Investor Control. By Joel D. Rubin D'Ancona & Pflaum Chicago, Illinois

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1 Investor Control By Joel D. Rubin D'Ancona & Pflaum Chicago, Illinois Private development has recently begun again, but in most cases Banks and other financial institutions are requiring the investment of equity capital and/or a firm take out from a financial source. Many developers are not interested in selling their projects and are looking for financial sources that will joint venture the development. While pension funds are looking for higher financial returns and, therefore, are willing to assume certain risks of development, usually leasing risks, they seek more control. The discussion here will seek to focus on the types of control that are sought and the exposure to liability that such control creates. The real estate environment for the private real estate developer has changed since the heady days of the 1980's. In the 80's the developer was king. Usually, a successful developer was able to negotiate at least a fifty percent interest as a general partner with very few fetters on its control. Typically, the financial partner approved the development budget, the annual operating budget, major leases and a sale of the property. As a limited partner the financial partner could only react to what the developer proposed. The only real control that the limited partner had was not to approve the operating budget. In that case there was usually a fail safe provision that allowed the property to be operated in accordance with last year s budget plus some inflation factor. However, the consequences for not approving the budget were usually too great, and the limited partner was unwilling to use such right as a hammer, maybe in part because a limited partner in such a position still has a fiduciary duty to the general partner. 1 The partnership agreement usually contained a buy/sell provision which allowed either party to trigger a sale of its partnership interest. Such process was cumbersome, did not allow the establishment of fair market value through a sale to a third party and in the meantime the partnership could be at a standstill. 1 In KE Property Management Inc. v. 275 Madison Management Corp., C.A. No (Del. Ch. July 21,1993), the limited partner purported to remove the general partner as permitted under the partnership agreement if the general partner injured the partnership as a result of his fraud or willful misconduct in the performance of his duties as a General Partner. After the purported removal the partnership filed a bankruptcy petition. In response to the General Partner s defense of bad faith on the part of the limited partner, the court stated that (i) all partners owe a fiduciary duty to each other, citing the Delaware Uniform Partnership Law and (ii) to the extent that a partnership agreement empowers a limited partner discretion to take action affecting the governance of the limited partnership, the limited partner may be subject to the obligations of a fiduciary, including the obligation to act in good faith as to other partners. The court held that the general partner was legally guilty of fraud or willful conduct...

2 To understand the possible alternatives for giving the financial source more control and their consequences, let us first examine the current vehicles being used for development joint ventures. These include a general partnership, a limited partnership, a limited liability company and a development agreement between the developer and the financial party. This last alternative is usually not used because it creates ordinary income to the developer for tax purposes, while most developers seek capital gain treatment for their deferred equity position. 2 A general partnership creates equal rights for both partners, but exposes both partners to liability. The financial party could form a corporation or a single member limited liability company to be the partner. In the former case the corporation would be a taxable entity and, therefore, use of a corporation is usually rejected. However, now that various States recognize single member limited liability companies, the use of one is certainly an alternative. Assuming a general partnership is used, the powers of each partner would be spelled out in the joint venture agreement, and the financial source could bargain for the powers it thought important, including the right to take the initiative in certain cases. However, as a general partner there is liability exposure to third parties, and third parties could seek to go beyond the investment of the financial party by attempting to pierce the corporate veil. This is especially true in the case of statutory environmental liability: if a party has control over decisions that concern environmental issues, it is more likely than not that such party will have exposure. 3 Thus, a general partner and the officers, directors or managers of the general partner will be subject to attack and may be forced to contribute to the clean up as well as pay damages to third parties. More common than a general partnership for these type of investments is a limited partnership where there is a corporate general partner. As a result of the new check the box regulations there is no tax reason to capitalize the general partner more than nominally. 4 Prior to the change in the IRS Regulations, for Ruling purposes a corporate general partner had to have a net worth of at least ten percent of the total capital of the partnership. 5 Tax purposes aside, while the use of a shell corporate general partner may expose the shareholders of such general partner to third party liability, it will probably not allow for any piercing of the veil of the partnership, and the use of such vehicle will continue to protect the limited partner from third party liability. 6 2 Recently I have seen development agreements which give the developer fees based on a yield to project cost. 3 See United States v. TIC Investment Corp., 68 F.3rd 1082 (8th Cir. 1995); and United States v. USX Corp., 68 F 3rd 811 (3rd Cir. 1995). 4 Treasury Regulation , as amended by T.D ( ). 5 Rev. Proc , C.B The argument would have to be that without an adequately capitalized general partner a limited partnership did not exist and I have found no case law to support such a result. 2

3 The focus, here, however, is on the limited partner and whether the powers sought by and granted to the limited partner create liability exposure to such partner. The Revised Uniform Limited Partnership Act has been adopted in almost all States in some version. While Section 18 of the Uniform Partnership Act provides that all partners have equal rights in management, Section 303 of RULPA states that a limited partner is not liable for the obligations of the partnership unless he [or she] is also a general partner or, in addition to the exercise of his [or her] rights and powers as a limited partner, he [or she] participates in the control of the business. Section 303 lists various specific activities in which a limited partner may engage in a relationship with the partnership which activities do not result in the limited partner becoming a general partner. These include: "(6) proposing, approving, or disapproving, by voting or otherwise, one or more of the following matters: (i) the dissolution and winding up of the limited partnership; (ii) the sale, exchange, lease, mortgage, pledge, or other transfer of all or substantially all of the assets of the limited partnership other than in the ordinary course of its business; (iii) the incurrence of indebtedness by the limited partnership other than in the ordinary course of its business; (iv) a change in the nature of the business; or (v) the admission or removal of a general partner (vi) the admission or removal of a limited partner; (vii) a transaction involving an actual or potential conflict of interest between a general partner and the limited partnership or the limited partners; (viii) an amendment to the partnership agreement or certificate of limited partnership; or (ix) matters related to the business of the limited partnership not otherwise enumerated in this subsection (b), which the partnership agreement states in writing may be subject to the approval or disapproval of limited partners;" 3

4 Normally, the limited partner is considered passive, and RULPA supports the concept that if the limited partner is in the role of approving or vetoing the acts of the general partner it will not be considered a general partner. Going further than its predecessor, Section 303 states that under certain limited situations the limited partner may even propose certain actions such as a financing out of the ordinary course or a sale of substantially all the assets of the entity and by doing so not create liability for itself as limited partner. Lastly, the Delaware Revised Uniform Limited Partnership Act gives the limited partner much more freedom to control the partnership without becoming a general partner. Section of the Del. RULPA provides in part that the limited partner will not expose itself to third party liability, if it has the power: "(8) To act or cause the taking or refraining from the taking of any action, including by proposing, approving, consenting or disapproving, by voting or otherwise, with respect to 1 or more of the following matters: a. The dissolution and winding up of the limited partnership or an election to continue the limited partnership or an election to continue the business of the limited partnership; b. The sale, exchange, lease, mortgage, assignment, pledge or other transfer of, or granting of a security interest in, any asset or assets of the limited partnership; c. The incurrence, renewal, refinancing or payment or other discharge of indebtedness by the limited partnership; d. a change in the nature of the business; e. The admission, removal or retention of a general partner; f. The admission, removal or retention of a limited partner; g. A transaction or other matter involving an actual or potential conflict of interest; h. An amendment to the partnership agreement or certificate of limited partnership; 4

5 i. The merger or consolidation of a limited partnership;... l. The making of, or calling for, or the making of other determinations in connection with, contributions; m. The making of, or the making of other determinations in connection with or concerning, investments, including investments in property, whether real, personal or mixed, either directly or indirectly, by the limited partnership;..." Thus, it would appear that a limited partnership agreement could provide the limited partner with significant powers to control the partnership as long as the powers of the limited partner are specific and track the statutory provisions. Recently, most states have enacted statutes that create limited liability companies. These new legal creatures have attributes that combine the best characteristics of corporations and limited partnerships. 7 In part the motivation for these statutory entities was the Internal Revenue 7 The Illinois Limited Liability Company Act was recently amended to add a provision covering fiduciary duties. The new law ( Section 15-3) sets forth two main fiduciary duties; the duty of loyalty and the duty of care. The duty of loyalty has three subsets; the duty not to appropriate the LLC's property or business opportunities; the duty to act fairly with the LLC; and the duty not to compete with the LLC. The duty of care requires refraining from grossly negligent or reckless conduct, intentional misconduct or knowing violation of law. These duties apply to members in a member-managed LLC and to managers in a manager-managed LLC. Section These duties may not be waived in the operating agreement, but the agreement may (i) set forth specific types or categories of activities that do not violate these duties, if not manifestly unreasonable, and (ii) specify the number or percentage of members or disinterested managers that may authorize or ratify, after full disclosure of all material facts, a specific act or transaction that would otherwise violate the duties. Section 15-5(b)(6), (7). Section 15-3 General standards of member and manager s conduct. (a) The fiduciary duties a member owes to a member-managed company and its other members include the duty of loyalty and the duty of care referred to in subsections (b) and (c) of this Section. (b) A member s duty of loyalty to a member-managed company and its other members includes the following: 5

6 (1) to account to the company and to hold as trustee for it any property, profit, or benefit derived by the member in the conduct or winding up of the company s business or derived from a use by the member of the company s property, including the appropriation of a company s opportunity; (2) to act fairly when a member deals with the company in the conduct or winding up of the company s business as or on behalf of a party having an interest adverse to the company; and (3) to refrain from competing with the company in the conduct of the company s business before the dissolution of the company. (c) A member s duty of care to a member-managed company and its other members in the conduct of a winding up of the company s business is limited to refraining from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law. (d) A member shall discharge his or her duties to a member-managed company and its other members under this Act or under the operating agreement and exercise any rights consistent with the obligation of good faith and fair dealing. (e) A member of a member-managed company does not violate a duty or obligation under this Act or under the operating agreement merely because the member s conduct furthers the member s own interest. (f) This Section applies to a person winding up the limited liability company s business as the personal or legal representative of the last surviving member as if the person were a member. (g) In a manager-managed company: (1) a member who is not also a manage owes no duties to the company or to the other members solely by reason of being a member; (2) a manager is held to the same standards of conduct prescribed for members in subsections (b), (c), (d), and (e) or this Section; (3) a member who pursuant to the operating agreement exercises some or all of the authority of a manger in the management and conduct of the company s business is held to the standards of conduct in subsections (b), (c), (d), and (e) of this Section to the extent that the member exercises the managerial authority vested in a manger by this Act; and (4) a manager is relieved of liability imposed by law for violations of the 6

7 Code and the desire to provide pass-through treatment without the restrictions or rules applicable to Subchapter S corporations and to avoid the requirements to qualify as a limited partnership instead of a corporation or association. By statute limited liability companies protect their members from third party claims. Further, in contrast to limited partnerships, there is no need for a general partner, let alone one that is capitalized with assets sufficient to avoid piercing the veil of the entity. A limited liability company may be managed by a manager, which may or may not be a member, or by the members themselves, and in such latter case the operating agreement may designate the member or members whose vote is controlling. In the case of a member managed company the making of decisions by the members does not expose such members to third party liability. Section 303 of the Uniform Limited Liability Company Act provides in part: "The debts, obligations, and liabilities of a limited liability company, whether arising in contract, tort, or otherwise, are solely the debts, obligations, and liabilities of the company. A member or manager is not personally liable for a debt, obligation, or liability of the company solely by reason of being or acting as a member or manager." (Emphasis added) (The Delaware Limited Liability Company Act has a similar provision.) What does the highlighted portion mean in the context of the discussion of RULPA and the Del. RULPA? Clearly, if the members act tortiously or contract on behalf of themselves, they will be personally liable. Furthermore, some statutes such as The Comprehensive Environmental Response, Compensation and Liability Act of create liability for those parties who have decisional control. 9 If the member is engaged in the day-to day management of the company, will the member be personally liable? Under agency theory if the agent discloses it is acting as agent and identifies the principal, the agent should not have any liability unless the agent acted recklessly. 10 Section 303 may be declaring that a member or manager who acts as agent for a limited liability company standards prescribed by subsections (b), (c), (d), and (e) to the extent of the managerial authority delegated to the members by the operating agreement. (805 ILCS 180/15-5) 8 42 U.S. C. 9601, et seq. 9 See citations at f.n Am Jur 2nd, Agency

8 and discloses its relationship to the company does not assume any personal liability for the debts of the company. Interestingly, under Section 351 of the Delaware General Corporation Act in the case of a corporation that is managed by its stockholders, the stockholders assume the liability that otherwise falls upon the directors. There appears to be no case law at this time under the various limited liability company statutes as to the liability of a member who is engaged in the day-to day management of the company, but an investor should proceed with caution in establishing a limited liability company which is managed by its members. Furthermore, to the extent that a member cannot for tax or other reasons create a separate entity to be the member, the liability exposure could extend beyond the investment in the limited liability company. Having discussed the types of entities that may be selected as the investment vehicle, what are the powers that a typical sophisticated financial investor is now looking for in return for its equity investment? Among those powers or initiation rights would be: approval of any acquisition, financing or disposition of any material asset; approval of the property manager; ability to remove a property manager and approval or designation of the substitute property manager; approval of the annual budget and leasing plan; possible approval of all leases or at least leases of a certain size; approval of additional capital calls and the right to call for additional capital when the general partner or manager does not; initiation of a financing, refinancing or sale of the assets of the entity; and in some cases removal without cause of the general partner or manager and the appointment of a replacement general partner or manager. Clearly, many of the foregoing, go to the heart of the management and existence of the entity, and there are some developers who will refuse to cede so much control to the investor and will seek alternative capital sources. Furthermore, the institutional party must be told that these rights cannot necessarily be exercised cavalierly. 11 Assuming the developer goes along, what advice should be given to the financial partner in structuring an entity that grants such powers to the so-called passive party. First, in nondevelopment ventures the financial partner may form a separate entity appropriately capitalized, through cash or a promissory note, to become the general partner with the developer and the financial partner being limited partners. However, in development transactions the developer 11 In Wilmington Leasing, Inc. v. Parrish Leasing Co.,L.P., C.A. No (Del.Ch. Dec.23,1996) the partnership agreement provided: If the Limited Partners determine that the General Partner has failed or is unable to perform satisfactorily as General Partner, the Limited Partners shall have the right to remove the General Partner and elect a new general partner. The Court made the following findings: (i) the Partnership had made no cash distributions, (ii) the Partnership continued to incur excessive overhead expenses, (iii) the Partnership never concluded any significant number of transactions, and (iv) the Limited Partner had lost confidence and trust in Mr. Parrish..., who was chairman of the general partner. In a previous letter opinion (Del. Ch. Sept. 18, 1996) the Court held that the removal power contained in the partnership agreement was not absolute, but, rather, was subject to the implied condition that the removal determination be reasonable and made in good faith. Based on the facts the Court held that the removal was proper. 8

9 needs to be in at least nominal control, although this could be accomplished though a development agreement. Another way to accomplish the same result in development deals is for the investor to provide a full or partial takeout after the development phase has been completed and the development risks have diminished, at which time the entity is formed with the investor creating a separate entity to be the general partner. However, the financial partner may not be interested in waiting until the project has been leased from the partnership The more typical structure is to use either a limited partnership or limited liability company which by contract grants the investor the necessary rights. To the extent the financial party is given approval rights over various actions of the developer, there should not be significant liability exposure for such party, assuming it acts prudently and in good faith. In the extreme, a failure to fund uncommitted dollars to cure an environmental clean-up should not in my opinion create liability, although a failure to approve a budget that includes such costs being funded out of cash flow may incur liability to the extent at least of the cash flow to be so applied and for any additional damages suffered because of any resultant delay. A suggested methodology for achieving the result sought by the investor is to provide such investor with the ability to appoint a special corporate general partner to initiate the desired action. Such partner would receive its partnership interest from the investor and would have to be appropriately capitalized to avoid such special general partner being considered a sham. If the special general partner acts reasonably, in good faith and in accordance with standards set forth in the agreement, its actions should withstand an attack by the developer/general partner. As to liability to third parties being a general partner which is an affiliate of a limited partner should not create liability for the limited partner nor in and of itself allow piercing the veil of the general partner. 12 Further, by appointing special limited partners to act only in certain situations, there should be additional protection from being charged with participating in the control of the business. Attached are a few suggested provisions. 12 Section 303 of the RULPA states in part that A limited partner is not liable for the obligations of a limited partnership unless he is also a general partner.... If the limited partner is an affiliate of the general partner, does it become liable? There do not appear any cases addressing this issue directly, and, therefore, the question would be one of attempting to pierce the corporate veil, similar to the case of a parent/subsidiary or to corporations are brother/sister entities. 9

10 SUGGESTED PROVISIONS "Major Decision" shall mean any decision or action concerning any of the following which has not been previously approved by the Limited Partner in its Approval of the Operating Budget provided that Approval of the Operating Budget shall constitute Approval of only those items or matters specifically contained therein: Subject to the provisions of Article 11, the acquisition, sale, assignment, transfer, conveyance, exchange, grant of a leasehold estate or mortgage, pledge, or other disposition of the Project or any portion thereof or any interest therein Incurring of any indebtedness on behalf of the Partnership (or the refinancing of any Approved indebtedness), other than the Construction Loan, the lien for which each Phase may be subject at the time of contribution to the Partnership (provided in both cases the instruments evidencing the same are approved either under the Contribution Agreement or pursuant to sub-paragraph below) and for (i) meeting current obligations incurred in the ordinary course of business and due within thirty (30) days, and (ii) "trade debt" or accounts payable which arise in connection with the day-to-day operations of the Project in the ordinary course of business Taking any action or failing to take any action which may result in a lien or encumbrance on the Project, or any other property or assets of the Partnership (including but not limited to the Rents and Leases) Unless specifically set forth in the Operating Budget Approved by the Limited Partner, incurring any cost or expense, making of any capital expenditure, establishing any reserve or incurring any debt or obligation, the cost or amount of which shall not have been included in such Operating Budget except (i) to the extent that any such cost, expense or expenditure may be authorized in the event of emergency pursuant to a Management Agreement, or (ii) to the extent that any such cost, expense or expenditure is otherwise necessary in the event of an emergency when an immediate cost, expense or expenditure must be incurred in order to protect against the loss of value of the Project or in order to maintain the safety of the tenants thereof. In the event any costs, expenses or expenditures are incurred pursuant to clause (i) or (ii) of this Section , the General Partner shall notify the Limited Partner immediately after the incurrence of such expenditure Any and all construction and architectural contracts or agreements and all plans and specifications and drawings for any construction, rebuilding, restoration, renovation or remodeling of the Project, or any portion thereof, including any material additions, amendments, change orders and modifications to any of the foregoing. 10

11 Any leasing program for all or any portion of the Project, including the standard form lease, tenant improvements and rental rates, and any amendment, revision or modification thereto The Operating Budgets and any amendment, revision or modification thereto Any agreements or understandings with real estate brokers or salesmen in connection with the sale or leasing of the Project The type and amount of any insurance to be obtained by the Partnership which is inconsistent with the types and amounts set forth in Section 3.10 [Insurance Requirements] The execution of the Management Agreement and similar management and leasing agreements, or any amendment, revision, modification or termination thereto or thereof The execution of or entering into any contract to borrow money, agreement to borrow money, or undertaking to borrow money on behalf of the Partnership; provided, further, for purposes of this subsection, the phrase "to borrow money" shall not include the incurring of any "trade debt" or accounts payable arising in connection with the day-to-day operation of the Project in the ordinary course of business Changing or permitting to be changed in any substantial way the accounting process and procedures employed in keeping the books of account or preparing financial statements with respect to the operation or management of the Partnership or the Project Settlement of any claims for insurance proceeds (after taking into account insurance deductibles) on behalf of the Partnership Settlement of any claim for payment of awards or damages arising out of the exercise of eminent domain by any governmental authority on behalf of the Partnership Making, execution or delivery on behalf of the Partnership of any assignment for the benefit of creditors or any guaranty, indemnity bond or surety bond Obligating the Partnership or any Partner as a surety, guarantor or accommodation party to any obligation. 11

12 Lending funds belonging to the Partnership to any third Person or extending credit to any Person on behalf of the Partnership (other than credit extended pursuant to a Lease) Enter into any Lease, or modify, cancel or terminate any of the Leases Renew or extend any of the Leases Permit any assignment of the Leases by the Partnership Taking of any legal action, filing any bankruptcy proceeding, or confession of any judgment on behalf of the Partnership Having any property of the Partnership partitioned or filing a complaint or institution of any proceeding at law or in equity to have such property partitioned Entering into any contract with or incurring any indebtedness with respect to the Partnership to any Person who is an Affiliate of any Developer Party Engaging any accountant, auditor, attorney or other professional to render services for the Partnership Any settlement, compromise, consent order or the like in connection with any dispute concerning the Partnership, any of its operations, or the Project Hiring of any employee of the Partnership, unless specifically approved in an Operating Budget Filing with any Governmental Authority having jurisdiction over the Project any application for zoning, rezoning or zoning variance, any subdivision plans or application, any request for annexation, or any similar filing affecting the use of the Project Making any election under Section [a Section 754 Tax Election] of this Agreement Making any amendment or modification to this Agreement The preparation and implementation of any closure, remedial or actions required pursuant to any Environmental Requirements Granting any easement or dedication, filing any plat, condominium declaration, or restriction. 12

13 Receive or collect Rents more than one month in advance (other than any such Rents expressly provided for in a Lease) Authorize a merger, consolidation, dissolution or liquidation of the Partnership Confess a judgment against the Partnership Admit a Person as a general partner or limited partner of the Partnership Perform any act in contravention of this Agreement Possess property of the Partnership or assign the Partnership's rights in specific property for other than Partnership purposes Approve any act that would make it impossible to carry on the business of the Partnership Cause an Event of Bankruptcy with respect to the Partnership Conversion of General Partner. At any time during the term of this Agreement, the Limited Partner shall have the option of converting the General Partner to a limited partner in which event the Limited Partner shall elect and admit a new general partner for the Partnership and the converted General Partner shall have no voting or approval rights hereunder. The newly admitted general partner shall have such portion of the Partnership Interest of the Limited Partner as the Limited Partner in its sole discretion shall determine and shall have all the rights and powers of the General Partner hereunder (except those that are given to limited partners, generally, under the Act). To the extent the General Partner was entitled to indemnification from the Partnership under Section 3.9, it shall continue to be entitled to such indemnification after such conversion Additional Capital Contributions. The Partners shall make Additional Capital Contributions to the Partnership from time to time as may be required to meet the demands of the business of the Partnership. The Partners shall contribute such Additional Capital Contributions in cash in proportion to their Primary Sharing Ratios. In addition, the General Partner shall call for Additional Capital Contributions to the Partnership under this Section when (A) such Additional Capital Contributions have been authorized in an Operating Budget or (B) (i) funds are insufficient to pay any anticipated expense or other obligation of the Partnership which will become due and owing within the next sixty (60) days, and such expense or obligation is in the nature of debt service or existing liabilities of the Partnership (except that the General Partner shall not be required to make an Additional Capital Contribution under the circumstances set 13

14 forth in the first sentence of Section ), or (ii) funds are necessary to (x) pay any contractual obligations of the Partnership approved by the Limited Partner, (y) maintain any Partnership assets or properties, and the requested Additional Capital Contribution when aggregated with all previous Additional Capital Contributions under this Subsection, other than Additional Capital Contributions called for payments of principal or interest on existing liabilities, does not exceed $100,000, unless the Limited Partner approves a higher amount, or (z) complete any capital improvements in accordance with an Operating Budget, or (iii) funds are necessary for an emergency situation, in which event the General Partner shall promptly notify the Limited Partner of any such expenses and the nature of the emergency [and the requested Additional Capital Contribution, when aggregated with all previous Additional Capital Contributions under this subsection (iii) does not exceed $, unless the Limited Partner approves a higher amount]. The Partners shall contribute in cash such Additional Capital Contributions to the Partnership within ten (10) days after the General Partner's call therefor. Calls for Additional Capital Contributions to the Partnership for expenses other than those described in the preceding sentence may be made only upon the Approval of the Limited Partner. In the event that the General Partner fails to call for Additional Capital Contributions for the foregoing purposes, irrespective of the dollar amount limitations, and continues to fail to call for such Additional Capital Contributions after ten (10) days written notice from the Limited Partner, the Limited Partner may elect to admit a new additional general partner to the Partnership with such Partnership Interest of the Limited Partner as the Limited Partner shall determine and such general partner shall have the sole authority to make a call for such Additional Capital Contributions and to cause the funds resulting from such Additional Capital Contributions to be applied for the purposes set forth above. Such general partner shall have no other authority to act as a general partner under this Agreement Subject to Section 6.1.3, in the event that a call for Additional Capital Contribution is made and the General Partner fails to contribute its share to the Partnership, then (A) such failure to contribute shall constitute an Event of Default unless there has been positive Operating Cash Flow for any period of consecutive months prior to such capital call, or (B) if there has been positive Operating Cash Flow for any period of consecutive months prior to such capital call, then the Primary Sharing Ratios of the Partnership shall be adjusted so that the Primary Sharing Ratio of the General Partner shall be reduced, and the Primary Sharing Ratio of the Limited Partner shall be increased, by percentage point for each $ of Additional Capital Contribution which was not contributed by the General Partner. An Event of Default shall occur when the General Partner s share of total Additional Capital Contributions for which it has failed to contribute exceeds$ Notwithstanding Section , the General Partner shall not be required to contribute any amount of Additional Capital Contribution to be used for the repayment of the Construction Loan at maturity unless such Loan comes due prior to its stated maturity as a result of a default by the General Partner (as distinguished from a default by 14

15 the Partnership). In the event that the Limited Partner contributes funds to the Partnership for the repayment of the Construction Loan when the General Partner is not required to fund its share of such Loan, such funds shall be treated as a capital contribution which shall increase the Limited Partner Equity Contribution Account for all purposes of this Agreement, including for purposes of calculating the Limited Partner Preferred Return Account and the Limited Partner s preferential distributions under Article 8 hereof Sale of Project. Except as otherwise provided by this Section, the General Partner shall have full power and authority to sell the Project, subject to Approval of the Limited Partner and in doing so shall have the right to develop a marketing plan for the Project, which plan, including the list of prospective purchasers to whom General Partner intends to market the Project, shall be subject to the approval of the Limited Partner. Notwithstanding, at any time after the occurrence of an Event of Default or after December 31, 1999, the Limited Partner, in its sole discretion, may elect an additional general partner to the Partnership to market and sell the Project on behalf of the Partnership (the "Marketing General Partner"). The Marketing General Partner shall have such Partnership Interest of the Limited Partner as the Limited Partner shall determine in its sole discretion. The Marketing General Partner may offer the Project for sale on such terms and conditions as it may determine in its sole discretion and may accept an offer from a third Person to purchase the Project upon such terms and conditions without Approval of the General Partner. The Partnership and the Partners shall timely execute any and all documents and take any other action necessary to consummate a sale pursuant to an accepted offer. The Marketing General Partner shall have sole control over the marketing and sale of the Project pursuant to this Article 11 and all costs and expenses incurred by it shall be paid by the Partnership. 15