LIHTC Year-15 and Resyndication

What Year-15 Means

In a Low-Income Housing Tax Credit transaction, the investor's primary economic interest — the tax credit claim — runs for ten years from the date the building is placed in service. But the compliance period runs longer: fifteen years of initial compliance, followed by an extended use period that typically brings the total affordability restriction to thirty years. The end of the initial fifteen-year compliance period — referred to in the industry as "Year-15" — is a legally and financially significant milestone.

At Year-15, the investor has generally claimed all available tax credits and has little remaining economic interest in the partnership or LLC. The investor wants to exit the entity cleanly, recover any remaining basis, and minimize exposure to ongoing liabilities. The developer or sponsor — particularly a nonprofit — wants to acquire the investor's interest and secure long-term ownership of the property. How that transition occurs depends on what the original partnership or operating agreement provides, how the property has performed, and what exit structure the parties can agree on.

Year-15 is not a single event. It requires planning that should begin two to three years in advance of the compliance period end date, particularly for nonprofit sponsors planning to exercise a right of first refusal or for any transaction involving resyndication.

The Compliance Period and Extended Use Period

Section 42 imposes a mandatory fifteen-year initial compliance period during which the property must meet all program requirements — income targeting, rent restrictions, physical standards, and set-aside minimums — to avoid credit recapture. The extended use period that follows the initial compliance period is governed by an extended use agreement between the PHA (or the state housing finance agency) and the owner, which typically extends the affordability restriction for an additional fifteen years, for a combined thirty-year compliance term.

The extended use agreement is recorded against the property and runs with the land. Its terms govern what happens to the property during the extended use period and, in some cases, at the end of that period as well. Understanding the terms of the extended use agreement — including any limitations on transfer, any right of first refusal, and any conditions on termination — is an essential first step in Year-15 planning.

Early Termination of the Extended Use Period

Under Section 42(h)(6)(E), an owner may request the state housing finance agency to find a buyer for the property after the initial fifteen-year compliance period. If the agency cannot identify a qualified buyer within one year, the extended use agreement may terminate, and the property may be converted to market-rate use — subject to existing tenant protections. This "qualified contract" process has been used less frequently in recent years as states have moved to restrict or eliminate it in their extended use agreements, but it remains a provision that affects how extended use periods can end and must be reviewed in any Year-15 analysis.

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.

The Section 42(i)(7) Right of First Refusal

Section 42(i)(7) of the Internal Revenue Code provides that, for properties in which a qualified nonprofit organization is a general partner or managing member, the nonprofit has a right of first refusal to acquire the property — upon the investor's disposition of its interest or upon a sale of the property — at a price equal to the outstanding debt on the property plus the costs of transfer. This price is commonly referred to as the "minimum purchase price" or "formula price" and is designed to be well below market value, enabling the nonprofit to acquire a performing affordable housing asset at a price its cash flow can support.

The right of first refusal is a statutory right, but its exercise requires careful attention to timing, notice, and the mechanics set out in the partnership or operating agreement. The right must be structured correctly in the original documents and exercised in compliance with the statutory requirements and any additional terms in the agreement. Failure to comply with notice or exercise procedures can jeopardize the nonprofit's ability to acquire the property at the formula price.

The right of first refusal applies to the acquisition of the property itself — not merely to the investor's partnership or LLC interest. This distinction matters for how the transfer is structured and what approvals (lender consent, housing finance agency consent) are required.

Put and Call Options

Many LIHTC partnership and operating agreements include put and call options that govern the investor's exit in for-profit transactions or where a nonprofit sponsor does not have a statutory right of first refusal. A put option gives the investor the right to require the developer or general partner to purchase the investor's interest at a formula price after Year-15. A call option gives the developer or general partner the right to purchase the investor's interest. These options are typically priced based on the investor's remaining adjusted capital account, a fixed formula, or a negotiated buyout amount.

The exercise of put and call options requires compliance with the procedures and timelines in the original documents. Where the buyout price is based on the investor's remaining tax basis or capital account, the calculation must account for the investor's share of depreciation, credit recapture risk, and exit taxes — all of which affect the total cost of the exit to the developer.

Exit Taxes

Exit taxes are a central economic issue at Year-15. When the investor exits the tax credit entity — whether through a sale of the property, a transfer of the investor's interest, or an exercise of a right of first refusal — the investor may recognize taxable income or gain as a result of the transaction. This gain arises primarily from the disparity between the investor's remaining adjusted basis in the partnership interest (reduced by years of depreciation deductions) and the amount the investor receives in the exit transaction.

The developer or sponsor is typically responsible for paying the investor's exit taxes — either directly or through an indemnity or guaranty. Exit tax exposure can be significant and must be modeled carefully in Year-15 planning. Structuring the exit to minimize exit tax liability — through basis adjustments, installment sale treatment, or other mechanisms — requires close coordination with tax counsel. Legal counsel's role is to document the exit structure accurately and ensure that the transaction agreements reflect the agreed allocation of exit tax responsibility.

Resyndication

Resyndication — sometimes called recapitalization — is the process of restructuring a tax credit property at or near Year-15 with a new LIHTC investment and, often, new debt financing. The transaction generates a new round of equity from a new tax credit investor, which is used to fund rehabilitation of an aging property, pay off existing debt, and reset the affordability term for another thirty years.

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 allocation — typically 4% credits paired with tax-exempt bonds for acquisition-rehabilitation deals, or a 9% credit award for larger rehabilitation needs
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 agreements resetting the affordability term
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

In a resyndication, the acquisition of the property by the new tax credit entity — even if the developer retains ownership through a related entity — can generate acquisition basis for LIHTC purposes, subject to the ten-year rule under Section 42(d)(2). The ten-year rule generally requires that the building not have been placed in service within the preceding ten years to qualify for acquisition credits, with important exceptions for federally assisted buildings and buildings acquired from a government agency or from a nonprofit organization exercising a right of first refusal. Navigating the ten-year rule and the applicable exceptions is a significant tax structuring issue in resyndications, handled by tax counsel in coordination with the transaction team.

Year-15 Planning: Starting Early

The most common mistake in Year-15 transactions is starting too late. The legal and financial issues involved — investor exit pricing, exit tax calculation, resyndication feasibility, new credit allocation, lender consent, and agency approval — require lead time that a two-year runway can accommodate but a six-month runway cannot.

Early planning for Year-15 involves reviewing the original partnership or operating agreement for exit mechanics, pricing formulas, and notice requirements; reviewing the extended use agreement for transfer restrictions and right of first refusal provisions; assessing the property's physical condition and capital needs to determine whether resyndication is warranted; modeling the exit tax exposure and sourcing; and beginning preliminary conversations with the state housing finance agency about credit availability and program requirements.

For nonprofit sponsors, Year-15 is also the moment at which long-term mission alignment — preserving affordable housing for residents — and legal execution must come together. The Section 42(i)(7) right of first refusal is a powerful tool, but only if it is exercised correctly and on time.

Year-15 and Resyndication Counsel at Snow LLP

Snow LLP 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. The 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.