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Urban 8 Fox Lake Corp. v. Nationwide Affordable Housing Fund 4, LLC

United States District Court, N.D. Illinois, Eastern Division

January 6, 2020

URBAN 8 FOX LAKE CORPORATION, an Illinois corporation, and Urban 8 Zion Corporation, an Illinois corporation, Plaintiffs,
v.
NATIONWIDE AFFORDABLE HOUSING FUND 4, LLC, an Ohio limited liability company, SCDC, LLC, an Ohio limited liability company, and Wentwood Capital Advisors, L.P., a Texas limited partnership, Defendants.

Page 996

          David Allan Davenport, Pro Hac Vice, Christina Rieck Loukas, Pro Hac Vice, Winthrop & Weinstine, Minneapolis, MN, Caitlin Martini Mika, Arnold & Porter Kaye Scholer LLP, Chicago, IL, for Plaintiffs.

          Marc Andre Al, Stoel Rives LLP, Minneapolis, MN, Stephen Donald Koslow, Koslow Law LLC, Rolling Meadows, IL, for Defendants.

         MEMORANDUM OPINION & ORDER

         MARY M. ROWLAND, United States District Judge.

         Before the Court are cross motions for summary judgment by Plaintiffs, Urban 8 Fox Lake Corporation and Urban 8 Zion Corporation ("Urban 8"), and Defendants, Nationwide Affordable Housing Fund 4, LLC ("Nationwide") and SCDC, LLC ("SCDC"). [55; 66] For the reasons set forth below, the Court grants Plaintiffs' motion for partial summary judgment [55] and denies Defendants' motion for partial summary judgment [66].

Page 997

          BACKGROUND

         1. The LIHTC Program

         Because these limited partnerships were formed for the purpose of participating in the Low Income Housing Tax Credit ("LIHTC") program, we begin by describing the program.

         The LIHTC program is a federal subsidy program designed to promote the construction and rehabilitation of affordable rental housing for low and moderate income households. 26 U.S.C. § 42 (2012). The program allocates tax credits to each State based on population; the States then allocate the tax credits to "qualified low-income housing projects." 26 U.S.C. § 42(g), (h)(3). "Qualified low-income housing projects" are residential rental properties that are rent-restricted and have a certain minimum share of rental units set aside for low and moderate income households. Id.

         "The owners of these properties can claim these 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." Homeowner's Rehab, Inc. v. Related Corporate V SLP, L.P., 479 Mass. 741, 99 N.E.3d 744, 749 (Mass. 2018); 26 U.S.C. § 42(a), (c)(2), (f)(1), (i)(1), (j). For LIHTC projects allocated tax credits after 1989, the owner must agree to comply with the affordability restrictions for another fifteen years in addition to the first fifteen-year compliance period, so the affordability restrictions remain in place for a total of thirty years. U.S.C. § 42(h)(6).

         Project developers frequently rely on 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 ... the tax credits are of little value to them." Homeowner's Rehab, 479 Mass. at 744, 99 N.E.3d 744. By syndicating the project, these developers can "sell" the tax credits to private investors—usually corporations with substantial and predictable tax liability —in exchange for an investment of equity 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).

         In a typical LIHTC project, the property is owned by a limited partnership, formed solely for that purpose, in which the general partners hold only a nominal equity interest and the limited partners are private investors who hold almost all of the equity (ninety-nine percent or more). Homeowner's Rehab, 479 Mass. at 744, 99 N.E.3d 744 (citing Khadduri et al., supra at 11, 25). The general partner is responsible for the day-to-day management of the property. Id. "The investor limited partners contribute capital and, in return, are allocated the tax benefits flowing from the project, including the LIHTC tax credits, deductions for depreciation, and other tax losses." Id.

         At the end of the first 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 by selling their interests to the general partner. See Khadduri et al., supra at 29-31.

         2. The Parties' Dispute

         The parties are partners in two limited partnerships created in 2000 to rehabilitate and operate an affordable housing development for elderly low-income residents in accordance with the ...


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