LIHTC Year-15 and Resyndication

What Year-15 Means

In a LIHTC transaction, the federal credit is generally claimed over ten years, while the initial compliance period lasts fifteen years. The recorded extended-use period begins on the first day during the compliance period that the building is part of a qualified low-income housing project and continues for the period specified by the housing credit agency, but no earlier than fifteen years after the close of the compliance period. The end of the initial compliance period — commonly called "Year 15" — is therefore an ownership and financing milestone, not the beginning of the extended-use restrictions.

By Year 15, the investor has generally claimed the scheduled federal credits, but its remaining economic, tax, consent, indemnity, and ownership interests depend on the project and governing documents. A sponsor may seek to acquire the investor's entity interest, acquire the property through a contractual right, refinance, recapitalize, or resyndicate. The available path depends on the partnership or operating agreement, any separate option or right-of-first-refusal agreement, the project's performance, lender and agency requirements, and applicable law.

Year-15 planning often begins several years before the end of the compliance period so the parties can review exit provisions, evaluate property needs and financing alternatives, obtain required consents, and address tax and regulatory issues.

The Compliance Period and Extended Use Period

Section 42 imposes a fifteen-year compliance period during which noncompliance may result in loss or recapture of federal credits. Separately, the owner must enter into an extended low-income housing commitment with the applicable housing credit agency. That recorded commitment begins during the compliance period and continues through the date specified by the agency, but no earlier than fifteen years after the close of the compliance period. Other regulatory agreements and financing documents may impose longer restrictions.

The recorded commitment runs with the property and ordinarily addresses required low-income occupancy, rent restrictions, enforcement rights, transfer limitations, and other conditions. Year-15 diligence should also review every separate regulatory agreement, use agreement, loan document, ground lease, and subsidy contract because those obligations may extend beyond the federal minimum.

Early Termination of the Extended Use Period

Section 42 permits an owner, after the fourteenth year of the compliance period, to submit a written request asking the housing credit agency to present a qualified contract for acquisition of the low-income portion of the building. The agency generally has a one-year statutory period after the request. The qualified-contract exception does not apply where more restrictive requirements are imposed by the recorded commitment or state law, and agency documents or state law may waive, restrict, or eliminate the process. Even when the extended-use period terminates through the process, statutory tenant protections continue for three years.

Investor Exit Mechanics

The primary legal question at Year-15 is how the investor exits the tax credit entity. The answer depends on what the original partnership or operating agreement provides. Exit structures vary, and the language in the original investor documents controls the mechanics, pricing, and timing of the exit.

Contractual Rights of First Refusal Under Section 42(i)(7)

Section 42(i)(7) is a federal tax safe harbor: federal income-tax benefits are not denied merely because qualifying tenants, a resident management corporation, a qualified nonprofit organization, or a government agency holds a right of first refusal to purchase the property after the compliance period at a price not less than the statutory minimum purchase price. The provision does not itself grant a self-executing purchase right.

The statutory minimum purchase price generally consists of the principal amount of qualifying outstanding indebtedness secured by the building plus federal, state, and local taxes attributable to the sale. The partnership or operating agreement, any separate right-of-first-refusal agreement, the required sale or offer process, notice and exercise procedures, and applicable law determine whether and how the contractual right may be exercised.

The Section 42(i)(7) safe harbor concerns a right to purchase the property, not merely the investor's partnership or LLC interest. A transaction may therefore require lender, housing-credit-agency, subsidy-provider, ground-lessor, or other third-party consent, as well as separate documentation for the investor's exit from the ownership entity.

Put and Call Options

Many LIHTC partnership and operating agreements include put rights, call rights, purchase options, or negotiated buyout procedures governing the investor's exit. These rights may apply alongside a contractual Section 42(i)(7) right of first refusal or in transactions where no such right was granted. Pricing may be based on a fixed amount, a negotiated formula, fair market value, capital-account concepts, or other terms stated in the governing documents.

The exercise of any put, call, option, or buyout right must follow the procedures and timing in the governing documents. Tax basis, capital accounts, liabilities, exit taxes, and contractual indemnity obligations may affect the economics and should be analyzed with tax counsel.

Exit Taxes

An investor exit may produce taxable income or gain depending on the form of the transaction, the investor's adjusted basis, its share of partnership liabilities, capital-account and minimum-gain items, and other tax attributes. The result may differ materially between a sale of the property, a transfer of an entity interest, an option exercise, or another restructuring.

Responsibility for any investor exit-tax payment, guaranty, indemnity, or reimbursement is transaction-specific and must be determined from the partnership or operating agreement and related guaranty and tax-benefit provisions. Tax counsel should model the consequences of each proposed exit structure; transaction counsel should ensure that the documents accurately reflect the agreed allocation of responsibility.

Resyndication

Resyndication — often part of a broader recapitalization — uses a new LIHTC transaction and, frequently, new debt and public financing to fund rehabilitation, refinance existing obligations, and preserve the property. A new LIHTC transaction generally creates a new compliance period and recorded extended-use commitment. Existing regulatory agreements and affordability restrictions may remain in effect and overlap with the new restrictions unless they are lawfully released or amended.

Resyndication is one of the most effective tools available for preserving the long-term affordability and physical condition of existing LIHTC housing. A property that was built or substantially rehabilitated twenty to thirty years ago may have deferred maintenance, outdated systems, or unit configurations that no longer meet resident needs. A resyndication finances the rehabilitation while keeping the property affordable and occupied.

Structure of a Resyndication

A resyndication involves many of the same legal workstreams as an original LIHTC closing — new entity formation or restructuring of the existing entity, new investor documentation, new loan documentation, new regulatory agreements — layered onto an existing ownership and debt structure that must be unwound or modified. The transaction must address:

Exit of the existing investor and termination of the existing investment documents
Payoff or restructuring of existing debt, including any prepayment conditions or lender consent requirements
New LIHTC structure — often bond-financed 4% credits for acquisition-rehabilitation or, where awarded, a competitive 9% rehabilitation allocation
New investor equity documentation, capital contribution schedule, and guaranty structure
New construction or permanent loan financing for the rehabilitation
New regulatory agreements and extended-use commitments, coordinated with any continuing existing restrictions
Title update, new title insurance, and resolution of any title issues that have arisen since the original closing
Relocation plan for residents during rehabilitation
Coordination with the state housing finance agency, HUD (if applicable), and any existing public agency lenders

Acquisition Basis in a Resyndication

A transfer to a new ownership entity may generate acquisition basis only if the requirements of Section 42(d) are satisfied, including the acquisition-credit rules, related-party limitations, and the applicable placed-in-service rule. Section 42 generally denies acquisition credit when the building was placed in service during the preceding ten years, but current law contains important exceptions, including a broad exception for qualifying federally or state-assisted buildings. The availability and amount of acquisition basis are tax questions that should be confirmed by tax counsel; a transfer between related sponsor entities does not by itself establish eligible acquisition basis.

Year-15 Planning: Starting Early

Year-15 planning should begin early enough to review the original documents, obtain valuations and tax modeling, evaluate capital needs and resyndication feasibility, and secure lender, agency, and other required consents. The necessary lead time varies by transaction, but a compressed schedule can materially limit available options.

Planning includes reviewing the partnership or operating agreement and every separate option or right-of-first-refusal agreement; identifying notice, sale, valuation, and consent requirements; reviewing all regulatory and financing restrictions; evaluating the property's physical and capital needs; and comparing a negotiated exit, property acquisition, refinancing, and resyndication.

For nonprofit sponsors, a properly drafted contractual right of first refusal within the Section 42(i)(7) safe harbor can be an important preservation tool, but its availability and exercise depend on the governing documents, transaction facts, tax analysis, and applicable law.

Year-15 and Resyndication Counsel at Snow LLP

The firm advises developers, sponsors, and nonprofit organizations on Year-15 planning and execution — including investor exit, right of first refusal exercise, exit tax structure, and resyndication transactions. This practice works with clients to review existing documents, assess the exit structure, coordinate with tax and compliance counsel, and manage the legal workstreams involved in a resyndication closing.

Illustrative Example

A nonprofit sponsor approaches the end of the initial compliance period for a 9% LIHTC project. The governing documents include a contractual right of first refusal intended to fall within Section 42(i)(7), permitting the nonprofit to purchase the property after the compliance period at not less than the statutory minimum purchase price, subject to the agreement's sale, notice, and exercise procedures. The parties review the investor's separate entity-exit rights, obtain tax analysis of the proposed structure, identify required lender and agency consents, and compare a right-of-first-refusal purchase, a negotiated transfer, and a resyndication. Planning begins well before Year 15 so the selected transaction can be documented without disrupting property operations.

This example is a simplified illustration of transaction structure and mechanics. It does not describe an actual engagement, is not legal advice, and does not predict any outcome.