Riseboro Cmty. P'ship Inc. v. Sunamerica Hous. Fund 682, Ltd.

• Decision Date: 28 August 2020
• Docket Number: 18-cv-7261 (RJD) (VMS)
• Citation: 482 F.Supp.3d 31
• Parties: RISEBORO COMMUNITY PARTNERSHIP INC., formerly known as Ridgewood Bushwick Senior Citizens Council, Inc., Plaintiff, v. SUNAMERICA HOUSING FUND 682, a Nevada Limited Partnership; SLP Housing I LLC; and 420 Stockholm Street Associates LP, Defendants. SunAmerica Housing Fund 682, a Nevada Limited Partnership and SLP Housing I LLC, Third-Party Plaintiffs, v. 420 Stockholm Corp., Third-Party Defendant.
• Court: U.S. District Court — Eastern District of New York

482 F.Supp.3d 31

RISEBORO COMMUNITY PARTNERSHIP INC., formerly known as Ridgewood Bushwick Senior Citizens Council, Inc., Plaintiff,

v.SUNAMERICA HOUSING FUND 682, a Nevada Limited Partnership; SLP Housing I LLC; and 420 Stockholm Street Associates LP, Defendants.

SunAmerica Housing Fund 682, a Nevada Limited Partnership and SLP Housing I LLC, Third-Party Plaintiffs,

v.420 Stockholm Corp., Third-Party Defendant.

18-cv-7261 (RJD) (VMS)

United States District Court, E.D. New York.

Signed August 28, 2020

Filed August 31, 2020

Brian J. Markowitz, Daniel Robert Goldenberg, Goldstein Hall PLLC, New York, NY, for Plaintiff Riseboro Community Partnership Inc.

Brian J. Markowitz, Goldstein Hall PLLC, New York, NY, for Third-Party Defendant.

Juan Luis Garcia, Skarzynski Marick & Black LLP, Paul Dewey, Nixon Peabody LLP, Shelby Nace, Cole Schotz P.C., New York, NY, Louis E. Dolan, Pro Hac Vice, Nixon Peabody LLP, Washington, DC, for Defendants/Third-Party Plaintiffs.

CORRECTED MEMORANDUM & ORDER

DEARIE, District Judge This is a contract dispute in which the parties make several claims, counter-claims, and cross-claims, but at its core, it is a disagreement over the meaning of a "right of first refusal" ("ROFR") held by Plaintiff to purchase an affordable housing property in Brooklyn, New York ("Apartment Complex" or "Complex"). The parties are developing the Apartment Complex under the Low-Income Housing Tax Credits ("LIHTC") Program, 26 U.S.C. § 42. In letters to the Court, Defendants indicated their intent to file a motion for summary judgment and Third-Party Defendant indicated its intent to file a motion to dismiss. See Dkt. No. 33-35. The Court limited all parties’ initial briefing to the issue of the meaning of the ROFR granted to Plaintiff. For the reasons set forth below, the Court holds that Plaintiff's ROFR operates by its definition under New York common law and is not an option to purchase the subject property.

BACKGROUND

I. The Parties and Their Relationship

Defendant 420 Stockholm Street Associates, L.P. ("Partnership") is a limited partnership organized under New York law to develop the Apartment Complex. It was established in December 1998 and is now principally governed by the May 1999 Amended and Restated Agreement of Limited Partnership ("May 1999 Agreement"). See Declaration of Brian J. Markowitz, Exhibit A, Dkt. # 45-1 ("Exhibit A"), at 10. According to the May 1999 Agreement, "[the] Partnership has been organized exclusively to acquire the Apartment Complex and to develop, rehabilitate, finance, construct, own, maintain, operate and sell or otherwise dispose of the Apartment Complex, in order to obtain long-term appreciation, cash income, [LIHTC Program tax credits,] and tax losses." See id. at 29. The May 1999 Agreement requires that the Apartment Complex be "developed in a manner which satisfies, and shall continue to satisfy, all restrictions, including tenant income and rent restrictions applicable to projects generating [LIHTC Program tax credits]." See id. at 34. After a further amendment to the partnership agreement, in August 2000, the Partnership assumed ownership of the Apartment Complex. See id. 1-4.

Defendants SunAmerica Housing Fund No. 682 ("SHF") and SLP Housing I, LLC ("SLP") are Limited Partner and Special Limited Partner, respectively, in the Partnership. Third-Party Defendant 420 Stockholm Corp. ("Stockholm"), a wholly-owned subsidiary of Plaintiff Riseboro Community Partnership, Inc. ("Riseboro"), is the General Partner. Riseboro, a non-profit entity, is not part of the Partnership, but the agreement governing the Partnership grants Riseboro the ROFR central to this dispute.

II. The LIHTC Program

To promote the development of low-income housing, the LIHTC Program offers tax credits to taxpayers that develop "qualified low-income housing projects." See 26 U.S.C. § 42(h)(3). A qualified low-income housing project must maintain a certain percentage of its units with certain rent and tenant income restrictions. See 26 U.S.C. § 42(g). Owners of qualified low-income housing projects will receive the maximum available tax credits only if they comply with LIHTC Program rent and tenant income restrictions for fifteen years, called the "Compliance Period." See 26 U.S.C. § 42(a), (c)(2), (f)(1), (i)(1), (j). For any project allocated tax credits after 1989, the rent and income restrictions must remain in place for an "extended use" period of fifteen years after the Compliance Period ends. See 26 U.S.C. § 42(h)(6).

The LIHTC Program recognizes that affordable housing development may be furthered by the involvement of both for-profit and non-profit entities. It mandates that in each state, at least 10 percent of LIHTC Program tax credits are set aside for properties owned by a non-profit entity or by a partnership in which a non-profit entity or its subsidiary has a stake. See 26 U.S.C. § 42(h)(5). As is the case here, these partnerships typically consist of a non-profit developer "general partner" (or its subsidiary)—here, Stockholm, Riseboro's wholly-owned subsidiary—and a for-profit investor "limited partner"—here, SHF. In these partnerships, the for-profit developer supplies the funds needed to operate the property and in return receives the LIHTC Program tax credits, and the non-profit entity oversees property management and has only a nominal equity interest in the partnership. See Homeowner's Rehab, Inc. v. Related Corp. V SLP, L.P., 479 Mass. 741, 744-45, 99 N.E.3d 744 (Mass. 2018).

The LIHTC Program also makes clear, in the provision central to this dispute, that a taxpayer will not be deprived of its tax benefits merely by a non-profit entity holding a "right of 1st refusal" to purchase an affordable housing property. Under 26 U.S.C. § 42(i)(7) :

No Federal income tax benefit shall fail to be allowable to the taxpayer with respect to any qualified low-income building merely by reason of a right of 1st refusal held by ... a qualified nonprofit organization ... to purchase the property after the close of the compliance period for a price which is not less than ... an amount equal to the sum of—

(i) The principal amount of outstanding indebtedness secured by the building ... and

(ii) All Federal, State, and local taxes attributable to such sale.

Notably, the minimum purchase price arrived at using the formula in § 42(i)(7) will very likely be less than market-value. See Homeowner's, 479 Mass. at 745, 99 N.E.3d 744 (citing Khadduri, C. Climaco, & K. Burnett, United States Department of Housing and Urban Development, What Happens to Low-Income Housing Tax Credit Properties at Year 15 and Beyond?, at 31 (2012)¹ ).

Section 42(i)(7) recognizes the possibility—and, it is only a possibility—that were a non-profit entity to hold a ROFR to purchase an affordable housing property at a below-market value, the IRS might deem the non-profit entity the "true owner" of the affordable housing property pursuant to the so-called "economic substance doctrine." See Homeowner's, 479 Mass. at 754, 99 N.E.3d 744 (citing Frank Lyon Co. v. United States, 435 U.S. 561, 572-73, 98 S.Ct. 1291, 55 L.Ed.2d 550 (1978) ). If the IRS were to conclude that the non-profit ROFR-holder were the "true owner" of an affordable housing property, it could limit, disallow, or redirect the flow of LIHTC Program tax credits. See 26 C.F.R. § 1.42-4(b). And if the flow of LIHTC Program tax credits were to dry up, this would remove the incentive to for-profit entities investing in affordable housing. Section 42(i)(7) protects against this result.

III. The May 1999 Agreement

The Partnership is structured much like Congress envisioned in § 42(h)(5). General Partner Stockholm has a 0.10% interest in the Partnership; Limited Partner SHF has a 99.89% interest; and Special Limited Partner SLP enjoys a 0.01% interest. See Exhibit A at 41-42. All profits, losses, and credits, including LIHTC Program tax credits, are distributed to each partner in accordance with its percentage interest in the Partnership. See id. at 81.

The May 1999 Agreement allocates among the partners the power to conduct the business of the Partnership. Under Section 8.01, "except as otherwise set forth [elsewhere in the May 1999 Agreement]," General Partner Stockholm has "full, complete and exclusive discretion to manage and control the business of the Partnership." See id. at 64. Section 10.01 limits the powers of the limited partners:

No Limited Partner shall take part in the management or control of the business of the Partnership nor transact any business in the name of the Partnership. Except as otherwise expressly provided in this Agreement, no Limited Partner shall have the power or authority to bind the Partnership or to sign any agreement or document in the name of the Partnership. No Limited Partner shall have any power or authority with respect to the Partnership except insofar as the consent of any Limited Partner shall be expressly required and except as otherwise expressly provided in this Agreement.

See id. at 80. Section 8.02(b) grants the Special Limited Partner significant control over the business of the Partnership. It states:

The General Partner shall not, without the Consent of the Special Limited Partner, which Consent may be withheld in its sole and absolute discretion, have any authority to: (i) sell or otherwise dispose of, at any time, all or any material portion of the assets of the Partnership, except as expressly provided in this Agreement.

See id. at 63.

At the core of this dispute is Section 12.03 of the May 1999 Agreement, which states:

Right of First Refusal. On and after the end of the 15 year Compliance Period, [Riseboro] or its designee, if it is at that time a qualified nonprofit corporation, shall have a right of first refusal to purchase the Apartment Complex for the price equal to the sum of:

(i) the principal amount of outstanding indebtedness secured by the building (other than indebtedness incurred within the 5-year period ending on the date of the

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