After years of steady growth, the value of taxi medallions in Greater Boston has begun to decline rapidly. Much of this is due to competition from ride share companies, such as Uber and Lyft. Many independent medallion owners funded their purchase with loans secured by mortgages on medallions. Many medallion owners are now finding that they can’t earn enough to cover these mortgage payments. To make matters worse, the medallions are now often worth less than half the amount owed on the mortgages.
What is happening today with taxi medallions is very similar to what happened in the real estate market at the end of the 2000s. People invested heavily in real estate by taking out large mortgages, expecting to generate enough rental income to make those mortgage payments, while benefiting from continued increases in property values. Unfortunately for many of these investors, the rental incomes were insufficient to cover their mortgage payments, and when the bubble burst, in some regions, the value of these properties dropped to a fraction of the mortgaged amounts. Many of these property owners were able to save their properties by turning to Chapter 11 of the Bankruptcy Code and restructuring their debts. This same strategy is beginning to be employed by medallion owners who want to keep their medallion and continue to operate, but who can’t afford their current loan payments.
So how does this work? Chapter 11 of the Bankruptcy Code allows a debtor (individual or corporate) to reduce a secured debt, such as a mortgage, on any property that is not their primary residence to a balance to equal the value of the collateral. As people do not reside in taxi medallions, they fit squarely into the class of collateral that can benefit from a “cram down” of its associated loan balance. As an example, one might own a medallion with a $400,000 mortgage and $5,000 monthly payment, but that medallion may now only be worth $200,000. In such a case, Chapter 11 would allow the owner to reduce the mortgage on the taxi medallion to $200,000, and also restructure the monthly payments to a lower payment. This can often make a money-losing taxi business profitable again.
Many savvy real estate investors took advantage of Chapter 11 when the real estate market crashed, allowing them to save their investments and build equity in their properties as the market recovered. This same concept can apply to taxi medallion owners. For many of these owners, they will have to work longer and harder just to keep up, or risk losing their medallion to foreclosure. We predict that many more medallion owners will take advantage of Chapter 11 as a way to retain their medallion and operate profitably. We have expertise in this area and can help. Feel free to call us at 617-338-9400 for a free consultation.