In re EM Lodgings, LLC, Case No. 17–80150

• Decision Date: 25 January 2018
• Docket Number: Case No. 17–80150
• Citation: 580 B.R. 803
• Parties: IN RE: EM LODGINGS, LLC, Debtor.
• Court: U.S. Bankruptcy Court — Central District of Illinois

580 B.R. 803

IN RE: EM LODGINGS, LLC, Debtor.

Case No. 17–80150

United States Bankruptcy Court, C.D. Illinois.

Signed January 25, 2018

Sumner Bourne, 411 Hamilton Blvd # 1600, Peoria, IL 61602, Attorney for Debtor.

David Neff, Perkins Coie LLP, 131 S. Dearborn Street, Suite 1700, Chicago IL 60603, Attorney for National Cooperative Bank.

OPINION

Thomas L. Perkins, United States Bankruptcy Judge

This matter is before the Court following an evidentiary hearing on a stay relief motion. The Debtor owns a hotel located in East Peoria, Illinois, operating as a Fairfield Inn, a Marriott brand in the limited service category. The Debtor filed a Chapter 11 petition on February 6, 2017, and has continued to operate the hotel as a debtor in possession since that time. The largest creditor is National Cooperative Bank (NCB) which holds a first mortgage on the hotel real estate as well as a blanket security interest covering most of the personal property, including rents.

Seven months into the case, on September 11, 2017, with the Debtor not having filed a plan of reorganization, NCB moved for relief from the automatic stay under section 362(d)(2), alleging that the Debtor does not have equity in the hotel property and that the property is not necessary to an effective reorganization. NCB had previously filed Claim 12–1 asserting a petition date loan balance of $7,259,253.67, which sum includes a prepayment premium of $70,828.67. In the proof of claim, NCB valued its collateral at $5,100,000. On December 21, 2017, NCB filed an amended proof of claim, Claim 12–2, asserting a total balance due as of December 20, 2017, of $7,898,155.21. The amended claim increased the stated value of NCB's collateral to $5,700,000.

In response to the motion, the Debtor takes the position that the hotel property is worth more than the balance due NCB. Whether the Debtor has equity in the hotel property was the primary focus of the evidence presented at trial. The Debtor concedes that it has no intention of filing a plan of reorganization. Instead, the Debtor is hoping to refinance or sell the property for an amount sufficient to pay off NCB in full, but it has not filed a plan of liquidation or moved to sell or refinance the property.

The trial on NCB's stay relief motion was held on December 22, 2017. Danny Balkam, a vice president specializing in troubled loans, testified on behalf of NCB. Mr. Balkam verified the accuracy of the proofs of claim filed by NCB and explained that the $5.7M valuation stated in the amended claim was based upon an updated appraisal. He testified that while NCB used appraiser Nina Owen from Chicago to appraise the property when the loan was initially made in 2013, its more recent appraisals were performed by appraiser Jonathan Jaeger from New York because of his hotel appraisal expertise.

As its valuation expert witness, NCB called Mr. Jaeger, an MAI who is employed by LW Hospitality Advisors (LWHA), a national hotel consulting and valuation firm. He has been appraising hotels for the past ten years and has participated in approximately 1,500 hotel appraisals. He first appraised the Debtor's hotel property for NCB as of May 1, 2017, assigning the property an "As Is Market Value" of $5,100,000 or $57,000 per room. His appraisal report defines Market Value to mean "the most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus." In his May 1, 2017 appraisal, Mr. Jaeger assigned the Debtor's hotel a stabilized occupancy rate of 63.0% as of May 1, 2019, a stabilized ADR (Average Daily room Rate) of $106.65 and a stabilized RevPAR (Revenue Per Available Room) of $67.19. For purposes of the income capitalization approach, Mr. Jaeger chose a discount rate of 11.50%, which is 50 basis points above the average of 11.00% from an investor survey conducted by Mr. Jaeger, reflecting his opinion that the subject property represents an above average risk level as perceived by potential investors.

In his updated appraisal, Mr. Jaeger assigned an "As Is Market Value" to the property as of December 1, 2017, of $5,700,000 or $64,000 per room. He incorporated an increased stabilized occupancy rate of 66.0%, a stabilized ADR of $107.12 and a stabilized RevPAR of $70.70. He maintained the same discount rate of 11.50%. He attributed the increased valuation to the hotel's significantly improved performance between March and November, 2017. Mr. Jaeger noted, however, the opinion of the regional manager of the Debtor's management company that the improved performance was attributable to problems that the two downtown Peoria Marriott hotels, the Pere Marquette and Marriott Courtyard, were having with Marriott. It was the manager's opinion that the short-term uptick in business was not sustainable if the Pere Marquette and Marriott Courtyard were able to work out their differences with Marriott and retain the Marriott flag. This opinion was disputed by the Debtor's principal, Gary Matthews, who also holds an ownership interest in the Pere Marquette and Marriott Courtyard.

The historical performance data relied upon by Mr. Jaeger reflects a steady decline in the aggregate occupancy rate for the subject property and its competitive set from a high of 74.7% in 2012 to 62.5% for the trailing 12 months (TTM) as of October, 2017, with a corresponding decline in RevPAR from $78.17 to $65.67. He predicts that market-wide occupancy for that group will stabilize at 63.0% beginning in 2018 and remain static at that figure through the terminal year of 2027. Mr. Jaeger acknowledges that the Debtor's hotel is likely to continue to capture slightly more than its fair share of occupancy among its competitive set, stabilizing at 66.0%. Nevertheless, he is projecting area-wide demand for limited service hotels as flat from this point forward into the foreseeable future.

Nina Owen testified as the valuation expert for the Debtor. She is employed as vice president of CB Richard Ellis Inc. (CBRE), which she stated is the largest real estate company in the world. She works out of CBRE's Chicago office. She holds a masters of management in hospitality from Cornell University, is a state of Illinois certified general real estate appraiser, and is an associate member of the Appraisal Institute. She is a candidate for but has not yet obtained her MAI designation.

Ms. Owen previously appraised the subject property in 2013 on behalf of NCB when it refinanced the debt on the property. At that time, she appraised the value of the property at $11.2M. She has also appraised several other hotels in the Peoria area. In her current appraisal report, she assigns an "As Is Market Value" as of November 20, 2017, of $7,400,000 or $83,000 per room. She assigns an alternative "As Stabilized Market Value" as of November 20, 2019, of $8,500,000 or $95,000 per room.

Ms. Owen selected 71.0% as the stabilized occupancy figure for the subject property. She projects a stabilized ADR of $106.21 and a stabilized RevPAR of $75.41. For purposes of the discounted cash flow analysis, Ms. Owen is of the opinion that an investor purchasing the property "As Is" would likely use a discount rate of 11.00%, but once the property is stabilized, investors would thereafter apply a slightly lower discount rate of 10.50%. Her appraisal report indicates that these discount rates are near the middle of the range established by available sources, with emphasis placed on the data collected from a survey of market participants, who indicated a relevant range of between 9.50% and 12.00%.

The two appraisers also differed with respect to projected expenses. For the first stabilized year ending November, 2020, on room revenue of $2,302,956 Mr. Jaeger projected room expenses to be $685,116, yielding an expense ratio of 29.7% of revenue. On significantly higher projected room revenue of $2,456,304, Ms. Owen projected substantially lower room expenses of $598,455, an expense ratio of 24.4% of room revenue. As to undistributed operating expenses for the same year, Mr. Jaeger predicts a total of $736,784, while Ms. Owen predicts a total of $833,500. With respect to non-operating expenses, including management fee, property taxes, insurance and reserve for replacement, Mr. Jaeger projects a sum of $356,974, while Ms. Owen projects a sum of $335,626. From these inputs, Mr. Jaeger calculates hotel cash flow (net operating income or NOI), for stabilized year 1, to be $539,115. Due largely to her significantly higher projected occupancy rate and corresponding room revenue, as well as the lower projected rooms expense, Ms. Owen calculates NOI for stabilized year 1 to be $704,679.

The appraisers' ten-year projections of net cash flow from the Debtor's hotel operation, which are the foundation for the discounted cash flow analysis, are markedly different. Mr. Jaeger's cash flow projections begin with a figure of $471,701 for 2018, increasing gradually to $660,714 in 2027 for an aggregate ten-year undiscounted cash flow of $5,774,597. Using a discount rate of 11.50%, he discounts the ten-year projected cash flow to $3,232,998. Assuming a sale at the end of the ten-year period, Mr. Jaeger discounts the net reversion value of $7,359,348 to a present value of reversion of $2,477,939. The sum of the present value of the discounted cash flow plus the present value of reversion is approximately $5.7M, his conclusion of As Is Market Value.

Ms. Owen's cash flow projections begin with a figure of $593,030 for 2018, increasing gradually to $860,615 in 2027, for an aggregate ten-year undiscounted cash flow of $7,480,800, which is $1,706,203 greater than Mr. Jaeger. She then applied a discount rate of 11.00%. Her report does not disclose the present value calculation of the ten-year cash flow or the present value calculation of the reversion value. The report...