Ninth Circuit Will Rehear Affordable Housing Case

TUCSON (CN) — The Ninth Circuit has agreed to hold an en banc rehearing on a case involving a bankrupt Phoenix affordable housing project and how federal tax credits affect its value.

A three-judge Ninth Circuit panel in April reversed and remanded the federal court's approval of a Chapter 11 reorganization plan, approved by the bankruptcy court for the Sunnyslope Housing Limited Partnership, because it was "based on an improper valuation" of plaintiff First Southern National Bank's secured interest.

Judge Richard Paez dissented.

After Sunnyslope, the owner of a 150-unit, low-income apartment complex , defaulted on its primary $8.5 million loan guaranteed by the Department of Housing and Urban Development, HUD acquired the loan from the original private lender and resold it to First Southern. The bank then began foreclosure, but Sunnyslope went into bankruptcy before the process was completed.

As low-income housing that qualified for federal tax credits, the Sunnyslope project was bound by rent restrictions. But the Ninth Circuit panel held that since Sunnyslope sought to keep the property under its reorganization plan, such affordable housing restrictions should not have been a factor in determining the value of First Southern's interest in the project. The property should be valued at market rate, the panel said.

Sunnyslope argued that the lender's claim should be limited to $2.6 million, not the $7.8 million that the senior lender said it was worth with the tax credits. The bankruptcy court sided with Sunnyslope, and said tax credits should not be included in the valuation.

On appeal, the U.S. District Court agreed that rent restrictions limited the value, but said the lender's interest should include tax credits. With the subsequent addition of the tax credits in bankruptcy court, the secured value of First Southern's claim increased to $3.9 million.

In dissent, Paez wrote: "No willing buyer would purchase similar property for a price that does not reflect the restrictive covenants because, as discussed above, those covenants burden how future buyers could use the property. The most obvious evidence of this is that First Southern paid significantly less for the complex than it would have if the property were not burdened by restrictive covenants."

In an accompanying order, Chief Judge Sidney R. Thomas wrote that though the panel's April decision was published, it cannot be cited on appeal of this case, nor by any other court.

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