WHEN ALL ELSE FAILS

1

• WHEN ALL ELSE FAILS
• LITIGATION, GENERAL PARTNER
• REMOVALS, WORKOUTS

By Deborah Thaxter Nixon Peabody LLP IPED
Boston, MA October 11-12, 2007
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LITIGATION ANALYSIS IS CRITICAL TO YOUR WORKOUT
OR DISPOSITION PLAN

• (The word Sues is not a forbidden four letter
  word) !!
• Know your rights and your leverage
• Marshall your troops at the border
• Choose your forum If you dont, they will
• You cannot escape litigation is everywhere

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WHEN THE LP AND GP HAVE DIFFERENT DISPOSITION
STRATEGIES
WHEN THE LP WANTS TO SELL AND GP SAYS NO WAY

• Specific Exit Provision
• Timing issue
• Right of First Refusal

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WHEN THE LP WANTS TO SELL AND GP SAYS NO WAY
(cont.)

• Dissolution Provisions
• State Law Requirements
• Impact on the Waterfall
• What actually happens after dissolution

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WHEN THE LP WANTS TO SELL AND GP SAYS NO WAY
(Cont.)

• GP Removal Provisions
• With or Without Cause
• Fiduciary Duties
• Forfeiture vs Push Aside
• Management Agent Removal

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WHEN THE LP WANTS TO SELL AND GP SAYS NO WAY
(Cont.)

• LP Right to Sell or Assign its LP Interest
• Threat of Unfriendly Third Party
• Assignment of Economic Benefits
• 13 to 18 Year Window

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WHEN THE LP WANTS TO SELL AND GP SAYS NO WAY
(Cont.)

• LP Leverage Based on Required Consent for
  Refinancing
• Debt/Equity Conflict
• Negotiated Exit Language
• Prepayment Penalty Payback

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WHEN THE GP WANTS TO SELL AND THE LP PREFERS
STATUS QUO

• Unilateral Transfers
• Timing and Recapture Bonds
• Disclosure Obligations
• Fiduciary duties?
• Immediate flip in higher value
• Resyndications

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WHEN THE UPPER TIER INVESTORS BECOME RESTLESS

• Public Funds
• Books and Records Request
• Threats to Proxy Contests
• Corporate Funds
• Recapture Risks
• Take Over of GP Syndicator Role
• Self-Dealing Concerns

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ARE YOU READY FOR A FIGHT?

• Where can the lawsuit be brought?
• Should you be first to the Courthouse?
• Do you own the moral high ground?
• Will it help or hurt your exit strategy?

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REVIEW PROJECT DOCUMENTS
KEY PARTNERSHIP PROVISIONS

• Removal of property manager
• Removal of GP
• Push aside or forfeiture
• Cure period
• Valuation of GP interest
• Deferred Developer Fees

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REVIEW PROJECT DOCUMENTS
KEY PARTNERSHIP PROVISIONS (CONT.)

• Repurchase
• GP Development and Operating Deficit Obligations
• GP and Developer Guaranties
• Adjusters
• Venue and Jurisdiction

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KEY LOAN PROVISIONS

• Events of Default and Cure Period
• Foreclosure Procedure
• Guaranties
• Consent required for change in General Partner
  and property manager

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MARSHALL YOUR FORCES AND TAKE CHARGE
AT CONSTRUCTION PHASE

• Problems
• GP Affiliated General Contractor with multiple
  projects
• Delays and Cost Overruns
• Failure to meet place in service date and loss of
  credits

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MARSHALL YOUR FORCES AND TAKE CHARGE
AT CONSTRUCTION PHASE (CONT.)

• Protections
• Construction contract terminates with removal of
  affiliated G.P.
• Payment and performance bonds
• Subguard insurance products
• Dont leave construction draw monitoring to
  lender
• Site visits

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MARSHALL YOUR FORCES AND TAKE CHARGE
AT CONSTRUCTION PHASE (CONT.)

• Remedial Actions
• Exercise rights under payment and/or performance
  bonds
• Remove and replace GP
• Terminate construction contract
• Work with local tax credit agencies to swap or
  secure additional credits
• Repurchase demand

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MARSHALL YOUR FORCES AND TAKE CHARGE
AFTER LEASE-UP

• Problems
• Low occupancy, negative cash flow and growing
  payables
• Failure to pay debt service or property taxes
• Deferred maintenance low REAC Scores
• The gap between construction and permanent
  loans
• Misappropriation or co-mingling of funds
• Compliance issues
• Failure to provide yearly audited financials

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MARSHALL YOUR FORCES AND TAKE CHARGE
AFTER LEASE-UP (CONT.)

• Protections
• Strong key partnership provisions
• Properly documented advances
• Properly documented demands for corrective
  behavior
• Workout agreement and escrow of removal documents

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MARSHALL YOUR FORCES AND TAKE CHARGE

• Remedial Actions
• Replace property manager
• Voluntary vs. involuntary removal
• Remove and Replace GP
• Has GP shown willingness to work with LP?
• What are the grounds for an involuntary removal?
• Push aside v. complete removal
• Can the GP interest be sold to a new third party
  GP?
• 2530 red flag risk and who wants the liability?
• Send monetary demands to GP and Guarantors

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CHOOSE YOUR FORUM AND PICK YOUR TIME

• Location of your business vs. location of
  property or adversary
• State vs. Federal
• Use of Declaratory Judgment to pick forum
• Requests for injunctive relief who goes first?
• Are the defaults substantial?
• Misappropriation of funds
• Risk of loss of credits due to failure to meet
  placed in service date

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CHOOSE YOUR FORUM AND PICK YOUR TIME

• Risk of Foreclosure
• Federal and state regulatory problems
• Failure to provide financial information
• Can your adversary afford to litigate
• GP/Developer claims
• Debt/equity conflict
• Poor underwriting vs. poor management
• Promises made to GP to step into existing project
• Failure to fund equity advances

22
CHOOSE YOUR FORUM AND PICK YOUR TIME

• Upper tier investor pressure
• Greater investor scrutiny
• Recent investor lawsuits
• Use of upper tier reserves

23
LITIGATION IS HERE TO STAY

• City vs. Property Partnerships
• Administrative proceeding to shut down property
  as a public nuisance
• Court proceeding by sheriff to declare property a
  public nuisance and to require extensive
  security improvements
• GP/GC vs. LP Sponsor/Syndicator
• Termination of construction contracts and lien
  filings
• Removals of GP and/or property manager
• Bankruptcy litigation over effect of removal of
  GP (358 B.R. 24)

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LITIGATION IS HERE TO STAY

• Third party suits against agencies, including
  against tax credit authority that granted tax
  credit swap
• Recovery of and defense against monetary demands
  against GPs and Guarantors
• Upper tier institutional investors vs.
  Syndicators
• Books and Records
• Removals of Syndicators as General Partners
• Exit strategy disputes over consents, back end
  splits and recapture

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NEGOTIATING A WORK-OUT AGREEMENT

• Does GP stay or go?
• How value GP interest?
• Does GP keep residual interest as SLP?
• Who Pays What to Whom
• GP fees
• GP loans amount and priority

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NEGOTIATING A WORK-OUT AGREEMENT (Contd)

• Capital contribution advances vs LP Loans
• Tax consequences of canceling developers fees
• Cash payments
• Remedy for Defaults under Workout Agreement
• Signed assignment and partnership amendment
  documents in escrow

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NEGOTIATING A WORK-OUT AGREEMENT (Contd)

• Forfeiture of fees
• Penalty payments
• Cross-collateralization and cross-default
  provisions
• Bankruptcy Proof Provisions
• Venue and Jurisdiction

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NEGOTIATING A WORK-OUT AGREEMENT (Contd)

• Release
• General or limited in scope
• Time period covered
• Tax compliance carve-out
• Effect on guaranty of non-released party
• Representations as to liens, payables and claims

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