1. 1 AHIC Meeting - October 25, 2012 Hot Topics – Year 15 Exits The Legal Challenges Jana Cohen Barbe Partner T + 1 312-876-7967 jana.barbe@snrdenton.com

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4. 4 Hot Topics – Legal Issues at Year 15  The impact of the Historic Boardwalk Case  Economic Compulsion  Exit Taxes  Transfer Taxes and other Negotiated Terms  Early Exit – What if the exit is at year 10 and not year 15?

5. 5 The Historic Boardwalk Case  Historic Boardwalk Hall v. Comm’r, No. 11273-07 (Third Circuit, August 27, 2012)  Facts: –renovation of the historic “East Hall” in Atlantic City undertaken by the New Jersey Sports and Exposition Authority. –In 1992, the NJSEA was tasked with developing and operating the East Hall as an events center and obtained a leasehold interest in the property –Renovation began in 1998. –In late 1998, the possibility of bringing in an investor to take the historic tax credits that would be available was considered and in September, 2000, after most of the historic expenditures had been incurred but before the renovation was placed in service, the NJSEA formed Historic Boardwalk Hall, LLC, transferred its interest in East Hall to HBH, and admitted a subsidiary of Pitney Bowes, Inc. as a member of HBH.

6. 6 The Historic Boardwalk Case –Under the HBH operating agreement, PB was entitled to an annual 3% preferred return and a share of residuals after the payment of various fees and loans. –To the extent not paid out of operations, PB could recover the 3% return on exit. –Both a put option and a call option at the end of the historic compliance period for a purchase price equal to the greater of the unpaid preferred return or fair market value. –To secure the obligation to pay the accrued preferred return on exercise of the option, HBH was required to acquire a guaranteed investment contract satisfactory to PB, so that the ultimate receipt of the preferred return was not dependent on the performance of the project.

7. 7 Historic Boardwalk Case  Third Circuit held PB was not a partner and therefore not entitled to the Historic Tax credits. The reasons: –It did not have any meaningful right to share in the upside. It’s upside was effectively capped at 3% and there was no realistic possibility that it might receive more. –It did not have any meaningful downside risk. The credits and 3% cash return were fully guaranteed. –FMV was irrelevant to its put option.

8. 8 Historic Boardwalk Case  Application to LIHTC Exits –Investor should have a meaningful interest in the residual –Issue is not how much residual but the investor’s share in whatever the residual may be –Transaction cannot be structured to deny investor all upside or require additional payments to share in the upside or to financially engineer reduced fair market value –Increased sensitivity to puts – closer scrutiny –Puts that include a right to receive cash amounts that are more than nominal (and not FMV), could be construed as a guaranteed payment

9. 9 Economic Compulsion  Issue existed before Historic Boardwalk but now increased sensitivity  Is put structure making it “too expensive to stay in the deal” or is investor penalized for staying in the deal  Early exits may exacerbate the analysis by boosting yield as compared to staying in (from a fast write off of the remaining capital account balance) and by providing a post-exit compliance guaranty  Best practice is for the investor to create a record of economic analysis on each exit where it exercises a put option so it can demonstrate that it weighed the relative costs and benefits of staying in the deal and exiting (not all of which need be economic)

10. 10 Exit Taxes  Exit taxes reflect a “recapture” of tax losses in excess of capital contributions. (They can be mitigated by a reduction of the limited partner’s loss percentage after the close of the credit period.)  Many general partners, especially non-profit general partners, are concerned about exit tax liability and look for ways to mitigate or eliminate exit taxes such as loss reallocations  A put right that includes payment of the limited partner’s exit taxes is problematic – needs to be within the general partner’s discretion/option

11. 11 Transfer Taxes and other Negotiated Terms  Many jurisdictions – state, county and city – impose transfer taxes upon a conveyance of the limited partner interest.  Who pays the transfer taxes must be dealt with explicitly.  Other terms to be addressed: –File maintenance – 6 years of until the statute closes on the compliance period, if later –On going reporting –Indemnification by seller and by buyer “as of the effective date” –Transferor will have capital gain on exit equal to its negative tax capital, or loss equal to its positive tax capital account, increased or decreased by the cash received, if any.

12. 12 Early Exits  Investor reasonably believes that the project will continue to be utilized as affordable housing  Indemnity if the project is not so used backed by a credit worthy entity  Ongoing reporting for the balance of the compliance period

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