ARTHUR I. HARRIS, Bankruptcy Judge.
This appeal arises from a bankruptcy court order in which the bankruptcy court
The five Kentucky limited partnership debtors in the five jointly-administered Chapter 11 cases (collectively "Debtors") and their general partners (collectively "General Partners") challenge the bankruptcy court's valuation of the real property. In connection therewith, they also take issue with the bankruptcy court's order overruling (1) the Debtors' objection to the valuation of low-income housing tax credits in the Bank's appraisals ("Valuation Objection") and (2) the Debtors' motion in limine to exclude certain portions of expert reports, affidavit, and testimony of the Bank's expert witness ("Motion In Limine").
For the reasons that follow, we affirm the bankruptcy court's orders setting the market value of the Debtors' low-income housing tax credit properties ("LIHTC properties") and overruling the Debtors' and the General Partners' Valuation Objection and Motion In Limine.
The main issue presented by this appeal is whether the bankruptcy court erred in including the purported value of the remaining low-income housing tax credits when valuing the Bank's secured interest in the Debtors' real properties under § 506(a) of the Bankruptcy Code. The Debtors and their General Partners have also alleged that the bankruptcy court made several errors in weighing the evidence at the valuation hearing and in denying their Motion In Limine to exclude certain portions of the Bank's appraisals.
The Bankruptcy Appellate Panel of the Sixth Circuit has jurisdiction to decide this appeal. The United States District Court for the Eastern District of Kentucky has authorized appeals to the Panel, and no party has timely elected to have this appeal heard by the district court. 28 U.S.C. § 158(b)(6), (c)(1). A final order of the bankruptcy court may be appealed as of right pursuant to 28 U.S.C. § 158(a)(1). For purposes of appeal, a final order "ends the litigation on the merits and leaves nothing for the court to do but execute the judgment." Midland Asphalt Corp. v. United States, 489 U.S. 794, 798, 109 S.Ct. 1494, 1497, 103 L.Ed.2d 879 (1989) (citations omitted).
An order determining the value of property pursuant to 11 U.S.C. § 506(a) is a final order for purposes of appeal if the valuation was made for purposes of plan confirmation. Chase Manhattan Mortg. Corp. v. Rodriguez (In re Rodriguez), 272 B.R. 54, 56 (D.Conn. 2002); see also Gen. Electric Credit Equities, Inc. v. Brice Rd. Devs., L.L.C. (In re Brice Rd. Devs., L.L.C.), 392 B.R. 274, 282 n. 4 (6th Cir. BAP 2008). Because the bankruptcy court made its valuation "for use in connection with the plan, disclosure statement, and confirmation process," the valuation order is a final order. (Order Setting Market Value of Debtors' Low-Income Housing Tax Credit Properties at 1, Bankr.Case No. 10-53019, ECF No. 252.)
A determination of value pursuant to 11 U.S.C. § 506(a) presents a mixed question of law and fact. Fin. Sec. Assurance,
As the trier of fact, a bankruptcy "`court's rulings on evidentiary matters will only be reversed on a clear showing of abuse of discretion.'" Phillips Petroleum Co. v. Stokes Oil Co., Inc., 863 F.2d 1250, 1257 (6th Cir.1988) (citing Apponi v. Sunshine Biscuits, Inc., 809 F.2d 1210, 1218 (6th Cir.1987)). This standard applies to denials of motions in limine, United States v. Poulsen, 655 F.3d 492, 508 (6th Cir. 2011), as well as to determinations regarding the weight particular evidence should be given. United States v. McKneely, 6 F.3d 1447, 1453 (10th Cir.1993).
This appeal arises from an order dated September 12, 2011, setting the market value of Debtors' low-income housing tax credit properties ("Valuation Order"), entered in five jointly-administered Chapter 11 cases in the Eastern District of Kentucky:
The Debtors are five single-asset real estate debtors as defined in 11 U.S.C. § 101(51B). Each of the Debtors is a Kentucky limited partnership with a corresponding general partner, an administrative limited partner, and an investor limited partner. By virtue of the partnership agreements, the General Partners hold.01% of the corresponding limited partnership's equity interests, the administrative limited partners hold .01% of the corresponding limited partnership's equity interests, and the investor limited partners hold the remaining 99.98% of the corresponding limited partnership's equity interests. Each of the Debtors owns a parcel of real property on which it operates a low-incoming housing apartment complex.
To finance the acquisition and construction/rehabilitation of each property, the Debtors obtained construction loan financing from the Bank. Each construction loan automatically converted into permanent financing upon various terms and conditions. Pursuant to the agreements, the Bank loaned the Debtors the following total amounts of money:
Creekside Senior Apartments, LP: $1,390,000.00 Nicholasville Greens, LP: $ 760,234.35 Franklin Place, LP: $ 793,345.29
Pennyrile Senior Apartments, LP: $ 534,242.63 Park Row Senior Apartments, LP: $1,034,222.00
As security for these loans, the Bank took a first mortgage lien upon the Debtors' real properties. All five notes matured prior to the filing of the Debtors' bankruptcy cases.
Each of the Debtors' real property complexes was developed in conjunction with the federal Low-Income Housing Tax Credit Program enacted by Congress in 1986 to encourage private market investment in low-income housing. See 26 U.S.C. § 42. In exchange for agreeing to rent restrictions, the owners or investors in the property get a dollar-for-dollar credit against their federal income tax obligations over a period of 10 years, provided that the property remains in compliance with the low-income housing tax credit program requirements. The Treasury Department administers the program while state agencies distribute the credits on a competitive basis.
In 2008, each of the Debtors entered into a land use restriction agreement ("LURA") with the Kentucky Housing Corporation ("KHC"), the agency tasked with administering the federal low-income housing tax credit program for the Commonwealth of Kentucky. The Debtors, and not their General Partners, administrative limited partners, or investor limited partners, entered into these LURAs as the owners of the properties. The LURAs entered into between the Debtors and the KHC in these cases provide that the restrictions set forth therein are covenants running with the land:
(LURA § 2(b), Bankr.Case No. 10-53019, ECF Nos. 204-4, 204-8, 204-12, 204-16, and 204-20.) The LURAs further provide:
(Id. at § 3(j) and (k).)
Subject to limited exceptions not applicable here, the term of each LURA was for an initial compliance period of 15 years
In accordance with 26 U.S.C. § 42(h)(6), the LURAs entered into between the Debtors and the KHC in this case provide as follows:
(LURAs at 1, Bankr.Case No. 10-53019, ECF Nos. 204-4, 204-8, 204-12, 204-16 and 204-20.) Each LURA was recorded in the appropriate county recorder's office.
Once the KHC awarded and reserved the tax credits to each of the Debtors' properties, the corresponding investor limited partner "syndicated the investment and tax credits opportunity to a pool of investors. Through the Investor LP, those investors then funded the `Investor Limited Partner Contribution' in accordance with paragraph 3.4 of each Debtor's Amended and Restated Agreement of Limited Partnership." (Appellant Br. at 4.) All of the investments were made by the investor limited partners in exchange for 99.98% of the equity ownership in the corresponding Limited Partnership.
With respect to the tax credits, the partnership agreements provide as follows:
(Amended and Restated Partnership Agreements at § 9.1(G)(v)(a), Bankr.Case No. 10-53019, ECF Nos. 214-1 through 214-15) (emphasis added.) In the event of a recapture of certain tax credits, then "Housing Tax Credits shall be recaptured by the Partners who originally claimed said Housing Tax Credits, in proportion to the ratio in which such recaptured Housing Tax Credits were claimed." (Id. at § 9.1(G)(v)(b).) Section 6.6 of the Partnership Agreements also provides "[e]xcept for the Apartment Complex, the Housing Tax Credits, and the contractual rights referred to herein, the [Limited] Partnership [aka the Debtor] owns no other property, tangible or intangible, real or personal." (Id. at § 6.6(A).)
In the "Low Income Housing Tax Credit Certificate of Carryover Allocation" letters from KHC to the Debtors, KHC identifies the name of the "Taxpayer Receiving Allocations" as "Creekside Senior Apartments, Limited Partnership," "Nicholasville Greens, Limited Partnership," "Franklin Place Senior Apartments, Limited Partnership," "Pennyrile Senior Apartments, Limited Partnership," and "Park Row Senior Apartments, Limited Partnership." (Tax Credit Letters, Bankr.Case No. 10-53019, ECF No. 204-29.)
The Debtors filed petitions for relief under chapter 11 of the Bankruptcy Code in
10-53019, Creekside: $1,272,589.36 10-53298, Nicholasville Greens: $ 714,857.43 10-53300, Franklin Place: $ 863,467.53 10-53301, Pennyrile: $ 466,294.67 10-53346, Park Row: $1,037,461.15
In each proof of claim, the Bank asserted that its claim was fully secured.
On March 4, 2011, the Debtors and the General Partners filed a motion for a hearing to determine the value of the Bank's secured claims pursuant to 11 U.S.C. § 506(a). The Debtors and the General Partners disputed the Bank's assertion that each claim was fully secured and instead alleged that the claims were substantially undersecured. The Debtors and the General Partners further asserted that a valuation hearing was vital because "[t]he treatment of the secured and unsecured portions of the [Bank's] Claims will be a critical component of the Debtors' and the General Partners' prospective plan." (Mot. for Valuation Hr'g at 5, Bankr.Case No. 10-53019, ECF No. 164.)
The Debtors filed their disclosure statement and plan on March 17, 2011. In Article IV, paragraph 4. 1, the plan states that the Bank will have an allowed secured claim "equal to the fair market value of [the Bank's] interest in the Estate's interest in such Debtor's Property as determined by the Court at the Valuation Hearing." (Joint Plan of Reorganization at ¶ 4. 1, Bankr.Case No. 10-53019, ECF No. 170.) Class 3 of the Debtors' plan is comprised solely of the Bank's allowed unsecured deficiency balance. The Debtors proposed to pay the Bank the "full principal amount of each of its Allowed Unsecured Claims" unless the Bank timely elected to be treated in accordance with the "Alternative Unsecured Claim Treatment." (Id. at ¶ 4.3.) The Debtors and General Partners filed their First Amended Plan on August 11, 2011, which provided for the same treatment of the Bank's claims as the original plan.
On March 28, 2011, the bankruptcy court granted the Debtors' request to schedule a valuation hearing. The bankruptcy court also set forth various deadlines for identifying expert witnesses, submission of written reports and/or appraisals, filing a list of witnesses, submission of testimony by affidavit, and other various pretrial issues.
On July 25, 2011, the Debtors and its General Partners filed their Valuation Objection and Motion In Limine seeking to exclude portions of expert reports, the affidavit, and related testimony of the Bank's appraiser, David A. Donan. In their Valuation Objection, the Debtors argued that the valuation of the remaining tax credits in the Bank's appraisals was critically flawed for three reasons. First, the Debtors alleged that the tax credits do not constitute property in which a security interest can be taken and, therefore, the credits are not part of the Bank's collateral or its secured claims. Second, the Debtors asserted that the tax credits were held by the Debtors' limited partners and not by the Debtors so the credits are not property of the Debtors' estates. Last, the Debtors argued that the Bank's loan and security documents failed to create a security interest in the tax credits "and, in fact, explicitly carve the Tax Credits out of the Bank's collateral." (Valuation Obj. at 1, Bankr.Case No. 10-53019, ECF No. 214.)
(Appellee Br. at 21, n. 5.) A review of the pleadings filed in the bankruptcy court supports the Bank's assertion. Additionally, the mortgage documents provide that the Bank's security interest includes:
(Construction Phase Mortgage at 3, ¶ 1.1(j), Bankr.Case No. 10-53019, ECF Nos. 214-16, 214-18, 214-20, 214-22, and 214-24.)
In their Motion In Limine, the Debtors argued that the bankruptcy court should exclude those portions of David Donan's reports, affidavit, and related testimony which purport to include the value of the remaining low-income housing tax credits in the value of the Bank's collateral. The Debtors alleged that those portions of Donan's evidence "are not based on sufficient facts and data, are not based on and do not conform to accepted principles and methodologies in the industry, and are therefore not reliable." (Mem. in Support of Mot. In Limine at 5, Bankr.Case No. 10-53019, ECF No. 215-1.) The Debtors also alleged that the testimony relating to the value of the remaining tax credits was irrelevant.
In response, the Bank argued that the value of the remaining tax credits was relevant to the valuation of its interest in the Debtors' real properties for several reasons. First, the Bank alleged that 28 U.S.C. § 47(d)(7)(A)(ii) clearly provides that federal low-income housing tax credits cannot be separated from ownership of the LIHTC properties, and that once the property is sold the purchaser obtains the right to claim the remaining tax credits. As a result, the Bank argued the value of the remaining tax credits significantly impacts the price a willing buyer would pay to obtain the LIHTC properties at issue in this case. The Bank also alleged that excluding consideration of the value of the remaining low-income housing tax credits while including consideration of the impact the low-income rent restrictions on the value of the properties would lead to an "absurd result." (Resp. to Obj. and Mot. In Limine at 1-2, Bankr.Case No. 10-53019, ECF No. 228.) Finally, the Bank asserted that the Debtors' arguments "incorrectly attempt[] to divert the Court's attention to whether security interests in the Remaining Tax Credits themselves are obtainable, as opposed to the real issue of § 506 valuation of [the Bank's] security interest in the Debtors' LIHTC real property and the impact the Remaining Tax Credits that go with the property have on value." (Mem. of Law in Support of Bank's Resp. to Obj. at 5-6, Bankr.Case No. 10-53019, ECF No. 229.)
On August 15, 2011, the bankruptcy court overruled the Debtors' Valuation Objection and Motion In Limine and held that evidence of the remaining tax credits was relevant to the issue of valuation ("In Limine Order"). The bankruptcy court also held that the Debtors' arguments really went "to the weight of the evidence, not to its reliability." The bankruptcy court observed that, as the trier of fact, it could determine the proper weight to give the evidence of the value of the remaining tax credits at the valuation hearing. (Id.)
In overruling the Debtors' Valuation Objection and Motion In Limine, the bankruptcy court stated:
(In Limine Order at 4-5 and 8, Bankr. Case No. 10-53019, ECF No. 235.)
The bankruptcy court conducted the valuation hearing on August 18, 2011. The Debtors' appraiser and the Bank's appraiser both appeared at the hearing.
The Bank's appraisals included a valuation of the respective properties and a separate valuation of the remaining tax credits prepared by its expert witness and appraiser, David A. Donan of Allgeier Company. The values placed on the Debtors' properties by the Bank's appraiser were as follows:
LIHTC Property Bank's Real Bank's Tax Bank's Total
Estate Value Credit Value Value
Creekside Senior Apartments $890,000 $350,000 $1,240,000.00
Nicholasville Greens Townhomes $495,000 $160,000 $ 655,000.00
Franklin Place Senior Apartments $535,000 $445,000 $ 980,000.00
Pennyrile Senior Apartments $575,000 $755,000 $1,330,000.00
Park Row Senior Apartments $825,000 $865,000 $1,690,000.00
(Valuation Order at 14, Bankr.Case No. 10-53019, ECF No. 252.)
Debtors' appraisals, prepared by its expert witness and appraiser, Brad Weinberg of Novogradac & Company, LLC, were as follows:
LIHTC Property Debtors' Total
Value
Creekside Senior
Apartments $593,000.00
Nicholasville Greens
Townhomes $425,000.00
Franklin Place Senior
Apartments $274,000.00
Pennyrile Senior
Apartments $398,000.00
Park Row Senior Apartments $750,000.00
(Valuation Order at 14, Bankr.Case No. 10-53019, ECF No. 252.) Like the Bank's appraiser, the Debtors' appraiser considered the impact the restricted rents have on the properties' values. (See Market Valuations at 3, Bankr.Case No. 10-53019, ECF Nos. 207-1, 207-3, 207-6, 207-8, 207-10.) Despite this similarity, the Debtors' appraisals specifically excluded the valuation of the remaining tax credits because the Debtors "believed, and continue to believe, that the remaining Tax Credits are irrelevant to the valuation of the Bank's secured claims, since the Tax Credits are not part of the Bank's collateral." (Appellant Br. at 7.)
Both appraisers testified that the availability of remaining low-income housing tax credits can affect the value of a piece of property. The Bank's appraiser included the value of the remaining tax credits as a component in his determination of the value of the properties; however, the Debtors' appraiser stated that he did not include any consideration of the remaining tax credits in his appraisal because "under the scope of work my appraisal was of the real property only, that was the collateral for the basis of the bankruptcy and that was defined for me, and I — I completed the appraisal on that basis." (Aug. 18, 2011 Tr. of H'rg at 72, Bankr.Case No. 10-53019, ECF No. 258.) When asked by counsel for the Debtors whether he thought there was a market for the sale of mid-stream tax credits associated with small properties in small, non-money center banking markets, the Debtors' appraiser testified that his opinion was "no." (Id. at 141-143.) The Bank's appraiser disputed this conclusion and instead stated that the market for tax credits is "extremely busy" at the present time. (Id. at 174.)
The bankruptcy court issued a Valuation Order on September 12, 2011. In that order, the bankruptcy court weighed the two appraisals and arrived at values for the Debtors' properties. In so doing, the bankruptcy court concluded that the Bank's appraisals more accurately reflected the true value of the Debtors' properties. The bankruptcy court recognized that "[b]oth appraisers stated substantially the same formula for calculating market value under the income capitalization method" although they disagreed on how each component of that formula was derived. (Valuation Order at 13, Bankr.Case No. 10-53019, ECF No. 252.)
As to the vacancy and collection loss rate ("VCLR"), the Debtors' appraiser stated that a minimum of 5% is the industry standard. (Aug. 18, 2011 Tr. of H'rg at 17, Bankr.Case No. 10-53019, ECF No. 258.) The Debtors' appraiser also pointed out that "while historical performance is important, lenders and buyers recognize that conditions can change over the life of the loan and simply will not factor in a vacancy and loss rate of less than 5%, in order to be conservative." (Appellant Br. at 35.) The Bank's appraiser, on the other hand, based his VCLRs on the historically low vacancy rates for most of Debtors' LIHTC properties. With the exception of Nicholasville Greens, all of the Debtors' properties had waiting lists at the time of the Bank's appraisals.
The bankruptcy court analyzed the VCLR for each property and concluded as follows:
LIHTC Property Debtors' Bank's Bankruptcy Court's
VCLR VCLR conclusion
Creekside 5% 3% 3%; based on historical vacancy rate,
existing waiting list, and vacancy rates of
comparable LIHTC properties
Franklin Place 6% 3% 3%; (same as Creekside) Nicholasville Greens 9% 11% 11%; composed of 9% vacancy loss and 2% collection loss Pennyrile 5% 3% 3%; (same as Creekside) Park Row — residential 4% 2.5% 2.5%; based on average historical vacancy rate of 2.45% for 2008-2010 Park Row — commercial 10% 15% 15%; one of two commercial units would have to be built-out for light and heat prior to being rented
(Valuation Order at 15-17.)
The parties disagreed on two other figures used in determining the proper value of the Debtors' properties. First, although the parties agreed that a management fee based on 5% of effective gross income was the proper measure for 4 of the 5 properties, they did not agree on that percentage for Nicholasville Greens. Instead, the Debtors' appraiser calculated a management fee of 4% of effective gross income, while the Bank's appraiser used a management fee of 5%. Because the management fee for Nicholasville Greens averaged 4.875% over the last four years, the bankruptcy court used the Bank's figure of 5%. (Id. at 17.)
Second, the parties disagreed as to the proper real estate tax expense to use in valuing the Debtors' properties. Although both appraisers stated "that the Debtors' real estate taxes were significantly higher than they should be as reflected by comparable LIHTC Properties," the bankruptcy court concluded that only "[t]he Bank's Appraiser reduced the real estate tax expense to an amount that would be consistent with his opinion of the market value of the Debtors' real estate for each particular LIHTC Property before any adjustments for the Remaining Tax Credit Value." (Id. at 18-19.) The Debtors' appraiser only reduced the expense for three of the five properties. The bankruptcy court found the Bank's appraiser's testimony "that a fair market purchaser will consider the effect of the purchase price on future property taxes in his decision regarding the value of (and thus price to pay for) the property" to be more credible. (Id. at 19.) However, because the Bank's appraiser failed to complete all of the necessary "calculation[s] once the effect of the Remaining Tax Credits was included in his opinion of fair market value, ... the Court adjusted the real estate tax component ... to arrive at the annual real estate tax that is consistent with the Court's findings regarding the fair market value of each property." (Id.) The bankruptcy court used the assessment rates set forth in the Bank's appraisals in order to do these calculations since the Bank's appraisals contained the most current information. (Id. at 19, n. 14.)
Turning to the issue of the remaining tax credits, the bankruptcy court stated:
(Id. at 20-22.) Because the Bank "provided the only detailed, substantiated evidence of the impact of the Remaining Tax Credits on the market value of the Debtors' LIHTC Properties," the bankruptcy court included the value of the remaining tax credits in its § 506(a) valuation of the Debtors' property. (Id.)
After considering all the evidence, the bankruptcy court set the following values for the Debtors' real properties:
LIHTC Property Value of Real Value of Tax Total Value
Estate Credits
Creekside Senior Apartments $708,718.67 $350,000 $1,058,718.67
Nicholasville Greens Townhomes $307,475.86 $160,000 $ 467,475.86
Franklin Place Senior Apartments $371,244.42 $445,000 $ 816,244.42
Pennyrile Senior Apartments $446,188.44 $755,000 $1,201,188.44
Park Row Senior Apartments $727,427,01 $865,000 $1,592,427.01
(Id. at 23-28.)
After the valuation hearing, but prior to entry of the Valuation Order, the Debtors and their General Partners had filed a notice of appeal and a motion for leave to appeal the bankruptcy court's In Limine Order as it related to the Debtors' Valuation Objection. On September 26, 2011, the Debtors and General Partners filed an amended notice of appeal to include an appeal of the bankruptcy court's Valuation Order. This appeal was timely.
Section 506(a)(1) of the Bankruptcy Code provides:
11 U.S.C. § 506(a)(1). In valuing property under this section, a court must engage in a two-step process. First, "a court must compare the creditor's claim to the value of `such property,' i.e., the collateral." Assocs. Commercial Corp. v. Rash, 520 U.S. 953, 961, 117 S.Ct. 1879, 1884-85, 138 L.Ed.2d 148 (1997). This determination necessarily requires the court to ascertain the "creditor's interest in the estate's interest in" the property. 11 U.S.C. § 506(a)(1). The second step in the valuation process requires the court to determine how to value the collateral. Rash, 520 U.S. at 961-62, 117 S.Ct. 1879. When a debtor proposes to retain property and
The Bank asserts Debtors' arguments are flawed because the right to claim the low-income housing tax credits goes to the owner of the LIHTC property and this right cannot be separated from the land. The bankruptcy court agreed with the Bank. (See In Limine Order at 4-5 Bankr. Case No. 10-53019, ECF Nos. 235 and 252) (referenced in Valuation Order at 20, Bankr.Case No. 10-53019, ECF No. 252.) Additionally, the bankruptcy court concluded that:
(Valuation Order at 22, Bankr.Case No. 10-53019, ECF No. 252.)
The Low-Income Housing Tax Credit program is provided for in § 42 of the Internal Revenue Code. 26 U.S.C. § 42. The program provides an incentive to develop low-income housing properties in exchange for a 10-year stream of tax credits. 26 U.S.C. § 42(b)(1)(B). The availability of the tax credits is dependent on the property maintaining compliance with the Low-Income Housing Tax Credit program's rent and occupancy restrictions. See 26 U.S.C. § 42.
Section 42(b)(1) provides that, for purposes of calculating the amount of the low-income housing credit,
26 U.S.C. § 42(b)(1) (emphasis added). Additionally, as recognized by the bankruptcy court, if a low-income housing property is sold prior to the conclusion of the compliance period,
26 U.S.C. § 42(d)(7)(A)(ii) (emphasis added). These sections make clear that the
The various exhibits in this case bolster this conclusion. Section 2(b) of the LURAs states that the covenants and the restrictions set forth therein are "covenants running with the Project." (LURA Section 2(b), Bankr.Case No. 10-53019, ECF Nos. 204-4 at 25, 204-8 at 5, 204-12 at 16, 204-16 at 11 and 204-20 at 14.) Section 6.6 of the Partnership Agreements states "[e]xcept for the Apartment Complex, the Housing Tax Credits, and the contractual rights referred to herein, the [Limited] Partnership [aka the Debtor] owns no other property, tangible or intangible, real or personal." (Amended and Restated Partnership Agreements, section 6.6(A), Bankr.Case No. 10-53019, ECF No. 214-1 through 214-15.) This section demonstrates that the Debtors own the low-income housing tax credits. The "Low Income Housing Tax Credit Certificate of Carryover Allocation" letters from KHC identify the "Taxpayer Receiving Allocations" as the Debtors. (Tax Credit Letters, Bankr.Case No. 10-53019, ECF No. 204-29 at 1-6.) Additionally, section 9.1G(v) of the Partnership Agreements state that tax credits shall be allocated among the partners, just as profits and losses are allocated among the partners. (Amended and Restated Partnership Agreements, section 9.1G(v), Bankr.Case No. 10-53019, ECF No. 214-1 through 214-15.) Nowhere in the partnership agreements is there an indication that the tax credits are sold or otherwise conveyed to the partners.
In a case factually analogous to the one before the Panel, a limited partnership, Pine Pointe, entered into a land-use restriction agreement with the state housing authority in exchange for the allocation of low-income housing tax credits. Pine Pointe Hous., L.P. v. Lowndes Cnty. Bd. of Tax Assessors, 254 Ga.App. 197, 561 S.E.2d 860 (2002). The limited partnership agreement allocated 99% of the tax credits to Pine Pointe's limited investor partners. Following an ad valorem tax assessment on the property, Pine Pointe appealed the assessment. The issue on appeal was how to determine the fair market value of the property "given the rental restrictions and the federal tax benefits applicable to the project." Id. at 862. Although the ultimate issue in the Pine Pointe case was different, two of the holdings are applicable to the case currently before the Panel.
In its appeal, Pine Pointe asserted that the tax credits had been effectively sold to its limited investor partners by virtue of the limited partnership agreement and thus had no value to Pine Pointe. Pine Pointe therefore alleged that inclusion of the value of the remaining tax credits was in error. The Georgia Court of Appeals rejected this argument based on the provisions of 26 U.S.C. § 42(d)(7) which state that, when the property is sold, the subsequent owner is entitled to claim the remaining tax credits. Id. at 863. The court held that because the tax credits run with the land, they cannot be severed from the property and sold to an investor.
The Pine Pointe court also concluded that "[b]ecause Section 42 tax credits are
In another case factually identically to the one before the Panel, Spring Hill, L.P. v. Tenn. State Bd. of Equalization, No. M2001-02683-COA-R3-CV, 2003 WL 23099679 (Tenn.Ct.App. Dec. 31, 2003), the taxpayers appealed from property tax assessments that included the present value of the remaining low-income housing tax credits authorized by § 42 of the Internal Revenue Code. The taxpayers were three limited partnerships who owned low-income housing tax credit properties. After the low-income housing tax credits were awarded by the Tennessee state agency tasked with administering the low-income housing tax credit program, the taxpayers allocated the right to claim the annual tax credits to limited partner investors. Id. at *2.
Like the Debtors in this case, the owners contracted with the state agency to receive the tax credits in exchange for surrendering a portion of their property rights, i.e., the right to charge higher rents and to use the property without restraint. "[B]ecause the tax credits may be transferred to purchasers" and because the "tax credits made ownership of the properties more desirable to" the owners of the properties, the trial court determined that the low-income housing tax credits "enhance[d] the value of the properties in the marketplace." Id. at *4. The court of appeals affirmed and stated "the real economic benefit caused by [the tax credits] has a significant impact on the value of the property and must, therefore, be analyzed when determining the fair value of the property." Id. at *11.
Id. (summarizing prior decision of Tax Board which found syndication of tax credits did not serve to exclude the consideration of tax credits in determining a property's value).
In determining that the value of the tax credits was properly included in the value of the property at issue in the case, the Spring Hill court recognized that
Id. at *12-13 (citations omitted). The Spring Hill court agreed. Because the "issue is `whether the price that a willing buyer and seller would agree upon would take into account the tax credits,'" the value of "[i]ntangible factors should be considered when they affect the value, either upward or downward." Id. at *14.
Kentucky has not excluded the consideration of tax credits in assessing property
In this appeal, the Debtors and the General Partners argue that the cases cited by the Bank are inapposite because the underlying policy considerations in those cases are tax policies, not the policies of § 506(a) of the Bankruptcy Code. Nevertheless, these cases are relevant in demonstrating that, just as the property tax rate can affect the value of real property, so too can the availability of tax credits. Indeed, in using an income analysis to value real property, it would be incongruous to consider the limitations imposed by land use restrictions but not consider the associated benefits of tax credits made available to the property's owners. For example, real property may be owned subject to certain restrictions in furtherance of historic preservation that limit its value, while at the same time providing the owner with a reduced property tax rate or even complete tax abatement. In such a situation, it would be inconsistent to consider the limitations imposed by the historic preservation restrictions without also considering the effect that a reduced or zero tax rate would have on the net income generated by the property. Ultimately, both the benefits and the burdens associated with property ownership are relevant in valuing the real property.
The Debtors cite the case of Randall v. Loftsgaarden, 478 U.S. 647, 106 S.Ct. 3143, 92 L.Ed.2d 525 (1986), in support of their position that the tax credits are not collateral in which the Bank could take a security interest and, therefore, cannot be included within the Bank's secured claim; however, the Supreme Court's decision in Randall is readily distinguished and is not inconsistent with the bankruptcy court's valuation analysis in the case currently before the Panel. In Randall, the Supreme Court considered whether an award of damages in a prospectus securities fraud case must be offset by the tax benefits received by defrauded investors. The Supreme Court held, under the plain meaning of the statute, that the "offset for `income received' on the security does not encompass the tax benefits received by defrauded investors by virtue of their ownership of the security, because such benefits cannot, under any reasonable definition, be termed `income.'" Id. at 656, 106 S.Ct. 3143.
The Supreme Court then added:
Id. at 657, 106 S.Ct. 3143 (citing 26 U.S.C. § 61).
The Debtors and General Partners assert that Randall stands for the proposition that tax credits have no value in and
The Debtors also rely on the case of City of Chicago v. Michigan Beach Housing Cooperative, 242 Ill.App.3d 636, 182 Ill.Dec. 343, 609 N.E.2d 877 (1993). In Michigan Beach, the City of Chicago argued that, because its security interest extended to proceeds of its collateral, its security interest extended to the syndication funds that investors paid to purchase interests in a limited partnership that owned a low-income housing complex and held the right to claim certain income tax credits. The trial court held that the language of the city's security agreement did not cover the income tax credits, and the Illinois Court of Appeals affirmed. Id. at 884-85. The Illinois Court of Appeals also found the city's argument unavailing "because income tax credits cannot be intangible personal property subject to a security interest under Article 9." Id. at 885. In following Randall, the Illinois Court of Appeals explained:
Id. at 886.
Although the Debtors and General Partners quoted at length from this paragraph of the opinion in support of their argument that the value of the Bank's secured claim does not include the value of the remaining tax credits, they omitted and replaced with ellipses a key sentence:
Id. (emphasis added). Even when an entity allocates the rights to use the low-income housing tax credits to investors, it does not lose ownership of the tax credits. The tax credits remain with the property and with the owner of the property. As the bankruptcy court recognized in this case, "[t]he [investor] limited partners may have become entitled to the allocation of
The Debtors in this case still own the tax credits, and the tax credits are covenants running with the real properties. This is true even though the Debtors allocated the credits to the investor limited partners. See Spring Hill, 2003 WL 23099679. As a result, determination of the Bank's interest in the Debtors' interest in the LIHTC properties must include consideration of the value of those credits. Because "[a] willing buyer would most certainly consider the availability of section 42 tax credits when determining the fair cash value of the property," 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. Rainbow Apartments v. Ill. Prop. Tax Appeal Bd., 326 Ill.App.3d 1105, 260 Ill.Dec. 875, 762 N.E.2d 534, 537 (2001).
The Debtors and General Partners seemingly fail to understand a key issue in this case. The question before the bankruptcy court was not whether the Bank has an independent security interest in the tax credits. The issue was whether the fair market value of the various apartment complexes secured by the Bank's mortgages should reflect the value of the remaining tax credits. The Bank did not argue, nor did the bankruptcy court determine, that the Bank was entitled to claim the tax credits on its tax returns. Nor did the Bank argue that it owned or had a separate security interest in the tax credits or in the money paid by the investors in exchange for allocation of the tax credits. The only aspect of the tax credits at issue in this case is whether the value of the remaining credits affects the value of the Bank's collateral and, thus, the amount of the Bank's secured claim.
The ability to claim the low-income housing tax credits pursuant to 26 U.S.C. § 42 flows from the property owner's agreement to comply with the rent and occupancy restrictions of the Low-Income Housing Program. If the owners fail to comply with those restrictions, the owners, or whomever they allocate the right to claim the tax credits to, lose the benefits of the tax credits. Simply stated, without the burden, there is no benefit.
Because the restrictions limit the amount of income an owner can realize from low-income housing properties, the restrictions affect the price a willing seller would agree to pay for such properties. The Debtors and the General Partners do not dispute this, and their appraisals state that the estimated market value was calculated in light of the rent and occupancy restrictions. If the burden impacts the value, the benefits must as well. In short, the bankruptcy court did not err when it concluded, consistent with the Internal Revenue Code, relevant case law, and the record before it, that the value of the remaining tax credits is properly included in determining the amount of the Bank's secured claim.
The Debtors and General Partners also allege that the bankruptcy court erred in accepting the Bank's appraisal figures in setting the value of the real properties and
"Findings of fact, whether based on oral or documentary evidence, shall not be set aside unless clearly erroneous, and due regard shall be given to the opportunity of the bankruptcy court to judge the credibility of the witnesses." Fed. R. Bankr.P. 8013. Courts have broad discretion in admitting expert witnesses and weighing testimony. Nordhoff Invs., Inc. v. Zenith Elecs. Corp., 258 F.3d 180, 191 (3rd Cir.2001) (citing Kumho Tire Co., Ltd. v. Carmichael, 526 U.S. 137, 153, 119 S.Ct. 1167, 143 L.Ed.2d 238 (1999)). "Judging the credibility and mental capacity of witnesses and resolving conflicts in the evidence are within the unique capacity of the factfinder" and a court's determinations on such issues will not be disturbed on appeal unless clearly erroneous. United States v. Baker, 807 F.2d 1315, 1320 (6th Cir.1986).
"The valuation of property is an inexact science and whatever method is used will only be an approximation and variance of opinion by two individuals does not establish a mistake in either." Boyle v. Wells (In re Gustav Schaefer Co.), 103 F.2d 237, 242 (6th Cir.1939). "Because the valuation process often involves the analysis of conflicting appraisal testimony, a court must necessarily assign weight to the opinion testimony received based on its view of the qualifications and credibility of the parties' expert witnesses." In re Smith, 267 B.R. 568, 572 (Bankr.S.D.Ohio 2001).
Buckland v. Household Realty Corp. (In re Buckland), 123 B.R. 573, 578 (Bankr. S.D.Ohio 1991). "A bankruptcy court is not bound to accept the values contained in the parties' appraisals; rather, it may form its own opinion of the value of the subject property after considering the appraisals and expert testimony." Smith, 267 B.R. at 572-73.
When faced with setting a value for a low-income housing tax credit property, a court's job is difficult.
Kenneth N. Alford & David C. Wellsandt, Appraising Low-Income Housing Tax Credit Real Estate, 10/1/10 APPRAISAL J. 350 (Oct. 1, 2010).
In the case currently on appeal, the bankruptcy court found both appraisers to be qualified as experts. (Valuation Order at 10, Bankr.Case No. 10-53019, ECF No. 252.) The bankruptcy court also found that both appraisers, as certified appraisers, had extensive experience in appraising low-income housing tax credit properties and that both appraisers used an accepted
With respect to the tax credits, the Debtors and General Partners argue that the bankruptcy court erred in accepting the Bank's appraiser's value of the credits because the Bank's appraiser did not consider the impact of the tax credits. Instead, he merely valued the remaining tax credits. The bankruptcy court rejected this argument and determined that the Bank's appraisal of the tax credits was valid.
(Valuation Order at 20-22, Bankr.Case No. 10-53019, ECF No. 252.)
After thoroughly reviewing the record and the briefs in this matter, it does not appear that the bankruptcy court abused its discretion in finding the Bank's appraisal more accurately reflected the true value of the properties under § 506(a), nor was that finding clearly erroneous. Although the Debtors argue that their appraiser's approach was "far more nuanced and better reasoned," they offer no true support for their assertion, which ignores the instruction given their appraiser not to factor the tax credits in his analysis. (Appellant Br. at 35.) As pointed out above, there is no exact science for determining the value of low-income housing tax credit properties. The bankruptcy court had copies of all the appraisals as well as the opportunity to assess the credibility of each appraiser in the courtroom. The bankruptcy court analyzed the market conditions as set forth by both appraisers and determined that the Bank's figures were more accurate. Quite simply, the bankruptcy court did what it was tasked with doing: determining which report more accurately reflected the market conditions for these properties.
With respect to the tax credits, the bankruptcy court was correct in determining their value was included when assessing the value of the Bank's secured claim. Because the Debtors held fast to their contention that the value of the tax credits was not properly included in the claim, they failed to timely introduce any evidence of the credits. When pressed at the hearing, their appraiser finally agreed that the Bank's appraiser used an accepted methodology, but contended that he had used some incorrect figures in calculating the value. The Debtors, however, failed to convince the bankruptcy court that the figures used by the Bank's appraiser were invalid.
In this case, the bankruptcy court engaged in a thorough analysis of the appraisals and the appraisers' qualifications. The bankruptcy court set forth a detailed analysis of why it gave more weight to the Bank's figures as compared to those of the Debtors. Additionally, the bankruptcy court also set forth a detailed explanation of why it deviated from those of the Bank's appraisals regarding the tax expense calculation. The bankruptcy court's reliance on the Bank's appraisals and its calculation of the final values was well-reasoned. There was neither clear error nor an abuse of discretion in the bankruptcy court's analysis.
The Debtors assert that the bankruptcy court erred in overruling their Valuation Objection and Motion in Limine on August 15, 2011, because those portions of the appraisals and related testimony about the remaining tax credits were "not based on sufficient facts and data" and did "not conform to accepted principles and methodologies in the industry...." (Mem. in Support of Mot. in Limine at 1, Bankr. Case No. 10-53019, ECF No. 215-1.) Specifically, the Debtors and General Partners asserted that the Bank's appraiser's reports did not comply with the USPAP. The Debtors and General Partners also argued that the value of the remaining tax credits was irrelevant to the valuation issue because the tax credits were not part of the Bank's collateral.
In their brief, the Debtors and General Partners allege that their Valuation Objection and Motion In Limine should have been granted in light of Federal Rule of Evidence 702 which governs testimony by expert witnesses and provided as of the valuation hearing:
Fed.R.Evid. 702 (version in effect prior to general restyling of the Federal Rules of Evidence effective December 1, 2011). There are essentially three components in making a Rule 702 determination. A court must determine (1) if the witness is qualified by "knowledge, skill, experience, training, or education;" (2) if the witness' opinion or testimony will "assist the trier of fact;" and (3) if the testimony is reliable "which is shown by the satisfaction of the three numbered elements in Rule 702." Kaylor v. Holsinger (In re Holsinger), 437 B.R. 260, 270 (Bankr.S.D.Ohio 2010) (citing In re Scrap Metal Antitrust Litig., 527 F.3d 517, at 528-29 (6th Cir.2008)).
Holsinger, 437 B.R. at 270.
Rule 702's requirement that the proffered testimony "assist the trier of fact" requires the testimony be relevant. Daubert v. Merrell Dow Pharm., Inc., 509 U.S. 579, 591, 113 S.Ct. 2786, 125 L.Ed.2d 469 (1993). "Expert testimony which does not relate to any issue in the case is not relevant and, ergo, non-helpful." Id. (citation omitted) (internal quotation marks omitted). Essentially, this requirement mandates that the expert testimony "is sufficiently tied to the facts of the case that it will aid the [factfinder] in resolving a factual dispute." Id. (citation omitted) (internal quotation marks omitted). "T[he] relevance requirement ensures that there is a `fit' between the testimony and the issue to be resolved at trial." Buck v. Ford Motor Co., 810 F.Supp.2d 815, 822 (N.D.Ohio 2011). As long as the testimony relates to an issue the factfinder must determine, it is relevant. Multimatic, Inc. v. Faurecia Interior Sys. USA, Inc., 358 Fed.Appx. 643, 652 (6th Cir.2009). Additionally,
Sigler v. Am. Honda Motor Co., 532 F.3d 469, 478 (6th Cir.2008) (citations omitted).
"The inquiry [under Rule 702] is ... a flexible one.... The focus ... must be solely on principles and methodology, not on the conclusions that they generate." Daubert, 509 U.S. at 595, 113 S.Ct. 2786. "Rule 702 should be broadly interpreted on the basis of whether the use of expert testimony will assist the trier of fact." Morales v. Am. Honda Motor Co., Inc., 151 F.3d 500, 516 (6th Cir.1998) (internal citations omitted).
Conwood Co., L.P. v. U.S. Tobacco Co., 290 F.3d 768, 792 (6th Cir.2002). "[R]ejection of expert testimony is the exception rather than the rule." Fed.R.Evid. 702 advisory committee's note. The party seeking to introduce the expert testimony bears the burden of demonstrating its admissibility by a preponderance of the evidence. Nelson v. Tenn. Gas Pipeline Co., 243 F.3d 244, 251 (6th Cir.2001).
With respect to a claim that a method used in an appraiser's report does not comply with the USPAP, there is no authority "for the proposition that an appraiser's compliance with USPAP is the sole determining factor as to whether an appraiser's valuation report is reliable." Whitehouse Hotel Ltd. P'ship v. Comm'r, 615 F.3d 321, 332 (5th Cir.2010). This is especially true when the trial court is the "factfinder as well as the expert-testimony gatekeeper...." Id. The issue of whether an appraiser's report complied with USPAP standards goes to "the weight [the] report should be given, instead of whether it should be admitted." Id. "[T]he nature and extent of the deviations [from USPAP] concern only the report's credibility...." Id.; see also Wal-Mart Stores, Inc. v. Qore, Inc., No. 1:06CV326, 2009 WL 224908, at *3 (N.D.Miss. Jan. 28, 2009). This is true even if an appraiser, like the Bank's appraiser in this case, makes "extraordinary assumptions in coming to his ultimate conclusion." Id.
When a party agrees that an expert witness used an accepted methodology, but that the data used in applying that methodology was flawed, such an allegation does not require a court to exclude the testimony or report. Quiet Tech. DC-8, Inc. v. Hurel-Dubois UK Ltd., 326 F.3d 1333, 1345-46 (11th Cir.2003). Instead, "such an attack goes to the weight of the evidence, rather than to its admissibility." Scrap Metal Antitrust Litig., 527 F.3d at 530 (citing Quiet Tech. DC-8, 326 F.3d at 1345) ("`Thus, the alleged flaws in [the appellee's] analysis are of a character that impugn the accuracy of his results, not the general scientific validity of his methods.'"). "The identification of such flaws in generally reliable scientific evidence is precisely the role of cross-examination." Quiet Tech. DC-8, 326 F.3d at 1345; see also Daubert, 509 U.S. at 596, 113 S.Ct. 2786 ("Vigorous cross-examination, presentation of contrary evidence, and careful instruction on the burden of proof are the traditional and appropriate means of attacking shaky but admissible evidence.").
Because a "trial court has broad discretion in admitting and excluding expert testimony," such a determination will be upheld on appeal unless there was an abuse of discretion or unless the decision was "manifestly erroneous." Gen. Electric Co. v. Joiner, 522 U.S. 136, 141-42, 118 S.Ct. 512, 517, 139 L.Ed.2d 508 (1997); Mayhew v. Bell S.S. Co., 917 F.2d 961, 962 (6th Cir.1990). However, "a determination that proffered expert testimony is reliable does not indicate, in any way, the correctness or truthfulness of such an opinion." Scrap Metal Antitrust Litig., 527 F.3d at 529. Instead, a court must determine whether an expert witness's opinion is accurate in deciding what weight to give to that opinion at trial. Id. at 531.
In the case currently before the Panel, the Debtors and General Partners allege that the Bank's appraisal of the value of the remaining tax credits "materially fail[s] to comply with the USPAP standards" because the "valuation of the remaining Tax Credits is based upon `extraordinary
Despite these allegations, the Debtors' own appraiser testified that the Bank's appraiser used an accepted methodology in calculating the value of the remaining tax credits. When asked by Bank's counsel if he agreed with Donan's methodology, the Debtors' appraiser stated:
(August 18, 2011 Tr. of H'rg at 144.)
In analyzing Debtors' arguments, the bankruptcy court noted that, by using an extraordinary assumption, the Bank's appraiser concluded that he could still reach a credible result. The bankruptcy court also held that the use of the extraordinary assumption was allowed by the USPAP. (See In Limine Order at 6-8, Bankr.Case No. 10-53019, ECF No. 235.) Based on these holdings, the bankruptcy court concluded that "the Debtors' arguments go to the weight of the evidence, not to its reliability." (Id. at 8.)
Whether the Bank's appraiser complied with USPAP is not a determining factor as to whether an appraisal is reliable. It may impact whether or not the report is credible, but does not determine the admissibility of the report. Additionally, as long as an appraiser uses a methodology that is accepted in the industry, his report is admissible. If, in applying the methodology, the appraiser uses incorrect data or the appraiser's use of the methodology is somehow flawed, a court is not required to exclude the testimony or report. Instead, the error may affect the weight the testimony or report is given.
In the case presently before the Panel, the bank's appraiser developed an "extraordinary assumption" as provided for in USPAP in valuing the remaining tax credits. Although the Debtors assert that the assumption was wrong, their own appraiser testified that the methodology the Bank's appraiser used in valuing the remaining tax credits was an accepted one in the industry. As a result, the bankruptcy court did not abuse its broad discretion in declining to exclude those portions of the Bank's appraisals which included valuation of the remaining tax credits.
As for the Debtors' argument that the value of the remaining tax credits was irrelevant to the valuation issue, such argument must fail. The ultimate issue the bankruptcy court had to determine was the value of the secured portion of the Bank's claim. A major component of this determination was whether the value of the remaining tax credits would influence the price offered by a hypothetical willing purchaser of the property that serves as collateral for the Bank's claims. As a result, the issue of whether the tax credits had any value was relevant to the issue before the bankruptcy court, and the bankruptcy court properly denied the Debtors' Motion In Limine.
For the foregoing reasons, we affirm the bankruptcy court's orders setting the market value of the Debtors' low-income housing tax credit properties and overruling the Debtors' and the General Partners'
