MEMORANDUM
PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT
TO: Douglas Fairchild, Responsible Partner, Real Estate Practice Group, Calderwood & Harkness LLP
FROM: Cynthia Ho, Lead Associate, Real Estate Practice Group, Calderwood & Harkness LLP
DATE: November 22, 2025
RE: Review and Analysis of Construction Loan Commitment Letter — Meridian National Bank, N.A. — Harbor Point Development JV, LLC
CLIENT: Fairwater Real Estate Investment Trust
MATTER: Harbor Point Towers — Institutional JV Development
Right-click to update Table of Contents
I. Executive Summary
This memorandum sets forth the results of my review and analysis of the construction loan commitment letter (the "Term Sheet" or "Commitment Letter") dated November 18, 2025, issued by Meridian National Bank, N.A. ("Meridian" or the "Lender"), through its Real Estate Finance Division (contact: Kevin P. Driscoll, Senior Vice President, Real Estate Finance, 200 South Charles Street, Baltimore, MD 21201), to Harbor Point Development JV, LLC (the "Borrower" or "HP JV"). The purpose of this memorandum is to provide a comprehensive analysis of the material terms and conditions set forth in the Commitment Letter, to identify areas of concern or ambiguity, and to recommend specific negotiation positions to be pursued during the transition from term sheet to definitive loan documentation.
The Commitment Letter contemplates a construction loan facility in the principal amount of $336,000,000 (the "Loan") to finance the development of Harbor Point Towers, a mixed-use residential project consisting of two 28-story residential towers comprising approximately 610 residential units and approximately 45,000 square feet of ground-floor retail space. The project is situated on an approximately 8.2-acre waterfront parcel located at 1500–1580 Wills Street, Baltimore, Maryland 21231 (Block 7419, Lots 1–6, Baltimore City) (the "Property" or the "Project").
The total project cost is estimated at $576,000,000. The Loan represents a loan-to-cost ratio of approximately 58.33% ($336,000,000 ÷ $576,000,000), which is within the typical institutional construction lending range of 55% to 65% for projects of this scale and quality. The remaining $240,000,000 in project costs will be funded through JV equity contributions, allocated 30% to Fairwater HP Manager, LLC ("Fairwater Manager"), an affiliate of our client, Fairwater Real Estate Investment Trust ("Fairwater" or the "Guarantor"), in the amount of $72,000,000, and 70% to Prescott HP Investor, LLC ("Prescott Investor"), an affiliate of Prescott Capital Partners, LP ("Prescott"), in the amount of $168,000,000.
The target construction loan closing date is February 15, 2026, with construction commencement targeted for March 1, 2026. Substantial completion of the Project is currently estimated for September 2028.
Overall Assessment. The Term Sheet is generally consistent with prevailing market standards for institutional construction lending on projects of this size, complexity, and risk profile. Meridian is a well-known participant in the Baltimore and Mid-Atlantic real estate lending market, and the indicative terms reflect a competitive offering. That said, certain provisions require substantive negotiation, clarification, or modification to adequately protect Fairwater's interests in its multiple capacities as (i) the guarantor of completion and recourse carve-out obligations, (ii) the operating partner and Managing Member of the JV, (iii) the recipient of development management fees, and (iv) a publicly traded Maryland real estate investment trust subject to mandatory income distribution requirements under the Internal Revenue Code. These areas of concern are discussed in detail throughout this memorandum and summarized in Section XV.
Recommendation. I recommend that Fairwater proceed toward definitive loan documentation, subject to successful negotiation of the specific points identified herein. I have prioritized these points into high-priority, medium-priority, and administrative categories to facilitate efficient discussions with both the Lender and Prescott's counsel at Whitmore, Calder & Briggs LLP.
II. Summary of Key Loan Terms
This Section sets forth a summary of the principal terms of the Commitment Letter, together with preliminary analytical observations regarding each term.
A. Borrower. The Borrower under the Commitment Letter is Harbor Point Development JV, LLC, a Delaware limited liability company formed for the purpose of owning, developing, and operating the Project. HP JV's registered agent in Delaware is Incorporators & Associates, Inc., 1209 Orange Street, Wilmington, Delaware 19801. The Borrower's Employer Identification Number ("EIN") is 84-6213950 (application filed; confirmation pending as of the date of this memorandum). HP JV has applied for foreign qualification to transact business in the State of Maryland.
HP JV is a two-member limited liability company. Its members and their respective equity interests are as follows:
Fairwater HP Manager, LLC is a Maryland limited liability company and a wholly owned subsidiary of Fairwater Real Estate Investment Trust. Prescott HP Investor, LLC is a Delaware limited liability company and an indirect subsidiary of Prescott Capital Partners, LP (EIN: 13-4587612), a private equity real estate fund (Fund IV, approximately $3.8 billion, 2023 vintage). The governance and economic arrangements between the members are set forth in the Amended and Restated Limited Liability Company Operating Agreement of Harbor Point Development JV, LLC (the "Operating Agreement"), which has been the subject of a separate memorandum circulated to this group.
B. Lender / Administrative Agent
The lender under the Commitment Letter is Meridian National Bank, N.A., acting in the capacities of lead arranger and administrative agent. Meridian's principal office for purposes of the Loan is located at 200 South Charles Street, Baltimore, Maryland 21201. The designated relationship banker is Kevin P. Driscoll, Senior Vice President, Real Estate Finance. It is anticipated that Meridian may syndicate a portion of the Loan commitment to one or more co-lenders (discussed further in Section XIV below), but will retain the administrative agent role and a meaningful hold position throughout the term of the Loan.
C. Loan Amount
The Commitment Letter provides for a committed construction loan facility in the aggregate principal amount of $336,000,000. This amount represents the total projected project cost of $576,000,000 less the aggregate JV equity commitment of $240,000,000. The full $336,000,000 is available to be drawn by the Borrower in accordance with the draw mechanics described in Section VII below, subject to satisfaction of applicable conditions precedent.
D. Loan-to-Cost Ratio
The Loan represents a loan-to-cost ratio ("LTC") of approximately 58.33% ($336,000,000 divided by total project costs of $576,000,000). This LTC is within the typical institutional construction lending range of 55% to 65% for large-scale, ground-up residential and mixed-use development projects with creditworthy sponsors. The moderate LTC should provide Meridian with adequate equity cushion, which will serve as a basis for negotiating favorable treatment on several guaranty and covenant issues discussed herein.
I note that certain construction lenders in the current market have been willing to extend LTC ratios of up to 65% for projects with comparable sponsor quality and pre-development status. The 58.33% LTC reflects a conservative underwriting position on the part of Meridian, which may provide negotiating leverage on points such as guaranty burn-off thresholds and financial covenant calibration.
E. Interest Rate
The Commitment Letter specifies an interest rate of Term SOFR plus 275 basis points (2.75%) per annum. The benchmark rate is Term SOFR as published by the CME Group Benchmark Administration Limited on a daily basis. Several aspects of the interest rate structure require clarification and potential negotiation in the definitive loan documents:
(i) SOFR Floor. The Commitment Letter does not expressly state whether a SOFR floor applies. It is increasingly common in the current lending environment for construction lenders to impose a SOFR floor (typically in the range of 0.00% to 1.00%) to protect against a low-rate environment. We should seek confirmation from Meridian that no SOFR floor applies or, if one is imposed, that it is set at zero.
(ii) SOFR Credit Spread Adjustment. Since the transition from LIBOR to SOFR, many lenders have incorporated a credit spread adjustment (CSA) of approximately 10 to 26.161 basis points to account for the historical differential between LIBOR and SOFR. We should confirm whether the 275 basis point spread is inclusive of any CSA or whether an additional CSA will be applied in the definitive documents.
(iii) Interest Calculation Convention. The Commitment Letter does not specify the day-count convention. Construction loans of this nature typically employ an Actual/360 convention, which effectively increases the annualized interest cost by approximately 1.4% compared to an Actual/365 convention. We should confirm the convention and model the interest reserve accordingly.
(iv) Default Rate. The Commitment Letter references a default rate of an additional 400 basis points above the contract rate during the continuance of any Event of Default. This is a standard provision. We should confirm that the default rate applies only during the continuance of an uncured Event of Default and that it ceases immediately upon cure.
(v) Interest Rate Protection. The Commitment Letter does not reference any interest rate hedging requirement. Given the current interest rate environment and the 30-to-48-month construction period, Meridian may require the Borrower to obtain an interest rate cap or other hedging instrument. If required, we should ensure that the cost of such instrument is included in the approved construction budget and that the terms are commercially reasonable.
F. Loan Term and Extensions
The Commitment Letter provides for the following term structure:
(i) Initial Term. Thirty-six (36) months from the date of Loan closing. Based on the target closing date of February 15, 2026, the initial maturity date would be approximately February 15, 2029.
(ii) Extension Options. Two (2) successive six-month extension options, which, if both are exercised, would extend the maximum maturity date to approximately February 15, 2030, for a total maximum loan term of forty-eight (48) months.
The extension options are discussed in greater detail in Section XIII below. The conditions to exercise of the extensions are anticipated to include, among others: (a) no existing Event of Default or condition that with the passage of time or the giving of notice would constitute an Event of Default; (b) payment of an extension fee; (c) achievement of specified construction milestones; (d) delivery of an updated appraisal; and (e) delivery of refreshed Guarantor financial statements demonstrating continued compliance with financial covenants.
Given that substantial completion of the Project is currently estimated for September 2028, which falls within the initial 36-month term, the extension options should serve primarily as a buffer against construction delays and to facilitate the transition to permanent financing or disposition. Nonetheless, the availability and conditions of these extensions merit careful attention, as discussed in Section XIII.
G. Interest Reserve
The Commitment Letter provides for an interest reserve of $29,400,000, which is included within the $90,000,000 soft costs budget and is a component of the overall Loan proceeds. The interest reserve is structured as a designated sub-account within the Loan facility. Draws on the interest reserve will be made monthly to pay accrued interest on the outstanding Loan balance during the construction period.
The adequacy of the interest reserve is a critical modeling assumption. Based on the anticipated draw schedule, the projected construction timeline through estimated substantial completion in September 2028, and current interest rate assumptions (Term SOFR currently at approximately 4.31%, implying an all-in rate of approximately 7.06%), our preliminary analysis suggests that the $29,400,000 interest reserve should be sufficient to cover interest costs through approximately the twenty-eighth month of the construction period, assuming a standard S-curve draw schedule. If construction is delayed or interest rates increase materially, the reserve could be exhausted before substantial completion. We should discuss with Fairwater's project finance team whether to model stress scenarios and negotiate for the right to replenish the interest reserve from contingency funds or additional equity without triggering a default.
H. Loan Fee Structure
The Commitment Letter references the following fee structure, which is within the range of current market terms for construction facilities of this magnitude:
(i) Origination/Commitment Fee. The Term Sheet indicates an origination fee of 0.75% of the total Loan commitment, equal to $2,520,000. This fee is payable at closing and is within the standard range of 0.50% to 1.00% for institutional construction loans.
(ii) Extension Fees. The Term Sheet provides for an extension fee of 0.25% of the then-outstanding principal balance for each six-month extension, payable at the time of extension exercise. We should negotiate for this fee to be calculated on the outstanding balance at the time of extension rather than on the full commitment amount.
(iii) Exit Fee. The Commitment Letter does not reference an exit fee. We should confirm in the definitive documents that no exit fee or prepayment premium applies.
(iv) Unused Line Fee. The Term Sheet provides for an unused line fee of 0.25% per annum on the daily average undrawn portion of the Loan commitment. This fee is payable quarterly in arrears and is standard for committed construction facilities where the lender is holding capacity for future draws.
I. Security / Collateral
The Commitment Letter requires the following collateral package, which is standard for an institutional construction loan of this nature:
(i) A first priority deed of trust/mortgage (the "Deed of Trust") on the approximately 8.2-acre Project site located at 1500–1580 Wills Street, Baltimore, Maryland 21231 (Block 7419, Lots 1 through 6, Baltimore City), together with all improvements, easements, appurtenances, and fixtures.
(ii) An assignment of leases and rents covering all current and future leases and rental income from the Project.
(iii) An assignment of all project contracts, including without limitation: (a) the Guaranteed Maximum Price Construction Contract with Pinnacle General Contractors, Inc. (the "GMP Contract"), (b) the Development Management Agreement between HP JV and Fairwater HP Manager, LLC, (c) the Architectural Services Agreement with the project architect, and (d) all other material project agreements.
(iv) An assignment of all permits and entitlements, including the Planned Unit Development ("PUD") approval granted by Baltimore City Council under Ordinance No. 24-0417 (approved June 14, 2024), all building permits (expected Q1 2026), and all governmental approvals and authorizations related to the Project.
(v) A pledge of 100% of the membership interests in HP JV, to be granted by both Fairwater HP Manager, LLC and Prescott HP Investor, LLC through one or more pledge agreements. This pledge would give Meridian the right to exercise remedies on the membership interests upon an Event of Default, effectively allowing the Lender to step into the ownership position.
(vi) UCC-1 financing statements to be filed in the State of Delaware (the Borrower's state of organization) and the State of Maryland covering all personal property, fixtures, and other collateral.
(vii) An assignment of insurance proceeds, including all proceeds under the builder's risk insurance policy maintained with Greystone Mutual Insurance Company and the lender's title insurance policy issued by Tidewater Insurance Group, Inc.
The collateral package is comprehensive and consistent with market practice. We should review the form of each collateral document to ensure that the terms are appropriately tailored to the Project and that no provisions inadvertently conflict with the Operating Agreement or Fairwater's rights as Managing Member.
J. Title Insurance
The Commitment Letter requires the following title insurance coverage:
(i) Lender's Policy. A lender's title insurance policy (ALTA Loan Policy) issued by Tidewater Insurance Group, Inc. in the amount of the full Loan commitment ($336,000,000), insuring the priority of the Deed of Trust as a first-lien encumbrance on the Property. The policy must include standard construction loan endorsements, including a "pending disbursements" endorsement, a survey endorsement, and a zoning endorsement.
(ii) Owner's Policy. An owner's title insurance policy (ALTA Owner's Policy) in the initial amount of $54,000,000 (reflecting the land acquisition cost), to be endorsed and increased to the full project cost upon completion of construction. The owner's policy was procured in connection with the anticipated land closing on January 30, 2026.
A title commitment dated December 9, 2025 has been issued by Tidewater Insurance Group, Inc. and is under separate review by Grace Nakamura on our team. A detailed Title Review Memorandum will be circulated separately addressing Schedule B exceptions, required endorsements, and any title matters requiring curative action.
K. Appraisal. The Commitment Letter requires an independent MAI appraisal of the Property and the proposed Project. An appraisal has been delivered on December 15, 2025, by Stonebridge Appraisal Associates, LLC (located at 211 East Lombard Street, Suite 300, Baltimore, Maryland 21202), an MAI-designated firm approved by Meridian. The appraisal must support both the LTC ratio of 58.33% and any applicable loan-to-value ("LTV") ratio requirements. If the Lender imposes an LTV requirement (which is common), the as-stabilized appraised value must be sufficient to satisfy such requirement. We will review the appraisal under separate cover and coordinate with Meridian's credit team on any appraisal-related conditions.
III. Equity Funding Conditions and Capital Call Coordination
One of the most significant structural issues in the Commitment Letter is the interaction between the Lender's equity-first requirements and the staged equity funding mechanics established in the Operating Agreement and the Capital Contribution Agreement among the JV members. This Section analyzes these interrelationships and identifies potential areas of conflict.
A. Equity-First Requirement
The Commitment Letter, consistent with standard construction lending practice, requires that all or a specified portion of the JV equity be funded prior to or concurrently with the initial draw on the Loan. The Term Sheet language is somewhat ambiguous on this point, referring to a requirement that "all equity contributions shall be funded prior to or pro rata with Loan advances." This language requires clarification during the negotiation of definitive documents.
The critical question is whether the Lender will require 100% of the aggregate $240,000,000 equity commitment to be deposited at or before Loan closing, or whether Meridian will permit the equity to be funded on a staged basis consistent with the Capital Contribution Agreement schedule. In our experience, institutional construction lenders typically require one of the following approaches:
(a) Full Equity Funded First: All equity must be contributed and verified before the first dollar of Loan proceeds is disbursed. This approach is the most conservative from the Lender's perspective and the most burdensome for the equity investors.
(b) Pro Rata Equity and Debt Funding: Equity and debt are funded pro rata (i.e., approximately 41.67% equity / 58.33% debt for each draw), meaning that each draw request must be accompanied by a pro rata equity contribution. This approach is more common in the current market and aligns more closely with the JV's capital call structure.
(c) Equity Funded First to a Threshold: A specified percentage (often 25% to 50%) of total equity is funded at or before closing, with the remainder funded pro rata or on an equity-first basis through specified construction milestones.
Based on the Operating Agreement and Capital Contribution Agreement, the initial capital call at or around land closing (currently scheduled for January 30, 2026) contemplates total equity contributions of $60,000,000 ($18,000,000 from Fairwater and $42,000,000 from Prescott), representing 25% of total equity. This initial equity contribution is earmarked to fund the land acquisition cost of $54,000,000, with the remaining $6,000,000 allocated to pre-development soft costs.
A significant coordination issue arises from the fact that the land closing date of January 30, 2026 precedes the construction loan closing date of February 15, 2026 by approximately sixteen days. We need to confirm with Meridian that equity contributions funded for the land acquisition will be credited toward the equity-first requirements under the Loan, even though such contributions are made prior to Loan closing. If Meridian does not recognize pre-closing equity contributions, Fairwater and Prescott could effectively be required to fund additional equity at Loan closing above and beyond the $60,000,000 already contributed, which would be inconsistent with the Capital Contribution Agreement and the approved JV budget.
Recommendation: We should negotiate definitive loan documentation that expressly credits equity contributions made prior to Loan closing (including the $60,000,000 land closing contribution) toward satisfaction of the equity-first requirement. The Loan Agreement should include a mechanism for the Borrower to certify the amount and timing of all equity contributions, including pre-closing contributions, supported by evidence of deposit and use of funds.
B. Equity Verification Mechanisms
The Lender will require verification of equity contributions in connection with each draw request. The Commitment Letter references a requirement for "evidence of all equity contributions funded to date" as a condition to each advance. In practice, this typically takes the form of a certification from the Borrower (or its accountants), accompanied by bank statements, wire transfer confirmations, or other documentary evidence.
The interaction between the Lender's equity verification requirements and the JV's capital call procedures warrants attention. Under the Operating Agreement, capital calls are issued by the Managing Member (Fairwater HP Manager, LLC) with 15 business days' notice to all members, with contributions funded pro rata in accordance with the approved JV budget. The Lender's draw request procedures (discussed in Section VII) will operate on a separate timeline — typically with a 10-to-15-business-day review period from submission of a draw request to funding.
If the Lender requires evidence of equity funding as a condition to each draw advance, but the capital call has not yet been funded at the time the draw request is submitted, there is a risk of timing mismatches that could delay draws and disrupt the construction schedule. The definitive loan documents should address this sequencing issue.
Recommendation: We should negotiate provisions in the definitive Loan Agreement that permit staged equity funding consistent with the Operating Agreement capital call mechanics. Specifically, the Loan documents should allow equity to be funded within a reasonable period (e.g., 15 business days) following each capital call notice, rather than requiring all equity to be on deposit at the time the draw request is submitted. Alternatively, the documents could permit equity certification to be provided within a specified period after the draw advance.
C. Capital Call Default Risk
The Commitment Letter does not address the consequences under the Loan of a capital call default by one of the JV members. This is a significant gap that must be addressed in the definitive loan documents. Under the Operating Agreement and Capital Contribution Agreement, if a member fails to fund a capital call within the specified cure period, the non-defaulting member has certain remedies, including the right to fund the defaulting member's share and to dilute the defaulting member's interest on a punitive basis, or ultimately to force a sale of the defaulting member's interest.
From the Lender's perspective, a capital call default poses several risks: (i) the Borrower may lack sufficient equity to continue construction, (ii) the JV's capital structure may change as a result of dilution, and (iii) a forced sale of a member's interest could constitute a prohibited transfer under the Loan documents.
Recommendation: We should negotiate the following protections in the definitive loan documents:
(a) The Lender should acknowledge and consent to the dilution and forced sale remedies set forth in the Operating Agreement and Capital Contribution Agreement, and agree that the exercise of such remedies does not constitute a prohibited transfer or change of control under the Loan documents.
(b) A capital call default by Prescott should not, by itself, constitute an Event of Default under the Loan, provided that Fairwater takes commercially reasonable steps to exercise its remedies under the Operating Agreement and to cure any resulting equity shortfall.
(c) The Lender should agree to a reasonable standstill period (e.g., 60 to 90 days) following a capital call default to allow the non-defaulting member to exercise its contractual remedies before the Lender accelerates the Loan or exercises other remedies.
IV. Completion Guaranty Analysis
The Completion Guaranty is among the most consequential aspects of the construction loan documentation from Fairwater's perspective. As the sole named guarantor of completion, Fairwater assumes significant financial exposure for the successful delivery of the Project. This Section provides a detailed analysis of the anticipated completion guaranty terms and recommends specific negotiation positions.
A. Guarantor. The Commitment Letter names Fairwater Real Estate Investment Trust as the sole guarantor of the Borrower's completion obligations. Fairwater is a publicly traded Maryland real estate investment trust listed on the New York Stock Exchange under the ticker symbol "FWT." Fairwater's Employer Identification Number is 52-2198437, and its Maryland State Department of Assessments and Taxation identification number is D19847321. Fairwater's principal offices are located at 7200 Pratt Street, Suite 1400, Baltimore, Maryland 21202.
As of Fairwater's most recently filed annual report (Form 10-K for the fiscal year ended December 31, 2024), Fairwater reported total assets of approximately $4.1 billion and total revenues of approximately $612 million. Fairwater's balance sheet and operating performance are consistent with the creditworthiness standards typically required by institutional construction lenders for guarantors of this magnitude of construction obligation.
B. Scope of Completion Guaranty
The Commitment Letter contemplates that the Completion Guaranty will require the Guarantor to guaranty the lien-free completion of Harbor Point Towers in accordance with the plans and specifications approved by the Lender and all applicable governmental authorities. The guaranty would be triggered if the Borrower fails to complete construction and deliver the Project in accordance with the approved plans, budget, and timeline.
The definition of "Completion" in the Commitment Letter is imprecise, referencing the "issuance of a certificate of occupancy for all units and retail space." This language requires significant clarification in the definitive documents. The following issues must be addressed:
(i) TCO vs. Final CO. The Term Sheet does not distinguish between a temporary certificate of occupancy ("TCO") and a final certificate of occupancy ("CO"). In Baltimore City, TCOs are routinely issued when a building is substantially complete and safe for occupancy, even if minor punch-list items remain. Final COs are typically issued only after all punch-list items, site work, and government inspections are complete, which can occur weeks or months after initial occupancy. From Fairwater's perspective, "Completion" should be defined by reference to the issuance of a TCO for both towers and all retail space, not a final CO.
(ii) Scope of Improvements. The guaranty should clearly delineate which improvements are included within the scope of "Completion." We should confirm whether the guaranty extends to: (a) punch-list items; (b) landscaping and hardscape improvements; (c) common area fit-out; (d) amenity spaces; and (e) off-site improvements required under the PUD approval (Ordinance No. 24-0417), such as sidewalk improvements, utility connections, and public access easements. We recommend that minor punch-list items and seasonal landscaping be excluded from the Completion definition, with a holdback mechanism in lieu of ongoing guaranty exposure.
(iii) Lien-Free Requirement. The "lien-free" completion requirement means that the Guarantor must ensure that no mechanics' liens or materialmen's liens encumber the Property upon completion. This is a standard provision, but Fairwater should be protected against liens that arise from disputes between the general contractor and subcontractors that are not attributable to the Borrower's or Guarantor's acts. We should negotiate that the lien-free requirement is satisfied if (a) all liens are bonded over or (b) the title company is willing to insure over such liens.
C. Guaranty Burn-Off / Release Conditions
The conditions under which the Completion Guaranty is released (or "burns off") are a critical negotiation point. Construction lenders typically release the Completion Guaranty upon the occurrence of defined completion milestones. However, lenders sometimes seek to extend the guaranty period beyond physical completion of construction, tying release to occupancy or stabilization thresholds.
The Commitment Letter's language regarding guaranty release is vague, referencing release "upon completion and stabilization of the Project." If "stabilization" is defined as achievement of a specified occupancy threshold (e.g., 93% or higher), the guaranty could remain outstanding for a significant period after construction is complete. Based on the current Project pro forma, stabilization is not expected until approximately March 2029, which would be approximately six months after substantial completion in September 2028. Requiring Fairwater to maintain the Completion Guaranty through stabilization would effectively transform a construction completion guaranty into a lease-up guaranty, which is a fundamentally different risk and one that Fairwater should not bear.
Recommendation: We should negotiate aggressively for the Completion Guaranty to burn off automatically upon the occurrence of the following conditions:
(a) Issuance of a TCO for both residential towers and all retail space;
(b) Completion of all punch-list items (or establishment of a holdback or escrow in lieu of completion);
(c) Satisfaction of any lien-free completion requirement (as modified per the recommendations above); and
(d) No then-existing Event of Default under the Loan.
We should resist any requirement that the guaranty remain in place until stabilization, lease-up, or achievement of debt service coverage thresholds. These are leasing risks, not construction risks, and should not be backstopped by a completion guarantor.
D. Prescott's Contribution to Completion Risk
The Commitment Letter names only Fairwater as the completion guarantor. Prescott HP Investor, LLC and its parent, Prescott Capital Partners, LP, are not named as guarantors or co-guarantors. This is a significant issue. Prescott holds 70% of the equity in the JV and will bear the majority of the economic benefit from the Project's success. It is inequitable for Fairwater, which holds only 30% of the equity, to bear 100% of the completion guaranty risk.
We recognize that institutional equity investors like Prescott frequently resist providing direct guaranties to construction lenders, preferring to limit their exposure to their equity commitment. However, Prescott Capital Partners, LP (Fund IV, approximately $3.8 billion, 2023 vintage) has substantial financial capacity to share in completion risk.
Recommendation: While Meridian may not require Prescott to execute a guaranty running directly to the Lender, we should strongly recommend to Fairwater that it negotiate with Prescott for one or more of the following protections in the JV Operating Agreement or a separate side agreement:
(a) A contribution guaranty from Prescott to Fairwater, obligating Prescott to contribute its pro rata share (70%) of any amounts paid by Fairwater under the Completion Guaranty;
(b) A co-guaranty from Prescott running to the Lender (or, alternatively, to Fairwater as subrogation assignee), covering 70% of any guaranty obligations; or
(c) At a minimum, a back-stop obligation in the Operating Agreement requiring Prescott to fund additional capital contributions to cover cost overruns before Fairwater's completion guaranty is called, proportionate to Prescott's 70% equity share.
This is a matter to be negotiated primarily between Fairwater and Prescott (through their respective counsel), but the construction loan documentation should be drafted in a manner that facilitates and does not impede these inter-party risk-sharing arrangements.
E. Guarantor Financial Covenants
The Commitment Letter anticipates that the Completion Guaranty will include ongoing financial covenants applicable to Fairwater as Guarantor. While the specific covenants are not fully enumerated in the Term Sheet, based on our experience with Meridian and comparable construction lenders, we anticipate that the following financial covenants will be required:
(i) Minimum Net Worth. A minimum tangible net worth or total equity value for Fairwater (likely in the range of $1.5 billion to $2.0 billion).
(ii) Minimum Liquidity. A minimum unencumbered cash and cash equivalents balance (likely in the range of $75 million to $150 million).
(iii) Maximum Leverage. A maximum total debt-to-total asset ratio for Fairwater on a consolidated basis (likely in the range of 55% to 65%).
(iv) Testing Frequency. Quarterly testing, with annual certification by Fairwater's independent auditors.
A critical issue in calibrating these financial covenants is the interaction with Fairwater's REIT distribution obligations. As a publicly traded REIT, Fairwater is required by the Internal Revenue Code to distribute at least 90% of its REIT taxable income to its shareholders in order to maintain its REIT status and avoid entity-level income tax. These mandatory distributions significantly constrain Fairwater's ability to retain earnings and build liquidity. If the Guarantor financial covenants are set at levels that do not account for Fairwater's distribution obligations, Fairwater could be placed in the untenable position of having to choose between breaching a financial covenant and jeopardizing its REIT status.
Recommendation: We should negotiate guarantor financial covenants that:
(a) Are set at levels consistent with Fairwater's current financial condition, with appropriate headroom to account for normal business fluctuations and REIT distribution requirements;
(b) Include express carve-outs or adjustments recognizing that Fairwater's liquidity and net worth may be impacted by mandatory REIT distributions;
(c) Provide for a reasonable cure period (e.g., 30 to 60 days) following any covenant breach before the Lender may exercise remedies; and
(d) Are tested on a quarterly basis using Fairwater's publicly filed financial statements (10-K and 10-Q) to minimize the administrative burden of separate reporting.
F. Summary of Recommendations on Completion Guaranty
For ease of reference, the following is a consolidated summary of our recommendations regarding the Completion Guaranty:
1. Negotiate a clear definition of "Completion" tied to the issuance of a TCO (not a final CO) for both towers and all retail space.
2. Seek automatic guaranty burn-off upon substantial completion, without any requirement for stabilization, lease-up, or debt service coverage thresholds.
3. Exclude minor punch-list items and seasonal landscaping from the Completion definition, with a holdback mechanism as an alternative.
4. Resist any extension of guaranty obligations beyond the scope of physical construction completion — the guaranty should not cover lease-up risk or stabilization risk.
5. Negotiate guarantor financial covenants that account for REIT mandatory distribution obligations and are calibrated to Fairwater's current financial condition.
6. Negotiate a right to cure with reasonable notice period (at least 30 days, with extension for diligent cure) before the Completion Guaranty can be called.
7. Advise Fairwater to negotiate with Prescott for a contribution guaranty, co-guaranty, or back-stop obligation allocating completion risk proportionate to each party's equity ownership (70/30).
V. Recourse Carve-Out Guaranty ("Bad Boy" Guaranty) Analysis
In addition to the Completion Guaranty, the Commitment Letter contemplates a standard Recourse Carve-Out Guaranty (commonly referred to as a "Bad Boy" Guaranty) from Fairwater, under which the Guarantor assumes personal liability for losses arising from certain specified acts or omissions of the Borrower. While the construction loan is generally structured as non-recourse to the Borrower (with recourse limited to the collateral), the Recourse Carve-Out Guaranty creates exceptions to this non-recourse structure that, if triggered, expose Fairwater to significant personal liability.
A. Standard Carve-Out Events
Based on the Commitment Letter and prevailing market practice, the following acts or events are anticipated to be included as carve-out triggers:
(a) Fraud or intentional misrepresentation by the Borrower or the Guarantor in connection with the Loan or the Project;
(b) Misapplication or misappropriation of rents, revenues, insurance proceeds, or condemnation awards received by the Borrower in violation of the Loan documents;
(c) Voluntary bankruptcy filing by the Borrower, or the Borrower's collusion in or failure to contest an involuntary bankruptcy filing;
(d) Violation of transfer restrictions or change-of-control provisions set forth in the Loan documents;
(e) Environmental liability arising from the Property, including the presence, release, or threatened release of hazardous materials (cross-reference to the Environmental Indemnity Agreement discussed in Section X);
(f) Commission of waste on the Property, including physical waste and failure to maintain the Property in accordance with the Loan documents;
(g) Breach of single-purpose entity ("SPE") covenants applicable to the Borrower (discussed further in subsection E below).
B. Full Recourse vs. Loss-Based Carve-Outs
A critical distinction in the Recourse Carve-Out Guaranty is between "full recourse" carve-outs and "loss-based" carve-outs. The characterization of each carve-out event has a dramatic impact on the Guarantor's potential liability exposure:
Full Recourse Carve-Outs. If a full recourse carve-out is triggered, the entire outstanding Loan balance becomes personal recourse to the Guarantor, regardless of the magnitude of the Lender's actual losses. For example, if the outstanding Loan balance is $300 million and a full recourse trigger event occurs, Fairwater could be liable for the full $300 million even if the Lender's actual loss is only $5 million.
Loss-Based Carve-Outs. If a loss-based carve-out is triggered, the Guarantor's liability is limited to the Lender's actual damages or losses resulting from the triggering event. This is a more proportionate allocation of risk.
The Commitment Letter does not clearly delineate which carve-outs are full recourse and which are loss-based. This classification must be resolved in the definitive documents.
Recommendation: We should negotiate the following classification:
The full recourse consequence should be limited to truly "bad boy" acts — voluntary bankruptcy and fraud — which represent intentional, egregious conduct. All other carve-outs should be loss-based, so that the Guarantor's exposure is proportionate to the Lender's actual damages.
C. Scope of Guarantor Liability
The Commitment Letter states that the Recourse Carve-Out Guaranty will be executed by Fairwater Real Estate Investment Trust as the Guarantor. We must confirm in the definitive documents that:
(a) The guaranty runs solely to Fairwater Real Estate Investment Trust as a corporate entity; individual officers, directors, or trustees of Fairwater (including Harold K. Brennan, Chairman and Chief Executive Officer; Patricia S. Liang, Chief Financial Officer; and Marcus D. Okonkwo, General Counsel and Executive Vice President) are not required to provide personal guaranties.
(b) The Lender should not require any personal guaranties from Fairwater's individual principals. To the extent the Term Sheet contemplates or can be read to contemplate personal guaranties, we should resist any such requirement. Personal guaranties are not standard in institutional construction lending of this scale, and Fairwater's corporate credit and balance sheet provide more than adequate credit support.
D. Transfer / Change of Control Triggers
The inclusion of "violation of transfer restrictions" as a recourse carve-out event requires particularly careful attention in the JV context. The Commitment Letter's transfer and change-of-control provisions must be drafted to accommodate the governance mechanisms in the Operating Agreement that could result in changes to the JV's management and ownership structure during the Loan term.
Specifically, the Operating Agreement provides for the following events that could be characterized as transfers or changes of control if not properly excepted:
(a) Removal of Managing Member. Under the Operating Agreement, Prescott has the right to remove Fairwater HP Manager, LLC as Managing Member upon the occurrence of specified removal events (including material breach, fraud, bankruptcy, and failure to meet development milestones). If removal of the Managing Member is characterized as a change of control under the Loan documents, the Recourse Carve-Out Guaranty could be triggered — exposing Fairwater to full recourse liability for an event that is largely outside its control.
(b) Buy-Sell Transactions. The Operating Agreement includes a buy-sell mechanism that may be exercised after January 12, 2031. Exercise of the buy-sell could result in one member acquiring the other member's interest, which could constitute a prohibited transfer if not properly carved out.
(c) Dilution of Defaulting Member. As discussed in Section III.C above, a capital call default by either member could result in dilution of the defaulting member's interest, which the Lender might characterize as a transfer.
Recommendation: We should negotiate a comprehensive "permitted transfer" exception in the Loan documents that carves out the following from the definition of prohibited transfers:
(a) Any transfer expressly permitted under the JV Operating Agreement, including removal and replacement of the Managing Member, exercise of buy-sell rights, and dilution of a defaulting member;
(b) Transfers of direct or indirect interests in the members (including Fairwater and Prescott) above a specified threshold (e.g., transfers of interests in Fairwater's publicly traded shares on the NYSE should not constitute prohibited transfers);
(c) Internal restructurings within the Fairwater or Prescott organizational structures that do not change the ultimate beneficial ownership; and
(d) Transfers required by operation of law, including in connection with estate planning, bankruptcy proceedings, or regulatory requirements.
E. SPE Covenants
The Commitment Letter requires HP JV to comply with standard single-purpose entity ("SPE") covenants. These covenants are designed to ensure that the Borrower entity remains "bankruptcy-remote" and is not substantively consolidated with the estates of its members in any bankruptcy proceeding. Standard SPE covenants include requirements that the Borrower:
(a) Maintain separate books and records and bank accounts;
(b) Not commingle its assets with those of any other entity;
(c) Hold itself out as a separate entity and not as a division or department of any other entity;
(d) Observe all entity formalities;
(e) Pay its own liabilities from its own funds;
(f) Not guarantee the obligations of any other entity;
(g) Maintain arm's-length relationships with affiliates; and
(h) Not incur indebtedness other than the Loan and trade payables in the ordinary course.
We should confirm that the SPE covenants in the definitive loan documents are consistent with the Operating Agreement and do not conflict with Fairwater's role as Managing Member or with the management and governance provisions of the Operating Agreement. Additionally, we should determine whether Meridian will require HP JV to appoint an independent director or independent manager as a condition to any voluntary bankruptcy filing. If an independent director requirement is imposed, we should negotiate independence criteria that are workable and consistent with market practice, ensuring that the independent director is selected by the Borrower (with Lender approval, not to be unreasonably withheld) and that the director has no fiduciary duty to the Lender.
VI. Borrower Covenants Analysis
This Section analyzes the affirmative covenants, negative covenants, and financial covenants that are anticipated to be imposed on the Borrower under the definitive loan documentation.
A. Affirmative Covenants
The Commitment Letter references the following affirmative covenants, which are standard for institutional construction loan facilities:
(i) Financial Reporting. The Borrower will be required to deliver quarterly and annual financial statements for both the Borrower (HP JV) and the Guarantor (Fairwater REIT). Given that Fairwater is a publicly traded company, we should negotiate that delivery of Fairwater's SEC filings (Form 10-K, Form 10-Q, and Form 8-K, as applicable) satisfies the Guarantor financial reporting requirements. This would eliminate the need for separate, non-public financial reporting packages.
(ii) Construction Progress Reporting. The Borrower must submit monthly construction progress reports in connection with each draw request, including: (a) AIA G702/G703 payment applications certified by the project architect and the construction manager; (b) an updated cost-to-complete analysis; (c) a construction schedule update showing progress against the approved baseline schedule; and (d) an engineer's certification regarding the percentage of completion and conformance with approved plans.
(iii) Insurance Maintenance. The Borrower must maintain the following insurance coverages throughout the construction period:
• Builder's risk insurance at full replacement cost, issued by Greystone Mutual Insurance Company;
• Commercial general liability ("CGL") insurance with limits of not less than $10,000,000 per occurrence and $20,000,000 in the aggregate;
• Umbrella/excess liability insurance with limits of not less than $50,000,000;
• Workers' compensation insurance as required by Maryland law;
• Such other coverages as the Lender may reasonably require.
(iv) Compliance with Laws. The Borrower must comply with all applicable federal, state, and local laws, regulations, and ordinances, including without limitation the conditions of the PUD approval under Baltimore City Ordinance No. 24-0417, all building code requirements, environmental laws, and the Americans with Disabilities Act.
(v) Maintenance of Permits and Entitlements. The Borrower must maintain in full force and effect all permits, licenses, and governmental approvals necessary for the construction and operation of the Project, including building permits (expected Q1 2026), the PUD approval, and all environmental permits.
(vi) Payment of Taxes and Assessments. The Borrower must pay all real property taxes, assessments, and governmental charges on the Property when due, prior to the imposition of any penalty or lien.
(vii) GMP Contract Compliance. The Borrower must comply with all material terms of the GMP Contract with Pinnacle General Contractors, Inc. and must not permit any material breach thereof.
(viii) Entity Maintenance. The Borrower must maintain its status as a duly formed and validly existing Delaware limited liability company, its foreign qualification to transact business in Maryland, and its status as a partnership for federal income tax purposes (which is critical for REIT income and asset testing purposes).
B. Negative Covenants
The Commitment Letter references the following negative covenants, which are also generally consistent with market practice: