Date: 12-27-2015

Case Style: J.E. Robert Co. v. Signature Properties, LLC

Case Number: SC19483

Judge: Peter T. Zarella

Court: Connecticut Supreme Court

Plaintiff's Attorney: Richard J. Buturla, Brian A. Lema

Defendant's Attorney: Eric S. Goldstein, Patrick M. Fahey

Description: Inthisappeal,weareaskedtodetermine whether the trial court properly relied on the appraisal submitted by the substitute plaintiff, Shaw’s New London, LLC (plaintiff), and the testimony of the plaintiff’s appraiser in granting the plaintiff’s motion for a deficiency judgment against the named defendant, Signature Properties, LLC (Signature), and the defendants AndrewJ.Julian,MaureenJulian,andMichaelMurray.1 The defendants Andrew J. Julian and Murray (defendants) appeal from the trial court’s judgment and claim that it was improper to rely on the appraisal and the appraiser’s testimony because they expressed an opinion on the value of the leased fee interest in the mortgaged property and the plaintiff was required to establishthevalueofthefeesimpleinterest.Thedefendants further argue that the value of the leased fee interest and fee simple interest of the mortgaged propertyarenotequivalent.Theplaintiffrespondsthatitwas propertoappraisethevalueoftheleasedfeeinterestin the mortgaged property because the day title to the property vested in the plaintiff, it was encumbered by three leases.2 Alternatively, the plaintiff contends that the value of the leased fee and fee simple interests in the mortgaged property are equal because the leases were at market rates. We conclude that the trial court’s reliance on the appraisal and the appraiser’s testimony was proper and affirm its judgment. On April 13, 2005, Signature executed a promissory note secured by a mortgage and security agreement on Signature’s property at 6 Shaw’s Cove in the city of New London.3 The note and mortgage were guaranteed byAndrew J.Julian,Maureen Julian,and Murray(guarantors). In August, 2007, an action was commenced to foreclose the mortgage, and, on February 3, 2010, the trial court, Shapiro, J., granted the plaintiff’s motion for partial summary judgment. The court granted the plaintiff, among other things, the relief of foreclosure andanorderpermittingtheplaintifftoseekadeficiency judgmentagainsttheguarantors.Thetrialcourt,Bright, J.,renderedajudgmentofstrictforeclosureonOctober 20, 2011, which was affirmed by this court on July 16, 2013. See J.E. Robert Co. v. Signature Properties, LLC, 309 Conn. 307, 342, 71 A.3d 492 (2013). The trial court, Sheridan,J.,thengrantedtheplaintiff’smotiontoopen thejudgmentofstrictforeclosure andsetnewlawdays for Signatureand theguarantors. NeitherSignature nor the guarantors redeemed by their respective law days, andtitletotheforeclosedpropertyvestedintheplaintiff on September 27, 2013. Theplaintiffsubsequentlyfiled atimelymotionseeking a deficiency judgment against Signature and the guarantors, and a hearing was scheduled. At the hearing,theplaintiffofferedthetestimonyofDanielBarber, the senior vice president of Northeast Property Group,
Inc., the court-appointed receiver, and Mark Bates, the plaintiff’s appraiser. The plaintiff also submitted nine exhibits,includingBates’ appraisalreport.Barbertestified regarding the current conditions of the mortgaged property.Onthebasisofthistestimony,thecourtfound that the property had three tenants on September 27, 2013,thedaytitletothepropertyvestedintheplaintiff, whooccupiedapproximately60percentofthebuilding. The remaining 40 percent of the property was vacant, and it had been since 2008, despite Barber’s efforts to lease the vacant space. Bates’ testimony and appraisal report ‘‘presented an opinionconcerning‘themarketvalueasisoftheleased fee interest’ of the mortgaged property . . . .’’ In reachinghisopinion,Batesutilizedthesalescomparisonand income capitalization approaches. The income capitalizationapproachemployedtwoanalyses,directcapitalization and discounted cash flow. To determine the projected income stream generated by the property, Batesutilizedthecontractrentsfortheoccupiedspace, after determining they were at or near market rates, and applied market rent to the vacant space.4 Bates did not use the cost approach, determining that it would be an inappropriate methodology in this case due to the age of the building and limited comparable land transactions. Moreover, the cost approach is generally employedonlywhenvaluingnewornearlynewproperties. Bates concluded, after considering the value indications from the sales comparison and income capitalization approaches, ‘‘that the market value as is of the leased fee interest in the mortgaged property was $5.3 million as of September 27, 2013,’’ the day title to the mortgaged property vested in the plaintiff. In addition, Bates testified that therewould be no significant difference in the valuation of the leased fee interest and the fee simple interest because the current contract rents were close to the market rents. The defendants did not present any evidence to contradict ordiscredit Bates’valuation ofthe propertybut, instead, argued that the valuation was flawed because it valued the leased fee interest, and not the fee simple interest, in the property. The trial court credited Bates’ testimony that the contract rents for the leased space were similar to the market rent for comparable space and concluded: ‘‘Under those circumstances, the value of the leased fee estate will be equivalent to the value of the fee simple estate, and the court is justified in using the valuation as is of the leased fee interest in arriving at its determination of the fair market value of themortgagedproperty.’’Thecourtthereforefoundthe fair market value of the mortgaged property to be $5.3 million and rendered a deficiency judgment in the amount of $13,264,318.57. The defendants appealed, claiming, in essence, that thetrialcourtimproperlyreliedonBates’appraisaland
his testimony in determining the fair market value of the foreclosed property because they valued the leased fee interest of the property rather than the fee simple interest. The defendants make a number of arguments, but their arguments areall derivative of two underlying claims: (1) General Statutes § 49-14 (a) required the plaintiff to establish the fair market value of the fee simple interest of the mortgaged property; and (2) the valuationofthefeesimpleinterestandleasedfeeinterest of mortgaged property is not equal, even though the leases are at market rate. We begin our analysis by setting forth the proper standard of review. It is in the trial court’s province to determine the valuation ofmortgaged property, usually guided by expert witnesses, relevant circumstances bearing on value, and its own knowledge. See, e.g., Eichman v. J & J Building Co., 216 Conn. 443, 451, 582 A.2d 182 (1990). The trial court also determines the credibility and weight accorded to the witnesses, their testimony, and the evidence admitted. See, e.g., id., 451–52. Thus, the trial court’s conclusion regarding the fair market value of the mortgaged property will be upheld ‘‘unless there was an error of law or a legal or logical inconsistency with the facts found.’’ (Internal quotation marks omitted.) New Haven Savings Bank v. West Haven Sound Development, 190 Conn. 60, 70, 459 A.2d 999 (1983). Its determination of valuation will stand unless ‘‘it appears on the record . . . that the [trial] court misapplied or overlooked, or gave a wrong or improper effect to, any test or consideration which it was [its] duty to regard.’’ (Internal quotation marks omitted.) Id. The defendants contend that § 49-14 (a) requires the plaintiff, in order to receive a deficiency judgment, to establishthefairmarketvalueofthefeesimpleinterest of the mortgaged property on September 27, 2013, the date title vested in the plaintiff. Their argument is as follows: First, § 49-14 (a) requires the party seeking a deficiency judgment to ‘‘establish a valuation for the mortgaged property . . . .’’ (Emphasis added.) Second, Connecticut follows the title theory of mortgages, meaning that, when a mortgage is executed, the mortgagee receives legal title to the property in the form of a vested fee simple subject to complete defeasance by the mortgagor’s compliance with the mortgage conditions, i.e., timely payment of the debt secured by the mortgage. Third, ‘‘the mortgaged property’’ referred to in § 49-14 (a) is the fee simple interest because, under the title theory of mortgages, that is what vests in the mortgagee when the mortgage is executed. Therefore, § 49-14 (a) requires the plaintiff to establish the value ofthefeesimple,nottheleasedfee.Weneednotdecide, however, whether § 49-14 (a) requires the plaintiff to establish the value of the fee simple interest in the mortgaged property because, as we discuss further in this opinion, when contract rents are at market rates,
the value of the leased fee and fee simple interests of mortgaged property is equivalent. Inthetrialcourt,thedefendantsarguedthattheplaintiff’s appraisal was flawed because it valued the leased fee interest rather than the fee simple interest of the mortgaged property. The trial court responded that a ‘‘leased fee interest is simply the fee simple interest encumbered by a lease. If the lease is at market rent, then the leased fee value and the fee simple value are equal.’’Thedefendantsnowarguebeforethiscourtthat the trial court’s statement was an incorrect conclusion of law. We do not agree. When employing the income capitalization approach to value the fee simple interest in an income producing property, such as the property at issue in the present case, an appraiser utilizes market rents. See Appraisal Institute, The Appraisal of Real Estate (12th Ed. 2001) pp. 480, 500. By multiplying the market rent by all rentable space, the appraiser can estimate the income the property would generate. See id., p. 480. Similarly, to valueowneroccupiedpropertiesundertheincomecapitalization approach,market rentestimates areutilized. Id., p. 500. To value the leased fee interest in such property, however,contract rents—that is,those determined by current leases—are used for space under existing leases and market rents are used for vacant space. Id. Thus, when market rents and contract rents are equal, the valuation of the fee simple interest in a particular property and the leased fee interest in the same property will likewise be equal. The authors of The Appraisal of Real Estate support this conclusion: ‘‘When an [appraisal] involves the valuation of a leased fee interest, the appraiser often must also appraise the fee simple interest. If the rent and/or terms of the lease are favorable to the landlord (lessor), the value of the leasedfeeinterestwillusuallybegreaterthanthevalue of the fee simple interest, resulting in a negative leasehold interest. If the rent and/or terms of the lease are favorable to the tenant (or lessee), the value of the leased fee interest will usually be less than the value of the fee simple interest, resulting in a positive leasehold interest . . . . The negative or positive leasehold interests will cease if contract rent and/or terms equal market rent and/or terms any time during the lease orwhen thelease expires.’’(Citationomitted;emphasis added.)Id.,p.82.Putanotherway,whencontractrents are at market rates, the value of the leased fee and fee simple will be equal. Theholdingsofothercourtsalsosupportthisconclusion. In Walgreen Co. v. Madison, 311 Wis. 2d 158, 752 N.W.2d 687 (2008), a tax assessment appeal, the Supreme Court of Wisconsin quoted with approval a state property assessment manual: ‘‘If the contract rent isatthesamelevelasthemarket,theleasedfeeinterest has the same value as a full interest (fee simple inter
est).’’5 (Internal quotation marks omitted.) Id., 177; see alsoid.,176(‘‘[i]fthecontractrentsareatmarketlevels . . . the leased fee interest is the same as a fee simple interest’’[internalquotationmarksomitted]).Similarly, in In re Prieb Properties, L.L.C., 47 Kan. App. 2d 122, 275 P.3d 56 (2012), also a tax assessment appeal, the Court of Appeals of Kansas stated that ‘‘it is clear that the legislative intent underlying the statutory scheme of ad valorem taxation in [Kansas] has always been to appraise the property as if in fee simple, requiring property appraisal to use market rents instead of contractrentsiftheratesarenotequal.’’(Emphasisadded.) Id., 130. Implicit in the court’s statement is the point that, when contract rents are equal to market rates, theydonotaffectthevaluationofthefeesimpleinterest in the appraised property. Our research has not uncovered any cases that hold to the contrary. This conclusion is also consistent with our cases addressing valuation issues. For example, in First Bethel Associates v. Bethel, 231 Conn. 731, 651 A.2d 1279 (1995), we considered whether the contract rent asubjectpropertyreceivesshouldfactorintotheanalysis of the market value of the property for tax assessment purposes. See id., 733. In First Bethel Associates, the defendant town contended that actual or contract rents should be considered only when they are equivalent to the market rents the property would command. Id.,740.Werejectedthatargument,explainingthatsuch a rule ‘‘would mean that contract rent would factor into the analysis only if it had no effect on the overall valuation . . . .’’ Id. Implicit in our statement is the understanding that, when contract rents are at market rates, they do not impact the fair market value of the property. It follows, then, that, because a leased fee interest is valued using contract rents for leased space and market rents for vacant space, and a fee simple interestisvaluedusingmarketrentsforallrentalspace, when contract rents are at market rates, the leased fee and fee simple value will be equal. The defendants cite to First Fiscal Fund Corp. v. Manchester, Superior Court, judicial district of Hartford-New Britain, Docket No. CV-91-0396739 (April 4, 1996), in support of their contention that the value of the leased fee interest and the fee simple interest in the subject property are not, as a matter of law, equivalent. That case, however, is inapposite. First Fiscal Fund Corp. was an appeal from the Board of Tax Review of the Town of Manchester and concerned the valuation of property located in Manchester. The plaintiffs’ appraiser in that case valued both the leased fee interest and the fee simple interest in the subject property under the income capitalization approach. The appraiser valued the fee simple interest at $5.75 million and the leased fee interest at $4.12 million. The defendants in the present case point to this difference as evidencethatthetrialcourt’sconclusionthatthevalues
of the leased fee interest and fee simple interest are equal when contract rents are at market rates is incorrect. What the defendants overlook, however, is that themarketrentsandcontractrentsinFirstFiscalFund Corp. were not equal, as they are in the present case. That does not matter, the defendants assert, because the variance in the rents was only one difference that distinguished the appraisal of the fee simple interest from that of the leased fee interest. The defendants arguethat,inadditiontothedifferentrentratesutilized in valuing the fee simple and leased fee interests in First Fiscal Fund Corp., the appraiser also employed different assumptions under the fee simple valuation than he did under the leased fee valuation. There is nothinginFirstFiscalFundCorp.,however,tosuggest thatthedifferentassumptionswerebasedonthedifference in the interest valued (fee simple or leased fee) rather than the difference in market lease rent rates and lease terms, and the actual rent rates and lease terms in that case. At oral argument, the defendants contended that the valuationofthefeesimpleinterestandleasedfeeinterestwouldnotbeequal,evenifrentsareatmarketrates, because valuation of the leased fee interest ignores the possibility that the property may be purchased by an owner-occupier. The defendants explained that, if the property was purchased to be occupied by the owner, there would be no need for certain adjustments. We assume the defendants are referring to the lease-up expenses and the vacancy and collection loss. They provide no support for their argument, however, and we have found none. In fact, The Appraisal of Real Estate notes that, when valuing the fee simple interest inowneroccupiedpropertiesundertheincomecapitalization approach, the appraiser should use market rent estimates for the space. Appraisal Institute, supra, p. 500. Further, it indicates that it is appropriate ‘‘to make a deduction in the forecast time for the market to achieve 100 [percent] use and occupancy of the building. (This is analogous to the lease-up time needed to achieve stabilized occupancy in the tenanted properties.)’’ Id. Thus, when market rents and contract rents are equal, the valuation of the fee simple interest of an owner occupied property will be the same as the valuation of the leased fee interest in the property.6 Finally, the defendants claim that the trial court’s finding of the fee simple value of the subject property was clearly erroneous because the plaintiff submitted no evidence of the value of the fee simple interest, that the plaintiff did not meet its burden of establishing the fair market value of the mortgaged property, and, therefore,thatitisnotentitledtoadeficiencyjudgment. At trial, the plaintiff presented Bates’ appraisal report and testimony, both of which noted that the value of the as is leased fee interest in the mortgaged property was $5.3 million. Bates also testified that the contract
rents for leased space at the mortgaged property were atmarketrates.ThetrialcourtcreditedBates’appraisal report and his testimony.7 In light of our conclusion that, when contract rents are at market rates, the value of the leased fee interest and fee simple interest in propertyisequal,andgiventhefindingofthetrialcourt that the terms of the existing leases in this case were similar to market terms, we cannot say that the trial court’s fair market value finding was erroneous or improper, or that the plaintiff did not satisfy its burden of establishing the value of the mortgaged property.8

Outcome: The judgment is affirmed.

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