Judge Rules Against Affordable Housing Investor In LIHTC Dispute With Big Ramifications
A Massachusetts-based real estate firm invested about $400K into a Miami-area affordable housing project in 2014 and was gunning for a multimillion-dollar payout on the exit last year, but its nonprofit partner foiled the plan.
An affiliate of HallKeen Management had lined up a deal to sell the project, called Aswan Village, for $21M, and split profits with its nonprofit partner, the Opa-Locka Community Development Corp. Instead, a court ruled the nonprofit can buy the property by assuming its debt and paying the cost of taxes owed: $110K.
Willie Logan, the founder, president and CEO of the OLCDC, claimed a victory in the 11th Judicial Circuit in Miami-Dade County. He warned of investors taking stakes in affordable housing projects and cashing out when the property appreciates, leaving nonprofit partners with crumbs from the deals or tied up in expensive litigation. More importantly, he said, such profit-motivated investors are exacerbating the challenge of providing affordable housing to low-income people.
“Their tactics are unethical, immoral and should be criminal,” said Logan, who served as mayor of Opa-Locka in the early 1980s. “It’s outrageous. It really is.”
Opa-Locka in Miami-Dade County is in such a perpetual financial and governmental mess due to fraud and mismanagement that authorities for years have flirted with dissolving the city. However, as land prices grow ever higher in geographically constrained South Florida, investors have seen value in Opa-Locka. Amazon in 2019 opened an 855K SF warehouse there. In November, a joint venture of BentallGreenOak and Bridge Development Partners paid $126M for another industrial Opa-Locka property.
Between these forces are Opa-Locka’s residents, whose median income is $17,908. For them, affordable housing has long been a crisis issue. Aswan Village is an apartment community at 2888 NW 132 St. that was first developed in the 1970s or '80s, Logan said. It was torn down and redeveloped in 2003 with 216 units across 14 buildings, with the Bank of America Housing Fund having the majority stake in the project and using the federal Low Income Housing Tax Credit program to get dollar-for-dollar tax credits in exchange for its investment.
In LIHTC deals, the developer usually reaps its tax credits over a 10-year period, but it must agree to keep rental units affordable for 15 years. Program rules incentivize a nonprofit partner to be in the deal — in this case, that nonprofit was the OLCDC.
Winthrop & Weinstine shareholder David Davenport, OLCDC's attorney in the case, specializes in the growing number of "Year 15" disputes around exits in these sorts of deals. He wrote in a blog post that the circuit court ruling has "broad implications for the LIHTC program" and that "aggregators" like HallKeen are part of a "troubling trend threatening the viability and accessibility of affordable housing in communities that desperately need it across the United States."
In a phone call, Davenport said it isn't always nonprofits that are put in bad positions when aggregator investors come in; for-profit developers can also get squeezed. Well-capitalized aggregators can either go through a regulatory process that throws off the affordability restrictions or wait until such restrictions expire to raise rents or sell the properties. Either way, that reduces the availability of affordable housing stock.
"The scope and scale is nationwide, and it's affecting hundreds of projects on a yearly basis," Davenport said. "I'm not the only person representing the good guys in these fights."
The attorney for the defendants, Mark Solov, told Bisnow, "We have the utmost respect for the judge but believe he is mistaken about the law and mistaken about the consequences on affordable housing in the future if the decision he has made is not overturned."
Asked if that meant he would appeal Circuit Court Judge William Thomas' ruling, he declined to comment further.
In 2014, after the tax benefit had been claimed, but before the 15-year compliance period was up, Bank of America sought to exit Aswan Village. A Boston-based firm, HallKeen (which owns 8,830 apartments and 12 assisted living communities throughout the East Coast, it says on its website) bought out Bank of America’s interest in Aswan Development Associates, the entity that owned the apartment property, for between $250K and $400K, according to a deposition by a HallKeen President and CEO Andrew Burnes.
Following this restructuring, HallKeen’s entity, HK Aswan, owned 51%, which entitled it to that percentage of the property's cash flow, and the OLCDC owned 49%. Additionally, HallKeen Management was hired as the property manager.
Under the LIHTC, at the end of the compliance period, the nonprofit partner can have the right of first refusal to purchase the project for a price equal to outstanding debt plus associated exit taxes — called "debt plus taxes" — which is usually lower than market value. In its agreements with both Bank of America and HallKeen, OLCDC secured this right of first refusal, Logan said.
According to emails filed as exhibits in court, Hallkeen board member Denison Hall, after reading a 2018 Bloomberg article (perhaps this one) about drinking water problems in Miami, emailed his colleagues at HallKeen: “Not to be an alarmist, but the attached would suggest to me that we sell our Miami area properties ASAP.”
HallKeen's Burnes replied that it was “pretty grim.”
In January 2019, HallKeen enlisted brokers to explore property values and recruit potential buyers to take over its interests in three Florida LIHTC projects: Aswan Village; Palm City, another Miami-area project in which OLCDC was a partner; and another project in Clearwater with a different nonprofit partner.
In April 2019, a potential buyer, Lincoln Avenue Capital, drafted a letter of intent to purchase Aswan Village for about $21M in a deal structure that would have let both HallKeen and OLCDC get cash payouts of about $5M and potentially still retain small minority positions in the project. HallKeen CEO Mark Hess signed the LOI, then turned to OLCDC to ask for its approval, which was needed to move forward.
But OLCDC exercised its right of first refusal and moved to buy the property itself for debt plus taxes. According to court filings, HallKeen initially thought there had been a misunderstanding — the nonprofit had initially been cooperative and had at one point signed an agreement saying that if it did exercise its right of first refusal, it would buy out HallKeen for market value. Logan explained to Bisnow that clause would only be triggered if OLCDC forced the sale, not if HallKeen did.
HallKeen blocked the sale to the nonprofit. OLCDC filed a lawsuit last June alleging breach of contract. HK Aswan filed a counterclaim, accusing the OLCDC of unjust enrichment. HK Aswan claimed in court filings that its main reason for having invested was to improve the property and benefit from its increased value.
"But for this potential economic opportunity, HK Aswan would never have purchased its controlling interest in ADA,” it said in the suit.
HK Aswan argued that it had merely been exploring exit options and hadn't finalized a sale. But a judge sided with the nonprofit in a summary judgment ruling on July 7, according to the OLCDC, "finding that all that is necessary under [LIHTC rules] to trigger a LIHTC right of first refusal is for the owner of the development to manifest an intent or willingness to sell the development." A contract or offer from a buyer is not necessary.
Logan said that the judge’s ruling now allows the nonprofit to move ahead and buy the property for $110K, and keep all $11M of the equity in the property (which also carries $7M in debt).
Logan said the OLCDC is in the process of ejecting HallKeen as the property manager at Aswan Village, but is also waiting to see if HallKeen files an appeal. However, he said, because of the deal structure, OLCDC will not enjoy the same right of refusal at the Palm City property. At the Clearwater site, the nonprofit partner ended up with only $200K on HallKeen's exit, he said.
Logan said he sees these investors as taking advantage of low-income communities, and that he found HallKeen to be condescending. HallKeen's website says that "the majority of residents living in our residential apartments are persons of color," and 40% of its employees are minorities. Yet only one of 16 people featured on its leadership page is Black.
“They dangle money. They think we’re not used to handling money,” Logan said.
No one from HallKeen responded to Bisnow's request for comment.
Logan said his nonprofit will not sell Aswan Village nor cash out the equity “as long as I have breath in my body." Ideally, it will stay affordable in perpetuity, he said.
Other groups, like the nonprofit LeadingAge, have also called attention to private firms challenging nonprofits' rights to take over LIHTC projects, thus tying them up in expensive litigation.
"Today's growing threats to nonprofit purchase rights jeopardize the availability of desperately needed affordable housing and weaken nonprofits’ ability to meet community needs as their resources are drained by a small minority of threatening investor partners," LeadingAge Vice President of Housing Policy Linda Couch wrote on the group's website.
Logan said that the case cost his nonprofit about $1M in legal fees, and it plans to go to trial to recoup those costs. (Because of Florida's corporate-friendly laws, if HallKeen had won, the nonprofit would automatically have had to pay its legal fees.) The litigation also caused problems with other aspects of the nonprofit's business — a bank held up a line of credit because of it, Logan said.
Logan called for more education among nonprofit groups about their rights and potential pitfalls under the LIHTC program. Most nonprofits don't have the time, money, know-how or appetite for risk to fight such a case, which could easily cause them to go bankrupt, he said. Logan has all of those things: the former mayor of Opa-Locka, a former state representative, has an MBA and an accounting degree and wrote his Ph.D. thesis on affordable housing.