In re Creekside Senior Apartments, LP, 2012 Fed App. 0008P (6th Cir. B.A.P. June 29, 2012)
In a case of first impression, the Sixth Circuit BAP held that, for purposes of valuing collateral under section 506(a) of the Bankruptcy Code, the availability of Low-Income Housing Tax Credits must be considered in valuing a creditor’s secured claim.
Five affiliated limited partnerships each purchased a low-income housing development, borrowing money from the bank, and securing the loans with the housing development as collateral. Each project was developed pursuant to the federal Low-Income Housing Tax Credit (LIHTC) Program, and was subject to rent and land use restrictions in connection therewith. Each borrower syndicated the LIHTCs to its respective investor limited partners. Each borrower filed chapter 11 bankruptcy petitions. In each case, the bank filed a proof of claim, asserting fully secured claims. The bank’s valuation of the collateral took into consideration the valuation of the LIHTCs.
The debtors objected to the bank’s valuations, arguing that the LIHTCs should not be included because (i) the credits were not property in which a security interest could be taken, (ii) the credits were not part of the debtors’ estates because they had been transferred to the limited partners, and (iii) the specific language of the bank’s security interest did not cover the tax credits, so the credits could not be considered collateral for purposes of valuation.
In contrast, the bank argued that the tax credits must be considered in the fair market value of the properties because, under the relevant provisions of the Internal Revenue Code, ownership of the credits was tied to ownership of the properties, and the tax credits would factor into any willing buyer’s calculation of a fair purchase price.
The bankruptcy court agreed with the bank, and the debtors appealed.
The court reviewed the Internal Revenue Code requirements regarding LIHTCs, and found that ownership of the credits and the subject property must reside in the same hands. In this case, the investor limited partners had no ownership in the LIHTCs. Instead, they were merely entitled to the tax benefits of the credits under the terms of their partnership agreements.
The court also assessed that a willing buyer would take into account the benefit of the tax credits, as well as the drawback of the restricted income arising from the rent restrictions, in arriving at a fair price for the properties. In rejecting the valuation of the properties proposed by the debtors, the court found that it would be "incongruous" to consider the income restrictions, but not the tax credit benefits. Because there could be no benefit (of the tax credits) without the burden (of the rent restrictions), the LIHTCs could not be separated from the debtors’ properties, and therefore, the bank’s claims appropriately valued the real estate in light of the LIHTCs.
This decision confirms that low-income housing tax credits are not separable from the property to which they are attached. Furthermore, for purposes of section 506 valuation, it confirms that a secured creditor is entitled to value the property on an income approach, with appropriate consideration of those factors that might affect the fair market value of the property.