UNITED STATES BANKRUPTCY COURT EASTERN DISTRICT OF MICHIGAN SOUTHERN DIVISION In re: Case No. 17-52483 PACKARD SQUARE LLC, Chapter 11 Debtor. Judge Thomas J. Tucker _____________________________/ OPINION REGARDING DEBTOR’S POST-PETITION FINANCING MOTION 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. The primary 1 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 Objections were filed by Quandel Construction Group, Inc. (Docket # 49)(claiming mechanic’s 1 lien); Gaylor Electric, Inc. (Docket # 52) (claiming construction lien); Zeeland Lumber and Supply Co. (Docket # 59) (claiming construction lien); and E.L. Painting Co. (Docket # 64). The written objection filed by E.L. Painting Co. was stricken as untimely, by an order entered on September 12, 2017 (Docket # 65). The United States Trustee did not file any written objection to the Motion. The United States Trustee appeared at the September 13, 2017 hearing, and its counsel stated that some of the terms of the Debtor’s proposed debtor-in-possession (“DIP”) financing order need to be modified, but that otherwise the United States Trustee does not object to the Motion. 17-52483-tjt Doc 142 Filed 10/13/17 Entered 10/13/17 17:00:21 Page 1 of 34
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UNITED STATES BANKRUPTCY COURTEASTERN DISTRICT OF MICHIGAN
SOUTHERN DIVISION
In re: Case No. 17-52483
PACKARD SQUARE LLC, Chapter 11
Debtor. Judge Thomas J. Tucker_____________________________/
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. The primary1
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
Objections were filed by Quandel Construction Group, Inc. (Docket # 49)(claiming mechanic’s1
lien); Gaylor Electric, Inc. (Docket # 52) (claiming construction lien); Zeeland Lumber and Supply Co.(Docket # 59) (claiming construction lien); and E.L. Painting Co. (Docket # 64). The written objectionfiled by E.L. Painting Co. was stricken as untimely, by an order entered on September 12, 2017 (Docket# 65).
The United States Trustee did not file any written objection to the Motion. The United StatesTrustee appeared at the September 13, 2017 hearing, and its counsel stated that some of the terms of theDebtor’s proposed debtor-in-possession (“DIP”) financing order need to be modified, but that otherwisethe United States Trustee does not object to the Motion.
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”). The Debtor signed a promissory note, and other3
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. The Debtor also executed an assignment of leases and rents in favor of4
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
Affidavit of Craig Schubiner in Support of Chapter 11 Petition and First Day Pleadings3
(“Schubiner Aff.”) (Docket # 7) at ¶¶ 6-7; Plaintiff’s Verified Complaint for Appointment of Receiverand Other Relief (the “state court complaint”) (Ex. A to Docket # 28) at ¶¶ 12, 15.
See state court complaint at ¶¶ 14-18; Order Appointing Receiver (Ex. C to Docket # 7) at 24
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.” On November 1,16
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. [Debtor] has defaulted in the performance of its obligationsunder the Loan Documents identified and defined in the Complaintand [Canyon] has provided notice of such default.
D. Further, [Debtor] has failed or refused to pay necessary andimmediate expenses to preserve and protect the Property, all ofwhich constitutes waste and which jeopardizes the security interestof [Canyon] and other parties having an interest in the Property. Inthis circumstance, MCL 600.2927 as well as the provisions of theLoan Documents authorize this Court to appoint a receiver.
E. Additionally, the requirements under MCL 570.1122(1) are metin this case, namely:
(i) The improvements and construction to the Property areincomplete;
(ii) The Indebtedness due [Canyon] secured by theMortgage is in default, and, therefore, the Mortgage is indefault; and
(iii) [Canyon], the mortgagee, is likely to sustain substantialloss, if the improvements to the Property are notcompleted.18
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.” The Order gave the Receiver authority and direction not only to protect and preserve20
the Property, but also to complete construction of the Project:
[T]he Receiver is authorized and directed to take immediatepossession and full control of the Receivership Property and to takeany and all necessary and appropriate action to effectuate hispossession and sole control over same in order to prevent wasteand to preserve, secure, safeguard, winterize and completeconstruction of the Receivership Property.21
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.” The Order authorized the Receiver to borrow22
up to $19.7 million from Canyon “to, among other things, winterize, safeguard and complete
construction of the Receivership Property.” Such loan was to be “subject to terms acceptable to23
[Canyon] and upon the approval of the Court,” and was to be secured by a “super priority” lien,
Testimony of Paul Marcus. (All citations to “testimony” in this opinion are to testimony given19
during the evidentiary hearing held on September 19 and 20, 2017.)
“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. Thereafter, the Receiver and25
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
Id. at 5, 6.24
Tr. of November 17, 2016 state court hearing (Docket # 103, Ex. 2) at 67-80. The state court25
entered its order approving the loan documents on November 21, 2016. (See Docket #103, Ex. 1 at 4(state court docket entry of 11/21/2016)).
Copies of these loan documents were admitted into evidence during the evidentiary hearing as26
Creditor’s Exhibits S-3, S-4, and S-5, and as Debtor’s Exhibit 60. (In this opinion, the Court will cite theexhibits admitted into evidence during the evidentiary hearing as “DX-__” for the Debtor’s exhibits and“CX-__” for Canyon’s exhibits. With respect to the Debtor’s exhibits, citation to a particular numberedexhibit is to the tab number in the Debtor’s exhibit books that were presented during the evidentiaryhearing. Debtor’s Exhibit 60, just referred to, for example, is cited as DX-60.)
preferred general contractor at the time, C.E. Gleeson Constructors, Inc., in place of the
Receiver’s chosen contractor O’Brien. The state court heard these motions on November 17,27
2016, and denied them. The Debtor then filed a motion for reconsideration of the Receivership28
order on December 8, 2016, which the state court denied on December 19, 2016. The Debtor29
appealed the Receivership order to the Michigan Court of Appeals, where the appeal remains
pending. The Debtor thereafter filed various oppositions and/or objections against the Receiver30
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. These matters were heard by the state court on June 22, 2017, and the31
Gaylor and Quandel motions were denied and their objections were overruled.32
Quandel Construction Group, Inc. had been the Debtor’s general contractor on the Project, but27
disputes between the Debtor and Quandel led the Debtor to terminate Quandel, effective October 17,2016. (See CX-N, CX-O).
Tr. of November 17, 2016 state court hearing (Docket # 103, Ex. 2) at 29-32, 54-58. The state28
court entered its order approving the loan documents on November 21, 2016. (See Docket # 103, Ex. 1 at4 (orders at state court docket entries of 11/21/2016)).
See Docket # 103, Ex. 1 at 4,5 (state court docket entries of 12/8/2016 and 12/19/2016).29
Schubiner Aff. (Docket # 7) at 8 n. 2.30
The motions by Gaylor and Quandel were concurred in by two other construction lien31
claimants, Amthor Steel and Zeeland Lumber and Supply Co. (See Docket # 109, Exs. 4, 5).
Tr. of June 22, 2017 state court hearing (Docket # 103, Ex. 7) at 15, 27, 32, 47, 57. The state32
court entered its orders reflecting these rulings on June 23, 2017. (See Docket # 103, Ex. 1 at 15 (ordersat state court docket entries of 6/23/2017); Docket # 109, Exs. 7-9 (copies of these state court orders)).
requirements. Adding that to the three values just stated, the values become:37
• $77,880,000 (As-Is Value on August 1, 2017);
• $89,780,000 (Future Completion Value on May 1, 2018);
and
• $93,480,000 (Future Stabilization Value on August 1, 2018). 38
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). The39
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
The Debtor and Canyon have not disputed the $4,080,000 component of Mr. Abraham’s37
valuation, or that the $4,080,000 amount should be included in the value of the property for purposes ofdeciding the issue of adequate protection.
Abraham Report at 3; testimony of David Abraham. 38
These numbers are taken from a document entitled “Adequate Protection Summary” (DX-33)39
prepared by the Debtor’s Craig Schubiner, who testified about it during the evidentiary hearing. Thelower of these two numbers, according to Schubiner’s summary, consists of a balance owing to Canyonof $31,479,443.25 plus “mechanics liens” totaling $2,144,925.69. The higher of these two numbers (the“worst case scenario”) according to Schubiner’s summary, consists of a balance owing to Canyon of$51,000,000.00 plus “mechanics liens” totaling $4,289,851.38.
$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. Canyon and its40
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. And Canyon contends that41
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
Mr. Eisenbraum wrote a report rebutting the Abraham Report. Eisenbraun’s report is CX-D,40
and was admitted into evidence during the evidentiary hearing, along with Mr. Eisenbraun’s testimony. (Mr. Eisenbraun’s report is referred to in this opinion as the “Eisenbraun Report.”)
E.g., CX-A; CX-U; CX-V; CX-W; testimony of Kevin Scholz. 41
general contractor, O’Brien Construction Company, Inc., of $2,946,570.36. Thus, according to42
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 adequateprotection
1. Applicable law
Section 364(d) of the Bankruptcy Code states:
(d)(1) The court, after notice and a hearing, may authorize theobtaining of credit or the incurring of debt secured by a senior orequal lien on property of the estate that is subject to a lien only if--
(A) the trustee is unable to obtain such creditotherwise; and
(B) there is adequate protection of the interest of theholder of the lien on the property of the estate onwhich such senior or equal lien is proposed to begranted.
(2) In any hearing under this subsection, the trustee has the burdenof proof on the issue of adequate protection.
11 U.S.C. § 364(d). The issue before the Court is whether, as required by § 364(d)(1)(B), there is
E.g., CX-L; CX-P; testimony of Kevin Scholz; testimony of Matthew Mason; testimony of42
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 (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:
The determination of adequate protection is a fact-specific inquiry.“Its application is left to the vagaries of each case . . . but its focusis protection of the secured creditor from diminution in the value ofits collateral during the reorganization process.” In re BekerIndustries Corp., 58 B.R. 725, 736 (Bankr. S.D.N.Y. 1986).“Given the fact that super priority financing displaces liens onwhich creditors have relied in extending credit, a court that isasked to authorize such financing must be particularly
cautious when assessing whether the creditors so displaced areadequately protected.” In re First South Savings Association, 820F.2d 700, 710 (5th Cir.1987).. . . .
A finding of adequate protection should be premised on facts, or onprojections grounded on a firm evidentiary basis.
In re Mosello, 195 B.R. 277, 289, 292 (Bankr. S.D.N.Y. 1996) (emphasis added).
The authorization to prime an existing lien should not be read asauthorization to increase substantially the risk of the existinglender in order to provide security for a new, post-petition lender. When the effect of the new borrowing with a senior lien is merelyto pass the risk of loss to the holder of the existing lien, the requestfor authorization should be denied.
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:
When adequate protection is required under section . . . 364 of thistitle of an interest of an entity in property, such adequate protectionmay be provided by--
(1) requiring the trustee to make a cash payment orperiodic cash payments to such entity, to the extentthat the stay under section 362 of this title, use, sale,or lease under section 363 of this title, or any grantof a lien under section 364 of this title results in adecrease in the value of such entity's interest in suchproperty;
(2) providing to such entity an additional orreplacement lien to the extent that such stay, use,sale, lease, or grant results in a decrease in the valueof such entity's interest in such property; or
(3) granting such other relief, other than entitlingsuch entity to compensation allowable under section503(b)(1) of this title as an administrative expense,as will result in the realization by such entity of
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.
The Court notes that the priority of Canyon’s liens, as against the construction liens, is a46
matter of some dispute between Canyon and the other lien holders. Canyon contends that its liens, bothas to the Receivership Loan and the Construction Loan, have priority over the construction liens. But, asCanyon states, in the state court “the construction lien claimants have asserted that their liens are seniorto the liens of Canyon,” and “[t]he state court had not yet adjudicated the issue when the bankruptcypetition was filed.” (Canyon’s Objection to Mot. (Docket # 53) at 4 n.3). And in this Court, theconstruction lien claimants who filed timely “limited” objections to the Debtor’s Motion all asserted thattheir liens at least have priority over the lien securing Canyon’s Construction Loan. (See Docket # 49 at1-2 (Quandel’s limited objection); Docket # 42 at 4 ¶ 11 (Gaylor Electric, Inc.’s limited objection);Docket # 59 at ¶1 (Zeeland Lumber and Supply Co.’s limited objection).) Canyon’s evidence shows thatthe debt owing on the Construction Loan is $41,041,777.07 of the total debt owing to Canyon, as ofAugust 31, 2017. See discussion at record citations in Part IV.A.2 of this opinion. So if the constructionlien claimants prevail in their priority arguments, Canyon’s lien securing roughly $41 million of the totaldebt owing to Canyon could be last in priority among the lien holders.
This Court is not resolving any priority disputes between the existing lien claimants at this time. That is beyond the scope of the evidentiary hearing and the dispute over adequate protection, which boththe Debtor and Canyon agree must be decided urgently in the very early days of this bankruptcy case. Asa result, the Court must consider the value and amount of all of the existing liens in deciding whether theDebtor has proven an adequate protection equity cushion, not just the value and amount of the liens heldby the objecting creditor Canyon. Neither the Debtor nor Canyon has argued otherwise; rather, theDebtor and Canyon each have presented their case regarding adequate protection on this basis.
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, and more importantly, it is only 4.68% of the projected48
amount of all the existing liens to be primed, as of May 1, 2018. It amounts to only 3.38% of49
Mr. Abraham’s projected value of the Debtor’s real property on May 1, 2018. The Court finds50
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, and more importantly, it is only 7.22% of the projected51
Canyon’s liens would total at least $55,832,681.48 as of May 1, 2018 ($50,710,493.64 as of48
August 31, 2017 plus 8 months’ interest thereafter totaling $5,122,187.84). The above projected equitycushion amount on May 1, 2018 of $3,032,465.67 divided by $55,832,681.48 equals .0543, or 5.43%.
As noted above, the existing liens (i.e., those other than the $22 million DIP loan lien) would49
total at least $64,747,534.33 as of May 1, 2018. The above projected equity cushion amount on May 1,2018 of $3,032,465.67 divided by $64,747,534.33 equals .0468, or 4.68%.
$3,032,465.67 divided by $89,780,000 equals .0338, or 3.38%.50
Canyon’s liens would total at least $57,753,501.92 as of August 1, 2018 ($50,710,493.64 as of51
August 31, 2017 plus 11 months’ interest thereafter totaling $7,043,008.28). The above projected equity
amount of all the existing liens to be primed, as of August 1, 2018. It amounts to only 5.15% of52
Mr. Abraham’s projected value of the Debtor’s real property on August 1, 2018. The Court53
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
cushion amount on August 1, 2018 of $4,811,645.23 divided by $57,753,501.92 equals .0833, or 8.33%.
As noted above, the existing liens (i.e., those other than the $22 million DIP loan lien) would52
total at least $66,668,354.77 as of August 1, 2018. The above projected equity cushion amount onAugust 1, 2018 of $4,811,645.23 divided by $66,668,354.77 equals .0722, or 7.22%.
$4,811,645.23 divided by $93,480,000 equals .0515, or 5.15%.53
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,” but he actually stated54
that the two other approaches — the Cost Approach and the Sales Comparison Approach — are
not reliable in this case:
The cost approach, while consistent with the other findings, is oflimited reliability because of the difficulty of accurately measuringthe various forms of depreciation. . . . The sales comparisonapproach was also consistent with the findings of the otherapproaches. It had to, however, rely on comparisons that wererelatively dissimilar and thus required extensive adjustments. Its reliability is limited as a result. . . . As a result, the conclusion
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:
• The lease-up time to stabilize the project is unrealistic. Theappraisal states that there is a 3-month window to finish andlease-up the property to an occupancy rate of 96.5 percent. Thereport does not indicate any pre-leasing for any of the apartmentsor the retail space. In fact, the receiver is working fully on theapartment units and no significant work has commenced with theretail space. No letters of intent (LOIs) have been brought to ourattention for the retail space.
• The capitalization rate within the report is not supported. Theappraisal utilizes a capitalization rate of 5.50 percent and states thatthe comparable sales are the best indication to support the rate.That stated, none of the comparable sales are located withinMichigan. The comparable sales presented are located in the statesof Colorado, New Jersey, Minnesota and Missouri. Despite thefact that local data is available, no local data to support the rate ispresented. Within the report, it states, “A rate slightly higher than5.50%, or around the average of the supplemental comparablesales, say 5.84% seems most reasonable, and the comparable salesdata is concluded to provide a rate of 5.75% for the subject.” Inthe end, a rate of 5.50 percent was utilized. Within the report, itstates, “Currently capitalization rates for stabilized assets rangefrom 5.50% to 10.50%, with an average of 6.25%.” Based on thedata presented within the report, a capitalization rate of 6.00percent appears to be more inline within investor expectationswithin Michigan. Leaving all other assumptions aside, simplycapitalizing the reported net operating income of $4,915,338 by 6.0percent would result in a diminution of value of $7,500,000(81,900,000 less $89,400,000).. . .
• The appraisal does not provide adequate support for apartment rentestimates. Basically, the appraisal has simply utilized the owner’sasking rental rates and has utilized them to develop the Income
Capitalization Approach. The average asking rental rate forapartment units is $2.32 per square foot. Market data presentedwithin the report has an average apartment rent of $1.85 per squarefoot. Within the report, Apartment Rent Comparables 1, 2 and 6are the only properties not in the downtown area of Ann Arbor. Apartment Rent Comparables 7, 8 and 9 are true student housingprojects near the University of Michigan and do not reflect theeconomics at the subject property. As shown on Page 68 of thereport, the apartment rents modeled are at 110.2 percent of marketrent.
• At 33,000 square feet, the size of the retail space is overstated. Thearchitectural rendering provided by the client states that the actualsquare footage is 22,692 square feet. This additional 10,308 ofsquare footage results in an overstatement of value. At the sametime, the rental rates for the retail are overstated. The appraisal hasbuilt rental rates of $26.40 per square foot for the larger retail unitand $33.00 per square foot for smaller retail space within thesubject. The appraisal report does not demonstrate support formarket rent. Rent Comparables 1, 3 and 5 are located inDowntown Ann Arbor near the University of Michigan. RentComparables 2 and 4 are located within traditional retaildevelopments. Comparable 2 is a Meijer retail outlet whileComparable 4 is located in an intensive retail development nearInterstate 94. At the same time, the subject property does not havea typical layout. The retail area is set slightly below the road and ispart of the U-Shape configuration positioned at the front of thebuilding. lt is unlikely that the subject property could generate thesame retail levels found at superior locations with retail space thathas greater visibility and appeal.. . .
• On Page 91, the growth rates modeled appear to be aggressive. The appraisal has rent spikes for Year 2, 3 and 4 of 4.0, 5.0 and 4.0percent per year. At the same time, no spikes are anticipated forexpenses. Most indications state that the Michigan market hasreached a point of stabilization and any additional recovery orgrowth is limited. Based on current market conditions, marketparticipants arc not modeling rent spikes at this time.58
For these additional reasons, the Court finds the Debtor’s appraisal evidence to be unpersuasive.