1036-00006 · Client 1036 · Ruling Request

private-letter-ruling-request.docx DOCUMENT M&A / Corporate

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PRIVATE LETTER RULING REQUEST

September 22, 2025

Filed Pursuant to Rev. Proc. 2025-1

SUBMITTED BY:

Calderwood & Harkness LLP 1750 K Street NW, Suite 900 Washington, DC 20006 Telephone: (202) 555-7400 Facsimile: (202) 555-7401

ON BEHALF OF:

Fairwater Real Estate Investment Trust EIN: 52-4718263 2400 Harbor Promenade, Suite 1100 Baltimore, MD 21202

ADDRESSED TO:

Associate Chief Counsel (Income Tax & Accounting) Internal Revenue Service, National Office 1111 Constitution Avenue NW Washington, DC 20224

Attention: Branch 2 — Financial Institutions & Products

Enclosures:

1. IRS Form 2848 (Power of Attorney and Declaration of Representative)

2. IRS User Fee Payment of $38,000 (Category 2 — Specific Issues, per Rev. Proc. 2025-1, Appendix A) via Ridgeline National Bank, N.A. check no. 00471826, payable to "United States Treasury"

3. Supporting Exhibits A through I, as described in Section IX herein

Authorized Representatives:

All communications regarding this ruling request should be directed to:

Sylvia Hartwell, Partner Calderwood & Harkness LLP 1750 K Street NW, Suite 900 Washington, DC 20006 Telephone: (202) 555-7400

Email: shartwell@calderwoodharkness.com

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I. INTRODUCTION

A. Purpose of the Request

Calderwood & Harkness LLP, as tax counsel to Fairwater Real Estate Investment Trust ("Fairwater" or "FREIT"), respectfully requests private letter rulings from the Internal Revenue Service ("IRS" or the "Service") regarding whether certain transactions undertaken in connection with Fairwater's proposed acquisition of a portfolio of eleven (11) mixed-use properties (collectively, the "Southgate Portfolio") from Thornfield Development Group, LLC ("Thornfield"), and the associated formation and capitalization of a taxable REIT subsidiary, Fairwater Southgate TRS, Inc. ("Southgate TRS"), will jeopardize Fairwater's continued qualification as a real estate investment trust ("REIT") under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code"). All references herein to the "Code" are to the Internal Revenue Code of 1986, as amended, and all references to "Treasury Regulations" or "Treas. Reg." are to the Treasury Regulations promulgated thereunder, unless otherwise indicated.

Fairwater is a publicly traded REIT listed on the New York Stock Exchange that has continuously qualified as a REIT since its initial election effective for the taxable year ended December 31, 2009. In connection with its proposed acquisition of the Southgate Portfolio, Fairwater seeks assurance from the Service that three specific aspects of the proposed transaction structure will not adversely affect its REIT status. The three specific rulings requested relate to (1) the treatment of rents received from Southgate TRS under intercompany leases as "rents from real property" within the meaning of Section 856(d) of the Code, (2) the effect of the formation and capitalization of Southgate TRS on the asset tests set forth in Section 856(c)(4) of the Code, and (3) the treatment of certain tenant improvement allowances funded by Fairwater for third-party retail tenants in the Southgate Portfolio under the impermissible tenant service income rules of Section 856(d)(7)(C)(i) of the Code.

The three rulings requested are described in detail in Section V of this request, and the factual and legal bases supporting each requested ruling are set forth in Sections III, IV, and VI, respectively.

B. Procedural Compliance

This ruling request is submitted in accordance with Rev. Proc. 2025-1, which sets forth the procedures for requesting private letter rulings from the IRS National Office. The following procedural requirements have been satisfied:

1. User Fee. The required user fee of $38,000 (Category 2 — Specific Issues, per Rev. Proc. 2025-1, Appendix A) is enclosed with this request. Payment is made by check drawn on Ridgeline National Bank, N.A., check no. 00471826, in the amount of $38,000, payable to "United States Treasury." A copy of the check is attached hereto as Exhibit B.

2. Power of Attorney. IRS Form 2848 (Power of Attorney and Declaration of Representative) is enclosed as Exhibit A, designating Sylvia Hartwell (PTIN: P01882447) and Garrett Simmons (PTIN: P02094518) of Calderwood & Harkness LLP as the authorized representatives of Fairwater Real Estate Investment Trust with respect to this ruling request and all matters related thereto. The Form 2848 was executed on September 19, 2025, by Jonathan M. Hirota, Vice President, Tax, on behalf of Fairwater, in his capacity as a duly authorized officer of the trust.

3. Supporting Exhibits. The supporting exhibits listed in Section IX herein are enclosed with this request, including certified copies of Fairwater's Articles of Trust, an organizational chart of Fairwater's current and proposed subsidiary structure, a summary of the Southgate Portfolio properties, the executive summary of the independent appraisal supporting the arm's-length rent determination, the form of the proposed intercompany lease, pro forma REIT qualification metrics, and relevant excerpts from the Purchase and Sale Agreement between Fairwater and Thornfield.

4. Communications. All communications from the Service regarding this ruling request should be directed to Sylvia Hartwell at the address set forth on the cover page of this request. Ms. Hartwell is authorized to receive all correspondence, participate in all conferences, and take all actions necessary in connection with this request on behalf of Fairwater.

C. Confidentiality Notice

This ruling request contains "return information" within the meaning of Section 6103 of the Code and is submitted in confidence to the Internal Revenue Service. Fairwater hereby consents to contact by the assigned IRS branch attorneys and other Service personnel with respect to this request and the matters described herein.

Fairwater does not consent to the public disclosure of this ruling request or any private letter ruling issued in response hereto, except in the redacted form published by the Service pursuant to Section 6110 of the Code. Fairwater reserves the right to submit a statement identifying information that it believes should be deleted from any published version of a ruling issued in connection with this request, in accordance with Section 6110(c) of the Code and Rev. Proc. 2025-1.

II. STATEMENT OF FACTS

A. Description of the Taxpayer — Fairwater Real Estate Investment Trust

1. Entity Information. Fairwater Real Estate Investment Trust is a Maryland real estate investment trust organized under the laws of the State of Maryland. The following summarizes Fairwater's key organizational information:

• Full Legal Name: Fairwater Real Estate Investment Trust

• Entity Type: Maryland real estate investment trust

• Employer Identification Number (EIN): 52-4718263

• Headquarters: 2400 Harbor Promenade, Suite 1100, Baltimore, MD 21202

• Registered Agent: Capitol Registered Agents, Inc., 7 Saint Paul Street, Suite 820, Baltimore, MD 21202

• Public Listing: Fairwater's common shares of beneficial interest are listed and traded on the New York Stock Exchange ("NYSE") under the ticker symbol "FREIT."

• Approximate Market Capitalization: As of September 30, 2025, Fairwater's approximate market capitalization is $4.37 billion, based on the closing price of its common shares on the NYSE.

Fairwater's Articles of Trust, as amended and restated, are governed by the Maryland REIT Law, Title 8 of the Corporations and Associations Article of the Annotated Code of Maryland. A certified copy of the Articles of Trust is attached hereto as Exhibit C.

2. REIT Status History. Fairwater elected REIT status effective for its taxable year ended December 31, 2009, by filing a timely federal income tax return on IRS Form 1120-REIT for that taxable year in which it affirmatively elected to be treated as a real estate investment trust under Subchapter M, Part II of the Code. Since that initial election, Fairwater has continuously qualified as a REIT under Sections 856 through 860 of the Code for every taxable year through and including its most recent completed taxable year ended December 31, 2024. At no point during this period has Fairwater failed to satisfy any of the organizational requirements, income tests, asset tests, or distribution requirements applicable to REITs under the Code.

Fairwater's independent auditor and tax compliance advisor is Gresham Lowell CPAs LLP, located at 100 Light Street, Suite 2000, Baltimore, MD 21202. The engagement partner responsible for Fairwater's REIT compliance matters is Nolan S. Carruthers, CPA. Gresham Lowell CPAs LLP has issued unqualified opinions on Fairwater's financial statements for each fiscal year since Fairwater's REIT election, and has separately confirmed Fairwater's compliance with the REIT qualification requirements on an annual basis as part of its tax compliance engagement.

3. Business Overview. Fairwater's primary business consists of the ownership, operation, acquisition, development, and management of Class-A office, retail, and mixed-use properties across the Mid-Atlantic and Southeast regions of the United States. Fairwater is among the leading REITs in the Mid-Atlantic region, with a diversified portfolio spanning multiple states and property types.

As of the date of this ruling request, Fairwater's portfolio consists of ninety-four (94) properties totaling approximately 18.6 million rentable square feet. These properties include Class-A office buildings, retail centers, and mixed-use developments located in Maryland, Virginia, the District of Columbia, North Carolina, South Carolina, and Georgia. Fairwater's total assets as reported in its most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission for the fiscal year ended December 31, 2024, were approximately $7.82 billion.

The following individuals serve as key officers of Fairwater:

Fairwater's investment strategy focuses on acquiring and developing high-quality, well-located mixed-use properties in urban and suburban markets with strong demographic fundamentals, including population growth, employment growth, and favorable income profiles. Fairwater typically holds its properties for long-term investment and derives substantially all of its revenue from rents under long-term leases with creditworthy commercial and residential tenants.

4. Current REIT Qualification Metrics (Pre-Acquisition). For its most recently completed taxable year ended December 31, 2024, Fairwater satisfied all applicable REIT qualification requirements under the Code, including the following:

Distribution Requirement (IRC § 857(a)(1)). Fairwater distributed approximately 92.7% of its REIT taxable income (as defined in Section 857(b)(2) of the Code, determined without regard to the deduction for dividends paid and excluding any net capital gain) for the taxable year ended December 31, 2024. This distribution ratio exceeds the statutory minimum of 90% required under Section 857(a)(1) of the Code.

75% Asset Test (IRC § 856(c)(4)(A)). At the close of each calendar quarter during the taxable year ended December 31, 2024, at least 75% of the value of Fairwater's total assets consisted of real estate assets (as defined in Section 856(c)(5)(B) of the Code), cash and cash items (including receivables), and Government securities.

25% Asset Test and Related Tests (IRC § 856(c)(4)(B)). Fairwater satisfied the 25% aggregate securities test, the 5% single-issuer test, and the 10% securities-value test set forth in Section 856(c)(4)(B) of the Code at the close of each calendar quarter during the taxable year ended December 31, 2024.

20% TRS Asset Test (IRC § 856(c)(4)(B)(ii)). At the close of each calendar quarter during the taxable year ended December 31, 2024, the value of Fairwater's securities of taxable REIT subsidiaries did not exceed 20% of the value of Fairwater's total assets.

75% Gross Income Test (IRC § 856(c)(2)). For the taxable year ended December 31, 2024, at least 75% of Fairwater's gross income (excluding gross income from prohibited transactions as defined in Section 857(b)(6) of the Code) was derived from sources enumerated in Section 856(c)(2) of the Code, including rents from real property, interest on obligations secured by mortgages on real property, and gain from the sale or other disposition of real property.

95% Gross Income Test (IRC § 856(c)(3)). For the taxable year ended December 31, 2024, at least 95% of Fairwater's gross income (excluding gross income from prohibited transactions) was derived from sources enumerated in Section 856(c)(3) of the Code, which includes all items qualifying under the 75% gross income test plus dividends, interest, and gain from the sale or other disposition of stock or securities.

Fairwater has satisfied each of the foregoing tests for every taxable year since its initial REIT election effective December 31, 2009.

B. Description of the Counterparty — Thornfield Development Group, LLC

The seller of the Southgate Portfolio is Thornfield Development Group, LLC ("Thornfield"), a Delaware limited liability company. The following summarizes Thornfield's key organizational information:

• Full Legal Name: Thornfield Development Group, LLC

• Entity Type: Delaware limited liability company, classified as a partnership for federal income tax purposes

• Employer Identification Number (EIN): 83-2956104

• Principal Office: 900 Peachtree Center Avenue NE, Suite 2200, Atlanta, GA 30309

• Managing Member: Rowan Capital Partners, LP, a Delaware limited partnership

• Key Principal: Calvin J. Murchison, Founder and Managing Partner of Rowan Capital Partners, LP

Rowan Capital Partners, LP holds an 87.5% equity interest in Thornfield, with the remaining 12.5% equity interest held by various minority members who are passive investors in the Southgate Portfolio. Thornfield developed or acquired the eleven Southgate Portfolio properties over a period of approximately twelve years and has operated the properties since their respective dates of acquisition or completion of construction.

Thornfield's outside counsel for the proposed transaction is Pemberton Locke & Avery LLP, located at 191 Peachtree Street NE, Suite 4600, Atlanta, GA 30303. The lead partner at Pemberton Locke & Avery LLP advising Thornfield on the transaction is Rachel D. Whitford.

Fairwater and Thornfield are unrelated parties. No officer, director, trustee, or beneficial owner of more than five percent of Fairwater's shares of beneficial interest holds any direct or indirect equity interest in Thornfield, Rowan Capital Partners, LP, or any of Thornfield's other members. Similarly, no member, officer, or principal of Thornfield or Rowan Capital Partners, LP holds any direct or indirect equity interest in Fairwater. The proposed acquisition was negotiated at arm's length between Fairwater and Thornfield through their respective financial and legal advisors.

C. The Proposed Transaction — Acquisition of the Southgate Portfolio

1. Purchase and Sale Agreement. On August 1, 2025, Fairwater and Thornfield executed a Purchase and Sale Agreement (the "PSA") pursuant to which Fairwater has agreed to acquire fee simple title to all eleven (11) properties comprising the Southgate Portfolio. The aggregate purchase price under the PSA is Eight Hundred Twelve Million Dollars ($812,000,000), subject to customary prorations and adjustments at closing. The PSA is the product of extensive arm's-length negotiations between Fairwater and Thornfield, assisted by their respective financial and legal advisors.

The Southgate Portfolio consists of eleven (11) mixed-use properties with retail, office, and residential components located across the states of Virginia, North Carolina, and Georgia. The portfolio encompasses a total of approximately 3.1 million rentable square feet of commercial and residential space. The properties are generally Class-A or Class-B+ quality developments situated in established urban and suburban mixed-use corridors with strong demographic profiles and favorable long-term demand characteristics.

Mercer Strauss & Co., LLC, an independent investment banking firm located at 399 Park Avenue, 22nd Floor, New York, NY 10022, is serving as financial advisor to Fairwater in connection with the acquisition of the Southgate Portfolio. The lead banker for Mercer Strauss & Co., LLC on this engagement is Ian K. Padilla & Ostrander LLP, Managing Director. Mercer Strauss & Co., LLC has provided Fairwater's Board of Trustees with financial analysis and a fairness opinion regarding the aggregate purchase price of the Southgate Portfolio.

The acquisition is expected to be financed through a combination of borrowings under Fairwater's existing $1.5 billion unsecured revolving credit facility and proceeds from the planned disposition of certain existing portfolio assets. The administrative agent and lead lender under Fairwater's revolving credit facility is Ridgeline National Bank, N.A., located at 227 West Trade Street, Charlotte, NC 28202. The relationship manager for Fairwater at Ridgeline National Bank, N.A. is Patricia F. Langdon. Ridgeline National Bank, N.A. has indicated its willingness to fund the acquisition draw under the existing facility, subject to customary conditions precedent.

Title insurance and escrow services for the acquisition are being provided by Whitecliff Title & Escrow Company, located at 1515 Market Street, Suite 700, Philadelphia, PA 19102. Whitecliff Title & Escrow Company will issue owner's title insurance policies for each of the eleven Southgate Portfolio properties in favor of Fairwater.

The closing of the acquisition is expected to occur during the first quarter of 2026 (Q1 2026), subject to the satisfaction of customary conditions precedent set forth in the PSA, including receipt of a favorable private letter ruling from the Service addressing the issues described in this request. The PSA provides that Fairwater may terminate the agreement without liability if Fairwater has not received a favorable ruling from the Service by March 31, 2026.

Relevant excerpts from the PSA are attached hereto as Exhibit I.

2. Southgate Portfolio — Property Detail. The following table sets forth a detailed summary of each of the eleven (11) properties comprising the Southgate Portfolio, including property name, location, property type, approximate rentable square footage, and allocated purchase price:

A detailed property-by-property summary, including descriptions of the physical improvements, occupancy rates, lease roll schedules, and tenant rosters, is attached hereto as Exhibit E. The properties are geographically diversified across seven metropolitan statistical areas in three states (Virginia, North Carolina, and Georgia), reducing concentration risk and providing Fairwater with exposure to attractive growth markets in the Southeast.

3. Asset Allocation. Based on the independent appraisal conducted by Caldwell Valuation Group, LLC, and the analysis performed by Fairwater's internal tax and accounting teams, the aggregate purchase price of the Southgate Portfolio has been allocated between qualifying and non-qualifying assets as follows:

Qualifying Real Estate Assets — $664,000,000 (approximately 81.8% of total portfolio value). This amount is attributable to the office and retail components of the Southgate Portfolio properties that will generate rents from real property within the meaning of Section 856(d) of the Code. These components consist of conventional office space leased to commercial tenants under long-term leases, retail space leased to national and regional retailers, and residential units leased to individual tenants. The rents derived from these components will be directly received by Fairwater and will constitute qualifying income for purposes of the 75% and 95% gross income tests.

Non-Qualifying Operating Business Assets — $148,000,000 (approximately 18.2% of total portfolio value). This amount is attributable to three categories of ancillary operating businesses that generate income not qualifying as "rents from real property" under Section 856(d) of the Code:

(a) Food-and-Beverage Operations. Several of the Southgate Portfolio properties include ground-floor restaurant and café spaces that are currently operated by Thornfield through managed food-and-beverage operators. The income derived from these operations is not rent from real property because it represents revenue from the provision of food services rather than compensation for the use of real property.

(b) Parking Management Operations. Certain properties in the Southgate Portfolio include structured parking garages that generate revenue from hourly, daily, and monthly parking fees charged to building tenants, their employees, and the general public. To the extent that Fairwater were to directly operate these parking facilities and charge fees based on usage rather than fixed rent, such income would not constitute qualifying REIT income.

(c) Co-Working-Space Operations. The Ashford Place property in Charlotte, North Carolina, includes a co-working space component that provides flexible office suites, shared conference rooms, and administrative support services to short-term occupants. The revenue generated from co-working-space operations typically includes charges for services furnished to occupants that go beyond the mere use or occupancy of real property, and therefore may not qualify as rents from real property.

To preserve Fairwater's REIT qualification, these three categories of non-qualifying operating business assets and the associated income streams will be segregated and housed within a newly formed taxable REIT subsidiary, Fairwater Southgate TRS, Inc., as described in Section II.D below.

D. Proposed Formation and Capitalization of Fairwater Southgate TRS, Inc.

1. Entity Formation. In connection with the acquisition of the Southgate Portfolio, Fairwater proposes to form Fairwater Southgate TRS, Inc. ("Southgate TRS") as a Maryland corporation organized under the Maryland General Corporation Law. Following its incorporation, Southgate TRS will jointly elect with Fairwater to be treated as a taxable REIT subsidiary under Section 856(l) of the Code. The joint election will be filed on a timely basis in accordance with the requirements of Section 856(l)(1) of the Code and Treas. Reg. § 1.856-1.

The purpose of Southgate TRS is to hold and operate the non-qualifying income-producing components of the Southgate Portfolio — specifically, the food-and-beverage operations, parking management operations, and co-working-space operations — that would otherwise produce income not qualifying as "rents from real property" under Section 856(d) of the Code. By conducting these activities through Southgate TRS, Fairwater will ensure that the non-qualifying income generated by these activities is taxed at the corporate level within Southgate TRS and does not adversely affect Fairwater's satisfaction of the REIT income tests.

An organizational chart depicting Fairwater's current subsidiary structure and the proposed formation of Southgate TRS is attached hereto as Exhibit D.

2. Projected TRS Financials. Following the closing of the Southgate Portfolio acquisition and the transfer of the non-qualifying operating business assets to Southgate TRS, the projected financial profile of Southgate TRS is as follows:

• Projected TRS Asset Value (post-restructuring): $147,000,000. This figure is slightly below the $148,000,000 non-qualifying asset allocation set forth in the Caldwell Valuation Group appraisal, reflecting certain working-capital adjustments that will be retained by Thornfield at closing rather than transferred to Fairwater. Specifically, Thornfield will retain approximately $1,000,000 in prepaid expenses and deposits associated with the operating businesses that will not transfer to Southgate TRS at closing.

• Projected Annual Gross Revenue: $38,400,000. This figure represents the aggregate projected annual gross revenue from the food-and-beverage operations, parking management operations, and co-working-space operations to be conducted by Southgate TRS, based on historical financial performance of these operations for the trailing twelve months ended June 30, 2025, adjusted for anticipated rent-up of certain recently completed spaces and contractual rate escalations.

Southgate TRS will be subject to federal corporate income tax on its taxable income at the applicable corporate tax rate. The income generated by Southgate TRS will not flow through to Fairwater for purposes of the REIT income tests; rather, Fairwater will receive income from Southgate TRS only in the form of rents under the intercompany leases (discussed below) and, if applicable, dividends declared by Southgate TRS.

3. Intercompany Lease Structure. Following the closing of the acquisition, Fairwater (as fee owner and lessor) will enter into intercompany leases with Southgate TRS (as lessee) with respect to the real property underlying the TRS-operated spaces within the Southgate Portfolio properties. The material terms of the proposed intercompany leases are as follows:

• Lessor: Fairwater Real Estate Investment Trust

• Lessee: Fairwater Southgate TRS, Inc.

• Leased Premises: The specific portions of the Southgate Portfolio properties in which the food-and-beverage, parking management, and co-working-space operations will be conducted, as identified and demised on the floor plans attached to each intercompany lease

• Annual Base Rent: $18,700,000 per annum, payable in equal monthly installments of approximately $1,558,333

• Lease Term: Ten (10) years, commencing on the closing date of the Southgate Portfolio acquisition

• Renewal Options: Two (2) consecutive five (5)-year renewal options, exercisable at the option of Southgate TRS upon written notice to Fairwater not less than twelve (12) months prior to the expiration of the then-current term

• Rent Escalator: The annual base rent shall increase by a fixed rate of 2.5% per annum on each anniversary of the commencement date

• Lease Structure: Triple-net (NNN). Southgate TRS, as lessee, shall be responsible for all operating expenses, insurance premiums, and real property taxes attributable to the TRS-operated spaces, including without limitation utilities, maintenance and repair costs, common area maintenance charges, and property management fees.

The annual base rent of $18,700,000 was determined to constitute arm's-length rent by an independent appraisal performed by Caldwell Valuation Group, LLC, an independent real estate valuation firm located at 4200 Dominion Boulevard, Suite 310, Glen Allen, VA 23060. The Caldwell Valuation Group appraisal, dated August 30, 2025, analyzed comparable lease transactions for similar mixed-use property components in the Virginia, North Carolina, and Georgia markets, and concluded that the proposed annual base rent is consistent with the rents that would be charged between unrelated parties in comparable arm's-length transactions. An executive summary of the Caldwell Valuation Group appraisal is attached hereto as Exhibit F, and the form of the proposed intercompany lease is attached hereto as Exhibit G.

4. Tenant Improvement Allowances. In addition to the intercompany leases with Southgate TRS, Fairwater, in its capacity as fee owner of the Southgate Portfolio properties, will fund certain tenant improvement allowances ("TIAs") for the benefit of third-party retail tenants occupying space in the Southgate Portfolio. These TIAs are provided directly to third-party tenants (not to Southgate TRS) and are designed to facilitate the build-out and customization of raw or second-generation retail space to meet the specific operational needs of the incoming tenants.

The tenant improvement allowances contemplated in connection with the Southgate Portfolio are customary and standard in the commercial real estate industry, particularly for Class-A mixed-use properties of the type included in the Southgate Portfolio. The nature and amount of these TIAs are consistent with the tenant improvement allowances that Fairwater routinely provides to third-party tenants across its existing ninety-four (94)-property portfolio. Historically, Fairwater has funded TIAs ranging from $30 to $85 per rentable square foot, depending on the property type, market conditions, and the creditworthiness and lease term of the applicable tenant. The TIAs associated with the Southgate Portfolio are expected to fall within this customary range.

The construction and build-out work funded by the tenant improvement allowances will be performed by independent contractors retained by Fairwater or, in certain cases, by the tenants themselves using the TIA funds. Fairwater will not itself furnish or render construction services, design services, or any other services to the tenants in connection with the tenant improvement allowances. Fairwater's role is limited to funding the allowances as a component of the overall lease economics negotiated with each third-party tenant.

E. Projected Post-Acquisition REIT Qualification Metrics

The following sets forth Fairwater's projected REIT qualification metrics after giving effect to the proposed acquisition of the Southgate Portfolio and the formation and capitalization of Southgate TRS:

Total Assets:

The planned dispositions consist of the sale of certain non-core properties in Fairwater's existing portfolio that have been identified for recycling as part of Fairwater's capital allocation strategy. These dispositions are expected to close prior to or contemporaneously with the closing of the Southgate Portfolio acquisition.

Asset Tests:

Income Tests:

Distribution Requirement: Fairwater distributed 92.7% of its REIT taxable income for the taxable year ended December 31, 2024, exceeding the 90% minimum distribution requirement under Section 857(a)(1) of the Code. Fairwater intends to continue distributing at least 90% of its REIT taxable income for all future taxable years.

A detailed pro forma REIT qualification metrics schedule is attached hereto as Exhibit H.

III. REPRESENTATIONS

Fairwater hereby makes the following representations in support of this ruling request. Fairwater understands that the rulings issued by the Service in response to this request will be based upon the accuracy and completeness of these representations, and that any material misstatement or omission may render any ruling inapplicable or subject to revocation.

A. General Representations

1. Fairwater has qualified as a real estate investment trust under Sections 856 through 860 of the Code for every taxable year since its initial REIT election, effective for the taxable year ended December 31, 2009, and intends to continue qualifying as a REIT for all future taxable years.

2. All facts set forth in this ruling request are true, correct, and complete to the best of the knowledge and belief of Fairwater and its authorized officers. Fairwater is not aware of any material fact or circumstance that has been omitted from this request that could affect the analysis or conclusions set forth herein.

3. The proposed transactions described herein — including the acquisition of the Southgate Portfolio, the formation and capitalization of Southgate TRS, the execution of the intercompany leases, and the provision of tenant improvement allowances — are being undertaken for bona fide business purposes and are not designed, in whole or in part, to circumvent, avoid, or evade the REIT qualification requirements under the Code or the Treasury Regulations promulgated thereunder.

B. Representations Regarding the Southgate Portfolio Acquisition

4. The aggregate purchase price of $812,000,000 for the Southgate Portfolio was negotiated at arm's length between unrelated parties (Fairwater and Thornfield). No officer, director, trustee, or beneficial owner of more than five percent (5%) of Fairwater's shares of beneficial interest holds any direct or indirect ownership interest in Thornfield, Rowan Capital Partners, LP, or any other entity affiliated with Thornfield. Similarly, no member, officer, or principal of Thornfield or Rowan Capital Partners, LP holds any direct or indirect ownership interest in Fairwater.

5. The allocation of the aggregate purchase price between qualifying real estate assets ($664,000,000) and non-qualifying operating business assets ($148,000,000) was determined based on an independent appraisal conducted by Caldwell Valuation Group, LLC, and reflects the fair market values of the respective asset categories as of the date of the appraisal. The allocation was not made for the purpose of artificially inflating or deflating the value of any asset category.

C. Representations Regarding Southgate TRS

6. Fairwater and Southgate TRS will timely file a joint election under Section 856(l) of the Code for Southgate TRS to be treated as a taxable REIT subsidiary for federal income tax purposes. The joint election will be filed in the manner prescribed by the Code, the Treasury Regulations, and applicable IRS guidance.

7. Southgate TRS will be a wholly owned subsidiary of Fairwater. Fairwater will own one hundred percent (100%) of the issued and outstanding shares of common stock of Southgate TRS. No other person or entity will hold any equity interest in Southgate TRS.

8. The projected TRS asset value of $147,000,000 will represent approximately 1.83% of Fairwater's projected total assets of $8,030,000,000 at the close of the calendar quarter in which the acquisition closes. This ratio is substantially below the 20% limitation imposed by Section 856(c)(4)(B)(ii) of the Code. Fairwater intends to monitor the TRS asset ratio on a quarterly basis to ensure continued compliance with the 20% limitation.

9. Southgate TRS will operate the food-and-beverage, parking management, and co-working-space components of the Southgate Portfolio properties. Southgate TRS will not engage in any activities beyond the operation of these ancillary businesses and activities reasonably incidental thereto, unless Fairwater determines that such additional activities are consistent with maintaining Fairwater's REIT status.

D. Representations Regarding the Intercompany Leases

10. The annual base rent of $18,700,000 under the intercompany leases between Fairwater and Southgate TRS was determined to be arm's-length rent by an independent appraisal performed by Caldwell Valuation Group, LLC, dated August 30, 2025. The appraisal was conducted in accordance with generally accepted valuation standards and analyzed comparable lease transactions for similar property types in the relevant geographic markets (Virginia, North Carolina, and Georgia).

11. The intercompany leases will be structured as triple-net (NNN) leases with an initial term of ten (10) years, two (2) consecutive five (5)-year renewal options, and a fixed annual rent escalator of 2.5%. Under the triple-net structure, Southgate TRS will be solely responsible for all operating expenses, insurance premiums, and real property taxes attributable to the TRS-operated spaces within the Southgate Portfolio properties.

12. Fairwater will not furnish or render services to the tenants, customers, or occupants of the TRS-operated spaces, other than through Southgate TRS or through independent contractors from whom Fairwater derives no income. Any services provided in connection with the food-and-beverage, parking management, or co-working-space operations will be performed by employees of Southgate TRS or by independent contractors engaged by Southgate TRS, and not by Fairwater or its employees.

E. Representations Regarding Tenant Improvement Allowances

13. The tenant improvement allowances funded by Fairwater and provided to third-party retail tenants in the Southgate Portfolio are customary in the commercial real estate market and are consistent with industry practice for Class-A mixed-use properties. The amount and nature of the tenant improvement allowances are comparable to those provided by Fairwater to third-party tenants across its existing ninety-four (94)-property portfolio.

14. The tenant improvement allowances do not constitute compensation for services furnished or rendered by Fairwater to tenants. The allowances represent capital contributions by the landlord (Fairwater) to the build-out and improvement of the leased premises, which become a permanent part of the real property owned by Fairwater. The allowances are negotiated as a component of the overall lease economics and are reflected in the rental rates charged to the applicable tenants.

15. Fairwater will not manage or operate the spaces to which tenant improvement allowances relate in a manner that would give rise to impermissible tenant service income within the meaning of Section 856(d)(7)(C)(i) of the Code. The construction and build-out of tenant improvements will be performed by independent contractors retained by Fairwater or by the tenants themselves. Fairwater will not perform construction, design, or other services for tenants in connection with the tenant improvement allowances.

F. Representations Regarding REIT Qualification Tests

16. After giving effect to the proposed acquisition of the Southgate Portfolio and the formation and capitalization of Southgate TRS, Fairwater will satisfy each of the following REIT qualification tests:

(a) The 75% asset test under Section 856(c)(4)(A) of the Code (projected result: 81.9%, exceeding the 75% threshold);

(b) The 20% TRS asset test under Section 856(c)(4)(B)(ii) of the Code (projected result: 1.83%, well below the 20% threshold);

(c) The 75% gross income test under Section 856(c)(2) of the Code (projected result: 80.3%, exceeding the 75% threshold);

(d) The 95% gross income test under Section 856(c)(3) of the Code (projected result: 97.1%, exceeding the 95% threshold); and

(e) The distribution requirement under Section 857(a)(1) of the Code (Fairwater distributed 92.7% of REIT taxable income for the taxable year ended December 31, 2024, and intends to continue distributing at least 90% for all future taxable years).

17. Fairwater intends to continue distributing at least 90% of its REIT taxable income (as defined in Section 857(b)(2) of the Code, determined without regard to the deduction for dividends paid and excluding any net capital gain) for all future taxable years, in compliance with the distribution requirement of Section 857(a)(1) of the Code.

IV. RULINGS REQUESTED

Fairwater respectfully requests the following three (3) private letter rulings from the Internal Revenue Service:

A. Ruling 1 — Rents from Real Property

Fairwater requests a ruling that the rents received by Fairwater from Fairwater Southgate TRS, Inc. ("Southgate TRS") under the intercompany leases for the use of real property within the Southgate Portfolio properties will constitute "rents from real property" within the meaning of Section 856(d) of the Code, provided that such rents are determined to be at arm's-length rates as required by Section 856(d)(7)(B) of the Code, and as supported by the independent appraisal performed by Caldwell Valuation Group, LLC, dated August 30, 2025.

Specifically, Fairwater requests confirmation that the annual base rent of $18,700,000 payable by Southgate TRS to Fairwater under the proposed intercompany leases will not be excluded from "rents from real property" under Section 856(d)(2)(B) of the Code (relating to rents from related-party tenants) by reason of the exception for TRS rents provided in Section 856(d)(8) of the Code, and that such rents will qualify as income described in Section 856(c)(2)(C) and Section 856(c)(3)(B) of the Code for purposes of the 75% and 95% gross income tests, respectively.

B. Ruling 2 — Asset Tests

Fairwater requests a ruling that the formation and capitalization of Fairwater Southgate TRS, Inc. with projected assets of approximately $147,000,000 will not cause Fairwater to fail the 20% taxable REIT subsidiary asset test under Section 856(c)(4)(B)(ii) of the Code, nor will it cause Fairwater to fail the 75% asset test under Section 856(c)(4)(A) of the Code or the 25% aggregate securities test under Section 856(c)(4)(B)(i) of the Code.

Specifically, Fairwater requests confirmation that, based on Fairwater's projected total assets of $8,030,000,000, the inclusion of Southgate TRS securities valued at $147,000,000 in Fairwater's asset portfolio (representing approximately 1.83% of total assets) will not cause Fairwater to violate any of the asset tests prescribed by Section 856(c)(4) of the Code.

C. Ruling 3 — Tenant Improvement Allowances

Fairwater requests a ruling that certain tenant improvement allowances funded by Fairwater and provided to third-party retail tenants occupying space in the Southgate Portfolio properties will not be treated as "impermissible tenant service income" within the meaning of Section 856(d)(7)(C)(i) of the Code, and that the provision of such tenant improvement allowances will not cause any amounts received or accrued by Fairwater from the Southgate Portfolio properties to be disqualified as "rents from real property" under Section 856(d) of the Code.

Specifically, Fairwater requests confirmation that tenant improvement allowances representing capital expenditures for the build-out and improvement of retail space, funded by Fairwater as landlord and provided to unrelated third-party tenants, do not constitute "services furnished or rendered" to tenants for purposes of Section 856(d)(2)(C) and Section 856(d)(7)(C)(i) of the Code.

V. LEGAL ANALYSIS

A. Overview of REIT Qualification Requirements

The Internal Revenue Code provides a comprehensive framework for the taxation of real estate investment trusts in Sections 856 through 860. Congress enacted the REIT provisions to enable investors to pool their capital for investment in diversified real estate portfolios and to receive the economic benefits of direct real estate ownership — including current income and capital appreciation — without the burden of double taxation that ordinarily applies to corporate investment vehicles. The REIT provisions accomplish this objective by permitting a qualifying REIT to deduct dividends paid to its shareholders, thereby effectively eliminating the entity-level tax, provided the REIT satisfies a series of organizational, income, asset, and distribution requirements designed to ensure that the entity functions as a passive investment vehicle for real estate.

Organizational Requirements. Section 856(a) of the Code sets forth the organizational requirements for REIT status. A REIT must be managed by one or more trustees or directors, must have transferable shares or certificates of beneficial interest, must not be a financial institution or insurance company, and must have at least 100 beneficial owners (the "100-shareholder test"). Additionally, during the last half of each taxable year, not more than 50% in value of the REIT's outstanding stock may be owned, directly or indirectly, by or for five or fewer individuals (the "5/50 test" set forth in Section 856(a)(6) of the Code). Fairwater satisfies each of these organizational requirements and has done so for every taxable year since its initial REIT election.

Income Tests. Section 856(c)(2) of the Code requires that at least 75% of a REIT's gross income (excluding gross income from prohibited transactions) be derived from specified real estate sources, including rents from real property, interest on obligations secured by mortgages on real property, and gain from the sale or other disposition of real property (the "75% gross income test"). Section 856(c)(3) of the Code requires that at least 95% of a REIT's gross income (excluding gross income from prohibited transactions) be derived from the items qualifying under the 75% test plus dividends, interest, and gain from the sale or other disposition of stock or securities (the "95% gross income test").

Asset Tests. Section 856(c)(4) of the Code imposes a series of asset composition requirements that must be satisfied at the close of each calendar quarter. The principal asset tests include:

(a) The 75% asset test (Section 856(c)(4)(A)): At least 75% of the value of the REIT's total assets must consist of real estate assets, cash and cash items (including receivables), and Government securities.

(b) The 25% aggregate securities test (Section 856(c)(4)(B)(i)): Not more than 25% of the value of the REIT's total assets may be represented by securities (other than those described in Section 856(c)(4)(A)).

(c) The 20% TRS asset test (Section 856(c)(4)(B)(ii)): Not more than 20% of the value of the REIT's total assets may be represented by securities of one or more taxable REIT subsidiaries.

(d) The 5% asset test (Section 856(c)(4)(B)(iii)(I)): The REIT may not hold securities of any one issuer (other than a TRS or a qualified REIT subsidiary) representing more than 5% of the value of the REIT's total assets.

(e) The 10% securities-value test (Section 856(c)(4)(B)(iii)(II)): The REIT may not hold securities representing more than 10% of the total value of the outstanding securities of any one issuer (other than a TRS or a qualified REIT subsidiary).

Distribution Requirements. Section 857(a)(1) of the Code requires a REIT to distribute dividends (other than capital gain dividends) to its shareholders in an amount at least equal to 90% of its REIT taxable income (as defined in Section 857(b)(2), determined without regard to the deduction for dividends paid and excluding any net capital gain) for each taxable year.

Taxable REIT Subsidiaries. The REIT Improvement Act of 1999 (Public Law 106-170) added Section 856(l) to the Code, establishing the taxable REIT subsidiary (TRS) regime. The TRS provisions were enacted to provide REITs with greater operational flexibility by permitting them to conduct certain non-qualifying activities — such as the provision of services to tenants or the operation of ancillary businesses — through a separately incorporated subsidiary that is subject to regular corporate income tax. A TRS is defined as any corporation (other than a REIT) that jointly elects TRS status with the REIT and in which the REIT directly or indirectly owns stock. The TRS provisions balance operational flexibility with safeguards against abuse, including the 20% TRS asset limitation under Section 856(c)(4)(B)(ii) and the arm's-length rent requirement under Section 856(d)(7)(B) for rents received from a TRS.

The legislative history accompanying the REIT Improvement Act of 1999 reflects Congress's intent to allow REITs to compete more effectively with other real estate market participants while preserving the fundamental requirement that a REIT derive its income primarily from passive real estate investments. See H.R. Conf. Rep. No. 106-478, at 120–24 (1999); S. Rep. No. 106-201, at 56–58 (1999).

B. Analysis of Ruling 1 — Rents from Real Property Under IRC § 856(d)

1. Definition of Rents from Real Property. Section 856(d)(1) of the Code defines "rents from real property" for purposes of the 75% and 95% gross income tests. Subject to certain exclusions, the term includes (A) rents from interests in real property, (B) charges for services customarily furnished or rendered in connection with the rental of real property, whether or not such charges are separately stated, and (C) rent attributable to personal property leased in connection with real property, to the extent the rent attributable to personal property does not exceed 15% of the total rent for the taxable year attributable to both the real and personal property.

Section 856(d)(2) of the Code excludes certain amounts from the definition of rents from real property. The exclusions relevant to this ruling request include:

(A) Rents based on net income or profits. Section 856(d)(2)(A) excludes from rents from real property any amount received or accrued, directly or indirectly, with respect to any real or personal property, if the determination of such amount depends in whole or in part on the income or profits derived by any person from such property. This exclusion is not implicated by the proposed intercompany leases, which provide for a fixed annual base rent of $18,700,000 with a fixed 2.5% annual escalator, without reference to the income or profits of Southgate TRS.

(B) Rents from related-party tenants. Section 856(d)(2)(B) excludes from rents from real property any amount received or accrued, directly or indirectly, from any person if the REIT owns, directly or indirectly, 10% or more of such person (by vote or value). Because Fairwater will own 100% of the outstanding stock of Southgate TRS, Southgate TRS is a "related party" within the meaning of this provision. However, as discussed below, Section 856(d)(8) provides an exception to this exclusion for rents received from a TRS.

(C) Impermissible tenant service income. Section 856(d)(2)(C) excludes from rents from real property any impermissible tenant service income (as defined in Section 856(d)(7)(C)(i)). This exclusion is addressed in connection with Ruling 3, below.

2. TRS Rent Exception Under IRC § 856(d)(8). Section 856(d)(8)(A) of the Code provides a critical exception to the related-party rent exclusion for rents received by a REIT from its TRS. Under this provision, amounts received by a REIT from a TRS shall not be excluded from "rents from real property" by reason of Section 856(d)(2)(B) — i.e., solely because the TRS is a related party — if the requirements of Section 856(d)(8)(B) are satisfied.

Section 856(d)(8)(B) requires that at least 90% of the leased space of the property must be leased to persons other than TRSs and related persons, and that the amounts paid by the TRS are substantially comparable to rents paid by non-related-party tenants for comparable space. Alternatively, under Section 856(d)(8)(A)(ii), if the TRS itself operates the space (rather than subleasing it to third parties), the rents are not excluded from rents from real property provided the rents are determined to be at arm's-length rates under Section 856(d)(7)(B).

In the present case, Southgate TRS will not sublease the TRS-operated spaces to third-party tenants. Rather, Southgate TRS will directly operate the food-and-beverage, parking management, and co-working-space businesses within those spaces. Accordingly, the relevant requirement is that the rents paid by Southgate TRS to Fairwater under the intercompany leases must be at arm's-length rates, as required by Section 856(d)(7)(B) of the Code. As demonstrated in the analysis below, this requirement is satisfied.

3. Arm's-Length Rent Requirement Under IRC § 856(d)(7)(B). Section 856(d)(7)(B) of the Code provides that rents received from a TRS shall be treated as rents from real property only if the rents are "substantially comparable to" the rents paid by other tenants of the REIT's property for comparable space, or, where the TRS is the sole tenant of the property (or the sole tenant of a particular component), the rents must reflect arm's-length rates as would be charged between unrelated parties in comparable transactions.

The purpose of the arm's-length requirement is to prevent a REIT from artificially inflating the rents charged to its TRS in order to shift income from the TRS (which is taxable at the corporate level) to the REIT (which deducts dividends paid and is generally not taxed at the entity level). The arm's-length standard ensures that the economic substance of the intercompany arrangement is consistent with market norms.

Fairwater has obtained an independent appraisal from Caldwell Valuation Group, LLC, dated August 30, 2025, to establish the arm's-length character of the proposed annual base rent of $18,700,000. The Caldwell Valuation Group appraisal was prepared by Mark E. Caldwell, MAI, SRA, a certified general real estate appraiser with over twenty-five years of experience in the valuation of commercial real estate, including mixed-use properties in the Mid-Atlantic and Southeast United States.

The appraisal employed multiple valuation methodologies, including the income capitalization approach, the sales comparison approach, and a direct market rent comparables analysis. The direct market rent comparables analysis identified and analyzed twenty-three (23) comparable lease transactions for food-and-beverage spaces, parking garage facilities, and co-working-space facilities in the Virginia, North Carolina, and Georgia markets. The comparable transactions were selected based on similarity of property type, quality, location, lease structure, and tenant profile. The analysis concluded that the proposed annual base rent of $18,700,000 falls within the range of rents that would be charged between unrelated parties for comparable spaces under comparable lease terms.

In addition to the base rent, the Caldwell Valuation Group appraisal examined the other material terms of the proposed intercompany leases — including the ten-year term, the 2.5% fixed annual escalator, the two five-year renewal options, and the triple-net structure — and concluded that each of these terms is consistent with prevailing market terms for comparable leases in the relevant geographic markets.

The Treasury Regulations do not prescribe a specific methodology for determining whether rents between a REIT and its TRS are at arm's-length rates. However, the Service has accepted independent appraisals and market comparables analyses as appropriate methods for establishing arm's-length rent in prior private letter rulings involving TRS leases. See, e.g., PLR 200504014 (Oct. 22, 2004); PLR 200151004 (Sept. 14, 2001). The methodology employed by Caldwell Valuation Group is consistent with these precedents and with the general principles for arm's-length pricing set forth in Section 482 of the Code and the Treasury Regulations thereunder, as applied by analogy to the TRS rent context.

4. Conclusion — Ruling 1. Based on the foregoing analysis, the rents to be received by Fairwater from Southgate TRS under the intercompany leases satisfy the arm's-length requirement of Section 856(d)(7)(B) of the Code. Because the rents are at arm's-length rates, the exception provided by Section 856(d)(8) of the Code applies, and the rents are not excluded from "rents from real property" under Section 856(d)(2)(B) by reason of Southgate TRS's status as a related party. Accordingly, the annual base rent of $18,700,000 (as escalated) payable by Southgate TRS to Fairwater under the intercompany leases will constitute "rents from real property" within the meaning of Section 856(d) of the Code and will qualify as income described in Section 856(c)(2)(C) and Section 856(c)(3)(B) of the Code for purposes of the 75% and 95% gross income tests, respectively.

C. Analysis of Ruling 2 — Asset Tests Under IRC § 856(c)(4)

1. The 20% TRS Asset Test — IRC § 856(c)(4)(B)(ii). Section 856(c)(4)(B)(ii) of the Code provides that not more than 20% of the value of a REIT's total assets may be represented by securities of one or more taxable REIT subsidiaries. This limitation was enacted as part of the REIT Improvement Act of 1999 and was subsequently amended by the Housing and Economic Recovery Act of 2008 (Public Law 110-289), which increased the threshold from 20% to 25%, and then by the Tax Cuts and Jobs Act of 2017 (Public Law 115-97), which reduced the threshold back to 20% effective for taxable years beginning after December 31, 2017. The purpose of the 20% limitation is to ensure that a REIT does not become, in substance, a holding company for taxable operating businesses conducted through TRS subsidiaries, which would be inconsistent with the fundamental requirement that a REIT derive its income primarily from passive real estate investments.

In the present case, the formation and capitalization of Southgate TRS will result in Fairwater holding TRS securities with a projected value of $147,000,000. Based on Fairwater's projected total assets of $8,030,000,000 following the Southgate Portfolio acquisition and the planned dispositions of existing assets, the TRS securities will represent approximately 1.83% of Fairwater's total assets:

$147,000,000 ÷ $8,030,000,000 = 1.83%

This ratio is substantially below the 20% statutory threshold. Fairwater has significant headroom under the 20% TRS asset test; even if Southgate TRS's asset value were to increase materially due to organic growth or additional capitalizations, Fairwater would remain well within the 20% limit. Fairwater represents that it will monitor its TRS asset ratio on a quarterly basis, as required by Section 856(c)(4) of the Code, and will take all actions necessary to ensure continued compliance.

The projected TRS asset value of $147,000,000 is slightly below the $148,000,000 non-qualifying asset allocation set forth in the Caldwell Valuation Group appraisal. The $1,000,000 difference reflects certain working-capital items — specifically, prepaid expenses and security deposits associated with the food-and-beverage and co-working-space operations — that will be retained by Thornfield at the closing of the Southgate Portfolio acquisition and will not be transferred to Southgate TRS. After adjusting for these retained items, the net asset value of Southgate TRS at the time of capitalization is projected to be $147,000,000.

2. The 75% Asset Test — IRC § 856(c)(4)(A). Section 856(c)(4)(A) of the Code requires that at least 75% of the value of a REIT's total assets at the close of each calendar quarter consist of real estate assets (as defined in Section 856(c)(5)(B)), cash and cash items (including receivables), and Government securities. Real estate assets include interests in real property, interests in mortgages on real property, and shares (or transferable certificates of beneficial interest) in other qualifying REITs.

Following the proposed acquisition of the Southgate Portfolio and the planned dispositions of existing assets, Fairwater's real estate assets are projected to be $6,580,000,000 out of total assets of $8,030,000,000, representing 81.9% of total assets:

$6,580,000,000 ÷ $8,030,000,000 = 81.9%

This ratio exceeds the 75% statutory threshold by a comfortable margin. The $6,580,000,000 figure includes the value of the qualifying real estate components of the Southgate Portfolio ($664,000,000) as well as Fairwater's existing real estate assets (net of the $602,000,000 in planned dispositions).

Fairwater notes that the planned dispositions of $602,000,000 in existing assets are part of its ongoing capital recycling strategy and are not being undertaken solely for the purpose of satisfying the 75% asset test. The properties identified for disposition are non-core assets that no longer align with Fairwater's investment strategy, and the disposition program was initiated prior to and independently of the Southgate Portfolio acquisition.

3. The 25% / 5% / 10% Tests. In addition to the 75% asset test and the 20% TRS asset test, Section 856(c)(4)(B) of the Code imposes the following related asset tests:

25% Aggregate Securities Test (Section 856(c)(4)(B)(i)). Not more than 25% of the value of a REIT's total assets may be represented by securities (including TRS securities) other than those described in Section 856(c)(4)(A) (i.e., real estate assets, cash, and Government securities). Because Southgate TRS securities of $147,000,000 represent only 1.83% of Fairwater's projected total assets, and because Fairwater's other non-qualifying securities holdings are de minimis, the 25% aggregate test is comfortably satisfied.

5% Single-Issuer Test (Section 856(c)(4)(B)(iii)(I)). A REIT may not hold securities of any one issuer (other than a TRS or a qualified REIT subsidiary) representing more than 5% of the va

PRIVATE LETTER RULING REQUEST
September 22, 2025
Filed Pursuant to Rev. Proc. 2025-1
SUBMITTED BY:
Calderwood & Harkness LLP 1750 K Street NW, Suite 900 Washington, DC 20006 Telephone: (202) 555-7400 Facsimile: (202) 555-7401
ON BEHALF OF:
Fairwater Real Estate Investment Trust EIN: 52-4718263 2400 Harbor Promenade, Suite 1100 Baltimore, MD 21202
ADDRESSED TO:
Associate Chief Counsel (Income Tax & Accounting) Internal Revenue Service, National Office 1111 Constitution Avenue NW Washington, DC 20224
Attention: Branch 2 — Financial Institutions & Products
Enclosures:
1. IRS Form 2848 (Power of Attorney and Declaration of Representative)
2. IRS User Fee Payment of $38,000 (Category 2 — Specific Issues, per Rev. Proc. 2025-1, Appendix A) via Ridgeline National Bank, N.A. check no. 00471826, payable to "United States Treasury"
3. Supporting Exhibits A through I, as described in Section IX herein
Authorized Representatives:
All communications regarding this ruling request should be directed to:
Sylvia Hartwell, Partner Calderwood & Harkness LLP 1750 K Street NW, Suite 900 Washington, DC 20006 Telephone: (202) 555-7400
Email: shartwell@calderwoodharkness.com
Right-click to update Table of Contents
I. INTRODUCTION
A. Purpose of the Request
Calderwood & Harkness LLP, as tax counsel to Fairwater Real Estate Investment Trust ("Fairwater" or "FREIT"), respectfully requests private letter rulings from the Internal Revenue Service ("IRS" or the "Service") regarding whether certain transactions undertaken in connection with Fairwater's proposed acquisition of a portfolio of eleven (11) mixed-use properties (collectively, the "Southgate Portfolio") from Thornfield Development Group, LLC ("Thornfield"), and the associated formation and capitalization of a taxable REIT subsidiary, Fairwater Southgate TRS, Inc. ("Southgate TRS"), will jeopardize Fairwater's continued qualification as a real estate investment trust ("REIT") under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code"). All references herein to the "Code" are to the Internal Revenue Code of 1986, as amended, and all references to "Treasury Regulations" or "Treas. Reg." are to the Treasury Regulations promulgated thereunder, unless otherwise indicated.
Fairwater is a publicly traded REIT listed on the New York Stock Exchange that has continuously qualified as a REIT since its initial election effective for the taxable year ended December 31, 2009. In connection with its proposed acquisition of the Southgate Portfolio, Fairwater seeks assurance from the Service that three specific aspects of the proposed transaction structure will not adversely affect its REIT status. The three specific rulings requested relate to (1) the treatment of rents received from Southgate TRS under intercompany leases as "rents from real property" within the meaning of Section 856(d) of the Code, (2) the effect of the formation and capitalization of Southgate TRS on the asset tests set forth in Section 856(c)(4) of the Code, and (3) the treatment of certain tenant improvement allowances funded by Fairwater for third-party retail tenants in the Southgate Portfolio under the impermissible tenant service income rules of Section 856(d)(7)(C)(i) of the Code.
The three rulings requested are described in detail in Section V of this request, and the factual and legal bases supporting each requested ruling are set forth in Sections III, IV, and VI, respectively.
B. Procedural Compliance
This ruling request is submitted in accordance with Rev. Proc. 2025-1, which sets forth the procedures for requesting private letter rulings from the IRS National Office. The following procedural requirements have been satisfied:
1. User Fee. The required user fee of $38,000 (Category 2 — Specific Issues, per Rev. Proc. 2025-1, Appendix A) is enclosed with this request. Payment is made by check drawn on Ridgeline National Bank, N.A., check no. 00471826, in the amount of $38,000, payable to "United States Treasury." A copy of the check is attached hereto as Exhibit B.
2. Power of Attorney. IRS Form 2848 (Power of Attorney and Declaration of Representative) is enclosed as Exhibit A, designating Sylvia Hartwell (PTIN: P01882447) and Garrett Simmons (PTIN: P02094518) of Calderwood & Harkness LLP as the authorized representatives of Fairwater Real Estate Investment Trust with respect to this ruling request and all matters related thereto. The Form 2848 was executed on September 19, 2025, by Jonathan M. Hirota, Vice President, Tax, on behalf of Fairwater, in his capacity as a duly authorized officer of the trust.
3. Supporting Exhibits. The supporting exhibits listed in Section IX herein are enclosed with this request, including certified copies of Fairwater's Articles of Trust, an organizational chart of Fairwater's current and proposed subsidiary structure, a summary of the Southgate Portfolio properties, the executive summary of the independent appraisal supporting the arm's-length rent determination, the form of the proposed intercompany lease, pro forma REIT qualification metrics, and relevant excerpts from the Purchase and Sale Agreement between Fairwater and Thornfield.
4. Communications. All communications from the Service regarding this ruling request should be directed to Sylvia Hartwell at the address set forth on the cover page of this request. Ms. Hartwell is authorized to receive all correspondence, participate in all conferences, and take all actions necessary in connection with this request on behalf of Fairwater.
C. Confidentiality Notice
This ruling request contains "return information" within the meaning of Section 6103 of the Code and is submitted in confidence to the Internal Revenue Service. Fairwater hereby consents to contact by the assigned IRS branch attorneys and other Service personnel with respect to this request and the matters described herein.
Fairwater does not consent to the public disclosure of this ruling request or any private letter ruling issued in response hereto, except in the redacted form published by the Service pursuant to Section 6110 of the Code. Fairwater reserves the right to submit a statement identifying information that it believes should be deleted from any published version of a ruling issued in connection with this request, in accordance with Section 6110(c) of the Code and Rev. Proc. 2025-1.
II. STATEMENT OF FACTS
A. Description of the Taxpayer — Fairwater Real Estate Investment Trust
1. Entity Information. Fairwater Real Estate Investment Trust is a Maryland real estate investment trust organized under the laws of the State of Maryland. The following summarizes Fairwater's key organizational information:
• Full Legal Name: Fairwater Real Estate Investment Trust
• Entity Type: Maryland real estate investment trust
• Employer Identification Number (EIN): 52-4718263
• Headquarters: 2400 Harbor Promenade, Suite 1100, Baltimore, MD 21202
• Registered Agent: Capitol Registered Agents, Inc., 7 Saint Paul Street, Suite 820, Baltimore, MD 21202
• Public Listing: Fairwater's common shares of beneficial interest are listed and traded on the New York Stock Exchange ("NYSE") under the ticker symbol "FREIT."
• Approximate Market Capitalization: As of September 30, 2025, Fairwater's approximate market capitalization is $4.37 billion, based on the closing price of its common shares on the NYSE.
Fairwater's Articles of Trust, as amended and restated, are governed by the Maryland REIT Law, Title 8 of the Corporations and Associations Article of the Annotated Code of Maryland. A certified copy of the Articles of Trust is attached hereto as Exhibit C.
2. REIT Status History. Fairwater elected REIT status effective for its taxable year ended December 31, 2009, by filing a timely federal income tax return on IRS Form 1120-REIT for that taxable year in which it affirmatively elected to be treated as a real estate investment trust under Subchapter M, Part II of the Code. Since that initial election, Fairwater has continuously qualified as a REIT under Sections 856 through 860 of the Code for every taxable year through and including its most recent completed taxable year ended December 31, 2024. At no point during this period has Fairwater failed to satisfy any of the organizational requirements, income tests, asset tests, or distribution requirements applicable to REITs under the Code.
Fairwater's independent auditor and tax compliance advisor is Gresham Lowell CPAs LLP, located at 100 Light Street, Suite 2000, Baltimore, MD 21202. The engagement partner responsible for Fairwater's REIT compliance matters is Nolan S. Carruthers, CPA. Gresham Lowell CPAs LLP has issued unqualified opinions on Fairwater's financial statements for each fiscal year since Fairwater's REIT election, and has separately confirmed Fairwater's compliance with the REIT qualification requirements on an annual basis as part of its tax compliance engagement.
3. Business Overview. Fairwater's primary business consists of the ownership, operation, acquisition, development, and management of Class-A office, retail, and mixed-use properties across the Mid-Atlantic and Southeast regions of the United States. Fairwater is among the leading REITs in the Mid-Atlantic region, with a diversified portfolio spanning multiple states and property types.
As of the date of this ruling request, Fairwater's portfolio consists of ninety-four (94) properties totaling approximately 18.6 million rentable square feet. These properties include Class-A office buildings, retail centers, and mixed-use developments located in Maryland, Virginia, the District of Columbia, North Carolina, South Carolina, and Georgia. Fairwater's total assets as reported in its most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission for the fiscal year ended December 31, 2024, were approximately $7.82 billion.
The following individuals serve as key officers of Fairwater:
Fairwater's investment strategy focuses on acquiring and developing high-quality, well-located mixed-use properties in urban and suburban markets with strong demographic fundamentals, including population growth, employment growth, and favorable income profiles. Fairwater typically holds its properties for long-term investment and derives substantially all of its revenue from rents under long-term leases with creditworthy commercial and residential tenants.
4. Current REIT Qualification Metrics (Pre-Acquisition). For its most recently completed taxable year ended December 31, 2024, Fairwater satisfied all applicable REIT qualification requirements under the Code, including the following:
Distribution Requirement (IRC § 857(a)(1)). Fairwater distributed approximately 92.7% of its REIT taxable income (as defined in Section 857(b)(2) of the Code, determined without regard to the deduction for dividends paid and excluding any net capital gain) for the taxable year ended December 31, 2024. This distribution ratio exceeds the statutory minimum of 90% required under Section 857(a)(1) of the Code.
75% Asset Test (IRC § 856(c)(4)(A)). At the close of each calendar quarter during the taxable year ended December 31, 2024, at least 75% of the value of Fairwater's total assets consisted of real estate assets (as defined in Section 856(c)(5)(B) of the Code), cash and cash items (including receivables), and Government securities.
25% Asset Test and Related Tests (IRC § 856(c)(4)(B)). Fairwater satisfied the 25% aggregate securities test, the 5% single-issuer test, and the 10% securities-value test set forth in Section 856(c)(4)(B) of the Code at the close of each calendar quarter during the taxable year ended December 31, 2024.
20% TRS Asset Test (IRC § 856(c)(4)(B)(ii)). At the close of each calendar quarter during the taxable year ended December 31, 2024, the value of Fairwater's securities of taxable REIT subsidiaries did not exceed 20% of the value of Fairwater's total assets.
75% Gross Income Test (IRC § 856(c)(2)). For the taxable year ended December 31, 2024, at least 75% of Fairwater's gross income (excluding gross income from prohibited transactions as defined in Section 857(b)(6) of the Code) was derived from sources enumerated in Section 856(c)(2) of the Code, including rents from real property, interest on obligations secured by mortgages on real property, and gain from the sale or other disposition of real property.
95% Gross Income Test (IRC § 856(c)(3)). For the taxable year ended December 31, 2024, at least 95% of Fairwater's gross income (excluding gross income from prohibited transactions) was derived from sources enumerated in Section 856(c)(3) of the Code, which includes all items qualifying under the 75% gross income test plus dividends, interest, and gain from the sale or other disposition of stock or securities.
Fairwater has satisfied each of the foregoing tests for every taxable year since its initial REIT election effective December 31, 2009.
B. Description of the Counterparty — Thornfield Development Group, LLC
The seller of the Southgate Portfolio is Thornfield Development Group, LLC ("Thornfield"), a Delaware limited liability company. The following summarizes Thornfield's key organizational information:
• Full Legal Name: Thornfield Development Group, LLC
• Entity Type: Delaware limited liability company, classified as a partnership for federal income tax purposes
• Employer Identification Number (EIN): 83-2956104
• Principal Office: 900 Peachtree Center Avenue NE, Suite 2200, Atlanta, GA 30309
• Managing Member: Rowan Capital Partners, LP, a Delaware limited partnership
• Key Principal: Calvin J. Murchison, Founder and Managing Partner of Rowan Capital Partners, LP
Rowan Capital Partners, LP holds an 87.5% equity interest in Thornfield, with the remaining 12.5% equity interest held by various minority members who are passive investors in the Southgate Portfolio. Thornfield developed or acquired the eleven Southgate Portfolio properties over a period of approximately twelve years and has operated the properties since their respective dates of acquisition or completion of construction.
Thornfield's outside counsel for the proposed transaction is Pemberton Locke & Avery LLP, located at 191 Peachtree Street NE, Suite 4600, Atlanta, GA 30303. The lead partner at Pemberton Locke & Avery LLP advising Thornfield on the transaction is Rachel D. Whitford.
Fairwater and Thornfield are unrelated parties. No officer, director, trustee, or beneficial owner of more than five percent of Fairwater's shares of beneficial interest holds any direct or indirect equity interest in Thornfield, Rowan Capital Partners, LP, or any of Thornfield's other members. Similarly, no member, officer, or principal of Thornfield or Rowan Capital Partners, LP holds any direct or indirect equity interest in Fairwater. The proposed acquisition was negotiated at arm's length between Fairwater and Thornfield through their respective financial and legal advisors.
C. The Proposed Transaction — Acquisition of the Southgate Portfolio
1. Purchase and Sale Agreement. On August 1, 2025, Fairwater and Thornfield executed a Purchase and Sale Agreement (the "PSA") pursuant to which Fairwater has agreed to acquire fee simple title to all eleven (11) properties comprising the Southgate Portfolio. The aggregate purchase price under the PSA is Eight Hundred Twelve Million Dollars ($812,000,000), subject to customary prorations and adjustments at closing. The PSA is the product of extensive arm's-length negotiations between Fairwater and Thornfield, assisted by their respective financial and legal advisors.
The Southgate Portfolio consists of eleven (11) mixed-use properties with retail, office, and residential components located across the states of Virginia, North Carolina, and Georgia. The portfolio encompasses a total of approximately 3.1 million rentable square feet of commercial and residential space. The properties are generally Class-A or Class-B+ quality developments situated in established urban and suburban mixed-use corridors with strong demographic profiles and favorable long-term demand characteristics.
Mercer Strauss & Co., LLC, an independent investment banking firm located at 399 Park Avenue, 22nd Floor, New York, NY 10022, is serving as financial advisor to Fairwater in connection with the acquisition of the Southgate Portfolio. The lead banker for Mercer Strauss & Co., LLC on this engagement is Ian K. Padilla & Ostrander LLP, Managing Director. Mercer Strauss & Co., LLC has provided Fairwater's Board of Trustees with financial analysis and a fairness opinion regarding the aggregate purchase price of the Southgate Portfolio.
The acquisition is expected to be financed through a combination of borrowings under Fairwater's existing $1.5 billion unsecured revolving credit facility and proceeds from the planned disposition of certain existing portfolio assets. The administrative agent and lead lender under Fairwater's revolving credit facility is Ridgeline National Bank, N.A., located at 227 West Trade Street, Charlotte, NC 28202. The relationship manager for Fairwater at Ridgeline National Bank, N.A. is Patricia F. Langdon. Ridgeline National Bank, N.A. has indicated its willingness to fund the acquisition draw under the existing facility, subject to customary conditions precedent.
Title insurance and escrow services for the acquisition are being provided by Whitecliff Title & Escrow Company, located at 1515 Market Street, Suite 700, Philadelphia, PA 19102. Whitecliff Title & Escrow Company will issue owner's title insurance policies for each of the eleven Southgate Portfolio properties in favor of Fairwater.
The closing of the acquisition is expected to occur during the first quarter of 2026 (Q1 2026), subject to the satisfaction of customary conditions precedent set forth in the PSA, including receipt of a favorable private letter ruling from the Service addressing the issues described in this request. The PSA provides that Fairwater may terminate the agreement without liability if Fairwater has not received a favorable ruling from the Service by March 31, 2026.
Relevant excerpts from the PSA are attached hereto as Exhibit I.
2. Southgate Portfolio — Property Detail. The following table sets forth a detailed summary of each of the eleven (11) properties comprising the Southgate Portfolio, including property name, location, property type, approximate rentable square footage, and allocated purchase price:
A detailed property-by-property summary, including descriptions of the physical improvements, occupancy rates, lease roll schedules, and tenant rosters, is attached hereto as Exhibit E. The properties are geographically diversified across seven metropolitan statistical areas in three states (Virginia, North Carolina, and Georgia), reducing concentration risk and providing Fairwater with exposure to attractive growth markets in the Southeast.
3. Asset Allocation. Based on the independent appraisal conducted by Caldwell Valuation Group, LLC, and the analysis performed by Fairwater's internal tax and accounting teams, the aggregate purchase price of the Southgate Portfolio has been allocated between qualifying and non-qualifying assets as follows:
Qualifying Real Estate Assets — $664,000,000 (approximately 81.8% of total portfolio value). This amount is attributable to the office and retail components of the Southgate Portfolio properties that will generate rents from real property within the meaning of Section 856(d) of the Code. These components consist of conventional office space leased to commercial tenants under long-term leases, retail space leased to national and regional retailers, and residential units leased to individual tenants. The rents derived from these components will be directly received by Fairwater and will constitute qualifying income for purposes of the 75% and 95% gross income tests.
Non-Qualifying Operating Business Assets — $148,000,000 (approximately 18.2% of total portfolio value). This amount is attributable to three categories of ancillary operating businesses that generate income not qualifying as "rents from real property" under Section 856(d) of the Code:
(a) Food-and-Beverage Operations. Several of the Southgate Portfolio properties include ground-floor restaurant and café spaces that are currently operated by Thornfield through managed food-and-beverage operators. The income derived from these operations is not rent from real property because it represents revenue from the provision of food services rather than compensation for the use of real property.
(b) Parking Management Operations. Certain properties in the Southgate Portfolio include structured parking garages that generate revenue from hourly, daily, and monthly parking fees charged to building tenants, their employees, and the general public. To the extent that Fairwater were to directly operate these parking facilities and charge fees based on usage rather than fixed rent, such income would not constitute qualifying REIT income.
(c) Co-Working-Space Operations. The Ashford Place property in Charlotte, North Carolina, includes a co-working space component that provides flexible office suites, shared conference rooms, and administrative support services to short-term occupants. The revenue generated from co-working-space operations typically includes charges for services furnished to occupants that go beyond the mere use or occupancy of real property, and therefore may not qualify as rents from real property.
To preserve Fairwater's REIT qualification, these three categories of non-qualifying operating business assets and the associated income streams will be segregated and housed within a newly formed taxable REIT subsidiary, Fairwater Southgate TRS, Inc., as described in Section II.D below.
D. Proposed Formation and Capitalization of Fairwater Southgate TRS, Inc.
1. Entity Formation. In connection with the acquisition of the Southgate Portfolio, Fairwater proposes to form Fairwater Southgate TRS, Inc. ("Southgate TRS") as a Maryland corporation organized under the Maryland General Corporation Law. Following its incorporation, Southgate TRS will jointly elect with Fairwater to be treated as a taxable REIT subsidiary under Section 856(l) of the Code. The joint election will be filed on a timely basis in accordance with the requirements of Section 856(l)(1) of the Code and Treas. Reg. § 1.856-1.
The purpose of Southgate TRS is to hold and operate the non-qualifying income-producing components of the Southgate Portfolio — specifically, the food-and-beverage operations, parking management operations, and co-working-space operations — that would otherwise produce income not qualifying as "rents from real property" under Section 856(d) of the Code. By conducting these activities through Southgate TRS, Fairwater will ensure that the non-qualifying income generated by these activities is taxed at the corporate level within Southgate TRS and does not adversely affect Fairwater's satisfaction of the REIT income tests.
An organizational chart depicting Fairwater's current subsidiary structure and the proposed formation of Southgate TRS is attached hereto as Exhibit D.
2. Projected TRS Financials. Following the closing of the Southgate Portfolio acquisition and the transfer of the non-qualifying operating business assets to Southgate TRS, the projected financial profile of Southgate TRS is as follows:
• Projected TRS Asset Value (post-restructuring): $147,000,000. This figure is slightly below the $148,000,000 non-qualifying asset allocation set forth in the Caldwell Valuation Group appraisal, reflecting certain working-capital adjustments that will be retained by Thornfield at closing rather than transferred to Fairwater. Specifically, Thornfield will retain approximately $1,000,000 in prepaid expenses and deposits associated with the operating businesses that will not transfer to Southgate TRS at closing.
• Projected Annual Gross Revenue: $38,400,000. This figure represents the aggregate projected annual gross revenue from the food-and-beverage operations, parking management operations, and co-working-space operations to be conducted by Southgate TRS, based on historical financial performance of these operations for the trailing twelve months ended June 30, 2025, adjusted for anticipated rent-up of certain recently completed spaces and contractual rate escalations.
Southgate TRS will be subject to federal corporate income tax on its taxable income at the applicable corporate tax rate. The income generated by Southgate TRS will not flow through to Fairwater for purposes of the REIT income tests; rather, Fairwater will receive income from Southgate TRS only in the form of rents under the intercompany leases (discussed below) and, if applicable, dividends declared by Southgate TRS.
3. Intercompany Lease Structure. Following the closing of the acquisition, Fairwater (as fee owner and lessor) will enter into intercompany leases with Southgate TRS (as lessee) with respect to the real property underlying the TRS-operated spaces within the Southgate Portfolio properties. The material terms of the proposed intercompany leases are as follows:
• Lessor: Fairwater Real Estate Investment Trust
• Lessee: Fairwater Southgate TRS, Inc.
• Leased Premises: The specific portions of the Southgate Portfolio properties in which the food-and-beverage, parking management, and co-working-space operations will be conducted, as identified and demised on the floor plans attached to each intercompany lease
• Annual Base Rent: $18,700,000 per annum, payable in equal monthly installments of approximately $1,558,333
• Lease Term: Ten (10) years, commencing on the closing date of the Southgate Portfolio acquisition
• Renewal Options: Two (2) consecutive five (5)-year renewal options, exercisable at the option of Southgate TRS upon written notice to Fairwater not less than twelve (12) months prior to the expiration of the then-current term
• Rent Escalator: The annual base rent shall increase by a fixed rate of 2.5% per annum on each anniversary of the commencement date
• Lease Structure: Triple-net (NNN). Southgate TRS, as lessee, shall be responsible for all operating expenses, insurance premiums, and real property taxes attributable to the TRS-operated spaces, including without limitation utilities, maintenance and repair costs, common area maintenance charges, and property management fees.
The annual base rent of $18,700,000 was determined to constitute arm's-length rent by an independent appraisal performed by Caldwell Valuation Group, LLC, an independent real estate valuation firm located at 4200 Dominion Boulevard, Suite 310, Glen Allen, VA 23060. The Caldwell Valuation Group appraisal, dated August 30, 2025, analyzed comparable lease transactions for similar mixed-use property components in the Virginia, North Carolina, and Georgia markets, and concluded that the proposed annual base rent is consistent with the rents that would be charged between unrelated parties in comparable arm's-length transactions. An executive summary of the Caldwell Valuation Group appraisal is attached hereto as Exhibit F, and the form of the proposed intercompany lease is attached hereto as Exhibit G.
4. Tenant Improvement Allowances. In addition to the intercompany leases with Southgate TRS, Fairwater, in its capacity as fee owner of the Southgate Portfolio properties, will fund certain tenant improvement allowances ("TIAs") for the benefit of third-party retail tenants occupying space in the Southgate Portfolio. These TIAs are provided directly to third-party tenants (not to Southgate TRS) and are designed to facilitate the build-out and customization of raw or second-generation retail space to meet the specific operational needs of the incoming tenants.
The tenant improvement allowances contemplated in connection with the Southgate Portfolio are customary and standard in the commercial real estate industry, particularly for Class-A mixed-use properties of the type included in the Southgate Portfolio. The nature and amount of these TIAs are consistent with the tenant improvement allowances that Fairwater routinely provides to third-party tenants across its existing ninety-four (94)-property portfolio. Historically, Fairwater has funded TIAs ranging from $30 to $85 per rentable square foot, depending on the property type, market conditions, and the creditworthiness and lease term of the applicable tenant. The TIAs associated with the Southgate Portfolio are expected to fall within this customary range.
The construction and build-out work funded by the tenant improvement allowances will be performed by independent contractors retained by Fairwater or, in certain cases, by the tenants themselves using the TIA funds. Fairwater will not itself furnish or render construction services, design services, or any other services to the tenants in connection with the tenant improvement allowances. Fairwater's role is limited to funding the allowances as a component of the overall lease economics negotiated with each third-party tenant.
E. Projected Post-Acquisition REIT Qualification Metrics
The following sets forth Fairwater's projected REIT qualification metrics after giving effect to the proposed acquisition of the Southgate Portfolio and the formation and capitalization of Southgate TRS:
Total Assets:
The planned dispositions consist of the sale of certain non-core properties in Fairwater's existing portfolio that have been identified for recycling as part of Fairwater's capital allocation strategy. These dispositions are expected to close prior to or contemporaneously with the closing of the Southgate Portfolio acquisition.
Asset Tests:
Income Tests:
Distribution Requirement: Fairwater distributed 92.7% of its REIT taxable income for the taxable year ended December 31, 2024, exceeding the 90% minimum distribution requirement under Section 857(a)(1) of the Code. Fairwater intends to continue distributing at least 90% of its REIT taxable income for all future taxable years.
A detailed pro forma REIT qualification metrics schedule is attached hereto as Exhibit H.
III. REPRESENTATIONS
Fairwater hereby makes the following representations in support of this ruling request. Fairwater understands that the rulings issued by the Service in response to this request will be based upon the accuracy and completeness of these representations, and that any material misstatement or omission may render any ruling inapplicable or subject to revocation.
A. General Representations
1. Fairwater has qualified as a real estate investment trust under Sections 856 through 860 of the Code for every taxable year since its initial REIT election, effective for the taxable year ended December 31, 2009, and intends to continue qualifying as a REIT for all future taxable years.
2. All facts set forth in this ruling request are true, correct, and complete to the best of the knowledge and belief of Fairwater and its authorized officers. Fairwater is not aware of any material fact or circumstance that has been omitted from this request that could affect the analysis or conclusions set forth herein.
3. The proposed transactions described herein — including the acquisition of the Southgate Portfolio, the formation and capitalization of Southgate TRS, the execution of the intercompany leases, and the provision of tenant improvement allowances — are being undertaken for bona fide business purposes and are not designed, in whole or in part, to circumvent, avoid, or evade the REIT qualification requirements under the Code or the Treasury Regulations promulgated thereunder.
B. Representations Regarding the Southgate Portfolio Acquisition
4. The aggregate purchase price of $812,000,000 for the Southgate Portfolio was negotiated at arm's length between unrelated parties (Fairwater and Thornfield). No officer, director, trustee, or beneficial owner of more than five percent (5%) of Fairwater's shares of beneficial interest holds any direct or indirect ownership interest in Thornfield, Rowan Capital Partners, LP, or any other entity affiliated with Thornfield. Similarly, no member, officer, or principal of Thornfield or Rowan Capital Partners, LP holds any direct or indirect ownership interest in Fairwater.
5. The allocation of the aggregate purchase price between qualifying real estate assets ($664,000,000) and non-qualifying operating business assets ($148,000,000) was determined based on an independent appraisal conducted by Caldwell Valuation Group, LLC, and reflects the fair market values of the respective asset categories as of the date of the appraisal. The allocation was not made for the purpose of artificially inflating or deflating the value of any asset category.
C. Representations Regarding Southgate TRS
6. Fairwater and Southgate TRS will timely file a joint election under Section 856(l) of the Code for Southgate TRS to be treated as a taxable REIT subsidiary for federal income tax purposes. The joint election will be filed in the manner prescribed by the Code, the Treasury Regulations, and applicable IRS guidance.
7. Southgate TRS will be a wholly owned subsidiary of Fairwater. Fairwater will own one hundred percent (100%) of the issued and outstanding shares of common stock of Southgate TRS. No other person or entity will hold any equity interest in Southgate TRS.
8. The projected TRS asset value of $147,000,000 will represent approximately 1.83% of Fairwater's projected total assets of $8,030,000,000 at the close of the calendar quarter in which the acquisition closes. This ratio is substantially below the 20% limitation imposed by Section 856(c)(4)(B)(ii) of the Code. Fairwater intends to monitor the TRS asset ratio on a quarterly basis to ensure continued compliance with the 20% limitation.
9. Southgate TRS will operate the food-and-beverage, parking management, and co-working-space components of the Southgate Portfolio properties. Southgate TRS will not engage in any activities beyond the operation of these ancillary businesses and activities reasonably incidental thereto, unless Fairwater determines that such additional activities are consistent with maintaining Fairwater's REIT status.
D. Representations Regarding the Intercompany Leases
10. The annual base rent of $18,700,000 under the intercompany leases between Fairwater and Southgate TRS was determined to be arm's-length rent by an independent appraisal performed by Caldwell Valuation Group, LLC, dated August 30, 2025. The appraisal was conducted in accordance with generally accepted valuation standards and analyzed comparable lease transactions for similar property types in the relevant geographic markets (Virginia, North Carolina, and Georgia).
11. The intercompany leases will be structured as triple-net (NNN) leases with an initial term of ten (10) years, two (2) consecutive five (5)-year renewal options, and a fixed annual rent escalator of 2.5%. Under the triple-net structure, Southgate TRS will be solely responsible for all operating expenses, insurance premiums, and real property taxes attributable to the TRS-operated spaces within the Southgate Portfolio properties.
12. Fairwater will not furnish or render services to the tenants, customers, or occupants of the TRS-operated spaces, other than through Southgate TRS or through independent contractors from whom Fairwater derives no income. Any services provided in connection with the food-and-beverage, parking management, or co-working-space operations will be performed by employees of Southgate TRS or by independent contractors engaged by Southgate TRS, and not by Fairwater or its employees.
E. Representations Regarding Tenant Improvement Allowances
13. The tenant improvement allowances funded by Fairwater and provided to third-party retail tenants in the Southgate Portfolio are customary in the commercial real estate market and are consistent with industry practice for Class-A mixed-use properties. The amount and nature of the tenant improvement allowances are comparable to those provided by Fairwater to third-party tenants across its existing ninety-four (94)-property portfolio.
14. The tenant improvement allowances do not constitute compensation for services furnished or rendered by Fairwater to tenants. The allowances represent capital contributions by the landlord (Fairwater) to the build-out and improvement of the leased premises, which become a permanent part of the real property owned by Fairwater. The allowances are negotiated as a component of the overall lease economics and are reflected in the rental rates charged to the applicable tenants.
15. Fairwater will not manage or operate the spaces to which tenant improvement allowances relate in a manner that would give rise to impermissible tenant service income within the meaning of Section 856(d)(7)(C)(i) of the Code. The construction and build-out of tenant improvements will be performed by independent contractors retained by Fairwater or by the tenants themselves. Fairwater will not perform construction, design, or other services for tenants in connection with the tenant improvement allowances.
F. Representations Regarding REIT Qualification Tests
16. After giving effect to the proposed acquisition of the Southgate Portfolio and the formation and capitalization of Southgate TRS, Fairwater will satisfy each of the following REIT qualification tests:
(a) The 75% asset test under Section 856(c)(4)(A) of the Code (projected result: 81.9%, exceeding the 75% threshold);
(b) The 20% TRS asset test under Section 856(c)(4)(B)(ii) of the Code (projected result: 1.83%, well below the 20% threshold);
(c) The 75% gross income test under Section 856(c)(2) of the Code (projected result: 80.3%, exceeding the 75% threshold);
(d) The 95% gross income test under Section 856(c)(3) of the Code (projected result: 97.1%, exceeding the 95% threshold); and
(e) The distribution requirement under Section 857(a)(1) of the Code (Fairwater distributed 92.7% of REIT taxable income for the taxable year ended December 31, 2024, and intends to continue distributing at least 90% for all future taxable years).
17. Fairwater intends to continue distributing at least 90% of its REIT taxable income (as defined in Section 857(b)(2) of the Code, determined without regard to the deduction for dividends paid and excluding any net capital gain) for all future taxable years, in compliance with the distribution requirement of Section 857(a)(1) of the Code.
IV. RULINGS REQUESTED
Fairwater respectfully requests the following three (3) private letter rulings from the Internal Revenue Service:
A. Ruling 1 — Rents from Real Property
Fairwater requests a ruling that the rents received by Fairwater from Fairwater Southgate TRS, Inc. ("Southgate TRS") under the intercompany leases for the use of real property within the Southgate Portfolio properties will constitute "rents from real property" within the meaning of Section 856(d) of the Code, provided that such rents are determined to be at arm's-length rates as required by Section 856(d)(7)(B) of the Code, and as supported by the independent appraisal performed by Caldwell Valuation Group, LLC, dated August 30, 2025.
Specifically, Fairwater requests confirmation that the annual base rent of $18,700,000 payable by Southgate TRS to Fairwater under the proposed intercompany leases will not be excluded from "rents from real property" under Section 856(d)(2)(B) of the Code (relating to rents from related-party tenants) by reason of the exception for TRS rents provided in Section 856(d)(8) of the Code, and that such rents will qualify as income described in Section 856(c)(2)(C) and Section 856(c)(3)(B) of the Code for purposes of the 75% and 95% gross income tests, respectively.
B. Ruling 2 — Asset Tests
Fairwater requests a ruling that the formation and capitalization of Fairwater Southgate TRS, Inc. with projected assets of approximately $147,000,000 will not cause Fairwater to fail the 20% taxable REIT subsidiary asset test under Section 856(c)(4)(B)(ii) of the Code, nor will it cause Fairwater to fail the 75% asset test under Section 856(c)(4)(A) of the Code or the 25% aggregate securities test under Section 856(c)(4)(B)(i) of the Code.
Specifically, Fairwater requests confirmation that, based on Fairwater's projected total assets of $8,030,000,000, the inclusion of Southgate TRS securities valued at $147,000,000 in Fairwater's asset portfolio (representing approximately 1.83% of total assets) will not cause Fairwater to violate any of the asset tests prescribed by Section 856(c)(4) of the Code.
C. Ruling 3 — Tenant Improvement Allowances
Fairwater requests a ruling that certain tenant improvement allowances funded by Fairwater and provided to third-party retail tenants occupying space in the Southgate Portfolio properties will not be treated as "impermissible tenant service income" within the meaning of Section 856(d)(7)(C)(i) of the Code, and that the provision of such tenant improvement allowances will not cause any amounts received or accrued by Fairwater from the Southgate Portfolio properties to be disqualified as "rents from real property" under Section 856(d) of the Code.
Specifically, Fairwater requests confirmation that tenant improvement allowances representing capital expenditures for the build-out and improvement of retail space, funded by Fairwater as landlord and provided to unrelated third-party tenants, do not constitute "services furnished or rendered" to tenants for purposes of Section 856(d)(2)(C) and Section 856(d)(7)(C)(i) of the Code.
V. LEGAL ANALYSIS
A. Overview of REIT Qualification Requirements
The Internal Revenue Code provides a comprehensive framework for the taxation of real estate investment trusts in Sections 856 through 860. Congress enacted the REIT provisions to enable investors to pool their capital for investment in diversified real estate portfolios and to receive the economic benefits of direct real estate ownership — including current income and capital appreciation — without the burden of double taxation that ordinarily applies to corporate investment vehicles. The REIT provisions accomplish this objective by permitting a qualifying REIT to deduct dividends paid to its shareholders, thereby effectively eliminating the entity-level tax, provided the REIT satisfies a series of organizational, income, asset, and distribution requirements designed to ensure that the entity functions as a passive investment vehicle for real estate.
Organizational Requirements. Section 856(a) of the Code sets forth the organizational requirements for REIT status. A REIT must be managed by one or more trustees or directors, must have transferable shares or certificates of beneficial interest, must not be a financial institution or insurance company, and must have at least 100 beneficial owners (the "100-shareholder test"). Additionally, during the last half of each taxable year, not more than 50% in value of the REIT's outstanding stock may be owned, directly or indirectly, by or for five or fewer individuals (the "5/50 test" set forth in Section 856(a)(6) of the Code). Fairwater satisfies each of these organizational requirements and has done so for every taxable year since its initial REIT election.
Income Tests. Section 856(c)(2) of the Code requires that at least 75% of a REIT's gross income (excluding gross income from prohibited transactions) be derived from specified real estate sources, including rents from real property, interest on obligations secured by mortgages on real property, and gain from the sale or other disposition of real property (the "75% gross income test"). Section 856(c)(3) of the Code requires that at least 95% of a REIT's gross income (excluding gross income from prohibited transactions) be derived from the items qualifying under the 75% test plus dividends, interest, and gain from the sale or other disposition of stock or securities (the "95% gross income test").
Asset Tests. Section 856(c)(4) of the Code imposes a series of asset composition requirements that must be satisfied at the close of each calendar quarter. The principal asset tests include:
(a) The 75% asset test (Section 856(c)(4)(A)): At least 75% of the value of the REIT's total assets must consist of real estate assets, cash and cash items (including receivables), and Government securities.
(b) The 25% aggregate securities test (Section 856(c)(4)(B)(i)): Not more than 25% of the value of the REIT's total assets may be represented by securities (other than those described in Section 856(c)(4)(A)).
(c) The 20% TRS asset test (Section 856(c)(4)(B)(ii)): Not more than 20% of the value of the REIT's total assets may be represented by securities of one or more taxable REIT subsidiaries.
(d) The 5% asset test (Section 856(c)(4)(B)(iii)(I)): The REIT may not hold securities of any one issuer (other than a TRS or a qualified REIT subsidiary) representing more than 5% of the value of the REIT's total assets.
(e) The 10% securities-value test (Section 856(c)(4)(B)(iii)(II)): The REIT may not hold securities representing more than 10% of the total value of the outstanding securities of any one issuer (other than a TRS or a qualified REIT subsidiary).
Distribution Requirements. Section 857(a)(1) of the Code requires a REIT to distribute dividends (other than capital gain dividends) to its shareholders in an amount at least equal to 90% of its REIT taxable income (as defined in Section 857(b)(2), determined without regard to the deduction for dividends paid and excluding any net capital gain) for each taxable year.
Taxable REIT Subsidiaries. The REIT Improvement Act of 1999 (Public Law 106-170) added Section 856(l) to the Code, establishing the taxable REIT subsidiary (TRS) regime. The TRS provisions were enacted to provide REITs with greater operational flexibility by permitting them to conduct certain non-qualifying activities — such as the provision of services to tenants or the operation of ancillary businesses — through a separately incorporated subsidiary that is subject to regular corporate income tax. A TRS is defined as any corporation (other than a REIT) that jointly elects TRS status with the REIT and in which the REIT directly or indirectly owns stock. The TRS provisions balance operational flexibility with safeguards against abuse, including the 20% TRS asset limitation under Section 856(c)(4)(B)(ii) and the arm's-length rent requirement under Section 856(d)(7)(B) for rents received from a TRS.
The legislative history accompanying the REIT Improvement Act of 1999 reflects Congress's intent to allow REITs to compete more effectively with other real estate market participants while preserving the fundamental requirement that a REIT derive its income primarily from passive real estate investments. See H.R. Conf. Rep. No. 106-478, at 120–24 (1999); S. Rep. No. 106-201, at 56–58 (1999).
B. Analysis of Ruling 1 — Rents from Real Property Under IRC § 856(d)
1. Definition of Rents from Real Property. Section 856(d)(1) of the Code defines "rents from real property" for purposes of the 75% and 95% gross income tests. Subject to certain exclusions, the term includes (A) rents from interests in real property, (B) charges for services customarily furnished or rendered in connection with the rental of real property, whether or not such charges are separately stated, and (C) rent attributable to personal property leased in connection with real property, to the extent the rent attributable to personal property does not exceed 15% of the total rent for the taxable year attributable to both the real and personal property.
Section 856(d)(2) of the Code excludes certain amounts from the definition of rents from real property. The exclusions relevant to this ruling request include:
(A) Rents based on net income or profits. Section 856(d)(2)(A) excludes from rents from real property any amount received or accrued, directly or indirectly, with respect to any real or personal property, if the determination of such amount depends in whole or in part on the income or profits derived by any person from such property. This exclusion is not implicated by the proposed intercompany leases, which provide for a fixed annual base rent of $18,700,000 with a fixed 2.5% annual escalator, without reference to the income or profits of Southgate TRS.
(B) Rents from related-party tenants. Section 856(d)(2)(B) excludes from rents from real property any amount received or accrued, directly or indirectly, from any person if the REIT owns, directly or indirectly, 10% or more of such person (by vote or value). Because Fairwater will own 100% of the outstanding stock of Southgate TRS, Southgate TRS is a "related party" within the meaning of this provision. However, as discussed below, Section 856(d)(8) provides an exception to this exclusion for rents received from a TRS.
(C) Impermissible tenant service income. Section 856(d)(2)(C) excludes from rents from real property any impermissible tenant service income (as defined in Section 856(d)(7)(C)(i)). This exclusion is addressed in connection with Ruling 3, below.
2. TRS Rent Exception Under IRC § 856(d)(8). Section 856(d)(8)(A) of the Code provides a critical exception to the related-party rent exclusion for rents received by a REIT from its TRS. Under this provision, amounts received by a REIT from a TRS shall not be excluded from "rents from real property" by reason of Section 856(d)(2)(B) — i.e., solely because the TRS is a related party — if the requirements of Section 856(d)(8)(B) are satisfied.
Section 856(d)(8)(B) requires that at least 90% of the leased space of the property must be leased to persons other than TRSs and related persons, and that the amounts paid by the TRS are substantially comparable to rents paid by non-related-party tenants for comparable space. Alternatively, under Section 856(d)(8)(A)(ii), if the TRS itself operates the space (rather than subleasing it to third parties), the rents are not excluded from rents from real property provided the rents are determined to be at arm's-length rates under Section 856(d)(7)(B).
In the present case, Southgate TRS will not sublease the TRS-operated spaces to third-party tenants. Rather, Southgate TRS will directly operate the food-and-beverage, parking management, and co-working-space businesses within those spaces. Accordingly, the relevant requirement is that the rents paid by Southgate TRS to Fairwater under the intercompany leases must be at arm's-length rates, as required by Section 856(d)(7)(B) of the Code. As demonstrated in the analysis below, this requirement is satisfied.
3. Arm's-Length Rent Requirement Under IRC § 856(d)(7)(B). Section 856(d)(7)(B) of the Code provides that rents received from a TRS shall be treated as rents from real property only if the rents are "substantially comparable to" the rents paid by other tenants of the REIT's property for comparable space, or, where the TRS is the sole tenant of the property (or the sole tenant of a particular component), the rents must reflect arm's-length rates as would be charged between unrelated parties in comparable transactions.
The purpose of the arm's-length requirement is to prevent a REIT from artificially inflating the rents charged to its TRS in order to shift income from the TRS (which is taxable at the corporate level) to the REIT (which deducts dividends paid and is generally not taxed at the entity level). The arm's-length standard ensures that the economic substance of the intercompany arrangement is consistent with market norms.
Fairwater has obtained an independent appraisal from Caldwell Valuation Group, LLC, dated August 30, 2025, to establish the arm's-length character of the proposed annual base rent of $18,700,000. The Caldwell Valuation Group appraisal was prepared by Mark E. Caldwell, MAI, SRA, a certified general real estate appraiser with over twenty-five years of experience in the valuation of commercial real estate, including mixed-use properties in the Mid-Atlantic and Southeast United States.
The appraisal employed multiple valuation methodologies, including the income capitalization approach, the sales comparison approach, and a direct market rent comparables analysis. The direct market rent comparables analysis identified and analyzed twenty-three (23) comparable lease transactions for food-and-beverage spaces, parking garage facilities, and co-working-space facilities in the Virginia, North Carolina, and Georgia markets. The comparable transactions were selected based on similarity of property type, quality, location, lease structure, and tenant profile. The analysis concluded that the proposed annual base rent of $18,700,000 falls within the range of rents that would be charged between unrelated parties for comparable spaces under comparable lease terms.
In addition to the base rent, the Caldwell Valuation Group appraisal examined the other material terms of the proposed intercompany leases — including the ten-year term, the 2.5% fixed annual escalator, the two five-year renewal options, and the triple-net structure — and concluded that each of these terms is consistent with prevailing market terms for comparable leases in the relevant geographic markets.
The Treasury Regulations do not prescribe a specific methodology for determining whether rents between a REIT and its TRS are at arm's-length rates. However, the Service has accepted independent appraisals and market comparables analyses as appropriate methods for establishing arm's-length rent in prior private letter rulings involving TRS leases. See, e.g., PLR 200504014 (Oct. 22, 2004); PLR 200151004 (Sept. 14, 2001). The methodology employed by Caldwell Valuation Group is consistent with these precedents and with the general principles for arm's-length pricing set forth in Section 482 of the Code and the Treasury Regulations thereunder, as applied by analogy to the TRS rent context.
4. Conclusion — Ruling 1. Based on the foregoing analysis, the rents to be received by Fairwater from Southgate TRS under the intercompany leases satisfy the arm's-length requirement of Section 856(d)(7)(B) of the Code. Because the rents are at arm's-length rates, the exception provided by Section 856(d)(8) of the Code applies, and the rents are not excluded from "rents from real property" under Section 856(d)(2)(B) by reason of Southgate TRS's status as a related party. Accordingly, the annual base rent of $18,700,000 (as escalated) payable by Southgate TRS to Fairwater under the intercompany leases will constitute "rents from real property" within the meaning of Section 856(d) of the Code and will qualify as income described in Section 856(c)(2)(C) and Section 856(c)(3)(B) of the Code for purposes of the 75% and 95% gross income tests, respectively.
C. Analysis of Ruling 2 — Asset Tests Under IRC § 856(c)(4)
1. The 20% TRS Asset Test — IRC § 856(c)(4)(B)(ii). Section 856(c)(4)(B)(ii) of the Code provides that not more than 20% of the value of a REIT's total assets may be represented by securities of one or more taxable REIT subsidiaries. This limitation was enacted as part of the REIT Improvement Act of 1999 and was subsequently amended by the Housing and Economic Recovery Act of 2008 (Public Law 110-289), which increased the threshold from 20% to 25%, and then by the Tax Cuts and Jobs Act of 2017 (Public Law 115-97), which reduced the threshold back to 20% effective for taxable years beginning after December 31, 2017. The purpose of the 20% limitation is to ensure that a REIT does not become, in substance, a holding company for taxable operating businesses conducted through TRS subsidiaries, which would be inconsistent with the fundamental requirement that a REIT derive its income primarily from passive real estate investments.
In the present case, the formation and capitalization of Southgate TRS will result in Fairwater holding TRS securities with a projected value of $147,000,000. Based on Fairwater's projected total assets of $8,030,000,000 following the Southgate Portfolio acquisition and the planned dispositions of existing assets, the TRS securities will represent approximately 1.83% of Fairwater's total assets:
$147,000,000 ÷ $8,030,000,000 = 1.83%
This ratio is substantially below the 20% statutory threshold. Fairwater has significant headroom under the 20% TRS asset test; even if Southgate TRS's asset value were to increase materially due to organic growth or additional capitalizations, Fairwater would remain well within the 20% limit. Fairwater represents that it will monitor its TRS asset ratio on a quarterly basis, as required by Section 856(c)(4) of the Code, and will take all actions necessary to ensure continued compliance.
The projected TRS asset value of $147,000,000 is slightly below the $148,000,000 non-qualifying asset allocation set forth in the Caldwell Valuation Group appraisal. The $1,000,000 difference reflects certain working-capital items — specifically, prepaid expenses and security deposits associated with the food-and-beverage and co-working-space operations — that will be retained by Thornfield at the closing of the Southgate Portfolio acquisition and will not be transferred to Southgate TRS. After adjusting for these retained items, the net asset value of Southgate TRS at the time of capitalization is projected to be $147,000,000.
2. The 75% Asset Test — IRC § 856(c)(4)(A). Section 856(c)(4)(A) of the Code requires that at least 75% of the value of a REIT's total assets at the close of each calendar quarter consist of real estate assets (as defined in Section 856(c)(5)(B)), cash and cash items (including receivables), and Government securities. Real estate assets include interests in real property, interests in mortgages on real property, and shares (or transferable certificates of beneficial interest) in other qualifying REITs.
Following the proposed acquisition of the Southgate Portfolio and the planned dispositions of existing assets, Fairwater's real estate assets are projected to be $6,580,000,000 out of total assets of $8,030,000,000, representing 81.9% of total assets:
$6,580,000,000 ÷ $8,030,000,000 = 81.9%
This ratio exceeds the 75% statutory threshold by a comfortable margin. The $6,580,000,000 figure includes the value of the qualifying real estate components of the Southgate Portfolio ($664,000,000) as well as Fairwater's existing real estate assets (net of the $602,000,000 in planned dispositions).
Fairwater notes that the planned dispositions of $602,000,000 in existing assets are part of its ongoing capital recycling strategy and are not being undertaken solely for the purpose of satisfying the 75% asset test. The properties identified for disposition are non-core assets that no longer align with Fairwater's investment strategy, and the disposition program was initiated prior to and independently of the Southgate Portfolio acquisition.
3. The 25% / 5% / 10% Tests. In addition to the 75% asset test and the 20% TRS asset test, Section 856(c)(4)(B) of the Code imposes the following related asset tests:
25% Aggregate Securities Test (Section 856(c)(4)(B)(i)). Not more than 25% of the value of a REIT's total assets may be represented by securities (including TRS securities) other than those described in Section 856(c)(4)(A) (i.e., real estate assets, cash, and Government securities). Because Southgate TRS securities of $147,000,000 represent only 1.83% of Fairwater's projected total assets, and because Fairwater's other non-qualifying securities holdings are de minimis, the 25% aggregate test is comfortably satisfied.
5% Single-Issuer Test (Section 856(c)(4)(B)(iii)(I)). A REIT may not hold securities of any one issuer (other than a TRS or a qualified REIT subsidiary) representing more than 5% of the va

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