Treatment of Fees Payable to a Removed General Partner Novogradac Company LLP
This article is the second in a series of articles discussing the removal of a general partner (GP) and other associated issues. Last month's article discussed the various grounds for a GP removal and recommendations for drafting partnership agreements that clearly delineate the partners' respective expectations with respect to the triggers and consequences of removal. To draw upon the analogy created by our colleague in last month's article, if the decision to remove a GP is akin to a divorce, the next step, which is to determine how to deal with fees payable to the removed GP and its affiliates, is akin to the settlement. Like removal itself, the treatment of fees is best addressed up front in the partnership agreement, or "pre-nuptial" agreement, so to speak, when the parties are still getting along. These fee issues are the focus of this article and present both economic and tax concerns.
Typical fees payable to the GP or its affiliates include the developer fee, a partnership management fee and/or incentive management fee, and a property management fee. A GP also may have made operating deficit or other similar support loans to the partnership that it may be owed. From an equitable perspective, the partnership likely will not want to pay fees to a GP that was removed for cause, and from an economic perspective, the partnership will need to preserve value for its continuing partners and preserve cash to pay replacement GP fees as a way to provide an incentive for the replacement GP to step into that role.
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