Background
The former Kenwood Convent and Doane Stuart School — a storied 75.51-acre campus in Albany — has been at the center of a commercial foreclosure dispute that highlights the significant gap that can exist between a property’s theoretical development value and its actual market worth. The property sat vacant for years before being sold in 2017 for $3 million; on the same day it was transferred to defendant Kenwood Commons, LLC for a reported $18 million — a jump attributed to zoning changes, but one whose arm’s-length nature was later called into question because the selling entity was represented by Kenwood’s managing member Jacob Frydman’s stepson. Kenwood Commons then borrowed $5 million from TBG Funding, LLC, secured by a mortgage and personal guarantees from Frydman and two family trusts.
When Kenwood Commons defaulted in late 2018, TBG (whose loan was later assigned to plaintiff Guild Ventures) commenced foreclosure. A bankruptcy filing by Kenwood Commons delayed the public auction until March 21, 2023, at which plaintiff Guild Ventures was the sole bidder — purchasing the campus for $100,000. After a referee calculated a net deficiency of over $18 million, the parties clashed over what the property was actually worth on the auction date. Plaintiff argued a fair market value of $2.55 million; the guarantors proffered $71.5 million, relying on the property’s theoretical capacity for large-scale mixed-use residential, hotel, and commercial development under favorable as-of-right zoning. After an evidentiary hearing with dueling expert appraisers, Supreme Court sided with plaintiff. The guarantors appealed.
The Court’s Holding
The Appellate Division, Third Department, affirmed. Under RPAPL § 1371(2), a deficiency judgment requires the court to determine the fair and reasonable market value of the mortgaged premises as of the foreclosure sale date. The court reiterated that “fair market value” means what a non-compelled buyer would pay a non-compelled seller — not panic value, auction value, or speculative future value. The lender carries the initial burden of demonstrating fair market value; if it does, the burden shifts to the guarantors to show that the property’s highest and best use warrants a higher figure.
The court held that plaintiff’s appraiser met this burden through a comparable-sales approach drawing on 30 sales within a 30-mile radius, accounting for the property’s physical constraints (wetlands, steep slopes), the deteriorated state of its existing structures, the absence of operative development approvals or permits as of the auction date, and the substantial costs of rehabilitation. The court also credited the appraiser’s conclusion that rising financing, construction, and carrying costs since 2017 had materially diminished the feasibility of large-scale development, such that the property’s redevelopment potential did not translate into an elevated present market value. Crucially, the court excluded any weight from the $18 million same-day transfer in 2017 (an apparent flip by related parties), the 2018 tax assessment, or the guarantors’ expert’s income-capitalization analysis, which depended on “extraordinary assumptions” about near-term realization of an unbuilt mixed-use project. Supreme Court’s broad discretion to arrive at a valuation within the range of expert testimony was not abused.
Key Takeaways
- Under RPAPL § 1371(2), fair market value for deficiency judgment purposes is the non-compelled buyer/seller standard — speculative or projective development value based on unbuilt plans does not control where development is not imminent and extraordinary assumptions underpin the estimate.
- A guarantor cannot rely on theoretical development potential to inflate fair market value when operative permits, financing, and market conditions as of the foreclosure sale date make large-scale development economically infeasible.
- Related-party transfers (here, a same-day flip where one party was represented by the managing member’s stepson) and municipal tax assessments alone are insufficient to set fair market value against a properly supported comparable-sales appraisal.
- Lenders moving for deficiency judgments should obtain appraisals using the comparable-sales method and carefully address any recent history of inflated transfers or tax assessments that guarantors will use to argue for a higher property value.
Why It Matters
This decision matters for New York commercial real estate lenders and guarantors alike. For lenders pursuing deficiency judgments on defaulted commercial loans — particularly on large development-potential sites — the Third Department has reaffirmed that courts will anchor value to actual comparable sales and present market conditions, not to aspirational development plans. The court’s skepticism of income-capitalization analyses predicated on extraordinary assumptions about unbuilt projects is a meaningful check on guarantors’ attempts to argue their way out of massive deficiency obligations.
For borrowers and guarantors, the case is a cautionary tale about the risk of personal guarantees on properties whose market value at default will be assessed on hard facts, not on the value embedded in a developer’s vision. The dramatic gap between the $100,000 auction purchase price and the guarantors’ claimed $71.5 million value illustrates that foreclosure sales routinely realize a fraction of development potential — and that deficiency judgments are calculated on actual market value, not what a completed project might someday be worth.