MANAGING THE UNEXPECTED: WORKOUTS, LIABILITY, BANKRUPTCY AND MORE

1. MANAGING THE UNEXPECTED: WORKOUTS, LIABILITY, BANKRUPTCY AND MORE By: Deborah Thaxter Nixon Peabody LLP IPED – San Diego, CA April 26-27, 2007

2. LITIGATION ANALYSIS IS CRITICAL TO YOUR WORKOUT PLAN (The word “Sues” is not a forbidden four letter word) $#!$#! • Know your rights and your leverage • Marshall your troops at the border • Choose your forum – If you don’t, they will • You cannot escape – litigation is everywhere

3. REVIEW PROJECT DOCUMENTS • Removal of property manager • Removal of GP • Push aside or forfeiture • Cure period • Valuation of GP interest • Deferred Developer Fees KEY PARTNERSHIP PROVISIONS

4. REVIEW PROJECT DOCUMENTS KEY PARTNERSHIP PROVISIONS (CONT.) • Repurchase • GP Development and Operating Deficit Obligations • GP and Developer Guaranties • Adjusters • Venue and Jurisdiction

5. KEY LOAN PROVISIONS • Events of Default and Cure Period • Foreclosure Procedure • Guaranties • Consent required for change in General Partner and property manager

6. MARSHALL YOUR FORCES AND TAKE CHARGE • Problems • GP Affiliated General Contractor with multiple projects • Delays and Cost Overruns • Failure to meet place in service date and loss of credits AT CONSTRUCTION PHASE

7. MARSHALL YOUR FORCES AND TAKE CHARGE • Protections • Construction contract terminates with removal of affiliated G.P. • Payment and performance bonds • Subguard insurance products • Don’t leave construction draw monitoring to lender • Site visits AT CONSTRUCTION PHASE (CONT.)

8. MARSHALL YOUR FORCES AND TAKE CHARGE • Remedial Actions • Exercise rights under payment and/or performance bonds • Remove and replace GP • Terminate construction contract • Work with local tax credit agencies to swap or secure additional credits • Repurchase demand AT CONSTRUCTION PHASE (CONT.)

9. MARSHALL YOUR FORCES AND TAKE CHARGE • Problems • Low occupancy, negative cash flow and growing payables • Failure to pay debt service or property taxes • Deferred maintenance – low REAC Scores • The “gap” between construction and permanent loans • Misappropriation or co-mingling of funds • Compliance issues • Failure to provide yearly audited financials AFTER LEASE-UP

10. MARSHALL YOUR FORCES AND TAKE CHARGE • Protections • Strong key partnership provisions • Properly documented advances • Properly documented demands for corrective behavior • Workout agreement and escrow of removal documents AFTER LEASE-UP (CONT.)

11. MARSHALL YOUR FORCES AND TAKE CHARGE • Remedial Actions • Replace property manager • Voluntary vs. involuntary removal • Remove and Replace GP • Has GP shown willingness to work with LP? • What are the grounds for an involuntary removal? • Push aside v. complete removal • Can the GP interest be sold to a new third party GP? • 2530 red flag risk and who wants the liability? • Send monetary demands to GP and Guarantors

12. CHOOSE YOUR FORUM AND PICK YOUR TIME • Location of your business vs. location of property or adversary • State vs. Federal • Use of Declaratory Judgment to pick forum • Requests for injunctive relief – who goes first? • Are the defaults substantial? • Misappropriation of funds • Risk of loss of credits due to failure to meet placed in service date

13. CHOOSE YOUR FORUM AND PICK YOUR TIME • Risk of Foreclosure • Federal and state regulatory problems • Failure to provide financial information • Can your adversary afford to litigate • GP/Developer claims • Debt/equity conflict • Poor underwriting vs. poor management • Promises made to GP to step into existing project • Failure to fund equity advances

14. CHOOSE YOUR FORUM AND PICK YOUR TIME • Upper tier investor pressure • Greater investor scrutiny • Recent investor lawsuits • Use of upper tier reserves

15. LITIGATION IS HERE TO STAY • City vs. Property Partnerships • Administrative proceeding to shut down property as a public nuisance • Court proceeding by sheriff to declare property a public nuisance and to require extensive security improvements • GP/GC vs. LP Sponsor/Syndicator • Termination of construction contracts and lien filings • Removals of GP and/or property manager • Bankruptcy litigation over effect of removal of GP (358 B.R. 24)

16. LITIGATION IS HERE TO STAY • Third party suits against agencies, including against tax credit authority that granted tax credit swap • Recovery of and defense against monetary demands against GPs and Guarantors • Upper tier institutional investors vs. Syndicators • Books and Records • Removals of Syndicators as General Partners • Exit strategy disputes over consents, back end splits and recapture

17. NEGOTIATING A WORK-OUT AGREEMENT • Does GP stay or go? • How value GP interest? • Does GP keep residual interest as SLP? • Who Pays What to Whom • GP fees • GP loans – amount and priority

18. NEGOTIATING A WORK-OUT AGREEMENT (Cont’d) • Capital contribution advances vs LP Loans • Tax consequences of canceling developers fees • Cash payments • Remedy for Defaults under Workout Agreement • Signed assignment and partnership amendment documents in escrow

19. NEGOTIATING A WORK-OUT AGREEMENT (Cont’d) • Forfeiture of fees • Penalty payments • Cross-collateralization and cross-default provisions • Bankruptcy Proof Provisions • Venue and Jurisdiction

20. NEGOTIATING A WORK-OUT AGREEMENT (Cont’d) • Release • General or limited in scope • Time period covered • Tax compliance carve-out • Effect on guaranty of non-released party • Representations as to liens, payables and claims B10533214.1