Mass Supreme Judicial Court Rules for Nonprofit Developer in LIHTC Dispute

On June 15th, the Massachusetts Supreme Judicial Court (SJC) issued an opinion in favor of nonprofit developer Homeowner’s Rehab, INC (HRI). The decision reinforces the right of first refusal as a crucial preservation tool within the Low Income Housing Tax Credit (LIHTC) framework. CHAPA filed an amicus brief with the court in support of HRI and was joined by the Greater Boston Real Estate Board and the Massachusetts Association of Community Development Corporations.

The disputing parties were partners in a limited partnership (Partnership) created in 1997 to rehabilitate and operate an affordable housing complex under the LIHTC program. Under the structure of the Partnership, the general partner was a corporation that was majority-owned and controlled by HRI. The two limited partners, Centerline Corporate Partners and Related Corporate were investors that made capital contributions in exchange for tax credits generated by the property through LIHTC.

Typically, when all tax credits have been claimed and are no longer subject to recapture, most limited partners seek to leave the project by selling their interest to the nonprofit general partner, in this case, HRI. In following this general practice, HRI made an offer to purchase the limited partners’ interest in 2014. The limited partners rejected the offer, claiming that HRI’s offer was for a price only available through the exercise of HRI’s right of first refusal, and since no third-party offer had been made, HRI’s right had not been triggered. After a series of negotiations where the parties could not agree on a price, HRI solicited a third-party offer from nonprofit developer Madison Park. Madison Park made an offer, and HRI exercised its right of first refusal. The primary issue in this case dealt with the exercise of this right.

The HRI right of first refusal was in accordance with § 42(i)(7) of the LIHTC statute. Including a right of first refusal in accordance with the LIHTC statute is a common practice in partnership agreements to protect the limited partners’ interest in receiving the tax benefit while providing the nonprofit developer an opportunity to acquire the property at a below-market price once the tax benefits have ended. Congress created this framework to ensure that affordable housing remains affordable in the long-term by facilitating the inexpensive transfer of property to nonprofits whose mission it is to provide such housing.

Under the Partnership agreement, if a third-party offer was made, a disposition notice would be sent to HRI with details about the buyer, the price, the terms, and a statement indicating whether the Partnership was willing to accept the offer. HRI would then be authorized to exercise the right of first refusal and acquire the property at a below market price. If HRI did not exercise its right, the sale would proceed, subject to the consent of the special limited partner, Related Corporate.

After Madison Park made its offer, HRI acted on behalf of the Partnership by issuing the disposition notice and indicated that that Partnership was willing to accept. HRI then notified the Partnership that, having received the disposition notice, it intended to exercise its right of first refusal. The special limited partner responded that they did not consent to accepting the Madison Park offer and therefore HRI’s right of first refusal was not triggered. HRI commenced an action against the limited partners seeking a judgment as to the parties’ rights under the agreements.

On appeal, the SJC examined three issues related to the right of first refusal:

Must the right of first refusal be triggered by a bona fide third-party offer?

No. A bona fide offer is one in which the offeror genuinely intends to bind itself to pay the offered price.  The limited partners argued that Madison Park was not a bona fide offeror because HRI solicited the offer for the sole reason of triggering the right of first refusal.  The court rejected the limited partners’ argument. Instead, the court ruled, HRI’s right of first refusal required only the Partnership to have received an enforceable offer from a third party. The court noted that a right of first refusal in accordance with § 42(i)(7) -- like the one exercised by HRI -- allows nonprofits to purchase the property at a below market price, even if it is lower than a third-party offer. The court found it difficult to imagine why a third party would make a bona fide offer for the property, knowing that the nonprofit organization has the right and is likely to exercise it.

The court also found no issue with HRI soliciting Madison Park for a third-party offer because there was nothing in the Partnership agreement that barred HRI from doing so.

Before HRI exercised its right of first refusal, must the Partnership first decide to accept the third-party offer?

Yes, but deciding to accept an offer is not the same as acceptance of an offer. The court examined the legislative history of § 42(i)(7) and found that Congress intended the right of first refusal to be a right to “purchase the building, for a minimum purchase price, should the owner decide to sell.” But, the cour noted, “the decision to accept does not constitute an acceptance of the offer—it need not be communicated to the third party—but a decision must be made.”

Here, the decision to accept Madison Park’s offer happened when HRI issued the disposition notice indicating that the Partnership was “willing to accept the offer.” The court ruled that under the Partnership agreement this was sufficient to indicate that a decision to accept had been made and trigger HRI’s right of first refusal.

Did the Partnership have the authority to decide to accept the offer without the consent of the limited partners?

Yes. Under the Partnership agreement, consent from the special limited partner to the terms of the sale was only required “before such transaction shall be binding on the Partnership.” Here, the court ruled, consent was not required because the disposition notice to HRI did not bind the Partnership in a sale to Madison Park. Moreover, nothing in the agreement required consent before issuing the disposition notice.

The court also suggested that requiring consent from the limited partners in this instance would run contrary to the congressional intent behind the § 42(i)(7) right of first refusal because, “in effect, this would mean that the nonprofit developer cannot exercise its right of fist refusal without the limited partners’ consent” and “consequently, if we were to interpret the right of first refusal to require the consent of the special limited partner, the nonprofit developer could be denied any meaningful opportunity to acquire the property interest at the § 42 (below market) price.”

A Cautionary Note:

The court emphasized that it arrived at these conclusions only through the interpretation of the language of the agreements of the parties in this case. The court was careful to not declare that every partnership participating in the LIHTC program must permit a right of first refusal that can be exercised under these circumstances, noting, “when the owner of the property is a limited partnership, how the partnership makes that decision is a matter of contract” and “we must enforce the language they chose.”