NHT is alarmed by a growing trend of private investors in Low-Income Housing Tax Credit (Housing Credit) partnerships starting to systematically challenge the transfer rights of nonprofit general partners and disrupt the normal exit process, threatening the long-term affordability of properties and the well-being of residents with low incomes. We have developed a “red flags” list to help Housing Credit developers and affordable housing stakeholders identify if a property approaching Year 15 may be at risk of a threat or dispute with an investor.
As NHT’s partners know, the Low-Income Housing Tax Credit (Housing Credit) program facilitates partnerships between mission-driven nonprofit organizations and for-profit investors to build and preserve affordable rental housing for low-income families across the country. The program offers the nonprofit partners a right to obtain eventual ownership of the property at a minimum purchase price after 15 years, once the investor has claimed all Housing Credits and before the program’s rent restrictions expire. For most of the program’s history, the vast majority of participating nonprofits have secured this transfer right, exercised it, and obtained full ownership to maintain the property as affordable housing in accordance with their missions.
Recently, however, some private investors have started to systematically challenge the transfer rights of nonprofit general partners and disrupt the normal exit process, in hopes of selling the property at market value and leaving those affordable properties at risk of being permanently lost. In hot rental markets, these firms have recognized a profit opportunity far exceeding the original investors’ expectations. We have learned that some companies are taking advantage of the investor interests they already hold in Housing Credit properties, while others have been acquiring investor interests in Housing Credit partnerships en masse for this purpose. The latter group often use tactics to profit from legal ambiguities, resource disparities and economics of scale to overwhelm their nonprofit partners.
These activities clearly threaten the long-term affordability of Housing Credit properties and the well-being of residents with low incomes. Housing Credit properties are far more likely to continue operating as affordable housing over the long-term if left in the hands of mission-driven nonprofit partners. Disputes over property transfers invariably drain the assets of the nonprofit partner, especially in the case of litigation. These resources otherwise would be devoted to resident services, building maintenance, and related affordable housing initiatives. A sale of the property at market value generally will leave the new owner with fewer resources to direct to operations, maintenance, and ancillary services.
NHT believes the practices of the private firms in question, commonly referred to as “aggregators,” are contrary to the intent of Congress in creating the Housing Credit program and designating a 30-year affordability period. For all these reasons, we have joined forces with David Davenport of Winthrop and Weinstine, an experienced litigator in Housing Credit disputes, and LeadingAge to create a top ten list of “red flags” to help Housing Credit developers and affordable housing stakeholders identify if a property approaching Year 15 may be at risk of a threat or dispute with an investor.
Some of the red flags include: Have the investor limited partner interests changed hands from the original investor limited partner? Are the investor limited partner interests managed by or affiliated with organizations that have been involved in litigation related to Housing Credit partnerships around Year 15? Does the limited partner believe it should be allowed to cash out a positive capital account?
We encourage our partners to carefully review the red flags list, as well as their own Housing Credit partnership agreements, to be prepared for possible disputes before they happen. Also, we highly recommend the Washington State Housing Finance Commission’s excellent report about this emerging threat. For new Housing Credit deals, be sure that new partnership agreements clearly define a purchase option for nonprofits to gain control of the property at the end of the initial 15-year compliance period.
Finally, beware of industry articles recasting the intent of Congress in designing the Housing Credit program. Congress created this incredibly successful and productive program to build and preserve housing that remains affordable to low-income residents for at least 30 years. It is imperative that this objective is not undermined by those who simply wish to maximize their profits.
For more information on the Red Flags for Year 15, please contact NHT Federal Policy Director Ellen Lurie Hoffman.