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...