Community Banks v. Start Properties II, LLC et al

IN THE U NITED S TATES B ANKRUPTCY C OURT
F OR THE E ASTERN D ISTRICT OF P ENNSYLVANIA
I N RE 	: CHAPTER 11
:
DAVID S . JARJISIAN , 	:
:
DEBTOR ( S ) 	: BANKRUPTCY NO. 02-15711 SR
:
COMMUNITY BANKS, SUCCESSOR BY MERGER 	:
TO COMMUNITY BANKS, N . A ., 	:
PLAINTIFF 	: ADVERSARY NO . 04-0659 SR
:
V . 	:
:
START PROPERTIES, II, LLC , 	:
START PROPERTIES, LLC , 	:
DAVID S . JARJISIAN AND VICTORIA A . 	:
JARJISIAN , 	:
DEFENDANT ( S ) 	:
_____________________________________
OPINION
By: 	STEPHEN RASLAVICH , UNITED STATES BANKRUPTCY JUDGE .
I. 	Introduction
Before the Court is Plaintiff Community Bank’s (“Bank”) Motion to Fix the Fair Market
Value of a property known as the Spring Lake Village Mobile Home Park (“Property”)
located in Delaware Township, Northumberland County, Pennsylvania. The Court held a
hearing on this matter on August 17-18, 2005. For the reasons stated below, the Court
finds the fair market value of the Property as of December 2, 2003 to be $1,750,000.
II. 	Background
This case arises from a loan made by the Bank to Debtor’s corporation. Debtor’s
corporation secured the loan by taking out a mortgage on the mobile home park it owned,
i.e., the Property. As additional collateral, the Debtor guaranteed the loan and gave the
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1 Section 8103 defines what a lender must do to preserve any deficiency claim
following the purchase of a property at a sheriff’s sale:
(a) General rule.– Whenever any real property is sold, directly
or indirectly, to the judgment creditor in execution proceedings
and the price for which such property has been sold is not
sufficient to satisfy the amount of the judgment, interest and
costs and the judgment creditor seeks to collect the balance
due on said judgment, interest and costs, the judgment creditor
shall petition the court to fix the fair market value of the real
property sold. . . .
42 Pa.C.S. § 8103(a).
2 A discrepancy exists over the exact number of pads that the site hosts– the Bank’s
appraiser identifies 124 pads in one appraisal but 132 in his other.
2
Bank a second mortgage on his home. After Debtor defaulted, the Bank foreclosed on the
Property and successfully bid on the Property at a November 12, 2003 sheriff’s sale. The
deed to the Property was dated December 2, 2003 and recorded in Northumberland
County’s Recorder of Deeds’ Office on January 6, 2004.
On May 28, 2004, in accordance with the Pennsylvania Deficiency Judgment Act,
42 Pa.C.S. § 8103, 1 the Bank filed a Petition to Fix Fair Market Value in the Court of
Common Pleas of Northumberland County. 	On June 22, 2004, the parties agreed to
remove the Petition to this Court. 	This Court held a hearing on August 17-18, 2005
(hereinafter cited as “8/_/05 Tr. at _”) to retrospectively determine the fair market value of
the Property on the sale date, a determination that will ultimately affect any deficiency claim
the Bank may have under the Deficiency Judgment Act.
The Property is a 124-pad 2 mobile home park situated on 48 acres of gently rolling
topography. The Property also encompasses approximately 13 acres of additional land
that has been approved for development of another 50 pads. 	In addition, the Property
maintains its own on-site water and sewer treatment plant, which serves not only the
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3 “Market value” is defined as:
. . . 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,
knowledgeably, and assuming the price is not affected by
undue stimulus. Implicit in this definition is the consummation
of a sale as of a specified date and passing of title from seller
to buyer under conditions whereby:
(1) buyer and seller are typically motivated;
(2) both parties are well informed or well advised,
acting in what they consider their own best
interest;
(3) a reasonable time is allowed for exposure in the
open market;
(4) payment is made in terms of cash in U.S. dollars or
in terms of financial arrangements comparable thereto; and
(5) the price represents the normal consideration for the
property, sold unaffected by special or creative financing or
sales concessions granted by anyone associated with the sale.
See Rules and Regulations, Federal Register, Volume 55, Number 165, at 34969.
4 The sheriff’s sale was held on November 12, 2003. The Bank, however, submitted
appraisals valuing the Property as of February 21, 2003 and February 2, 2004. Defendants
submitted an appraisal valuing the Property as of the deed date–December 2, 2003–a date
within three weeks of the sale date. 	To the extent that the appraisals offered provide
evidence of the Property’s fair market value on the sheriff’s sale date, the Court will rely on
them because the parties have provided nothing more precise. Furthermore, the Court will
adopt December 2, 2003–the date used by Defendants’ appraiser–as the valuation date
because it is a date not unreasonably delayed from the sale date, and therefore serves the
intent of the statute. Moreover, the parties during the hearing agreed that December 2,
2003 should be used as the valuation date.
3
tenants of the park but also a neighboring 36-home subdivision. The neighboring residents
pay a monthly fee of $25 per dwelling for water service.
III. 	Discussion
To determine the Property’s fair market value 3 on December 2, 2003, 4 the Court first
examines both parties’ appraisals, which notably use the same (accepted) methodology.
The Bank submitted two appraisal reports dated nearly one year apart, both of which were
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5 See Walters’ February 9, 2004 Appraisal, at 42, 51.
6 Under the income approach, an appraiser derives a value indication for income-
producing property by converting anticipated benefits, i.e., cash flows and reversions, into
property value. See Walters’ February 24, 2003 Appraisal, at 30 (citing American Institute
of Real Estate Appraisers, The Dictionary of Real Estate Appraisal, 2 nd ed., American
Institute of Real Estate Appraisers: Chicago, at 156 (1989)).
7 Under the sales comparison approach, an appraiser “derives a value indication by
comparing the property being appraised to similar properties that have been sold recently,
applying appropriate units of comparison and making adjustments, based on the elements
(continued...)
4
prepared by Jeffrey L. Walters of Walters Appraisal Service, Inc. The first appraisal, dated
February 24, 2003, appraised the Property as of February 21, 2003 at $1,850,000. The
second appraisal, dated February 9, 2004, appraised the Property as of February 2, 2004
at approximately $1,300,000, 5 a nearly 29-percent reduction in value from the 2003
appraisal.
In response, Defendants submitted two reports prepared by Reaves C. Lukens of
the Reaves C. Lukens Company. Mr. Lukens prepared a review of the Bank’s appraisal
and provided his own valuation of the Property as of December 2, 2003. 	Mr. Lukens
estimated the fair market value of the Property on December 2, 2003 to be $1,800,000.
At the August hearing, the parties also presented additional, extrinsic evidence, the
sum of which illustrates the common observation that real estate appraisal is an inexact
science. 	There are three widely acknowledged methodologies to the valuation of real
estate: the income approach, the replacement cost approach, and the sales comparison
approach. 	Both appraisers agree that the most accepted methodology for present
purposes is the income approach. 6 Each noted, but failed to develop, the replacement cost
approach. Finally, both used the third method, the sales comparison approach, 7 to test the
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7(...continued)
of comparison, to the sales price of the comparable.” See Walters’ February 24, 2003
appraisal (citing American Institute of Real Estate Appraisers, The Dictionary of Real Estate
Appraisal, 2nd ed., American Institute of Real Estate Appraisers: Chicago, at 265 (1989)).
8 In contrast to fair market value, liquidation value contemplates a seller under
extreme compulsion to sell and a severely limited future marketing period. See Lukens’
Appraisal, at 3. Defendants filed a motion in limine seeking to exclude Mr. Walters’ second
appraisal, alleging (1) it uses the term “liquidation market value” which is a term not
recognized in the lexicon of real estate appraising and moreover is contradictory, and (2)
it purports to offer an opinion on liquidation value, a value that has no relevance to the
inquiry at hand. 	Mr. Walters conceded that the term “liquidation market value” was a
typographical error and that he intended to use the term “liquidation value” throughout his
report. (8/17/05 Tr. at 81). But he argued that he opined on fair market value in his second
appraisal because his method of determining liquidation value involved first calculating the
(continued...)
5
validity of their respective opinions using the income approach.
Turning to the appraisals, the Court first notes that the Bank’s appraisals fail to
determine the Property’s value on the relevant date, December 2, 2003. 	Rather, the
Bank’s appraiser valued the Property on dates–February 21, 2003 and February 2,
2004–several months removed from the sale date. 	By contrast, Defendants’ appraiser
valued the Property on December 2, 2003. Because the Defendants’ appraisal provides
valuation on the relevant date, the Court finds it more probative of the inquiry at hand.
Next, the Court turns to the appraisers’ analyses of occupancy rates. In the Bank’s
first appraisal, Mr. Walters forecasted that an 87.5% occupancy rate would be reached in
year four following stabilization and improvements in the projected period. (8/17/05 Tr. at
101-102). One year later, Mr. Walters forecasted a fixed 64.5% occupancy rate with no
expected future change. 	(8/17/05 Tr. at 78, 102). 	Mr. Walters prepared the second
appraisal after the Bank asked him to supplement his earlier appraisal with a liquidation
value8 based upon the current occupancy and continuing water problems at the park. See
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8(...continued)
fair market value of the Property and then discounting that number by 10%. (8/17/05 Tr.
at 108). 	Although this method strikes the Court as rudimentary, the Court did deny
Defendants’ motion, allowing admission of the second appraisal and testimony but only to
the extent they opine on fair market value.
9 Interestingly, Mr. Walters admits that the second appraisal was never prepared for
the purpose of, nor intended to be used as evidence of, fair market valuation as of the sale
date. (8/17/05 Tr. at 68).
6
January 21, 2004 letter from R. Granger to J. Walters. By using the then-current 64.5%
occupancy rate, Mr. Walters dropped the estimated net operating income from $224,000
in the first appraisal to $136,453 in the second, representing a decline of $90,000 or nearly
40%.
The Court finds Mr. Walters’ analysis flawed in several respects. First, it is evident
that the strict parameters placed on Mr. Walters with regard to using the current occupancy
rate constrained him from his ability to offer an independent valuation of the Property. 9 Mr.
Walters’ use of a fixed occupancy rate represents an unreasonable assumption and
departure from accepted methodologies. Indeed, using such a static rate is at odds with
the purpose and meaning of determining fair market value. Assuming a never-improving
64.5% occupancy rate, it is hard to imagine the Property ever being salable under the
Bank’s appraisal. Second, the Court finds Mr. Walters’ attempts to distance himself from
his earlier report undermine his credibility as an expert. Mr. Walters testified that because
vacancies rose by the end of 2003, his earlier predictions of stabilization were inaccurate.
(8/17/05 Tr. at 103, 112). 	In adopting this strategy of impugning his earlier estimate of
value, Mr. Walters undermines his own credibility. The Court questions why it should give
any weight to Mr. Walters’ second appraisal after he has admitted he erred so gravely with
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7
the first. In any event, the Court places little probative weight on the Bank’s appraisals.
By contrast, Defendants’ appraiser forecasted a stabilized occupancy rate of 85%.
(8/18/05 Tr. at 29-30). Although Mr. Lukens acknowledged that the occupancy rate had
decreased slightly by the end of 2003, he testified that nothing precluded the Property’s
remediation, which would likely result in higher occupancy rates. 	(8/18/05 Tr. at 29-30).
Mr. Lukens’ estimate of stabilization is in fact more conservative than the one Mr. Walters
provided in his initial appraisal. The Court finds Mr. Lukens analysis of occupancy rates
to be the more credible of the estimates before it.
The Court next considers the appraisers’ differing views on improvements necessary
to repair the Property, including most significantly the water and sewer treatment facility.
In his first appraisal, Mr. Walters projected an expense ratio of 35%. 	In his second
appraisal, he increased that ratio to 39% based in part on what he determined to be
ongoing, severe problems with the water and sewer system. (8/18/05 Tr. at 109).
Defendants’ appraiser, on the other hand, forecasted an expense ratio of 37%. (8/18/05
Tr. at 31). Specifically, Mr. Lukens budgeted a flat amount of $75,000 to improve the water
and sewer system and cover costs relating to re-leasing vacant pads and promotional
expenses necessary to recruit new tenants. (8/18/05 Tr. at 34).
The evidence suggests that the industry norm for this type of property is an expense
ratio of 30-40% (8/18/05 Tr. at 32). 	The Property’s historic operating expenses have
ranged above the norm due to one-time repair expenses in 2002 and higher than normal
professional fees in 2003. (8/17/05 Tr. at 74-75). With a greater expense ratio depressing
net income, this estimation clearly impacts the ultimate value of the Property. Although the
Court generally finds the Defendants’ appraisal is entitled to greater probative weight than
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10 The Court has attached virtually no weight to the remaining testimony of Mr.
Granger, which was replete with hearsay, speculation, legal conclusions and was almost
wholly lacking in foundation.
11 The parties also disagree on the efforts necessary to obtain rate relief from the $25
per dwelling flat rate currently being charged to the neighboring 36 homes for water. The
evidence failed to clarify how long the $25 rate will remain in effect or how the Property’s
owner can obtain a rate adjustment. The parties do agree that the $25 fee is well below
market. (8/17/05 Tr. at 85-86). Predictably, Mr. Lukens downplayed the efforts he thinks
would be necessary to obtain rate relief, while Mr. Walters predicted a lengthy bureaucratic
process. Without a more complete record, the Court cannot determine the ease with which
rate relief may be obtained. Suffice it to say, however, that the Court finds it a reasonable
assumption that competent management could avail itself of some procedure to obtain a
market rate adjustment to its current fee.
8
the Bank’s, the Court finds that Mr. Lukens’ estimate in this instance appears somewhat
deflated. The Bank’s officer, Raymond Granger, testified to problems with surface water
infiltration that, by all accounts, will require significant costs to remediate. 10 (8/17/05 Tr.
at 32-35). 	Recognizing the magnitude of ongoing problems with the water and sewer
facility, the Court will adjust Defendants’ appraisal downward by $50,000 to better reflect
the costs of necessary improvements.11
Next, the Court weighs the appraisers’ conflicting valuations of the 13 surplus acres.
Mr. Walters valued the extra acreage at $3,000 per acre based on comparable land sales
of undeveloped land. (8/18/05 Tr. at 63-64). By contrast, Mr. Lukens valued the surplus
acreage based on the potential development of additional income-producing pads.
Specifically, Mr. Lukens estimated the 50 additional pads to be worth $2,000 each, for a
total of $100,000 in additional value to the Property. (8/18/05 Tr. at 33). In Mr. Walters’
view, because the vacancy rate is so high and likely to continue as such, no foreseeable
reason exists to develop the additional pads. Accordingly, Mr. Walters believes that the
land should be valued in its undeveloped state. 	Although Mr. Lukens agrees that the
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9
additional pads should not be developed until rentals increase and the occupancy rate
stabilizes, he believes nonetheless that the value of the overall property should include the
prospect of development and the potential revenue-producing income from the additional
acreage. The Court here agrees with Defendants that the valuation of the 13 acres should
include some enhancement based on the potential to develop additional income-producing
pads. Accordingly, the Court finds Defendants’ valuation of the surplus land to be the more
sound of the estimates before it.
Finally, the Court considers the appraisers’ respective comparative sales analyses.
Defendants’ appraiser disputes that Mr. Walters performed a true “comparative” sales
analysis. Mr. Walters claims to have looked at five comparable sales in his first appraisal,
ranging in size from 37 to 92 pads and in per pad rate from $11,689 to $13,980. 	Mr.
Walters valued the Property under this approach at $12,500 per pad. 	In his second
appraisal, Mr. Walters looked at six properties, ranging in size from 29 to 92 pads and in
per pad rate from $6,552 to $13,980, and valued the Property at just $10,500 per pad.
However, when pressed on the qualitative comparability of the parks– i.e., geographic
location, number of pads, etc.–Mr. Walters conceded that he based his comparison solely
on income. (8/17/05 Tr. at 60-61, 88-89, 95-96). In fact, the only comparable site that had
close to 100 pads (comp #4) was disregarded entirely because Mr. Walters did not have
income data for that site. (8/17/05 Tr. at 93). Mr. Walters also failed to compare the data
on the sale of Pine Valley, a mobile home park in the same geographical area that
accommodates roughly the same number of pads. (8/17/05 Tr. at 61). Based on these
shortcomings, the Court finds that Mr. Walters’ comparative sales analysis was neither
complete nor truly comparative. 	Conversely, Mr. Lukens performed a true comparative
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10
sales analysis, resulting in an estimate of sales per pad of $14,516 (8/18/05 Tr. at 28).
Again, the Court finds Mr. Lukens’ approach the more reliable of the two before it.
IV. 	Conclusion
Reiterating the maxim that the appraisal of realty is an inexact science, the Court
concludes that the value of the Property lies well toward the higher end of the estimates
before it. 	The Court recognizes attractive features in the Property including the renter-
friendly location, the ability to expand, mobile homes that are owner-occupied and
maintained, and the limited number of on-site, depreciating assets. On the other hand, the
Property clearly has shortcomings, the most significant of which are the water and sewer
treatment facility and low occupancy rates. 	The Court believes, however, that these
problems can be overcome with improvements.
As discussed above, the Court finds the Bank’s appraisals deficient in numerous
regards. First, the appraisals fail to value the Property at or about the sale date. Second,
the Bank’s second appraisal reflects an unrealistic assumption that the occupancy rate
shall remain at 64.5% in perpetuity. 	Third, the Bank’s appraiser undermines his own
credibility by trying to distance himself from his earlier forecasts. Fourth, the Bank failed
to recognize that the Property is entitled to some enhanced value because it has been
approved for additional 50 pads and has the ability to generate an operating income much
greater than it is currently producing.
Conversely, Defendants have offered their own credible valuation prepared at or
about the sale date that allows for a realistic stabilization of the occupancy rate, and takes
into account the Property’s enhanced worth from the potential to develop the surplus land.
The only area of concern that the Court has is Defendants’ appraiser’s estimation of costs
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11
needed to improve the water problems that continue to plague the park. By all reasonable
accounts, a significant amount of work is needed to rectify problems with the water and
sewer treatment facility. 	For that reason, the Court will adjust Defendants’ appraisal
downward by $50,000 in an attempt to better estimate expenditures needed to adequately
improve the Property.
Accordingly, the Court determines the value of the Spring Village Mobile Home Park
as of December 2, 2003 to be $1,750,000.
An appropriate Order follows.
BY THE COURT :
STEPHEN RASLAVICH
DATED: October 26, 2005 	UNITED STATES BANKRUPTCY JUDGE
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IN THE U NITED S TATES B ANKRUPTCY C OURT
F OR THE E ASTERN D ISTRICT OF P ENNSYLVANIA
I N RE 	: CHAPTER 11
:
DAVID S . JARJISIAN , 	:
:
DEBTOR ( S ) 	: BANKRUPTCY NO. 02-15711 SR
:
COMMUNITY BANKS, SUCCESSOR BY MERGER 	:
TO COMMUNITY BANKS, N . A ., 	:
PLAINTIFF 	: ADVERSARY NO . 04-0659 SR
:
V . 	:
:
START PROPERTIES, II, LLC , 	:
START PROPERTIES, LLC , 	:
DAVID S . JARJISIAN AND VICTORIA A . 	:
JARJISIAN , 	:
DEFENDANT ( S ) 	:
:	ORDER
AND NOW, upon consideration of Plaintiff’s Motion to Fix the Fair Market Value of
the Spring Lake Village Mobile Home Park, and any opposition thereto, and after a
hearing held thereon on August 17-18, 2005, it is hereby:
O RDERED, that, for the reasons stated in the accompanying Opinion, the fair
market value of the Spring Lake Village Mobile Home Park as of December 2, 2003, is
fixed at $1,750,000.
BY THE COURT :
STEPHEN RASLAVICH
DATED: October 26, 2005 	UNITED STATES BANKRUPTCY JUDGE
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2
MAILING LIST:
Dexter K. Case, Esquire
Case DiGiamberardino & Lutz, P.C.
845 North Park Road, Suite 101
Wyomissing, PA 19610
Elliot H. Berton, Esquire
Steven L. Sugarman and Associates
1273 Lancaster Avenue
Berwyn, PA 19312
Eugene J. Malady, Esquire
200 E. State Street, Suite 309
Media, PA 19063
George Conway, Esquire
Office Of The U.S. Trustee
833 Chestnut Street
Suite 500
Philadelphia PA 19106
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