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Borrower not liable for loan deficiency where credible appraisal shows fair market value of interest in the property exceeded indebtedness on the relevant date.

In 2006-2007 Grantsville Holdings, LLC (Grantsville) and some other entities purchased more than 1,200 acres of undeveloped land (the property) located near Grantsville City, Utah, for residential development for a total price of $11,060,000. Grantsville borrowed $3.2 million (the loan) from American Equity, LLC (later, ARCUS) as the source for its portion of the purchase money.

During the first year of the loan, the real estate market sharply declined, rendering development of the property economically unfeasible. Therefore, Grantsville requested that ARCUS extend the loan for an additional year to develop the property. As a condition to granting the request, ARCUS required that Grantsville provide ARCUS with an updated appraisal. The resulting appraisal valued the property at $12,295,000 as of November 12, 2008. In reliance upon this valuation, ARCUS extended the loan for another year.

The real estate market did not recover quickly, and Grantsville did not develop the property. ARCUS foreclosed on the property, and it was sold at a trustee's sale on March 11, 2011, where ARCUS credit bid successfully for $1,502,686.30--a fraction of the total indebtedness of $4,029,718.99. ARCUS, pursuant to its loan agreement, then pursued Grantsville for a deficiency of the unsecured loan balance.

At the trial, ARCUS submitted appraisal evidence indicating a value of $2,560,000 for the property, and Grantsville submitted appraisal evidence indicating property value of $5,860,000. The court noted the Grantsville appraiser had more experience in valuing raw, undeveloped large tracts of land intended for residential development, and found Grantsville's appraisal of the property to be more credible than ARCUS's appraisal for a number of reasons.

First, the court observed that the Grantsville appraiser's conclusion of value of $5,860,000 represents about a 53% decline in value between 2007 and 2011, which was consistent with the percentage decline in the relevant residential market during the same period. In contrast, the ARCUS appraiser's valuation of $2,560,000 represented approximately a 79% decline in value between 2007 and 2011, which was not supported by market data.

The court also noted that the ARCUS appraiser acknowledged the comparables he used in the comparable sales analysis were not sufficiently similar to the property to be reliable. Some of the comparables selected by the ARCUS appraiser did not have the same highest and best use as the subject property; some of the sales comparables involved much smaller tracts (20, 31, and 60 acres); and some of the comparable sales used were excessively old, dating back to January 2000 and October 2002.

The court further noted that after spending most of the appraisal focused on a standard comparative sales analysis, the ARCUS appraiser completely abandoned that methodology for an "unconventional and arbitrary appraisal approach" that he called the "alternative land valuation" (ALV) method, and he used unadjusted comparables in the ALV. The ARCUS appraiser could not explain how he arrived at the $7,500 per acre value using the ALV for about 100 acres of property, or why his per-acre value of $800 for 805 acres of the property was lower than the value of every other comparable. Finally, the ARCUS appraiser failed to consult the general plan or Grantville City's planning department personnel regarding the city's future plans for the property when considering the highest and best use of the property, and he did not consider that 412 acres of the property had already been platted and had received preliminary approval, which would likely have impacted the property's value.

The court noted that under Arizona law, Grantsville cannot be liable for a deficiency if, on the date of the trustee's sale, the fair market value of the property exceeded the indebtedness under the note. The court found that as the fair market value of Grantsville's interest in the property exceeded the indebtedness on the relevant date, Grantsville was not liable to ARCUS for a deficiency. The court further determined that Grantsville was entitled to its attorney fees and costs in the amount of $158,197.

Arcus Private Capital Solutions, LLC v.

Grantville Holdings, LLC

United States District Court for the

District of Utah, Central Division

December 3, 2017

2012 WL 12888553
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Title Annotation:Recent Court Decisions on Real Estate and Valuation
Publication:Appraisal Journal
Geographic Code:1U8UT
Date:Jun 22, 2017
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