Opinion
CV166026981S
04-20-2018
BANK OF AMERICA, N.A. v. STONESTREET HOSPITALITY REALTY COMPANY, LLC et al.
UNPUBLISHED OPINION
OPINION
Cosgrove, J.
On September 25, 2017, the court entered a judgment of strict foreclosure in this action. By the agreement of the parties the court found the debt to be $23,108,768.17 and set law days to commence running on October 31, 2017 (Docket Entry 144). The plaintiff, Bank of America, and the defendant mortgagor, Stonestreet Hospitality Realty Company, LLC (defendant), agreed to defer a court finding on the fair market value of the subject properties and the allowance of legal fees and costs until a hearing was held on the anticipated motion for a deficiency judgment.
Title to the parcels vested in the plaintiff on November 8, 2017. The plaintiff filed the subject motion for a deficiency judgment on November 16, 2017 (Docket Entry 148). The court conducted a hearing on the motion for a deficiency judgment between February 15 and 27, 2018. At the final hearing the plaintiff withdrew its request for counsel fees. At the conclusion of the evidence the court requested that the appraisers submit additional fair market value analyses with a modification of certain variables. The appraisers were asked to assume a " PIP of $1,900,000, use their year one occupancy rate and thereafter assume an occupancy rate of 63 percent over a ten-year term, with costs increasing at a rate of 2.5 percent, inflation at 3 percent and municipal taxes at 2 percent. The court then asked the appraisers to run their programs utilizing discount rates of 11 percent, 10.66 percent, 10.33 percent and 10 percent. These calculations were of assistance to the court in assessing how the changing of assumptions effected the opinions of value. The parties filed these additional reports on March 12, 2018.
Property Improvement Plan. The PIP is a plan of improvements that would be required by the Franchisor of the Franchisee.
It is the court’s understanding that once it decides the fair market value of the subject properties that the parties will thereafter calculate the interest that has accrued since the vesting date and any other credits/debits necessary prior to entering the deficiency judgment.
Discussion
General Statutes § 49-14 creates the procedure by which the court may enter a deficiency judgment in a mortgage foreclosure action. At the hearing on the motion for a deficiency judgment " the court shall hear the evidence, establish a valuation for the mortgaged property and shall render judgment for the plaintiff for the difference, if any, between such valuation and the plaintiff’s claim ..." Section 49-14(a). " This deficiency judgment procedure presumes the amount of the debt as established by the foreclosure judgment and merely provides for a hearing on the value of the property." (Citation omitted; internal quotation marks omitted.) Federal Deposit Ins. Corp. v. Voll, 38 Conn.App. 198, 208, 660 A.2d 358, cert. denied, 235 Conn. 903, 665 A.2d 901 (1995).
The plaintiff has the burden of proof in the proceeding to establish the value of the subject properties that it took title to through the foreclosure process. Eichman v. J & J Building Co., 216 Conn. 443, 451, 582 A.2d 182 (1990). " [T]he determination of the credibility of expert witnesses and the weight to be accorded their testimony is within the province of the trier of facts, who is privileged to adopt whatever testimony he reasonably believes to be credible ... When confronted with conflicting evidence as to valuation the trier may properly conclude that under all the circumstances a compromise figure most accurately reflects fair market value." (Citation omitted; emphasis in original; internal quotation marks omitted.) Eichman v. J & J Building Co., supra, 216 Conn. 451-52. On a motion for a deficiency judgment in a foreclosure action, " the trial court has broad discretion in ruling on the admissibility [and relevancy] of evidence." (Internal quotation marks omitted.) Banco Popular North America v. du’Glace, LLC, 146 Conn.App. 651, 657, 79 A.3d 123 (2013).
The Subject Properties
The underlying note was secured by a mortgage on two parcels of land that are the subject of this valuation process. The first parcel is known as 2049 Norwich New London Turnpike in Uncasville, Connecticut 06382. The defendant held a fee interest in this parcel. This parcel contains approximately 5.60 acres and is improved with a 176-room hotel, currently operated as the Hyatt Place Mohegan Sun (Hotel). The second parcel is known as 2057 Norwich New London Turnpike (Parcel B) and abuts the first parcel. It consists of approximately 1.2 acres and is improved with a 5,000-square-foot shell building. The defendant held a ninety-nine-year ground lease from Stonestreet Hospitality Retail Realty Company, LLC at the time of the granting of the mortgage.
Testimony
The plaintiff presented evidence of the fair market value of the subject properties through the testimony of James Berry, MAI, MRICS, ASA. Using the income capitalization approach Mr. Berry came to the conclusion that on November 8, 2017, the subject properties had a fair market value of $15,200,000, which included $14,730,000 attributable to the real property interests and $470,000 for personal property or fixtures. Mr. Berry did not assign any value to the leasehold interest of Parcel B. The value per room was $86,346.
MAI, MRICS, and ASA are Member of Appraisal Institute, Member of Royal Institute of Chartered Surveyors, and American Society of Appraisers, respectively.
The defendant presented evidence of the fair market value of the subject properties through the testimony of Mark Dunec, MAI, MRICS. Using the income capitalization approach Mr. Dunec came to the conclusion that on November 8, 2017, the subject properties had a fair market value of $20,535,000, which included $19,442,000 for the hotel parcel, $315,000 for the Parcel B and $778,000 for the personal property or fixtures. The value per room was $114,886.
In addition to the testimony of Mr. Dunec, the defendant presented the testimony of Alan Tantleff of FTI Consulting. Mr. Tantleff holds a Bachelor of Science degree from the School of Hotel Administration at Cornell University and a Masters degree in Real Estate Investment and Development from New York University. He presented the court with his opinion regarding the prospects for the Mohegan Sun Casino (Casino or Sun), the impact of building a Convention Center on the Mohegan Sun Casino property, and the impact of gaming competition that is coming from current and planned gaming facilities in New England and New York.
Each of the appraisers presented a detailed and sophisticated analysis regarding the research and the considerations they considered in reaching their conclusions as to value. There were a number of areas of agreement. Both appraisers relied upon substantially similar historical data on the Hotel operations, including occupancy rates, average daily room rate and expenses. The Hotel, which was built in 2009, was of good quality and above average condition. It was the highest and best use of the parcel. The appraisers also agreed that the Hotel was an upscale, franchise-related, select service hotel, that it had poor visibility from the road, that the success of the Sun was a primary driver of the business of the hotel, that the planned and partially constructed convention center at the Sun was a positive force on the value of the Hotel and that increased gaming competition was a negative force on the value of the hotel. Both appraisers agree that the subject property benefits from its special relationship agreement, as a preferred vendor, with the Sun and the fact that physically, it is the closest hotel to the Sun campus.
Each appraiser did an analysis of the existing market conditions, the population, the income and the other aspects that make up a market. Both utilized market data obtained from Smith Travel Research which collects data in the hotel industry. Both appraisers used a comparative sale method as a check on their income capitalization valuations.
The appraisers agreed that the lodging market, excluding hotels on the Casino campus, was eight other properties within a ten-mile radius. Mr. Berry implicitly assumed that there will be some additional competition introduced into the area, while Mr. Dunec notes for the purposes of this appraisal he would not consider increased competition where there were no new hotels under construction. Both appraisers recognized the dominant position of the subject property in this market. Although its fair share of the market was 17 percent, it in fact captured 21.4 percent of the market on a historical basis (a penetration factor of 124.2 percent). The average daily rate (ADR) that the subject property has been able to earn on a per room basis has grown from $132.84 in 2013 to $152.02 at the end of 2016. By comparison, the market ADR in 2016 was $143.30. Further, the revenue per available room (RevPar) for the subject property was approximately $96.00 in 2016, as compared to $69.07 for the competitive market.
Both appraisers made extraordinary assumptions that a " PIP" would be required for the subject property and neither appraiser identified any hypothetical conditions. The appraisers agreed upon the appropriate " Terminal Capitalization Rate," the " Cost of Sale at Reversion" and the investor/buyer’s holding period, and the appropriate marketing period for the property. There is agreement that the subject property experienced water damage to seven rooms in September of 2017. This was an insured loss and is not a significant factor in valuation of the properties.
The appraisers disagreed about the stabilized rate of inflation and the appropriate discount rate to be utilized in recognition of the investment risk for these properties. They disagreed about future occupancy rates and the effect of the opening of the Earth Hotel on the Casino campus in November 2016. They disagreed about the amount of the PIP and when the PIP would have to be implemented. They disagreed on whether Parcel B contributed value to the parcels and how to attribute the tax burden on Parcel B. They further disagreed on the depreciated value of the furniture and fixtures on the Hotel parcel.
Generally, Mr. Berry noted negative trends in the market. Slot revenue at the Mohegan Sun was down from historical highs. New resort casinos opened or under construction in New England raise significant concern for the continued financial health of the Sun Casino, and, therefore, for the local lodging market. In his opinion, the subject’s lodging market carries an above average risk given the potential for fewer visitors at the Connecticut casinos in the future as well as the lack of a local office and industrial based job growth.
Mr. Dunec and Mr. Tantleff were more optimistic about the economic prospects for the Sun Casino. They noted the strong management team at the Sun Casino and the plans to diversify the revenue streams. Of particular importance to Mr. Tantleff was the almost complete Convention and Expo Center. He sees the Convention Center as diversifying the income streams of the Casino and boosting demand and business at the Sun.
Conclusions
The court is appreciative of the presentation of the valuation arguments in this case. The direct and cross examinations of the witnesses were instructive to the court as to the methods, assumptions and variables that the appraisers had to consider or failed to consider. The discount rate used by each of the appraisers was a significant influence for the valuation of the subject properties. The higher the discount rate, the greater the risk that the purchasers saw in the competitive market for the hotel and the lower the price they would pay for the subject property. The assessment of the risk focused on the Mohegan Sun Casino’s strategy for addressing the increased competition in the gaming industry in the northeast. The defendant’s witnesses made persuasive arguments that the Mohegan Sun Management team was aggressively addressing these risks and diversifying their product and revenues. While gaming is still the dominant revenue stream for the Casino, the Sun has achieved success in its diversification efforts. The court believes that a discount rate closer to the 10 percent used by Mr. Dunec is more appropriate than Mr. Berry’s 11 percent.
A second variable for the court was the " PIP" program that a potential buyer would face to ensure the ability to retain the franchise agreement with the Hyatt brand hotel. Here, the plaintiff’s expert was more persuasive in his opinion that the Hyatt brand would require the " PIP" program to be implemented in a one-year term. After review of the estimates used by each appraiser from the various hotel management groups’ data, the court believes that a " PIP" of $1,900,000 is the most probable " PIP" that would have to be addressed by a potential purchaser. The court further believes that the PIP would have to be funded in a condensed time period.
A third variable identified by the appraisers was the projected occupancy rate that the hotel would achieve over a ten-year term. Mr. Berry assumes that the Hotel will achieve an occupancy rate of 60 percent while Mr. Dunec assumes that the Hotel will achieve an occupancy rate of 63.5 percent. As between the expert appraisal opinions, the court is persuaded that it is appropriate to assume an occupancy rate closer to 63 percent. The reasons for this conclusion are multiple. Historically this hotel has shown a positive growth line in its occupancy over the last seven years of data. The hotel benefits from its geographical proximity to the Casino campus and its preferred vendor status. The hotel’s performance was not substantially diminished by the opening of the 400-room Earth Hotel on the Casino campus. The Casino’s diversification strategy with the opening of the Convention and Expo Center in the near future will bring in weekday potential customers that will support the Hotel’s market. The Hotel’s dominance in the off Casino campus hotel market is also likely to continue into the foreseeable future.
The appraisers were also in dispute as to the value and depreciation of the personal property associated with the operation of the Hotel. Each made assumptions as to the depreciation of the existing personal property as well as the value of the property prior to depreciation.
The appraisers also made assumptions as to future inflation in pricing and in costs going forward. Each agreed to an income cost growth rate of 3 percent for the operation of the Hotel. One area of disagreement was the growth of the municipal tax burden on the property. The court is of the opinion, based upon an examination of the historical rates of taxes and increases in the town of Montville, that it is likely that taxes will not grow at a 3 percent rate but rather at a lesser rate.
A difficult issue to assess for this deficiency process is the valuation of the land lease on Parcel B. Over the past six years the shell building has been vacant. Further, the lessor’s parcel that abuts parcel 2 and fronts on Route 32 has remained undeveloped. The terms of the lease restrict to some degree the development of the parcel. The plaintiff’s appraiser has not placed a value on the parcel and has caused a decrease in value of the Hotel parcel by attributing the $20,000 tax expense for Parcel B to the operating expenses of the Hotel. The court notes that, as the leasehold interest was foreclosed in this action, there is now not a close business relationship between the plaintiff and the lessor. The defendant has attributed a value of $315,000 to the parcel. The court finds that the land lease parcel is of minimal value. Its development is more closely linked to the lessor’s development of its parcel than the current uses of the Hotel parcel. As a result, the court attributes a value of $100,000 to the parcel.
Based upon the testimony of the appraisers and the gaming expert witness, the documents used by those individuals to support their opinions and the court’s analysis of how the changing of some of the variables effected the fair market value opinion the court reaches the conclusion that on the date the title to the subject parcels vested in the plaintiff, November 8, 2017, the parcels and the personal property had a combined fair market value of $18,400,000, with $18,300,000 attributed to the Hotel parcel and personalty and $100,000 for Parcel B.
Using these valuations, the court requests that the plaintiff prepare a final calculation, including accrued interest as well as any credits or debits for calculation of the amount of the deficiency judgment. The court requests that this document be filed within two weeks. If there is a dispute as to the calculation, the court will conduct a further hearing.