HOMEOWNER‘S REHAB, INC., & another vs. RELATED CORPORATE V SLP, L.P., & another.
SJC-12441
Supreme Judicial Court of Massachusetts
February 6, 2018. - June 15, 2018.
Suffolk. Present: Gants, C.J., Lenk, Gaziano, Lowy, Cypher, & Kafker, JJ.
NOTICE: All slip opinions and orders are subject to formal revision and are superseded by the advance sheets and bound volumes of the Official Reports. If you find a typographical error or other formal error, please notify the Reporter of Decisions, Supreme Judicial Court, John Adams Courthouse, 1 Pemberton Square, Suite 2500, Boston, MA, 02108-1750; (617) 557-1030; SJCReporter@sjc.state.ma.us
Partnership, Limited partnership, General partner, Consent of limited partner. Housing. Real Property, Right of first refusal.
Civil action commenced in the Superior Court Department on December 5, 2014.
The case was heard by Jane L. Sanders, J., on a motion for summary judgment, and entry of judgment was ordered by her.
The Supreme Judicial Court on its own initiative transferred the case from the Appeals Court.
Karen E. Friedman (David E. Lurie also present) for the plaintiffs.
The following submitted briefs for amici curiae:
Henry Korman & Daniel M. Rosen for Citizens’ Housing and Planning Association & others.
W. Bart Lloyd, Gregory M. Katz, & Jonathan Klein for Preservation of Affordable Housing, Inc., & another.
Stephen M. Nolan for Massachusetts Housing Investment Corporation.
Roberta L. Rubin, Special Assistant Attorney General, & Bruce E. Falby for Department of Housing and Community Development & others.
Albert P. Zabin for Chinese Progressive Association, Inc., & another.
Charles R. Bennett for Holland & Hart LLP.
Christopher G. Caldwell, Michael D. Roth, & Kelly L. Perigoe, of California, & William C. Jackson for Jonathan Zasloff.
Christopher G. Caldwell, Michael D. Roth, & Kelly L. Perigoe, of California, & William C. Jackson for Bradley Myers.
GANTS, C.J. The parties in this case are partners in a limited partnership formed for the purpose of rehabilitating and operating an affordable housing complex. The project was eligible for financing under the Low Income Housing Tax Credit (LIHTC) program set forth in the Internal Revenue Code,
As set forth in the Internal Revenue Code,
The owners of these properties can claim the tax credits annually over a period of ten years, thereby offsetting their tax liability, but must continue to comply with rent affordability restrictions for a period of fifteen years, known as the compliance period, to avoid recapture of those credits. See
Developers of affordable housing projects frequently use the tax credits available under the LIHTC program as an incentive to attract capital from private investors. Because these projects rarely generate enough tax liability for the developers to claim the full value of the credits themselves, and because many of these developers are nonprofit organizations and therefore tax-exempt, the tax credits are of little value to them. By syndicating the project, however, these developers can “sell” the tax credits to private investors -- in most cases corporations with substantial and predictable tax liability -- in exchange for an equity investment in the project. See J. 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 2 (2012) (Khadduri et al.); M.I. Sanders, Joint Ventures Involving Tax-Exempt Organizations 949-951 (4th ed. 2013).
Section 42 requires each State to set aside at least ten per cent of its allocable tax credits for projects developed and operated by qualified nonprofit organizations.
At the end of the fifteen-year compliance period, when all tax credits have been claimed and are no longer subject to recapture, most investor limited partners will seek to leave the project, usually -- but not always -- by selling their interest to the nonprofit general partner. See Khadduri et al., supra at 23-31;
“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 [first] refusal held by the tenants . . . or resident management corporation of such building or by a qualified nonprofit organization . . . to purchase the property after the close of the compliance period for a price which is not less than the minimum purchase price . . . .”
The “minimum purchase price” (§ 42 price) is an amount equal to the outstanding debt on the property, excluding debt incurred in the five years preceding the sale, plus exit tax liability,5 and is typically below fair market value.
Section 42 does not mandate that nonprofit organizations be granted a right of first refusal, but the Internal Revenue Service has issued guidance indicating that, in order to qualify for tax-exempt status, a nonprofit organization participating as a general partner in a LIHTC partnership must secure a right of first refusal to acquire the property at the end of the compliance period. Memorandum from Robert S. Choi, Director of Exempt Organizations, Internal Revenue Service, Income Housing Tax Credit Limited Partnerships 1, 3-4 (July 30, 2007).
2. The agreements. The parties here are partners in a limited partnership (partnership) created in 1997 to rehabilitate and operate an affordable housing complex in Cambridge (property) under the LIHTC program. The general partner is Memorial Drive Housing, Inc., a corporation that is majority-owned and controlled by Homeowner‘s Rehab, Inc. (nonprofit developer), a nonprofit organization that specializes in the development of affordable housing. The investor limited partners are Centerline Corporate Partners V L.P., as limited partner, and Related Corporate V SLP, L.P., as special limited partner. The partnership owns a ninety-nine-year lease of
Pursuant to the partnership agreement, the limited partners made capital contributions of approximately $7 million. The partnership agreement allocates 99.99 per cent of the tax credits -- as well as the profits and losses of the partnership, with some exceptions, and deductions for expenses, including depreciation expenses -- to the limited partners.
The partnership agreement requires that, for the fifteen-year compliance period, the property will comply with the affordability restrictions and other requirements of
The partnership agreement also defines the rights and obligations of the respective partners. Section 5.1 vests “[t]he overall management and control of the business, assets[,] and affairs of the Partnership” in the general partner. The partnership agreement envisions only a limited managerial role for the limited partners, providing that neither “shall take part in the management or control of the business of the Partnership.”
The parties also entered into another agreement (option agreement) outlining two potential mechanisms by which the nonprofit developer could acquire the property interest. The first mechanism is a right of first refusal, granted in accordance with
The second mechanism by which the nonprofit developer can
The partnership agreement specifically references and incorporates the option agreement, which, as defined in the partnership agreement, is not limited to the option to purchase but also includes the provisions governing the right of first refusal. Section 5.4 of the partnership agreement outlines the procedure for the sale of partnership assets, stating:
“Except as may be otherwise expressly provided . . . in this Agreement, the General Partner[] . . . [is] hereby authorized to sell . . . all or substantially all of the assets of the Partnership; provided, however, that except for a sale pursuant to the Option Agreement, the terms of any such sale . . . must receive the Consent of the Special Limited Partner before such transaction shall be binding on the Partnership.”
That section further states:
“The Partnership and [the nonprofit developer] agree that, with respect to the Option Agreement, it is their intention that the purchase price under the Option Agreement be the minimum price consistent with the requirements of [§] 42(i)(7) of the [Internal Revenue] Code.”
Section 5.4 also sets forth an interpretation of certain terms in
The closing documents to the agreements include a memorandum from the accounting firm Reznick Fedder & Silverman (Reznick memorandum) providing financial projections for the partnership over the fifteen-year compliance period. The Reznick memorandum also projected the return on investment the limited partners would receive if the property interest were to be sold at the end of the compliance period for a purchase price of one
3. The parties’ dispute. The following facts in the summary judgment record are not materially in dispute.
Over the fifteen-year compliance period, the limited partners claimed approximately $7.5 million in tax credits and over $24 million in tax losses through the partnership. In January, 2014, after the compliance period had ended, the nonprofit developer offered to purchase the limited partners’ interest in the property for one dollar, plus the assumption of outstanding debt, which it contended was the minimum price consistent with
Despite further negotiations, the parties were unable to agree upon a purchase price for the property interest, and were also unable to agree on their interpretation of the right of first refusal.
In the fall of 2014, the nonprofit developer decided to trigger its right of first refusal according to its own interpretation by soliciting a third-party offer from Madison Park Development Corporation (Madison Park), another nonprofit developer of affordable housing. Peter Daly, executive director for both the general partner and the nonprofit developer, asked the chief executive officer of Madison Park, Jeanne Pinado, to make an offer as a “favor” to him. In November, 2014, Madison Park submitted a written offer to purchase the property interest for approximately $42 million. Pinado understood that Daly had solicited the offer in order to trigger the right of first refusal. She also knew that Madison Park‘s offer was subject to the nonprofit developer‘s right of first refusal, which the nonprofit developer was likely to exercise. But Pinado testified that Madison Park had made “a good offer” that was “appropriate . . . for [the] property,” and that, in the event that the nonprofit developer did not exercise its right of first refusal, Madison Park was willing and able to honor its offer.
Having received Madison Park‘s offer, the general partner, acting on behalf of the partnership, issued a disposition notice to the nonprofit developer and to the limited partners, stating that the
4. The action for declaratory judgment. Because it was apparent that the limited partners would continue to oppose the sale, the nonprofit developer and the general partner commenced an action against the limited partners in the Superior Court, seeking a declaratory judgment as to the parties’ rights under the relevant agreements. In their answer, the limited partners asserted a counterclaim alleging that, by attempting to trigger the nonprofit developer‘s right of first refusal without the special limited partner‘s consent, the general partner had committed a breach of its fiduciary duty to the limited partners and the implied covenant of good faith and fair dealing.
Following discovery, the plaintiffs moved for summary judgment on their claims for declaratory relief and on the limited partners’ counterclaim. The judge allowed the plaintiffs’ motion as to all claims. The judge determined that the option agreement should not be read in isolation, but must instead be construed together with the partnership agreement, in keeping with the intent of the parties, and in the context of the statutory requirements of the LIHTC program. The judge concluded that under those agreements the general partner could solicit a third-party offer and issue a disposition notice -- thereby triggering the nonprofit developer‘s right of first refusal -- without the consent of the special limited partner.
In reaching this conclusion, the judge pointed to two specific provisions in the agreements. First, the judge noted that, under section 2 of the option agreement, the disposition notice must state ”whether the Partnership is willing to accept the [third-party] offer” (emphasis added), indicating that “the offer need not be accepted by the Partnership . . . in order to trigger the [right of first refusal].” Second, the judge also noted that, under section 5.4 of the partnership agreement, the general partner need not obtain the consent of the special limited partner for a sale “pursuant to
The judge also rejected the limited partners’ contention that Madison Park‘s offer was not a bona fide offer and therefore could not trigger the right of first refusal. Emphasizing that the nonprofit developer‘s right of first refusal was “not a typical right of first refusal but rather a statutorily defined one designed to allow non-profit entities to buy back property . . . at a preset price,” the judge concluded that the right could be triggered by any enforceable third-party offer and that Madison Park‘s offer qualified as such.
The judge concluded that this interpretation “would not deprive the defendants of the benefit of their bargain,” finding, based on the Reznick memorandum, that the limited partners’ expected benefit from their investment was limited to the tax credits and other tax benefits -- which they did receive -- and did not include any residual value from the property in the event of a sale.
As to the limited partners’ counterclaim, the judge concluded that because the general partner‘s actions were authorized by the agreements, there was no breach of fiduciary duty or of the covenant of good faith and fair dealing.
Accordingly, the judge issued a judgment declaring, inter alia, that the general partner was authorized to solicit an offer from Madison Park and to issue a disposition notice without the special limited partner‘s consent, that this disposition notice triggered the nonprofit developer‘s right of first refusal, that the general partner was authorized to sell the property interest to the nonprofit developer without the special limited partner‘s consent, and that the general partner did not commit a breach of its fiduciary duty to the limited partners. The limited partners appealed.7 We transferred the case to this court on our own motion.
Discussion. We review a grant of summary judgment de novo to determine whether, viewing the evidence in the light most favorable to the nonmoving party (here, the defendant limited partners), the moving party (here, the plaintiff general partner and nonprofit developer) is entitled to judgment as a matter of law. See Pinti v. Emigrant Mtge. Co., 472 Mass. 226, 231 (2015). On
With respect to the agreements, the parties here agree that the partnership agreement and the option agreement incorporate each other by reference, and must be read together as an integrated whole. See Phoenix Spring Beverage Co. v. Harvard Brewing Co., 312 Mass. 501, 505 (1942) (“[W]hen several writings evidence a single contract between the parties, they will be read together in order to arrive at an interpretation of the contract“). They also agree that these agreements were carefully negotiated and crafted by sophisticated parties, and that the language of these agreements is unambiguous -- although each side contends that that unambiguous language favors their own position.
The limited partners contend that the right of first refusal cannot be exercised unless triggered by a bona fide third-party offer, and then only if the partnership, with the special limited partner‘s consent, has agreed to accept that offer. The general partner and nonprofit developer contend that the right can be triggered by any enforceable offer from a third party, and can be exercised when the general partner decides to accept it on behalf of the partnership, without the special limited partner‘s consent. There are therefore three discrete issues that we must resolve: first, whether the right of first refusal can only be triggered by a bona fide third-party offer; second, whether the partnership must decide to accept that offer in order for the nonprofit developer to exercise the right; and third, if so, whether the general partner is authorized to make that decision on behalf of the partnership without the consent of the special limited partner.
Where both sides agree only that the language of the agreements is unambiguous, we must interpret that language in the context in which it was written and “with reference . . . to the objects sought to be accomplished,” mindful that “a contract should be construed [so as] to give it effect as a rational business instrument and in a manner which will carry out the intent of the
This mutuality of interest is reflected in the language of the agreements. The partnership agreement makes clear that the amount of the limited partners’ capital contributions was tied to the amount of tax credits allowable under
We therefore examine the agreements with these mutual interests in mind. As earlier stated, the option agreement outlines two separate mechanisms by which the nonprofit developer can acquire the partnership‘s property interest: the
right of first refusal, and the option to purchase. At common law, the distinction between these two forms of purchase rights is well established. See, e.g., Bortolotti v. Hayden, 449 Mass. 193, 201 (2007); Uno Restaurants, Inc. v. Boston Kenmore Realty Corp., 441 Mass. 376, 382 (2004). An option to purchase entitles the holder to purchase the property from the owner at a specific price; the holder can exercise it unilaterally, thereby compelling even an unwilling owner to sell. See Uno Restaurants, Inc., supra at 382 & n.3. See also 25 R.A. Lord, Williston on Contracts § 67:85, at 502 (4th ed. 2002). In contrast, a right of first refusal is only a preemptive right, prohibiting the owner from selling the property to a third party “without first offering the property to the holder . . . at the third party‘s offering price.” Uno Restaurants, Inc., supra at 382. The holder of the right may then decide whether to purchase the property by matching that price. Id. at 383. Also unlike an option to purchase, a right of first refusal cannot be exercised unilaterally, but can only be exercised where two conditions are met. First, the right of first refusal must be triggered by “a bona fide and enforceable offer to purchase” the property, Roy v. George W. Greene, Inc., 404 Mass. 67, 69 (1989), meaning an offer that is made “honestly and with serious intent.” Uno Restaurants, Inc., supra at 383, quoting Mucci v. Brockton Bocce Club, Inc., 19 Mass. App. Ct. 155, 158 (1985).
Second, the owner of the property must have decided to accept that third-party offer. See Bortolotti, supra at 204 (right of first refusal “arises only when a property owner receives, and is prepared to accept, a bona fide offer“); Roy, supra at 71 (right of first refusal can be exercised “only when the owner has decided to accept” third-party offer). See also Williston on Contracts, supra (“[A] right of first refusal has no binding effect unless the offeror decides to sell“).
The limited partners contend that, in granting the right of first refusal, the agreements here incorporate these common-law limitations on its exercise. What they fail to acknowledge is that the right of first refusal in this case is not purely a creation of the common law but, as stated in the preamble to the option agreement, was granted “in accordance with [§] 42(i)(7) of the Internal Revenue Code,” and must be understood in the context of agreements designed to secure tax credits under the LIHTC program.
By creating this safe harbor,
The legislative history of
With this statutory background in mind, we now turn to the right of first refusal at issue here. It is important to remember that, although
1. Bona fide offer. The first issue we must consider is whether the right of first refusal can only be triggered by a bona fide offer. Although the agreements are silent on this issue, we conclude that such a limitation would be inconsistent with the statutory scheme of
2. Partnership‘s decision to accept the offer. The second issue we consider is whether, having received an offer from a third party, the partnership must decide to accept that offer in order for the nonprofit developer to exercise its right of first refusal. Section 2 of the option agreement states that, before the right of first refusal can be exercised, the partnership must deliver to the nonprofit “notice of an offer to purchase” from a third party. This disposition notice must state, among other things, “whether the Partnership is willing to accept the offer” (emphasis added). The judge interpreted this language to mean that the partnership need not have decided to accept the offer in order to trigger the right of first refusal. We disagree with this interpretation because it effaces the common-law distinction between a right of first refusal and an option to purchase, which, as discussed, Congress relied upon when it enacted
3. Authority of the general partner to decide to accept the offer. The third issue is whether the general partner has the authority to decide to accept the third-party offer on behalf of the partnership, without the limited partners’ consent. The limited partners contend that the general partner does not have such authority, and that the special limited partner must consent before the partnership can decide to accept an offer or issue a disposition notice that would trigger the right of first refusal. In effect, this would mean that the nonprofit developer cannot exercise its right of first refusal without the limited partners’ consent. If this were the case, one would expect that the limited partners would withhold their consent unless they were willing to sell the property interest at the § 42 price. But, if they were in fact willing to sell the property interest at that price, they would have no reason to wait for a third-party offer to trigger the right of first refusal; they could simply sell to the nonprofit developer at that price. Consequently, if we were to interpret the right of first refusal to require the consent of the special limited partner, the nonprofit developer could be denied any meaningful opportunity to acquire the property interest at the § 42 price. In cases where the limited partners are unwilling to sell at the § 42 price, the nonprofit developer would be able to purchase the property only by exercising its option to purchase at the market price. Moreover, because both the right of first refusal and the option to purchase were set to expire four years after the end of the fifteen-year compliance period, the nonprofit developer would have had to exercise its option to purchase before then or lose the right to purchase the property interest at any price without the consent of the special limited partner.
The limited partners contend that this is precisely what was agreed to and expressed in the unambiguous language of the agreements, which would mean that -- contrary to the congressional intent behind
The limited partners concede that, under section 5.4, the special limited partner need not consent to the terms of a sale if the sale is pursuant to the option agreement, for example where the nonprofit developer has exercised its right of first refusal. The limited partners nevertheless contend that the special limited partner must consent to the terms of a sale if the sale is to a third party, which is what triggers the right of first refusal, before the general partner can issue a disposition notice. But section 5.4 states only that the special limited partner must consent to the terms of a sale “before such transaction shall be binding on the Partnership.” As stated, the decision to accept a third-party offer does not itself constitute an acceptance of the offer. Thus, the mere issuance of a disposition notice does not bind the partnership to sell to the third party or even to accept its offer if the nonprofit developer were for some reason to fail to exercise its right of first refusal. Section 5(a) of the option agreement provides that, if the nonprofit developer fails to exercise its right of first refusal, the partnership “may thereupon consummate the sale to the [third party] upon the terms of the offer” (emphasis added). Section 5(a) specifically recognizes the possibility that the partnership will not consummate the sale, and provides in such an event that the nonprofit developer‘s right of first refusal would then apply to any subsequent third-party offer. To be sure, the partnership could not consummate a sale to a third party without
Because the issuance of the disposition notice does not bind the partnership to sell to a third party, and because a sale pursuant to the option agreement is specifically excluded from the requirement of consent by the special limited partner, we look to other provisions of the partnership agreement to see if there is any restriction on the general partner‘s authority to issue the disposition notice. The only relevant restriction is contained in section 5.5.B(xv), which prohibits the general partner from taking any action that would threaten the limited partners’ tax credits. In order to secure the tax credits, the partnership must continue to own the property interest throughout the compliance period. Moreover, the safe harbor under
Examining the language of the agreements in their statutory and practical context, we conclude that the general partner is authorized to trigger the nonprofit developer‘s right of first refusal by soliciting an enforceable offer from a third party and, upon receipt of such an offer, issuing a disposition notice if the general partner has decided, on behalf of the partnership, to accept the offer. In reaching this conclusion, we emphasize that we are only interpreting the language of the agreements that the parties executed here. We are not declaring that every partnership participating in the LIHTC program must permit a right of first refusal that can be exercised under these circumstances. We have stated that, unless otherwise negotiated between the parties, a right of first refusal granted in accordance with
For example, they may include language in their agreements requiring the consent of the investor limited partners before any right of first refusal is triggered.16 The parties here did not include any such language in their agreements, and we must enforce the language they chose.
We also note that we reach this conclusion without any reference to the Reznick memorandum. Because our review of a decision to grant summary judgment is de novo, we need not determine whether the judge erred in considering that memorandum. We recognize that a court may consider extrinsic evidence only when the meaning of the contract is ambiguous, because “extrinsic evidence cannot be used to contradict or change the written terms, but only to remove or to explain the existing uncertainty or ambiguity.” General Convention of the New Jerusalem in the U.S. of Am., Inc. v. MacKenzie, 449 Mass. 832, 836 (2007).
Conclusion. The judgment arising from the allowance of the plaintiff‘s motion for summary judgment is affirmed.
So ordered.