The United States Bankruptcy Appellate Panel for the Sixth Circuit recently upheld the dismissal of a Chapter 11 bankruptcy suit for five related LIHTC partnerships. In re Creekside demonstrates some of the difficulties a LIHTC partnership can face when seeking bankruptcy protection. First, in September 2012 the Bankruptcy Court for the Eastern District of Kentucky determined that “if the LIHTC Properties are sold, all proceeds of a sale belong to the respective Debtor with any benefits of the Remaining Tax Credits flowing through the new entity to the owners of that new entity.” Thus the value of properties and thus the creditor’s secured claims included the value of the remaining LIHTC, which the court determined using a 9% discount rate for the remaining LIHTC. A silver lining in this holding may be further confirmation of the industry’s practice of including tax credits in an investment value appraisal when considering whether a partnership’s debt will be considered bona fide indebtedness for tax purposes. The Eighth Circuit reached a similar conclusion In re: Lewis and Clark Apartments, 479 B.R. 47 (2012).
Second, in affirming the dismissal, the Appellate Panel the found that the LIHTC partnerships failed to present a plan that showed positive cash flow. “The projections also demonstrated that negative cash flow would continue through 2020. In addition, the Appellants admitted that they were claiming slightly over $1,000,000 in tax credits per year against the LIHTC Properties.” The court noted that while the LIHTC investor, Alliant Capital, had agreed to fund an additional funding plan and a cash flow shortfall escrow set forth in the projections, it had not committed to full repayment of the debt if the properties could not be sold for the full amount of the remaining debt or were unable to be refinanced. The Court cited precedent that a debtor who is unable to service its debt at the outset of the case and remains unable to do so for the foreseeable future does not have a reasonable likelihood of rehabilitation and upheld the dismissal.
For more information on In re Creekside or to discuss LIHTC property workouts in general please contact, Brian J. Beck, Esq., 314-726-6868.
In re Creekside Senior Apts., L.P., 57 Bankr. Ct. Dec. 201 (March 25, 2013).