Structuring General Partner Transfers During the Compliance

Period

By: Thomas A. Giblin

Nixon Peabody LLP

Successfully Completing A General Partner Transfer

• Understanding buyer/seller perspectives

• Tax and business issues

• Common due diligence traps

• Obtaining required consents

• Working with project lenders and investors

• Processing general partner transfers: the investor perspective

Understanding Seller’s Motivation to Sell

• Retirement/family succession issues

• Corporate merger/sale/restructuring of developer

• Workout/removal situation

• Death/incapacity/bankruptcy

• Insufficient access to additional resources

Understanding Buyer’s Motivation to Buy

• Property management fees

• Efficiencies with nearby projects

• Future acquisition/rehabilitation transaction

• Unlocking residual value (conversion to market rate/condominium)

• Charitable purpose/mission for non-profits

• Access to debt/equity not available to current owner

Ownership Transfers: Business Issues• Structuring the business deal

- Identifying assumed obligations

- Release/indemnification

- Representations and warranties

• Addressing deferred maintenance/repairs

• Partnership restructuring issues (refinancing/debt restructuring)

• Negotiating management transition

• Scope of due diligence review

Common Due Diligence Traps When Acquiring Partnership Interests

• Real estate/property due diligence

• Tax credit due diligence

• Financial due diligence

Real Estate/Property Due Diligence• Understanding physical condition/deferred maintenance

– Physical needs assessment

– Phase I report

• Confirm no ROFR/Options have been granted

• UCC/litigation/judgment searches and title “date down” reports

• Review of material contracts

– Termination fees/assignability

– Construction warranties

• Rent rolls

• Identify deed restrictions/use agreements that survive repayment of loan

TAX CREDIT DUE DILIGENCE

• Tax credit application/carryover/LURA/regulatory agreements/8609s

• Tenant files (especially 1st year files to confirm minimum set-aside)

• IRS Form 8823 (non-compliance reports)

• Use of IRS Form 8821 (Tax Information Authorization)

Financial Due Diligence• Reviewing tax returns and financial statements

- Unpaid tax credit adjusters

- Accrued fees and loans to partners

- Unpaid development fees

• Understanding accrued soft debt and other financing issues

- Accrued interest (especially with soft debt)

- Loan terms/balloon payments

• Understanding existing capital account balances

Understanding Consent Requirements

• Lender

• Tax credit agency

• HUD

• Syndicator/investor

• Other partners

• Local jurisdiction (if tax exemption/PILOT)

Working with Project Lenders

• Reviewing transfer restrictions/due on sale clauses

• Obtaining required lender consents

– General partner interest

– Management agent change

• Negotiating application and transfer fees

• Obtaining “no default” letter

• Transferring any key principal/guarantor liability

• Reserve funding

Ownership Transfers: Tax Issues

• Managing exit tax liability

• Calculating recapture liability/obtaining recapture bond

• Reviewing partner capital account balances

• Addressing future reallocations

• Phantom income

• Debt restructuring/debt forgiveness

• Other state and local tax issues

– Termination/liquidation under state law

– Real estate transfer tax issues

Processing Ownership Transfers: the Investor Perspective

• Understanding reasons behind the proposed transfer

• Underwriting experience and financial strength of replacement general partner

• Status of reporting obligations/adjusters/asset management fees

• Assumption of all general partner obligations/replacement guaranties

• Underwriting new accountant/management agent

• Exit strategy

• Consents (lender/agency consents)

• Impact on other deals with investor

• Insurance issues1593854