Year 15 and the Aggregator Problem Hits the Texas Courts

By Justin H. Jenkins & Samuel T. Johnson

The federal government’s Low-Income Housing Tax Credit (“LIHTC”) program has successfully led to the development of millions of units of affordable housing for Americans in need. In recent years, however, the program has faced an intensifying threat from predatory private equity interests – known as Aggregators – who aim to seize financial gains from affordable housing properties that were never intended for them.1 The Aggregator threat has arrived in the Lone Star State and is now playing out in its courts, and developers must familiarize themselves with Aggregator tactics to protect their interests.

Breaching the Contract

The LIHTC program is premised on tax credits (“Housing Credits”), which developers “sell” to investors, typically through a syndicator, after securing an award from state housing agencies through a competitive application process. In Texas, the Texas Department of Housing & Community Affairs administers the program. Investors then contribute capital in exchange for the Housing Credits and other tax benefits. Developers use the capital, along with additional sources, to build affordable housing. The Housing Credits are allocated to the investor over a 10-year “Credit Period,” and are generally safe from recapture by the IRS following the 15-year “Compliance Period,” after which the investor usually seeks to exit the deal. The investor exit is typically negotiated at the deal’s inception. In a for-profit development, the parties often enter into an economic sharing agreement governing the sale or refinancing of the property, through which the developer or its affiliate receives the super-majority (e.g., 90%) of any appreciated equity in the property, while the investor receives the remainder (e.g., 10%). This sharing agreement is often effectuated after the Compliance Period through the developer’s option to buy the property or the investor’s ownership interest for a price based on a hypothetical sale of the property. Options to buy the investor’s ownership interest also sometimes use a price based on the “going concern value” of the interest rather than a sale of the property. In a non-profit development, the developer or its affiliate is usually granted a right of first refusal (“ROFR”) to buy the property for a Congressionally-created “Minimum Purchase Price,” which is intended to be substantially below fair market value and typically results in the investor receiving $1 for its ownership interest. In both for-profit and non-profit LIHTC deals, developers often reinvest the appreciated equity they receive from the exit into the property or other affordable housing developments.

Unfortunately, Aggregators (and others now acting like them) seek to disrupt this result for unintended pecuniary gain. In Texas, at least four lawsuits have arisen alleging Aggregator tactics.

Lawsuits

Oak Timbers Litigation

The Dallas Court of Appeals recently affirmed an arbitration award holding an alleged Aggregator liable for breach of contract after a developer general partner exercised an option to purchase an investor limited partner’s partnership interest after the Compliance Period.2 The partnership agreement required the option price to be based on the “going concern value” of the limited partner’s interest in the partnership as determined by an appraiser. But the limited partner refused to agree to any appraiser unless the general partner acquiesced to an appraisal methodology different than that required by the partnership agreement, which would have substantially inflated the option price. The arbitrator, an esteemed retired Texas judge, rejected the limited partner’s claims, enforced the option at the price of $83,000, and awarded the general partner damages and nearly all of its attorney’s fees. A related case is now underway, whereby essentially the same parties are disputing the same partnership agreement involving a related property.3

AHI Town Parc Litigation

In Amarillo, a different general partner developer was forced to file a lawsuit against an alleged Aggregator concerning its Year 15 option to purchase limited partner interests in a LIHTC partnership involving substantially similar option language.4 The general partner’s lawsuit alleges the limited partner misled it into agreeing to an appraiser because neither the limited partner nor the appraiser disclosed their preexisting business relationship. The general partner alleges that, had it known of the relationship, it would have never agreed to the appraiser who valued the limited partner’s interest based on a liquidation of the partnership instead of the methodology required by the partnership agreement. The case, which has just begun, was recently removed by the limited partner to federal court.

One Kensington Litigation

In Houston, a general partner brought suit against an Aggregator-controlled limited partner and alleged that the limited partner unreasonably and pretextually conditioned consent to refinance the partnership’s debt on terms meant to benefit the Aggregator.5 After two years of litigation, the case was settled.

These cases are emblematic of the nationwide trend involving Aggregators and those who act like them. Unfortunately, the Texas affordable housing industry is now at the forefront of this important problem.

About the Author Justin H. Jenkins is a founding partner, and Samuel T. Johnson is an associate attorney, at BC Davenport, LLC. Their law firm is dedicated to representing developers and other stakeholders in the LIHTC industry.

1See JER Hudson GP XXI LLC v. DLE Invs., LP, 275 A.3d 755, 771-74, nn.78-86 (Del. Ch. May 2, 2022) (citing authorities); CED Capital Holdings X, Ltd. et al. v. CTCW-Waterford East, L.L.C., No. 2019-CA-002758-O, 2023 WL 3436906, at *11-12, ¶¶ 2-3 (Fla. Cir. Ct. May 8, 2023)(noting threat has “intensified” recently)

2White Settlement Senior Living LLC v. Multi-Housing Tax Credit Partners XXXI, JAMS Arb. Ref. No. 1410008849, 2022 WL 18542447 (2022), confirmed, Ca. No. DC-2204532, 2022 WL 18492132 (Tex. Dist. Ct.—Dallas Cty. 2022), aff’d sub. nom., Ca. No. 05-22-00721-CV, 2024 WL 301916 (Tex. App.—Dallas 2024).

3See White Settlement Senior Living II, LLC v. MHTCP 43, L.P. and Highridge Cost Investors, LLC, Ca. No. 141-352269-24 (Tex. Dist. Ct.—Tarrant Cty., April 25, 2024).

4Petition, AHI-Town Parc, LLC v. Multi-Housing Tax Credit Partners LII, L.P. [hereinafter, “AHI-Town Parc”], Ca. No. 112049-B-CV (Tex. Dist. Ct.—Potter Cty., April 5, 2024).

5Petition, One Kensington, L.P. et al. v. MMA Kensington Place, LLC [hereinafter, “One Kensington”], Ca. No. 2021-57631 (Tex. Dist. Ct.—Harris Cty., Sept. 8, 2021).

1See JER Hudson GP XXI LLC v. DLE Invs., LP, 275 A.3d 755, 771-74, nn.78-86 (Del. Ch. May 2, 2022) (citing authorities); CED Capital Holdings X, Ltd. et al. v. CTCW-Waterford East, L.L.C., No. 2019-CA-002758-O, 2023 WL 3436906, at *11-12, ¶¶ 2-3 (Fla. Cir. Ct. May 8, 2023)(noting threat has “intensified” recently)