             United States Bankruptcy Appellate Panel
                          FOR THE EIGHTH CIRCUIT

                                  _______________

                                    No. 12-6023
                                  _______________

In re: Lewis and Clark Apartments, LP *
                                      *
       Debtor                         *
                                      *
U.S. Bank National Association        *        Appeal from the United States
                                      *        Bankruptcy Court for the
       Creditor-Appellant             *        Eastern District of Missouri
                                      *
             v.                       *
                                      *
Lewis and Clark Apartments, LP        *
                                      *
       Debtor-Appellee                *

                                  _______________

                           Submitted: September 12, 2012
                              Filed: October 11, 2012
                                _______________

Before KRESSEL, Chief Judge, FEDERMAN AND NAIL, Bankruptcy Judges

FEDERMAN, Bankruptcy Judge

       U.S. Bank National Association (“U.S. Bank”) appeals from an Order granting
the motion of Debtor Lewis and Clark Apartments, LP to value U.S. Bank’s allowed
secured claim pursuant to § 506(a) of the Bankruptcy Code, and valuing the claim at
$3,500,000. There are two issues before us. The first is whether the valuation Order
by itself can be the subject of this appeal. We hold that the Order is not final but that
U.S. Bank’s alternative request1 to grant leave to appeal it as an interlocutory order
should be granted. The second issue is whether the Bankruptcy Court erred in its
valuation by not attributing any value to the low income tax credits that the owner of
the property is eligible to claim. For the reasons that follow, we conclude that such
credits, as well as the obligations they impose, do affect the value of the property and
should have been considered as part of the property’s value. Therefore, we
REVERSE AND REMAND.

                            FACTUAL BACKGROUND

      The Debtor owns an apartment complex. It is structured as a limited
partnership consisting of (i) a General Partner - Lewis and Clark Partners, LLC - that
owns a 0.01% interest, (ii) a Special Class B Limited Partner - Lewis and Clark State
LIHTC Fund, LLC (“State LIHTC Fund”) - that owns a 0.01 % interest, (iii) an
Investor Limited Partner - Centerline LP - that owns a 99.97% interest, and (iv) a
Special Limited Partner - Centerline LLC - that owns a 0.01% interest.

       The apartment complex is a Low Income Housing Tax Credit (LIHTC)
property. LIHTC programs provide parties with an incentive to invest in affordable
housing for low-income families by awarding state and federal tax credits to owners
of property, provided those owners agree to certain rent and occupancy restrictions
on their multi-family properties. The tax credits are available to the owners for a ten-
year period, but the rent and occupancy restrictions remain with the land for a longer
period of time. In this case, the restrictions are evidenced by a Low Income Tax
Credit Land Use Restriction Agreement, dated June 11, 2009 and recorded June 17,
2009. The parties agreed at oral argument that, with certain conditions including the
compliance with the rent and occupancy restrictions, the tax credits are available to
a subsequent owner of the property, regardless of whether the new owner acquires


      1
          Notice of Appeal at n.1.
                                           2
through a foreclosure or a sale. The amount of the state tax credits that may be
claimed by the owner of the Debtor’s apartment complex each year through 2018 is
approximately $277,649, and the amount of the federal tax credits that may be
claimed by the owner in those years is likewise approximately $277,649. The
Debtor’s partnership agreement specifies how these tax credits are to be allocated
among the partners. Since eligibility for the tax credits runs with the land, those
partners are only eligible to claim those tax credits so long as they retain an
ownership interest in the entity that owns the property.

       U.S. Bank filed a proof of claim in Debtor's bankruptcy case asserting a
secured claim against Debtor in the total amount of $6,297,215.39. There is no
dispute that that claim is secured by a first priority Deed of Trust on the apartment
complex. U.S. Bank also claims a security interest in other collateral including, but
not limited to, the tax credits. BankLiberty claims a security interest in the portion
of the tax credits allocated by the partnership agreement to State LIHTC Fund, the
Special Class B Limited Partner, as security for a loan made by that bank’s
predecessor to someone other than the Debtor.

                            STANDARD OF REVIEW

      A determination of value pursuant to § 506(a) of the Bankruptcy Code presents
a mixed question of fact and law.2 The bankruptcy court’s findings of facts are
reviewed under the clearly erroneous standard, while its legal conclusions are
reviewed de novo.3




      2
       In re Creekside Senior Apartments, LP, ___ B.R. ____, 2012 WL
2479549 at *13 (B.A.P. 6th Cir. June 29, 2012).
      3
          Addison v. Seaver (In re Addison), 540 F.3d 805, 809 (8th Cir. 2008).
                                          3
                                LEGAL ANALYSIS

                            1. Is the Order Appealable?

       We have jurisdiction to hear appeals from final orders and from interlocutory
orders with leave of the court.4 As stated, this appeal is from an Order granting the
Debtor’s motion to value U.S. Bank’s claim and determining the value of the
property. Generally speaking, an order valuing collateral, standing alone, is not a
final order inasmuch as it does not give either party the right to do anything as against
the other.5 At the time the Debtor filed its motion for valuation, however, there were
two pending matters which were dependent on the value of the property. One was a
motion for relief from the stay or, in the alternative for adequate protection, which
was filed by U.S. Bank. The other was the Debtor’s Second Amended Plan of
Reorganization.

       On March 6, 2012, the Court held a hearing on the motion for relief from stay
and on valuation. At that hearing, the Debtor offered no evidence on valuation, but
did offer evidence on the elements necessary to confirm a plan, recognizing that the
confirmation hearing was to be held two weeks later. Debtor’s counsel represented
that the Debtor valued the property – without consideration of any value attributable
to the tax credits – at $3.4 to $3.5 million. U.S. Bank appraised it at $3.27 million,
with an additional $2,040,000 for the tax credits, for a total of $5,310,000. On March
12, 2012, the Court entered its Order denying the motion for relief from the stay and,




      4
        In re Coleman Enters., Inc., 275 B.R. 533, 537 (B.A.P. 8th Cir. 2002); 28
U.S.C. §§ 158(a)(1), (a)(3), (b).
      5
         Gaines v. Nelson (In re Gaines), 932 F.2d 729, 731 (8th Cir. 1991)
(finality requires, inter alia, that the Order leave nothing for the bankruptcy court
to do but execute on it).
                                           4
as applicable here, valuing the property. This appeal does not involve the portion of
the Order dealing with the automatic stay.

       Subsequently, on March 20, 2012, the Bankruptcy Court held the confirmation
hearing. As of now, the Bankruptcy Court has not entered an order on confirmation
of the Second Amended Plan.

       If the motion to value were being appealed as part of an appeal of one of those
other pending matters, it might be considered final for purposes of appeal.6 However,
the motion itself was silent as to its purpose, and there is nothing in the record stating
what the purpose of valuation was. The Debtor asserts that it filed the motion for
valuation in connection with the motion for stay relief, since one element of proof
under § 362(d) is that there is no equity in the property. However, the Debtor
conceded, and the Bank’s appraisal evidence showed, that there was no equity in the
property even if the tax credits were included in the value. Therefore, contrary to the
Debtor’s assertion, no further valuation was necessary for purposes of stay relief.
U.S. Bank contends that valuation was necessary in order for the Debtor to confirm
its plan, which requires the Debtor to prove that the plan pays secured creditors the
present value of their collateral.7 As stated, the Bankruptcy Court has not ruled on
confirmation.

      As a result, since the determination of value was not needed for the stay relief
motion, and since the Court has not ruled on confirmation, the determination as to
value is not a final order.



      6
        See, e.g., Zahn v. Fink (In re Zahn), 526 F.3d 1140, 1143 (8th Cir. 2005)
(holding that earlier rulings can be reviewed as part of appeal from confirmation
order).
      7
          11 U.S.C. § 1129(b)(2).
                                            5
        In deciding whether to grant a motion for leave to appeal an interlocutory
order, the Eighth Circuit typically applies the standards found in 28 U.S.C. 1292,
which define the jurisdiction of courts of appeal to review interlocutory orders.
Section 1292(b) requires that: (1) the question involved be one of law; (2) the
question be controlling; (3) there exists a substantial ground for difference of opinion
respecting the correctness of the bankruptcy court’s decision; and (4) a finding that
an immediate appeal would materially advance the ultimate determination of the
litigation.8 Leave to grant review of interlocutory appeals should be sparingly
granted, and then only in exceptional cases.9 We hold that, in the unusual
circumstances presented to us here, such leave should be granted. That is so because
regardless of whether the pending plan is confirmed, or a modified one is proposed,
a determination of the value of U.S. Bank’s collateral is critical to the manner in
which its claim will be treated in any such plan. This appeal presents a novel issue
of law in this Circuit, namely whether the tax credits and attendant use restrictions
attributable to the Bank’s collateral should be considered in valuing such collateral.
Determination of that issue will control U.S. Bank’s rights in any plan which may be
confirmed. Unlike a typical appeal involving valuation, where the issue involves a
finding of fact as to which party’s evidence is more credible, the issue here is whether
the Court applied the correct legal standard in determining that the availability of tax
credits should not be considered.

      In addition, as will be seen, there is a substantial ground for difference of
opinion with the Bankruptcy Court’s legal determination; indeed, we hold that its
ruling as to value was based on an erroneous legal conclusion. Since any plan
confirmation will be dependent on valuation, resolution of the question presented
would materially advance a final determination on confirmation. For these reasons,
we grant U.S. Bank’s alternative request for leave to appeal the interlocutory order.

      8
          In re Machinery, Inc. 275 B.R. 303, 306 (B.A.P. 8th Cir. 2002)
      9
          Id. (citation omitted).
                                           6
                   2. Did the Court Err by Failing to Consider the
            Tax Credits and Restrictions in Valuing U.S. Bank’s Collateral?

       Section 506(a)(1) of the Bankruptcy Code provides:

       An allowed claim of a creditor secured by a lien on property in which
       the estate has an interest, . . . is a secured claim to the extent of the value
       of such creditor's interest in the estate's interest in such property, . . . and
       is an unsecured claim to the extent that the value of such creditor's
       interest . . . is less than the amount of such allowed claim. Such value
       shall be determined in light of the purpose of the valuation and of the
       proposed disposition or use of such property, and in conjunction with
       any hearing on such disposition or use or on a plan affecting such
       creditor's interest.10

Valuation under § 506(a)(1) first requires the court to “compare the creditor’s claim
to the value of such property, i.e.,, the collateral.”11 This determination requires the
court to ascertain the “creditor’s interest in the estate’s interest in” the property.12 The
second step requires the court to determine how to value the collateral.13 When, as
here, the debtor proposes to retain property and continue to use it in the debtor’s trade
or business, “the proper methodology to use in establishing ‘the amount of the




       10
            11 U.S.C. § 506(a)(1).
       11
        Assocs. Commercial Corp. v. Rash, 520 U.S. 953, 961, 117 S.Ct. 1879,
1884-85, 138 L.Ed.2d 148 (1997) (internal quotation marks omitted).
       12
       11 U.S.C. § 506(a)(1). See also In re Creekside Senior Apartments, 2012
WL 2479549 at *11.
       13
         Creekside, 2012 WL 2479549 at *11 (citing Rash, 520 U.S. at 961-62,
117 S.Ct. 1879).
                                              7
secured claim under § 506(a) . . . is the price a willing buyer in the debtor’s trade,
business, or situation would pay to obtain like property from a willing seller.’”14

        As noted, U.S. Bank claims a direct security interest in the tax credits
themselves, which is disputed by the Debtor. In addition, BankLiberty claims a
security interest in the portion of the credits which, under the partnership agreement,
have been allocated to State LIHTC Fund, for a separate loan as to which the Debtor
is not obligated. These claims presume that the tax credits are an asset which can be
owned separate and apart from ownership of the apartment complex itself. Instead,
those tax credits – like a low property tax rate or good schools – are a benefit which
accrues only to those who have an ownership interest in the apartment complex
itself.15 For that reason, we hold that those credits and the accompanying restrictions
have an effect on the amount that a willing buyer would pay to purchase the real
estate: i.e.,, its value.

       In Creekside Apartments, the Bankruptcy Appellate Panel for the Sixth Circuit
recently considered the precise issue presented here: whether, as a matter of law,
valuation of LIHTC property must include the value of remaining tax benefits
available to the owners of such property. As here, the debtors in Creekside
Apartments argued that the right to the tax credits was a separate asset held by the
partnership that owned the debtor, and should therefore not be included in the
property’s value for plan confirmation purposes. But, as the Court there pointed out,
“[t]he [investor] limited partners may have become entitled to the allocation of the
Tax Credits through the respective partnership agreements, but they did not become


      14
           Id. (quoting Rash, 520 U.S. at 960, 117 S.Ct. 1879).
      15
          See 26 U.S.C. § 42(b)(1) and (d)(7)(A)(ii); In re Creekside, 2012 WL
2479549 at *16 (“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.”).
                                          8
the owners of the Tax Credits through those agreements.”16 Instead, the Court held,
those tax credits were owned by the debtors, and were covenants that ran with the real
property. Therefore, such credits would become available to subsequent owners of
the property, whether due to sale or foreclosure, assuming the subsequent owners
remained in compliance with applicable requirements. In any event, upon transfer of
ownership, the existing partnership and its members would no longer be entitled to
claim the credits.

       While the tax credits are only available to those who own the property, either
directly or via an interest in an entity which itself owns the property, the Bankruptcy
Court concluded that the availability of those credits should not be considered in
determining what a willing buyer would pay for such property. The problem with that
conclusion is that a valuation of income-producing property typically relies at least
in part on the income capitalization approach, as did U.S. Bank’s appraisal here. Of
course, the income capitalization approach produces a result which is directly related
to the rents charged on the property. LIHTC property, by its very nature, is property
as to which the owners agree to a cap on the rents to be charged tenants. Therefore,
to the extent that that cap is below the market rate that could otherwise be charged,
the value produced by the income capitalization approach would be expected to be
artificially reduced. The reason that the owners agree to those caps is that in
exchange they, by virtue of their status as owners, become entitled to the tax credits,
which in turn reduce the taxes the owners owe on other income. In the same way that
the caps and other restrictions on use of the property may affect its value negatively,
the tax credits available to the owners as a result affect its value positively. For that
reason, valuation without consideration of the tax credits does not accurately reflect
what a willing buyer would pay to purchase the property from the Debtor. While the
partners of the Debtor have decided in their partnership agreement how to allocate


      16
         In re Creekside, 2012 WL 2479549 at *16 (brackets in original, quoting
the bankruptcy court’s order).
                                           9
use of the tax credits among themselves, they cannot choose to transfer the right to
those credits to someone who does not have a direct or indirect ownership interest in
the apartment complex.

        The Debtor relies heavily on footnote 6 in In re Rash,17 which concerned
valuation of a vehicle. The Supreme Court held that where a debtor chooses to retain
a vehicle, the secured claim should be the cost that the debtor would incur to obtain
a like asset for the same proposed use. In footnote 6, the Court stated in part that “[a]
creditor should not receive portions of the retail price, if any, that reflect the value of
items the debtor does not receive when he retains his vehicle, items such as
warranties, inventory storage, and reconditioning.”18 Thus, if the debtor went to a car
lot to buy that vehicle, it might as part of the price get a short-term warranty which
it does not get if it simply retains its own vehicle, so the value of the warranty should
not be included. But here, the owners of the Debtor will, by retaining the property,
continue to get the benefits of the tax credits which are available to them only
because of their status as owners. Debtor also relies on the last sentence of the
footnote, which states that “Nor should the creditor gain from modifications to the
property – e.g., the addition of accessories to a vehicle – to which a creditor’s lien
would not extend under state law.”19 Thus, if a bank has a lien on the vehicle and the
debtor installs a stereo system to which the lien does not attach, the secured claim
does not include the amount by which that system enhances the vehicle’s value.
Again, this argument tries to make an artificial distinction between ownership of the
real property and ownership of the tax credits. Regardless whether U.S. Bank has or
even could claim a lien on the tax credits themselves, the value of U.S. Bank’s Deed




      17
            520 U.S. at 965, n.6, 117 S.Ct. at 1886 n. 6.
       18
            Id.
       19
            Id.
                                            10
of Trust on the apartment complex is affected both by the existence of the restrictions
on rents and the value of the tax credits available to whomever owns such complex.

       The Bankruptcy Court held first that the tax credits should not be considered
in valuing the property on which U.S. Bank holds a lien. For the reasons stated, we
hold that that conclusion was erroneous as a matter of law.

       In the alternative, the Bankruptcy Court rejected in its entirety the testimony
of U.S. Bank’s expert as to the value of those tax credits. While we find no clear
error in the Bankruptcy Court’s decision to do so, that testimony was the only
evidence offered to establish the effect of the tax credits on the value of the apartment
complex. Consequently, the Bankruptcy Court was left with no basis for determining
the amount a willing buyer, giving due consideration to the availability of the tax
credits, would pay for the apartment complex.

        In order to confirm a plan, the Debtor must offer evidence as to all elements
needed for confirmation, including that it proposes to pay U.S. Bank the present value
of its secured claim.20 To the extent the Debtor’s motion for valuation was intended
to establish a value for those purposes, the Debtor failed to offer sufficient evidence
to allow the Bankruptcy Court to establish that value. On remand, the Bankruptcy
Court should afford the parties the opportunity to offer additional valuation evidence
before ruling on confirmation of the Debtor’s plan.

      The decision of the Bankruptcy Court granting the Debtor’s motion for
valuation and valuing U.S. Bank’s secured claim at $3.5 million is REVERSED AND
REMANDED.




      20
           11 U.S.C. § 1129.
                                           11
