What actually happens at the end of the compliance period
The fifteen year compliance period ends and recapture risk goes away. The investor's economic interest has largely run out and it wants to exit. The extended use agreement, which runs at least thirty years in total and often longer under state requirements, keeps the affordability restrictions in place. And the building is fifteen years older than it was, usually with a capital need that the original reserve schedule did not fully fund.
So the end of the compliance period is not an exit. It is a recapitalization, and the question is on what terms.
The provisions that decide it
A nonprofit general partner may hold a right of first refusal under Section 42(i)(7), which allows purchase at a formula price tied to debt plus exit taxes rather than at fair market value. How that right is drafted matters enormously, and the drafting has been litigated. Whether it is triggered by a bona fide third party offer or exercisable at the partner's option, what counts in the price, and what notice and timing apply are all negotiable at closing and nearly impossible to change later.
A purchase option, available to for profit and nonprofit partners alike, generally at fair market value subject to the restrictions. The restriction matters: a property under a thirty year use agreement is not worth what an unrestricted building is worth, and the appraisal method specified in the partnership agreement will drive the number.
The qualified contract process, which can end restrictions early in some circumstances, and which many states have restricted or waived as a condition of allocation. Check your state's position.
Exit taxes, which are the item most often missed. The investor's capital account and the allocation of liabilities determine whether an exit triggers tax, and for whom. Model it in year one with your accountant.
The capital need
Fifteen years of a reserve schedule set at closing rarely covers fifteen years of actual capital need, particularly on a property that was built to a cost constrained budget. Resyndication with 4% credits is the usual answer where the rehabilitation scope supports it, and it is a full transaction with a full application calendar.
Start that conversation around year twelve. Get a physical needs assessment, get a current appraisal under restriction, and get the partnership documents in front of counsel while there is still time to negotiate rather than react.
What to do at closing instead
Read the transfer, option and right of first refusal provisions as carefully as you read the construction schedule. Have counsel who has handled a year fifteen transition, not only a closing. Write down the exit tax model and keep it with the partnership agreement.
The sponsors who end up owning their properties at year sixteen are, almost without exception, the ones who negotiated for it at year zero.
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