Opinion ID: 663089
Heading Depth: 2
Heading Rank: 3

Heading: Increased Value of the Property

Text: 51 The bankruptcy court was also wrong in finding that Carteret derived adequate protection from the increased value of the Crystal Springs project through the contemplated continuing construction. As we have indicated, Carteret presented evidence, which Swedeland did not dispute, that the value of the Crystal Springs property was $18,495,000. Under the superpriority lien awarded to First Fidelity, it obtains $3,160,000 before Carteret receives anything. Thus, the only way to justify First Fidelity's superpriority lien based on the value of the property is to show that somehow Carteret's interest in the collateral ($18,495,000) has been increased by $3,160,000. The bankruptcy court apparently believed that the construction of the development and the potential sales increased the value of the property by this amount. 52 Yet, the evidence does not establish that the property has increased in value to compensate Carteret for the loss of its priority to First Fidelity. In the first place, continued construction based on projections and improvements to the property does not alone constitute adequate protection. See Town of Westport v. Inn at Longshore, 32 B.R. 942, 946 (Bankr.D.Conn.1983). Those cases which have considered improvements to be adequate protection have done so only when the improvements were made in conjunction with the debtor's providing additional collateral beyond the contemplated improvements. See, e.g., In re O'Connor, 808 F.2d at 1396 (grant of additional, unencumbered collateral); In re 495 Central Park Avenue Corp., 136 B.R. 626 (Bankr.S.D.N.Y.1992) (projected property improvements constituted adequate protection where annual rental income of $180,000 from an existing lease conditioned on improvements would increase value of real estate securing pre-petition loan by at least $800,000, and superpriority post-petition loan financing the projected improvements amounted to only $650,000). We reject the notion that development property is increased in value simply because a debtor may continue with construction which might or might not prove to be profitable. 53 Neither does the possibility of selling the units show that the value of the property has increased to protect Carteret adequately. 17 Indeed, as the district court pointed out, Swedeland's projections concerning how many units it will sell were belied by its historical performance. Swedeland already had defaulted on the loan to Carteret, the five-month sales projections for the period between August through December 1991 were below expectations, and the cash flow projections upon which the bankruptcy court relied were deficient as they did not provide for a reasonable developer's profit nor discount the projected eight-year cash flow to present value. In fact, the testimony showed that discounting would yield only a net present value of $14,340,303. The district court correctly found that this amount was insufficient to protect Carteret adequately. In this regard, we cannot resist pointing out that we do not doubt that Swedeland's original projections certainly could not have contemplated that within 28 months of acquiring the Crystal Springs property it would file a Chapter 11 petition. 54