At the heart of every low-income housing tax credit (LIHTC) development is a partnership agreement (or an operating agreement) entered into between the general partner/LIHTC developer and the limited partner/LIHTC investors.  These partnership agreements govern the parties’ rights and obligations to each other and to the partnership.  And, importantly, they also detail the options available to the general partner developers at the end of the Year 15 tax credit compliance period to buy out their investor partners.  Common options that may be available to a general partner include purchase options and call rights.

It is not uncommon that in the time between the initial signing of the agreement and the approach of Year 15, the investor partners to a deal have changed, and with that change, may come changing priorities about the limited partners exiting the partnership.  Therefore, it is very important that general partners properly exercise these rights to ensure they are protected from potential attack by the new limited partner.

  1. Start Early: It is a best practice to start reviewing the governing partnership agreement (and any amendments thereto) at year ten and then re-review at least two years before the end of the Year 15 tax credit compliance period.  It is important to start early because many options need to be exercised well before the end of the compliance period, and substantial time may be needed to get the necessary arrangements in place for before, and after, the exercise of any available rights.
  2. Keep Things Formal: General partners have a tendency to communicate informally with investor partners as the development nears the end of Year 15 compliance period.  This can create serious issues down the road if a dispute arises.  As a result, formal, written communication, preferably by letter, is the best way to avoid potential issues with the limited partners.  And, any notice must be provided in the form, and at the address, provided in the partnership agreement.
  3. Mirror the Partnership: The exercise of any purchase option or call right should mirror the requirements detailed in the partnership agreement.  If the partnership agreement requires the general partner to include certain documents or information at the time of the exercise, make sure to include it.  If the partnership agreement states that the exercise must be “unconditional,” be sure to state in the letter that the exercise is “unconditional.”  The exercise of an option is not the time to get creative or to negotiate a potential alternative resolution.  Instead, the agreement should be closely followed.
  4. Be On Time—Not Uncomfortably Early or Fashionably Late: The partnership agreement will detail the required timing for the exercise of any purchase option or call right.  Any exercise must conform to the timing requirements.  If you are too early or too late you may lose your right.
  5. Work Closely with Professionals: Just as it was important to have industry professionals involved at the beginning of the deal, it is equally important to have them involved at the end of the deal.  You should work closely with legal and financial consultants and (potentially) property and partnership appraisers to ensure that the exit goes smoothly.  Attorneys who are experienced with LIHTC exits and disputes can help you navigate the exit and overcome any hurdles that may arise.

November 8, 2021