Bankruptcy Court Upholds Tax Credits in Appraisal of Apartment Buildings —Appraisal Institute

Five Limited Partnerships Owned Real Estate Complexes Built in Accordance with Federal Low Income Housing Guidelines 

The Appraisal Institute Newsletter notes that Bankruptcy cases assigning value to apartment buildings owned by debtors are required to include the value of remaining low-income housing tax credits.  The news was originally reported by Bloomberg BNA on July 3.

A valuation order setting market price of debtors’ low-income housing properties must consider tax credits that are covenants running with the real properties. The fair market value of apartment buildings in a bankruptcy case must include the value of the remaining federal low-income housing tax credits, the Bankruptcy Appellate Panel of the Sixth Circuit ruled June 29:

Judge Arthur Harris said that the ultimate issue the bankruptcy court had to decide was the value of the secured portion of claims of Bank of America, and a primary piece of the determination was whether the value of the remaining tax credits would impact the price offered by a hypothetical willing buyer of the property that serves as collateral for the bank’s claims, Bloomberg BNA reported. The judge added that, as a result, the issue of whether the tax credits had any value was relevant. 

The debtors in question are five limited partnerships that own real estate complexes. Each complex was built in accordance with federal low-income housing tax credit programs tied to Internal Revenue Code Section 42. 

According to Bloomberg BNA, the debtors filed for bankruptcy in September and October 2010. The debtors and their general partners filed in March 2011 to ascertain the value of the bank’s secured claims related to the Bankruptcy Code. 

In August 2011, the bankruptcy court ruled that the evidence of the remaining tax credits was relevant to the issue of valuation. In a valuation order, the court considered the appraisals of both the bank and debtors and determined the values. 

Harris noted that the debtors owned the tax credits, and the credits are “covenants running with the real properties,” Bloomberg BNA reported. He said this was the case even though the debtors allocated the credits to individual partners. 

According to Bloomberg BNA, Harris stated that a determination of the debtors’ interest in the properties is required to include consideration of the value of the credit based on the fact that a willing purchaser would most likely consider the availability of the Section 42 tax credits when determining the fair cash value of the property. 

Harris’ ruling stated that “The bankruptcy court in this case was correct in concluding that the value of the remaining tax credits is properly included in determining the value of the bank’s secured claim,” Bloomberg BNA reported. Robert Gordon of Clark Hill PLC of Birmingham, Mich., argued for the appellants. Daniel Hitchcock of Wyatt, Tarrant & Combs LLP of Lexington, Ky., argued for the appellee. 

The case is , In re Creekside Senior Apartments LP, B.A.P. 6^th Cir; No. 11-8072, 6/29/12.

Tax Credits are  “Covenants Running With the Real Properties,” Rules Judge Harris