The following items are expressly excluded from the scope of the GMP Contract:
• Land acquisition costs ($54,000,000);
• Soft costs ($90,000,000), including but not limited to architectural and engineering design fees, permitting and entitlement costs, legal fees, marketing and leasing commissions, construction period interest carry, property taxes during construction, and other development-related overhead;
• Owner-furnished equipment and fixtures, as specifically enumerated in Exhibit D to the GMP Contract, which includes specialty kitchen equipment, audio-visual systems for amenity spaces, and certain proprietary building management system components.
We have reviewed the scope exhibit (Exhibit A to the GMP Contract) for completeness and general alignment with the approved plans and specifications referenced in the PUD (Ordinance No. 24-0417). Based on our review, the scope exhibit appears to be comprehensive and consistent with the project drawings and specifications prepared by the project architect. However, we recommend that Fairwater's development team and the project architect conduct a line-by-line comparison of the scope exhibit against the current construction documents to confirm that no material scope items have been inadvertently omitted. Any scope gaps could result in Owner-directed change orders, which would increase the cost of the work above the GMP and would be borne entirely by the JV.
B. GMP Amount and Cost Breakdown
The GMP amount established under the Contract falls within the $432,000,000 hard cost budget that has been approved by both JV members and reflected in the pro forma financial model for the Project. The GMP is composed of the following principal components:
• Cost of the Work. This includes all direct costs of construction, comprising subcontractor costs (pursuant to competitively bid subcontracts), direct labor costs for Pinnacle's self-performed work (if any), material costs, and equipment costs. The cost of the work represents the largest component of the GMP and is subject to open-book accounting, meaning that the JV has the right to audit and verify all costs charged against the GMP.
• General Conditions. This includes Pinnacle's project-level overhead costs, such as site office expenses, project management and supervisory personnel, temporary facilities, temporary utilities, safety programs, project signage, and similar items. General conditions costs are typically stated as a fixed amount or as a percentage of the cost of the work, and should not be subject to escalation absent an extension of the construction schedule.
• Contractor's Fee. This represents Pinnacle's overhead and profit on the project. The Contractor's fee is typically stated as a fixed percentage of the cost of the work and is the primary component of Pinnacle's compensation. We have reviewed the fee percentage for reasonableness in light of current market conditions for projects of comparable scale in the mid-Atlantic region.
• Contingency. The GMP includes a construction contingency held within the GMP amount. This contingency is intended to cover unforeseen costs, minor scope adjustments, and other items that do not rise to the level of a formal change order. We address the contingency provisions in greater detail below.
Contractor's Contingency. The contingency amount included within the GMP is a critical component of the cost structure. The purpose of the contingency is to provide a financial buffer for unexpected costs that arise during construction but that do not constitute Owner-directed changes warranting a formal change order. Typical uses of the contingency include minor scope clarifications, minor quantity overruns, unforeseen field conditions that are within the Contractor's risk allocation, and similar items.
We recommend that the GMP Contract include the following provisions governing access to and use of the contingency:
(i) The Contractor should not be permitted to access the contingency without the Owner's prior written approval, with adequate supporting documentation for each proposed use;
(ii) Monthly reporting on contingency usage should be required, including a running tally of remaining contingency and a forecast of anticipated future draws;
(iii) Any unused contingency at the completion of the Project should be included in the GMP savings sharing calculation discussed below;
(iv) The Owner should have the right to reallocate unused contingency to other budget line items within the GMP, subject to the Contractor's reasonable consent.
Owner's Contingency. In addition to the contingency included within the GMP, the JV budget should separately carry an Owner-side contingency outside the GMP to address Owner-directed changes, unforeseen soft cost overruns, and other costs that fall outside Pinnacle's scope of work. We have confirmed with Fairwater's development team that the approved JV budget includes an Owner's contingency within the soft cost budget. We recommend that this contingency be sized at not less than 5% of the GMP amount, or approximately $21,600,000, to provide an adequate cushion for Owner-directed scope changes and other items that may arise during the 30-month construction period.
C. GMP Savings Sharing
The GMP Contract includes a provision for sharing any savings between the actual cost of the work (plus Contractor's fee and general conditions) and the GMP amount at the completion of the Project. Savings sharing is a standard feature of GMP contracts and serves as an incentive for the Contractor to manage costs efficiently while still receiving a share of the benefit of cost management.
We have reviewed the savings sharing mechanism and offer the following observations and recommendations:
Sharing Ratio. Typical savings sharing structures in the market range from a 50/50 split (Owner/Contractor) to a 75/25 split (Owner/Contractor), with the more Owner-favorable 75/25 split becoming increasingly common in large-scale multifamily projects. The GMP Contract should specify the sharing ratio clearly, and we recommend a ratio no less favorable to the Owner than 75/25.
Calculation Methodology. The savings sharing calculation should be performed only after all of the following conditions have been satisfied: (i) achievement of final completion (not merely substantial completion); (ii) completion of all punch list work; (iii) resolution of all outstanding change orders and claims; and (iv) expiration of any applicable warranty claim periods, or at minimum, establishment of a holdback reserve to cover potential warranty claims. This sequencing is important because premature distribution of savings could leave the JV without adequate funds to address latent defects or unresolved claims.
Clawback Provisions. We recommend that the GMP Contract include a clawback provision under which Pinnacle's share of any distributed savings is subject to recapture if latent defects are discovered within the general warranty period (or, for structural and building envelope components, within the extended warranty period). This provision provides an additional layer of protection beyond the standard warranty remedies and aligns Pinnacle's financial incentives with long-term quality performance.
Implications for Development Management Fee. The savings sharing provision has direct implications for the calculation of Fairwater's development management fee. Because the fee is calculated at 3.5% of hard costs incurred, a reduction in actual hard costs (resulting in savings) would correspondingly reduce the development management fee. Conversely, if savings are shared with Pinnacle rather than retained by the JV, the JV's net benefit from cost underruns is further reduced. These dynamics should be taken into account in evaluating the savings sharing ratio and in the financial modeling for the Project.
Implications for Distribution Waterfall. Under the Operating Agreement, distributable cash flow and capital event proceeds are allocated between Fairwater and Prescott pursuant to a distribution waterfall that includes preferred returns and promote tiers. GMP savings that are retained by the JV flow through the distribution waterfall and benefit both members proportionally (subject to the waterfall mechanics). Accordingly, the savings sharing provision affects not only the overall project economics but also the relative returns to each JV member.
IV. Change Order Procedures
A. Types of Change Orders
The GMP Contract contemplates several categories of change orders, each with different risk allocations and pricing implications:
Owner-Directed Changes. These are changes initiated by the Owner, typically involving discretionary scope additions, design modifications, or upgrades to finishes, fixtures, and equipment. Owner-directed changes increase the cost of the work beyond the original scope and are funded outside the GMP (i.e., they are additions to the GMP amount). Because Owner-directed changes represent voluntary decisions by the JV, they must be carefully evaluated against the approved budget and the JV governance framework, including Prescott's major decision consent rights.
Contractor-Initiated Changes. These are changes proposed by Pinnacle based on unforeseen conditions encountered during construction, changes in applicable building codes or regulations, force majeure events, or other circumstances that affect the cost or schedule of the work. Contractor-initiated changes may result in adjustments to the GMP (upward or downward) and may also affect the construction schedule. The key analytical question for each Contractor-initiated change is whether the underlying circumstance constitutes a risk that was allocated to the Contractor under the original GMP, or whether it constitutes a risk that was retained by the Owner.
Allowance Adjustments. The GMP Contract includes specified allowance amounts for certain categories of work where the final scope or cost was not fully determined at the time of GMP execution. As actual costs are incurred, the allowances are reconciled to reflect the difference between the allowance amount and the actual cost. Allowance adjustments may result in increases or decreases to the GMP. We recommend that all allowance items be clearly identified in a separate schedule to the GMP Contract, with defined reconciliation procedures and timelines.
Concealed or Unknown Conditions Change Orders. The 8.2-acre waterfront site presents inherent risks related to subsurface conditions, environmental contamination, existing utility infrastructure, and other concealed conditions. We address the risk allocation for concealed conditions in greater detail in Section VII.E below.
B. Change Order Approval Thresholds
The GMP Contract establishes thresholds for Pinnacle's authority to proceed with change order work without prior written approval from the Owner. We have reviewed these thresholds and have identified a significant area of concern: the existing thresholds do not align with the major decision consent rights established in the Operating Agreement.
Current Contract Provisions. Under the GMP Contract as currently drafted, Pinnacle has authority to proceed with individual change orders up to a specified dollar threshold without obtaining prior written approval from the Owner's Authorized Representative. Above that threshold, written approval from the Owner's Authorized Representative (i.e., Fairwater's designee) is required.
Recommended Revisions. We recommend the following tiered approval structure:
(i) Tier 1 — Routine Changes (Individual Change Orders up to $100,000; Cumulative up to $500,000). Pinnacle may proceed with prior notification to the Owner's Authorized Representative, subject to monthly reconciliation and documentation requirements. These changes are within the Contractor's contingency management authority and do not require formal Owner approval.
(ii) Tier 2 — Significant Changes (Individual Change Orders exceeding $100,000 but not exceeding $500,000; Cumulative Change Orders exceeding $500,000 but not exceeding $1,000,000). Prior written approval of the Owner's Authorized Representative (Fairwater's EVP, Development) is required before Pinnacle proceeds with the work. These changes fall within Fairwater's authority as Managing Member and development manager under the Operating Agreement.
(iii) Tier 3 — Major Changes (Individual Change Orders exceeding $500,000; or any change order or series of change orders causing a budget line item variance of more than 5% of the approved budget for that line item). Prior written approval of both the Managing Member (Fairwater) and the Non-Managing Member (Prescott) is required. These changes trigger Prescott's major decision consent rights under the Operating Agreement and require dual-member approval. The GMP Contract should provide for a minimum review period of 15 business days for Tier 3 change orders to allow adequate time for the internal JV approval process.
This tiered structure aligns the GMP Contract with the JV governance framework and reduces the risk that Fairwater could inadvertently approve a change order that requires Prescott's consent.
Documentation Requirements. All change orders, regardless of tier, should be documented on AIA G701 Change Order forms (or equivalent) and should be accompanied by the following supporting documentation: (a) a detailed description of the proposed change; (b) the reason for the change, including identification of the party initiating the change; (c) a detailed cost breakdown, including subcontractor quotes, material costs, labor costs, and markups; (d) a time impact analysis; and (e) identification of any impact on the critical path schedule.
C. Pricing of Changes
The GMP Contract establishes markup percentages that Pinnacle may charge on change order work, including overhead and profit markups on both subcontractor-performed work and self-performed work. We have reviewed these markups and offer the following observations:
Markup on Subcontractor Work. The standard market practice for overhead and profit markups on subcontractor change order work ranges from 5% to 10% for the general contractor's markup on top of the subcontractor's cost. The GMP Contract should specify the permitted markup clearly and should prohibit stacking of markups (i.e., Pinnacle should not be entitled to mark up a subcontractor's markup on its own sub-subcontractor costs).
Markup on Self-Performed Work. If Pinnacle self-performs any portion of the change order work, the permitted markup should be consistent with the markup on subcontractor work, but should be applied only to the direct cost of labor and materials, not to Pinnacle's own overhead or general conditions costs (which are already covered under the GMP).
Disputed Change Orders. Change orders that are disputed as to scope, cost, or entitlement should be resolved through the dispute resolution mechanism described in Section X below. However, to avoid construction delays during the dispute resolution process, the GMP Contract should provide that disputed change orders may be priced on an interim basis at the Owner's estimated cost (or, alternatively, at Pinnacle's estimated cost subject to a specified reduction), with the final adjustment determined through the dispute resolution process. Pinnacle should be required to proceed with the work during the pendency of the dispute, subject to timely receipt of interim payment.
Unit Pricing Schedules. For common categories of change order work that can be anticipated in advance (e.g., electrical outlet additions, plumbing fixture upgrades, drywall modifications, concrete quantity adjustments), the parties should agree on unit pricing schedules at the time of GMP execution. These unit pricing schedules should be attached as an exhibit to the GMP Contract and should be used to price change orders involving these categories of work, thereby avoiding the need for individual negotiations on recurring items.
D. Time Impact of Changes
Each change order that has the potential to affect the construction schedule should include a time impact analysis prepared by Pinnacle and reviewed by the Owner and the project scheduler. Time extensions should be granted only for changes that demonstrably affect the critical path of the CPM schedule.
We recommend that the GMP Contract include the following provisions regarding the time impact of changes:
(i) Time Impact Analysis Required. Every change order request submitted by Pinnacle that includes a request for a time extension must be accompanied by a time impact analysis demonstrating the effect of the changed work on the critical path schedule. The time impact analysis should use the concurrent delay analysis methodology, identifying the specific activities affected and the resulting delay to the critical path.
(ii) Prohibition on Cumulative Impact Claims. Pinnacle should not be permitted to assert cumulative impact claims (i.e., claims that the aggregate effect of multiple change orders has caused delays or disruptions beyond the sum of their individual time impacts) without specific documentation supporting each element of the cumulative impact.
(iii) Schedule Extensions Only for Critical Path Delays. Time extensions should be granted only for changes that demonstrably extend the critical path. Changes that affect non-critical activities and that can be absorbed within the existing schedule float should not entitle Pinnacle to a time extension.
(iv) Concurrent Delays. To the extent that an Owner-caused delay and a Contractor-caused delay are concurrent, the Contractor should be entitled to a time extension but should not be entitled to additional compensation for the concurrent period.
V. Schedule Requirements
A. Contract Time
The GMP Contract establishes a contract time of approximately 30 months, with a target construction commencement date of March 1, 2026, and a scheduled substantial completion date of September 2028. These dates are consistent with the overall Project timeline and the financial projections in the JV pro forma.
Definition of Substantial Completion. The definition of "substantial completion" in the GMP Contract is critically important, as it triggers numerous consequences including the commencement of warranty periods, the cessation of liquidated damages accrual, the availability of the project for occupancy and lease-up, and the ability to request a reduction in the construction loan balance. We recommend that the definition of substantial completion be reviewed to ensure that it includes the following elements:
(i) All residential units in both towers are substantially complete and ready for occupancy, with the exception of minor punch list items that do not impair the use or habitability of the units;
(ii) The ground-floor retail spaces are complete to core and shell condition, with all building systems serving the retail spaces operational and ready for tenant fit-out;
(iii) All common areas and amenity spaces are substantially complete and ready for use by residents;
(iv) The structured parking facility is substantially complete and accessible;
(v) All site improvements, including landscaping, hardscaping, and stormwater management facilities, are substantially complete;
(vi) A temporary or permanent certificate of occupancy has been issued by the Baltimore City Department of Housing and Community Development for both towers;
(vii) All building systems have been tested, balanced, and commissioned in accordance with the approved commissioning plan.
The GMP Contract should expressly provide that the existence of punch list items does not delay the achievement of substantial completion, provided that such items do not impair the beneficial occupancy and use of the completed portions of the Project.
Final Completion. Final completion is typically defined as the date on which all punch list work has been completed to the satisfaction of the Owner and the project architect, all required documentation (including as-built drawings, warranties, operations and maintenance manuals, and final lien waivers) has been delivered, and all conditions to final payment have been satisfied. The GMP Contract should establish a defined period for achievement of final completion following substantial completion, which is typically 60 to 90 days. We recommend a 90-day period given the scale of the Project and the number of residential units involved.
B. Construction Schedule
CPM Schedule Requirement. The GMP Contract requires Pinnacle to prepare and maintain a detailed Critical Path Method ("CPM") schedule for the Project. The CPM schedule is the primary tool for tracking construction progress, identifying delays, and managing the construction sequence. We recommend that the GMP Contract specify the following requirements for the CPM schedule:
(i) The baseline CPM schedule should be submitted to the Owner within 30 days of the Notice to Proceed and should be subject to Owner approval;
(ii) The schedule should contain a sufficient level of detail to identify individual activities, their durations, predecessor and successor relationships, and the critical path;
(iii) Monthly schedule updates should be submitted to the Owner, accompanied by a narrative report describing progress during the preceding period, any actual or anticipated delays, the current status of the critical path, and any recovery measures being implemented;
(iv) The schedule should incorporate milestone dates for key events, including foundation completion, structural topping-out of each tower, building envelope completion, MEP rough-in, interior fit-out commencement and completion for each floor, and commissioning activities.
Monthly Reporting. In addition to schedule updates, Pinnacle should be required to provide monthly construction progress reports to the Owner (Fairwater, acting in its capacity as development manager). These reports should include photographic documentation, percentage of completion for each trade, safety reports, quality control reports, and any notices of potential claims or disputes. The reporting format should be consistent with the requirements of the Lender's construction monitor, as discussed in Section XII.B below.
Early Completion Incentives. We have reviewed the GMP Contract for the presence of early completion incentive provisions. Given the JV's stabilization timeline—which targets 93% occupancy by March 2029, only six months after the scheduled substantial completion—there may be a business case for including a modest early completion bonus to incentivize Pinnacle to achieve substantial completion ahead of schedule. However, any such bonus must be carefully evaluated in the context of the overall project budget and the GMP amount. If an early completion bonus is included, it should be structured as a fixed amount tied to specific milestones (e.g., $500,000 for each full month of early completion, up to a maximum of $2,000,000) and should be funded from the Owner's contingency, not from the GMP. We defer to the business judgment of Fairwater's development team and Prescott on whether an early completion bonus is warranted.
C. Extensions of Time
The GMP Contract provides for extensions of the contract time under specified circumstances. The following categories of delay are relevant:
Excusable Delays. These are delays caused by circumstances beyond the Contractor's control, including force majeure events, weather days in excess of historical averages for the Baltimore metropolitan area, Owner-caused delays (such as delays in providing Owner-furnished equipment or approving submittals), and concealed conditions. For excusable delays, the Contractor is entitled to an extension of the contract time but is typically not entitled to additional compensation, except in the case of Owner-caused delays, for which the Contractor may be entitled to both a time extension and additional compensation for extended general conditions and related costs.
Non-Excusable Delays. These are delays that are within the Contractor's control or that are attributable to the Contractor's negligence, mismanagement, or failure to adequately staff and resource the work. For non-excusable delays, the Contractor is not entitled to a time extension, and liquidated damages accrue from the scheduled substantial completion date.
Recommendation — Narrow Force Majeure Definition. We recommend that the force majeure definition in the GMP Contract be narrowly drawn to include only the following categories of events: acts of God (including earthquakes, hurricanes, floods, and tornados), fire and other casualties not caused by the Contractor, epidemics and pandemics declared by the World Health Organization or the U.S. Centers for Disease Control and Prevention, acts of war or terrorism, government-imposed embargoes or sanctions, and similar extraordinary events beyond the reasonable control of the parties.
Critically, the force majeure definition should expressly exclude the following:
• Labor shortages or labor disputes (including strikes, unless industry-wide);
• Subcontractor defaults or delays;
• Material cost escalation or general supply chain disruptions (as distinct from specific government-imposed embargoes);
• Weather conditions within historical norms for the Baltimore metropolitan area (based on a defined historical average, typically the preceding 10-year period).
These exclusions are important because labor shortages, subcontractor management issues, and material procurement challenges are risks that a sophisticated general contractor of Pinnacle's caliber should be expected to manage within the GMP framework. Allowing these items to constitute force majeure would effectively shift construction execution risk from the Contractor back to the Owner, undermining the fundamental purpose of the GMP structure.
D. Acceleration. The GMP Contract should include provisions addressing the Owner's right to direct acceleration of the work to recover schedule in the event of delays.
Owner-Directed Acceleration. The Owner should have the right to direct Pinnacle to accelerate the work if the construction schedule falls behind the critical path milestones. The cost of acceleration should be allocated as follows:
(i) If the delay is non-excusable (i.e., attributable to the Contractor), the cost of acceleration should be borne by Pinnacle at no additional cost to the Owner. Pinnacle's obligation to accelerate at its own cost should be enforceable through the performance bond if necessary.
(ii) If the delay is excusable (i.e., caused by force majeure or concealed conditions), the Owner may direct acceleration, but the cost of acceleration should be borne by the Owner and should be processed through the change order approval mechanism.
(iii) If the delay is Owner-caused, any direction to accelerate should be treated as an Owner-directed change and processed accordingly.
Change Order Approval for Acceleration Costs. Acceleration costs that are borne by the Owner are subject to the same change order approval process and major decision thresholds discussed in Section IV.B above. Depending on the magnitude of the acceleration costs, Prescott's consent may be required under the Operating Agreement, and adequate time must be allowed for the internal JV approval process.
VI. Liquidated Damages
A. Delay Liquidated Damages
The GMP Contract includes a liquidated damages provision under which Pinnacle is obligated to pay the Owner a specified amount for each day (or week) of delay beyond the scheduled substantial completion date. Liquidated damages serve as a pre-agreed estimate of the Owner's actual damages resulting from construction delay, which in the context of a large-scale development project are difficult to quantify precisely at the time of contract execution.
Calibration of Liquidated Damages Amount. The per-diem (or per-week) liquidated damage amount should be calibrated to reflect the JV's actual carrying costs during a period of delay. The principal components of the JV's delay-related costs include:
(i) Construction Loan Interest. At a loan balance of $336,000,000 and an interest rate of Term SOFR plus 275 basis points, the daily interest cost is substantial. Assuming a blended interest rate of approximately 7.25% (Term SOFR of approximately 4.50% plus 275 basis points), the monthly interest cost is approximately $2,030,000, or approximately $67,700 per day.
(ii) Extended General Conditions. Pinnacle's general conditions costs continue to accrue during periods of delay, including costs for site supervision, temporary facilities, temporary utilities, and project management personnel. These costs are estimated at approximately $500,000 to $600,000 per month.
(iii) Extended Insurance Premiums. Both the Owner's builder's risk insurance and the Contractor's liability insurance premiums continue during periods of delay.
(iv) Lost Revenue. Each day of delay beyond the scheduled substantial completion date defers the commencement of lease-up, resulting in lost rental revenue. Based on the pro forma projections, the Project is expected to generate approximately $3,500,000 in gross monthly rental revenue at stabilization. During the initial lease-up period, gross revenue would be lower, but the lost revenue component is nonetheless significant.
(v) Extension Fees. If construction delays cause the construction loan to extend beyond the initial 36-month term, the JV may be required to pay extension fees to Meridian National Bank and may be required to satisfy additional conditions (including leasing milestones) that may be more difficult to achieve if the Project is not complete.
Taking these factors into account, we estimate that the JV's fully-loaded daily carrying cost during a period of delay is in the range of $85,000 to $110,000 per day. The liquidated damages amount in the GMP Contract should be set at a level that provides meaningful compensation for these carrying costs while remaining enforceable under Maryland law as a reasonable pre-estimate of damages (as opposed to an unenforceable penalty).
Cap on Liquidated Damages. The GMP Contract includes a cap on total liquidated damages that Pinnacle may be required to pay. We have reviewed the cap amount and are concerned that it may not provide adequate financial coverage for Fairwater's exposure under the completion guaranty to Meridian National Bank. We recommend that the liquidated damages cap be set at no less than 10% of the GMP amount, which would provide coverage of approximately $43,200,000. This level of coverage, when combined with the performance bond discussed in Section VIII.C, would provide a meaningful backstop for Fairwater's completion guaranty exposure.
Liquidated Damages Not Exclusive Remedy. We recommend that the GMP Contract expressly provide that liquidated damages are not the Owner's exclusive remedy for delay in the event that the delay is caused by Pinnacle's willful misconduct, abandonment of the work, or fraud. In such circumstances, the Owner should be entitled to pursue actual damages, including consequential damages, without regard to the liquidated damages cap.
B. Early Completion Bonus
As discussed in Section V.B above, we have reviewed the GMP Contract for the presence of an early completion bonus. If such a bonus is included, the following considerations apply:
(i) The bonus amount and the triggering milestones should be clearly defined;
(ii) The bonus should be funded from the Owner's contingency or soft cost budget, not from within the GMP, to avoid inflating the hard cost base on which Fairwater's development management fee is calculated;
(iii) The bonus should be payable only upon achievement of full substantial completion (both towers and all common areas), not upon partial completion of individual towers or phases;
(iv) The bonus should be subject to reduction or elimination if Pinnacle achieves early completion through the use of methods or practices that compromise quality or safety.
C. Coordination with Completion Guaranty
As discussed in Section II.C above, Fairwater has provided a completion guaranty to Meridian National Bank guaranteeing lien-free completion of the Project. This guaranty creates a direct financial exposure for Fairwater in the event that the Project is not completed on time and within budget. The delay liquidated damages and the performance bond under the GMP Contract are the primary back-to-back risk allocation mechanisms that mitigate this exposure.
We recommend that the liquidated damages cap and the performance bond coverage amount be evaluated together in the context of Fairwater's completion guaranty exposure. Specifically:
(i) The liquidated damages cap should be sufficient to cover the JV's carrying costs for a reasonable delay period (e.g., 12 to 18 months) without requiring Fairwater to fund shortfalls under the completion guaranty;
(ii) The performance bond should provide coverage for the full GMP amount, including change orders, so that if Pinnacle defaults or abandons the work, Fairwater can call upon the surety to complete the Project without a significant gap in coverage;
(iii) Fairwater should consider negotiating a subcontractor default insurance ("SDI") policy as an additional risk mitigation tool, although this is outside the scope of the GMP Contract itself.
VII. Risk Allocation
A. Warranties and Defect Liability
General Warranty Period. The GMP Contract establishes a general warranty period during which Pinnacle warrants that all work is free from defects in materials and workmanship. The standard warranty period in the construction industry is one year from the date of substantial completion. For certain specialized building systems, longer warranty periods are customary:
• Roofing systems: manufacturer's warranty of 10 to 20 years, plus contractor installation warranty of 2 years;
• Waterproofing and below-grade moisture protection: 5 to 10 years;
• Structural systems: varies; typically governed by the statute of repose under applicable state law;
• MEP systems: 1 to 2 years, plus manufacturer warranties on major equipment;
• Exterior building envelope (curtain wall, glazing): 5 to 10 years for water penetration; 2 years for general installation warranty.
Manufacturer Warranties. The GMP Contract should require Pinnacle to pass through to the Owner all manufacturer warranties on equipment and materials incorporated into the Project. These warranties should be assigned to the JV (or its successors) and should survive the expiration of Pinnacle's general warranty period. Pinnacle should provide the Owner with a compiled warranty manual at the time of final completion, organized by trade and building system.
Latent Defect Provisions. Under Maryland law, the statute of repose for construction defect claims is 20 years from the date of the alleged defective construction (Md. Code Ann., Cts. & Jud. Proc. § 5-108). This extended period provides the Owner with a statutory right to bring claims for latent structural defects well beyond the standard contractual warranty period. However, the GMP Contract should not contain any provisions that purport to shorten or waive the Owner's rights under the statute of repose. We recommend reviewing the warranty provisions to ensure that they do not include any limitations that would restrict the Owner's claims for latent defects beyond the standard warranty period.
Completed Operations Insurance. We recommend that the GMP Contract require Pinnacle to maintain completed operations insurance coverage for a minimum period of three years following substantial completion. Completed operations insurance provides coverage for third-party claims arising from defects in the completed work and is a critical backstop for the Owner in the event that defects are discovered after the expiration of the general warranty period but within the statute of repose period.
B. Indemnification. The GMP Contract establishes a mutual indemnification framework, which is the standard approach for construction contracts of this nature.
Contractor's Indemnification of Owner. Pinnacle indemnifies the Owner, its members, their respective affiliates, and their respective officers, directors, employees, and agents (collectively, the "Owner Indemnitees") against all claims, damages, losses, costs, and expenses (including reasonable attorneys' fees) arising from or related to: (i) Pinnacle's negligent acts or omissions or willful misconduct in the performance of the work; (ii) personal injury or death caused by the acts or omissions of Pinnacle, its employees, subcontractors, or agents; (iii) property damage caused by the acts or omissions of Pinnacle, its employees, subcontractors, or agents; and (iv) violations of applicable law, including environmental laws, arising from Pinnacle's work.
Owner's Indemnification of Contractor. The Owner indemnifies Pinnacle and its officers, directors, employees, and agents against claims arising from the Owner's negligent acts or omissions.
Scope and Breadth of Indemnification. We recommend that the indemnification provisions be reviewed to ensure the following:
(i) The Contractor's indemnification is broad enough to cover third-party claims, property damage, personal injury and death, and environmental claims arising from the Contractor's work;
(ii) The indemnification obligation is independent of insurance requirements and is not limited to the Contractor's insurance coverage amounts;
(iii) The Contractor's indemnification extends to claims by Pinnacle's own employees (to the extent permitted by Maryland law) arising from conditions caused by Pinnacle's negligence;