W h o G e t s W h a t W h e n t h eP a r t n e r s h i p i s L i q u i d a t e d

Presented By:Terence KimmTerry.Kimm@CohnReznick.com301-657-7766

To d a y ’ s A g e n d a

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Partnership Capital Accounts 

Sample Partnership Agreement

Sample Back End Calculations• 4% deal

• 9% deal

Concluding Comments

P a r t n e r s h i p C a p i t a l A c c o u n t s

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All Partners in a Partnership Have a Capital Account 

Safe Harbor Capital Account Maintenance Rules under IRC 704(b)• All Capital Accounts Start at Zero

• Increased by Capital Contributions

• Increased by Income & Gain Allocations

• Decreased by Loss & Deduction Allocations

• Decreased by Distributions

• Upon Liquidation, all Capital Accounts Return to Zero

S a m p l e P a r t n e r s h i p A g r e e m e n t

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Partnership Profit, Loss & Cash allocations controlled by Partnership Agreement

• Section 5 – Allocations of Profits from Capital Transactions • Section 6 – Distributions and Applications of Cash Flow from Capital

Transactions

• Section 10 – Dissolution and Termination of the Partnership

S e c t i o n 5 – A l l o c a t i o n s o f P r o f i t s f r o m C a p i t a l T r a n s a c t i o n s

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Profits from a Capital Transaction shall be allocated to the Partners in the following order of priority:

A) To the LP to eliminate any negative capital account.

B) To the GP to eliminate any negative capital account.

C) The balance to the Partners in accordance with their sharing ratio of Section 6G.

S e c t i o n 6 – D i s t r i b u t i o n s a n d A p p l i c a t i o n s o f C a s h F l o w f r o m C a p i t a l T r a n s a c t i o n s

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Sale or Refinancing Proceeds shall be applied in the following order of priority:

A) To the payment of all expenses of such sale or refinancing.

B) To the payment of all debts and obligations of the partnership other

than amounts owed to Partners.

C) To establish any Reserves reasonably required by the GP.

D) To repay any LP Loans.

E) To repay any GP Loans.

F) To repay any balance remaining on the Development Fee.

G) The balance shall be distributed 20% to the LP and 80% to the GP.

S e c t i o n 1 0 – D i s s o l u t i o n a n d Te r m i n a t i o n o f t h e P a r t n e r s h i p

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10.1 Events which cause a Dissolution of the Partnership shall include:

A) Election made by the GP with the consent of the LP

B) Withdrawal of GP

C) Sale or other disposition of all or substantially all of the assets of the

Partnership. 10.2 Priority on Liquidation – To extent proceeds are

sufficient, they shall be applied in the following order:A) In accordance with Section 6A through 6F

B) The balance shall be distributed in accordance with positive Capital

Accounts.

S a m p l e 4 % D e a l L i q u i d a t i o n C a l c u l a t i o n

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S a m p l e 9 % D e a l L i q u i d a t i o n C a l c u l a t i o n

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W h a t I f t h e U l t i m a t e A l l o c a t i o n s o f C a s h A r e n ’ t W h a t Yo u E x p e c t e d ?

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For Existing Deals Approaching Year 15:

Stay out of the Liquidation Section of the Partnership

Agreement• Refinance instead of Selling (Note the LP must consent to refinancing)

• Negotiate the purchase of the LP interest

• Where applicable, use not-for-profit right of first refusal. 

Manage the Tax Capital accounts – Generate more tax losses

W h a t To D o f o r N e w D e a l s :

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Negotiate Special Gross Income Allocation Provisions

Negotiate Right to Purchase LP Interests

Forced Sale Rights• Do not allow them

• If used, agree to how cash will be distributed up front

Factor in Year 15 Distributions in Credit Pricing