Syndicators/investors typically require a repurchase obligation from the sponsor as a condition of making equity investments in LIHTC projects. This is the most potentially costly but least likely guarantee.
So, information pills what does that mean?
Essentially, unhealthy here’s what you need to know: If the developer does not meet major deadlines for completion and lease up of the project, try the developer agrees to buy back the limited partner’s interest. The payment / repurchase is generally the amount of the equity put into the deal by the limited partner (to date) plus some negotiated amount of interest.
The Repurchase Guarantee states that all identified guarantors are required to fully repay the contributed limited partner equity plus some level of interest in case of failure to meet fundamental project requirements, like project completion by PIS deadlines or credit delivery within certain parameters. The idea is that if the project changes so substantively from what the limited partner approved that they need a pre-negotiated exit in this extreme situation.
It is important to note that although the limited partner may have only contributed 10-20% of total equity at the time of a recapture, the event of recapture would also be a default under the equity bridge loan, so would likely require repayment of that loan, too.
This obligation is very rarely called upon. Here are a couple of examples (not LGG deals!) where the syndicator called this guarantee:
Theoretical example 1: Developer A completes a project in a rapidly growing area. Upon completion, none of the rental applicants are below the required AMI areas. The rapid growth in the community raised wages to a level that not enough of the community residents qualified as low income. The developer and syndicator worked through a repurchase where the project converted to a market rate deal at much higher rents, was able to take on higher debt and repaid its equity and bridge loan accordingly.
Theoretical example 2: During construction, the soil is discovered to be of much lower quality than anticipated so costs skyrocket. After contingency is exhausted, Developer B does not pay for overruns, so construction stops. The project is delayed beyond the Placement In Service (PIS) deadlines (two years after the date of the carryover letter) mandated by the IRS. Thus, the project loses its LIHTC allocation. The syndicator requires the Developer to purchase its interest in the failed project.
It’s important to note that even non-profits and their assets are subject to a repurchase obligation.
Avoiding Repurchase Obligation for LIHTC projects
The key to avoiding a situation in which a repurchase is necessary is to limit any factors that could trigger the obligation—namely construction expertise and oversight and quality market research / execution. Most situations are curable, so be work with your LIHTC advisors to avoid these situations. Or when the unanticipated occurs, connect with all of your team members to find creative solutions.
Are You Prepared?
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