Right of First Refusal Under IRC Section 42(i)(7)

Institute for Professional and Executive Development, Inc.Boston, Massachusetts

October 11-12, 2007

James F. Duffy

jduffy@nixonpeabody.com, 617-345-1129

Right of First Refusal Under IRC Section 42(i)(7)

• Added to Section 42 in 1990

• Provides that no Federal income tax benefit will fail to be allowable merely by reason of:

– A Right of First Refusal to purchase the property after the close of the Compliance Period

– Held by Certain Eligible Holders

– For a specified Minimum Purchase Price

Eligible Holders of a Right of First Refusal Under IRC Section 42(i)(7)

• Tenants of the project (in cooperative form or otherwise)

• Resident management corporation of such building

• Qualified nonprofit organization (as defined in Section 42(h)(5)(C), the test for the nonprofit set-aside)

• Government agency

Minimum ROFR Purchase Price

The Minimum Purchase Price equals the sum of:

(1) the principal amount of the outstanding indebtedness secured by the buildings (other than indebtedness incurred during previous 5 years), plus

(2) all Federal, state and local taxes attributable to such sale

Considerations When There’s a Right of First Refusal

• The statutory purchase price is a minimum price. It doesn’t include accrued but unpaid amounts due to limited partners, such as Fees, Loans and Tax credit adjusters

• This is not an option

• Look to the sales proceeds waterfall in the partnership agreement to see how the proceeds are distributed

• The parties don’t have to use the ROFR in Year 1510750975.2