In re: Costa Bonita Beach Resort, Inc.

Opinion

1 IN THE UNITED STATES BANKRUPTCY COURT 5 FOR THE DISTRICT OF PUERTO RICO

° IN RE: : CASE NO. 09-00699 ‘ COSTA BONITA BEACH 5 RESORT, INC. : CHAPTER 11 6 Debtor : et

8 9 OPINION AND ORDER 10 Before the court is Doral Bank’s (hereinafter referred to as the “Creditor”) motion for an order 11 determine that Costa Bonita Beach Resort, Inc. (hereinafter referred to as the “Debtor”) is a single 12 real estate property or project as defined in the Bankruptcy Code, 11 U.S.C. §101(51B). For the 13 |}feasons set forth below this court determines that Debtor is a single real estate property or project 14 [pursuant to §101(51B) of the Bankruptcy Code. As such, Debtor is subject to §362(d)(3) of the 15 ||Bankruptcy Code. 16 Facts and Procedural Background 17 The Debtor filed a bankruptcy petition under Chapter 11 of the Bankruptcy Code on February 18 2009. Creditor’s claim was included in Debtor’s Schedule D (Creditors Holding Secured Claims) 19 disputed. Creditor filed a secured proof of claim on April 6, 2009 in the amount of $4,226,822.32. 99 341 meeting of the creditors was held on March 12, 2009 (Docket No. 17). 1 On April 22, 2009, Creditor filed a “Motion For An Order Determining Debtor To Be Subject 97 To 11 U.S.C. §101(51B)” alleging that Debtor satisfies the three prong test in the statutory definition, 93 as a Single Asset Real Estate (“SARE”), Debtor is subject to 11 U.S.C. § 362(d)(3) (Docket No. 24 ||29). Debtor filed an “Answer To Motion For An Order Determining Debtor To Be Subject To 11 95 U.S.C. §101(51B)” on May 4, 2009 claiming that Debtor is not a SARE since the same, “... is 26 ||involved in substantial business other than the operation of its real property and incidental activities, 97 |\consisting of the operation of a commercial area dedicated to restaurant and a convenience store, and 9g rental of condominium units and the sale there.” (Docket No. 34, paragraph #4). Subsequently, on May 6, 2009 Creditor filed a “Memorandum of Doral Bank In Response To Debtor’s Answer To

1 [Motion For Determination That Debtor Is A Single Asset Real Estate Entity” in which it reaffirms 2 position that Debtor’s business falls within the definition of a SARE pursuant to 11 U.S.C. 3 |§101(51B) (Docket No. 35). Creditor in its motion argues that Debtor fails to present any evidence 4 proves that it is involved in substantial business operations other than the selling and marketing 5 jlof the individual condominium units within the Costa Bonita Beach Resort project. Creditor also 6 llargues that the condominium units which remain for sale constitute a “single asset” and a “single 7 |\jproject,” due to the following: “The remaining condominium units located at the property are a 8 ||“single asset” since they have not been segregated from the main parcel over which the condominium 9 |iregime was constituted, and additionally the condominium development was and continues to be a 10 |I‘single project” of Debtor. The reason for being labeled a single project is that from its origin Debtor 11 engaged in a single project— designing and building a condominium structure with intent to sell 12 |[the condominium units once the project was completed.” (Memorandum of Doral Bank In Response 13 Debtor’s Answer to Motion for Determination that Debtor is a Single Asset Real Estate Entity, p. 14 Furthermore, Creditor alleges that this project generates substantially all of the Debtor’s income 15 income is derived primarily from the sale and/or rental of the condominium units. Incidental 16 |lincome from the sale and/or rental of condominium units is generated from the concession store or 17 restaurant. 18 The court on May 12, 2009 issued an Order and Notice scheduling all of the aforementioned 19 motions for a hearing on June 23, 2009, and requested both parties to file proposed findings of fact 20 |land conclusions of law ten (10) days prior to the hearing (Docket No. 36). Creditor filed its “Motion 21 |In Compliance With Order Regarding Findings of Facts and Conclusions of Law” on June 17, 2009 22 (Docket No. 41). On June 19, 2009 Debtor filed its “Motion In Compliance With Order Regarding 23 ||Findings Of Facts and Conclusions Of Law” (Docket No. 42). At the hearing, Debtor agreed with all 24 |lof the proposed findings of facts which Creditor included in its Motion in Compliance with Order 25 ||Regarding Findings of Facts and Conclusions of Law. The only minor discrepancy found by Debtor 26 respect to Creditor’s proposed findings of facts was regarding paragraph #20 in which Debtor 27 \noted that Creditor’s first priority lien and mortgage on the real property, improvements and/or 28 |jstructures on which the condominium is located has been duly presented but has not been recorded

1 the Puerto Rico Property Registry.’ 2 Applicable Law and Analysis 3 Asset Real Estate Cases (“SARE”) 4 Section 101(51B) of the Bankruptcy Code defines the term “single asset real estate” as, 5 real property constituting a single property or project, other than residential real property with 6 than 4 residential units, which generates substantially all of the gross income of a debtor who 7 |lis not a family farmer and on which no substantial business is being conducted by a debtor other than 8 |Ithe business of operating the real property and activities incidental.” 11 U.S.C. § 101(51B). Pursuant 9 Section 101(51B) in order for a bankruptcy case to fall under the definition of a SARE it must 10 |jsatisfy the following three (3) factors: (i) the real property must constitute a single property or 11 project, other than residential real property with fewer than four residential units; (11) the real property 12 generate substantially all of the debtor’s gross income; and (iii) debtor must not be involved in 13 |jany substantial business other than the operation of its real property and incidental activities. In re 14 Philmont Dev. Co., 181 B.R. 220, 223 (Bankr. E.D. Pa. 1995). 15 The first factor which the bankruptcy case must satisfy is whether the real property constitutes 16 single property or project, other than residential real property with fewer than four residential units. 17 ||Apartment buildings and residential projects are within the scope of Section 101(51B). In re 18 ||Kkemko, Inc., 181 B.R. 47, 50 (Bankr. S.D. Ohio 1995); In re Philmont Dev. Co., 181 B.R. at 224. 19 In the instant case, Debtor acquired title to a property of 39,402.945 square meters (10.0252 20 ||‘‘cuerdas”) located at the Frailes Ward in Culebra, Puerto Rico on October 30, 2001. Debtor 21 ||\developed this property into a residential condominium known as “Costa Bonita Beach Resort 22 ||\Condominium” and was built as a single property. The Costa Bonita Beach Resort Condominium 23 |Iconsists of 41 buildings or clusters with a total of 164 residential units. On June 25, 2003 Costa 24 Bonita Beach Resort Condominium was constituted under the regime of horizontal property pursuant 25 26 ‘Whether or not Doral has a duly perfected lien over the property will not affect the outcome 97 || of the contested matter before the court, that is, if this is a single asset real estate case. As of this date the Debtor has not objected by motion or adversary proceeding the secured claim filed by 28 || Doral on April 6, 2009. Also Doral is listed as a secured creditor in Schedule D.

1 deed number 13 executed in San Juan, Puerto Rico before notary public Francisco José Garcia 2 Garcia. The Costa Bonita Beach Resort Condominium is the only project developed by the Debtor. 3 Debtor only sells the real estate at the Costa Bonita Beach Resort Condominium. (Motion in 4 Compliance with Order Regarding Findings of Facts and Conclusions of Law, paragraphs #3, 4, 5, 5 ||6, 7, and 8). 6 Costa Marina Beach Resort Condominium constitutes a single project of 41 buildings or 7 |Iclusters with a total of 164 residential units of which 50 (per Schedule A- Real Property) are currently 8 ||for sale. Debtor currently leases to Costa Bonita Villas Management Corp. the first and second floor 9 the reception area of the “Commercial Area of Costa Bonita” which forms part of the Costa Bonita 10 Resort Condominium project (Joint Exhibit #13- Commercial Property Lease Agreement, pgs. 11 According to the contract clauses in the Commercial Property Lease Agreement, Costa Bonita 12 Management is only permitted to operate a food and beverage store in this leased area. Debtor 13 |jalso leases 20 villas to Costa Bonita Villas Management Corp. However, clause twelve (12) of the 14 Agreement (Joint Exhibit #14) stipulates that these villas are for sale and if a sale of one of 15 villa takes place the same shall be excluded from the group of villas which are subject to this 16 |icontract (Joint Exhibit #14- Lease Agreement). 17 Costa Bonita Beach Resort Condominium satisfies the first prong of the SARE test, as it is 18 |ja single project located in a parcel (grouping of parcels 391 and 428) of land with 41 buildings or 19 |Iclusters that have 164 residential units and other amenities such as a commercial unit, a pool, parking 20 |Ifacilities, and other common areas. Furthermore, the financing for the Costa Bonita Beach Resort 21 |Condominium was treated as one project by the Debtor, given that the construction loan was used 22 |\primarily to finance part of the construction of the residential walk-ups of the project and to finance 23 development of certain improvements in the common areas of the project (Joint Exhibits 6-8, in 24 |lparticular Joint Exhibit #6, paragraph three on pg. 2). 25 The second prong of the SARE test is whether the real property generates substantially all of 26 ||the Debtor’s gross income. At the June 23, 2009 hearing, Mr. Carlos Escribano, President of Debtor, 27 |Itestified that the revenues of the Debtor originated from the following three (3) sources: (i) the sale 28 residential units; (ii) the lease with Costa Bonita Villas Management Corp. for the rental of 4

1 |residential units; and (iii) the lease with Costa Bonita Villas Managment Corp. for some commercial 2 |jarea of the Costa Bonita Beach Resort Condominium. It is clear from Mr. Escribano’s testimony that 3 ||Debtor’s real property (namely, Costa Bonita Beach Resort Condominium) generates all of its gross 4 |lincome, thus satisfying the second prong of the SARE test. 5 The remaining prong of the SARE test is whether the Debtor has any other substantial 6 ||business activities other than the operation of its real property, namely the Costa Bonita Beach Resort 7 (Condominium project. In In re Kkemko, the court noted that in common usage the term single asset 8 jlreal estate generally referred to buildings or raw land which were intended to be income producing. 9 Kkhemko, 181 B.R. at 49. With respect to this last criteria, Mr. Escribano testified at the hearing 10 Debtor’s other business activities consisted of three major areas which are the following: (4) 11 |]developing a yacht club on the north area of the Costa Bonita Beach Resort; (ii) intention of 12 ||developing an international exchange vacational program similar to a timeshare program; and (iii) 13 |Debtor’s 50% participation in Hill Top Corporation. Mr. Escribano also testified that regarding the 14 |lyacht club, a United States contractor had substantially developed the marina but that such project 15 currently on hold. These potential business activities, namely the marina and the international 16 ||vacational program described by Mr. Escribano are currently in their developmental stages and at the 17 ||present time Debtor is not conducting any operational business activities related to the same. Debtor’s 18 participation in the common stock of Hill Top Corporation cannot be considered a “substantial 19 business activity” because Debtor as a shareholder of Hill Top Corporation is merely entitled to 20 receive passive income in the form of dividends from such corporation. 21 In In Centofante v. CBJ Dev. (In re CBJ Dev.), the court noted that, “[t]he use of the present 22 by Congress in §101(51B) suggests that only current activities may be considered in 23 ||\determining whether the debtor is conducting substantial business activities other than the operation 24 |lof the property.” In Centofante v. CBJ Dev. (In re CBJ Dev.), 202 B.R. 467, 472 (B.A.P. 9" Cir. 25 1996). The other substantial business activities or operations a debtor carries out must be separate 26 distinct from owning and managing real estate. See Ad Hoc Group of Timber Noteholders v. 27 ||Pacific Lumber Co. (In re Scotia Pacific Co., LLC), 508 F. 3d 214, 217 (5" Cir. 2007). This court 28 that Debtor is not involved in any substantial business other than owning and managing the

1 ||Costa Bonita Beach Resort Condominium, thus satisfying the third prong of the SARE test. 2 Conclusion 3 In view of the foregoing, the court concludes that Debtor satisfies all three (3) prongs of the 4 ||SARE test, and, as such, is a single asset real estate case and is subject to 11 U.S.C. § 362(d)(3). 5 SO ORDERED. 6 In San Juan, Puerto Rico, this dt ® day of July 2009 7

9 . 8. Bankruptcy Judge 10

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