General Partner Interest Transfers

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					General Partner Interest Transfers

        Legal / Business Issues



           Robert H. Adkins
             Boston, MA
              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
              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
          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
              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)
  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
             Regulatory consents

• HUD
  – 2530 approval of new GP
  – Modified TPA (transfer of physical assets) approval—
    potentially time consuming
• Credit agency
                  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
      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?
            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
                  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
            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
                    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
Now you know everything!

       Robert H. Adkins
   Nixon Peabody – Boston
        617-345-1239
 radkins@nixonpeabody.com