LIHTC Year 15: exits, ROFR, qualified contracts and recapitalization

Fifteen years after the first credit year, a LIHTC partnership reaches a turning point. The investor has taken all its credits (the 10-year credit period ended five years earlier) and its recapture exposure ends. The general partner, often the original developer, usually wants to keep the property. What happens next depends on three sets of documents: the recorded extended use agreement, the partnership agreement, and any right of first refusal or purchase option granted at closing.

The timeline

Period	Starts	Length	Code
Credit period	Placed-in-service year, or the next year at the owner’s election	10 taxable years	42(f)(1)
Compliance period	First year of the credit period	15 taxable years	42(i)(1)
Extended use period	First day of the compliance period the building is in a qualified project	Ends at the later of the agency’s date or 15 years after the compliance period	42(h)(6)(D)
Qualified contract window	Owner’s written request after year 14	1 year for the agency to present a buyer	42(h)(6)(I)
Tenant protection after early termination	End of extended use	3 years	42(h)(6)(E)(ii)

How the investor gets out

Most LIHTC investors don’t expect cash at exit; they priced their equity on credits and losses. Common exits:

1. GP buyout of the investor’s interest. The partnership agreement often gives the general partner an option to buy the limited partner’s interest at a formula price, frequently fair market value of the interest or a nominal amount plus the investor’s exit taxes.
2. Exercise of a right of first refusal by a nonprofit or government entity, at the 42(i)(7) minimum price.
3. Sale of the property to a third party, subject to the extended use agreement.
4. Resyndication into a new partnership with new credits.

The investor’s exit taxes matter. After 15 years of depreciation losses, the investor usually has a negative capital account, and a sale or transfer of its interest triggers taxable gain even if no cash changes hands. Exit pricing often starts from covering that tax.

The right of first refusal

IRC 42(i)(7) says a building’s tax benefits aren’t lost just because tenants, a resident management corporation, a qualified nonprofit or a government agency holds a right of first refusal to buy the property after the compliance period at a price not less than the minimum purchase price:

• the principal amount of outstanding indebtedness secured by the building, other than debt incurred within the 5-year period ending on the date of the sale, plus
• all federal, state and local taxes attributable to the sale.

That price can be far below market value, which is why ROFRs have been litigated. Disputes have turned on whether a “bona fide offer” from a third party is needed to trigger the right and whether the ROFR covers the property or only the partnership interests. Courts have split depending on the agreement’s wording. The Affordable Housing Credit Improvement Act would clarify the ROFR, but as of October 30, 2026 it is pending in Congress, not law (S. 1515). Today the agreement’s text decides; read it before Year 14.

The qualified contract

After the 14th year of the compliance period, the owner may submit a written request asking the agency to find a buyer for the low-income portion of the building. If the agency can’t present a qualified contract within one year, the extended use period ends (42(h)(6)(E)(i)(II), (I)), but existing low-income tenants can’t be evicted without good cause or have their rents raised above the section 42 limits for 3 more years.

The qualified contract price for the low-income portion is at least the applicable fraction times (42(h)(6)(F)):

• outstanding indebtedness secured by or with respect to the building,
• plus adjusted investor equity: cash investors invested, increased by a cost-of-living factor, counting only amounts they were obligated to invest at the start of the credit period and that are reflected in basis, with any yearly increase above 5% counted only up to 5% (42(h)(6)(G)(ii)),
• plus other capital contributions not already counted,
• minus cash distributions from, or available for distribution from, the project.

The market-rate portion is added at fair market value. Treasury’s rules are at 26 CFR 1.42-18.

Worked example

Assumptions only. Applicable fraction 100%. Outstanding mortgage $9,000,000. Investors paid $12,000,000 in capital that was committed at the start of the credit period; the cumulative cost-of-living adjustment over the period is assumed at 40%, so adjusted investor equity is $16,800,000. Other capital contributions $500,000. Cash distributed or available for distribution over the life of the deal $1,200,000.

	Amount
Debt	$9,000,000
Adjusted investor equity (12,000,000 x 1.40)	$16,800,000
Other contributions	$500,000
Less distributions	($1,200,000)
QC price (x 100%)	$25,100,000

Compare with the ROFR minimum on the same deal: about $9,000,000 of debt (assuming none was incurred in the last 5 years) plus exit taxes. And compare with appraised value at restricted rents, which in many markets is below the QC price. That gap is why the QC process often produces no buyer and why many states now require owners to waive it. The qualified contract calculator runs the formula with your numbers.

State limits on the QC option

Many QAPs score or require a waiver of the right to request a qualified contract, and many require extended use periods longer than 30 years. Some agencies set their own QC procedures, including market studies and listing periods. Look up your state on the state pages. Repeal of the QC option for new allocations is part of the pending AHCIA, not law as of October 30, 2026.

Recapitalization with new credits

A resyndication sells the property to a new partnership that claims new credits on acquisition and rehabilitation, usually as a 4% bond deal. The checklist:

Requirement	Rule
Acquisition credit, 10-year rule	Building not placed in service in the 10 years before acquisition, or exempt as a federally or state-assisted building (42(d)(2)(B)(ii), 42(d)(6))
Rehab minimum	Greater of 20% of adjusted basis or $8,700 per low-income unit for 2026, within a 24-month period (42(e)(3); Rev. Proc. 2025-32)
Bond test	50%, or 25% with a post-2025 issue financing at least 5% of aggregate basis (guide)
Seller financing	A seller note for the price above what new debt and equity can pay, structured as real debt (gap financing)
Prior extended use	The old extended use agreement stays recorded and the new one is layered on

The proceeds pay off the old debt, fund the investor’s exit and seller note, and finance rehab. The capital stack builder and credit estimator model both sides of the sale.

What to start doing in Year 12

1. Pull the partnership agreement, ROFR or option, and extended use agreement, and note every notice deadline.
2. Get a restricted-rent appraisal and a physical needs assessment.
3. Ask the investor for its capital account and exit tax estimate.
4. Run the QC price, the ROFR price and market value side by side.
5. Price a resyndication against a straight refinance.

The Janover Capital desk can price the refinance or the new bond and permanent debt for a resyndication.