1. Untangling Property Dispositions: The Partnership Tangle NCSHA June 2015 Los Angeles CA

2. 2 The Y15 Landscape  Most Year 15 events do not involve sale of the property  Instead, the Property GP (the Developer) buys out the LP (the investor or syndicator)  Most LPs want an exit  Untangling the tax credit partnerships can be complex and contentious – and take a long time  Two key factors in the unwind negotiations:  Level of equity value in the property  Level of ambiguity and complexity in the partnership documents

3. 3 The Difficulty Scale Document Complexity or Ambiguity Equity Value of Property

4. 4 The Easy Deals  Either:  There is limited equity value in the property OR  Partnership documents are very clear about exit  Limited Equity Value  Very low rent/income restrictions  Weak markets  High levels of soft debt  Mortgage prepayment restrictions or penalties  Clear Documents  Usually means a clear Right of First Refusal or option at Debt + LP Taxes

5. 5 Non-Profit Right of First Refusal  Practically speaking, usually treated like an option  LPs do want their exit tax paid  Non-profit GPs now working with LP during years 10-15 to manage tax capital accounts to zero  When exit tax is high, negotiations can get trickier and/or the exit can be slowed

6. 6 Low Equity Value  GP makes offer  LP confirms GP estimate of value with internal analysis or Broker Opinion of Value  LP will want to be caught up on any unpaid priorities  LP may want transaction expenses covered  GP handles all third-party approvals  If prior to Year 15, LP will want assurances about continued compliance

7. 7 The Tough Deals  Lots of value to fight over  In many deals, GP has an option to purchase the property or the LP’s interest at fair market value  In the absence of a real market sale, fair market value can be debated endlessly  Dueling appraisals is an expensive way to address this problem

8. 8 Valuing the LP Interest  First you have to agree on the property value  Then you run it through the capital proceeds waterfall in the partnership agreement  But it’s not that simple:  Reserves  Liquidation analysis  Other partnership provisions

9. 9 Liquidation Analysis Issue  Virtually all partnership agreements have provisions about the distribution of in the event of a liquidation  The provisions can differ from the capital transactions waterfall  They tend to favor the Investor Limited Partner  The provisions do not apply if the GP is buying out the LP, but the LP can and often does argue that the hypothetical sale on which the buy-out is based would in fact be a liquidation  Buy-outs can get stuck on this issue

10. 10 Other Complicating Factors in the Buy-Out  LP has no right to force a sale of the property  LP has a right to force a sale but cannot really enforce its right without removing the GP  LP’s ability to transfer its interest without the GP’s consent  The GP gets the majority of the cash flow but very little of the residual proceeds  There are conditions to the exercise of the Right of First Refusal

11. 11 The Good News  Significant equity value is a happy surprise  Most GPs and third-party buyers are not planning QCP or market rate conversion  Planning to operate for cash flow and/or  Redevelop with a new round of tax credits, extending affordability  New deals are structured with more thought about back-end  Track record of cash flow and residual proceeds helps keep investors interested in further investment

12. Untangling Property Dispositions: The Partnership Tangle NCSHA June 2015 Los Angeles CA