Including Long-Term Affordability and Preservation of HOME Compliance into Development Negotiations

It is important for PJs to integrate the relevant preservation strategies into their HOME agreements whenever possible. This can be accomplished if the PJ understands the investor’s exit strategy at the earliest stage of the development process.

Sometimes, the owner of an affordable housing development seeks HOME funds from a PJ after the LIHTCs are allocated, or shortly before an application deadline. The PJ may feel pressure to accommodate the owner’s terms so that important tax credits are not lost to its community. However, even when this occurs, the PJ has a responsibility to understand the entire financing structure of the project, including the exit strategy, prior to committing HOME funds.

The best approach to ensure that all parties understand the terms, conditions, and needs of the other parties to the transaction is to bring all the stakeholders or their representatives together to discuss all aspects of the deal, including expected outcomes, and the investor’s anticipated exit strategy.

The stakeholders include:

  • PJ
  • Managing General Partner of the ownership entity
  • HOME sponsor, if different than above
  • The state allocating agency
  • Lender representatives
  • LP investor or its representative
  • Legal and tax counsel.

The PJ is investing HOME funds and it should expect, as a minimum return on its investment, compliance with HOME affordability requirements over the long term. Even when contacted late in the deal, the PJ must make sure that provisions are incorporated into HOME agreements to ensure compliance with HOME requirements throughout the affordability period.

Areas that PJs should consider in their negotiations are:

  • Agreements that survive foreclosure
  • Agreements with the owners that provide the PJ (or an appropriate successor) the Right of First Refusal in the event of a sale initiated by the LIHTC investor that precedes the expiration of the HOME and/or PJ affordability period
  • Agreements with the owners and all other lenders that provide the PJ notification in the event of default or noncompliance
  • Agreements with the owners and all lenders that allow the PJ the right to cure the event of default, and where possible, any identified noncompliance issue
  • A provision in any agreement(s) with the owner that any change in ownership and/or management must be approved by the PJ.

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