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Inc. v. Related Corporate V SLP, LP

Superior Court of Massachusetts, Suffolk

September 13, 2016

Homeowner's Rehab, Inc. et al.
Related Corporate V SLP, LP et al No. 135216


          Janet L. Sanders, Justice

         This case arises from competing interpretations of agreements executed in connection with the rehabilitation of an affordable housing complex in Cambridge. Plaintiff Homeowner's Rehab Inc., (HRI) was the nonprofit sponsor of the development. Plaintiff Memorial Drive Housing Inc. (Memorial Drive) is the General Partner under a Limited Partnership Agreement entered into among the parties. Plaintiffs instituted this action this action against the Limited Partners, contending that the defendants' interpretation of that agreement together with a related Option Agreement effectively prevents HRI from exercising a right of first refusal conferred upon it when the partnership was formed. The defendants have asserted counterclaims alleging among other things that, in an effort to trigger that right of first refusal in favor of HRI, plaintiffs breached their fiduciary duties to defendants.

         In July 2015 this Court (Roach, J.) denied plaintiffs' Motion for Judgment on the Pleadings (the July 2015 Decision). Although the Court noted that the plaintiffs appeared to be on strong ground in their interpretation of the relevant documents and that " much of what will ultimately be required to construe the Agreement is already available, " Judge Roach agreed with the defendants that there were factual issues remaining as to whether plaintiffs had put their own interests first in the manner by which they had gone about invoking their rights and obtaining an offer on the Property, particularly since she was bound at that stage in the proceedings to take as true all the factual allegations contained in defendants' counterclaims. Judge Roach also pointed out that Memorial Drive apparently had not given defendants access to the partnership's books and records, which might be relevant to the issues before the Court. Discovery was conducted, and the plaintiffs, essentially renewing the arguments they made before Judge Roach but on a more complete factual record, now move for summary judgment in their favor. This Court concludes that the plaintiffs' Motion must be Allowed .


         The summary judgment record contains the following undisputed facts. In July 1997, the parties entered into an extensively negotiated and documented deal for the redevelopment, rehabilitation and financing of land and buildings located at 808-812 Memorial Drive in Cambridge as affordable housing (the Property). In furtherance of that project, the parties established a Limited Partnership, with their rights and obligations set forth in a Limited Partnership Agreement. Memorial Drive is the General Partner of the partnership. Defendant Centerline Corporate Partners V L.P. (Centerline) is the Limited Partner, and the defendant Related Corporate V SLP L.P. (Related) is the Special Limited Partner or SLP. HRI was the nonprofit sponsor of the redevelopment of the Property and a majority owner of Memorial Drive. The partnership acquired a 99-year lease for the Property. The Property is owned by a charitable trust created by HRI, with HRI designated as the trust's sole beneficiary.

         The Property consists of 211 affordable apartment units, 89 market rate units, commercial space and a 262-space parking garage. As a " qualified low-income housing project, " it was eligible for financing under the Low Income Housing Tax Credit (LIHTC) provision of the Internal Revenue Code., 26 U.S.C. § 42 (Section 42). LIHTC projects generate tax credits for equity investors over a ten-year period and are subject to a 15-year " compliance" period in which they must be maintained as affordable housing if investors are to avoid recapture of the tax benefits. The compliance period for the Property here ended December 31, 2012.

         Pursuant to the Partnership Agreement, the defendants as Limited Partners acquired a 99.98 percent interest in the partnership and made capital contributions of $6.9 million--an amount directly tied to the amount of tax credits that the Limited Partners anticipated receiving. As General Partner, Memorial Drive made a small capital contribution but was to have " full and complete charge of the management of the business of the partnership in accordance with its purpose, " Section 5.1A. That purpose is defined in Section 2.5A of the Partnership Agreement as " investment in real property and the provision of low income housing through the construction, renovation, rehabilitation, operation and leasing" of the Property.

         As part of the deal and in accordance with Section 42, the Partnership executed a Right of First Refusal and Option Agreement (the Option Agreement). The Option Agreement was between the Limited Partnership and HRI (described as the " Holder"). The Option Agreement provided HRI with two potential mechanisms by which it could acquire the Partnership's interest in the Property. The first mechanism was set forth in Section 2 and 3 and gave HRI a Right of First Refusal (ROFR), described as " absolute, exclusive, and continuing." Section 2 described how and when this right could be exercised:

Notice of Disposition : At any time commencing on the date hereof and ending on the date which is four years after the last day of the 15-year compliance period with respect to the Property pursuant to Section 42 of the Code, the Partnership shall not directly or indirectly grant, sell, transfer, exchange, assign, give or otherwise dispose of its interest in the Property without it first being offered in writing to the Holder in accordance with the terms and conditions of this Agreement and until at least ninety (90) days after the Partnership shall have delivered to the Holder notice of an offer to purchase the Property from such purchaser (hereinafter the " Disposition Notice"). The Disposition Notice shall specify the portion of the Property proposed to be disposed, the names and addresses of each person or entity to whom the Partnership proposes to make such disposition, the consideration payable therefore (" the Third-Party Price"), and all other terms of the proposed disposition, together with a copy of any executed or proposed agreement(s) setting forth the terms of the proposed disposition and all other instruments related thereto, a statement indicating whether the Partnership is willing to accept the offer and the Partnership's estimate of the Restricted Market Price as hereinafter defined.

         As to the price that HRI would pay if it were to exercise its ROFR, that was described in Section 3 of the Option Agreement: HRI could acquire the Partnership's interest for the lesser of three prices: a) the " Section 42 Price" (a term defined by 26 U.S.C. 42(i)(7); b) the " Third-Party Price as specified in the Disposition Notice"; or c) the " Restricted Market Price." The Restricted Market Price is fair market value, subject to certain restrictions encumbering the Property.

         The second mechanism by which HRI could acquire the interest of the Partnership was set forth in Section 6 of the Option Agreement. That provision stated that HRI could, at the end of the 15-year compliance period, make its own offer to acquire the Property. As to what the purchase price would be, only one option was given: HRI had to pay the Restricted Market Price. Under this provision, the Partnership could dispute the price proposed by HRI and the matter would then be submitted to an appraiser.

         The Partnership Agreement specifically references the Option Agreement (defined under the Partnership Agreement to include the RFOR), and gives some indication as to the parties' intentions in executing it. For example, Section 5.4.C(iii) of the Partnership Agreement states: " The partnership and HRI agree that, with respect to the Option Agreement, it is their intention that the purchase price under the Option Agreement be the minimum price consistent with the requirements of Section 42(i)(7)." The Partnership Agreement makes another reference to the Options Agreement which is important to resolution of the issues before the Court: Section 5.4A states:

The General Partners . . . are hereby authorized to sell . . . all or substantially all of the assets of Partnership; provided, however, that, except for a sale pursuant to the Option Agreement, the terms of any such sale must receive the consent of the Special Limited Partners before such transaction shall be binding on the partnership.

         In other words, if the proposed sale was pursuant to the Option Agreement, the SLP's consent was not required.

         In connection with the negotiation of these agreements, HRI requested that the defendants provide it with financial projections as to the anticipated return on their investment. The defendants provided a memorandum from the firm of Reznick, Feder & Silverman dated May 21, 1997 (the Reznick Memo). See Exhibit S of Joint Appendix. The Reznick Memo was part of the closing documents. That memo projected that the Limited Partners would receive $6.9 million tax credits between 1997 and 2012--an amount which coincided with their capital contribution. The Reznick Memo also projected what return the Limited Partners would receive in the event the Partnership interests were sold December 31, 2012 for $1 over the mortgage balance. Taking into account the tax benefits they would receive and even after payment of any exit taxes resulting from the sale, the Limited Partners could be expected to net $3.3 million over their capital contribution of $6.9 million. In other words (as described by the Memo), the benefit to the Limited Partners in providing equity for the project was not in a later sale but in the tax credits and benefit of tax losses that they would receive. They did in fact reap such benefits: from 1997 when these agreements were executed up to the end of the compliance period in 2012, the Limited Partners received approximately $7.5 million in tax credits and took advantage of over $24 million in tax losses.

         After the compliance period had run, Peter Daly contacted Centerline in October 2013 about HRI's acquiring the Limited Partners' interest in the Property. Daly is Executive Director of both HRI and of Memorial Drive, the General Partner. As to what HRI would pay, Daly proposed using the " Minimum Price Methodology" that was attached to the Partnership Agreement as Schedule C. The title to that document is: " Projection of General Partner Purchase Price upon Sale or Disposition of the Project on 12/31/2012" and is further described as the " Section 42 Price pursuant to the Right of First Refusal." As noted above, the " Section 42 Price" was one of the options for calculating purchase price if HRI was exercising its ROFR under Sections 2 and 3 of the Option Agreement; it was not an option under Section 6 where HRI made an offer independent of exercising its ROFR in the face of a third party offer. As Daly explained in his affidavit, " HRI was attempting not to invoke the ROFR but rather to buy out the Limited Partners interest using the Minimum Methodology rather than going through the lengthy ROFR process of soliciting and responding to an offer." It was his belief that the agreements entitled him to insist on the buyout price ...

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