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1 All Information Contained in the Document is intended for the purpose of education and may not be reproduced without prior consent. Copyright 2013 CohnReznick, LLP

2 Maximizing Opportunities in Year 15 2

3 David Leon, Broad & Cassel 3

4 Today s Agenda Partnership Capital Accounts Sample Partnership Agreement Sample Back End Calculations: 4% Deal 9% Deal Concluding Comments 4

5 Partnership Capital Accounts All Partners in a Partnership Have a Capital Account Safe Harbor Capital Account Maintenance Rules under IRC 704(b) All Capital Accounts Start at Zero Increased by Capital Contributions Increased by Income & Gain Allocations Decreased by Loss & Deduction Allocations Decreased by Distributions Upon Liquidation, all Capital Accounts Return to Zero 5

6 Sample Partnership Agreement Partnership Profit, Loss & Cash allocations controlled by Partnership Agreement Section 5 Allocations of Profits from Capital Transactions Section 6 Distributions and Applications of Cash Flow from Capital Transactions Section 10 Dissolution and Termination of the Partnership 6

7 Section 5 Allocations of Profits from Capital Transactions Profits from a Capital Transaction shall be allocated to the Partners in the following order of priority: A) To the LP to eliminate any negative capital account. B) To the GP to eliminate any negative capital account. C) The balance to the Partners in accordance with their sharing ratio of Section 6G. 7

8 Section 6 Distributions and Applications of Cash Flow from Capital Transactions Sale or Refinancing Proceeds shall be applied in the following order of priority: A) To the payment of all expenses of such sale or refinancing. B) To the payment of all debts and obligations of the partnership other than amounts owed to Partners. C) To establish any Reserves reasonably required by the GP. D) To repay any LP Loans. E) To repay any GP Loans. F) To repay any balance remaining on the Development Fee. G) The balance shall be distributed 10% to the LP and 90% to the GP. 8

9 Section 10 Dissolution and Termination of the Partnership 10.1 Events which cause a Dissolution of the Partnership shall include: A) Election made by the GP with the consent of the LP B) Withdrawal of GP C) Sale or other disposition of all or substantially all of the assets of the Partnership Priority on Liquidation To extent proceeds are sufficient, they shall be applied in the following order: A) In accordance with Section 6A through 6F B) The balance shall be distributed in accordance with positive Capital Accounts. 9

10 Sample 4% Deal Liquidation Calculation 10

11 11

12 Sample 9% Deal Liquidation Calculation 12

13 13

14 What If the Ultimate Allocations of Cash Aren t What You Expected? For Existing deals approaching year 15: Stay out of the Liquidation Section of the Partnership Agreement Refinance instead of Selling (watch out for forced sale provisions) Negotiate the purchase of the LP interest Manage the Tax Capital accounts Generate more tax losses 14

15 What To Do for New Deals: Negotiate Special Gross Income Allocation Provisions Negotiate Right to Purchase LP Interests Modify Liquidation Events Forced Sale Rights Do not allow them If used, agree to how cash will be distributed up front similar to the limited partner put right. Factor in Year 15 Distributions in Credit Pricing 15

16 Jorge Lopez, Cornerstone Group 16

17 Early Discussions What is LP's desire to exit early? Time to plan a strategy 17

18 Advantages to Early Exit Save cash flow split Depreciation losses and possible cost segregation Debt amortization accrues to Developer Re-investment all benefits developer Flexibility on re syndication 18

19 What do Documents Say Return of LP capital? Back-end split of proceeds? Capital account balances Method of liquidating/selling Purchase option/right of first refusal 19

20 Formulate a Strategy Hire a CPA or tax attorney Project value Projected waterfall 20

21 Cornerstone Experience 5 syndicators/13 LP acquisitions Relationships count! Re syndication can help overcome an impasse Older properties requiring Return of Capital can be expensive! 21

22 Money Losers Specially important to exit prior to year 15 Forgiveness of Debt Tax ramifications Pay-down of debt Sell to third party w new equity 22

23 Break-Even or Minimal Cash Flow Can be best candidates for LP buy-out Deferred developer fee Negative capital accounts Re-financing can make these real winners 23

24 Strong Performing Properties Will probably need to pay the investor Can combine w re-financing May have substantial value to hold for long term What are rent restrictions on property - Next 15 years 24

25 Re syndicate VS Long Term Hold Amount of rehab the property needs When do existing restrictions burn-off Liquidity event Possibility of getting more soft loans 25

26 Sue Wilson, Enterprise 26

27 STRUCTURE OF LIHTC INVESTMENTS Investments are sold through Limited Partnerships and LLC s Partnership Agreements control dispositions, providing: Transfer restrictions and price Consent requirements Distribution of Proceeds Liquidation and Dissolution 27

28 TYPES OF INVESTORS Types of Investor vary: Direct Investors Syndicators ( Intermediaries ) Single Corporate Investor Funds Multiple Corporate Investor Funds Multiple Individual Investor Funds Types of Syndicators vary: National for-profit National nonprofit Regional (mostly nonprofit) 28

29 GOALS OF THE INVESTORS Receive Expected Benefits Exit in Year 16 at little or no cost To the extent there is value, share in the value 29

30 GOALS OF THE INVESTORS Transfer to Sponsors Preserve affordability Minimize displacement of low-income residents Preserve project viability 30

31 ENTERPRISE S EXPERIENCE TO DATE 474 Projects transferred or approved through 8/16/ Transferred 9 Lease purchases (Cleveland) 14 Consulting projects (all early exits) 18 Re-syndications 166 Projects pending through

32 SIGNIFICANCE OF YEAR 15 Initial compliance period expires at the end of Year 15 Can transfer ownership in year 16 without recapture Tax credit transactions are envisioned by investors as 15-year investments Most investors are ready to dispose of their interest in year 16 32

33 EXIT STRATEGIES: POSSIBLE SCENARIOS Right of First Refusal to purchase property Buyout option to purchase partnership interest Purchase within compliance period ( Early Exit ) 33

34 RIGHT OF FIRST REFUSAL Formula Price = Debt plus Exit Taxes (Parties may agree to add an adjuster for unpaid benefits) Formula Price is available to: Tenants Resident management corporations Qualified nonprofits Government agencies 34

35 RIGHT OF FIRST REFUSAL Issues with Right of First Refusal: Is a bona-fide 3rd party offer required? Formula Price may exceed fair market value Reserves not included Transaction costs 35

36 BUYOUT OPTION OF PARTNERSHIP INTEREST Typically, option price is greater of: Fair Market Value of Partnership Interest Or Unpaid Benefits plus Exit Taxes 36

37 EARLY EXIT Investor can dispose of its interest prior to Year 16, provided LIHTC compliance is maintained An indemnity agreement is required to protect the exiting investor and syndicator may retain rights to access property and files through Year 15 37

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