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Adkins Limited Partnership, et al v. O Street Management

October 25, 2012

ADKINS LIMITED PARTNERSHIP, ET AL., APPELLANTS,
v.
O STREET MANAGEMENT, LLC, ET AL., APPELLEES.



Appeals from the Superior Court for the District of Columbia (CAB-5908-08) (Hon. John M. Mott, Trial Judge)

The opinion of the court was delivered by: Oberly, Associate Judge:

Argued June 21, 2012

Before BLACKBURNE-RIGSBY, OBERLY, and BECKWITH, Associate Judges.

Adkins Limited Partnership and representatives of its former partners (collectively, "Adkins") appeal two orders of the trial court in a suit brought by O Street Management, LLC ("OSM"), to enforce its right to buy out Adkins' seventy-five percent interest in O Street Roadside, LLC, a company formed by OSM and Adkins for the purpose of owning, developing, leasing, and managing two parcels of real property in Washington, D.C. Adkins appeals the trial court's September 16, 2011, order canceling Adkins' notice of pendency of action (lis pendens) and the trial court's January 12, 2012, order confirming the appraiser's valuation of Adkins' buy-out interest and ordering settlement. We affirm the trial court's order confirming the appraisal; because the valuation of the buy-out was the only remaining issue pending before the trial court, Adkins' challenge to the order canceling the lis pendens becomes moot with our affirmance.

I.Background

In a Memorandum Opinion and Judgment issued on May 20, 2010, this court affirmed the trial court's grant of declaratory judgment to OSM, holding that under the Operating Agreement for O Street Roadside, LLC, signed by both OSM and Adkins, OSM was entitled to exercise a buy-out of Adkins' seventy-five percent membership interest in the company upon the incapacitation of the last of Adkins' surviving general partners (Cilla Adkins). Adkins Ltd. P'ship v. O St. Mgmt., LLC, No. 09-CV-1067, Mem. Op. & J. (D.C. May 20, 2010). O Street Roadside's primary asset consisted of two parcels of land covering two city blocks in Northwest Washington, D.C. (the "O Street property"). The larger of the two parcels was improved with a Giant Food grocery store and an historic masonry building, known as the O Street Market, occupied by a variety of small vendors. The smaller parcel was an undeveloped site with no improvements. The Operating Agreement between the parties incorporated a master lease for the entire property with Giant Food Stores/GFS Realty, Inc. ("Giant"), for twenty-five years plus five five-year renewal options, which we recognized gave "Giant complete control over the retail or commercial development of the [O Street] property in return for the rent payments." Adkins Ltd. P'ship, 09-CV-1067 at 2. In our May 2010 decision, we held that under the Operating Agreement, OSM, as the managing member of O Street Roadside, had not breached any contractual or fiduciary duties to Adkins when it negotiated with Giant to develop the O Street property, and we affirmed the trial court's conclusion that Adkins' rights in the property "were limited to, and would be protected by, O Street Management's exercise of a buy-out provision." Id.

Following this court's decision, the only issue left to resolve was what price OSM would pay Adkins in the buy-out. The Operating Agreement established the following process for determining the value of the membership interest:

The withdrawing Member or the Representative and the purchasing Member shall each appoint an appraiser to determine the fair market value of the Membership Interest of the withdrawing Member. . . . If the fair market values set forth in the appraisals do not differ by more than Fifty Thousand Dollars ($50,000), then the average of the two appraisal values shall be the Purchase Price of the Interest. If the fair market values set forth in the appraisals differ by more than Fifty Thousand Dollars ($50,000), then the appraisers shall together promptly appoint a third appraiser who shall appraise the fair market value of the Interest and who shall render a separate written report setting forth its valuation and the basis upon which such fair market value was established. The value set forth in [the] third appraisal shall be the Purchase Price of the Interest, except as follows: (i) if the fair market value contained in the appraisal report is greater than the higher of the first two appraisals, then the higher of the first two appraisals shall be the Purchase Price and (ii) if the fair market value contained in the appraisal report is less than the lower of the first two appraisals, then the lower of the first two appraisals shall be the Purchase Price.

Adkins' appraiser valued Adkins' seventy-five percent interest in O Street Roadside at $22,033,000, which was based on a real estate appraisal prepared for Adkins that appraised the O Street property at $37,900,000. The $37.9 million real estate appraisal valued the fee simple interest in the property, i.e., the ownership interest in property where the owner has the exclusive and complete rights to do whatever it wishes with the property. The fee simple appraisal was prepared based on the assumption that the O Street property would be developed as the mixed-use project ("City Market at O") that OSM and another development company, Roadside Development, LLC,*fn1 had proposed for the property. OSM's appraiser valued Adkins' seventy-five percent interest in O Street Roadside at $721,000, which was based on a real estate appraisal prepared for OSM that appraised the O Street property at $10 million. The $10 million real estate appraisal valued the leased fee interest in the property, i.e., the ownership interest in property that is encumbered by a lease. The leased fee appraisal applied a discounted cash flow analysis, using the fixed schedule of annual rental payments from Giant for the remaining forty-four years of the lease - assuming Giant would exercise the renewal options - and assessing the reversionary interest in the land once the lease expired,*fn2 valuing the land at its maximally productive use, which OSM's appraiser identified as a high-rise multifamily residential development.

More than a year after preparing its first valuation, Adkins prepared a revised valuation in light of the availability of a November 2007 appraisal prepared for Roadside Development and OSM for purposes of the City Market at O project that valued the fee simple interest in the property at $54 million. OSM and Roadside Development's $54 million appraisal was conducted assuming that City Market at O had been approved for construction. Adkins' revised valuation, based on the $54 million appraisal, was $26 million, in contrast to its previous valuation of $22 million.

Because the independent appraisals completed by Adkins and OSM were not within $50,000 of each other, the trial court, per the Operating Agreement, ordered the parties to appoint a third, neutral appraiser. The information submitted to the third appraiser to prepare the valuation included OSM's $721,000 valuation report, Adkins' $22 million valuation report, the $37.9 million real estate appraisal, and the $10 million real estate appraisal (as well as the Operating Agreement, the master lease with Giant, and O Street Roadside's Return of Partnership Income for 2007)*fn3 Presented with valuation reports that valued different interests in the O Street Property and an Operating Agreement that did not specify whether to appraise the fee simple or leased fee interest - the single factor that accounted for the great discrepancy between the parties' valuations - the third appraiser requested guidance from the court. After briefing from both parties, the trial court agreed with OSM that the appraiser should appraise the fair market value of the leased fee interest in the O Street property, not the value of the fee simple estate.

In assessing the fair market value of Adkins' seventy-five percent interest in O Street Roadside, the third appraiser used the book value of the company as of September 1, 2007, adjusted to reflect the fair market value of the company's assets, namely the O Street property. Consistent with the trial court's instructions, the third appraiser relied on OSM's real estate appraisal and valued the leased fee interest in the O Street property. The appraiser concluded that the company's total assets amounted to $10,140,228, which included the $10 million real estate appraisal and $140,228 in other assets. The company's liabilities amounted to $8,663,564. The appraiser calculated seventy-five percent of the company's assets less its liabilities, and he then discounted that number to reflect Adkins's non-controlling and non-marketable interest in the company. These calculations led the appraiser to conclude that Adkins' seventy-five percent ownership interest in O Street Roadside was $660,889, as of September 1, 2007.

OSM filed a motion to confirm the valuation and order settlement in accordance with the Operating Agreement, which provided that "if the fair market value contained in the [third appraiser's] appraisal report is less than the lower of the first two appraisals, then the lower of the first two appraisals shall be the Purchase Price." Under these terms, OSM's appraisal of $721,000 was the price OSM had to pay Adkins in the buy-out. Adkins filed a motion to vacate the valuation, arguing that: (1) it was "tainted by deception and other undue means" because the third appraiser was biased in favor of OSM; (2) the third appraiser failed to consider important financial documents relating to OSM's agreements with Giant and its application for Tax Increment Financing ("TIF") for the City Market at O project; (3) the valuation date of September 1, 2007, was unfair and improper;*fn4 (4) and by valuing the leased fee interest in the property instead of using the $54 million or $37.9 million fee simple appraisals, the third appraiser undervalued Adkins' ownership interest.

In September 2011, in the middle of this litigation, Adkins filed a lis pendens. OSM immediately moved to cancel it, which the trial court did, concluding that Adkins "no longer retain[ed] any ownership interest in the property." As the trial court noted in its September 2011 order, "[t]he only issue left to be ...


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