New York Attorney General Letitia James has weighed in on  the low-income housing tax credit Year 15 struggle. In cooperation with James E. Johnson New York City’s Corporation Counsel, she has filed an amicus brief supporting RiseBoro Community Partnership (RiseBoro)  in its litigation with AIG affiliate, Sun America Housing Fund 682, over ownership and control of 35 units of housing at 420 Stockholm Street in the Bushwick neighborhood of Brooklyn.

Year 15

The Low Income Housing Tax Credit (Section 42)(LIHTC) goes to the owners of qualified projects for 10 years.  Then there is a five year period where the credit might be subject to recapture.  The project will have an additional commitment to maintain affordability for another 15 years, sometimes longer, but that is not enforced by the IRS.  There is a cap on the total amount of credit that can be claimed.  The law apportions the credit to states based on population and state housing agencies allocate the credit to projects. Often there are other subsidies involved,

At any rate Year 15 is critical because that is when an investor who is only in it for the credit will no longer want to be involved.  Generally, investing in something just for tax benefits does not work, but with respect to LIHTC there is an explicit exception to this rule (Reg. 1.42-4).  And there is an explicit provision that allows a not for profit sponsor to take out an investor at a bargain price without disturbing the credit allocations (Section 42(i)(7)).

Not for profit sponsors view 42(i)(7) as, in effect, an option.  But the Code does not say option. It says right of first refusal (ROFR).  Investors, sometimes not the original investors, have been using this distinction to frustrate not for profit sponsors from executing the transition that was expected when the initial deal were struck over 15 years back.  They claim that there is no bona-fide third party offer and no desire on their part to sell.  And those are generally required to trigger an ordinary ROFR.

The district court decision in the RiseBoro case is one the three federal decisions that have supported the investor view.  It is now being appealed to the Second Circuit.

About RiseBoro

RiseBoro Community Partnership is a neighborhood service organization with a broad range of programs, housing being among them.  I spoke with Emily Kurtz, VP Housing.  Ms. Kurtz has been with RiseBoro for 17 years.  She has a bachelors in economics from Brandeis and a masters in urban planning from Columbia. She relishes the complexity of putting housing deals together.  She believes LIHTC is a great program that has created a lot of affordable housing.  She also believes that the action by the AIG affiliate is contrary to the spirit of the original deal.

On the other hand, her interaction with the AIG asset managers has not been compromised by the ongoing dispute.  There are reports of investor groups harassing not for profit sponsors with a possible view to shortening the second fifteen years of affordability.  Apparently there is none of that going on here.  AIG appears content to wait till 2030 to cash in on neighborhood gentrification. AIG has declined to comment on the dispute.

Big Picture

Putting aside the legal technicalities, the Year 15 struggle is understandable from the big picture.  The not for profit housing community is attached to the notion that housing is a basic human right.   One of the ways to assure that housing stays affordable is through not for profit ownership and control.  The low income housing tax credit is a concession to the private profit motive.  Commercial interests get their ten years of tax credits and five years of waiting out recapture and then they should just go away.  And the Section 42 ROFR seems to provide for that and even if there are technical problems that is still the spirit of the deal in the view of the not for profit sponsors.

There is a additional fifteen years of affordability required beyond the compliance period.  But after fifteen years on a tight budget the property may need a capital infusion. Continued investor involvement can complicate that.  And furthermore the goal of the housing advocates is affordability forever.

As noted AIG would not comment on this story and I could not get anything out of Alden Torch, an aggregator, who is involved in several other similar cases.  But you can infer that they are operating using something like the Ferengi Rules of Acquisitions – Rule 97 Enough is never enough and Rule 202 The justification for profit is profit.  If there is an opportunity to get more profit out of the deal, it would be irresponsible of them not to.

The Attorney General’s Argument

This is where it gets pretty lawyerly.  The district court decision is basically textual. Congress put ROFR into the Code not option.  And the bona fide third party offer and desire to sell are tied up in the common law notion of ROFR.  Reilly’s First Law of Tax Planning – It is what it is.  Deal with it.

The argument is that the bona fide third party offer requirement makes the bargain ROFR pointless.  No third party would go to the trouble of making such an offer, if they know the bargain price will be triggered by it. The AG argues that RiseBoro made substantial investment in the project based on the “practice and custom” of investor exit after year fifteen.  This argument is a little off, since in 1999, there had yet to be any projects that were through the compliance period, so it is kind of hard to say there was a custom then.

Another argument is that Section 42 ROFRs have a different meaning under New York law than common law ROFRs. Trade usage or custom may overcome a literal interpretation of contract language.  They note a report from the State Division of Housing and Community Renewal in 2000 that refers to the LIHTC ROFR as an option.  They even have a quote from a SunAmerica VP to the effect that they were not engaging in typical real estate transactions, but were entirely tax driven.  On that basis, they argue for vacating the district court decision.

The AG suggests in the alternative that the court refer the issue to the New York Court of Appeals to make the determination under New York law.  For what it is worth sponsors have done better in state court having won in Massachusetts and Florida.

The Court Of Public Opinion

The not for profits have been vigorous in making their argument to the public, whereas the investors have saved their arguments for the actual courts, where they are doing well at least at the federal level.  It seems like the only people defending them in public are a couple of people that show up in my twitter feed.  They are quite passionate about the not for profits being in the wrong.

Here is some of the other coverage on this case.

The Real Deal has Ownership dispute at Brooklyn rental puts affordable tax break at risk, city says .

Eliot Hetterly has An Emerging Threat to Nonprofit Affordable Housing on the website of the Association for Neighborhood Housing and Development.

Emily Kurtz had an OpEd in The Daily News – A shady partner in affordable housing: How corporations threaten LIHTC’s success.  That story is linked to an appeal by RiseBoro to Fight Corporate Greed.

Gabriel Sandoval and Hiram Alejandro Duran have Brooklyn Group Battles for Bushwick Building — and the Future of Affordable Housing in The City.

Kelsey Neubauer has N.Y. AG Joins Appeal To Determine Control Of A Brooklyn Affordable Housing Property on Bisnow.

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Originally published on Forbes.com.

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