The tax legislation proposed by House Ways and Means addresses a long-standing dispute between promoters of low-income housing tax credit agreements and investors. The legislation favors sponsors. To understand the problem, I need to briefly explain how credit works.

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The owner of the building, usually a partnership, receives a credit each year on the building’s “qualifying base” which reflects the portion of the building that provides low-income housing for 10 years.

Credit is currently set at 9% per annum for projects with unsubsidized mortgages and 4% for projects with subsidized mortgages. Originally, the credit was reset monthly to ensure that it would provide either 70% of the current value of the investment, or 30% in the case of subsidized projects.

After 10 years, the credit is partially clawed back for 5 years, resulting in a “compliance period” of 15 years. There remains a requirement to keep the project affordable for another fifteen years, but this is enforced by the state housing authorities. The IRS is out of sight.

By AD 15, the project may need a makeover. And there is a provision in section 42 that can allow a non-profit developer to bring in an investor at a bargain price over fair market value. Until relatively recently, there was no controversy, but there is now a significant amount of litigation between sponsors, often not original sponsors, and nonprofit sponsors. Sponsors resist non-profit organizations exercising a “right of first refusal” (ROFR) defined in section 42. I have deepened the litigation a little and you can read it here, here and here.

The legal question

Nonprofit promoters have operated on the assumption that Section 42 ROFR is, in fact, an option. In their opinion, the project was underwritten to provide credit to investors and it is time for them to move on. Investors, on the other hand, feel that they are entitled to consider increasing the value of the property.

The problem with sponsors is that a common law right of first refusal is not the same as an option. So far, the sponsors have won a few decisions in state courts, but when a federal case has been pulled, the sponsors have lost.

The proposed change

The proposed amendment substitutes “an option” for “a right of first refusal”. This may affect the way agreements are designed in the future, but it won’t matter for fifteen years or more. But there is more :

” For the purposes of determining whether an option, including a right of first refusal, to purchase property or interests in a company holding (directly or indirectly) such property is described in the preceding sentence: ‘(i) this option or this right of first refusal may be exercised with or without the approval of any owner of the project (including any partner, member or affiliated organization of such owner), and “(ii) a right of first refusal may be exercised in response to any offer to buy the property or partnership interests, including an offer by a related party. ”

This interpretation is retroactive and applies to existing agreements.

Will it work?

What the legislation does is that a section 42 ROFR has never been a common law ROFR. And to be honest, that’s what a lot of people thought. Federal courts, so far, have not given their consent. But now maybe Congress is telling them what that really meant over thirty years ago.

Another possibility is that the change could be an unconstitutional take. That’s what the Federalist Society argued about a similar proposal in 2019.

David Davenport, a lawyer who represents the sponsors in these disputes, wrote to me:

Without commenting on what federal courts have ruled in some cases, I would say that legislative branches (both federal and state) often change laws in response to how the courts have interpreted those laws to ensure that this what the legislature intends is what actually happens in the event of litigation in the courts. This, in my opinion, is not retroactive and as I understand the provision approved by the House Ways and Means Committee, it expressly says that it would not replace express language in existing agreements (meaning that it is prospective).

I’m just a CPA and on a good day I call myself a writer, but I read Antonin Scalia’s book on textualism. And I’m skeptical that Congress could say that meant something different thirty years ago when it used the ROFR rather than the option.

Reactions

Elizabeth Roehm a What Congress Is Right About Its Proposed Housing Tax Credit Provisions in Texas Homes.

Using federal law is also the best way to resolve issues with the current system of “qualified contracts” and the right of first refusal, which are notoriously difficult to use in a way that preserves our national investment in housing. affordable LIHTC in the long run. Once a property is developed using the LIHTC, which is indirectly a colossal injection of public funds, the property can only provide affordable housing for 15 to 30 years before leaving the program and reaching the rate. of the market. These corrective measures proposed in the appropriation bill can close loopholes and make our collective investment more meaningful in the long term.

Preferred age To Home loan: increase by 60%, correct the right of first refusal and more.

LeadingAge has helped sound the alarm bells on right of first refusal issues and is very pleased with the inclusion of this language in the bill.

Housing Management Tax Credit Insider To House committee includes LIHTC provisions in reconciliation package.

The bill also makes several changes to prevent third-party investors from using the right of first refusal provisions under the LIHTC program to prevent mission-driven nonprofits from becoming full ownership of LIHTC sites at Year 15. The bill converts the right to purchase into an option to purchase and expands the definition of “property” to include the assets of the partnership. The option holder can exercise their right of first refusal without the need for investor approval or a good faith offer from a third party.