State Supreme Court Rules in Favor of Nonprofit in LIHTC Right of First Refusal

The Massachusetts Supreme Judicial Court recently upheld a lower court’s ruling supporting a nonprofit developer’s right of first refusal to purchase an LIHTC site once a third party makes an enforceable offer to purchase the site. In Homeowner’s Rehab Inc. v. Related Corporate V SLP LP the court ruled that the right of first refusal doesn’t require a bona fide offer to be made and accepted with the consent of the special limited partner. The ruling specifies that the power of the general partner to decide to accept the offer depends on the partnership language.

As part of the initial closing, the investors and the nonprofit developer of the site entered into a Right of First Refusal (ROFR) and Option Agreement that gave the nonprofit developer the right to purchase the site by either exercising a ROFR or by exercising an option to purchase the site. The ROFR and the purchase option were distinct and were addressed in two different sections of the ROFR/Option Agreement.

If the ROFR was exercised, the purchase price would be the lesser of: (1) outstanding debt on the site plus any exit taxes owed to the investor (Section 42 price); (2) the price a third party was willing to pay pursuant to an offer that triggered the ROFR (third-party price); or (3) fair market value, subject to certain restrictions encumbering the site (restricted market price).

The nonprofit developer could also acquire the site by exercising the purchase option after the end of the 15-year compliance period, but the purchase price was set at the restricted market price. After the 15-year compliance period had run, the nonprofit contacted the investor/limited partner about acquiring its limited partnership interest in the site for the Section 42 price. Initially, the nonprofit indicated that it was not attempting to exercise the ROFR, but was instead trying to purchase the investor’s interest in the site for the Section 42 price without going through the lengthy process of obtaining an offer and complying with the ROFR procedural requirements set forth in the ROFR/Option Agreement.

The investor/limited partner indicated that if the nonprofit wanted to acquire the site, it had to be done through the purchase option, not through the ROFR. The investor/limited partner also claimed that the ROFR applied only if the owners were willing to sell to a third party, which required the other limited partner’s consent. The other limited partner wasn’t willing to consent to a possible third-party sale. The investor also claimed that without the other limited partner’s consent, the general partner wasn’t in a position to solicit or entertain any third-party offer that would be required to trigger the ROFR.

After much back and forth, between the general partner and the investor/limited partners, the general partner solicited an offer to purchase the site from a nonprofit organization based in Boston that develops affordable housing projects. The offer was less than the restricted market price, but more than the Section 42 price. The Boston-based nonprofit also made a $10,000 deposit in conjunction with its offer.

The developer then sued, claiming that the investor/partners’ interpretation of the Partnership Agreement and the ROFR/Option Agreement effectively prevented it from exercising its ROFR. The defendants counterclaimed, alleging, among other claims, that the developer’s attempt to trigger the ROFR breached its fiduciary duties to the investor/partners.

In reaching its decision, the court determined that the ROFR/Option Agreement could not be read in isolation and had to be construed in connection with the partnership agreement, the intent of the parties at the time these documents were executed, and the purpose behind the LIHTC program in general.

In examining the LIHTC program, the court noted that one of the real incentives for the general partner to participate in the LIHTC program was the ability to buy the site back from the partnership at the end of the 15-year compliance period for the Section 42 price. The court also noted that the LIHTC program explicitly envisions that nonprofit developers be given a ROFR to acquire the site for the Section 42 price at the end of the 15-year compliance period.

In interpreting the partnership agreement, the court noted that the stated purpose of the partnership was to provide affordable housing. The court then discussed the powers that were given to the general partner under the Partnership Agreement and focused on its power to sell or dispose of the project and the circumstances under which the limited partner’s consent would be required.

In interpreting the ROFR/Option Agreement, the court found that the ROFR is triggered when the “Partnership delivers a notice to the Holder (nonprofit developer) that there is an offer to purchase the Project.” This notice needed to specify the terms of “any executed or proposed agreement” from a potential purchaser, as well as “a statement indicating whether the Partnership is willing to accept the offer.” The court interpreted this to mean that the partnership didn’t need to accept the offer or be ready and willing to accept the offer to trigger the ROFR, even though the notice stated that it was subject to limited partner consent.

The court noted that the partnership agreement gave the general partner very broad powers regarding the management and operation of the site, including the power to “sell, lease, exchange, refinance or otherwise transfer, convey or encumber all or substantially all assets of the partnership so long as it has the consent of the special limited partner before such transaction shall be binding on the Partnership.” The one exception to the consent requirement was a sale pursuant to the Purchase Option, which did not require the limited partner’s consent.

The court concluded that if the limited partner couldn’t hold up a sale of the site pursuant to the purchase option, it couldn’t hold up a transaction in which the nonprofit developer was exercising the ROFR. To construe this otherwise would mean that the investor or limited partner could hold up a sale to the nonprofit developer under the ROFR, which was clearly prohibited by the partnership agreement.