In re National Real Estate Ltd. Partnership II
| Decision Date | 16 June 1988 |
| Docket Number | Bankruptcy No. 87-05232. |
| Citation | 87 BR 986 |
| Parties | In re NATIONAL REAL ESTATE LIMITED PARTNERSHIP II, a Wisconsin limited partnership, Debtor. |
| Court | U.S. Bankruptcy Court — Eastern District of Wisconsin |
Frisch, Dudek & Slattery, Ltd., Patrick B. Howell, Milwaukee, Wis., for debtor.
Jeffrey P. Aiken, Milwaukee, Wis., for John Vishnevsky, an individual general partner of debtor.
Michael, Best & Friedrich, Paul S. Medved, Mark G. Styles, Milwaukee, Wis., for Consolidated Capital Properties.
DECISION
This is a core proceeding under 28 U.S.C. § 157(b)(2)(G). It arises in the context of a motion for relief from the automatic stay by Consolidated Capital Properties ("ConCap"), a California limited partnership, with its prime focus upon § 362(d)(2) of the Bankruptcy Code. § 362(d)(1) has been asserted as an alternative ground for relief from stay.
An evidentiary hearing was held on May 2, May 13 and May 16, 1988. Briefs and oral argument have been ably presented to the court by participating counsel.
National Real Estate Limited Partnership II ("debtor") is a limited partnership organized in Wisconsin on December 24, 1980. It was created to engage in the business of investing in, operating, leasing and improving interests in real estate. The debtor's sole asset is a 228 unit apartment complex known as the Round Tree Apartments, located on a 14-acre site in San Antonio, Texas. The limited partnership has 691 limited partners and two general partners consisting of John Vishnevsky and NRELP-II General Partner, Inc., a Wisconsin corporation whose stock is wholly owned by Mr. Vishnevsky.
The Round Tree Apartments was built in 1970. It was purchased by the debtor from ConCap on September 15, 1981 for $6,100,0001 and financed by a $5,400,000 promissory note bearing interest at the rate of 12% per year secured by a Deed of Trust.2 The note became fully due on May 1, 1987.
The Round Tree Apartments is comprised of 1-bedroom, 2-bedroom and 3-bedroom units with rents ranging from $215 per month to $400 per month. The leases vary from month-to-month up to one year with 6-month leases being the most common form. The occupancy rate is currently 88-90%. The property is in need of considerable maintenance, including painting, major roof repairs and general upkeep, at a total estimated cost of approximately $150,000.
The background for these proceedings is very familiar to bankruptcy courts in Texas, a state particularly hard hit by a drastic economic decline in the oil industry. See, In re Playa Development Corp., 68 B.R. 549 (Bankr.W.D.Tex.1986); In re Anderson Oaks (Phase I) Ltd. Partnership, 77 B.R. 108 (Bankr.W.D.Tex.1987). This depressed economy has resulted in high unemployment, declining construction and an escalating number of real estate foreclosures in Texas.3
The debtor defaulted on the ConCap note when it became due on May 1, 1987, owing $3,300,000 on principal and $34,100 on accrued interest. ConCap thereafter commenced foreclosure proceedings in Texas. Unlike Wisconsin, under Texas foreclosure law, there are no court proceedings and no equity of redemption. Instead, the grantee of the Deed of Trust provides a notice to cure default to the grantor (in this case, 30 days), and upon failure by grantor to cure said default, the grantee can, after a further 21-day notice, conduct a public sale. Frequently, it is the grantee who is the successful bidder.
On or about November 21, 1987, in an attempt to avoid the public sale and enable the parties to continue negotiations, the debtor paid $17,500 to ConCap. In exchange, ConCap delayed the public sale to December 1, 1987. Negotiations broke down, and on November 30, 1987 — one day before the scheduled public sale — the debtor filed its chapter 11 petition in the Eastern District of Wisconsin. ConCap filed its motion for relief from automatic stay on March 17, 1988. On March 29, 1988, the debtor filed a plan of reorganization and disclosure statement.
Under its plan, the debtor has proposed a maturity date of June 30, 1998 on the outstanding principal and an interest rate which is significantly below the 12% interest rate provided in the promissory note between the parties.4
The debtor candidly anticipates that ConCap will vote against its plan. It is pinning its hopes upon the use of § 1129(b) — the cram down provision of the Bankruptcy Code. Although the plan is not specifically before the court at this time, it is inextricably linked with ConCap's motion for relief from stay and must therefore be presently scrutinized.
As of November 30, 1987 (when the chapter 11 petition was filed), the balance due to ConCap (including principal, interest and attorneys' fees and expenses) was $3,739,358.99. The promissory note obligates the debtor to pay ConCap's reasonable attorneys' fees and costs. The debtor, however, is not presently conceding that the attorneys' fees and costs being claimed, totalling approximately $75,000, are reasonable. Other outstanding obligations include approximately $75,000 in unpaid 1987 real estate taxes and approximately $4,000 in mechanics' and materialmen's liens. After making some allowance for a possible reduction in the claimed attorneys' fees and costs (solely for purposes of this motion), the court finds that as of November 30, 1987 the total of all outstanding liens and encumbrances against the property is not less than $3,750,000.
11 U.S.C. § 362(d)(2) states:
Under this section, the following two elements must be established:
The burden of proving that the debtor has no equity in the property is upon ConCap. The debtor must prove that the property is necessary to an effective reorganization. Each element shall hereafter be analyzed in the context of the particular facts involved.
The record has clearly established that the debtor lacks equity in the Round Tree Apartments. The total of all of the outstanding liens and encumbrances has been found to be not less than $3,750,000. What must be measured against this amount is the present market value of the Round Tree Apartments.
Love & Dugger, a real estate appraisal firm located in San Antonio, Texas, made the only current appraisal on the property. Albert Scruggs Love Jr., a highly qualified and respected appraiser and a partner of this firm, presented testimony in support of the appraisal. The appraisal concluded that the market value for the Round Tree Apartments is $3,500,000. The market value was obtained by use of the following three valuation techniques which produced the following values:
Replacement cost $3,250,000
Income $3,500,000
Market data $3,365,000
Harold Coon Jr., another real estate appraiser from San Antonio, testified for the debtor. He stated that he was retained solely to analyze any discrepancies in the Love & Dugger appraisal, but not to conduct an independent appraisal of the property. He did not dispute the final conclusion reached in the appraisal. However, he did state that recently the San Antonio market has shown some slight improvement. As a result, he estimated that the value of the property may have increased "5% to 10%" since the Love & Dugger appraisal was made. Mr. Love testified that the value of the Round Tree Apartments remains "somewhere between $3.4 million and $3.6 million in today's market." Mr. Coon did dispute certain basic factors which were utilized by Love & Dugger in arriving at the market value under the replacement cost analysis. He stated that he would have used a 40-year economic life, rather than a 30-year economic life and also an apartment unit cost of $24.97/sq. ft. rather than $19.00/sq. ft. Because both appraisers agreed that replacement cost was the least reliable approach, these attempts to undermine the Love & Dugger appraisal were inconsequential.
The only other appraisal presented was that of John M. Hamilton. That appraisal was completed for ConCap in September, 1985 and produced a market value of $6,200,000. Because that appraisal is well over 2½ years old and was prepared when economic conditions were drastically different, it has little or no bearing upon this proceeding.
Little credence was also placed upon the existing real estate tax assessed value of $5,000,000. The debtor, in accordance with its past practice, has recently applied for a reduction in the assessed value. In 1986, the assessed value was reduced from $6,300,000 to $5,800,000, and in 1987, was further reduced to $5,000,000. Love & Dugger concludes that the existing $5,000,000 assessed value is excessive and should be further reduced to $3,500,000.
The debtor has urged this court to recognize the existence of what it calls "real value," and which it claims exceeds the market value arrived at by Love & Dugger. According to the debtor, there is an "inherent value" which must be considered as part of "real value" due to the inactive real estate market in San Antonio. A similar argument was advanced in In re Conquest Offshore Int'l., Inc., 73 B.R. 171 (Bankr.S. D.Miss.1986). In Conquest, the court, rejecting that argument, concluded that, notwithstanding the lack of a normal market, due to the existing depressed state in offshore drilling activity, it must rely upon comparable current sales as the proper measure for...
To continue reading
Request your trial