Sixth Circuit Gives Statutory Context To Affordable Housing ROFRs

• Published date: 17 May 2022
• Law Firm: Holland & Knight
• Author: Mr Alan Cohen, Jessica Ragosta Early and Edward R. Hickey

Highlights

• The U.S. Court of Appeals for the Sixth Circuit concludes that the right of first refusal contemplated by the federal low income housing tax credit program, 26 U.S.C. § 42(i)(7), "varies markedly" from a right of first refusal in a "typical real estate transaction," such that application of general "common law" definitions of "right of first refusal" and "bona fide offer" would contravene the purpose of Section 42(i)(7).
• Section 42(i)(7) is a safe harbor enacted by Congress that operates to protect the incentives of for-profit entities to initially invest in affordable housing projects, while creating a means for nonprofits to regain ownership and continue the mission of affordable housing once these incentives expire.
• A general partner's intent or knowledge that its nonprofit affiliate will exercise its right of first refusal to acquire an affordable housing property at the Section 42(i)(7) price does not preclude the general partner's formation of any requisite intent to sell the property to a third party, so as to trigger the right of first refusal; otherwise, the right of first refusal would be rendered meaningless.

The federal low income housing tax credit (LIHTC) program, 26 U.S.C. § 42, is the largest driver of affordable housing in the country. In an effort to keep LIHTC projects affordable as long as possible, Congress created a safe harbor that allows certain types of entities, including nonprofits whose exempt purposes include fostering low-income housing, to hold a right of first refusal to acquire a LIHTC project following the end of the 15-year compliance period at a statutory, below-market minimum price (the Nonprofit ROFR). In recent years, a small subset of for-profit investors¹ have aggressively challenged the validity and exercise of contractual Nonprofit ROFRs – particularly the conditions precedent required to exercise these rights – with a goal of extracting value or proceeds that would arise absent the below-market Nonprofit ROFR. A growing number of lawsuits have sprung up across the country involving such investor challenges, with courts applying wide-ranging standards.

In the first decision by a federal appellate court to review an exercise of a Nonprofit ROFR, the U.S. Court of Appeals for the Sixth Circuit issued an opinion on May 10, 2022, that reversed the U.S. District Court for the Eastern District of Michigan's decision in SunAmerica Housing Fund 1050 v. Pathway of Pontiac, Inc.and remanded the case back to the district court for trial.²

The District Court Opinion

The Limited Partnership Agreement (LPA) included a fairly typical variant of the Nonprofit ROFR provisions routinely seen in the LIHTC industry. The LPA expressly carved out of the investor's consent rights any consent over a sale of the property pursuant to the Nonprofit ROFR. However, the LPA included a requirement that the Nonprofit ROFR could only be triggered "[u]pon receipt of a bona fide offer."

The general partners of the property limited partnership received two non-binding letters of intent (LOIs), which indicated each offeror's desire to purchase the property upon specified terms. The general partners solicited at least one of the LOIs and did so to...