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Inc. v. Related Corporate V SLP, L.P.

Supreme Judicial Court of Massachusetts, Suffolk

June 15, 2018

HOMEOWNER'S REHAB, INC., & another[1]
v.
RELATED CORPORATE V SLP, L.P., & another.[2]

          Heard: February 6, 2018.

         Civil action commenced in the Superior Court Department on December 5, 2014.

         The case was heard by Janet L. Sanders, J., on a motion for summary judgment, and entry of judgment was ordered by her. The Supreme Judicial Court on its own initiative transferred the case from the Appeals Court.

          Dennis E. McKenna for the defendants.

          Karen E. Friedman (David E. Lurie also present) for the plaintiffs.

          The following submitted briefs for amici curiae:

          Henry Korman & Daniel M. Rosen for Citizens' Housing and Planning Association & others.

          W. Bart Lloyd, Gregory M. Katz, & Jonathan Klein for Preservation of Affordable Housing, Inc., & another.

          Stephen M. Nolan for Massachusetts Housing Investment Corporation.

          Roberta L. Rubin, Special Assistant Attorney General, _& Bruce E. Falby for Department of Housing and Community Development & others.

          Albert P. Zabin for Chinese Progressive Association, Inc., & another.

          Charles R. Bennett for Holland & Hart LLP.

          Christopher G. Caldwell, Michael D. Roth, & Kelly L. Perigoe, of California, & William C. Jackson for Jonathan Zasloff.

          Christopher G. Caldwell, Michael D. Roth, & Kelly L. Perigoe, of California, & William C. Jackson for Bradley Myers.

          Present: Gants, C.J., Lenk, Gaziano, Lowy, Cypher, & Kafker, JJ.

          GANTS, C.J.

         The parties in this case are partners in a limited partnership formed for the purpose of rehabilitating and operating an affordable housing complex. The project was eligible for financing under the Low Income Housing Tax Credit (LIHTC) program set forth in the Internal Revenue Code, 26 U.S.C. § 42 (2012). Under the agreements executed in connection with this project, the majority owner of the general partner, a nonprofit organization, holds a right of first refusal to purchase the partnership's interest in the property "in accordance with" § 42(i)(7). The primary issue in this case is when that right of first refusal may be exercised under the terms of these agreements. The plaintiffs contend that the right of first refusal can be exercised once a third party makes an enforceable offer to purchase the property interest. The defendants contend that the right of first refusal cannot be exercised unless and until the partnership has received a bona fide offer from a third party, and has decided, with the consent of the special limited partner, to accept that offer. The Superior Court judge in this case agreed with the plaintiffs, and granted their motion for summary judgment. We affirm the grant of summary judgment.[3]

         Background.

         1. The LIHTC program.

         Because the limited partnership here was formed for the purpose of participating in the LIHTC program, we begin by describing the program.

         As set forth in the Internal Revenue Code, 26 U.S.C. § 42, the LIHTC program is a Federal subsidy program designed to promote the construction and rehabilitation of rental housing that is affordable to low and moderate income households. It is the most important source of financing for affordable housing in Massachusetts and across the nation. See Joint Center for Housing Studies of Harvard University, America's Rental Housing: Expanding Options for Diverse and Growing Demand 32-33 (2015) (LIHTC program now provides more affordable rental units than are provided in public housing or with Section 8 housing vouchers); Department of Housing and Community Development, Low Income Housing Tax Credit Program, 2018-2019 Qualified Allocation Plan 6 (since 1987, LIHTC program has helped finance over 67, 000 affordable rental units in Massachusetts and almost 3 million nationwide). Under § 42, tax credits are allocated to each State based on population; the States, in turn, allocate the tax credits to "qualified low-income housing projects" --that is, residential rental properties that are rent-restricted and have a certain minimum share of rental units set aside for low and moderate income households. See 26 U.S.C. § 42(g), (h) (3) [4]

         The owners of these properties can claim the tax credits annually over a period of ten years, thereby offsetting their tax liability, but must continue to comply with rent affordability restrictions for a period of fifteen years, known as the compliance period, to avoid recapture of those credits. See 26 U.S.C. § 42(a), (c)(2), (f)(1), (i)(1), (j). For any LIHTC project allocated tax credits after 1989, the owner must also agree to comply with the affordability restrictions for an additional fifteen years, known as the extended use period, so that the affordability restrictions remain in place for a total of thirty years. See 26 U.S.C. § 42(h) (6) .

         Developers of affordable housing projects frequently use the tax credits available under the LIHTC program as an incentive to attract capital from private investors. Because these projects rarely generate enough tax liability for the developers to claim the full value of the credits themselves, and because many of these developers are nonprofit organizations and therefore tax-exempt, the tax credits are of little value to them. By syndicating the project, however, these developers can "sell" the tax credits to private investors -- in most cases corporations with substantial and predictable tax liability --in exchange for an equity investment in the project. See J. Khadduri, C. Climaco, & K. Burnett, United States Department of Housing and Urban Development, What Happens to Low-Income Housing Tax Credit Properties at Year 15 and Beyond?, at 2 (2012) (Khadduri et al.); M.I. Sanders, Joint Ventures Involving Tax-Exempt Organizations 949-951 (4th ed. 2013).

         Section 42 requires each State to set aside at least ten per cent of its allocable tax credits for projects developed and operated by qualified nonprofit organizations. 26 U.S.C. § 42(h)(5). In a typical project of this kind, the property is owned by a limited partnership, formed solely for that purpose, in which the general partner is a nonprofit organization holding only a nominal equity interest (one per cent or less) and the limited partners are private investors who hold almost all of the equity (ninety-nine per cent or more). The nonprofit general partner is responsible for the day-to-day management of the property. The investor limited partners contribute capital and, in return, are allocated the tax benefits flowing from the project, including the LIHTC tax credits, deductions for depreciation, and other tax losses. See Khadduri et al., supra at 11, 25; Mittereder, Pushing the Limits: Nonprofit Guarantees in LIHTC Joint Ventures, 22 J. Affordable Hous. & Cmty. Dev. L. 79, 83 (2013) (Mittereder).

         At the end of the fifteen-year compliance period, when all tax credits have been claimed and are no longer subject to recapture, most investor limited partners will seek to leave the project, usually -- but not always -- by selling their interest to the nonprofit general partner. See Khadduri et al., supra at 29-31; Mittereder, supra at 83. Section 42 specifically contemplates such sales, allowing nonprofit organizations to hold a right of first refusal to purchase the property at the end of the compliance period at a statutorily prescribed minimum price, and protecting investors against the risk that their tax credits will be disallowed or recaptured for that reason. Title 26 U.S.C. § 42(i)(7)(A) states:

"No Federal income tax benefit shall fail to be allowable to the taxpayer with respect to any qualified low-income building merely by reason of a right of [first] refusal held by the tenants ... or resident management corporation of such building or by a qualified nonprofit organization ... to purchase the property after the close of the compliance period for a price which is not less than the minimum purchase price . . . ."

         The "minimum purchase price" (§ 42 price) is an amount equal to the outstanding debt on the property, excluding debt incurred in the five years preceding the sale, plus exit tax liability, [5] and is typically below fair market value. 26 U.S.C. § 42(i)(7)(B). See Khadduri et al., supra at 31.

         Section 42 does not mandate that nonprofit organizations be granted a right of first refusal, but the Internal Revenue Service has issued guidance indicating that, in order to qualify for tax-exempt status, a nonprofit organization participating as a general partner in a LIHTC partnership must secure a right of first refusal to acquire the property at the end of the compliance period. Memorandum from Robert S. Choi, Director of Exempt Organizations, Internal Revenue Service, Income Housing Tax Credit Limited Partnerships 1, 3-4 (July 30, 2007).

         2. The agreements.

         The parties here are partners in a limited partnership (partnership) created in 1997 to rehabilitate and operate an affordable housing complex in Cambridge (property) under the LIHTC program. The general partner is Memorial Drive Housing, Inc., a corporation that is majority-owned and controlled by Homeowner's Rehab, Inc. (nonprofit developer), a nonprofit organization that specializes in the development of affordable housing. The investor limited partners are Centerline Corporate Partners V L.P., as limited partner, and Related Corporate V SLP, L.P., as special limited partner. The partnership owns a ninety-nine-year lease of the property (property interest).[6]

         Pursuant to the partnership agreement, the limited partners made capital contributions of approximately $7 million. The partnership agreement allocates 99.99 per cent of the tax credits -- as well as the profits and losses of the partnership, with some exceptions, and ...


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