Judge Ted Albert Tentative on Interest Rates in Chapter 11 Cramdown

“Commercial real estate cases are very different from Chapter 13s involving used trucks.  Till cannot be properly read for the proposition that a debtor gets away with an unreasonable discount just because some courts, as noted in Till, have used a 1-3% adjustment over prime rate.  North Valley Mall, 432 B.R. at 831.  Instead, in the commercial real estate context the court favors the approach used in Pacific First Bank v. Boulders on the River, Inc. (In re Boulders on the River, Inc.), 164 B.R. 99, 105 (9th Cir BAP 1994).  As explained in the North Valley Mall opinion, a cramdown rate can be imputed by reference to market data and then “built up” or “blended.”  One starts by survey comparison to a “market” rate representing what real lenders in the loan markets are doing on similar properties for similar terms.  Usually this represents only say 65% of the value of the collateral, as seldom will new loans be made at 100% of value.  The remaining 35% is then blended from mezzanine rates and hypothetical equity return rates to yield an overall blended rate that more nearly represents compensation for the degrees of risk inherent in the transaction. Debtor’s analysis contains none of these elements, nor, frankly, do creditors’.  But the court is quite certain that 2.25% -2.97% over Index, [which is around 2.5%-3% if .26%, the current one year treasury average, is used as the Index] interest only, for a period of five years, and then reverting to a rate of 4.57% per annum fixed for a thirty year term [as is suggested in the plan] is way too low, probably on the order of 300-350 basis points too low.  It should be noted that even in this environment of historically low (probably artificially low) interest rates, 4.57% without points would be somewhat low even for a conforming loan, much less an extremely leveraged and risky transaction as is proposed here. Cramdown at such a low rate in effect shifts uncompensated risk to the dissenting lenders and results in a “present value” well less than the value of the collateral/secured claim.  This is not permitted under §1129(b)(2)(A).”

Thanks to Dennis McGoldrick for this heads up.

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