Somerset Properties SPE, LLC

UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF NORTH CAROLINA
RALEIGH DIVISION
IN RE:
SOMERSET PROPERTIES SPE, LLC
DEBTOR
CASE NO.
10-09210-8-SWH
ORDER REGARDING VALUATION OF PROPERTY
The matter before the court is the joint request for valuation of the debtor’s property.
Hearings took place in Raleigh, North Carolina, on June 20, 2011, June 27, 2011, and July 21, 2011,
and post-hearing briefs were submitted on August 5, 2011.
Background
Somerset Properties SPE, LLC filed a petition for relief under chapter 11 of the Bankruptcy
Code on November 8, 2010. The debtor owns and operates six office buildings in Raleigh, North
Carolina, known as “Somerset Park” and “Somerset Center and Place.” On February 17, 2011, the
debtor filed its plan of reorganization. LNR Partners, LLC1 holds a security interest in the debtor’s
real property, and filed an objection to confirmation of the plan on April 20, 2011. On May 26,
2011, the debtor and LNR attempted mediation of many disputed claims, including the proposed
1Acting as special servicer to CSFB 2001-CP4 Falls of Neuse, LLC and CSFB 2001-CP4
Bland Road, LLC.
SO ORDERED.
SIGNED this 19 day of September, 2011.
________________________________________
Stephani W. Humrickhouse
United States Bankruptcy Judge
____________________________________________________________
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treatment of LNR’s claim under the plan, as well the claims at issue in a pending adversary
proceeding. During the mediation, the parties determined that they could not address these issues
without first resolving their disagreement as to the value of the subject property. As a result, the
parties requested that the court determine the value of the debtor’s real property, and plan to resume
mediation once that value has been ascertained.
Discussion
Although the court considered the testimony of all witnesses presented at the hearings, it
gives greatest weight on matters of valuation to that of the two appraisers, Craig D. Smith and Chris
R. Morris. Mr. Smith values the property at $24,500,000 and Mr. Morris values the property at
$27,125,000. The parties agree that the valuation methodology and assumptions of the appraisers
are substantially similar except as to three areas of expenses: 1) tenant improvements, 2) broker
commissions, and 3) capital expenditures. Although the court does not fully adopt the valuation of
either appraiser, for the reasons set forth below it believes that the appropriate value number can be
derived by applying the following modifications to Mr. Morris’ calculations.2
1) 	Tenant Improvements
Mr. Morris employed a $10 per square foot tenant improvement expense figure for new
leases and a $5 per square foot figure for lease renewals in his discounted cash flow analysis. Mr.
Smith utilized $15 and $7 figures in his. The court is persuaded by the testimony of Mr. Dennis D.
Hurley, a commercial real estate broker, and Mr. Kevin J. Wilk, an agent of the debtor’s manager,
Somerset Properties, LLC, regarding the necessity in the applicable market for landlords to offer
2The same value could be determined by using Mr. Smith’s appraisal as a starting point with
converse modifications, but for Mr. Smith’s reduction of the “as is” value for capital expenditures,
rather than reducing net income by a capital expenditure expense.
2
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significant incentives to prospective lessees for tenant upfit. 	The court notes that Mr. Morris
acknowledged Mr. Hurley’s familiarity with tenant expectations in this regard. The court does not
however embrace the $20-25 per square foot figures forwarded by Hurley and Wilk, but will adopt
the more conservative Smith figures. Using the comparative Exhibit 20 for guidance, it appears that
the tenant improvement expense number used by Mr. Morris should be increased by $1,712,032.00.
2) 	Broker Commissions
Mr. Morris utilized a 4% commission number for new leases and a 2% number for renewals
for that component in his discounted cash flow analysis. Mr. Smith used 6% and 4% figures. The
court is similarly persuaded that brokers are more apt to push properties regarding which they will
earn higher commissions. Acknowledging the expertise of both appraisers, the court will average
the commission rates and find that the correct numbers are 5% and 3%. Again, using Exhibit 20 for
guidance, the expense number for commissions in the Morris analysis should be increased by
$202,564.00.
3) 	Capital Expenditures
Mr. Morris did not include an expense for capital expenditures, while Mr. Smith made a
$1,900,000 reduction to “as is” value for capital improvements. 	The court finds that sufficient
evidence of the need for capital improvements was introduced. Based upon the debtor’s capital
expenditure summary contained in Exhibit 9, and the schedule provided for such expenditure, the
court finds that in order to bring the property to a state which will allow it to be effectively
marketed, the expenditures set forth to be accomplished in the first two years of the plan should be
considered in the valuation. The cost of those improvements, approximately $1,500,000, should
therefore be included in the analysis by increasing Mr. Morris’ expenditures by that figure.
3
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Conclusion
The court therefore directs the parties to recalculate the discounted cash flow analysis of Mr.
Morris using the additions to expenses set forth above and jointly submit the resulting valuation
number to the court within 5 days of the date of this order.
SO ORDERED.
END OF DOCUMENT
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