Readers Respond to Novogradac Blog Posts about Right-Of-First-Refusal and Qualified Contracts
Selected responses are posted here with permission.The views, information, and/or opinions expressed on this page are solely those of the author(s) and do not necessarily represent those of Novogradac, its affiliates, partners, or employees.
Multiple Affordable Housing Organizations Respond to Right-Of-First-Refusal Blog
We are writing in response to your July 24, 2019 blog “Congress Considering Retroactive Changes Affecting Low-Income Housing Tax Credit Property Owners” regarding the proposed changes to the right-of-first refusal (ROFR) in section 303 of the Cantwell and DelBene Low-Income Housing Tax Credit bills. We want to share with you our perspective on this issue based on many of our organizations’ participation in the original construction of the ROFR in 1989 and the modifications proposed in the introduced bills.
When section 42(i)(7)) was first drafted in 1989, it was for the purpose of enabling nonprofit general partners (in addition to government agencies and tenant organizations) to obtain full ownership of the affordable housing development after 15 years. Virtually all partnerships involving nonprofit owners include a ROFR and in almost all cases the ROFR has worked as intended to transfer ownership under the terms of the statute. More recently, in a limited number of cases, disputes have arisen as a few limited partners – typically entities who acquired control of the limited partnership interests years after the original investment – have rejected the ability of nonprofits to exercise their rights under the ROFR. This has engendered legal disputes that have in a few instances resulted in litigation.
Eric Pettit: Section 303 of the Affordable Housing Credit Improvement Act has Serious Constitutional, Tax and Fiscal Problems
I am writing in regard to your July 24, 2019, blog post, “Congress Considering Retroactive Changes Affecting Low-Income Housing Tax Credit Property Owners,” which addresses Section 303 of the Affordable Housing Credit Improvement Act (AHCIA). I am a partner in the Los Angeles office of Boies Schiller Flexner LLP, and have represented investor limited partners in LIHTC partnership disputes, including a recent case involving the proper interpretation of a “right of first refusal” granted to a Washington nonprofit pursuant to the safe harbor created by Internal Revenue Code (IRC) Section 42(i)(7). Senior Hous. Assistance Grp. v. AMTAX Holdings 260, LLC et al., No. C17-1115 RSM. I agree with many of the concerns raised in your post, and wanted to provide some additional relevant information.
In 1989 Sens. John Danforth and George Mitchell proposed creating a statutory safe harbor that would permit nonprofits focused on affordable housing to hold a unilateral option to purchase LIHTC projects at below-market prices after all of the tax credits had been earned. Congress rejected this proposal, however, because giving nonprofits an option to force a below-market sale would eliminate any possibility that an investor holding virtually all of the equity in a LIHTC partnership would receive any tax-independent upside from its investment based on the appreciation of the LIHTC property’s value. Pursuant to fundamental tax principles on which Congress based the entire LIHTC program, this would not only create precisely the type of tax shelter that the Tax Reform Act of 1986 sought to eliminate, but also would effectively transfer ownership of the projects for tax purposes–and the corresponding right to receive tax credits–from investors to nonprofits, thereby undermining the functioning of the entire LIHTC program.
Mike and Dirk:
I am writing in response to your recent blog post concerning the draft Save Affordable Housing Act of 2019 (SAHA), which would prospectively repeal the Qualified Contract exit provision in Code section 42 and modify the manner in which the statutory qualified contract purchase price is calculated for existing properties. In particular, the blog states that “A consequence of SAHA being enacted would be most, if not nearly all, properties, arguably having [land use restriction] agreements inconsistent with the revised law. If so, existing properties might not be eligible for LIHTCs due to their LURA containing an invalid qualified contract provision.”
I do not share this concern. While section 42(h)(6) does “[b]roadly speaking” describe a lot of what goes into an extended use agreement (EUA) or LURA with the applicable housing credit agency, its requirements for these agreements are specifically set forth at section 42(h)(6)(A) and (B). Subparagraph (A) simply provides that no credit is allowed for a building in a year “unless an extended low-income housing commitment is in effect” by the end of such year. Section 42(h)(6)(B) then tells us what must be in the EUA in order for it to be “an extended low-income housing commitment.” Those mandatory provisions are set forth in clauses (i) through (vi) of that subparagraph, including, at clause (i), that the agreement must require “that the applicable fraction (as defined in subsection (c)(l)) for the building for each taxable year in the extended use period will not be less than the applicable fraction specified in such agreement and which prohibits the actions described in subclauses (I) and (II) of subparagraph (E)(ii).”