In May of 2021 I wrote about, New York Attorney General Letitia James, who is best known for being a thorn in the side of Donald Trump, weighing in on a dispute about affordable housing in Brooklyn. It is part of a larger issue that I have been covering since early 2021. The dispute is commonly referred to as Year 15, a critical point in the lifecycle of projects funded by the Low Income Housing Tax Credit .
The Big Picture
The Low Income Housing Tax Credit (Section 42) is probably the greatest federal support for affordable housing. The aggregate credit is apportioned among the states in accordance with population and allocated to projects by state housing agencies. There is a preference for not-for-profit sponsors (NFPs). Typically an entity controlled by the NFP will have a general partnership interest with a miniscule share of the credit and loss allocations and an investor entity that is allocated almost all the credits and losses. The credit is doled out over ten years and there is an additional five years where it is subject to recapture.
The projects are committed to an additional fifteen years of affordability, but that is enforced by the state housing agencies. The credit is no longer at risk. This makes Year 15 a logical exit point for the investor entity. Section 42 gives a little nudge in that direction allowing a NFP sponsor to have a “right of first refusal” (ROFR) to acquire the project for outstanding debt plus any exit taxes of the investor. The viewpoint of NFP sponsors is that investors should be content with that on the theory that the deal is underwritten to provide enough value from the tax benefits.
In recent years, investor entities, sometimes second-hand holders of the interests, have not been playing along with the ROFR strategy. The argument is that a ROFR is not the same thing is an option. Generally the sponsors do well in state courts and the court of public opinion, to the extent anybody outsider the LIHTC bubble pays any attention to this, but not so well in federal courts until recently.
Riseboro
Riseboro Community Partnership’s (RCP) mission is to “service the needs of elderly residents in the community, and contains a commitment to eliminate or reduce poverty in Brooklyn & Queens by engaging in planning, creating, coordinating, initiating, evaluating and supervising community action programs“. Among the projects directed toward the mission was Stockholm Manor 35 units of LIHTC affordable housing at 420 Stockholm Street in the Bushwick neighborhood.
RCP wanted to exercise the ROFR to take ownership of the property at the end of the fifteen year period. The investor limited partner, then an affiliate of AIG, objected. They argued that the ROFR could not be exercised until they had indicated that they wanted to sell and a third party had made a bona-fide offer.
The problem with the ROFR model is that no third party will go to the trouble involved in making a bona-fide offer knowing that a ROFR holder is waiting to buy the property at a bargain price. Nonetheless Judge Raymond Dearie of the US District for the Eastern District of New York ruled against RCP on August 28, 2020 in Riseboro Comunity Partnership Inc v SunAmerica Housing Fund 662:
Nothing in 41(i)(7), its legislative history, or any provision in the May 1999 Agreement shows the partners intended Riseboro to be able to exercise its ROFR absent the common law conditions precedent.
RCP appealed to the Second Circuit which drew the amicus brief from AG Letitia James. There was also an amicus brief on behalf of 42 nonprofits focused on affordable housing
The Happy Ending
On July 1, 2022 RCP announced that it had reached a settlement with Blackstone
BX
Scott Short CEO of RCB statement was
RiseBoro and Blackstone share a commitment to preserving affordable housing and delivering residents the services that they need to thrive. We are pleased to have reached a resolution that puts residents first and ensures our communities will remain affordable for decades to come. Responsible investors play a critical role in our country’s affordable housing ecosystem and we are pleased to be establishing a new model for partnership among non-profit organizations and private investors.
Kathleen McCarthy, Global Co-Head of Blackstone Real Estate commented:
We have been impressed by RiseBoro’s deep commitment as stewards of the communities they serve and we are proud to deepen our relationship for the benefit of residents. This agreement is another example of our commitment to maintain and expand affordable housing.
Alice Carr, CEO of April Housing said:
We are thrilled to reach an agreement with RiseBoro that will allow us to further our shared mission of preserving affordable housing. We greatly value the expertise and dedication of the RiseBoro team, and we welcome the opportunity to provide them with resources to enhance their exceptional resident services program as we continue to work together to support residents and local communities.
The Other Development
The other development besides the change in ownership that may have influenced the settlement was the Sixth Circuit decision in SunAmerica Housing Fund 1050 v Pathway of Pontiac Inc.
When interpreting such an ROFR provision, we must account for Congress’s goals expressed in LIHTC, including its intention to make it easier for nonprofits to regain ownership of the property and continue the availability of low-income housing. Thus, those Congressional intentions confirm that the general common law understanding of bona fide offer cannot be substituted for the ROFR mechanism created by Congress in LIHTC.
Settlement was also a good break for the not-for-profit community, as they would surely prefer that the Sixth Circuit be the last word on this issue.
Other Coverage
Jessy Edwards has Bushwick Non-Profit Takes on Billion-Dollar Investment Company, Wins Affordable Housing Settlement on BKReader.
A Bushwick non-profit that took on a billion-dollar finance company in court says it has reached a settlement that will allow it to keep 190 units of housing in Brooklyn affordable “forever.”
Kirstyn Brendlen has Bk nonprofit RiseBoro reaches affordable housing settlement with private equity giant Blackstone in Brooklyn Paper.
RiseBoro now has a majority share of Stockholm Manor and two other affordable housing developments previously under LIHTC agreements, Renaissance Estates and Rheingold Gardens, both in Bushwick. Neither were part of the original lawsuit, but Blackstone wanted to come to a solution on all three properties, Short said.