3 G Properties, LLC

UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF NORTH CAROLINA
RALEIGH DIVISION
IN RE:
3G PROPERTIES, LLC 	CASE NUMBER: 10-04763-8-JRL
CHAPTER 11
DEBTOR.
______________________________________________________________________________
ORDER DENYING RELIEF FROM AUTOMATIC STAY
This matter is before the court on Southern Community Bank & Trust’s (“Southern”)
motion for relief from the automatic stay. A hearing was held on October 6, 2010 and continued
on October 7, 2010 in Raleigh, North Carolina.
BACKGROUND
1. On June 19, 2008, Lake Glad Road Commercial, LLC (“Commercial”) executed a
note in favor of Southern in the principal amount of $3,600,000.00 (the “Commercial Note”).
The Commercial Note is secured by eleven undeveloped contiguous tracts of land in Granville
County, North Carolina. On the same date, Lake Glad Road Partners, LLC (“Partners”)
executed a note in favor of Southern in the principal amount of $3,100,000.00 (the “Partners
Note”). The Partners Note is secured by two undeveloped tracts of land also in Granville County
SO ORDERED.
SIGNED this 05 day of November, 2010.
________________________________________
J. Rich Leonard
United States Bankruptcy Judge
____________________________________________________________
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which are adjacent to tracts of land securing the Commercial Note.
2. On June 14, 2010, Commercial and Partners merged with a third entity known as
Granville Park Partners, LLC. The debtor, 3 G Properties, LLC, is the resulting entity from the
merger. On the same date, the debtor filed for relief under chapter 11 of the Bankruptcy Code.
The debtor’s Schedule A lists the aggregate value of the subject properties as $8,285,000.00.
The debtor’s Schedule A and D indicate that Southern holds two secured claims in the aggregate
amount of $6,767,611.86.
3. The properties at issue are situated along Highway 56, in the city of Creedmoor near
the town of Butner and I-85. It is the intent of the debtor to develop the properties collectively
into a mixed-use community known as Highland Trails. 	Highland Trails totals approximately
250 acres. The commercial portion of the development would encompass 58 acres, while the
remaining 192 acres would accommodate approximately 340 residential home sites.
4. The debtor also owns raw land commonly known as Triangle Park North. Before the
merger, Triangle Park North was an asset of Granville Park Partners. This separate real estate
project is being developed in connection with the State of North Carolina as an expansion of the
Research Triangle Park. The debtor intends to reorganize, and fund further development of
Highland Trails with revenue generated from the development of Triangle Park North.
DISCUSSION
Southern requests relief from the automatic stay under both prongs of § 362(d), both “for
cause” based on a lack of adequate protection, and because the debtor lacks equity in the
property and it is not necessary for an effective reorganization. Under both provisions, the value
of the property becomes central to the court’s determination. The Bankruptcy Code provides no
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bright-line rule for establishing valuation; however, “[w]here property values have declined . . .
as a result of a depressed economy, the court, in valuing the property . . . must look at the
situation realistically and in light of the most reasonably commercial disposition of real estate
practicable in the circumstances.” 21 AM. JUR. Proof of Facts 3d 769 § 4 (2010)(citing In re
Nat’l Real Estate Ltd. P’ship II, 87 B.R. 986, 990 (Bankr. E.D.Wis. 1988)).
There are three appraisals of Highland Trails in contention with one another, the first
completed in April 2008. On April 30, 2008, Frank Leatherman (“Leatherman), a North
Carolina real estate appraiser, appraised Highland Trails “as is” for $7,510,000.00. In the
interim between the first and latter appraisals, the property was listed for sale. Commercial and
Partners listed the property with John LaRocca (“LaRocca”), a real estate broker who specializes
in commercial real estate transactions. The property was on the market from June 1, 2009
through May 2010, at a list price of $7,000,000.00. At the hearing, LaRocca testified that during
the listing period he received approximately a dozen unsolicited inquiries. No written offers
were made. In his professional capacity, LaRocca stated that on the whole properties are
maintaining value. However, Highland Trails is subject to the caveat that large tracts of
development land appeal to a much smaller pool of buyers.
On March 25, 2010, the second appraisal of the property was completed by Jonathan
Chapman (“Chapman”). Chapman appraised the value of the land in total for $4,080,000.00.
This figure was broken down as $1,810,000.00 for the portion of the property intended for
residential use, and $2,270,000.00 for the property to be used commercially. Although Chapman
indicated in his written report that an 8.64% population increase is expected to affect the location
surrounding the property by 2014, his ultimate opinion of the current highest and best use is to
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“sit on it.” The appraisal acknowledges its own faults - that those comparable properties having
closed transactions date back to 2008. This, however, is not the only problem with the
comparable sales. The bigger issue is that only one of three comparables is located in Granville
County. The other two properties are located in the northern portion of Durham County, in an
unincorporated community known as Bahama. The court appreciates that finding comparables
for a property such as Highland Trails is a difficult task in the current market. However, the
value of property in rural Bahama more than two years ago seems irrelevant to an analysis of
Highland Trails. While Chapman’s prediction that the market will not demand development for
Highland Trails within the next two years may ultimately be correct, it remains speculative. Use
of the Bahama properties within the analysis deflates what would otherwise be a solid
representation of current value.
Subsequently, on May 7, 2010 the final appraisal was conducted. The third appraisal was
prepared by Frank Leatherman. Leatherman’s previous 2008 appraisal was commissioned by
Southern; the 2010 appraisal was for the benefit of the debtor. In 2010, Leatherman valued the
residential portion of the property at $4,535,000.00 and the commercial portion at $3,750,000.00
for a total value of $8,285,000.00. In his summary of the comparable land sales, for both the
residential and commercial portions, Leatherman states that “price levels in the area and region
have increased over the period [of time] . . . [and that comparable] sales will be adjusted upward,
based on a 3% per year time adjustment in all years except for 2007.” This conclusion flies in
the face of all other reports concerning the current economic climate. Moreover, the 2010
appraisal appears to rely heavily on the 2008 appraisal. With the exception of the 2009 Fox
Road comparable, the two appraisals contain the same comparables dating back to 2005 and
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2006. While more recent in time, Fox Road is in the northern part of Wake County near high
traffic areas of heavy commercial development. Perhaps most disparaging is Leatherman’s
testimony at the hearing that he was unaware Highland Trails had been listed for sale within the
last year. Crediting LaRocca’s assertion that the property garnered little to no interest while
listed for $7,000,000.00, it would seem nonsensical to place a higher value on Highland Trails.
The inclusion of Fox Road and the upward adjustments made to valuations while not accounting
for the marketing period is unrealistically optimistic. The court cannot in good faith
countenance Leatherman’s 2010 appraisal as accurate.
Considering the varying appraisals, the previous marketing period and the current
economic climate, Southern correctly asserts the lack of an equity cushion in Highland Trails.
This alone, however, does not justify lifting of the stay. A secured creditor’s interest under §
362(d)(1) is not adequately protected “if the security is depreciating during the term of the stay.”
U. Sav. Ass’n of Texas v. Timbers of Inwood Forest Associates, 484 U.S. 365, 370, 108 S. Ct.
626, 630 (1988). In the present case, all evidence is to the contrary. Each of the witnesses
providing testimony with ties to the current real estate market stated that the market was stable
with beginning signs of correction. Of importance is the testimony that developers and
companies that were not previously in the North Carolina real estate market are beginning to
investigate prospects. It is not unlikely that Highland Trails may be an attractive prospect to
such a developer.
Although lifting the stay for lack of adequate protection pursuant to § 362(d)(1) is not an
appropriate measure, the burden shifts to the debtor to state why this property is necessary for an
effective reorganization. 11 U.S.C. § 362(d)(2)(B); Timbers, 484 U.S. 365 at 375, 108 S. Ct. 626
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at 633 (1988). Supported by counsel’s forecast of the debtor’s plan and the testimony of Jim
Adams (“Adams”), a managing member of the debtor, the second prong of § 362 is satisfied. At
the hearing, Adams described the debtor’s dual approach to their plan of reorganization -
continue to develop Highland Trails with revenue generated from development of Triangle Park
North while simultaneously listing the property for sale. Adams contends that the merger
benefits the debtor’s creditors by enhancing the ability for development, and providing more
equity to which they may ultimately look for payment. To wit, the debtor already has a contract
with a pharmaceutical company for the purchase of 50 acres of Triangle Park North in the
approximate amount of $2,500,000.00. It was uncontested that equity exists in Triangle Park
North. Adams further asserted that the managing members of the debtor are prepared to make
personal investments to reach the goal of successful reorganization. In addition to personal
funding, the debtor’s managing members have considered additional partners who could invest
capital in the debtor.
To effectuate the second part of its dual plan, the debtor made an application to employ
NAI Carolantic Realty, Inc. (“NAI”), which was granted by this court on October 8, 2010.
During the hearing, Scott Hadley (“Hadley”), a real estate broker for NAI, asserted that NAI
would be employed to list both Highland Trails and Triangle Park North. The listing price for
Highland Trails in its entirety was $7,300,000.00. Hadley stated that while this price is slightly
north of the previous listing, it was fair and reasonable under current market conditions. In
Hadley’s opinion, the 2009 listing was during the absolute bottom of the real estate downturn.
Hadley further stated that there appears to be on an upward trend as pre-existing inventory is
absorbed into the market necessitating the resurgence of new development. Highland Trails may
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1The court entered an order on October 7, 2010 extending the exclusivity period for filing
a chapter 11 plan to November 12, 2010.
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be particularly attractive to developers because it already has some of the permitting and
infrastructure necessary for water and sewer, including certain high density allotments.
Debtor’s counsel expanded upon the testimony of Adams and Hadley, providing further
insight into the forthcoming proposed plan of reorganization. The intent of the merger which
created the debtor was to improve the position of Southern. Independent of the court’s
determination of valuation, the debtor proposes to treat the loans made by Southern as fully
secured. Terms of repayment will entail amortization over a reasonable period of years and
subject to a call. Furthermore, cross-collateralization in Triangle Park North is a possibility
which would provide Southern with additional security.
Southern is unmistakably an undersecured creditor of the debtor. However, the record
before the court suggests that at worst Southern’s collateral will maintain value going forward.
In addition, the debtor has the exclusive right to propose a plan of reorganization. 11 U.S.C. §
1121(b).1 While the debtor’s plan for reorganization has yet to be filed, the debtor has
sufficiently shown that the subject property is necessary for an effective reorganization and that
such reorganization is possible within a reasonable time. Timbers, 484 U.S. 365 at 375, 180
S.Ct. 626 at 633.
CONCLUSION
Based on the foregoing, the motion for relief from stay is DENIED.
END OF DOCUMENT
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