Guest post by Ellen Lurie Hoffman of National Housing Trust.

Protect Affordable Properties and Residents

As Peter Reilly points out in “After the Low-Income Housing Tax Credits are Done, Investors Want More,” (Forbes, January 13, 2021), the below market Right of First Refusal (ROFR) provision in Section 42(i)(7) has become a contentious issue and led to costly litigation across the country. As a mission-driven nonprofit organization dedicated to creating and preserving affordable homes to provide opportunity, advance racial equity, reduce economic disparities and strengthen community resilience, my organization, the National Housing Trust, views these lawsuits and the disputes underlying them as a dangerous growing trend which threatens to undermine the long-term affordability of properties financed with Low-Income Housing Tax Credits (Housing Credits) and to deplete the communities in which they are located of precious resources.

I am extremely troubled by the rapidly unfolding phenomena in which major sources of outside capital have begun buying up control of Housing Credit investor limited partnerships with the aim to extract resources out of affordable housing properties after the end of the initial 15-year Compliance Period. This has caught many advocates, stakeholders, and policymakers unaware, but will have a profound impact on affordable housing in this country. Essentially, as the Tenants’ Development Corporation (TDC) case illustrates, major sources of outside capital have discovered a commercial sector to exploit and reap hundreds of millions of dollars of profits, contrary to the
intention of Congress.

The purpose of the ROFR is to enable nonprofit general partners to obtain full ownership of affordable housing properties, financed under the Housing Credit program, after a 15-year period known as the Compliance Period, and to do so for a statutorily prescribed, below market purchase price that includes the assumption of property debt and the payment of certain taxes as may be applicable. Virtually all Housing Credit 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, however, disputes have arisen because some organizations – typically entities like Alden Torch, which acquired control of Housing Credit partnership interests years after the original investment – have rejected the ability of nonprofits like TDC to exercise their rights under the ROFR in hopes of receiving financial windfalls never intended by the Housing Credit program. As a result, this has engendered legal disputes that have resulted in litigation, like the TDC versus AMTAX case.

In such disputes, these organizations have taken the position that the Section 42(i)(7) ROFR is a common law right-of-first refusal and they do not need to recognize the rights established in the partnership agreement without a bona fide and enforceable offer from an unrelated third party with whom a contract for sale is ultimately executed. In essence, they have rejected a bargained-for-right in the partnership agreement held by the nonprofit, taking the position that the contractual language is basically meaningless. Most nonprofits do not have the resources to litigate these issues in court, so a stalemate ensues that is used by such parties to leverage a cash payment in return for leaving the partnership. The payment of such scarce funds undermines the continued viability of the property as affordable housing, in contravention of congressional intent.

While the language in Section 42(i)(7) refers to a “right-of-first-refusal,” it clearly was not intended to be a common law right-of-first refusal because the purchase price is established in the statute and therefore is not based on the nonprofit holder of the ROFR meeting or matching an offer price from a third party. Additionally, the Housing Credit program includes a 10 percent set-aside designed to encourage and ensure nonprofit participation.

in the development and long-term ownership of affordable housing. This set-aside, when coupled with the intent of the ROFR and its statutorily created below market minimum purchase price (often referred to as the “debt plus taxes” transfer price), makes clear the intent of Congress to facilitate long-term nonprofit participation in, and ownership of, affordable housing.

In Reilly’s piece, the statement from Alden Torch, which controls the limited partners in the CDC case, suggesting that some nonprofits are trying to “change the nature of the program in ways that ignore the principles on which it was founded for their own benefit, thereby jeopardizing the benefits for everyone involved in the program enjoys” could not be more disingenuous and self-serving. Alden Torch is an interloper to the Housing Credit and has one overriding objective: to earn windfall profits at the expense of affordable housing. As previously stated, in almost all cases the ROFR works as intended to transfer full ownership after the Compliance Period to the nonprofit general partner. For 30 years, Housing Credit investors have understood that when they commit equity capital to this program, their investment is undertaken for a financial return that is based on the tax subsidies in the program, not based on an expectation of residual value. They have understood, and invested billions of dollars in affordable housing, with the assumption that the ROFR will work as Congress intended to transfer full ownership to the nonprofit general partner. Court decisions that uphold the contractually bargained for ROFR do not threaten any benefits of the program, except for those who wish to extract more than Congress intended.

The National Housing Trust and our mission-driven partners intend to challenge “Aggregators” like Alden Torch, which seek windfall returns by demanding the payment of money from the general partner — either from its balance sheet or from the property’s reserves — or to insist the property be sold, stripping resources out of the property and the community. We will fight this battle with every tool available, including pursing federal legislation and regulatory guidance, as well as state allocating agency policy and practice upholding the ROFR and blocking the predatory actions of aggregators. We will educate stakeholders, including developers, state and local officials, investors, and advocates about these industry trends. On a parallel track, ongoing litigation promises favorable precedents as judges across the country better understand the Housing Credit statute and how Aggregators are trying to take advantage of it.

Unlike the Aggregators, we are fighting not for our own profit, but in the interest of low-income residents and disadvantaged communities across the country which benefit from the precious resource provided by this program, affordable housing. At a time when our nation faces an unprecedented pandemic and an economic crisis, housing insecurity is at an all-time high and we cannot afford to lose or threaten a single affordable apartment.

Ellen Lurie Hoffman is Federal Policy Director of National Housing Trust