The Year 15 Pivot: What Hawaii Owners Need to Know When Tax Credits Expire

In the affordable housing world, Year 15 is the end of the beginning.

The initial tax credits have been claimed. Your Limited Partner (the investor) is looking at their “Exit Tax” liability and wants to dissolve the partnership. And let’s be honest—your building, sitting in the corrosive Hawaiian salt air for 15 years, probably needs a new roof.

Many owners assume they can simply sell the property or convert it to market-rate condos. In Hawaii, that is rarely the case.

If you developed your property after 2000, you likely signed a 61-Year LURA (Land Use Restriction Agreement) to win your tax credits. That means you have 46 more years of rent caps.

So, how do you unlock value from an asset that can’t raise rents? You don’t sell it. You pivot.

Here is the “Insider’s Guide” to the three paths forward for Hawaii owners.

Path 1: Resyndication (The “Double Dip”)

The Smart Play for Long-Term Owners.

Since you can’t raise rents to fund renovations, the only way to generate new equity is to generate new tax credits. This is called “Resyndication,” and it is the most common Year 15 strategy in Hawaii.

How the Mechanics Work:

1. The Transfer: You (the GP) form a new partnership and “buy” the building from the old partnership. This sale allows you to claim “Acquisition Credits” (based on the building’s value) AND “Rehab Credits” (based on the construction budget).
2. The Capital Stack: This transaction typically triggers a new allocation of 4% LIHTC Credits paired with HMMF Bonds (Hula Mae Multi-Family). Unlike the 9% competitive credits, 4% credits are generally non-competitive as long as HHFDC has bond cap available.
3. The Payoff: You generate a fresh Developer Fee (often $2M+), and the building gets a massive renovation budget to fix that spalling concrete, replace salt-corroded windows, and upgrade elevators.

The “140% Rule” Trap: This is where most owners fail. During resyndication, the IRS requires you to treat the property as a “new” placement in service.

• The Test: You must re-certify every tenant. If a tenant’s income has risen above 140% of the current limit, they are still considered “qualified”—but only if the unit was originally rent-restricted.
• The Risk: If your files from 2012 are missing or messy, you cannot prove the unit’s history. That unit becomes “Market Rate” in the eyes of the IRS, slashing your eligible basis and killing your tax credit equity. HAPI conducts a Compliance Audit Sweep in Year 14 to catch this.

Path 2: The “Qualified Contract” (The Hail Mary)

The Only Way to Break the LURA.

If you really want to sell to a market-rate buyer (or convert to condos), you have to request a Qualified Contract (QC) from HHFDC. This is essentially a challenge to the state: “Find me a buyer who will keep this affordable, or let me go.”

The “Formula Price” Reality: You cannot sell for whatever you want. You must offer the building at a statutory “Formula Price,” which is roughly:

• Outstanding Debt + Adjusted Investor Equity – Cash Distributions.
• Note: In Hawaii, this price is often lower than the fair market value of the land, making it unattractive for sellers unless the goal is purely to exit the program.

The Outcome:

• Scenario A: HHFDC finds a non-profit buyer at the Formula Price. You must sell.
• Scenario B: HHFDC cannot find a buyer within 1 year. The Decontrol Period Begins. The LURA is dissolved. You can now convert to market rates, but you must allow existing tenants to stay for 3 years at their current rent (the “Three Year Decontrol Period”).

The Hawaii Trap: Check your original regulatory agreement. Most modern Hawaii LURAs (post-2000) include a clause that says “Owner waives the right to a Qualified Contract.” If that sentence is in your deed, this path is legally closed to you.

Path 3: The Non-Profit ROFR (The Battleground)

The “Right of First Refusal” under Siege

If you are a Non-Profit General Partner, you likely negotiated a Right of First Refusal (ROFR) in the original partnership agreement. This allows you to buy the building for a bargain price: usually just the outstanding debt plus any “Exit Taxes.”

The Aggregator Threat: In the past, investors were happy to exit for zero dollars just to avoid the tax liability. Today, aggressive national investment firms (“Aggregators”) are buying up Limited Partner interests specifically to block these ROFRs.

• The Tactic: They sue the Non-Profit, arguing that a ROFR can only be triggered by a “Bona Fide Third-Party Offer.” They claim your attempt to buy the building is “Self-Dealing” and demand you sell the building on the open market (where they get a share of the profit).
• The Defense: This is currently being fought in courts across the US. Your best defense is a perfect compliance record. If the Aggregator tries to claim “Material Non-Compliance” to remove you as the General Partner, our “Superior” audit scores act as your legal shield.

The “Exit Tax” Surprise

Why your investor might owe the IRS money.

When the Limited Partner exits, they often have a negative capital account. The IRS treats this “phantom gain” as taxable income.

• The Problem: The investor will demand cash from you to pay their tax bill.
• The Fix: You need to model this “Exit Tax” liability in Year 13. HAPI works with your accountants to structure the exit so the building’s cash flow covers this hit, rather than your own pocket.

The “Year 15” Checklist: When to Act

Don’t wake up in Year 15 and panic. Start in Year 13.

•  Year 13: Order a Capital Needs Assessment (CNA). How much will the renovation actually cost?
•  Year 14 (Month 1): Forensic File Audit. We audit 100% of files to identify “Over-Income” risks.
•  Year 14 (Month 6): Exit Tax Analysis. Calculate the LP’s tax liability to negotiate the buyout price.
•  Year 15: Close the Deal. The LP exits, the new financing closes, and the renovation begins.