1. Section One Every Year 15 Exit Negotiation is Won Before It’s Ever Fought
Sun Tzu Hoffman

2. Introduction to Klein Hornig LLP
Klein Hornig LLP is one of the nation’s premier firms concentrating exclusively on affordable housing and community development.
Klein Hornig attorneys have worked on a range of Year 15 exits and issues:
Amicus Curiae Brief to Massachusetts Appeals Court for Homeowners Rehab, Inc., c Related (Centerline) in 2017
Committee Member & Drafter of Stewards of Affordable Housing for the Future (SAHF) Memo to Members on ROFR Provisions
Refinancings, Recapitalize with LIHTCs, Full Redevelopment projects
Portfolio Exits for National Nonprofit
GP Purchases by Third Parties & Related Party Interest Acquisitions
Partnership Redemptions from Refinancings
For-profit Options, Nonprofit ROFRs and Options
Collegial and Adversarial Exits
Tax Mitigation Strategies (for nonprofits with taxable blockers)
Founded in 2002, Klein Hornig has 39 attorneys operating out of offices in Washington, DC and Boston, Mass.

3. ROAD MAP Part A—Projections and the LOI Capital Account Rules
Going Negative! … and Fixes
Flying High! … and Fixes
Part B—The Partnership Agreement
MM Authority
Forced Sales, Puts, and Qualified Contracts
Restrictions on LP Transfers
Part C—Rights of First Refusal (will skip)
ROFR versus Option
Trigger, Terms & Defaults
THE PRICE
Anticipating Federal Legislation

4. Part A. The Projections & the LOI
Review Assumptions to ensure conclusions are relatively accurate
Review Residuals and Capital Accounts in Year 15
Inform Negotiations at LOI Stage on Exit Provisions

5. 1. Capital Account Rules (in plain English)
Year 0, Capital Account is 0
Capital Contributions Increase CA
Income & Gain Allocations Increase CA
Loss & Deduction Allocations Reduce CA
Distributions Reduce CA
Liquidation, IRS says Capital Accounts Back to Zero

6. 2. Two Sets of Projections—Running Negative
$975,000 of Exit Taxes!
$450,000 of Exit Taxes
Emperor Trump will spend on Daily Golf!
Year 15 Special Only!

7. Upfront LOI Fixes—Negative Cap Acct
The Flip—flip losses from the Investor to the MM, but will reduce yield (lost losses years 11-15).
“In addition, in the first taxable year following the last year in which Tax Credits are allocated to Investor, net taxable losses may be allocated 90% to the Managing Member but only after the Investor Member’s capital account has been reduced to zero.”

8. 3. Cap Account Running FLYING HIGH
Limited Partner - Federal
Year 1 3 4 11 15 17
Cap Account
Beginning Balance $0
1,705,094
15,263,962
11,270,864
8,777,132
7,624,230
CapCon (+)
14,493,303
852,547 -
CashDist(-)
(15,528)
(18,407)
(19,804)
Allocation of Partnership Net Income (Loss)
(934,436)
(731,451)
(634,531)
(566,311)
(521,222)
ENDING BALANCE
$1,705,094
15,385,058
10,620,805
8,192,414
7,083,204
Slow Decline
Back-ended equity
I am gonna cost you dearly!

9. Negative Bad, so Positive Good, Right?
Year 1 Balance Sheet
Year 15 Balance Sheet
Assets Land: 3,000,000 Bldg: 17,000,000 Total: 20,000,000 Liabilities Debt: 6,200,000 Initial Inv. CA: 13,800,000 Total: 20,000,000
Assets
Land: 3,000,000
Bldg: ,800,000
($17MM - $9.2 Deprc)
Total: ,800,000
Liabilities
Debt: ,200,000 Int.Only
Investor CA: 4,600,000
Total: ,800,000
Initial – Total Losses
Year 1 – Year 15 Total Losses (Assume All Depreciation) = 9,200,000

10. 90-10 Split, right? Surprise! Sale in Year 16 Gain Allocation 90/10
Sales Price 22,000,000 Land 3,000,000 Building 7,800,000 Net Gain $11,200,000 Sale for $22,000,000 Debts 6,200,000 Cash Proceeds: 15,800,000
Investor CA 4,600, % Gain 1,120,000 Investor End CA 5,420,000 GP CA 0 Cash Allocations Investor (36%): $ 5,720,000 GP (64%): $10,080,000

11. Upfront LOI Fixed & Positive Cap Acct #1 Avoid Liquidation Provisions!
Negotiate the right to purchase the Investor interests at FMV without liquidation, “deemed Liquidation” or reference to “sale”

12. Investor Interests without Liquidation
LOI Provision: For the period of (__) months following the close of the Compliance Period (the “Option Period”), the General Partner or its assigns shall have the option (the “Option”) to purchase the interests of the Investment Limited Partner and the Special Limited Partner in the Partnership for a purchase price equal to the fair market value of such Interests. The acquisition of the interests of the Investment Limited Partner and the Special Limited Partner shall not liquidate the Partnership provided the Partnership maintains two partners at all times.
Typical LPA Mark Up

13. Upfront LOI Fix—Positive Cap Account #2 Rebalancing of Capital Accounts
LOI Provision
“In addition, upon liquidation of the Company, taxable gain will be allocated in a manner that will causes, as nearly as possible, the Member’s positive capital accounts to be in the same ratio as Capital Transaction proceeds are to be allocated.”

14. LPA Rebalancing Provision
Typical LPA Mark Up
Seventh,, the balance thereof, if any, shall be distributed annually, ninety (90) days after the end of the Fiscal Year, 10% to the Investment Limited Partner and 90% to the General Partner

15. Upfront LOI Fix & Positive Cap Acct Reducing Value of Project and Interest
LOI Provisions
At the end of the 15 year Credit Compliance Period, the Managing Member or an affiliate of Guarantor will have the option to purchase either the Investor Member's interest in the Company or the Project for a 42 month period after the Compliance Period at a price equal to the appraised value of the Investor Member’s interests or the Project, as applicable, assuming that the Project remains available for low-income use and subject to any discounts the appraiser determines are appropriate, in its sole and absolute discretion, which may include the Right of First Refusal, and with respect to the Investor Member’s interest, discounts for lack of control and marketability (the “Appraised Value”).
Control the Appraiser
The Managing Member shall select the appraiser, which shall not be subject to the approval of IM as long as such appraiser is MAI with at least five years’ experience in valuing multifamily affordable projects.
No Investor Rights to Exit (other than Nominal Put)
Sale of Project; Other than the $100 Put Right, the Investor Member shall not have the ability to force the Managing Member to market or sell the Project or to require the Managing Member to request that the Virginia Housing Development Authority find a buyer pursuant to a qualified contract under Code Section 42(h)(6)(E)(ii)(II).

16. Part B. The LPA and Exits Partnership Agreements & Related Provisions
MM Authority and Consents-
No consent if consistent with ROFR
Forced Sales, Puts & Qualified Contracts
Restrictions on LP Transfers

17. 1. Managing Member Authority
The General Partner shall not, without the Consent of the Special Limited Partner have any authority to:
Enter into a contract for the sale or disposition or sell or otherwise dispose of, at any time, all or substantially all of the Apartment Complex or any portion of the Land upon which the Apartment Complex is built (except for the ROFR Agreement which will not require such Consent);

18. Year 10 Option

19. 2. Puts and Forced Sales Worst Language
(c) The Investor Limited Partner shall have the right to require the General Partner (or its designee) to acquire all, but not less than all, of the Investor Limited Partner’s Interest for a price equal to the amount that the Investor Limited Partner would receive if the Project were sold for its fair market value (determined as described in (a) above).
Better Language
Put Option: At any time after [[Alternatives: (1) the last expiring Compliance Period applicable to any building in the Apartment Complex or (2) payment of Limited Partner’s entire Capital Contribution]] Limited Partner may require that General Partner purchase Limited Partner’s Interest and Special Limited Partner’s Interest, subject to all then existing liens and encumbrances to title, for an amount equal to $100 (the “Put Option”). Limited Partner and Special Limited Partner will represent that such Partner has not previously transferred its Interest and such Partner’s Interest is free of liens or encumbrances other than those contemplated by the Partnership’s Loans and/or by this Agreement. Limited Partner and Special Limited Partner agree that General Partner will have no liability for any adverse consequences to Limited Partner or Special Limited Partner as a result of the exercise of the Put Option, including, but not limited to, recapture or lost Tax Benefits.
Best Language (nothing)

20. Just Say NO to Qualified Contracts

21. 3. Restrictions on LP Transfers
See me after the Session!

22. Part C. Right of First Refusal
ROFR versus an Option
Triggering the ROFR: bona fide what?
Terms of the ROFR—time to exercise and time to close
Default and Removal—easy come, hard to go
Reserves must be part of the Property, right?
Buying the Limited Partner Interests
Formula Price may exceed fair market value

23. ROFR versus an Option Option Option can be unilaterally exercised
Option must be at Fair Market Value
ROFR
ROFR must be “refusing” another offer, so not unilateral
ROFR can be at the Statutory Price in IRC sec. 42(i)(7) (or higher)

24. Trigger Language for the Right
WORST ROFR Trigger Language:
2. Grant of Refusal Right. In the event that the Partnership receives a bona fide offer to purchase the Apartment Complex (other than under the circumstances described in paragraph 1), which offer the Partnership intends to accept, Grantee shall have a right of first refusal to purchase the Apartment Complex (the “Refusal Right”) for a period of twelve (12) months (the “Refusal Right Period”) following the close of the Compliance Period, on the terms and conditions set forth in this Agreement and subject to the conditions precedent to exercise of the Refusal Right specified herein. In addition to all other applicable conditions set forth in this
Better ROFR Trigger Language:
in the event that the Partnership determines to sell or receives an offer to purchase the Project, which offer the Partnership intends to accept (the “Offer”), Grantee or City shall have a right of first refusal to purchase the Project (the “Refusal Right”) [and CHECK LPA for Investor rights to consent to sale]
Best ROFR Trigger Language (2 options):
1. Grantor grants to Sponsor a right of refusal (the " Right of Refusal"), commencing on the expiration of the Compliance Period with respect to the Project, as defined in Section 42(i)(I) of the Internal Revenue Code (the "Code"), and terminating on the fifth (5th ) anniversary thereof, to purchase the Property in the event Grantor proposes to sell, transfer, assign or ground lease all or substantially all Grantor's interest therein.
2. Grant of Refusal Right. Commencing on December 31 of the 15th year of the Compliance Period and for a period of thirty-six (36) months thereafter (the “Refusal Right Period”), in the event that the Partnership determines to sell or receives an offer to purchase the Project, which offer the Partnership intends to accept, or receives any bona fide third party offer to Purchase the Project (the “Offer”),

25. Terms of the ROFR— time to exercise and time to close
Worst: One (1) Year from end of Compliance Period
Better: 24 Months
Best: years or no time limit
Time to Close
Worst: Silent or Less than 90 days
Better: 120 days
Best: days or more, plus additional time to make tax credit application based on annual cycle
Other Terms (of a purchase agreement)

26. Default and Removal
Worst—“Purchaser's exercise of the right of first refusal granted herein is contingent upon any Affiliate of Purchaser not being in default of its obligations under the Operating Agreement.” Better—“The right of first refusal granted under this paragraph 1 shall terminate in the event of the removal of the General Partner.” Best—“The right of first refusal granted under this paragraph 1 shall terminate in the event of the removal of the General Partner and any continuing event of default that may prevent the Beneficiary from exercising the Refusal Rights may be cured by the General Partner during the ROFR Period.”

27. Reserves must be part of the Property, right
What does the Internal Revenue Code allow?
(A) In general. No Federal income tax benefit shall fail to be allowable to the taxpayer with respect to any qualified low-income building merely by reason of a right of 1st refusal held by … to purchase the property after the close of the compliance period for a price which is not less than the
minimum purchase price …
What is the Property?

28. Including the Reserves
Worst—“WHEREAS, the Partnership was formed for the purpose of acquiring, owning or leasing, developing, constructing and/or rehabilitating, leasing, managing, operating, and, if appropriate or desirable, selling or otherwise disposing of a residential project located in Alexandria, Virginia (the “Project”) on the land described on the attached Exhibit A; and” Better—Include language in the LPA allowing release of reserves or the GP to use reserves to pay debt, improve property, pay ROFR price Best—“WHEREAS, the Partnership was formed for the purpose of acquiring, owning or leasing, developing, constructing and/or rehabilitating, leasing, managing, operating, and, if appropriate or desirable, selling or otherwise disposing of a residential project, including all reserves established therefor, located in Alexandria, Virginia (the “Project”) on the land described on the attached Exhibit A; and”

29. Buying the LP Interests (same issue, what is the property?)
Worst—no right to purchase interests other than option at FMV
Better—“Alternative Purchase of Partnership Interests. In addition to the foregoing, if the Internal Revenue Service hereafter issues public authority to permit the owner of a low-income housing tax credit project to grant a “right of first refusal to purchase partnership interests” pursuant to Section 42(i)(7) of the Code as opposed to a “right of first refusal to purchase the Project” without adversely affecting the status of such owner as owner of its project for federal income tax purposes…
Best—“…to purchase the Property or the interests of the Limited Partner and the interests of the special limited partner of the Owner, if any (collectively, the "Interests of the Limited Partner"), in the event Owner proposes to sell…”

30. ROFR Purchase Price
2. Refusal Right Purchase Price. The purchase price for the Project (the “Refusal Purchase Price”) pursuant to the Refusal Right shall be the lesser of
(i) the price in the Offer or the proposed sales price, provided such price is not less than the fair market value of the Project subject to all restrictive covenants or other agreements regarding use of the Project as affordable housing, any such appraisal to be made jointly by two independent appraisers, one selected by the Partnership and one selected by Purchaser. If the appraisers are unable to agree on the fair market value of the Project, they shall jointly appoint a third appraiser. The decision of a majority of such appraisers shall be final and binding. Each party shall pay the cost of its own appraiser and shall evenly divide the cost of the third appraiser, if necessary, or
(ii) the sum of the principal amount of outstanding indebtedness secured by the Project (other than indebtedness incurred within the 5-year period ending on the closing on the sale of the Project) and all Federal, state and local taxes projected to be imposed on the Partners of the Partnership to such sale including federal income tax liability incurred as a result of the payment of purchase price. The purchase price shall comply with and be interpreted and calculated consistently with the provisions of Section 42(i)(7)(B) of the Code. In the absence of formal IRS guidance or legal precedents to the contrary, the phrase “principal amount of outstanding indebtedness” shall exclude any accrued interest owed. In the event that accrued interest is determined to be included in the phrase “principal amount of outstanding indebtedness,” then, in the absence of formal IRS guidance or legal precedent to the contrary, the phrase “other than indebtedness incurred with the 5-year period ending on the Closing Date” shall include any accrued interest incurred in the 5-year period ending on the Closing Date that remains unpaid as of that date. The Partnership agrees to accept Purchaser’s computation of the amount described in this clause (ii) if the method of computation is supported by an opinion of a national or regional law firm with recognized expertise in matters relating to Section 42 of the Code.

31. Section TWO Preparing for The Exit

32. Planning and Implementing an Effective Year 15 Strategy September 2019

33. Your Presenter Jennifer Burris, Tax Senior Manager
Dixon Hughes Goodman LLP

34. About DHG

35. DHG Affordable Housing Experience

36. Document Requirements
Partnership Agreement; including all amendments
Purchase Options and Right of First Refusal Agreements
Partnership Interest Option Agreements
Most Recent Audited Financials & Tax Returns
Current Year to Date Financials
Partner Tax Basis Schedules
Depreciation/Amortization Schedules
Loan and Regulatory Agreements
Original Underwriting Projections
Current Capital Need Assessments/Estimate of Needed Repairs
Appraisal

37. What We Analyze Tax basis of partners
Liabilities to potentially be paid off or reimbursed to related parties/partners
Reserve accounts and ability to use those funds for various purposes
Exit tax calculations
Pros/Cons of various options

38. Options Sale the property to third party
Exercise Right of First Refusal
Purchase Investor’s interest
Bargain Sale of Property
Prior to Year 15 exit
Re-Syndicate Property
Qualified Contract

39. Managing Exit Taxes Forgive debt
Change allocation percentages after credits
Capitalize rather than expense repairs, slow depreciation on new assets
Change debt structure to change loss allocation to MM/GP
Use tax code to re-allocate losses from Investor

40. Gain Allocation First to negative capital accounts
Second to investor until capital account equals the tax liability from the gain
Third to balance the capital accounts to cash flow distribution percentages

41. Cash Flow for Liquidation
First to pay debt/liabilities
Second for reserves related to closing costs
Third for Investor payables
Fourth for MM/GP payables
Last pro-rata in accordance with positive capital account balances