Valuing Collateral: Do Low-Income Housing Tax Credits Count?

In re Creekside Senior Apartments, LP, 477 B.R. 40 (6th Cir. B.A.P. 2012)

In valuing a bank claim secured by a low-income housing project for purposes of a plan of reorganization, should the remaining federal low‑income housing tax credits allocated to the project be taken into consideration?  In Creekside the bankruptcy court said yes, and the bankruptcy appellate panel agreed.

Five single‑asset real estate debtors owned low‑income housing projects that were subject to mortgages securing loans made by a bank.  Each project had been allocated federal low‑income housing tax credits (LIHTC) and in exchange was subject to rent restrictions.  As is typically the case, a limited partnership debtor was awarded the tax credits, and then under its partnership agreement 99.98% of the tax credits were allocated to an investor limited partner, which in turn “syndicated the investment and tax credits opportunity to a pool of investors.”  At the time of the bankruptcy there were 4 to 5 years of tax credits remaining and 24 to 25 years remaining on the rent restrictions.

The debtors moved for valuation of the bank’s secured claims for purposes of determining treatment under a plan of reorganization.  Under Section 506(a) of the Bankruptcy Code (emphasis added):

An allowed claim of a creditor secured by a lien on property in which the estate has an interest,… is a secured claim to the extent of the value of such creditor’s interest in the estate’s interest in such property,… and is an unsecured claim to the extent that the value of such creditor’s interest… is less than the amount of such claim.  Such value shall be determined in light of the purpose of the valuation and of the proposed disposition or use of such property… .

Since the debtors proposed to retain the projects under a plan of reorganization, value was determined based on “the price a willing buyer in the debtor’s trade, business, or situation would pay to obtain like property from a willing seller.”

The bank’s appraiser valued the real estate using an income capitalization approach, and separately valued the remaining tax credits as an additional component of the total value.  The debtors’ appraiser also used an income capitalization approach, but did not ascribe any value to the tax credits.

The debtors objected to consideration of the tax credits arguing:

  • Tax credits are not property in which a security interest can be taken, and thus were not part of the bank’s collateral for its secured claims.
  • The tax credits were held by the debtors’ limited partners not the debtors, so the credits were not part of the debtors’ estates.
  • The bank’s loan documents did not create a security interest in the tax credits.

Both the bankruptcy court and the bankruptcy appellate panel rejected the debtors’ position that the tax credits should not be considered:

  • Tax credits run with the land and cannot be separated from the real estate.  If a LIHTC project is sold, the purchaser is entitled to the credits for the period after the acquisition in the amount that would have been allowable to the selling owner.
  • The tax credits are not a separate property right, nor was the bank asserting a lien on the tax credits.  Rather tax credits are an attribute of real estate that affects the value to a buyer. In other words, a buyer will be willing to pay more because it receives the benefit of the remaining tax credits post-closing.
  • It is inappropriate to reduce value based on the rent restrictions (i.e. due to the impact on the projected income stream resulting in a lower value under the income capitalization approach), while failing to include the benefit of the tax credits.

Consequently, the bankruptcy appellate panel upheld the bankruptcy court’s determination of values, which included value attributable to the tax credits.

Ultimately the bankruptcy court adopted the tax credit values proposed by the bank’s appraiser, but used its own modified values for the portion derived from the income capitalization approach.  Recognize that considering the tax credits had a significant effect:  For the five properties, the value attributable to the tax credits ranged from approximately 33% to 63% of the total value.

Vicki R. Harding, Esq.

About BankruptcyRealEstateInsights

Vicki R. Harding was a partner in the Detroit office of Pepper Hamilton LLP who moved to Arizona seeking warmer weather. Ms. Harding continues to handle commercial transactions with an emphasis on real estate and bankruptcy issues (but no longer owns a snow shovel).
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