Section One Every Year 15 Exit Negotiation is Won Before It’s Ever Fought

1. Section OneEvery Year 15 Exit Negotiation is Won Before It’s Ever Fought Sun Tzu Hoffman

2. Introduction to Klein Hornig LLP • Klein Hornig LLP is one of the nation’s premier firms concentrating exclusively on affordable housing and community development. • Klein Hornig attorneys have worked on a range of Year 15 exits and issues: • Amicus Curiae Brief to Massachusetts Appeals Court for Homeowners Rehab, Inc., c Related (Centerline) in 2017 • Committee Member & Drafter of Stewards of Affordable Housing for the Future (SAHF) Memo to Members on ROFR Provisions • Refinancings, Recapitalize with LIHTCs, Full Redevelopment projects • Portfolio Exits for National Nonprofit • GP Purchases by Third Parties & Related Party Interest Acquisitions • Partnership Redemptions from Refinancings • For-profit Options, Nonprofit ROFRs and Options • Collegial and Adversarial Exits • Tax Mitigation Strategies (for nonprofits with taxable blockers) • Founded in 2002, Klein Hornig has 39 attorneys operating out of offices in Washington, DC and Boston, Mass.

3. ROAD MAP Part A—Projections and the LOI • Capital Account Rules • Going Negative! … and Fixes • Flying High! … and Fixes Part B—The Partnership Agreement • MM Authority • Forced Sales, Puts, and Qualified Contracts • Restrictions on LP Transfers Part C—Rights of First Refusal (will skip) • ROFR versus Option • Trigger, Terms & Defaults • THE PRICE • Anticipating Federal Legislation

4. Part A. The Projections & the LOI • Review Assumptions to ensure conclusions are relatively accurate • Review Residuals and Capital Accounts in Year 15 • Inform Negotiations at LOI Stage on Exit Provisions

5. 1. Capital Account Rules(in plain English) • Year 0, Capital Account is 0 • Capital Contributions Increase CA • Income & Gain Allocations Increase CA • Loss & Deduction Allocations Reduce CA • Distributions Reduce CA • Liquidation, IRS says Capital Accounts Back to Zero

6. 2. Two Sets of Projections—Running Negative $975,000 of Exit Taxes! Emperor Trump will spend on Daily Golf! $450,000 of Exit Taxes Year 15 Special Only!

7. Upfront LOI Fixes—Negative Cap Acct The Flip—flip losses from the Investor to the MM, but will reduce yield (lost losses years 11-15). “In addition, in the first taxable year following the last year in which Tax Credits are allocated to Investor, net taxable losses may be allocated 90% to the Managing Member but only after the Investor Member’s capital account has been reduced to zero.”

8. 3. Cap Account Running FLYING HIGH Slow Decline Back-ended equity I am gonna cost you dearly!

9. Negative Bad, so Positive Good, Right? Year 1 Balance Sheet Year 15 Balance Sheet Assets Land: 3,000,000 Bldg: 7,800,000 ($17MM - $9.2 Deprc) Total: 10,800,000 Liabilities Debt: 6,200,000 Int.Only Investor CA: 4,600,000 Total: 10,800,000 Assets Land: 3,000,000 Bldg: 17,000,000 Total: 20,000,000 Liabilities Debt: 6,200,000 Initial Inv. CA: 13,800,000 Total: 20,000,000 Initial – Total Losses Year 1 – Year 15 Total Losses (Assume All Depreciation) = 9,200,000

10. 90-10 Split, right? Surprise! Sale in Year 16 Gain Allocation 90/10 Investor CA 4,600,000 + 10% Gain 1,120,000 Investor End CA 5,420,000 GP CA 0 Cash Allocations Investor (36%): $ 5,720,000 GP (64%): $10,080,000 Sales Price 22,000,000 Land 3,000,000 Building 7,800,000 Net Gain $11,200,000 Sale for $22,000,000 Debts 6,200,000 Cash Proceeds: 15,800,000

11. Upfront LOI Fixed & Positive Cap Acct#1 Avoid Liquidation Provisions! Negotiate the right to purchase the Investor interests at FMV without liquidation, “deemed Liquidation” or reference to “sale”

12. Investor Interests without Liquidation LOI Provision: For the period of (__) months following the close of the Compliance Period (the “Option Period”), the General Partner or its assigns shall have the option (the “Option”) to purchase the interests of the Investment Limited Partner and the Special Limited Partner in the Partnership for a purchase price equal to the fair market value of such Interests. The acquisition of the interests of the Investment Limited Partner and the Special Limited Partner shall not liquidate the Partnership provided the Partnership maintains two partners at all times. Typical LPA Mark Up

13. Upfront LOI Fix—Positive Cap Account#2 Rebalancing of Capital Accounts LOI Provision “In addition, upon liquidation of the Company, taxable gain will be allocated in a manner that will causes, as nearly as possible, the Member’s positive capital accounts to be in the same ratio as Capital Transaction proceeds are to be allocated.”

14. LPA Rebalancing Provision Typical LPA Mark Up Seventh,, the balance thereof, if any, shall be distributed annually, ninety (90) days after the end of the Fiscal Year, 10% to the Investment Limited Partner and 90% to the General Partner

15. Upfront LOI Fix & Positive Cap AcctReducing Value of Project and Interest LOI Provisions At the end of the 15 year Credit Compliance Period, the Managing Member or an affiliate of Guarantor will have the option to purchase either the Investor Member's interest in the Company or the Project for a 42 month period after the Compliance Period at a price equal to the appraised value of the Investor Member’s interests or the Project, as applicable, assuming that the Project remains available for low-income use and subject to any discounts the appraiser determines are appropriate, in its sole and absolute discretion, which may include the Right of First Refusal, and with respect to the Investor Member’s interest, discounts for lack of control and marketability (the “Appraised Value”). Control the Appraiser The Managing Member shall select the appraiser, which shall not be subject to the approval of IM as long as such appraiser is MAI with at least five years’ experience in valuing multifamily affordable projects. No Investor Rights to Exit (other than Nominal Put) Sale of Project; Other than the $100 Put Right, the Investor Member shall not have the ability to force the Managing Member to market or sell the Project or to require the Managing Member to request that the Virginia Housing Development Authority find a buyer pursuant to a qualified contract under Code Section 42(h)(6)(E)(ii)(II).

16. Part B. The LPA and Exits • Partnership Agreements & Related Provisions • MM Authority and Consents- • No consent if consistent with ROFR • Forced Sales, Puts & Qualified Contracts • Restrictions on LP Transfers

17. 1. Managing Member Authority The General Partner shall not, without the Consent of the Special Limited Partner have any authority to: Enter into a contract for the sale or disposition or sell or otherwise dispose of, at any time, all or substantially all of the Apartment Complex or any portion of the Land upon which the Apartment Complex is built (except for the ROFR Agreement which will not require such Consent);

18. Year 10 Option

19. 2. Puts and Forced Sales Worst Language • (c) The Investor Limited Partner shall have the right to require the General Partner (or its designee) to acquire all, but not less than all, of the Investor Limited Partner’s Interest for a price equal to the amount that the Investor Limited Partner would receive if the Project were sold for its fair market value (determined as described in (a) above). Better Language • Put Option: At any time after [[Alternatives: (1) the last expiring Compliance Period applicable to any building in the Apartment Complex or (2) payment of Limited Partner’s entire Capital Contribution]] Limited Partner may require that General Partner purchase Limited Partner’s Interest and Special Limited Partner’s Interest, subject to all then existing liens and encumbrances to title, for an amount equal to $100 (the “Put Option”). Limited Partner and Special Limited Partner will represent that such Partner has not previously transferred its Interest and such Partner’s Interest is free of liens or encumbrances other than those contemplated by the Partnership’s Loans and/or by this Agreement. Limited Partner and Special Limited Partner agree that General Partner will have no liability for any adverse consequences to Limited Partner or Special Limited Partner as a result of the exercise of the Put Option, including, but not limited to, recapture or lost Tax Benefits. Best Language (nothing)

20. Just Say NO to Qualified Contracts

21. 3. Restrictions on LP Transfers See me after the Session!

22. Part C. Right of First Refusal • ROFR versus an Option • Triggering the ROFR: bona fide what? • Terms of the ROFR—time to exercise and time to close • Default and Removal—easy come, hard to go • Reserves must be part of the Property, right? • Buying the Limited Partner Interests • Formula Price may exceed fair market value

23. ROFR versus an Option Option • Option can be unilaterally exercised • Option must be at Fair Market Value ROFR • ROFR must be “refusing” another offer, so not unilateral • ROFR can be at the Statutory Price in IRC sec. 42(i)(7) (or higher)

24. Trigger Language for the Right WORST ROFR Trigger Language: 2. Grant of Refusal Right. In the event that the Partnership receives a bona fide offer to purchase the Apartment Complex (other than under the circumstances described in paragraph 1), which offer the Partnership intends to accept, Grantee shall have a right of first refusal to purchase the Apartment Complex (the “Refusal Right”) for a period of twelve (12) months (the “Refusal Right Period”) following the close of the Compliance Period, on the terms and conditions set forth in this Agreement and subject to the conditions precedent to exercise of the Refusal Right specified herein. In addition to all other applicable conditions set forth in this Better ROFR Trigger Language: in the event that the Partnership determines to sell or receives an offer to purchase the Project, which offer the Partnership intends to accept (the “Offer”), Grantee or City shall have a right of first refusal to purchase the Project (the “Refusal Right”) [and CHECK LPA for Investor rights to consent to sale] Best ROFR Trigger Language (2 options): 1. Grantor grants to Sponsor a right of refusal (the " Right of Refusal"), commencing on the expiration of the Compliance Period with respect to the Project, as defined in Section 42(i)(I) of the Internal Revenue Code (the "Code"), and terminating on the fifth (5th ) anniversary thereof, to purchase the Property in the event Grantor proposes to sell, transfer, assign or ground lease all or substantially all Grantor's interest therein. 2. Grant of Refusal Right. Commencing on December 31 of the 15th year of the Compliance Period and for a period of thirty-six (36) months thereafter (the “Refusal Right Period”), in the event that the Partnership determines to sell or receives an offer to purchase the Project, which offer the Partnership intends to accept, or receives any bona fide third party offer to Purchase the Project (the “Offer”),

25. Terms of the ROFR—time to exercise and time to close Time to Exercise • Worst: One (1) Year from end of Compliance Period • Better: 24 Months • Best: 5 years or no time limit Time to Close • Worst: Silent or Less than 90 days • Better: 120 days • Best: 240 days or more, plus additional time to make tax credit application based on annual cycle Other Terms (of a purchase agreement)

26. Default and Removal Worst—“Purchaser's exercise of the right of first refusal granted herein is contingent upon any Affiliate of Purchaser not being in default of its obligations under the Operating Agreement.” Better—“The right of first refusal granted under this paragraph 1 shall terminate in the event of the removal of the General Partner.” Best—“The right of first refusal granted under this paragraph 1 shall terminate in the event of the removal of the General Partner and any continuing event of default that may prevent the Beneficiary from exercising the Refusal Rights may be cured by the General Partner during the ROFR Period.”

27. Reserves must be part of the Property, right What does the Internal Revenue Code allow? (A) In general. No Federal income tax benefit shall fail to be allowable to the taxpayer with respect to any qualified low-income building merely by reason of a right of 1st refusal held by … to purchase the property after the close of the compliance period for a price which is not less than the minimum purchase price … What is the Property?

28. Including the Reserves Worst—“WHEREAS, the Partnership was formed for the purpose of acquiring, owning or leasing, developing, constructing and/or rehabilitating, leasing, managing, operating, and, if appropriate or desirable, selling or otherwise disposing of a residential project located in Alexandria, Virginia (the “Project”) on the land described on the attached Exhibit A; and” Better—Include language in the LPA allowing release of reserves or the GP to use reserves to pay debt, improve property, pay ROFR price Best—“WHEREAS, the Partnership was formed for the purpose of acquiring, owning or leasing, developing, constructing and/or rehabilitating, leasing, managing, operating, and, if appropriate or desirable, selling or otherwise disposing of a residential project, including all reserves established therefor, located in Alexandria, Virginia (the “Project”) on the land described on the attached Exhibit A; and”

29. Buying the LP Interests(same issue, what is the property?) Worst—no right to purchase interests other than option at FMV Better—“Alternative Purchase of Partnership Interests. In addition to the foregoing, if the Internal Revenue Service hereafter issues public authority to permit the owner of a low-income housing tax credit project to grant a “right of first refusal to purchase partnership interests” pursuant to Section 42(i)(7) of the Code as opposed to a “right of first refusal to purchase the Project” without adversely affecting the status of such owner as owner of its project for federal income tax purposes… Best—“…to purchase the Property or the interests of the Limited Partner and the interests of the special limited partner of the Owner, if any (collectively, the "Interests of the Limited Partner"), in the event Owner proposes to sell…”

30. ROFR Purchase Price 2. Refusal Right Purchase Price. The purchase price for the Project (the “Refusal Purchase Price”) pursuant to the Refusal Right shall be the lesser of (i) the price in the Offer or the proposed sales price, provided such price is not less than the fair market value of the Project subject to all restrictive covenants or other agreements regarding use of the Project as affordable housing, any such appraisal to be made jointly by two independent appraisers, one selected by the Partnership and one selected by Purchaser. If the appraisers are unable to agree on the fair market value of the Project, they shall jointly appoint a third appraiser. The decision of a majority of such appraisers shall be final and binding. Each party shall pay the cost of its own appraiser and shall evenly divide the cost of the third appraiser, if necessary, or (ii) the sum of the principal amount of outstanding indebtedness secured by the Project (other than indebtedness incurred within the 5-year period ending on the closing on the sale of the Project) and all Federal, state and local taxes projected to be imposed on the Partners of the Partnership to such sale including federal income tax liability incurred as a result of the payment of purchase price. The purchase price shall comply with and be interpreted and calculated consistently with the provisions of Section 42(i)(7)(B) of the Code. In the absence of formal IRS guidance or legal precedents to the contrary, the phrase “principal amount of outstanding indebtedness” shall exclude any accrued interest owed. In the event that accrued interest is determined to be included in the phrase “principal amount of outstanding indebtedness,” then, in the absence of formal IRS guidance or legal precedent to the contrary, the phrase “other than indebtedness incurred with the 5-year period ending on the Closing Date” shall include any accrued interest incurred in the 5-year period ending on the Closing Date that remains unpaid as of that date. The Partnership agrees to accept Purchaser’s computation of the amount described in this clause (ii) if the method of computation is supported by an opinion of a national or regional law firm with recognized expertise in matters relating to Section 42 of the Code.

31. Section TWO Preparing for The Exit

32. Planning and Implementing an Effective Year 15 StrategySeptember 2019

33. Your Presenter Jennifer Burris, Tax Senior Manager Dixon Hughes Goodman LLP jennifer.burris@dhg.com

34. About DHG

35. DHG Affordable Housing Experience

36. Document Requirements • Partnership Agreement; including all amendments • Purchase Options and Right of First Refusal Agreements • Partnership Interest Option Agreements • Most Recent Audited Financials & Tax Returns • Current Year to Date Financials • Partner Tax Basis Schedules • Depreciation/Amortization Schedules • Loan and Regulatory Agreements • Original Underwriting Projections • Current Capital Need Assessments/Estimate of Needed Repairs • Appraisal

37. What We Analyze • Tax basis of partners • Liabilities to potentially be paid off or reimbursed to related parties/partners • Reserve accounts and ability to use those funds for various purposes • Exit tax calculations • Pros/Cons of various options

38. Options • Sale the property to third party • Exercise Right of First Refusal • Purchase Investor’s interest • Bargain Sale of Property • Prior to Year 15 exit • Re-Syndicate Property • Qualified Contract

39. Managing Exit Taxes • Forgive debt • Change allocation percentages after credits • Capitalize rather than expense repairs, slow depreciation on new assets • Change debt structure to change loss allocation to MM/GP • Use tax code to re-allocate losses from Investor

40. Gain Allocation • First to negative capital accounts • Second to investor until capital account equals the tax liability from the gain • Third to balance the capital accounts to cash flow distribution percentages

41. Cash Flow for Liquidation • First to pay debt/liabilities • Second for reserves related to closing costs • Third for Investor payables • Fourth for MM/GP payables • Last pro-rata in accordance with positive capital account balances