General Partner Interest Transfers

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General Partner Interest Transfers

• Legal / Business Issues
• Robert H. Adkins
• Boston, MA

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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

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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

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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

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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)

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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

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Regulatory consents

• HUD
• 2530 approval of new GP
• Modified TPA (transfer of physical assets)
  approvalpotentially time consuming
• Credit agency

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Lender consents

• First mortgage lender
• New GP must meet underwriting criteria
• New GPs 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 consentstrustee,
  servicer, credit enhancer, bond holders
• Soft money and other subordinated lenders

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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?

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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

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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

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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

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Tax issues

• Disaffiliation of new GP from its affiliate
  which receives deferred development fees
• Capital accountscause distortion of sharing of
  sale proceeds?
• Price allocation among interests in portfolio

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• Now you know everything!
• Robert H. Adkins
• Nixon Peabody Boston
• 617-345-1239
• radkins_at_nixonpeabody.com

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