Circling the Wagons: General Partner Replacements

A Partnership is like a Marriage… They are built & thrive on trust that both partners will honor their commitments and communicate honestly, openly, and often.

Yet some still end in Divorce…

Divorce can be messy and should be avoided if possible… The Preferred Strategy: Don’t form a marriage with a partner likely to default. Underwrite your partners thoroughly including: Lien and Judgement Searches Pending Litigation Bankruptcy Searches UCC Violations Background Checks (including criminal) Credit Checks Financial Review Reference Checks Google Search Review all parties including GP, Developer, Sponsor, Guarantors, Affiliates, etc. .

The Prenuptial Agreement – Partnership Agreement Make sure to include partners’ respective expectations and establish grounds, mechanics, and consequences of and for default and removal. Know and understand your agreement: Which items are defaults Which defaults are grounds for removal What are the notice requirements What are the cure periods for various types of defaults

The Prenuptial Agreement – Partnership Agreement Common Removable Offenses Include: Fraud, Gross Negligence, Willful Misconduct Breach of Fiduciary Duty Material Breach of Partnership Agreement, Guaranty, or Development Agreement Breach of “Project Documents” (Loan Documents, Regulatory Agreement, etc.) Actions by GP that cause loss of Partnership limited liability protections Bankruptcy of GP or Guarantors Material Mismanagement of the Project Predefined Material Reduction in Tax Credits It is recommended to include as a removable offense failure of GP to fund operating deficits even after the ODG has expired. If GP is not willing to support the project, should they really still be entitled to fees and residual value of the project?

Filing the Paperwork Is this a voluntary or involuntary separation? Removal for cause: Strictly follow notice provisions Take note of cure periods None for things like fraud Generally 10 days for monetary items Generally 30 days for non-monetary items Is it something that can even be cured? What other consents or notices may be necessary? Lender consent State Agency consent or notice

Partner Response – What Happens Next Removal notice may elicit some or all of the following responses: Request for release from liability Demand for payment of fees and/or value of interest Dispute of the facts Litigation General Partner should not be rewarded for defaulting on its obligations by being permitted to simply walk away while the Limited Partner has millions of dollars at risk and faces potential recapture of tax credits and/or ongoing financial needs of the project.

Dividing the Assets – Financial Matters *Always consult your financial and legal advisors* Typical fees/amounts payable to the GP or affiliates may include: Developer Fee Partnership Management Fee Incentive Management Fee Property Management Fee Operating Deficit or Support Loans Treatment of various fees may depend if they have been earned or services were provided, if they are accrued, if they are part of basis, etc. What does the LPA say? Hopefully you included these things in your prenuptial agreement.

What About the Kids? Identify what other parties are involved or impacted: Lenders Soft Debt Providers Service Providers Management Agent State Agency State/Local Municipalities How are they involved? Are they related parties? Are they willing to help? Might they make things worse?

Finding a New Partner – The 2nd Marriage The LP must be prepared to move on quickly! Must designate a new GP immediately A Partnership without a GP may be dissolved as a matter of law within 90 days Will the replacement GP be an affiliate of the LP, the SLP, or an unrelated 3rd party? If the answer is a 3rd party, what’s in it for them? What are the economics of the deal? What are the ongoing needs? This should have been identified early in the process!