The federal Low Income Housing Tax Credit Program (LIHTC), IRC §42, was created to encourage the creation of low-income rental housing for low-income households. It provides tax incentives to investors to make equity investments in exchange for tax credits and other tax benefits. Pursuant to IRC § 42, low-income housing developers partner with private investors to build affordable housing. The investor provides the capital and, in exchange, is allocated the federal tax credits that are awarded to the partnership as a result of the development of the housing. IRC § 42(i)(7) grants nonprofit developers the authority to negotiate provisions in their partnership agreements to “buy out” the investor partner through a right of first refusal (ROFR). Within the last five years, there have been several challenges to the right of first refusal under the LIHTC across the nation, the most recent case being SunAmerica Housing Fund 1050 v. Pathway of Pontiac, Inc., et. al.
In SunAmerica, the nonprofit developer (Developer) entered into a limited partnership agreement with SunAmerica, the investor partner, to rehabilitate an affordable housing community. Under the limited partnership agreement, the Developer possessed a ROFR to purchase the property at below market value if the partnership received a “bona fide offer.” In early 2019, after another bidder conveyed an offer to buy the property, the Developer solicited a third-party entity, Lockwood Development Company LLC, to make another offer to purchase the property (suggesting that it add terms to the offer that would satisfy the ROFR conditions, whereas it was suggested the first offer may not have done so). The Developer’s solicitation to Lockwood notified Lockwood that it intended to “put out” the ROFR. After Lockwood submitted its offer, the Developer informed SunAmerica of its intent to exercise its ROFR. In response, SunAmerica filed suit against General Partners, seeking declaratory relief for its right under § 42, along with several other claims. The District Court concluded that the Lockwood offer was not a bona fide offer, because it was solicited for the purpose of triggering the ROFR and granted summary judgment in favor of SunAmerica. The Developer appealed.
The Sixth Circuit Court of Appeals concluded that the District Court had erred in its conclusion that Lockwood did not make a bona fide offer. It held that the limited partnership agreement must be read in the light of the LIHTC, which was expressly incorporated in the ROFR provision of the agreement, which had been created to accord with the LIHTC program. Relying on a relatively recent decision from the SJC, the Court determined that the § 42(i)(7)-established ROFR differs markedly from the general common law meaning of a ROFR, in that it allows the parties to negotiate a below-market price for the property, as opposed to permitting the holder of the ROFR to match a bona fide offer. Nonetheless, the Court concluded that the meaning of “bona fide offer” in the agreement was ambiguous and, accordingly, must be decided by a jury. Similarly, the Court held that the District Court erred in concluding that the evidence showed that partnership’s general partners did not intend to sell the property, and found there was a dispute of material fact as to whether they had the requisite intent, pursuant to §42, to trigger the ROFR. Accordingly, the Court of Appeals reversed the District Court’s grant of summary judgment and remanded the case for further proceedings.