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Lender on Monarch 716 project loses court bid for $26.4M judgment against developer

In a victory for the former owner of Monarch 716, a state judge in Buffalo has ruled that the lender who foreclosed on the West Side student housing property is not entitled to go after the Rochester-based developer for more money because its appraiser and his valuation weren't credible.

The ruling by State Supreme Court Justice Deborah Chimes denied the request by Acres Capital for a $26.4 million judgment against DHD Ventures and its principals, Thomas Masaschi and Jason Teller.

That means Acres, which took possession of Monarch 716 in a foreclosure sale last April, must settle for whatever it can recoup from reselling the property to cover the $47.67 million loan balance that it was owed at the time. And it means Masaschi and Teller – whose company has been struggling with some of its other projects as well – are not on the hook for millions of dollars in damages.

Representatives of DHD could not be reached for comment.

The decision marks a victory of sorts for DHD and its principals, although they still lost possession of the property they had spent two years developing.

DHD and its contractors built the 592-bed project at 100 Forest Ave., on the site of a former pharmaceutical manufacturing plant between Grant Street and the Niagara Thruway. The complex, which was largely aimed at SUNY Buffalo State despite not having a formal agreement with the school, features nine four-story buildings with 176 suites, plus a one-story clubhouse and a pool.

DHD borrowed $36.38 million from Acres, which represented three insurance companies, but ran into trouble with the project as soon as it opened in August 2017. The project's completion had been delayed, the management company struggled to fully lease it, and there were multiple complaints about leases and even safety. As a result, occupancy and revenues declined, and DHD – after trying unsuccessfully to sell it – defaulted on the loans.

Acres foreclosed on the debt, and won a judgment in its favor in February 2019, ordering a foreclosure sale that took place on April 8, with Acres buying the property for $14 million. The lender asked the court for a judgment for the gap between how much the property was worth and how much was owed on the loan, based on an appraiser who set the property valuation at $21.25 million as of March 11, 2019.

But DHD and its attorneys took issue with that valuation. Their appraiser set the value at $44 million, as of April 8 – the date of the auction.

According to the judge's order, the two appraisers used similar methodologies, but used different projections and multipliers. Acres' appraiser spoke to the leasing manager, inspected five of the nine buildings, and reviewed the rent roll, current rents at the time, and the occupancy level – which had fallen to 40%. He called that a "big risk to purchase at a high value," according to the order.

He also noted that the buildings had no elevators, which he believed created a "functional problem" for leasing, and expressed the view that the vacancy stemmed from a lack of enough demand because student enrollment was dropping at Buffalo State, according to the judge's decision.

However, the judge noted that Acres' appraiser did not support that opinion with "independent facts," and did not consider how the delay in the project's completion "along with poor marketing" hurt occupancy and rents. Finally, the judge said, the appraiser used the current reduced rents of $575 per month – which had been cut in order to draw tenants – instead of comparable market rents of $750.

DHD's appraiser, on the other hand, had valued the property three times previously in 2016 and 2018, so he was familiar with it and the challenges it had faced. And in contrast to the opinion by Acres' appraiser, according to the judge, DHD's appraiser said that Buffalo State's admissions office "expected a modest increase in enrollment," and noted that the vacancy rate within the private student housing market for Buffalo State and University at Buffalo is at 5%, indicating strong demand.

The appraiser for DHD suggested that Monarch 716 could be turned around with new and better management, citing its "superior amenities" and larger units compared to Greenleaf Development's Campus Walk – which is closer but "inferior in its size and amenities."

And he said the below-market rents should not be expected to "continue on in perpetuity" when market rents are higher.

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