2. IPED Tax Credit Property Disposition 2008: Obligations and Opportunities Through Year 15 and Beyond Boston, Massachusetts, November 20-21, 2008 William X. Lang, Esq.Tatiana Gutierrez Abendschein, Esq. Nixon Peabody LLPNixon Peabody LLP 437 Madison Avenue401 9 th Street, NW, Suite 900 New York, New York 10022Washington, DC 20004 (212) 940-3095(202) 585-8860 wlang@nixonpeabody.comtgutierrez@nixonpeabody.com wlang@nixonpeabody.com Assess Your Rights and Duties at Year 15

3. PART I: THE USE RESTRICTIONS MEMO

4. What is a Use Restrictions Memo? l A memorandum prepared soon after you select a property for disposition that answers the following questions: –What use restrictions currently encumber the property? –What use restrictions will remain after transfer of the property? –What approvals are required for transfer of the property or any interest therein and how long will it take to obtain these approvals? l The use restrictions memo is meant to facilitate marketing of the property and negotiations for the sale

5. What is a Use Restrictions Memo? (contd) l Example of 123 Property –56 units on floors 3 through 9 on one of 2 structures located at 123 East Main Street in Manhattan. –The partnership owns the multifamily rental portion and the Neverending Church Society owns the land, floors 1, 2 and 10 and an adjacent structure. –32 of the 56 units were developed per NYC Inclusionary Zoning Program, and 24 pursuant to the 421a tax exemption program –LIHTC were generated on the property in 1990. We represent the LIHTC limited partners who want to dispose of their interest in the 56 units.

6. Where to Start? l Gather all partnership, financing, building and financial documents. l Ask the following questions: –Who was the land originally acquired from? –How was the property construction or rehabilitation financed? –Does the property receive any tax abatements or exemptions?

7. Where to Start? (contd) l Example of 123 Property –The partnership acquired title from the Neverending Church Society (indenture). –Original construction loan now extinguished. Construction also financed with the equity proceeds from the LIHTC syndication (15 year term on LIHTC covenants) –421a tax exemption program and Inclusionary Zoning program (each with a restrictive covenant).

8. Watch out for Restrictions that Survive Prepayment of Financing and Transfer l Proxies for long-term restrictions: –Of course, presence of LIHTC (extended LIHTC compliance period) –HUD participation (Wellstone, 250(a), LIHPRHA, ELIHPHA, CDBG, HOME) –State and/or local program originally financed the deal; and/or –Local tax abatements or exemptions

9. Watch out for Restrictions that Survive Prepayment of Financing and Transfer (contd) l Examples of long-term restrictions: –Number and configuration of rental units –Maximum rents and incomes –Local rent stabilization law applicability –Prohibition on condo/coop conversions –Tenant selection and marketing –3 rd party approvals of management agent and agreement –3 rd party consent to transfer of property or interests in owner –** Also, watch our for local preservation laws **

10. Watch out for Restrictions that Survive Prepayment of Financing and Transfer (contd) l Example of 123 Property – Income Restrictions –Inclusionary units: maintained as lower income housing (80% of AMI and below) in perpetuity –421a units: maintained as lower income housing until 2011 (indenture trumps) –Indenture: 56 units maintained as lower income housing from the date of initial occupancy until the later of Dec. 30, 2012 or the date that is 21 years after the death of the last survivor of a group composed of members of the Neverending Church as of 1990 with a reversion provision

11. Watch out for Restrictions that Survive Prepayment of Financing and Transfer (contd) l Example of 123 Property – Rents –Inclusionary Units: restricted to fair rents (initially 30% of annual income and subsequently per Rent Stabilization) –421a Units: increases subject to Rent Stabilization

12. Watch out for Restrictions that Survive Prepayment of Financing and Transfer (contd) l Example of 123 Property – Misc. –Management must be a qualified non-profit qualified by HPD –Must maintain special operating reserve funds –The 56 units comprise one condominium unit, the other 2 condo units are owned by the Society, and Bylaws govern the 3 units interaction

13. What Use Restrictions Currently Encumber the Property? l Financing documents requirements (expire if financing prepayed) –Submission of audited financial statements –Due on sale clauses –Consent of mortgagee for assignment and assumption –Notice to mortgagee of management changes –Building reserve fund requirements

14. What Internal Consents Needed for Transfer? l Partnership document requirements for transfers? –May GP withdraw without consent of LPs? –Does GP have option to purchase property? –Does LP need GP consent to withdraw? –Can LP force a sale? –Which partners must consent to transfer of property?

15. How Long Will Approvals Take? l Assess prepayment notice periods and fees l Assess whether any parties have rights of first refusals or options l If governmental approvals required for transfer give yourself leeway of 6 months to be safe

16. How Long Will Approvals Take? (contd) l Example 123 Property –The Society has an option to purchase the 56 units between January 1, 2007 and December 31, 2009 –Owner of 56 units must notify HPD in writing of the assignment of 421a and Inclusionary Zoning agreements to a new owner –LPs may dispose of interests without GP consent

17. Moral of the Story l If you are disposing of a tax credit property, preparing a use restrictions memo early will facilitate the structuring of your transaction and save all parties time later on. l And, believe it or not, the owner of the 56 units at 123 Apartments has the units under contract...

18. PART II: The Purchase and Sale

19. What is the Structure of the Deal? l Assignment of Sellers partnership interests to Purchaser l Sale of the Limited Partners partnership interest to the General Partners l Straight Deed transfer of the Property pursuant to a Purchase and Sale Agreement

20. What is the Structure of the Deal ? (contd) l Example 123 –Seller offered to sell partnership interests, but Purchaser is a not-for-profit and cannot own a for profit entity. –Result is a deed transfer

21. Drafting the Purchase and Sale Agreement l Depending on the structure of the deal you will need to draft –Standard Purchase and Sale Agreement; or –Assignment of Partnership Interests w This could vary depending on if you are just selling 100% of the partnership interests or just the limited partnership interests

22. Drafting the Purchase and Sale Agreement (contd) l Before drafting you need to review the Restrictions Memo carefully l The Restrictions Memo should be attached as an Exhibit to the P&S and Purchaser should represent that they are familiar with the terms l Same issues as in a standard real estate contract

23. Drafting the Purchase and Sale Agreement (contd) l Example 123 –Since it is a straight deed transfer, we used a standard Purchase and Sale Agreement

24. Negotiating the Purchase and Sale Agreement l Specific contract issues to be aware of with respect to the disposition of a low income housing property: –Time Periods for approvals –Right to terminate if approvals are not obtained within such time periods

25. Negotiating the Purchase and Sale Agreement (contd) –Representation from Purchaser that he/she/it is in good standing with agencies and will not impede obtaining the approvals –Who is responsible for obtaining the approvals – Seller or Purchaser –Assumption of regulatory agreements, loan documents, etc.

26. Negotiating the Purchase and Sale Agreement (contd) –Issues related to Selling within the Compliance Period: w No longer a Recapture Bond requirement w Need Indemnity from Purchaser and preferred practice is to get personal guarantee from principal of Purchaser w May want representation regarding net worth of guarantor

27. Negotiating the Purchase and Sale Agreement (contd) l Example 123 –Actually a rather smooth negotiation –Issues that have arisen on other deals: w Net worth of guarantor in compliance period deals w Rights to terminate for failure to obtain approvals

28. Contract to Closing l If obtaining approvals, need to do so l If Purchaser is obtaining approvals, need to monitor and cooperate l Need to make sure all partnership/corporate consents and authorizations are in place l Mortgage payoffs – what is the time period for notice? Are there prepayment penalties? l Standard real estate closing issues

29. Closing and Post Closing l In most cases, standard real estate closing l Be aware of which, if any, of the approvals need to be recorded – if so, make sure you have originals at closing l Some agencies (e.g., New York City DHCR under the LIHTC Regulatory Agreements) need to be notified within 30 days of the Closing of the transfer

30. Closing and Post Closing (contd) l Have Brokers take you out to a nice Closing Dinner!!