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An Emerging Threat to Nonprofit Affordable Housing

April 8, 2021

Protecting the Right of First Refusal from Profit-Driven Investors

ANHD urges our members and allies to stand up against the predatory entities manipulating the Low-Income Housing Tax Credits (LIHTC) program for personal profit by blocking nonprofits’ Right of First Refusal (ROFR).

As housing advocates, we know that creating affordable housing that does not stay permanently affordable does little to address the housing crisis – it simply kicks the can down the road. The Right of First Refusal is an important provision of the LIHTC program that protects permanent affordability by enabling nonprofits to buy the buildings they develop for a minimal price at the end of the 15 year compliance period when the tax credit investor exits. Recently, this critical protection of the LIHTC program has come under threat from predatory investors seeking to make a profit by selling LIHTC properties at market rate after the compliance period ends, on top of the tax credit benefits they already receive. ANHD and many of our local affordable housing partners are calling for city, state and federal action to make it clear to investors: ROFR is here to stay.


LIHTC and the Right of First Refusal

Since Congress created the program in 1986, Low Income Housing Tax Credits (LIHTC) have financed the construction and rehabilitation of millions of affordable housing units across the country. Although the program was in many ways a compromise when it was created (leveraging private investment into housing through tax credits was more appealing to Reaganomics conservatives than direct public investment), for the past four decades LIHTC has been the primary mechanism by which low-income housing is created, and the financing program is heavily relied upon by nonprofit developers.

In LIHTC projects, a nonprofit developer applies for tax credits from a city or state agency and then sells them to banks or other institutions with high tax liabilities (since nonprofits are not taxed, they have no use for the credits). The proceeds from the sale of the tax credits funds the construction or renovation of a building.

The investors who purchase the credits maintain some ownership in the project for a 15-year compliance period while they are receiving the tax benefits, and then exit. At that time, nonprofit developers exercise what’s called the Right of First Refusal (ROFR), to purchase the building or buildings from the investor at a minimal cost and take over full nonprofit, mission-driven ownership.

Until recently, nonprofit takeover after Year 15 through the Right of First Refusal had been a matter of course. So, what has changed?


ROFR Under Threat

As neighborhoods continue to gentrify and property values rise, some investors (those acting in bad faith) have devised methods to hold on to LIHTC affordable housing beyond Year 15 and sell the buildings at market rate, by blocking their nonprofit partners from exercising their Right of First Refusal.

To be clear, this is not the intent of the LIHTC program: the benefits that investors receive in LIHTC projects include the 10+ years of tax credits and fulfilment of Community Reinvestment Act requirements, not future ownership or sale of the building. Long-term ownership is meant to be held by the nonprofit to preserve the building’s permanent affordability.

Section 42 of the Internal Revenue Code, which outlines the LIHTC program, clearly describes nonprofits’ right to purchase LIHTC buildings at the end of the 15 year compliance period for a minimal purchase price, defined as the outstanding debt plus taxes, which is typically well below market value. By blocking this Right of First Refusal, bad actors are attempting to extract more profit out of affordable housing development, far beyond what the LIHTC program was designed to offer.

These bad actors are often not the original investor partners themselves, but rather predatory agents called “aggregators.” Aggregators buy up ownership interest in LIHTC projects from the original investors with the expectation that they will be able to block the property transfer to nonprofits at Year 15 and then sell the buildings at market rate. Aggregators use a variety of tactics to block nonprofits’ ROFR, by disputing different aspects of the property transfer in lengthy and expensive court battles that nonprofits, like ANHD’s members, often don’t have the resources or capacity to fight.


Bushwick’s ROFR Battle

One of these battles is taking place right here in our backyard: RiseBoro Community Partnership versus SunAmerica / AIG.

420 Stockholm St. in Bushwick
Photo Credit: Riseboro

In Bushwick, a 34-unit affordable housing project at 420 Stockholm St, developed by RiseBoro using LIHTC, is under threat. When RiseBoro sought to exercise their Right of First Refusal to take over full ownership of 420 Stockholm St, the tax credit investor SunAmerica Asset Management (a subsidiary of AIG) tried to block them. The case went to Federal Court, where unfortunately the court ruled in favor of SunAmerica / AIG. Riseboro has appealed the decision to the Second Circuit, and they are now urging housing advocates as well as city and state agencies to support their case by filing an amicus brief with the court. ANHD encourages our members and allies to aid Riseboro by joining their coalition of support.

What’s at stake in RiseBoro’s case and in similar lawsuits across the country is the future protection and preservation of our precious affordable housing and the nonprofit organizations that steward them. Lengthy court battles are prohibitively expensive for nonprofit organizations, and resources that are needed for staff, social services, and housing development are instead having to go toward legal fees. These lawsuits can make or break decades-old nonprofit organizations that low-income communities deeply rely on. Furthermore, legal battles like the one RiseBoro is engaged in prevent nonprofits from refinancing their projects - as is typically done after Year 15 - to bring in fresh capital resources to make needed repairs and to renew the regulatory agreements that maintain affordability. The actions of predatory investors therefore not only jeopardize the affordability of buildings but also residents’ quality of life. Finally, what’s at stake is the long-term affordability and livability of our neighborhoods for low-income people and people of color. Mission-driven, nonprofit-owned affordable housing is a bulwark against the forces of racialized gentrification and neighborhood turnover. If predatory investors are permitted to buy up and sell affordable LIHTC housing developments in neighborhoods like Bushwick, this will directly hurt the predominantly Black and brown renters in these areas.


Steps to Protect Our Affordable Housing

ANHD urges our members and allies to stand up against the corporations manipulating the LIHTC program for personal profit. We need federal legislation clarifying and strengthening the ROFR in LIHTC projects, and ANHD is actively in conversation with our federal legislators and national housing partners to move this forward. At the same time, New York State and New York City have the opportunity to take a stand and defend our LIHTC affordable housing stock from predatory entities who see our neighborhoods as dollar signs instead of places where people live, work and raise their families. We urge HPD, HCR and the New York State Attorney General to clearly set out expectations for the ROFR in the LIHTC Qualified Action Plans and Regulatory Agreements.

Protecting the ROFR is of critical importance amidst the housing and homelessness crisis we are facing across our city and our country. While the LIHTC program alone is not sufficient to end that crisis, allowing predatory corporations to profiteer off of our existing affordable housing stock – which was created through public resources – is unacceptable. We must remove the perverse profit-incentives that allow housing to be seen as a commodity rather than a human right, and move toward ensuring truly permanent, affordable housing for all.


What You Can to Do Help

  • Learn more about supporting Riseboro’s Coalition
  • Attend the upcoming virtual training led by ANHD and Goldstein Hall on Year 15 in LIHTC projects on May 26, 2021 at 10am
  • Share your feedback with HPD and HCR when the LIHTC Qualified Allocation Plan opens for public comment – follow ANHD for updates about when that is
  • Reach out to your senators and representatives in Congress and urge them to enact federal legislation protecting the ROFR for nonprofits


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