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IN RE CAPITOL STATION 65, LLC, 17-23627-B-11 (2018)

Court: United States Bankruptcy Court, E.D. California Number: inbco20180109549 Visitors: 34
Filed: Jan. 08, 2018
Latest Update: Jan. 08, 2018
Summary: NOT FOR PUBLICATION MEMORANDUM AND ORDER GRANTING MOTION TO APPROVE POSTPETITION FINANCING, GRANTING PRIMING LIEN, AND RELATED RELIEF DC No. NH-3 CHRISTOPHER D. JAIME , Bankruptcy Judge . Presently before the court is a motion by Capitol Station 65, LLC, Capital Station Member, LLC, Capitol Station Holdings, LLC, and Township Nine Owners, LLC, each a debtor and debtor in possession — collectively, "Debtors" — to approve postpetition financing, grant a priming lien, and for related relief.
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NOT FOR PUBLICATION

MEMORANDUM AND ORDER GRANTING MOTION TO APPROVE POSTPETITION FINANCING, GRANTING PRIMING LIEN, AND RELATED RELIEF

DC No. NH-3

Presently before the court is a motion by Capitol Station 65, LLC, Capital Station Member, LLC, Capitol Station Holdings, LLC, and Township Nine Owners, LLC, each a debtor and debtor in possession — collectively, "Debtors" — to approve postpetition financing, grant a priming lien, and for related relief. An initial hearing on the motion was held on August 29, 2017. A final evidentiary hearing on the motion was held on December 11, 2017. Appearances at both hearings were noted on the record. This memorandum and order constitutes the court's final decision on the motion and its findings of fact and conclusions of law pursuant to Federal Rule of Civil Procedure 52(a) applicable by Federal Rules of Bankruptcy Procedure 7052 and 9014(c).

INTRODUCTION

The Debtors request authorization to borrow up to an aggregate amount of $10,000,000.00 from Serene Investment Management, LLC, or its assigns ("Serene"), as postpetition debtor in possession financing (the "DIP Loan"). The Debtors also request authorization to grant Serene a super-priority administrative claim and a senior priming lien on substantially all real and personal property assets, including the real property comprising the development known as the Township Nine project which encompasses approximately 65 acres bound by North 5th Street on the west, North 7th Street on the east, Richards Boulevard on the south, and the American River on the north (the "Township Nine Property"). The Township Nine Property, and the Debtors' other personal property assets, are encumbered by a deed of trust held by Township Nine Avenue, LLC, which is the assignee of Copia Lending, LLC.1 There are also additional encumbrances on the Township Nine Property.

Copia opposes the motion and the DIP Loan. Copia filed an initial opposition on August 15, 2017, and a supplemental opposition on November 27, 2017. The Debtors filed an initial reply on August 22, 2017, and a supplemental reply on December 4, 2017. The Unsecured Creditors' Committee also filed a position statement on August 15, 2017, and it has expressed support for both the motion and the DIP Loan.

At the conclusion of the August 29, 2017, hearing the court granted the Debtors' motion on an interim basis and authorized the Debtors to borrow up to $1,900,000.00 through December 8, 2017. The borrowing date was subsequently extended to January 9, 2018, and the amount increased to $2,000,000.00 on a further interim basis following the final evidentiary hearing held on December 11, 2017.

As an initial matter, the court adopts and by this reference incorporates herein its evidentiary rulings stated on the record in open court on December 11, 2017, regarding objections to, and the admissibility and admission of, the parties' direct testimony declarations and exhibits.

The court also adopts and incorporates herein as its final findings of fact and conclusions of law the tentative findings of fact and conclusions of law stated on the record in open court on August 29, 2017, as they pertain to the following sections of Copia's initial opposition: (i) § III.A. (objection re: "end run" around § 362(d) (3)); and (ii) § III.C. (objection re: use of the proposed DIP Loan as a sub-rosa plan). See Transcript, dkt. 128, at 6:3-7:17 (re: § III.A.) and 10:12-11:13 (re: § III.C.). Section III.F. of Copia's initial opposition, which pertains to repayment of the DIP Loan, was addressed and sufficiently resolved by the § 1125 "adequate information" disclosures made in the context of the now-approved disclosure statement. See dkts. 175, 177, and 179.

In addition to valuation and adequate protection determinations, that leaves §§ III.B., III.D., and III.E. of Copia's initial opposition and the additional objections and arguments in Copia's supplemental opposition. Those matters are addressed below.

BACKGROUND

As noted above, the Township Nine Property is a master planned development that consists of approximately 65 gross acres north of Downtown Sacramento. The development includes approximately 31.62 net developable acres. Anthem United Homes, Inc. ("Anthem") is under contract to buy 11.27 of the net developable acres (land) for $17,677,000.00. Anthem will also assume $4,398,420.00 in infrastructure completion costs associated with the land it is buying. It is also buying fee credits.

The Township Nine Property is a mixed-use, transit-oriented development that does and will include high-density rental units and for-sale housing, retail and office space, open space, trials, and parks. It includes 2,201 residential units consisting of apartments, condominiums, hotel, hospitality, and attached and detached townhouse projects. It also includes up to 840,000 square feet of office space and 150,000 square feet of retail space as well as 27 acres of parks and open space. The development is light rail accessible on the Green Line and includes extensive footage along the American River and Twin Rivers Bike Trail. The project was entitled in August 2007, with the tentative map amended in 2010 and again in 2017.

Copia holds a first deed of trust on the Township Nine Property. That deed of trust secures Copia's 2008 loan to the Debtors in the original principal amount of $20,000,000.00. Copia contends that as of December 11, 2017, the loan balance is $46,787,543.00, exclusive of attorney's fees after May 24, 2017. The Debtors dispute that amount. Other encumbrances on the Township Nine Property total approximately $597,154.00.

On December 11, 2017, the court heard several hours of testimony by two appraisers: Arthur E. Gimmy, President of AGI Valuations ("AGI"), and Adam Bursch, Director of Appraisal with Bender Rosenthal, Inc. ("BRI"). Both appraisers have extensive education, training, and professional qualifications. Both are qualified as experts.

Mr. Gimmy testified for the Debtors. Mr. Gimmy prepared an appraisal which the Debtors submitted with their motion. That initial appraisal, dated March 29, 2016, concluded that as of March 15, 2016, (i) the total appraised market value of the Township Nine Property, with fee credits, was $78,160,000.00, and (ii) the market value of the "as is" fee simple interest in the Township Nine Property, without fee credits, was $64,950,000.00.

Mr. Gimmy also prepared an updated appraisal. That updated appraisal is dated October 2, 2017. It relies on discounted comparables from the Downtown, Midtown, and East Sacramento area markets. It concludes that, as of October 2, 2017, (i) the total appraised "as is" market value of the Township Nine Property, with fee credits (valued at $16,512,769.00) and less the cost to complete remaining infrastructure (estimated at $9,918,500.00) is $77,950,000.00 and (ii) the market value of the "as is" fee simple interest in the Township Nine Property exclusive of fee credits and reflecting the cost to complete the remaining infrastructure is $61,431,500.00 (the "AGI Appraisal").2

Mr. Bursch testified for Copia. Mr. Bursch prepared an appraisal that Copia submitted with its initial opposition to the Debtors' motion. That initial appraisal, dated May 26, 2017, concluded that as of December 31, 2016, the market value of the Township Nine Property, (i) with fee credits, was $27,100,000.00, and (ii) without fee credits, was $12,810,000.00.

Mr. Bursch also prepared an updated appraisal. That updated appraisal is dated September 26, 2017. It relies on no Downtown and Midtown comparables, and, instead, relies exclusively on comparables from West and East Sacramento and the River District neighborhood. It concludes that as of September 15, 2017, the Township Nine Property has a market value, (i) with fee credits (valued at $13,190,000.00) of $46,540,000.00, and (ii) without fee credits of $33,350,000.00 (the "BRI Appraisal").

A summary of the AGI and BRI Appraisals is as follows:

AGI Appraisal Date Valuation Date W/Fee Credits W/O Fee Credits March 29, 2016 March 15, 2016 $78,160,000.00 $64,950,000.00 October 2, 2017 October 2, 2017 $77,950,000.00 $61,431,500.00 BRI Appraisal Date Valuation Date W/Fee Credits W/O Fee Credits May 26, 2017 December 31, 2016 $27,100,000.00 $12,810,000.00 September 26, 2017 September 15, 2017 $46,540,000.00 $33,350,000.00

The updated AGI Appraisal and the updated BRI Appraisal, and their respective exhibits, were admitted into evidence and are the governing appraisals and exhibits for purposes of the December 11, 2017, final evidentiary hearing.

In addition to Messrs. Gimmy and Bursch, the court also heard expert testimony and received into evidence a report from Dean Wehrli, Senior Vice President, John Burns Real Estate Consulting, LLC, on behalf of the Debtors. Mr. Wehrli's testimony and report concerned the Downtown and Midtown competitive market areas, the inclusion of the Township Nine Property in those market areas, and the appropriate use of a discount applicable to comparables from those market areas to value the Township Nine Property. Copia provided no similar expert testimony independent of Mr. Bursch's opinion. Alberto Esquivel, Project Manager for Capitol Station 65, LLC, also testified for the Debtors. And the court admitted into evidence a declaration of Robert Perkins for the limited purpose of establishing the disputed amount of the debt owed to Copia. The testimony of these witnesses and the exhibits are discussed in greater detail below.

Debtors' Exhibit Q was also admitted into evidence as Copia's business record. Exhibit Q consists of a number of Real Estate Portfolio Reports in which Copia's agent, TDA Investment Group, represented to its investor, Construction Laborers Pension Trust for Southern California, historical values of the Township Nine Property consistent with a number of AGI's prior appraisals of the property.3 Those representations of value are as follows:

(1) $40,400,000.00 (land value) for the quarter ended December 31, 2009: (2) $51,400,000.00 for the quarters ended December 31, 2011; March 31, 2012; June 30, 2012; September 30, 2012; December 31, 2012: (3) $57,200,000.00 for the quarters ended March 31, 2013; June 30, 2013; September 30, 2013: (4) $61,500,000.00 for the quarters ended December 31, 2013; March 31, 2014; June 30, 2014; September 30, 2014: (5) $64,950,000.00 for the quarters ended December 31, 2014; March 31, 2015; June 30, 2015; September 30, 2015: and, (6) $78,000,000.00+ for the quarters ended December 31, 2015; March 31, 2016; June 30, 2016; September 30, 2016; December 31, 2016; March 31, 2017; June 30, 2017.

Notably, the $51,400,000.00, $64,950,000.00, and $78,000,000.00 value representations are consistent with value conclusions in the AGI appraisals that were prepared for and requested by Copia as noted in footnote 2, supra. Copia and/or its agent did not criticize or object to the methodology, assumptions, or ultimate value conclusions in any of AGI's prior appraisals of the Township Nine Property.

Valuation at this stage of the chapter 11 case is critical. It will determine whether the Debtors are able to borrow up to $10,000,000.00 from Serene and grant Serene a senior lien that primes Copia's existing deed of trust and all other encumbrances on the Township Nine Property.

Exercising their business judgment, the Debtors have selected Serene as their debtor in possession lender. Without Serene, and the ability to grant Serene a super-priority administrative claim and senior priming lien, the Debtors could not obtain any credit or postpetition financing, unsecured or otherwise. And the Debtors made diligent efforts to do so.

Early on, the Debtors engaged the assistance of Tim Eppler of COF Capital Partners. Mr. Eppler is qualified in the area of real estate finance, including distressed lending and debtor in possession financing. Mr. Eppler approached six potential lenders on the Debtors' behalf in an effort to procure postpetition debtor in possession financing. The Unsecured Creditors Committee also assisted in the search for other potential lenders.

All lenders that Mr. Eppler contacted requested a first priority and senior lien on the Debtors' assets. All lenders also offered interest rates that varied from 14% to 18%. Serene, on the other hand, offered a lower interest rate at 10% — which is actually lower than Copia's current 16% default rate. Serene also offered the Debtors terms more favorable than the other lenders contacted. For example, Serene offered the Debtors an option to convert the postpetition financing into postconfirmation financing (rather than the paying the DIP Loan in full on effective date). Serene also offered lower fees. And Serene agreed to terms for release prices for parcels of the Township Nine Property as they are sold.

JURISDICTION

Federal subject matter jurisdiction is founded on 28 U.S.C. § 1334. This is a core proceeding under 28 U.S.C. §§ 157(b)(2)(A), (B), (L), (M), and (O). To the extent this is a matter that may ever be determined to be a matter that a bankruptcy judge may not hear and determine without consent, the parties have nevertheless consented to such determination by a bankruptcy judge. See 28 U.S.C. § 157(c) (2). Venue is proper under 28 U.S.C. § 1409.

DISCUSSION

I. Valuation Analysis and Value Determination

A. Appraisal Standards

Valuation of property in bankruptcy a case may be determined in various contexts and for different purposes throughout the case. Fin. Sec. Assurance Inc. v. T-H New Orleans Ltd. P'ship (In re T-H New Orleans Ltd. P'ship), 116 F.3d 790, 797 (5th Cir. 1997) (valuation issues arise in various contexts including establishing equity, adequate protection, and plan confirmation). In the context of the motion before the court, the court is asked to value the Township Nine Property for DIP Loan adequate protection purposes and for plan confirmation.

Bankruptcy courts are given considerable flexibility in resolving valuation issues. Id. at 799; see also 4 COLLIER ON BANKRUPTCY ¶ 506.03[7], at 506-50 (Alan N. Resnick & Henry J. Sommer eds., 16th ed. 2010). Valuation of property is not an exact process. See Boyle v. Wells (In re Gustav Schaefer Co.), 103 F.2d 237, 242 (6th Cir.), cert. denied, 308 U.S. 579, 60 (1939) ("The valuation of property is an inexact science and whatever method is used will only be an approximation[.]"). In fact, courts are often greeted with conflicting appraisals and testimony, to which weight must be assigned depending upon credibility assessments. In re Smith, 267 B.R. 568, 572 (Bankr. S.D. Ohio 2001) ("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 Coates, 180 B.R. 110, 112 (Bankr. D.S.C. 1995) ("The valuation process is not an exact science, and the court must allocate varying degrees of weight depending upon the court's opinion of the credibility of . . . [the appraisal] evidence.").

A bankruptcy court is not bound by valuation opinions or reports submitted by appraisers, and may form its own opinion as to the value of property in bankruptcy proceedings. See In re Patterson, 375 B.R. 135, 144 (Bankr. E.D. Pa. 2007). Indeed, the Ninth Circuit has stated that a court may reject an appraisal or not credit it with any weight whatsoever when determining value. See Sammons v. C.I.R., 838 F.2d 330, 334 (9th Cir. 1988). And as one court in the Ninth Circuit explained:

Complex factual inquires such as valuation require the trial judge to evaluate a number of facts: whether an expert appraiser's experience and testimony entitle his opinion to more or less weight; whether an alleged comparable sale fairly approximates the subject property's market value; and the overall cogency of each expert's analysis. Sammons v. Comm's of IRS, 838 F.2d 330, 333 (9th Cir. 1988); Ebben v. Comm's, 783 F.2d. 906, 909 (9th Cir. 1986). The court does not necessarily abuse its discretion if it decides to reject an appraisal. Id.

In re Ahmed, 2011 WL 1004649, *2 (Bankr. N.D. Cal. 2011); see also In re Evans, 492 B.R. 480, 508 (Bankr. S.D. Miss. 2013) ("A court may accept an appraisal in its entirety, may choose to give weight only to portions of the appraisal, or may reject the appraisal altogether.").

An appraisal may be rejected as unreliable when it is based on assumptions that are fundamental to the appraiser's conclusion with no anchors to reality thereby rendering the assumptions fundamentally flawed. In re Diamond Beach VP, LP, 506 B.R. 701, 717-718 (Bankr. S.D. Tex. 2014). An appraisal may also be rejected when its purpose is suspect. See In re Hoosier Hi-Reach, Inc., 64 B.R. 34, 38 (Bankr. S.D. Ind. 1986). And significantly, where only one of two competing appraisals is based on relevant comparables the court may reject in its entirety the other appraisal that is not. See In re Jones, 2004 WL 298612, *2 (Bankr. C.D. Ill. 2004). Indeed, "[a]ppraisals that use comparable properties that are so dissimilar to the subject property have been recognized as unreliable." In re Pod, 560 B.R. 77, 83 (Bankr. E.D.N.Y. 2016) (citations omitted); see also In re Brown, 289 B.R. 235, 238 (Bankr. M.D. Fla. 2003) ("[T]he better reasoned approach is to review all of the proposed comparables, including in its analysis only those that assist the Court in its determination.").

B. The Appraisals

The AGI Appraisal and the BRI Appraisal differ dramatically with regard to the comparables that each uses to value the Township Nine Property. The AGI Appraisal relies on Downtown and Midtown comparables whereas the BRI Appraisal excludes comparables from those areas and relies on comparables from East and West Sacramento and the River District neighborhood. Mr. Bursch testified that the comparables used to value the Township Nine Property are the most important factor in each appraiser's opinion of value. The court agrees with that concept. See In re Wood, 2017 WL 562248, *5 (Bankr. D. N.H. 2017) ("If an appraiser has chosen the `wrong' comparable sales, i.e., properties that are not actually comparable, then the adjustments an appraiser makes to the comparable sales do not really matter.").

Substantial evidence supports the placement of the Township Nine Property in the Downtown and Midtown market areas. Colliers International, an industry-leading global real estate company with extensive knowledge and experience in commercial and property development real estate, is cited throughout the BRI Appraisal. Colliers is a credible data source. Colliers places the Township Nine Property in the Central Sacramento submarket, the Downtown/Midtown/East Sacramento retail submarket, and the Downtown Sacramento office submarket. Mr. Bursch also acknowledged on cross-examination that the Township Nine Property is in (and within) those Downtown and Midtown market areas. And he also acknowledged on cross-examination that the Township Nine Property is within the same "CMA" — or "competitive market area" which is defined as the geographic source of competitive real estate supply — as the Downtown and Midtown market areas. In that regard, Mr. Bursch's latter acknowledgment is consistent with Mr. Wehrli's expert testimony and report, which are credible and which the court accords substantial weight. Both place the Township Nine Property in the same competitive market area as Downtown and Midtown.

The categorical exclusion of Downtown and Midtown comparables from the BRI Appraisal renders the BRI Appraisal unreliable and internally inconsistent. The BRI appraisal is unreliable because Downtown comparables are relevant, if not critical, to the determination of the value of the Township Nine Property. That means by excluding Downtown and Midtown comparables the BRI Appraisal uses comparables that are too dissimilar from the Township Nine Property and, in that regard, it uses the wrong comparables. That also means the analysis applied to the comparables used in the BRI Appraisal really does not matter. The BRI Appraisal is also internally inconsistent, and thereby inherently unreliable, because, on the one hand, the appraisal and its author acknowledge that the that the Township Nine Property is in (and within) the Downtown and Midtown market areas and, at the same time, the appraisal excludes Downtown and Midtown comparables.

Mr. Bursch gave several reasons in an attempt to justify the exclusion of Downtown and Midtown comparables from the BRI Appraisal. However, the court finds and concludes that none of those reasons are credible.

Mr. Bursch testified that he excluded Downtown and Midtown comparables from the BRI Appraisal based on "surveys" — which were actually free-form telephone conversations — that he conducted with numerous "market participants." Mr. Bursch testified on the witness stand that he asked each market participant with whom he spoke their opinion about comparisons between the Downtown and Midtown market areas and the Township Nine Property, and the use of the former as comparables for the latter. Mr. Bursch was then presented with his deposition testimony where he was asked if he asked each "market participant" whether Downtown and Midtown market areas should be used as comparables for the Township Nine Property and his answer during his deposition was a direct "No."

In short, Mr. Bursch's directly contradicted himself on a critical point relevant to the appraisal process and the Township Nine Property valuation analysis. The court draws several conclusions from Mr. Bursch's conflicting testimony.

First, and most important, Mr. Bursch's conflicting witness stand and deposition testimony weighs negatively on his overall credibility.

Second, if Mr. Bursch's witness stand testimony is not true and his deposition testimony is true, i.e., he did not ask each "market participant" about the Township Nine Property in comparison to the Downtown and Midtown market areas, then it would appear that Mr. Bursch contradicted himself on the witness stand in an effort to justify the exclusion of Downtown and Midtown comparables from the BRI Appraisal by creating the false impression of a unanimous opinion among "market participants" that the Township Nine Property is not comparable to the Downtown and Midtown areas.

Third, if Mr. Bursch's witness stand testimony is true and his deposition testimony is not true, i.e., he did ask each "market participant" with whom he spoke about the use (and exclusion) of Downtown and Midtown comparables for the Township Nine Property, then his opinion of value was unduly and prejudicially influenced. Mr. Bursch also testified that one of the "market participants" with whom he spoke is a competitor of the Debtors. As the Debtors' competitor that "market participant" would have a significant financial motive and business incentive to exclude the Township Nine Property from the Downtown and Midtown market areas and thereby influence a substantial reduction in the value of the Township Nine Property.

Mr. Bursch also testified that he excluded Downtown and Midtown comparables from his valuation analysis in the BRI Appraisal because the Township Nine Property does not have the quality and concentration of amenities that are found in the Downtown and Midtown areas. It is true that the Township Nine Property offers fewer and different types of amenities than the amenities found in the immediate Downtown and Midtown market areas. For example, whereas Downtown and Midtown offer access to bars, restaurants, grocery, retail, and entertainment the Township Nine Property offers access to parks, trails, open space, and river and light rail access. However, Mr. Bursch also testified that no one amenity is more important than another and the market does not distinguish between amenities because the market does not have the granularity to differentiate in the value of amenities. And if the market lacks the granularity to distinguish between the value of different amenities then, as Mr. Wehrli's expert testimony and report establish, it is more appropriate and reliable to include, and then discount, Downtown and Midtown comparables, as the AGI Appraisal does, rather than to categorically exclude comparables from those areas, as the BRI Appraisal does.

Including, and then discounting, Downtown and Midtown comparables, rather than excluding those comparables altogether, is also consistent with the "walkability" concept as it pertains to the amenities that each area offers. Both appraisers testified that "walkability" is an important consideration in the context of amenities. "Walkability" was defined to include access to amenities from within one-quarter to one mile. Mr. Bursch acknowledged that the Township Nine Property is within one mile of the central core of the central Downtown Sacramento business district. That puts many of the amenities in the Downtown and Midtown areas, including the Golden 1 Arena according to Mr. Bursch, within "walkability" of the Township Nine Property. And that too undercuts Mr. Bursch's testimony that the difference in the quality and number of amenities between the Township Nine Property and the Downtown and Midtown areas warrants a total exclusion of Downtown and Midtown comparables rather than discounting comparables from those areas in the valuation analysis.

Three additional factors also weigh heavily against the reliability and credibility of the BRI Appraisal.

First, for a number of years Copia and/or its agent represented to its investor values of the Township Nine Property nearly identical to values established by AGI's prior appraisals of the property. In fact, at least three of those represented values were established by AGI appraisals that Copia directed and requested. Placed in that context, the purpose of the BRI Appraisal is suspect. Copia only became an advocate for appraisals that reduce the value of the Township Nine Property by nearly two-thirds, and then by over one-half, after the Debtors filed their chapter 11 petitions and moved to approve the DIP Loan that requires a lien senior to its deed of trust. Otherwise, Copia and/or its agent were more than willing to accept substantially higher values and to continually represent those substantially higher values to its investor without questioning or criticizing AGI's concluded values or the assumptions and methodologies that AGI used to establish the concluded values.

Second, and along the same lines, in its quarter ended March 30, 2017, Copia and/or its agent represented to its investor that the Township Nine Property was worth upwards of $78,000,000.00. About two months later, at the end of May of 2017, Copia obtained the first BRI appraisal that purported to value the Township Nine Property at nearly one-third that amount with fee credits, i.e., $27,100,000.00, and substantially less without fee credits, i.e., $12,810,000.00. Yet, for the quarter ended June 30, 2017, almost a month after it obtained that first appraisal from BRI in May of 2017, Copia and/or its agent continued to represent to its investor that the value of Township Nine Property remained at upwards of $78,000,000.00 without any mention of the (first) May 2017 BRI appraisal.4 One conclusion easily drawn from that course of conduct, and the apparent concealment of material information from its investor, is that Copia and/or its agent did not view the first BRI appraisal as a reliable valuation of the Township Nine Property. And if that's the case, why then should the court view the (second) BRI Appraisal as a reliable valuation of the Township Nine Property when the (second) BRI Appraisal is merely an "update" of the first May 2017 appraisal.

Third, there is a substantial variance in land values between the first and second BRI appraisals. The first BRI appraisal values the Township Nine Property land, without fee credits and as of December 31, 2016, at $12,810,000.00. The second BRI Appraisal values the Township Nine Property land, without fee credits and as of September 15, 2017, at $33,350,000.00. That is an increase in dollars of $20,540,000.00. And according to the court's math, that translates to a 160.3435% increase in land value over a nine month period. That increase is not realistic. Nor is it consistent with the BRI Appraisal which reflects that between December 2016 and September 2017 the Sacramento market experienced a monthly appreciation of between'5% and 6%. Assuming that Mr. Bursch's market appreciation analysis is correct, at best, one would realistically expect a corresponding increase in the land value of the Township Nine Property between the first and second BRI appraisals of between 45% and 54% — not 160%.5 In that regard, not only is the BRI Appraisal unreliable, but, it is unrealistic and therefore not credible.

The AGI Appraisal, in contrast, relies on Downtown and Midtown comparables. And although it discounts those Downtown and Midtown comparables, based on the court's conclusion that the Township Nine Property is in (and within) the Downtown and Midtown market areas, the court reiterates that it is more reliable to value the Township Nine Property by using, and then discounting, Downtown and Midtown comparables rather excluding comparables from those markets altogether. This approach is consistent with and supported by Mr. Wehrli's expert testimony and report and it is precisely what the AGI Appraisal does, i.e., it discounts Downtown and Midtown comparables used to value the Township Nine Property.6

Finally, a word about the Anthem sale. Copia's argument regarding the Anthem sale and its effect on the AGI appraisal is somewhat inconsistent. Mr. Bursch testified that the Anthem sale is a retail sale and the AGI Appraisal value is a bulk sale value which means one does not compare to the other. That differs substantially from the argument Copia makes in its supplemental opposition where it states as follows:

The Anthem PSA is clearly a strong indicator of the value for the [Township Nine] Property. It is a sale of a portion of the [Township Nine] Property. It is recent, having been executed in July, 2017. Both Anthem and Debtors are knowledgeable market participants. The Anthem sale is a result of arm's length negotiation. Debtors have represented to the bankruptcy court that [the] Anthem PSA is a market transaction.

Dkt. 225 at 7:27-8:3. Copia cannot have it both ways. And although this may be a case of Copia's witness not supporting Copia's argument, the argument that the Anthem sale is a relevant indicator of value is nevertheless made. Therefore, the court will address it.

Anthem is purchasing 11.27 net developable acres for $17,677,000.00 and assuming $4,398,420.00 in infrastructure development costs for a total effective purchase price (not including fee credits) of $22,075,420.00. The 11.27 net developable acres is 490,921 square feet which means, at least according to Mr. Bursch's testimony, the Anthem sale factors out to $45.00 per square foot.

The total square footage of the Township Nine Property considered is 1,377,367 square feet. That means: (i) at the $71,350,000.00 adjusted retail land value concluded in the AGI Appraisal the square foot price is approximately $51.80;7 (ii) at the $61,431,500.00 land value (exclusive of fee credits and inclusive of estimated costs to complete infrastructure) concluded in the AGI Appraisal the square foot price is approximately $44.60; and (iii) at the court's adjusted land value of $59,114,105.00 (exclusive of fee credits and inclusive of adjusted costs to complete infrastructure) the square foot price is approximately $42.92.8 In contrast, the concluded land value (exclusive of fee credits) in the BRI Appraisal is $33,350,000.00 which is approximately $24.21 per square foot.

The point is, if, as Copia asserts, the Anthem sale is a market sale and as a market sale it is indicative of the value of the Township Nine Property, see Tyner v. Nicholson (In re Nicholson), 435 B.R. 622, 634 (9th Cir. BAP 2010), abrogation on other grounds noted, Ramirez v. Nationstar Mortgage, LLC, 2016 WL 7189831 (9th Cir. BAP 2016), then it supports the land value established by the AGI Appraisal and further undercuts the BRI Appraisal's land value. In other words, if anything, as to the AGI Appraisal, the Anthem sale reinforces its reliability, and as to the BRI Appraisal, the Anthem sale undercuts its reliability.

In sum, the court finds and concludes that the Township Nine Property is in (and within) the Downtown and Midtown market areas and within the same area of competitive supply as those areas. That means Downtown and Midtown comparables are relevant, if not critical, to a reliable valuation of the Township Nine Property. That also means the wholesale exclusion of Downtown and Midtown comparables renders the BRI Appraisal, together with its concluded value and valuation analysis, unreliable.

The BRI Appraisal is also unreliable and not credible because it includes assumptions that are either unfounded or unsupported when tested against Mr. Bursch's cross-examination testimony. That includes its fee credit analysis discussed, infra.

And the purpose of the BRI Appraisal is also suspect when considered in the context of these chapter 11 proceedings, particularly, when Copia and/or its agent directed, requested, accepted, and relied upon a number of prior AGI appraisals as the source for representations to an investor without questioning or criticizing the methodology, assumptions, and value conclusions in those earlier AGI appraisals.

Therefore, for all the foregoing reasons, the court rejects the BRI Appraisal and gives it no weight in its valuation analysis. Instead, the court adopts and relies on the AGI Appraisal as a reliable and credible valuation of the Township Nine Property, subject to the adjustments noted below.

C. Fee Credits

Now on to fee credits. In order to build on a parcel of land a developer must obtain building permits. The City of Sacramento requires builders to pay various fees in order to obtain building permits. Fee credits reduce or eliminate fees that a builder has to pay to acquire building permits. Fee credits are an additional asset that can be sold with and enhance the value of the land.

The BRI Appraisal discounts the fee credits available to the Township Nine Property and values those fee credits at a discounted value of $13,190,000.00. The AGI Appraisal, on the other hand, values the Township Nine Property fee credits at face value in the amount of $16,512.769.00. Based on the evidence presented, the court finds and concludes that valuation of the fee credits associated with the Township Nine Property at face value is more reliable.

Mr. Bursch testified that fee credits should be discounted because in his opinion a developer would not pay 100% of the face value of fee credits that are not used when purchased but, instead, are used for development at some future point. The court gives no weight to that opinion for at least three reasons.

First, Mr. Bursch testified that his discounted fee credit analysis is based on telephone conversations with "market participants." However, Mr. Bursch also testified that the "market participants" with whom he had those telephone conversations had no experience with fee credits and, in fact, never dealt with fee credits associated with any development.

Second, Mr. Bursch considered only fee credit decreases. He acknowledged that over time the value of fee credits may actually increase. And he also testified that he did not consider that potential for increase in his discount analysis.

Third, discounting fee credits conflicts with historical and real-world market data unique to the Township Nine Property. Fee credits associated with the Township Nine Property have now been sold twice in the recent past. They were sold for the construction associated with the Cannery Place apartment and they were sold with the Anthem sale. In both instances, the respective buyers paid, or have agreed to pay, face value for fee credits. That is significant with regard to the Anthem sale. It closes in phases, yet, Anthem is paying full face value for fee credits it will use sometime in the future.

Therefore, for the foregoing reasons and consistent with the AGI Appraisal, the court values fee credits associated with the Township Nine Property at, $16,512,769.00.

D. Cost to Complete Infrastructure

Costs of completion must be factored into valuation. The parties stipulated to a gross cost to complete infrastructure of $15,635,895.00. There are $3,400,000.00 in grants available to offset those costs. There is a dispute over whether $1,625,000.00 attributable to what is referred to as "Sump 111" should be treated as a grant or fee credit, or whether it should be included in or subtracted from the costs of completion. There is also a dispute over whether the infrastructure completion costs of over $4,000,000.00 that Anthem has agreed to assume in its purchase of Township Nine Property parcels should likewise be included or deducted.

The "Sump 111" cost was not included as a fee credit in the AGI Appraisal so it will not be included here. The court also will not deduct from the stipulated gross costs to complete the infrastructure completion costs being assumed by Anthem. The Anthem sale has not closed and the infrastructure completion costs associated with that sale have not yet been assumed which means that, as of October 2, 2017, those costs remained the Debtors' obligation.

Therefore, the court finds and concludes that the net cost of completion is the stipulated $15,635,895.00 less the $3,400,000.00 existing grants which results in a net cost of completion of infrastructure of $12,235,895.00.

E. Determination of Value

Having rejected the BRI Appraisal as unreliable and not credible, and having adopted the AGI Appraisal subject to the infrastructure completion cost adjustment, the court values the Township Nine Property as follows:

(i) the total "as is" market value, as of October 2, 2017, with fee credits and less the adjusted net costs to complete the remaining infrastructure of $12,235,895.00, is ($71,350,000.00-$12,235,895.00 =) $59,114,105.00 plus $16,512,769.00 (value of fee credits) which is $75,626,874.00; and (ii) the market vale of the "as is" fee simple interest, exclusive of fee credits and reflecting the cost to complete the remaining infrastructure, as of October 2, 2017, is $59,114,105.00.

II. Adequate Protection

Now to adequate protection. The Ninth Circuit has held that a 20% equity cushion provides adequate protection. Pistole v. Mellor (In re Mellor), 734 F.2d 1396, 1401 (9th Cir. 1984) (relief from stay context). In fact, case law almost uniformly holds that an equity cushion of at least 20% constitutes adequate protection. In re Holt, 2010 WL 3294693, *6 (Bankr. D. Mont. 2010) (citing cases); see also In re McKillips, 81 B.R. 454, 458 (Bankr. N.D. Ill. 1987) (surveying the cases which show that an equity cushion of more than 20% is adequate but less than 11% is not). The 20% threshold is applied to the use of cash collateral. In re McClure, 2015 WL 1607365, *6 (Bankr. C.D. Cal. 2015). And importantly, 20% is also the threshold that is applied to partially developed land. See In re C.B.G. Ltd., 150 B.R. 570, 573 (Bankr. M.D. Pa. 1992).

The court assumes for purposes of its analysis that Copia is owed the disputed amount of $46,787,543.00. Other encumbrances on the Township Nine Property total approximately $597,154.00. Factoring in the proposed $10,000,000.00 DIP Loan, encumbrances against the Township Nine Property total approximately $57,384,697.00. With a $75,626,874.00 valuation, at a minimum, there remains unencumbered equity of $18,242,177.00. That translates to an equity cushion of at least 24.12%.9 Therefore, the court finds and concludes that Copia's interest in, and all other encumbrances on, the Township Nine Property are adequately protected.

III. Copia's Remaining Objections

A. DIP Loan Terms [Copia Obj. § III.B.]

Copia objects to the terms of the DIP Loan as "outrageous." The court disagrees.

Copia's objection centers primarily on the DIP Loan interest rate. Copia appears to complain that the effective interest rate of 14% (which includes points, 10% otherwise) is too high given an apparent lack of risk. Copia cites In re Tapang, 540 B.R. 701, 707 (Bankr. N.D. Cal. 2015), apparently to suggest that the applicable interest rate of the DIP Loan should be no more than a 5% cramdown rate.

Copia's reliance on Tapang is misplaced. The 5% cramdown rate in Tapang is a postconfirmation rate. The rate here is a postpetition, preconfirmation rate. There is a difference in that there is significantly more risk to a postpetition, preconfirmation lender than there is to a postconfirmation lender where risk is diminished by the stability of a confirmed plan. See In re MPM Sillicones, LLC, 2014 WL 4436335, *27 (Bankr. S.D.N.Y. 2014) (citing 7 COLLIER ON BANKRUPTCY, ¶ 1129.05 [c] [i] (16th ed. 2014) ("[I]nstead of the interim and inherently more uncertain risk present in debtor-in-possession financing, the court, at confirmation, is presented with a less risky, more stable and restructured debtor."), aff'd, 531 B.R. 321 (S.D.N.Y. 2015), aff'd in part, rev'd in part, and remanded, 874 F.3d 787 (2d Cir. 2017). That additional preconfirmation risk justifies a somewhat higher interest rate for postpetition, preconfirmation financing. See Id. ("[L]oans imposed at confirmation resemble more traditional exit or long-term financing than interim debtor-in-possession financing.").

Copia states the effective interest rate on the DIP Loan is 14%, the Debtors state it is 10%. In either case, the DIP Loan interest rate is below Copia's current 16% default rate. And although perhaps somewhat significant, the interest rate offered by Serene is not outrageous. See generally ABI Commission Report: Proposed Amendments and Their Impact on Valuation, 031416 ABI-CLE 163 at n.56 (noting Lyondell Chemical Co.'s $8 billion postpetition DIP financing facility which came with a 13% interest rate and a 7% fee). Moreover, as the bankruptcy appellate panel stated in Official Committee of Unsecured Creditors v. Bank of America (In re Fleetwood Enters., Inc.), 471 B.R. 319 (9th Cir. BAP 2012): "In any extension of debt financing under § 364, . . . [o]ften the debtor in possession will be able to obtain only onerous terms, which the bankruptcy court must balance against the debtor in possession's apparent lack of alternatives." Id., 2012 WL 2017952 at *11 (citing 3 COLLIER ON BANKRUPTCY ¶ 364.04 [2] [d] (Alan N. Resnick & Henry J. Sommer, eds., 16th ed. 2011)).

Here, there are no better alternatives for the Debtors. The Debtors made diligent and good faith efforts to obtain postpetition financing on the best terms possible. The Debtors presented evidence at the initial August 29, 2017, hearing that they discussed postpetition debtor in possession financing with numerous other potential lenders. The Unsecured Creditors Committee also assisted in a search for other potential lenders. And while other potential lenders offered the Debtors interest rates between 14% and 18%, their repayment terms and fees were less favorable than the terms and fees offered by Serene. The point is, when balanced against favorable terms, the DIP Loan interest rate does not render the terms of the DIP Loan "outrageous" as Copia contends. Therefore, Copia's objection to the DIP Loan on this basis is overruled.

B. Violation of the Bankruptcy Code's Priority Scheme. [Copia Obj. § III.D.]

Copia next objects to the Debtors' use of loan proceeds from the DIP Loan to pay administrative expenses, including attorney's fees, operating expenses, and claims. Copia contends that proposed use of loan proceeds from the DIP Loan violates the Bankruptcy Code's priority scheme because the DIP Loan is effectively a disposition of its collateral which means it must be paid before any administrative expenses and, further, administrative expenses may only be paid from the proceeds of its collateral if the requirements of § 506(c) are met. The court disagrees.

In In re Olde Praire Block Owner, LLC, 448 B.R. 482 (Bankr. N.D. Ill. 2011), the court concluded that even if a priming lien granted to secure postpetition financing was tantamount to the disposition of an existing secured creditor's collateral thereby making the loan proceeds cash collateral those loan proceeds could nevertheless be used to pay administrative expenses because the secured creditor was adequately protected by a substantial equity cushion. Id. at 496-97. Stated another way, the court recognized that § 506 (c) is inapplicable to proceeds of financing obtained from unencumbered equity under § 364(d) even if the loan proceeds are or are tantamount to cash collateral under § 363 so long as there is adequate protection. In that regard, Olde Praire is consistent Sec. Leasing Partners, LP v. ProAlert, LLC (In re ProAlert, LLC), 314 B.R. 436 (9th Cir. BAP 2004), which the court finds instructive and persuasive.

In ProAlert, the BAP considered whether a bankruptcy court may allow the use of cash collateral pursuant to.§ 363 without considering whether the requirements for a § 506(c) surcharge were met. The debtor moved to use cash collateral to pay operating expenses, attorney fees, a valuation expert, and an accountant. The secured creditor consented to the use of cash collateral to pay the operating expenses but not for professional fees, and argued that the debtor was seeking to use a cash collateral motion brought under § 363 to effectuate a surcharge under § 506(c). In its order approving the use of cash collateral, the bankruptcy court wrote that "[a]nalytically, if the creditor's interest is adequately protected, then, by definition, there is no surcharge and section 506(c) does not come into play." Id. at 439. The BAP affirmed, holding that even if the requirements of § 506(c) are not met, a debtor may nevertheless use the cash collateral for administrative expenses so long as a secured creditor whose cash collateral is being used is adequately protected. Id. at 444-45; see also In re Gen. Auto Bldg., LLC, 2012 WL 6737741, at *2 (Bankr. D. Or. 2012) ("Debtor seeks to pay its appraiser from [the lender's] cash collateral, which is governed by § 363, not § 506(c). Section 363 requires adequate protection, not benefit to the creditor.") (internal citation omitted).

Like Old Praire, here, the Debtors seek to use the unencumbered equity in the Township Nine Property as collateral for the DIP Loan. Even if that makes the DIP Loan tantamount to a disposition of Copia's collateral, and the loan proceeds cash collateral as Copia has argued and as the court opined during the August 29, 2017 hearing, existing encumbrances on the Township Nine Property, Copia's included, are adequately protected. Consistent with ProAlert, that means loan proceeds from the DIP Loan may be used to pay ongoing expenses in the administration of the estate without regard to § 506(c). The use of proceeds from the DIP Loan in that manner does not violate the Bankruptcy Code's priority scheme. Therefore, Copia's objection to the Debtors' motion on these grounds is overruled.

C. Proposed Budget is Woefully Deficient [III.E.]

Copia's objection to the Debtors' proposed budget focuses on the absence of any explanation of the development costs and the Debtors' budget allocation for the payment of attorney's fees. The latter is addressed above and the former is resolved by the parties' stipulation regarding the costs of completion admitted into evidence for purposes of the December 11, 2017, evidentiary hearing. Therefore, this objection to is overruled.

IV. § 364(c) & § 364(d) Requirements

As explained above, the court is persuaded that the Debtors diligently attempted and were unable to obtain credit or secure a loan, unsecured or otherwise, and they could not do so in the absence of the Serene DIP Loan. And as is also explained above, all interests in the Township Nine Property, Copia's included, are adequately protected. Therefore, the court finds and concludes that the statutory requirements of § 364 (c) and § 364(d) are satisfied.

V. § 364(e) Requirements

The terms of DIP Loan are at least as favorable to the Debtors as those available from alternative sources the Debtors diligently pursued. The DIP Loan was negotiated in good faith and is an arm's length transaction between a sophisticated lender, on the one hand, and a significant market participant and real estate developer, on the other hand. The Debtors' selection of Serene as its postpetition lender for the DIP Loan reflects the Debtors' valid and legitimate exercise of prudent business judgment consistent with their fiduciary duties, the loan terms are fair and reasonable under the circumstances, and the loan and its terms are enforceable in accordance with applicable law. The credit extended to the Debtors by Serene under the terms of the DIP Loan shall therefore be deemed to have been extended in good faith as that term is used in § 364(e) and Serene, and its assigns, shall have protections of Bankruptcy Code § 364(e).

CONCLUSION

Therefore, based on the foregoing and for all the foregoing reasons;

IT IS ORDERED that the Motion to Approve Postpetition Financing, Grant Priming Lien, and Related Relief filed on August 1, 2017, at dkt. 59, is, on a final basis, GRANTED.

IT IS FURTHER ORDERED that the Debtors are authorized to borrow up to an aggregate of $10,000,000.00, on the terms set forth in the DIP Credit Agreement.

IT IS FURTHER ORDERED that the Debtors are authorized to make the expenditures of funds consistent with this memorandum and order and the motion.

IT IS FURTHER ORDERED that Serene and/or its assigns shall have and are hereby granted a super-priority administrative claim under 11 U.S.C. §§ 507(b) and 364(c) (1) and a senior and first-priority priming lien under 11 U.S.C. § 364(d) on the Debtors' real and personal property assets (subject the defined Carve-Out) generally and, in particular, on the Township Nine Property.

IT IS FURTHER ORDERED that Serene, and its assigns, shall be and hereby are entitled to the protections of 11 U.S.C. § 364(e).

IT IS FURTHER ORDERED that the continued hearing set for January 9, 2018, at 2:00 p.m. is VACATED. The matter is removed from calendar and no appearances are necessary.

FootNotes


1. To avoid confusion, Township Nine Avenue, LLC, will be referred to by its former name, i.e., Copia.
2. In addition to the March 2016 and October 2017 appraisals, Mr. Gimmy and AGI have a long history of valuing Township Nine Property for the Debtors' current and former owners, and for Copia. Those valuations are as follows: (a) an appraisal for Copia with a value date of January 2012 and market value opinion of $51,400,000.00; (b) an appraisal for Nehemiah Corporation of America ("Nehemiah") with a value date of December 24, 2012, and market value opinion of $57,200,000.00; (c) an appraisal for Nehemiah with value date of December 20, 2013, and market value opinion of $61,500,000.00; (d) an appraisal for Nehemiah with a value date of December 31, 2014, and market value opinion of $64,950,000.00; (e) an appraisal for Nehemiah with a value date of August 15, 2015, and market value opinion of $64,950,000.00 without fee credits and $78,160,000.00 with updated fee credit values; and (f) an appraisal for Nehemiah with a value date of December 31, 2015, and market value opinion of $64,950,000.00 without fee credits and $78,160,000.00 with updated fee credit values.

The appraisal in ¶ (a) was prepared directly for Copia. The appraisals in ¶¶ (d) and (f) were prepared at Copia's request but paid for by Nehemiah. BRI does not have a similar history of appraising the Township Nine Property.

3. Mr. Gimmy testified that TDA is an agent of Copia. His testimony on that point was not disputed or rebutted.
4. Notably, the June 30, 2017, quarter end representation of value is consistent with the value established by AGI's March 2016 appraisal which, in turn, is consistent with the December 31, 2015, appraisal that AGI prepared at the request of Copia and/or its agent.
5. Even the highest percentage of appreciation noted during the time period is 95% which is still far below the 160% increase in land value between the first and second BRI appraisals.
6. There is no evidence to suggest that the discount applied in the AGI Appraisal is illogical or unreasonable. Copia does suggest in its supplemental opposition that some of the Township Nine Property parcels were not discounted. Copia notes that the AGI Appraisal values Areas I & IV at an adjusted retail value of $120.00 per square foot which it also notes is the same square foot price for comparable C-3 Downtown parcels. That is incomplete. Comparable C-3 Downtown parcels are valued at a range of between $120.00 and $135.00 per square foot. The $120.00 adjusted retail valuation is at the lower end of that range and is subject to further discounts overlooked by Copia.
7. Copia maintains in its supplemental opposition that AGI Appraisal uses an $88.00 per square foot adjusted value which results in an overvaluation of the land. The $88.00 per square foot is an adjusted weighted average that is further discounted and adjusted down to to $51.80 per square foot. Copia fails to account for the additional adjustments.
8. Of course, these are averages of entire property and there are some parcels that are more valuable than others. The parcels that Anthem is purchasing are not as valuable as some of the other Township Nine Parcels.
9. That amount is based on the disputed amount of Copia's claim. Of course, to the extent the Debtors are able to reduce that claim amount the equity cushion increases.
Source:  Leagle

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