Recent Court Decision Confirms that a Right of First Refusal is Not an Option to Purchase

A recent New York court case has affirmed that a non-profit’s Right of First Refusal (“ROFR”) is not an option to purchase a Low-Income Housing Tax Credit (LIHTC) property.

The Case

Riseboro Community Partnership, Inc., formerly known as Ridgewood Bushwick Senior Citizens Council, Inc., v. SunAmerica Housing Fund (SHF) 682, a Nevada Limited Partnership; SLP Housing I LLC; and 420 Stockholm Street Associates, LP

Introduction to the Case

  1. The case is a basic disagreement over the meaning of a “right of first refusal” (“ROFR”) held by the Plaintiff to purchase an affordable housing property in Brooklyn, NY. The property was developed under the LIHTC program.
  2. The court limited all parties’ initial briefing to the issue of the meaning of the ROFR granted to Plaintiff.
  3. The court held that the Plaintiff’s ROFR operates by its definition under New York common law and is not an option to purchase the subject property.


  1. The defendant (420 Stockholm Street Associates, LP) is a limited partnership formed under the laws of the State of New York in 1998.
  2. Riseboro, a non-profit entity, is not part of the partnership, but the agreement governing the Partnership grants Riseboro the ROFR central to the dispute.
  3. The LIHTC program makes clear, in the provision central to this dispute, that a taxpayer will not be deprived of its tax benefits merely by a non-profit entity holding a “right of 1st refusal” to purchase an affordable housing property. The exact wording in §42 (i)(7) is:
    1. No federal income tax benefit shall fail to be allowable to the taxpayer with respect to any qualified low-income building merely by reason of a right of 1st refusal held by … a qualified nonprofit organization…to purchase the property after the close of the compliance period for a price which is not less than … an amount equal to the sum of –
      1. The principal amount of outstanding indebtedness secured by the building … and
      1. All Federal, State, and local taxes attributable to such sale.
  4. The minimum purchase price arrived at using the formula stated above will very likely be less than market value.
  5. Section 42(i)(7) recognizes the possibility – and, it is only a possibility – that were a nonprofit entity to hold a ROFR to purchase an affordable housing property at below-market value, the IRS could deem the non-profit entity the “true owner” of the property under the so-called “economic substance doctrine.” If the IRS were to conclude that the non-profit ROFR-holder was the “true owner” of the property, it could limit, disallow, or redirect the flow of LIHTC Program tax credits.
  6. If the flow of tax credits were to dry up, this would remove the incentive to for-profit entities investing in affordable housing. Section 42 (i)(7) protects against this result.
  7. At the core of the dispute is a section of the 1999 Partnership Agreement, which states: ”Right of First Refusal. On and after the end of the 15 year Compliance Period, [Riseboro] or its designee, if it is at that time a qualified nonprofit corporation, shall have a right of first refusal to purchase the Apartment Complex for the price equal to the sum of:
    1. The principal amount of outstanding indebtedness secured by the building (other than indebtedness incurred within the 5 years ending on the date of the sale;
    1. All Federal, State, and local taxes attributable to such sale and to any amounts paid pursuant to subsection (iii) hereof; and
    1. Any amounts of a Tax Credit shortfall which have not been paid.
  8. The 1999 Agreement states that it “shall be construed and enforced in accordance with the law of the State [of New York].

The Litigation

  1. In November 2015, after the Compliance Period expired, Riseboro notified the General Partner that it would soon exercise the ROFR.
  2. In response, the Partners asserted that because investor consent was required for the Partnership to sell the Apartment Complex and the Partnership was not interested in selling, Riseboro could not exercise its ROFR.
  3. Three years later, in February 2018, Stockholm sought to transfer ownership of the complex to Riseboro, its corporate parent, under the partnership agreement but met with the same result: counsel for SHF and SLP indicated that their clients did not consent to sell the property. – The litigation followed.


  1. Riseboro asked the court to hold that there were no conditions precedent to it exercising its ROFR, and that it may exercise its ROFR at any time after the Compliance Period has ended. In other words, Riseboro contended that its ROFR is, in fact, an option to purchase.
  2. The defendants countered that Riseboro may exercise its ROFR only after two conditions are satisfied: (1) the Partnership must be willing to sell; and (2)a third party must have made a bonafide offer to buy.
  3. The language in the partnership agreement was “unambiguous,” and the language of a contract is not made ambiguous simply because the parties urge different interpretations.
  4. Under New York law, contracts are “construed in accord with the parties’ intent,” and “the best evidence of what the parties to a written agreement intend is what they say in their writing,” which here is the 1999 Partnership Agreement.

New York Law

  1. “Right of first refusal” is a legal term of art with a well-established definition in New York. A ROFR “requires an owner, when and if he decides to sell, to offer the property first to the party holding the preemptive right so that he may meet a third-party offer or but the property at some other price set by a previously stipulated method.”
  2. A “ROFR does not give its holder the power to compel an unwilling owner to sell.” Rather, a ROFR restricts “the power of one party to sell without first making an offer of purchase to the other party upon the happening of a contingency: the owner’s decision to sell to a third party.”
  3. A ROFR thus “binds the party who desires to sell not to sell without first giving the other party the opportunity to purchase the property at a specified price.”
  4. A ROFR stands in contrast to an “option” to purchase, which may be triggered unilaterally, even against the owner’s unwillingness to sell at the time the option-holder invokes the option.
  5. The court was not persuaded by the Riseboro argument that they had a unilateral right – or “option” – to purchase the property regardless of the owner’s willingness to sell or the availability of a good-faith third party purchaser.

The Context of §42 and Other Terms in the 1999 Agreement

  1. “Right of first refusal” is a common-law term, and Congress is “presumed unless the statute otherwise dictates” to have incorporated its common-law meaning.
  2. The court stated – “It is a settled principle of interpretation that absent other indication, Congress intends to incorporate the well-settled meaning of the common-law terms it uses.”
  3. The presumption that Congress incorporated the common law meaning of ROFR is confirmed by the legislative history of §42(i)(7). Where this section refers to “right of first refusal,” a pre-enactment draft of the bill originally used the term “option.” The House Report on the law makes clear that when Congress made this change, it grasped the difference between “option” and “right of first refusal,” stating:
    1. The bill provides that any determination as to whether Federal income tax benefits are allowable to a taxpayer for a qualified low-income building shall be made without regard to whether the tenants are given the right of first refusal … to purchase the building, for a minimum purchase price, should the owner decide to sell (at the end of the compliance period).
  4. H.R. Rep. No. 101-247 supports the conclusion that Congress “understood that a right of first refusal – in contrast to an option to purchase – could not be exercised unilaterally by the holder.” This change and the explanation given in the House Report is a clear indication, not “shoddy evidence” as Riseboro suggested, that §42(i)(7) refers to common law ROFR.
  5. Riseboro also took the position that no third party in their right mind would go through the process of making an offer to purchase knowing that an entity with a ROFR purchase price set below fair market value will very likely exercise its superior purchase right.
  6. The court agreed that Riseboro may be right that a third party offer is unlikely, but the conclusion that this leads to a senseless statute or contract provision is wrong. Regardless of whether a third party offer materializes, the fact that Riseboro holds a ROFR secures its right to purchase the property at the stated price. The partnership need not wait for a third party offer before it offers the property to Riseboro at the stipulated price.
  7. In the event the Partnership attempts a sale to a third-party without first offering the property to Riseboro, the ROFR provides a contractual basis for Riseboro to defeat such a sale.


The partners granted Riseboro a right of first refusal, not an option. This case is another strong indicator that unless a partnership attempts to sell a LIHTC property to a third party purchaser, a non-profit with a ROFR has no right to invoke the ROFR and force a sale.