Every year, a new group of apartment complexes financed with low-income housing tax credits (LIHTCs) march closer to the end of their Year 15 compliance periods. It’s also the year in which the valuable housing credits that make the projects profitable for investor limited partners (LPs) reach the end of recapture risk and when these limited partners typically look to exit the partnership that owns the rental housing.
In recent years, this has given rise to disputes over differing objectives at Year 15 and disputes concerning the terms and conditions of the governing partnership agreements. These disputes—involving buy-out options, rights of first refusal, qualified contracts, and other issues—can jeopardize the financial security and long-term affordability of these properties, as well as the much-needed preservation of existing affordable housing.
But, how can you tell if your project is headed for a dispute? LIHTC developers and general partners (GPs) should look out for the following red flags* in their project partnerships beginning no later than Year 10. These events may indicate a problem is on the horizon.
1. Investor LP interests have changed hands from the original investor LP. Is your partner today the same one as you signed with at the beginning? If the answer is no, you would be wise to identify the new purchaser’s intentions. Some LPs—known as “aggregators”—purchase LIHTC investments specifically to use them as a financial instrument with high potential return.
2. The investor LP’s interests are managed by or affiliated with organizations that have been involved in litigation concerning LIHTC project partnerships around Year 15. Experience has shown that LPs with a history of Year 15 litigation are likely to be involved in litigation again. When the housing credits expire, the main goal of these LPs can be to extract as much financial return from the asset as possible—rather than preserve a property’s affordability.
3. The investor LP has a large positive capital account and believes that it should be allowed to monetize the book entry through a “cash-out” process. In general, cash generated from liquidating a LIHTC partnership will be distributed in accordance with the original deal parameters. However, in some partnerships where the LP has a large positive capital account, LPs may attempt to distort the liquidating distributions in their favor.
4. Discussions concerning liquidation of the partnership are presented. While liquidation of the partnership is one potential exit strategy, GPs have several options when an LP chooses to exit at Year 15. Liquidation discussions may signal that an LP is seeking a heavy payday on the open market.
5. The investor LP begins talking to you about future planning, future values, and future circumstances beyond Year 15—like refinancing or resyndication—as a means to generate proceeds to “buy them out.” In rare cases, an LP will refuse to consent to refinancing the project as Year 15 approaches unless the proceeds from a refinance are used to buy out their interests at a price they determine.
6. The investor LP undertakes efforts to restrict or limit the use of reserve accounts and withholds approvals for project needs. Experience has shown these methods are commonly used to try to coerce a GP into a forced sale or substantial buyout.
7. Qualified contract requests are suddenly presented. In states where qualified contracts are or have been permitted in the past, LPs may request a qualified contract in order to phase out the long-term affordability requirements and list the property at market rate.
8. Exit negotiations stall or you experience periods of non-responsiveness from your investor LP. Negotiation and communication breakdowns may indicate an LP is pursuing alternative exit strategies against the wishes of the GP.
9. The investor LP begins to question otherwise routine financial reports or suggests that a forensic audit of past events is necessary for some reason. These could be early signs that an LP is preparing to dispute the terms of the partnership agreement or challenge GP ownership rights.
10. You are not adequately familiar with your documents and are talking to or fielding questions from your investor LP about their exit. From the first year to Year 15, it’s important to monitor and manage your project’s partnership agreement. Talk to your legal and financial consultants early and often to ensure your Year 15 exit strategy is protected.
*These red flags were assembled in collaboration with the National Housing Trust and LeadingAge.
