LLC v. 488 LLC (2010)

ARTICULATION OF MEMORANDUM OF DECISION AND CORRECTION OF TYPOGRAPHICAL ERROR

This memorandum is in response to the order of the Appellate Court issued on December 1, 2010.

In this foreclosure case this court heard the plaintiff's motion for a deficiency judgment on January 5, 2010.   The plaintiff offered the appraisal reports and testimony of Peter Zeidel, a qualified appraiser.   The defendant offered the appraisal report and testimony of Casper Amodio, also a qualified appraiser.   The evidence and arguments took the entire day.

The subject property is a four-story apartment building located at 488 Chapel Street at the corner of Franklin Street in New Haven.   It is located in the Wooster Square neighborhood.   The building was constructed in 1900.   It contains four 1-bedroom units and two 2-bedroom units.

Title vested in the plaintiff on September 18, 2009.   The purpose of the hearing was to determine, as of September 18, 2009, the highest and best use of the property, the fair market value, amount of the debt owed to the plaintiff, and the amount of the deficiency judgment, if any.

Mr. Zeidel has appraised the property three times in the course of this litigation.   His appraisal reports reflect the fair market value of the property on March 3, 2009, July 21, 2009, and September 18, 2009.   He testified that the highest and best use of the property was to continue its use as an apartment house.   His opinion was that the fair market value of the property on the respective dates of his appraisals was $547,000.00, $600,000.00, and $545,000.00.   In connection with reaching his opinion that the property had a fair market value of $545,000.00 on the day of vesting, Mr. Zeidel considered the income capitalization and sales comparison approaches, with primary reliance on the income approach.   The cost approach was not considered because the building is over 100 years old.

In the income capitalization analysis Mr. Zeidel determined that the net operating income was $54,458.00 which he capitalized at 10%, resulting in a fair market value of $545,000.00.   In the sales comparison approach he used three sales that he felt were comparable, found that the likely unit price was $80.00 per square foot, and concluded that the fair market value was $590,000.00.   He was of the opinion that in the prevailing market the income approach figure is the most reliable and his final opinion is that the fair market value of the property as of September 18, 2009 is $545,000.00.

Mr. Amodio determined that the highest and best use of the property was to convert the six-unit apartment building into condominiums.   He used comparable sales as the method to determine the value of the units and the gross sellout of all the units.   He then determined how long it would take to sell the units and the expenses to be incurred in connection with the sales.   He used five condominium sales as comparables and concluded that the gross sellout would be $1,122,000.00.   Using the same five comparable sales he concluded that the entire project would be sold in eighteen months.   After deducting expenses in connection with the conversion and sales he came up with net income of $810,000.00, which he testified was the fair market value of the property as condominiums.

At the time Mr. Zeidel was preparing his July 27, 2009 appraisal in preparation for a foreclosure hearing, he examined the advisability of converting the property into condominiums because he was informed that the prior owner had intended to do that.   As a result of his examination of the possibility of converting to condominiums he concluded that the highest and best use for the property continued to be as an apartment house.   The reasons for his opinion were that the condominium market was not particularly strong, the costs involved for preparing the offering statement, architectural and engineering fees, and legal fees was about $20,000.00 and would take 60 to 90 days to complete.   He also considered the statutory rights of the current tenants which included a nine-month period of time to decide whether to accept the condominium offer or to vacate and the difficulty in evicting any tenants who didn't buy the condominium and refused to vacate their apartment.   He estimated that the selling of the condominium units could not begin for between three and twelve months.   Mr. Zeidel also testified that certain deferred maintenance would be required.   Each of the five upstairs apartments have their own electric meter in each of the apartments and their circuit breakers in the basement apartment.   The basement apartment is on the house meter which includes all of the common areas throughout the building.   There is a question with respect to the access to the parking lot in the rear of the building.   Access is over a neighbor's driveway but the building does not have an easement.   According to Mr. Zeidel's appraisal report the owner is presently negotiating with the neighbor to reach a solution.

This court finds that the highest and best use is to continue the property as apartments.   The court agrees with the reasoning of Mr. Zeidel in reaching his conclusion that conversion to condominium units was not advisable.   The real estate market is not strong.   The timeframe for selling the units as projected by Mr. Amodio is unduly optimistic.   Mr. Amodio, in reaching his conclusion, did not appear to be knowledgeable with respect to the statutory rights of tenants in buildings which are being converted into condominiums and which can delay substantially the selling of the units.   There are certain renovations and alterations within the building, not considered by Mr. Amodio, that will delay the selling of the units and increase the expenses before putting the units on the market.   Mr. Amodio testified that three tenants were interested in buying their units as condominiums and that this would affect the rate at which the entire building would be sold.   There was no credible evidence that three tenants were ready, willing and able to purchase their units.

The court finds that the fair market value of the property as an apartment house as of September 18, 2009 is $600,000.00.   This conclusion is reached based on Mr. Zeidel's evaluation of the property using the comparable sales approach.   The court recognizes that Mr. Zeidel, in his final analysis, used the income capitalization approach and found the value to be $545,000.00, and that his sales comparison approach resulted in a value of $590,000.00 which he claimed was supportive of the value found by the income approach.   In reaching his valuation of $545,000, using the income capitalization approach, Mr. Zeidel had limited data on actual expenses for the subject property on September 18, 2009 and when his appraisal was prepared.   Mr. Zeidel had no income tax returns or accountant's audited statements prepared for the former owner, and details on the history of the operation was limited.   He was forced to use national statistics published by the U.S. Department of Housing and Urban Development and the National Apartment Association for much of the data used in his income capitalization approach.   The court accepts the analysis of comparable sales used by Mr. Zeidel in arriving at his fair market value of $590,000, which the court has rounded off at $600,000.

Mr. Amodio's appraisal report did not mention any analysis of fair market value of the property as an apartment house.   He did offer brief testimony indicating that he had valued the property as apartments by use of comparable sales.   He testified that he used the Edwards Street property used by Mr. Zeidel and “one on Whitney Avenue and one on Lion Street in New Haven.”   He testified that he “briefly looked at those sales, made adjustments,” and determined that the value of the property as apartments was between $660,000 and $720,000.   The court does not find this limited evidence to be credible.

For the foregoing reasons the court finds that the highest and best use of the property is as an apartment building.   The court further finds that the fair market value of the property on the day that title vested in the plaintiff, September 18, 2009, was $600,000.00.

The court corrects the typographical error in its earlier memorandum of decision filed on August 30, 2010 and finds that the mortgage debt is $892,201.45, which sum includes an additional attorneys fee of $2,000.00 and an appraiser's fee of $2,000.00, less the fair market value of the property established at $600,000.00, for a present balance due to the plaintiff of $292,201.45.   A deficiency judgment in this sum may enter in favor of the plaintiff and against the defendants 488 Chapel Street Associates, LLC, and David W. Nyberg.

William L. Hadden, Jr.

Judge Trial Referee

Hadden, William L., J.T.R.