The value of federal low income housing tax credits are included in the value of a project in order to determine whether a secured creditor’s claim is fully secured, held the Bankruptcy Appeals Panel for the 6th Circuit. This is the case even thought the credits have been specially allocated to individual partners of the debtor.

 The tax code allows a tax credit to subsidize affordable housing under the low income housing tax credit (“LIHTC”) set out in Section 42 of the Internal Revenue Code. The LIHTC is allowed over a ten year period. This new case deals with a five separate LIHTC projects in Kentucky. The debtor limited partnerships executed and recorded a land use restriction agreement to comply with the terms of the LIHTC agreement administered by the states’ affordable housing agency. The tax credits were allocated to specific investors who became limited partners in the debtor partnerships.

The debtor partnerships claimed the the value of the projects were not adequate to satisfy the claims of the secured creditor who held the mortgages on the projects, and filed a motion to determine the value of the secured claims per Section 506(a). The secured creditor’s appraisal of the project included the value of the tax credits that still remained because the ten year period for the tax credit pay-out had not yet run. The debtors objected, arguing that the value of the remaining tax credits did not constitute property in which a security interest could be taken. The debtors also argued that because the tax credits had been specially allocated to particular investor/partners, the credits were not property of the debtor. The Bankruptcy Court overruled the objections of the debtors, and the debtors appealed to the Bankruptcy Appeals Panel.

Citing to the provisions of the LIHTC set out in Section 42 of  the Internal Revenue Code, the Bankruptcy Appeals Panel found that the low income housing tax credits run with the land, and so become a property right that can be secured, and consequently, the value of the tax credits should be included in valuing the collateral held by the secured creditor. The Court further held that the allocation of the tax credits to the investor/partners did not act as a sale of the credits, but was merely a financing transaction; therefore, the remaining tax credits were the property of the debtor partnerships, and were not owned by the investor/partners to whom the credit were allocated. As a result, the Court held that the value of the remaining tax credits were properly included in the value of the projects.