Industry West Commerce Center, LLC

OCR transcription for search; preserved printed pages are authoritative

Entered on Docket
August 16, 2010

GLORIA L. FRANKLIN, CLERK
U.S BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA

7 UNITED STATES BANKRUPTCY COURT
8 NORTHERN DISTRICT OF CALIFORNIA

9 || Inre

10 |} INDUSTRY WEST COMMERCE CENTER,

LLC, No. 10-10088
1] Debtor(s).
/
‘a —
Memorandum on Confirmation of Amended Plan
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14 Chapter | 1 debtor Industry West Commerce Center, LLC, owns an industrial warehouse

15 || facility in Santa Rosa, California. The facility is worth about $20 million. It is encumbered by a first
16 || deed of trust held by Central Pacific Bank (“Bank”) securing a debt of about $16.5 million and a

17 || second deed of trust held by Todd JBRE, LLC (“Todd”), securing a debt of about $900,000.00. There
18 || are about $100,000.00 in unsecured claims. The unsecured creditors have accepted the plan. The two
19 || secured creditors originally reject it. After the court denied confirmation, the debtor modified it and
20 |) Todd accepted the modification and now supports confirmation. Only the objection of the Bank

21 || remains.

22 The issue before the court at confirmation is whether the plan is fair and equitable as to the

23 | Bank. If it is, the plan can be confirmed over its objection by virtue of § | 129(b)(1) of the Bankruptcy
24 |} Code.

25 The plan calls for the Bank to retain its lien and to receive a new note providing for monthly

26 || payments of interest at the rate of 4.45%. The entire balance of principal and interest would be due in

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INFORMATIO!
GPO

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seven years.

The Bank concedes that while equity is thin, there is enough value in its collateral to pay all
creditors in full. It argues that this is a better result, despite the fact that all creditors except it have
accepted the plan. The court is not persuaded by the Bank’s argument. Pursuant to § 1123(a)(5)(D)
and § 1123(b)(4) of the Code, sale of estate property is merely one of numerous ways to reorganize.
When a secured creditor dissents, the only issue is whether or not the plan is fair and equitable to it,
not whether the other creditors should have opted for a different mode of reorganization. Moreover, a
plan which avoids a sale is generally in the best interests of the economy as a whole, as it results in one
less property available for sale, thereby assisting in maintaining overall property values.

The seven-year term is reasonable, as it is long enough to weather the current economic storm
without being unduly long. Fair and equitable treatment depends on the interest rate to be paid to the
Bank.

The Bank points out correctly that there are two significant risks associated with its treatment
under the amended plan. First, some of the leases from which the debtor earns the revenue need to
make the payments will expire during the seven year term, and the debtor may not be able to replace
them. Second, there is a risk of an overall crisis in the commercial real estate market in the next few
years which could result in a meltdown similar to that which has occurred in the residential real estate
market. The court agrees that these are real risks.

Under current conditions, there is no efficient market rate of interest to be applied as the “cram-
down” interest. Under such circumstances, the generally accepted approach for a court to take is to
start with the current prime rate and enhance it for risk factors while considering the contract rate as
some sort of vague admission by the secured creditor. J re American Homepatient, Inc. 420 F.3d 559,
567-68 (6 Cir.2005), cert denied, 127 S.Ct.55 (2006).

The current prime rate is 3.25%, The contract rate, under a complicated calculation, would be
something less but for a shorter term. The primary risk factor, that the commercial real estate market

might implode due to a lack of available money in the future, requires an adjustment up from prime but

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Cas

not to the extent argued by the Bank, as there remains the possibility that Congress would intervene to
make funds available rather than allow the commercial real estate market to tank. The fact that the
property is not fully leased and some of the leases will expire during the term of the plan is also a
significant risk factor. On the other hand, the fact that there is at least $1 million in value of the
property over and above the Bank’s lien militates for a lower snterest tate than the Bank seeks.

After reviewing the evidende on the issue, the court feels that 120 basis points should be added
to prime to cover the risk of further economic downturn and 50 basis points should be added for risks
associated with possible declining lease revenue. This leads the court to a determination that the plan
would be fair and equitable to the Bank if its rate of interest were 4.95%. If the plan is amended to call
for this rate, it will be confirmed. Counsel for the debtor shall submit an order confirming the plan if it

is SO amended,

.Dated: August 13, 2010

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