GP's want to reduce profits paid to LP's

Limited partnership owns CA real property worth $140M. This is the partnership's only asset. Limited partner receives a letter from Property Manager, who is not a General Partner. General Partners want to rehab property. They say the construction costs will be $35M and will increase value of property by $80M. They propose to finance the costs of rehab though a loan on the property. No financing details are provided. It is not clear that the $35K in rehab costs include financing costs.

Original partnership agreement says 90% of cash flow and any proceeds from a Capital Event (such as a sale) go to limited partners.. There is no provision for paying fees to General Partners for services in connection with financing or construction management.

General Partners want to change the partnership agreement:

--Amount of cash flow to limited partners will be reduced from 90% to 70% going forward.

--Proceeds of "Capital Events" over $140M (current value of building) will be allocated 70% to limited partners (reduced from 90%)

--GP's get a construction fee equal to 4% of any rehabilitation expenditures, now and in the future.

--GP's get a finance fee of 1% of new loan balance, now and in the future.

Limited partner is told that if he sellls, he will have a tax liability of $xxxxxxx (surprisingly, they give an exact dollar amount--which is probably not correct given anticipated sales proceeds and either the basis of property in hands of partnership or the partner's basis in partnership interest).

Limited partnership is asked to check a box on the letter indicating one of three choices:

1. He votes to sell.

2. He votes to do the rehab and change the partnerhsip agreement.

3. If the partnership votes in favor or rehab and the changes, he wants to sell his interest.

Letter is a short two pages. It is under the letterhead of the Property Management Company (a fairly large local company). Most of the letter concerns the benefits of the rehab. The changes to the partnership agreement are mentioned in one paragraph at the end of the letter.

Seen anything like this before? Comments?

My advice was to consult an attorney with expertise in real estate limited partnerships, but I am curious as to what y'all think about this.

My opinion: Throw the letter away and contact one or more of the actual general partners asking for both verification and clarification of the details - especially about how the $xxxxxxxx tax liability was computed and request that his attorney be CC'd on the reply.

Frankly, this smells like an attempt to bully your client into an unfavorable arrangement and he needs to let it known that he does not care to be railroaded.

Thanks, Ten. This is helpful.

I just received an interesting phone call from the client's Estates and Trusts Attorney. Apparently, the client called her asking for a referral to an attorney with expertise in RE Ltd Partnerships (per my recomendation). The E and T attorney has no connection with the partnership. She was rather terse and told me I wasd being overly cuatious. In her view, asking the client to consult an RE attorney about this matter was advising the client to incur a needless expense. She told me that her opinion was that it was entirely proper for the General Partners to get in increase in profit sharing as well as a payment of fees since they were " bearing a greater share of the liabiliy".

Huh? What am I missing? The only liability here will be a mortgage on real property. As I understand it, in CA, a mortgage on real property is qualified non recourse financing----so if there is a default, neither the general nor the limited partners would lose more then their share of the property. I can agree that the General Partners may have a greater investment, but that was per the agreement they made when they entered into the deal---at the time of the original partnership agreement.

Proceeds of "Capital Events" over $140M (current value of building) will be allocated 70% to limited partners (reduced from 90%)

Is the $140M indexed?

Limited partnership is asked to check a box on the letter indicating one of three choices

I assume each of these 3 choices includes a Yes/No option.

She told me that her opinion was that it was entirely proper for the General Partners to get [ask for] in increase in profit sharing as well as a payment of fees since they were " bearing a greater share of the liability".

Agree with Ten.
Although (see my edits above), this should have been what she said.
No one gets what they don't ask for, but your client is fully within their rights to say 'no'.
Maybe the E&T attorney should leave opinions about Real Estate deals to someone who deals in that area.
Further, I don't think you were necessarily being cautious as much as encouraging your client to get proper advice...like any professional should.

Proceeds of "Capital Events" over $140M (current value of building) will be allocated 70% to limited partners (reduced from 90%)

Is the $140M indexed?

Limited partnership is asked to check a box on the letter indicating one of three choices

I assume each of these 3 choices includes a Yes/No option.

The $140M is the current value. Basically, the old 90/10% split applies to the current value, but anything over that amount gets split 70/30%.

No, no yes or no option and no option to keep things the way they are. Of the three choices, client is supposed to pick one.

Further, I don't think you were necessarily being cautious as much as encouraging your client to get proper advice...like any professional should.

Thanks...I think I needed a reality check on that one. Still not sure why the E and T attorney felt the need to weigh in, but I will stand my my original advice to the client and continue to recomend that he seek the advice of legal counsel with expertise in RE limited partnerships.

No, no yes or no option and no option to keep things the way they are. Of the three choices, client is supposed to pick one.

I wonder what would happen if the majority of the LPs voted to sell their interest.

No indexing. Hmm... What if it ends up costing $80M to rehab the property?