1. (a) General. This section applies to Development Owners that agreed to offer a Right of First Refusal ("ROFR") to a Qualified Entity, as memorialized in the applicable LURA. The purpose of this section is to provide administrative procedures and guidance on the process and valuation of properties under the LURA. All requests for ROFR submitted to the Department, regardless of existing regulations, must adhere to this process.

   1. (1) The Development Owner may market the Property for sale and sell the Property to a Qualified Entity without going through the ROFR process outlined in this section.
   2. (2) A ROFR request must be made in accordance with the LURA for the Development. If there is a conflict between the Development's LURA and this subchapter, requirements in the LURA supersede the subchapter. If a conflict between the LURA and statute exists the Development Owner may request a LURA amendment to be consistent with any changes to Texas Government Code Chapter 2306.
   3. (3) If a LURA includes the ROFR provision, the Development Owner may not request a Preliminary Qualified Contract (if such opportunity is available under §10.408) until the requirements outlined in this section have been satisfied.
   4. (4) The Department reviews and approves all ownership transfers pursuant to §10.406. Thus, if a proposed purchaser is identified in the ROFR process, the Development Owner and proposed purchaser must complete the ownership transfer process. A Development Owner may not transfer a Development to a Qualified Entity that is considered an ineligible entity under the Department's rules. In addition, ownership transfers to a Qualified Entity pursuant to the ROFR process are subject to Chapter 1, Subchapter C of this title (relating to Previous Participation Reviews).
   5. (5) Satisfying the ROFR requirement does not terminate the LURA or the ongoing application of the ROFR requirement to any subsequent Development Owner.

   6. (6) The ROFR process is not triggered if a Development Owner seeks to transfer the Development to a newly formed entity:

      1. (A) that is under common control with the Development Owner; and
      2. (B) the primary purpose of the formation of which is to facilitate the financing of the rehabilitation of the development using assistance administered through a state financing program.

2. (b) Right of First Refusal Offer Price. There are two general expectations of the ROFR offer or sale price identified in the outstanding LURAs. The descriptions in paragraphs (1) and (2) of this subsection do not alter the requirements or definitions included in the LURA but provide further clarification as applicable:

   1. (1) Fair Market Value is established using either a current appraisal (completed within three months prior to the ROFR request and in accordance with §10.304 of this chapter (relating to Appraisal Rules and Guidelines)) of the Property or an executed purchase offer that the Development Owner would like to accept. The purchase offer must contain specific language that the offer is conditioned upon satisfaction of the ROFR requirement. If a subsequent ROFR request is made within six months of the previously approved ROFR posting, the lesser of the prior ROFR posted value or new appraisal/purchase contract amount must be used in establishing Fair Market Value;

   2. (2) Minimum Purchase Price, pursuant to §42(i)(7)(B) of the Code, is the sum of:

      1. (A) the principal amount of outstanding indebtedness secured by the project (other than indebtedness incurred within the five (5)-year period immediately preceding the date of said notice); and
      2. (B) all federal, state, and local taxes incurred or payable by the Development Owner as a consequence of such sale. If the Property has a minimum Applicable Fraction of less than 1, the offer must take this into account by multiplying the purchase price by the applicable fraction and the fair market value of the non-Low-Income Units.

3. (c) Required Documentation. Upon establishing the value of the Property, the ROFR process is the same for all types of LURAs. To proceed with the ROFR request, submit all documents listed in paragraphs (1) - (12) of this subsection:

   1. (1) upon the Development Owner's determination to sell the Development to an entity other than a Qualified Entity or pursuant to subpart (a)(6) above, the Development Owner shall provide a notice of intent to the Department, to the residents, and to such other parties as the Department may direct at that time. If the LURA identifies a Qualified Entity that has a contractual ROFR to purchase the Development, the Development Owner must identify that entity to the Department and first offer the Property to this entity. If the Qualified Entity does not purchase the Property, this denial of offer must be in writing and submitted to the Department along with the ROFR Fee. The Department will determine from this documentation whether the ROFR requirement has been met and will notify the Development Owner of its determination in writing. In the event that the Qualified Entity with the contractual ROFR is not operating or in existence at the time the Development Owner intends to sell the provisions of this Section shall apply to any proposed sale by the Development Owner;

   2. (2) documentation verifying the ROFR offer price of the Property:

      1. (A) if the Development Owner receives an offer to purchase the Property from any buyer other than a Qualified Entity that the Development Owner would like to accept, the Development Owner may execute a sales contract, conditioned upon satisfaction of the ROFR requirement, and submit the executed sales contract to establish fair market value; or
      2. (B) if the Development Owner of the Property chooses to establish fair market value using an appraisal, the Development Owner must submit an appraisal of the Property completed during the last three (3) months prior to the date of submission of the ROFR request, establishing a value for the Property in compliance with Subchapter D of this chapter (relating to Underwriting and Loan Policy) in effect at the time of the request. The appraisal should take into account the existing and continuing requirements to operate the Property under the LURA and any other restrictions that may exist. Department staff will review all materials within thirty (30) calendar days of receipt. If, after the review, the Department does not agree with the fair market value proposed in the Development Owner's appraisal, the Department may order another appraisal at the Development Owner's expense; or
      3. (C) if the LURA requires valuation through the Minimum Purchase Price calculation, submit documentation verifying the calculation of the Minimum Purchase Price as described in subsection (b)(2) of this section regardless of any existing offer or appraised value;
   3. (3) description of the Property, including all amenities and current zoning requirements;
   4. (4) copies of all documents imposing income, rental and other restrictions (non-TDHCA), if any, applicable to the operation of the Property;
   5. (5) copy of the most current title report, commitment or policy in the Development Owner's possession;
   6. (6) the most recent Physical Needs Assessment, pursuant to Texas Government Code conducted by a Third-Party;
   7. (7) copy of the monthly operating statements, including income statements and balance sheets for the Property for the most recent twelve (12) consecutive months (financial statements should identify amounts held in reserves);
   8. (8) the three (3) most recent consecutive audited annual operating statements, if available;
   9. (9) detailed set of photographs of the Property, including interior and exterior of representative units and buildings, and the Property's grounds (including digital photographs that may be easily displayed on the Department's website);
   10. (10) current and complete rent roll for the entire Property;
   11. (11) if any portion of the land or improvements is leased for other than residential purposes, copies of the commercial leases; and
   12. (12) ROFR fee as identified in §10.901 of this chapter (relating to Fee Schedule).

4. (d) Process. Within 30 business days of receipt of all required documentation, the Department will review the submitted documents and notify the Development Owner of any deficiencies. During that time, the Department will notify any Qualified Entity identified by the Development Owner as having a contractual ROFR of the Development Owner's intent to sell. Once the deficiencies are resolved and the Development Owner and Department come to an agreement on the ROFR offer price of the Property, the Department will list the Property for sale on the Department's website and contact entities on the buyer list maintained by the Department to inform them of the availability of the Property at the agreed upon ROFR offer price as determined under this section. The Department will notify the Development Owner when the Property has been listed and of any inquiries or offers generated by such listing. If the Department or Development Owner receives offers to purchase the Property from more than one Qualified Entity, the Development Owner may accept back up offers. To satisfy the ROFR requirement, the Development Owner may sell the Property to the Qualified Entity selected by the Development Owner on such basis as it shall determine appropriate and approved by the Department. The period of time required for offering the property at the ROFR offer price is based upon the period identified in the LURA and clarified in paragraphs (1) - (3) of this subsection:

   1. (1) if the LURA requires a 90 day ROFR posting period, within 90 days from the date listed on the website, the process as identified in subparagraphs (A) - (D) of this paragraph shall be followed:

      1. (A) if a bona fide offer from a Qualified Entity is received at or above the posted ROFR offer price, and the Development Owner does not accept the offer, the ROFR requirement will not be satisfied;
      2. (B) if a bona fide offer from a Qualified Entity is received at or above the posted ROFR offer price and the Development Owner accepts the offer, and the Qualified Entity fails to close the purchase, if the failure is determined to not be the fault of the Development Owner, the ROFR requirement will be deemed met so long as no other acceptable offers have been timely received. If the proposed Development Owner is subsequently not approved by the Department during the ownership transfer review due to issues identified during the Previous Participation Review process pursuant to Chapter 1, Subchapter C of this title, the ROFR requirement will be deemed met so long as no other acceptable offers have been timely received;
      3. (C) if an offer from a Qualified Entity is received at a price below the posted ROFR offer price, the Development Owner is not required to accept the offer, and the ROFR requirement will be deemed met if no other offers at or above the price are received during the 90 day period;
      4. (D) request a Preliminary Qualified Contract (if such opportunity is available under §10.408) or proceed with the sale to an entity that is not a Qualified Entity at or above the posted price;

   2. (2) if the LURA requires a two year ROFR posting period, and the Development Owner intends to sell the Property upon expiration of the Compliance Period, the notice of intent described in this section may be submitted no more than 2 years before the expiration of the Compliance Period, as required by Texas Government Code, §2306.6726. If the Development Owner determines that it will sell the Development at some point later than the end of the Compliance Period, the notice of intent shall be given within two (2) years before the date upon which the Development Owner intends to sell the Development in order for the two year ROFR posting period to be completed prior to intended sale. The two (2) year period referenced in this paragraph begins when the Department has received and approved all documentation required under subsection (c)(1) - (12) of this section. During the two (2) years following the notice of intent and in order to satisfy the ROFR requirement of the LURA, the Development Owner may negotiate or enter into an agreement to sell the Development only with the parties listed, and in order of priority:

      1. (A) during the first six (6) month period after notice of intent, only with a Qualified Entity that is also a Community Housing Development Organization, as defined in the HOME Final Rule and is approved by the Department;
      2. (B) during the second six (6) month period after notice of intent, only with a Qualified Entity or a tenant organization;
      3. (C) during the second year after notice of intent, only with the Department or with a Qualified Entity approved by the Department;
      4. (D) if, during the two (2) year period, the Development Owner shall receive an offer to purchase the Development at or above the Minimum Purchase Price from one of the organizations designated in subparagraphs (A) - (C) of this paragraph (within the period(s) appropriate to such organization), the Development Owner may sell the Development to such organization. If, during such period, the Development Owner shall receive more than one offer to purchase the Development at or above the Minimum Purchase Price from one or more of the organizations designated in subparagraphs (A) - (C) of this paragraph (within the period(s) appropriate to such organizations), the Development Owner may sell the Development at or above the Minimum Purchase Price to the organization selected by the Development Owner on such basis as it shall determine appropriate and approved by the Department; and
      5. (E) upon expiration of the two (2) year period, if no Minimum Purchase Price offers were received from a Qualified Entity or by the Department, the Department will notify the Development Owner in writing that the ROFR requirement has been met. Upon receipt of written notice, the Development Owner may request a Preliminary Qualified Contract (if such opportunity is available under §10.408) or proceed with the sale to a buyer that is not a Qualified Entity at or above the Minimum Purchase Price.

   3. (3) if the Development Owner has a LURA or has amended the LURA to require a 180 day ROFR posting period pursuant to Texas Government Code §2306.6725, as amended, and the Development Owner intends to sell the Property at any time after the expiration of the Compliance Period, the notice of intent shall be given to the Department as described in this section. The 180 day ROFR period referenced in this paragraph begins when the Department has received and approval all documentation required under subsection (c)(1) - (12) of this section. During the 180 days following the notice of intent and in order to satisfy the ROFR requirement of the LURA, the Development Owner may negotiate or enter into an agreement to sell the Development only with the parties listed, and in order of priority:

      1. (A) during the first 60 day period after notice of intent, only with a Community Housing Development Organization, as defined in the HOME Final Rule, or with a Qualified Entity that is controlled by a Community Housing Development Organization, and is approved by the Department;
      2. (B) during the second 60 day period after notice of intent, only with a Qualified Nonprofit Organization as described by Texas Government Code §2306.6706, a Qualified Entity that is controlled by a Qualified Nonprofit Organization as described by Texas Government Code §2306.6706, or a tenant organization, and is approved by the Department;
      3. (C) during the last sixty (60) day period after notice of intent, with any other Qualified Entity that is approved by the Department;
      4. (D) if, during the one hundred and eighty (180) day period, the Development Owner shall receive an offer to purchase the Development at a price that the Department determines to be reasonable from one of the organizations designated in subparagraphs (A) - (C) of this paragraph (within the period(s) appropriate to such organization), the Development Owner may sell the Development to such organization. If, during such period, the Development Owner shall receive more than one offer to purchase the Development at or above the price that the Department determines to be reasonable from one or more of the organizations designated in subparagraphs (A) - (C) of this paragraph (within the period(s) appropriate to such organizations), the Development Owner may sell the Development at or above the price that the Department determines to be reasonable in accordance with subsection (b)(2) of this section to the organization selected by the Development Owner on such basis as it shall determine appropriate and approved by the Department; and
      5. (E) beginning on the 181st day after the date the Department posts notice of the Development Owner's intent to sell, if no offers at the Minimum Purchase Price were received from a Qualified Entity, the Department will notify the Development Owner in writing that the ROFR requirement has been met. Upon receipt of written notice, the Development Owner may request a Preliminary Qualified Contract (if such opportunity is available under §10.408) or proceed with the sale to a buyer that is not a Qualified Entity at or above the Minimum Purchase Price;
      6. (F) this section applies only to a right of first refusal memorialized in the Department's LURA. This section does not authorize a modification of any other agreement between the Development Owner and a Qualified Entity.
   4. (4) If the LURA does not specify a required ROFR posting timeframe, or, is unclear on the required ROFR posting timeframe, and the required ROFR value is determined by the Minimum Purchase Price method, any Development that received a tax credit allocation prior to September 1, 1997 is required to post for a 90-day ROFR period and any Development that received a tax credit allocation on or after September 1, 1997 and until September 1, 2015 is required to post for a 2-year ROFR, unless the LURA is amended under §10.405(b), or after September 1, 2015 is required to post for a 180-day ROFR period as described in Texas Government Code, §2306.6726.

5. (e) Closing the Transaction. The Department shall have the right to enforce the Development Owner's obligation to sell the Development as herein contemplated by obtaining a power-of-attorney from the Development Owner to execute such a sale or by obtaining an order for specific performance of such obligation or by such other means or remedy as shall be, in the Department's discretion, appropriate.

   1. (1) Prior to closing a sale of the Property, the Development Owner must obtain Department approval of the transfer through the ownership transfer process in accordance with §10.406 of this chapter (relating to Ownership Transfers (§2306.6713)). The request should include, among other required transfer documents outlined in the Post Award Activities Manual, the final settlement statement and final sales contract with all amendments. If there is no material change in the sales price or terms and conditions of the sale, as approved at the conclusion of the ROFR process, and there are no issues identified during the Ownership Transfer review process, the Department will notify the Development Owner in writing that the transfer is approved.
   2. (2) If the closing price is materially less than the amount identified in the sales contract or appraisal that was submitted in accordance with subsection (c)(2)(A) - (C) of this section or the terms and conditions of the sale change materially, in the Department's sole determination, the Development Owner must go through the ROFR process again.
   3. (3) Following notice that the ROFR requirement has been met, if the Development Owner fails to proceed with a request for a Qualified Contract or sell the Property to a for-profit entity within twenty-four (24) months of the Department's written approval, the Development Owner must again offer the Property to nonprofits in accordance with the applicable section prior to any transfer. If the Department determines that the ROFR requirement has not been met during the ROFR posting period, the Owner may not re-post under this provision at a ROFR price that is higher than the originally posted ROFR price until twenty-four (24) months has expired from the Department's written denial. The Development Owner may market the Property for sale and sell the Property to a Qualified ROFR Organization during this twenty-four month period.

6. (f) Appeals. A Development Owner may appeal a staff decision in accordance with §10.902 of this chapter (relating to the Appeals Process (§2306.0321; §2306.6715)). The appeal may include:

   1. (1) the best interests of the residents of the Development;
   2. (2) the impact the decision would have on other Developments in the Department's portfolio;
   3. (3) the source of the data used as the basis for the Development Owner's appeal;
   4. (4) the rights of nonprofits under the ROFR;
   5. (5) any offers from an eligible nonprofit to purchase the Development; and
   6. (6) other factors as deemed relevant by the Executive Director.

Source Note:The provisions of this §10.407 adopted to be effective January 6, 2016, 41 TexReg 174.