IPED Tax Credit Property Disposition 2008: Obligations and Opportunities Through Year 15 and Beyond

Boston, Massachusetts, November 20-21, 2008

William X. Lang, Esq. Tatiana Gutierrez Abendschein, Esq.Nixon Peabody LLP Nixon Peabody LLP437 Madison Avenue 401 9th Street, NW, Suite 900New York, New York 10022 Washington, DC 20004(212) 940-3095 (202) 585-8860wlang@nixonpeabody.com tgutierrez@nixonpeabody.com

Assess Your Rights and Duties at Year 15

PART I:

THE USE RESTRICTIONSMEMO

What is a Use Restrictions Memo?

A memorandum prepared soon after you select a property for disposition that answers the following questions:

– What use restrictions currently encumber the property?

– What use restrictions will remain after transfer of the property?

– What approvals are required for transfer of the property or any interest therein and how long will it take to obtain these approvals?

The use restrictions memo is meant to facilitate marketing of the property and negotiations for the sale

What is a Use Restrictions Memo? (cont’d)

Example of 123 Property

– 56 units on floors 3 through 9 on one of 2 structures located at 123 East Main Street in Manhattan.

– The partnership owns the multifamily rental portion and the Neverending Church Society owns the land, floors 1, 2 and 10 and an adjacent structure.

– 32 of the 56 units were developed per NYC Inclusionary Zoning Program, and 24 pursuant to the 421a tax exemption program

– LIHTC were generated on the property in 1990. We represent the LIHTC limited partners who want to dispose of their interest in the 56 units.

Where to Start? Gather all partnership, financing, building and

financial documents.

Ask the following questions:

– Who was the land originally acquired from?

– How was the property construction or rehabilitation financed?

– Does the property receive any tax abatements or exemptions?

Where to Start? (cont’d)

Example of 123 Property

– The partnership acquired title from the Neverending Church Society (indenture).

– Original construction loan now extinguished. Construction also financed with the equity proceeds from the LIHTC syndication (15 year term on LIHTC covenants)

– 421a tax exemption program and Inclusionary Zoning program (each with a restrictive covenant).

Watch out for Restrictions that Survive Prepayment of Financing and Transfer

Proxies for long-term restrictions:

– Of course, presence of LIHTC (extended LIHTC compliance period)

– HUD participation (Wellstone, 250(a), LIHPRHA, ELIHPHA, CDBG, HOME)

– State and/or local program originally financed the deal; and/or

– Local tax abatements or exemptions

Watch out for Restrictions that Survive Prepayment of Financing and Transfer (cont’d)

Examples of long-term restrictions:– Number and configuration of rental units

– Maximum rents and incomes

– Local rent stabilization law applicability

– Prohibition on condo/coop conversions

– Tenant selection and marketing

– 3rd party approvals of management agent and agreement

– 3rd party consent to transfer of property or interests in owner

– ** Also, watch our for local “preservation” laws **

Watch out for Restrictions that Survive Prepayment of Financing and Transfer (cont’d)

Example of 123 Property – Income Restrictions

– Inclusionary units: maintained as lower income housing (80% of AMI and below) in perpetuity

– 421a units: maintained as lower income housing until 2011 (indenture trumps)

– Indenture: 56 units maintained as lower income housing from the date of initial occupancy until the later of Dec. 30, 2012 or the date that is 21 years after the death of the last survivor of a group composed of members of the Neverending Church as of 1990 with a reversion provision

Watch out for Restrictions that Survive Prepayment of Financing and Transfer (cont’d)

Example of 123 Property – Rents

– Inclusionary Units: restricted to “fair” rents (initially 30% of annual income and subsequently per Rent Stabilization)

– 421a Units: increases subject to Rent Stabilization

Watch out for Restrictions that Survive Prepayment of Financing and Transfer (cont’d)

Example of 123 Property – Misc.

– Management must be a qualified non-profit qualified by HPD

– Must maintain special operating reserve funds

– The 56 units comprise one condominium unit, the other 2 condo units are owned by the Society, and Bylaws govern the 3 units’ interaction

What Use Restrictions Currently Encumber the Property?

Financing documents requirements (expire if financing prepayed)

– Submission of audited financial statements

– Due on sale clauses

– Consent of mortgagee for assignment and assumption

– Notice to mortgagee of management changes

– Building reserve fund requirements

What Internal Consents Needed for Transfer?

Partnership document requirements for transfers?

– May GP withdraw without consent of LPs?

– Does GP have option to purchase property?

– Does LP need GP consent to withdraw?

– Can LP force a sale?

– Which partners must consent to transfer of property?

How Long Will Approvals Take?

Assess prepayment notice periods and fees

Assess whether any parties have rights of first refusals or options

If governmental approvals required for transfer give yourself leeway of 6 months to be safe

How Long Will Approvals Take? (cont’d)

Example 123 Property

– The Society has an option to purchase the 56 units between January 1, 2007 and December 31, 2009

– Owner of 56 units must notify HPD in writing of the assignment of 421a and Inclusionary Zoning agreements to a new owner

– LPs may dispose of interests without GP consent

Moral of the Story

If you are disposing of a tax credit property, preparing a “use restrictions” memo early will facilitate the structuring of your transaction and save all parties time later on.

And, believe it or not, the owner of the 56 units at 123 Apartments has the units under contract . . .

PART II:

The Purchase and Sale

What is the Structure of the Deal?

Assignment of Seller’s partnership interests to Purchaser

Sale of the Limited Partner’s partnership interest to the General Partners

Straight Deed transfer of the Property pursuant to a Purchase and Sale Agreement

What is the Structure of the Deal ? (cont’d)

Example 123– Seller offered to sell partnership interests, but

Purchaser is a not-for-profit and cannot own a for profit entity.

– Result is a deed transfer

Drafting the Purchase and Sale Agreement

Depending on the structure of the deal you will need to draft– Standard Purchase and Sale Agreement; or

– Assignment of Partnership Interests This could vary depending on if you are just

selling 100% of the partnership interests or just the limited partnership interests

Drafting the Purchase and Sale Agreement (cont’d)

Before drafting you need to review the Restrictions Memo carefully

The Restrictions Memo should be attached as an Exhibit to the P&S and Purchaser should represent that they are familiar with the terms

Same issues as in a standard real estate contract

Drafting the Purchase and Sale Agreement (cont’d)

Example 123

– Since it is a straight deed transfer, we used a standard Purchase and Sale Agreement

Negotiating the Purchase and Sale Agreement

Specific contract issues to be aware of with respect to the disposition of a low income housing property:– Time Periods for approvals

– Right to terminate if approvals are not obtained within such time periods

Negotiating the Purchase and Sale Agreement (cont’d)

– Representation from Purchaser that he/she/it is in good standing with agencies and will not impede obtaining the approvals

– Who is responsible for obtaining the approvals – Seller or Purchaser

– Assumption of regulatory agreements, loan documents, etc.

Negotiating the Purchase and Sale Agreement (cont’d)

– Issues related to Selling within the Compliance Period: No longer a Recapture Bond requirement Need Indemnity from Purchaser and

preferred practice is to get personal guarantee from principal of Purchaser

May want representation regarding net worth of guarantor

Negotiating the Purchase and Sale Agreement (cont’d)

Example 123– Actually a rather smooth negotiation

– Issues that have arisen on other deals: Net worth of guarantor in compliance period

deals Rights to terminate for failure to obtain

approvals

Contract to Closing

If obtaining approvals, need to do so If Purchaser is obtaining approvals, need to

monitor and cooperate Need to make sure all partnership/corporate

consents and authorizations are in place Mortgage payoffs – what is the time period for

notice? Are there prepayment penalties? Standard real estate closing issues

Closing and Post Closing

In most cases, standard real estate closing Be aware of which, if any, of the approvals need to

be recorded – if so, make sure you have originals at closing

Some agencies (e.g., New York City DHCR under the LIHTC Regulatory Agreements) need to be notified within 30 days of the Closing of the transfer

Closing and Post Closing (cont’d)

Have Brokers take you out to a nice Closing Dinner!!