OPINION REGARDING DEBTOR'S POST-PETITION FINANCING MOTION

Thomas J. Tucker, United States Bankruptcy Judge.

I. Introduction

This Chapter 11 case is before the Court on the Debtor's motion under 11 U.S.C. §§ 364(c)(1) and 364(d) for approval of post-petition financing, filed September 5, 2017, entitled "First Day Emergency Motion of the Debtor for Entry of Interim and Final Orders (I) Authorizing Debtor to Obtain Post-Petition Financing, (II) Scheduling a Final Hearing, and (III) Granting Certain Related Relief" (Docket #13, the "Motion"). The Court held a preliminary hearing on the Motion on September 13, 2017. Several creditors filed objections to the Motion before the hearing, including several creditors claiming to have construction liens on the Debtor's real property. Those objections were all styled as "limited" objections.1 The primary filed objection to the Motion is not limited in nature, but rather objects to the Motion on numerous grounds, including a lack of adequate protection. That is the objection filed by the Debtor's pre-petition secured lender, CAN IV Packard Square LLC ("Canyon").2

The Court held an evidentiary hearing on the Motion, limited to the issue of adequate protection as described below, on September 19 and 20, 2017, then took the matter under advisement. The Court has considered all of the evidence presented at the evidentiary hearing, and all of the arguments of the parties. This opinion states the Court's findings of fact and conclusions of law regarding the Motion and the subject matter of the evidentiary hearing. For the reasons stated in this opinion, the Court will deny the Motion.

II. Jurisdiction

This Court has subject matter jurisdiction over this bankruptcy case and this contested matter under 28 U.S.C. §§ 1334(b), 157(a) and 157(b)(1), and Local Rule 83.50(a) (E.D. Mich.). This is a core proceeding under 28 U.S.C. §§ 157(b)(2)(D) and 157(b)(2)(O).

This proceeding also is "core" because it falls within the definition of a proceeding "arising under title 11" and of a proceeding "arising in" a case under title 11, within the meaning of 28 U.S.C. § 1334(b). Matters falling within either of these categories in § 1334(b) are deemed to be core proceedings. See Allard v. Coenen (In re Trans-Industries, Inc.), 419 B.R. 21, 27 (Bankr. E.D. Mich. 2009). This is a proceeding "arising under title 11" because it is "created or determined by a statutory provision of title 11," see id., including Bankruptcy Code §§ 364 and 361. And this is a proceeding "arising in" a case under title 11, because it is a proceeding that "by [its] very nature, could arise only in bankruptcy cases." See id. at 27.

III. Background

A. The Construction Loan

Pre-petition, in October 2014, the Debtor obtained a construction loan from Canyon in the maximum principal amount of $53,783,184,00 (the "Construction Loan") to finance the construction of "a 360,000 square foot mixed-use development [project] on a six and a half acre site on Packard Street in Ann Arbor, Michigan," including "249 residential units with high-end amenities, nearly 30,000 square feet of retail space and over 450 parking space[s] including an underground parking garage" (the "Project").3 The Debtor signed a promissory note, and other loan documents, and granted Canyon a mortgage on the real property of the Project "together with the related easements, privileges and licenses, and the buildings, structures, improvements, fixtures and personal property located [on it]" to secure the Debtor's indebtedness for the Construction Loan.4 The Debtor also executed an assignment of leases and rents in favor of Canyon.5

B. The appointment of a receiver in the state court suit

On October 21, 2016, Canyon filed suit against the Debtor in Washtenaw County Circuit Court, in the case of CAN IV Packard Square LLC v. Packard Square, LLC, et al., Case No. 16-000990 CB (the "state court case"). In its verified complaint in the state court case, Canyon requested the appointment of a receiver over the property securing its debt, due to the Debtor's alleged failure "to fulfill its obligations to complete construction of improvements for which funds were provided in accordance with the relevant loan agreements" and "to maintain the [p]roperty is a suitable condition."6 Canyon also sought foreclosure of its mortgage in the state court complaint.7

On October 27, 2016, the state court held a hearing in which it heard oral argument regarding the appointment of a receiver.8 Counsel for Canyon and counsel for the Debtor both appeared at the hearing and argued their respective positions at length, for and against the appointment of a receiver. During the hearing, Canyon alleged, in relevant part, that there had been multiple material defaults by the Debtor, in the form of missing critical construction milestone dates under the terms of the Construction Loan and the mortgage, despite Canyon having granted some extensions of those dates. Canyon alleged that, among other defaults, the Debtor had defaulted by missing the "substantial completion date which was October 25[, 2016]," and that the Debtor had defaulted on its obligation to enclose the building of the Project by July 1, 2016, which was "a critically important aspect of the [construction] schedule" to avoid damage to the building, from the inclement weather that had already occurred and that would be getting worse due to the approaching winter season.9 Canyon alleged that although it had worked with the Debtor and extended the original contractually-agreed date of July 1, 2016 to August 26, 2017, the Debtor had also defaulted on its promise to enclose the building by the extended date.10 According to Canyon, that default still had not been cured, and the building was "still open and exposed to the elements" at the time of the hearing.11 Canyon also alleged that Gaylor Electric Inc. d/b/a Gaylor, Inc. ("Gaylor") and Jermor Plumbing & Heating, Inc. ("Jermor"), two subcontractors who had worked on the Project but had not been paid, had recorded construction liens against the property subject to its mortgage, and that more liens would soon be filed based on the Debtor's firing of Quandel Construction Group, Inc. ("Quandel"), the former general contractor for the Project.12 Canyon informed the Court that due to the Debtor's defaults, it had accelerated the promissory note and so the promissory note was due and owing in full. Canyon argued that "under either the [parties'] contract or the Construction Lien Act, the [c]ourt was authorized to appoint a receiver under the current existing circumstances" because the Project was only partially completed; the Debtor had defaulted on its obligations under its contract with Canyon; and the building was not enclosed and at risk of being damaged.13

The Debtor argued that although there had been "technical defaults" due to missed construction milestone dates, the Debtor was entitled to an extension of the construction milestone dates of "up to 150 days" due to the force majeure clause in the parties' loan agreement.14 Debtor also argued that the "fundamental equities" of the case favored denying Canyon's request for the appointment of a receiver.15

At the conclusion of the hearing, the state court gave a bench opinion in which it rejected the Debtor's arguments and ruled that it would "appoint McKinley, Incorporated ["McKinley"] as receiver for the [P]roject and that that [would] be done immediately."16 On November 1, 2006, the state court entered an order appointing McKinley as the receiver (the "Receivership Order").17

In the Receivership Order, the state court made the following findings, among others:

C. Terms of the Receivership Order, and the receivership loan

At the time of the Receiver's appointment, the Debtor estimates that the Project was about 65% complete. Canyon presented credible evidence, however, that at that time the Project was only about 50% completed, and needed reworking of some of the work that had been done.19 In any case, the Receivership Order gave the Receiver broad authority over the Debtor's property and the Project, the purpose of which was "to protect the interests of all interested parties in the Property."20 The Order gave the Receiver authority and direction not only to protect and preserve the Property, but also to complete construction of the Project:

To this end, the Receivership Order authorized the Receiver to "immediately enter into a loan agreement with [Canyon] to borrow funds to winterize, safeguard, and complete construction of the Receivership Property and to lease and potentially sell such property, in accord with the terms of MCL 570.1122, et seq."22 The Order authorized the Receiver to borrow up to $19.7 million from Canyon "to, among other things, winterize, safeguard and complete construction of the Receivership Property."23 Such loan was to be "subject to terms acceptable to [Canyon] and upon the approval of the Court," and was to be secured by a "super priority" lien, "senior to all other liens," on the Receivership Property.24

Shortly after its appointment, the Receiver and Canyon jointly sought the state court's approval of proposed loan documents for the Receivership Loan. The Debtor objected, and the state court held a hearing on November 17, 2016, during which the court heard arguments and then granted the joint motion to approve the loan documents.25 Thereafter, the Receiver and Canyon entered into the Receivership Loan, in a loan agreement dated as of November 22, 2016 and related documents.26

D. Pre-petition activity under the state court receivership

During the more than 10-month period after the state court appointed the Receiver and before the Debtor filed this bankruptcy case, there was considerable activity on the Project by the Receiver and its chosen general contractor on the project, O'Brien Construction Company, Inc. And there was a great deal of litigation in the state court case, between the Debtor and some of the construction lien holders on the one hand, and the Receiver and Canyon on the other hand.

The state court case has been contentious. For example, almost immediately after appointment of the Receiver, the Debtor appealed the Receivership appointment and sought a stay pending appeal. The Debtor also sought an order requiring the Receiver to use the Debtor's preferred general contractor at the time, C.E. Gleeson Constructors, Inc., in place of the Receiver's chosen contractor O'Brien.27 The state court heard these motions on November 17, 2016, and denied them.28 The Debtor then filed a motion for reconsideration of the Receivership order on December 8, 2016, which the state court denied on December 19, 2016.29 The Debtor appealed the Receivership order to the Michigan Court of Appeals, where the appeal remains pending.30 The Debtor thereafter filed various oppositions and/or objections against the Receiver in the state court. The state court litigation has also included various motions and objections filed by some of the creditors claiming construction liens predating the receivership. This includes motions by Gaylor Electric, Inc. ("Gaylor") and Quandel seeking relief from, and amendment of, the Receivership Order, a motion by Gaylor for leave to file a complaint against the Receiver for claimed breaches of fiduciary duty, and objections by Gaylor and Quandel to reports of the Receiver.31 These matters were heard by the state court on June 22, 2017, and the Gaylor and Quandel motions were denied and their objections were overruled.32

Most recently in the state court case, on August 31, 2017, the Receiver and Canyon filed a joint motion seeking to increase the total amount of the Receivership Loan that the Receiver is authorized to borrow, in order to complete the Project. In round numbers, the motion sought to increase the maximum borrowing amount from the original maximum of $19.7 million (approved in November 2016) to $37.5 million, an increase of $17.8 million.33 The motion alleged, among other things, that: (1) "[s]ince entry of the Receivership Order, the Receiver has dutifully executed his obligations and has taken all necessary steps to complete the Project," and to date, had incurred costs of $8.9 million; (2) the remaining undrawn amount of the original $19.7 million Receivership Loan was insufficient to complete construction of the Project; (3) the original $19.7 million loan authorization had been based on the Debtor's budget, which had proven inadequate and unrealistic; and (4) the costs to complete the Project were significantly higher because of deficient work done by the Debtor and other specified problems caused by the Debtor.

The joint motion was noticed for a hearing that was to have occurred in the state court on September 7, 2017.34 The hearing did not occur, however, because the Debtor filed this bankruptcy case two days before the hearing.

E. The Debtor's bankruptcy case

The Debtor filed a voluntary petition for relief under Chapter 11 commencing this case on September 5, 2017. As noted above, this was more than 10 months after the state court appointed the Receiver.

In Part I of this opinion, above, the Court described the hearings it held on the Motion. In addition, the Court held a lengthy hearing on September 13, 2017, on two other, competing motions: (1) the Debtor's motion entitled "First Day Emergency Motion for Order Directing Receiver to Turn Over All Property to Chapter 11 Debtor-in-Possession and Related Relief" (Docket #8); and (2) the motion filed by Canyon entitled "CAN IV Packard Square LLC's Emergency Cross-Motion To: (1) Excuse Receiver from Turnover Provisions; and (2) Suspend the Bankruptcy Case" (Docket #28). The Court is addressing those motions in a separate opinion and order being filed today.

F. The Debtor's financing motion

In the Motion, the Debtor seeks an order under 11 U.S.C. § 364 to borrow up to $22,006,132 from Ardent Financial Fund, II, L.P. ("Ardent" or the "DIP Lender"), and of that loan amount, the Debtor seeks an interim order authorizing it to immediately borrow up to $1.5 million from Ardent, before entry of a final order. The purpose of the proposed $22 million loan is to enable the Debtor to complete construction of the Project. The Debtor's budget for the use of the $22 million loan proceeds includes money for this purpose, and it also includes money to finance certain expenses the Debtor expects to incur for its Chapter 11 bankruptcy case — namely, $980,000 for the Debtor's projected legal fees and payment of the Chief Restructuring Officer that the Debtor proposes to employ. The Debtor's loan budget also includes $4,690,282 in "Loan Costs."35

It is undisputed that without post-petition financing, the Debtor has no money with which to fund its Chapter 11 bankruptcy case or perform any work on the Project.

To secure repayment of the proposed DIP loan, the Motion seeks an order granting Ardent a lien that will "prime" all other liens on the Debtor's property — that is, a lien that will have priority over all other liens, under 11 U.S.C. § 364(d)(1). The Motion also seeks an order granting Ardent a super-priority administrative expense to secure full repayment of the proposed DIP loan, under 11 U.S.C. § 364(c)(1). The Debtor says that it is unable to obtain post-petition financing without such a priming lien and super-priority administrative expense being granted to the lender.

Thus, if approved, the lien securing the Debtor's $22 million DIP loan would have priority over the existing liens that Canyon has to secure repayment of its Receivership Loan and its Construction Loan, and priority over all construction liens that are held against the Project by contractors and subcontractors.

In order to obtain the proposed priming lien, of course, the Debtor must prove that "there is adequate protection of the interest[s] of the holder[s] of" the liens to be primed. 11 U.S.C. §§ 364(d)(1)(B), 364(d)(2). The Debtor contends that such adequate protection exists in this case because there is a substantial "equity cushion" — i.e., that the value of the Debtor's property (the Project real estate) is substantially greater than the total of all debts secured by any liens on the property, and that an equity cushion would still exist if the priming lien for the $22 million DIP loan were added. Canyon disputes this, and argues that the Debtor has failed to meet its burden to prove adequate protection. The dispute about adequate protection was the subject of the evidentiary hearing.

IV. Discussion

A. The adequate protection dispute

1. Debtor's position

The Debtor contends that the real property that is the subject of the Project now has, and will in the future have, a value substantially greater that the total debts secured by all liens against the property, including the priming lien to be granted to Ardent as the lender on the proposed DIP loan. The Debtor supports its claims about the value of the property with the opinions of its appraisal expert, David Abraham of Colliers International, who testified during the evidentiary hearing and whose written appraisal report was admitted into evidence.36 In his report and in his testimony, Mr. Abraham opined that the real property has and will have the following present and future market values:

To each of these three values Mr. Abraham adds $4,080,000, which he says is the present value of a certain tax increment financing agreement for which the Debtor has completed all requirements.37 Adding that to the three values just stated, the values become:

With respect to the value of liens on the property, the Debtor argues that these range from a total of $33,624,368.94 (Debtor's contention) to a maximum of $55,289,851.38 (the "worst case scenario" from the Debtor's perspective, according to the Debtor's Craig Schubiner).39 The Debtor presents these two different lien totals as part of its adequate protection case, in large part because the Debtor disputes the amount that Canyon claims it is owed on its loans and the amounts Canyon and some of the lien claimants say is owing on construction liens.

When the proposed priming lien for the $22,000,000 DIP loan is added to the above lien amounts, the total liens would be in the range of $55,624,368.94 to $77,289,851.38. Even the higher of these two amounts, according to the Debtor, is below the market value of the property, no matter which of the three values opined by Mr. Abraham is used ($77,880,000 "As-Is" value as of August 1, 2017; $89,780,000 Future Completion Value on May 1, 2018; or $93,480,000 Future Stabilization Value on August 1, 2018). And, the Debtor emphasizes, the $22 million DIP loan would only be advanced over time, as progress toward completion of the Project occurred. Because of this, the Debtor argues, the value of the Project would be increasing toward the $89,780,000 Future Completion Value as the DIP loan advances move upward toward the full $22 million priming lien amount.

2. Canyon's position

Canyon disputes Debtor's contentions, both as to the value of the property and as to the amount of debt secured by existing liens against the property.

In support of its contentions about value, Canyon relies largely upon the testimony and written report of its appraisal expert, Timothy A. Eisenbraun, discussed below.40 Canyon and its expert Mr. Eisenbraun contend that the Abraham Report and Mr. Abraham's opinions about the value of the property are not properly supported, are based on faulty assumptions, are unreliable, and overstate the value of the property.

With respect to the amount of debt secured by existing liens, Canyon contends that the debt owing to it totals $50,710,493.64 as of August 31, 2017 (consisting of $41,041,777.07 owing on the Construction Loan and $9,668,716.56 owing on the Receivership Loan), with interest accruing on this debt at the rate of $640,273.48 per month.41 And Canyon contends that construction liens against the property total $8,914,852.85 — consisting of a lien in favor of the Project's former general contractor, Quandel, of $5,968,282.49 plus a lien in favor of the current general contractor, O'Brien Construction Company, Inc., of $2,946,570.36.42 Thus, according to Canyon, for purposes of the adequate protection analysis, the existing liens total at least $59,625,346.49 as of August 31, 2017, and that lien total is increasing by the amount of interest accruing after August 31, 2017, at the rate of at least $640,273.48 per month. The $59,625,346.49 sum, plus the $22,000,000 amount of the proposed priming lien under the DIP loan the Debtor seeks, totals $81,625,346.49. And, Canyon argues, the Debtor has not met its burden of proving that the value of the property exceeds, let alone substantially exceeds, this lien total amount.

B. The Court's findings and conclusions about lien amounts, value, and adequate protection

1. Applicable law

Section 364(d) of the Bankruptcy Code states:

11 U.S.C. § 364(d). The issue before the Court is whether, as required by § 364(d)(1)(B), there is adequate protection of the interests of Canyon and the other lien creditors whose liens will be primed by the lien of the DIP Lender, if the Motion is granted. The Debtor has the burden of proving such adequate protection, by a preponderance of the evidence. See 11 U.S.C. § 364(d)(2); see generally Grogan v. Garner, 498 U.S. 279, 286, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991).

In determining whether the Debtor has satisfied this burden, the Court is mindful of the fact that "granting post-petition financing on a priming basis is extraordinary and is allowed only as a last resort." In re YL West 87th Holdings I LLC, 423 B.R. 421, 441 (Bankr. S.D.N.Y. 2010) (citations omitted); see also Bland v. Farmworker Creditors, 308 B.R. 109, 115 (S.D. Ga. 2003) (internal quotation marks and citation omitted) ("[T]he § 364(d) process is considered rare and extraordinary...."); In re Seth Co., Inc., 281 B.R. 150, 153 (Bankr. D. Conn. 2002) (citations omitted) ("The ability to prime an existing lien is extraordinary, and in addition to the requirement that the [debtor-in-possession] be unable to otherwise obtain the credit, the [debtor-in-possession] must provide adequate protection for the interest of the holder of the existing lien[.]"); In re Qualitech Steel Corp., 276 F.3d 245, 248 (7th Cir. 2001) (citation omitted) ("Section 364(d) is supposed to be a last resort. The statutory text itself conveys that message[.]").

In a similar vein, courts have held that the bankruptcy court must exercise particular caution in determining adequate protection in the face of a proposed priming lien:

In re Mosello, 195 B.R. 277, 289, 292 (Bankr. S.D.N.Y. 1996) (emphasis added).

In re Windsor Hotel, L.L.C., 295 B.R. 307, 314 (Bankr. C.D. Ill. 2003).

Section 361 of the Bankruptcy Code, entitled "Adequate protection," lists ways a debtor can provide adequate protection. It states:

11 U.S.C. § 361 (emphasis added).

Sections 361(1) and 361(2) do not apply, because the Debtor is not offering cash payments or replacement liens as adequate protection. Rather, § 361(3) applies, so the Debtor must provide, as adequate protection, the "indubitable equivalent" of the secured creditors' interest in the property securing their claims. "Indubitable equivalence requires such relief as will result in the realization of value [by the secured creditor]." In re Vander Vegt, 499 B.R. 631, 637 (Bankr. N.D. Iowa 2013) (internal quotation marks and citation omitted), aff'd sub nom. First Sec. Bank & Tr. Co. v. Vegt, 511 B.R. 567 (N.D. Iowa 2014). To be the "indubitable equivalent" of a secured creditor's interest in property, the proposed adequate protection must both compensate the secured creditor for the present value of that interest, and insure the safety of that interest. In re Pac. Lifestyle Homes, Inc., No. 08-45328, 2009 WL 688908, at *9 (Bankr. W.D. Wash. Mar. 16, 2009) (relying on in In re Murel Holding Corp., 75 F.2d 941, 942 (2d Cir.1935), and In re Am. Mariner Indus., Inc., 734 F.2d 426, 431 (9th Cir. 1984)), effectively overruled on other grounds by United Sav. Ass'n of Tex. v. Timbers of Inwood Forest Assocs., Ltd., 484 U.S. 365, 108 S.Ct. 626, 98 L.Ed.2d 740 (1988)).

In this case, the Debtor argues, in effect, that the secured creditors will realize the value of their interests in the collateral from the future increase in the value of the collateral which will result when the Project is completed and the residential units and retail spaces are leased.

"In general, courts have denied financing that included a priming lien where adequate protection relied on increased value in highly speculative circumstances, where time periods for value increase were tight, or where a debtor faced red tape or other hurdles." Vander Vegt, 499 B.R. at 638.

Numerous reported cases confirm the need for courts to use great caution in granting a priming lien, where adequate protection is based on predictions of future value. For example:

2. The debt amounts currently secured by liens that would be primed

Canyon presented substantial, credible evidence that there are construction liens against the Debtor's property consisting of (1) $5,968,282.49, based on the lien filed by the Project's former general contractor, Quandel, plus (2) a lien in favor of the current general contractor, O'Brien Construction Company, Inc. ("O'Brien"), of $2,946,570.36. These liens total $8,914,852.85.43 Quandel was the Debtor's general contractor on the Project, until the Debtor terminated Quandel in October 2016, shortly before the Receiver was appointed by the state court. Quandel's filed lien of $5,968,282.49 includes amounts owed by Quandel to subcontractors, some of whom also filed lien notices against the Project. Because of this possible duplication in the filed lien amounts, the Court does not count the dollar value of liens filed by any of the subcontractors for purposes of deciding the adequate protection issue.

During the evidentiary hearing, the Debtor attempted to prove that the valid amount of construction liens against the Project are less than asserted by Canyon. But as part of its burden of proving adequate protection, the Debtor has the burden of proof regarding the amount of liens against the property. And the Debtor failed to meet its burden of proving, by a preponderance of the evidence, that the valid lien amounts against the property are less than the sum of $8,914,852.85 shown by Canyon's evidence. Similarly, Canyon presented substantial, credible evidence that its liens for the Construction Loan and the Receivership Loan total $50,710,493.64 as of August 31, 2017, with interest continuing to increase that lien amount at the rate of $640,273.48 per month thereafter.44 The Debtor failed to meet its burden of proving, by preponderance of the evidence, that the debt amount owing to Canyon, secured by Canyon's liens, is less than the amounts shown by Canyon's evidence.

For these reasons, the Court must assume, and finds and concludes, that for purposes of deciding the issue of adequate protection, the total amount of debt secured by liens against the Debtor's property is at least $59,625,346.49 as of August 31, 2017, and is increasing by the amount of interest accruing after that date at the rate of at least $640,273.48 per month.45 The $59,625,346.49 sum, plus the $22,000,000 amount of the proposed priming lien under the DIP loan Debtor seeks, totals $81,625,346.49.46

3. The value of the property

"In some cases, the [equity] cushion alone is adequate to guarantee a party will receive the `indubitable equivalent' of its interest in the property as permitted by 11 U.S.C. § 361(3). The adequacy of a[n equity] cushion amount must be evaluated on a case-by-case basis." In re Schaller, 27 B.R. 959, 962 (W.D. Wis. 1983) (citations omitted).

To succeed in proving adequate protection in this case, the Debtor must prove that an adequate equity cushion exists and will exist, through the interim period covered by an interim order (with a DIP loan maximum amount of $1.5 million during the interim period), and into the future as the full $22,000,000 DIP loan is to be advanced to the Debtor.

Turning now to the dispute between the Debtor and Canyon regarding the value of the Debtor's real property, the Court first notes that all three of the valuation amounts opined by the Debtor's appraisal expert, Mr. Abraham, are based on projections of the future value of the property after the Project is fully constructed ("completed") and, thereafter, when the Project is fully rented ("stabilized"). This is obviously so for Mr. Abraham's $85,700,000 Future Completion Value on May 1, 2018 and his $89,400,000 Future Stabilization Value on August 1, 2018. But it is also true with respect to Mr. Abraham's opinion of the $73,800,000 As-Is Value on August 1, 2017.

To arrive at the As-Is Value on August 1, 2017, Mr. Abraham began with the $89,400,000 Future Stabilization Value on August 1, 2018, and deducted certain adjustments from that value. The total of these deductions was $15,600,000. Mr. Abraham subtracted the $15,600,000 from the $89,400,000 Future Stabilization Value to arrive at the $73,800,000 As-Is Value on August 1, 2017. The largest of these deductions was for $11,880,000 as the "total cost to complete" the development between now and the August 1, 2018 assumed date of stabilization. The logic of this approach — deducting the assumed future cost to complete the Project from the Future Stabilized Value to help arrive at a current As-Is Value — is that the current value of the property in its partially-completed, completely un-rented (and therefore non-income producing) state is what the property will be worth after the Project is completed and fully rented, less the cost it will take to move the project from its current state to the future completed and stabilized state. (Mr. Abraham's other deduction adjustments were $2,357,371 in "Total Lease-Up" costs and $1,382,195 in "Total Other Income Loss.")47

Thus, all of Mr. Abraham's opinions about the value of the Debtor's real property, at each of the three different times, are based on projections of what the value of the property will be in the future after construction of the Project is completed, and in the case of the As-Is Value and the Future Stabilization Value, after the apartments and retail space in the Project are fully rented and income-producing.

But the Project is far from completed, and no part of the Project's apartment space or retail space is occupied and rented, so the Project is not currently producing any income. And there is inherent uncertainty about the future — including how long it will take and how much it will cost in the future to complete the Project and to fully rent it, and how much rental income will be generated in the future. For these reasons alone, the Court finds each of the three valuation amounts ascribed to the Debtor's real property by the Debtor's appraisal expert to be inherently uncertain and speculative to some extent.

In addition, the Court finds that there are several major flaws in the Debtor's valuation evidence that make it unreliable. These are discussed later in this opinion.

But first, the Court will focus on what the adequate protection picture is, using Mr. Abraham's projected values. Even using those, the Debtor has failed to prove adequate protection.

The Court will begin by considering Mr. Abraham's "As-Is Value" of the Debtor's real property, on August 1, 2017, which is $73,800,000, plus the $4,080,000 present value of the tax increment financing agreement, for a total of $77,880,000. This current value is less than the sum of (1) the existing liens, which total at least $59,625,346.49 as of August 1, 2017, plus (2) the $22,000,000 amount of the proposed priming lien under the DIP loan the Debtor seeks. This lien sum equals $81,625,346.49. Thus, the total amount of the proposed priming lien plus the existing liens is greater than the current, As-Is Value by $3,745,346.49. This, of course, is an equity deficit, not an equity cushion.

But the Debtor's view is that this is not a fair comparison of value to lien amounts, because under the DIP loan the Debtor seeks, the loan would only be disbursed in periodic advances as construction of the Project progressed and moved toward completion. The Debtor argues that as the Debtor would draw upon the $22,000,000 DIP loan gradually over time, the value of the real property would be increasing correspondingly, and would be higher than the current As-Is Value of $77,880,000. Instead, the value would be moving toward Mr. Abraham's projected $89,780,000 Future Completion Value and projected $93,480,000 Future Stabilization Value.

There are at least two problems with the Debtor's argument. First, the Debtor failed to prove with any evidence how much the value of the property would increase as DIP loan proceeds were gradually being spent on constructing the Project. The Debtor's counsel argued, in effect, that the value of the Project would continually increase by at least as much as the amount of the DIP loan money being spent on the Project. But the Debtor did not prove this.

Second, the Debtor's argument overlooks the fact that as time passes, the amount of the existing liens will be increasing by at least the amount of interest accruing on Canyon's loans — at least $640,273.48 per month. Thus, by the date on which Mr. Abraham projects a $89,780,000 Future Completion Value (May 1, 2018), the existing liens would have increased from the $59,625,346.49 amount as of August 31, 2017, by at least $5,122,187.80 ($640,273.48 per month times 8 months), to a total of at least $64,747,534.33. Adding the $22 million DIP loan priming lien to that equals a total of $86,747,534.33 in liens against the property as of May 1, 2018. This is only $3,032,465.67 less than Mr. Abraham's projected Future Completion Value on May 1, 2018. This is a very slim equity cushion. It is only 5.43% of the above projected amount of Canyon's liens as of May 1, 2018,48 and more importantly, it is only 4.68% of the projected amount of all the existing liens to be primed, as of May 1, 2018.49 It amounts to only 3.38% of Mr. Abraham's projected value of the Debtor's real property on May 1, 2018.50 The Court finds that this is not enough of an equity cushion to be adequate protection of the existing liens.

Similarly, by the date on which Mr. Abraham projects a $93,480,000 Future Stabilization Value (August 1, 2018), the existing liens would have increased from the $59,625,346.49 amount as of August 31, 2017, by at least $7,043,008.28 ($640,273.48 of interest per month times 11 months), to a total of at least $66,668,354.77. Adding the $22 million DIP loan priming lien to that equals a total of $88,668,354.77 in liens against the property as of August 1, 2018. This is only $4,811,645.23 less than the projected Future Stabilization Value on August 1, 2018. This is a slightly higher equity cushion than the one projected for May 1, 2018, but this August 1, 2018 equity cushion too is a very slim equity cushion. It is only 8.33% of the projected amount of Canyon's liens as of August 1, 2018,51 and more importantly, it is only 7.22% of the projected amount of all the existing liens to be primed, as of August 1, 2018.52 It amounts to only 5.15% of Mr. Abraham's projected value of the Debtor's real property on August 1, 2018.53 The Court finds that this is not enough of an equity cushion to be adequate protection of the existing liens.

The Court finds these equity cushion percentages just calculated to be too small to be adequate protection of the existing liens, in large part because they are based on projections of value that are several months into the future, and that are inherently uncertain and speculative, as discussed above. This uncertainty and these small equity cushion percentages leave too great a margin of risk to the existing lien holders — too great a risk that the proposed priming DIP loan lien would impair the value of the existing liens. See generally In re Windsor Hotel, L.L.C., 295 B.R. at 314 (priming lien must be denied "[w]hen the effect of the new borrowing with a senior lien is merely to pass the risk of loss to the holder of the existing lien"). Other cases have found equity cushion percentages in this range insufficient to be adequate protection. See Kost v. First Interstate Bank of Greybull (In re Kost), 102 B.R. 829, 831-33 (D. Wyo. 1989) (quoting, with approval, In re McKillips, 81 B.R. 454, 458 (Bankr. N.D. Ill. 1987) (citations omitted): "[c]ase law has almost uniformly held that an equity cushion of 20% or more constitutes adequate protection;" and "[c]ase law has almost as uniformly held that an equity cushion under 11% is insufficient to constitute adequate protection;" and "[c]ase law is divided on whether a cushion of 12% to 20% constitutes adequate protection"); Drake v. Franklin Equip. Co. (In re Franklin Equip. Co.), 416 B.R. 483, 528-29 (Bankr. E.D. Va. 2009) (quoting above passage from Kost with approval, and citing numerous other cases; and finding an equity cushion of 4.87% to be insufficient).

Thus, even using Mr. Abraham's estimates of projected future values, the Court concludes that the Debtor failed to meets its burden of proving adequate protection by a preponderance of the evidence.

But even if the slim equity cushion amounts described above could be deemed adequate, the Debtor has not met its burden of proving them. These equity cushions are based on projected values of the Debtor's real property that have not been proven by reliable evidence. There are several significant flaws in the Debtor's appraisal evidence.

First, as he testified and described in more detail in his report, Mr. Abraham considered three general valuation approaches — the Income Capitalization Approach; the Sales Comparison Approach; and the Cost Approach. Of these three approaches, however, Mr. Abraham relied ultimately on only the Income Capitalization Approach. He stated in his report that "the [Income Capitalization Approach] warranted primary emphasis,"54 but he actually stated that the two other approaches — the Cost Approach and the Sales Comparison Approach — are not reliable in this case:

Because the Debtor's own expert conceded that his Cost Approach and his Sales Comparison Approach are not reliable in this case, the Court finds them to be unreliable and will give them no weight in determining value in this case.

Second, and in any event, under all of the valuation approaches, all three of the values opined by Mr. Abraham are premised on significant, unproven assumptions. They are based on, among other things, the following assumptions: (1) that the total cost to complete the Project will be $11,880,000,56 and that the Project will be completed by May 1, 2018, which is less than seven months from now. These are assumptions that were crucial to Mr. Abraham's appraisal values, and were provided to Mr. Abraham by the Debtor's Craig Schubiner. But the Debtor failed to prove these crucial assumptions by a preponderance of the evidence.

Canyon presented substantial, credible evidence that it will cost roughly $19 million to complete the Project, and that the Project cannot be completed until the end of October 2018.57 The Debtor attempted to prove its much more optimistic assumptions, chiefly through the testimony of the Debtor's Craig Schubiner. But the Court finds the Debtor's evidence to be unpersuasive on these points, and finds the evidence presented by Canyon, including the testimony of the current general contractor O'Brien's Paul Marcus, to be more credible and persuasive. The Debtor failed to meet its burden of proving the truth and validity of its above assumptions by a preponderance of the evidence. This renders Mr. Abraham's appraisal values unreliably high.

Third, the Court agrees with several of the other criticisms of Mr. Abraham's appraisal opinions made by Canyon's appraisal expert Mr. Eisenbraun in his report and testimony. These include the following points, which are some, but not all, of Mr. Eisenbraun's criticisms. As Mr. Eisenbraun stated in his report, CX-D, in rebutting Mr. Abraham's appraisal report:

For these additional reasons, the Court finds the Debtor's appraisal evidence to be unpersuasive.

For all of these reasons, the Court finds that the Debtor has failed to meet its burden of proving, by a preponderance of the evidence, adequate protection in the form of any equity cushion, let alone an adequate equity cushion, to protect the lien interests of the existing lien holders, including Canyon, if the proposed DIP loan and priming lien are approved.

V. Conclusion

For the reasons stated in this opinion, the Court will enter an order denying the Motion.