General Partner Interest Transfers

1. General Partner Interest Transfers Legal / Business Issues Robert H. Adkins Boston, MA

2. Blending of concepts • First, think of transaction as a real estate sale • Then, remember this is not a sale of assets, but the transfer of an interest in an operating business • Finally think about special issues in GP interest sales

3. Real estate transaction • Normal legal / business points must be addressed • Purchase price • Deposit • Due diligence process • Representations by seller and buyer • Closing date • Remedies for defaults, failure to close

4. Operating business issues • In straight real estate sale, real estates assets are generally transferred free of prior liabilities (other than recorded liens) • In GP interest sale, underlying partnership is an operating business with continuing liabilities which could affect new GP • Partnership has other partners, especially tax credit LP, whose interests must be accommodated

5. GP interest portfolios • All, none or some • Buyer would like to pick and choose “best” GP interests • Seller wants to sell everything • Compromise: • Allow buyer to kick out agreed number of interests during due diligence • After that, buyer must terminate entire transaction (in fact, parties will usually renegotiate)

6. Consent required from limited partner • LP will want new GP with experience, net worth • LP may require modifications to GP guarantees, other deal terms, e.g.: • Expansion of operating deficit guaranty • More favorable post compliance LP exit strategy • May be two LPs, may not be related to each other • Federal tax credit investor • State tax credit investor

7. Regulatory consents • HUD • 2530 approval of new GP • Modified TPA (transfer of physical assets) approval—potentially time consuming • Credit agency

8. Lender consents • First mortgage lender • New GP must meet underwriting criteria • New GP’s affiliated management company must also be approved • Assumption of loan guarantees, “key principal” liability • Transfer fees and lender legal expenses • Bond loans may require multiple consents—trustee, servicer, credit enhancer, bond holders • “Soft money” and other subordinated lenders

9. Co-general partner (?) consent • Any co-GP likely to be nonprofit organization, friendly to old GP, unknown to new GP • Is co-GP consent required? • Does co-GP help or confuse operation of property? • What are rights and duties of new GP vs. co-GP?

10. Unpaid equity, fees, loans • In addition to payment of fees accruing in future, new GP will likely also acquire payment rights for: • Deferred development fees • Other unpaid past fees (partnership management fees, etc.) • loans to partnership previously made by old GP • Pricing of deal by new GP may be based on: • Amounts of outstanding fees and loan repayments • Judgment as to likelihood of payment • Note: sources of payments may be future tax credit equity installments, cash flow, refinancing and sale proceeds

11. Pro-rating of cash • In straight real estate sale, seller and buyer usually divide rents, operating expenses and debt service as of closing date • In a GP interest sale, cash flow waterfall will likely require some cash flow to go to LPs also (asset management fees, priority payments, final % split) • One approach • Just before closing, old GP pays all current payables and debt service, applies any remaining cash to payments to old GP, LP per waterfall • New GP starts from there

12. Allocation of risks, liabilities • GP “guarantees” to LP • Especially tax credit risks • Also completion, operating deficit guarantees • New GP must provide credit-worthy guarantor • Liabilities to third parties – vendors, tenants, environmental, etc. • Whose watch? • Liabilities typically split based on which GP in charge when events occurred • Who is liable? • LP could insist on joint liability on both old, new GP for everything – avoids finger pointing between GPs

13. Tax issues • “Disaffiliation” of new GP from its affiliate which receives deferred development fees • Capital accounts—cause distortion of sharing of sale proceeds? • Price allocation among interests in portfolio

14. Now you know everything! Robert H. Adkins Nixon Peabody – Boston 617-345-1239 radkins@nixonpeabody.com