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WHEN ALL ELSE FAILS—LITIGATION A CASE STUDY Katherine Alitz Boston Capital Asset Management

WHEN ALL ELSE FAILS—LITIGATION A CASE STUDY Katherine Alitz Boston Capital Asset Management IPED—Boston October 11 – 12, 2007. WHEN ALL ELSE FAILS—LITIGATION A CASE STUDY. 132 Unit Property Local economy experienced a severe downturn that persisted for several years after syndication

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WHEN ALL ELSE FAILS—LITIGATION A CASE STUDY Katherine Alitz Boston Capital Asset Management

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  1. WHEN ALL ELSE FAILS—LITIGATION A CASE STUDY Katherine Alitz Boston Capital Asset Management IPED—Boston October 11 – 12, 2007

  2. WHEN ALL ELSE FAILS—LITIGATION A CASE STUDY 132 Unit Property Local economy experienced a severe downturn that persisted for several years after syndication As a result the property generated substantial operating losses Investment Limited Partner’s capital account depleted by end of Year 5

  3. WHEN ALL ELSE FAILS—LITIGATION A CASE STUDY Investment Limited Partner’s ability to continue taking annual LIHTC required GP to agree to reallocation of losses GP refused to cooperate Two years later we started to explore possible sale of “non-performing” property

  4. Know your rights and… WHEN ALL ELSE FAILS—LITIGATION A CASE STUDY Audit review revealed: Ginormous Subordinated Loan accruing interest annually at 9% No Credit Recovery Loan

  5. WHEN ALL ELSE FAILS—LITIGATION A CASE STUDY Partnership review revealed: Specific Definition of Operating Deficits which excluded accrued but unpaid interest on Subordinated Loans Terms of Subordinate Loan provided for simple interest at 9% Credit Recovery Loan provision—priority loan applicable if credits not delivered “for any reason, at any time…” Know your rights and…

  6. WHEN ALL ELSE FAILS—LITIGATION A CASE STUDY Reviewed every audit issued since original syndication and prepared a calculation of “Operating Deficits” that followed the specific definition in the Partnership Agreement …LEVERAGE!

  7. WHEN ALL ELSE FAILS—LITIGATION A CASE STUDY This exercise demonstrated: The principal “gap” between the construction loan and permanent loan was carried as an “Operating Deficit” in the annual audit Annual operating deficits included interest accrued on the Subordinated Loan but not paid, resulting in the double counting of annual interest Problems after Lease-Up Remember GP Development vs. Operating Deficit Obligations

  8. The effect of the General Partners creative accounting looks something like this: WHEN ALL ELSE FAILS—LITIGATION A CASE STUDY

  9. WHEN ALL ELSE FAILS—LITIGATION A CASE STUDY Contacted General Partner to discuss possible sale of the Property, noting: - Apparent overstatement of Subordinated Loan balance - Failure to recognize Credit Recovery Loan which had a balance in excess of $850,000 and receives a priority return under the Partnership Agreement GP rejected sale proposal and refused to restate Subordinated Loan and recognize Credit Recovery Loan

  10. WHEN ALL ELSE FAILS—LITIGATION A CASE STUDY Made written demand of General Partner to restate Subordinated Loan and recognize Credit Recovery Loan Received written response rejecting demand from GP’s attorney Properly document demands for corrective behavior

  11. WHEN ALL ELSE FAILS—LITIGATION A CASE STUDY “MARSHALL YOUR TROOPS AND TAKE CHARGE” HOW TO PROCEED GP Removal, misappropriation claim, fraud, compliance, repurchase, etc. VENUE JURISDICTION

  12. WHEN ALL ELSE FAILS—LITIGATION A CASE STUDY Filed claim against GP for fraud Complaint filed in Massachusetts

  13. WHEN ALL ELSE FAILS—LITIGATION A CASE STUDY GP challenged jurisdiction We filed a brief defending jurisdiction. Our attorneys did such a masterful job on the brief that the GP called to discuss settlement and sale of the property

  14. WHEN ALL ELSE FAILS—LITIGATION A CASE STUDY The Settlement Agreement provided: Sale of the property through competitive marketing process Agreed upon split of available cash proceeds

  15. WHEN ALL ELSE FAILS—LITIGATION A CASE STUDY Anticipate greater investor scrutiny Several months later…. …an Upper Tier Investor demanded: Written description of the transaction Complete with an analysis of why we engaged in a settlement of the litigation

  16. WHEN ALL ELSE FAILS—LITIGATION A CASE STUDY Litigation Outcome Fund Prevails GP Prevails Asset Management Fees 120,000 120,000 Credit Recovery Loan 859,000 0 Subordinated Loan 682,436 1,443,324 Partnership Management Fees 0 98,112 ILP Return of Capital 0 0 Total 1,661,436 1,661,436 Outcome Total to ILP 979,000 120,000 Outcome Total to GP 682,436 1,541,436

  17. WHEN ALL ELSE FAILS—LITIGATION A CASE STUDY Actual Proceeds to ILP : $ 830,718

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