## Facts

- Buena Vista Oceanside, LLC (Buena Vista) owned and operated two small hotels in Lauderdale-by-the-Sea, Florida: the Buena Vista Hotel (14 units, across from the beach) and the Courtyard Villa Hotel (8 units, on the beachfront).
- In 2005, Optimum Bank (Optimum) loaned Buena Vista $4,368,000, evidenced by a promissory note, and received a first-priority mortgage lien on both hotel properties.
- Buena Vista filed a voluntary bankruptcy petition under chapter 7 in July 2011; the case was converted to chapter 11 in August 2011, with Buena Vista continuing as debtor in possession.
- Optimum filed a proof of claim in the amount of $4,977,984.70; the bankruptcy court later entered an order allowing the claim in full, while reserving determination of the secured portion for a separate valuation proceeding.
- Buena Vista filed a motion seeking (1) valuation of Optimum’s secured claim under 11 U.S.C. § 506(a) and (2) avoidance of Optimum’s lien to the extent it exceeded the value of the collateral.
- Each side retained professional real-estate appraisers. The parties presented three MAI-certified appraisers at trial, and their appraisal reports were admitted by stipulation.
- The appraisers used the sales comparison approach and the income capitalization approach and agreed the cost approach was not appropriate for these properties.
- Based on their respective appraisals, Buena Vista contended the combined value of the two hotels was about $1.69 million, while Optimum contended the combined value was about $3.375 million.
- The court held a two-day evidentiary valuation trial (April 9–10, 2012), during which it examined the competing assumptions used to value operating hotels, including occupancy, room rates, operating expenses, and capitalization rates, along with the properties’ physical condition and needed repairs.

## Issues

1. What is the fair market value of the Buena Vista Hotel and the Courtyard Villa Hotel for purposes of determining the extent of Optimum’s secured claim under 11 U.S.C. § 506(a)?
2. How should the court weigh competing appraisal methodologies and conflicting valuation inputs for operating hotel properties?
3. To what extent may Buena Vista avoid Optimum’s lien under § 506(d) to the extent Optimum’s allowed claim exceeds the value of the collateral?

## Decision

- The court determined the value of the two hotel properties for § 506(a) purposes after considering the appraisal reports and trial testimony.
- The court declined to adopt any party’s appraisal as a complete package and instead reconciled the evidence by selecting and adjusting portions of the competing analyses.
- The court found the income capitalization approach to be the most reliable valuation method for these operating hotel properties and relied primarily on that approach rather than the sales comparison approach.
- In applying the income approach, the court evaluated and adjusted key assumptions (including projected income, expenses, and capitalization rates) based on the record and its assessment of the reliability of each appraiser’s inputs.
- Based on the value it set for the collateral, the court bifurcated Optimum’s allowed claim under § 506(a) into a secured claim equal to the collateral value and an unsecured claim for the remainder.
- Consistent with the court’s valuation ruling as reflected in later proceedings, Optimum’s allowed secured claim was fixed at $2,238,182.63 and the balance of its allowed claim was treated as an unsecured deficiency claim of $2,739,802.07, with lien avoidance available under § 506(d) to the extent of the unsecured portion.

## Legal Principles

- Under 11 U.S.C. § 506(a), a creditor’s allowed claim is secured only up to the value of the creditor’s interest in the debtor’s interest in the collateral; any excess is an unsecured claim.
- Bankruptcy courts have wide latitude in valuation and are not bound to accept valuation opinions in full; a court may accept, reject, or modify appraisals and reach its own value based on the record.
- For income-producing real estate such as operating hotels, the income capitalization approach may be the most reliable method when it best reflects how the market values the property, but the court must test the reasonableness of the assumptions and inputs.
- When a lien exceeds collateral value, § 506(a) supports bifurcation of the claim into secured and unsecured portions in chapter 11, and § 506(d) permits avoidance of the lien to the extent it secures no value (subject to plan treatment and the court’s orders).

## Conclusion

The bankruptcy court valued Buena Vista’s two Florida hotel properties for § 506(a) by relying primarily on an income capitalization analysis, adjusting appraisal inputs based on the trial record, and then bifurcated Optimum Bank’s allowed claim into a secured claim capped at the court-determined collateral value and an unsecured deficiency claim for the remainder, permitting lien avoidance under § 506(d) to the extent the lien exceeded value.


In re Buena Vista Oceanside, LLC, 479 B.R. 342 (2012)