“Nonprofit Transfer Disputes in the Low Income Housing Tax Credit Program: An Emerging Threat to Affordable Housing,” documents how “some private firms have begun to systematically challenge nonprofits’ project-transfer rights and disrupt the normal exit process in hopes of selling the property at market value.” The vast majority of LIHTC developments are reaching year-15 as planned, but a small number of nonprofits find themselves struggling to retain their communities after tax credits have been absorbed by the investors.

The report sheds light on a growing trouble point for nonprofit housing entities: “aggregators” who systematically challenge nonprofit transfer rights under the LIHTC program and, the WSHFC report says, “pressure nonprofits to abandon their transfer rights, pay a substantial buyout, agree to a forced sale, or otherwise provide financial benefit to the aggregator—all at the expense of low-income housing.”

LeadingAge is aware of members currently facing these battles and is concerned that additional members may be threatened with the loss of their resources and their communities.

These firms were dubbed “aggregators” in a May 2019 article by attorney David Davenport who has worked on dozens of these cases. “An aggregator – unlike a typical syndicator or investor that developers have worked with for years – is someone new to the general partner, who was not part of the initial transaction that led to the LIHTC partnership or affordable housing development, and who may view the partnershi8p and its development as a financial instrument rather than an affordable housing real estate investment,” Mr. Davenport says. An aggregator, he says, “casts reason, fairness, good faith, intent, and legal principles aside in hopes of extracting more financial return from the development than the tax benefits purchased.”

According to the report, “Multiple suits between aggregators and housing nonprofits have already been filed in courts across the country. But most of these disputes presumably will never make it to court, especially if the nonprofit lacks the resources or will to fight. The nonprofit might be quickly pressured into paying a buyout, or even ceding ultimate ownership, in which case the aggregator can sell the property at a higher price than originally anticipated in the partnership agreement.”

Courts, the WSHFC says, need a clear interpretive framework to maneuver the overall complexity the LIHTC statute’s “various provisions that are ambiguous and sometimes inconsistent.” Critically, the special role of nonprofits in LIHTC program is quite clear and, thus, “ambiguities … should be resolved in favor of nonprofit ownership and low-income housing.” The WSHFC reviewed cases in this area and determined that aggregators have used “myriad tactics to obtain value from LIHTC projects and thwart nonprofit transfers.”

“For decades,” the report says, “the widespread expectation and practice has been that the nonprofit partners will secure ownership of LIHTC projects as a matter of course after the 15-year compliance period, usually by exercising the statutory [Right of First Refusal] at the specified minimum price.”

However, threats to these decades-long practices have recently emerged when, as described by the report, “a number of private firms have been challenging LIHTC project transfer rights across the country as a way of obtaining additional profit from these deals at the back end. These firms appear to be aggregating investor interests in LIHTC partnerships; asserting myriad claims and arguments against project transfers, including transfers to nonprofits; and extracting value from the project or nonprofit in the shadow of protracted litigation.”

Different from original LIHTC investors, the WSHFC report says, aggregators tend to pick out markets where property values have increased substantially in order to replace the investors and extract maximum additional return. As a direct result of the increased property values, these markets tend to be the very places facing serious housing affordability problems, where LIHTC projects are needed most.”

The WSHFC report recommends that “the statutory ROFR should be interpreted as a transfer right that … empowers the nonprofit to take ownership as a practical matter.” The report also asserts that “Ambiguities in partnership agreements should be resolved consistent with the provisions and policies of the LIHTC statute and in furtherance of nonprofit ownership and low-income housing.”

Identical Senate (S. 1703) and House (H.R. 3077) bills to expand and improve the Low Income Housing Tax Credit program attempt to help resolve this issue for some existing LIHTC partnership agreements. When an existing partnership agreement lacks clarity on the subject, the bills offer clarity on the right of first refusal and its terms. The bills would not supersede clear, existing agreements. LeadingAge supports the bills’ clarification of existing agreements and, for newly financed LIHTC properties, a replacement of the ROFR with a more straightforward purchase option for nonprofits to gain control of the property at the end of the initial 15-year compliance period.

Unfortunately, a blog posted by Novogradac, an affordable housing consultancy firm, mischaracterizes the bills’ provision as a retroactive change to existing contracts. The bills’ language explicitly states, “No provision of this amendment shall supersede the agreement among the parties as to the manner of execution or terms of a right of first refusal or option.” The blog creates unfounded concern for the bills’ language, which was carefully drafted with all sides in agreement, and could cause hurdles for the solution’s much-needed enactment.

If your nonprofit is under pressure by a potential aggregator or other non-affordable-housing-motivated entity to relinquish your LIHTC community, please reach out to LeadingAge.