Bank of Am. v. 203 NO. LASALLE STREET PARTNERSHIP
| Decision Date | 01 May 1996 |
| Docket Number | Bankruptcy No. 95 C 7144,96 C 0238. |
| Citation | 195 BR 692 |
| Parties | BANK OF AMERICA, ILLINOIS, Appellant, v. 203 NORTH LASALLE STREET PARTNERSHIP, an Illinois Limited Partnership, Appellee. |
| Court | U.S. District Court — Northern District of Illinois |
COPYRIGHT MATERIAL OMITTED
COPYRIGHT MATERIAL OMITTED
Thomas S. Kiriakos, Mayer, Brown & Platt, Chicago, IL, for Bank of America, Illinois.
Richard Marcus Bendix, Jr., Paul Joseph Gaynor, Schwartz, Cooper, Greenberger & Krauss, Chicago, IL, Marc Wilkow, Chicago, IL, for 203 North LaSalle Street Partnership.
The Appellant Bank of America, Illinois (the "Bank") appeals from three orders entered by the United States Bankruptcy Court for the Northern District of Illinois (Honorable Eugene Wedoff) in the underlying Chapter 11 case of 203 North LaSalle Street Partnership (the "Debtor"): an order (the "Confirmation Order") confirming over the objection of the Bank, the Debtor's major creditor, the Debtor's Second Amended Plan of Reorganization Dated September 11, 1995 as modified (the "Plan"), In re 203 North LaSalle Street Limited Partnership, 190 B.R. 567 (Bankr.N.D.Ill.1995); and two orders denying the Bank's motion for relief from the automatic stay and the Bank's motion to convert the Debtor's Chapter 11 case to one under Chapter 7 of the Bankruptcy Code (the "Code").1 The Debtor also moves to dismiss the Bank's appeal as moot. For the reasons set forth below, we deny the Debtor's motion to dismiss the appeal and affirm the orders of the bankruptcy court in all aspects.
We summarize the bankruptcy court's findings of fact, set forth in it Memorandum of Decision, 190 B.R. 567 ("Bk.Dec.") as follows.
The Debtor is an Illinois limited partnership that owns the upper fifteen floors of office space (the "Property") in a building in the central business district of Chicago. The lower floors are separately owned. The Property is encumbered by a lien in favor of the Bank that secures a nonrecourse note in the principal amount of $92,582,000. The note became due and payable, according to its terms, on January 3, 1995. The debtor was unable to pay the note at that time, and the Bank commenced a state court foreclosure action on January 20, 1995. In response, the debtor filed this bankruptcy case on March 13, 1995. At that time, the Bank's claim, principal and interest, was $93,013,612. Several smaller claims were outstanding at the time of filing: (a) a state property tax claim of about $2.3 million; (b) general unsecured trade debt of about $160,000; (c) unsecured insider claims of $7.7 million (of which $6.8 million is a claim of the Debtor's general partner for an unsecured loan); and (d) a second mortgage held by the Debtor's general partner in the amount of $11.3 million. After the filing, the Debtor's general partner purchased some of the trade claims, reducing the general unsecured claims held by non-insiders to about $90,000. In addition to its real property, the Debtor holds the right to a cash account, consisting of prepetition rents, that at the time of confirmation held approximately $3.1 million.
The Debtor proposed its original plan of reorganization on April 13, which was subsequently amended on May 12. After briefing and a hearing, the bankruptcy court denied confirmation of the plan on August 7. The principal ground for the ruling was unfeasibility: the minimum interest rate that the court found to be required for payment of the Bank's secured claim could not be supported by the projected cash flow of the Property. However, because the question of the appropriate interest rate was an unsettled legal issue, the court allowed the Debtor an opportunity to amend its plan. After several revisions, the debtor proposed the plan dated September 11. The court again held a hearing and ultimately confirmed the Plan in an order dated December 6, 1995.
The principal factual dispute between the parties concerned the value of the Property and the cash flow it was likely to generate. Both the Debtor and the Bank presented expert appraisal testimony on these issues, and the experts agreed that the most appropriate valuation method was discounted cash flow. This technique operates in three steps. First, the appraiser estimates the cash flow that the property will generate each year of a several year holding period. Next, the appraiser determines the "reversionary" value of the property at the end of the period by capitalizing a stabilized income that is estimated to produce at that time. Finally, using an appropriate discount rate, the appraiser reduces the values derived in the first two steps to present values and combines them to arrive at the value of the property. The bankruptcy court accepted the discounted cash flow method. Thus, to arrive at a value of the property, it was necessary to: (1) estimate net cash flows over an appropriate holding period; (2) determine an appropriate capitalization rate for the reversion; and (3) determine an appropriate discount rate.
Each of the appraisers chose a period of ten years for estimating annual cash flow, then capitalized a stabilized income for the eleventh year. The appraisers differed, however, in their estimates of income and in the capitalization and discount rates they applied. The Debtor's appraiser applied a higher discount rate (14.367%) to overall higher income estimates; the Bank's appraiser used both a lower discount rate (11.75%) and lower income estimates. The Debtor's estimated cash flow for the ten years was $58.285 million leading to a present value of $28.628 million. The Bank's estimated cash flow was $48.077 million leading to a present value of $27.457 million — about $1.1 million lower than the Debtor's.
The appraisers also differed in their calculation of reversionary value, but the Debtor's valuation was about $4.8 million less than the Bank's. In sum, the Debtor arrived at an estimated value of $53.75 million, while the Bank arrived at an estimated value of $57.4 million.
The bankruptcy court did not accept either of these valuations. The future cash flows depend primarily on the renewal of leases. The Property is currently nearly fully leased, but two leases to major tenants will expire during the ten year period. The debtor negotiated a renewal of one of these leases, to Rudnick & Wolfe, contingent on confirmation of the Plan, and that renewal is reflected in the appraisers' estimates of cash flow. However, the other major tenant, Coopers & Lybrand, has not agreed to renew its lease. The Bank's appraiser treated this tenant's lease in the same way as other smaller tenants, estimating a 50% chance of renewal. The Debtor's appraiser, on the other hand, assumed a one hundred percent chance of renewal and assumed highly favorable circumstances in that renewal. The bankruptcy court's assessment of the situation lay generally between those of the appraisers. It found that the size of the space occupied by the tenant and the paucity of available alternative space made it very likely that the tenant would renew, but that the importance of that tenant to the Debtor's operations would likely allow it concessions that would depress the debtor's cash flow under the renewed lease. Thus the court's estimate reflected no extraordinary loss at the time of the lease expiration, but lower income thereafter than suggested by either appraiser.
The bankruptcy court also found that the difference in capitalization and discount rates of the appraisers reflected their different approaches to income estimation. The Debtor's appraiser set both rates at the high end of the spectrum of reasonable rates to reflect its view that the cash flow projections were somewhat risky, whereas the Bank's appraiser used lower rates to reflect its belief in the high quality of the building and perhaps the conservative estimate of cash flow. The court's view was that if income is properly estimated based on likely leasing results, the rates employed should be those of an average building of the Debtor's type — in this case, a first-class office building in the central business district. From data presented by the appraisers, the court took these rates to be a 10% terminal capitalization rate and a 12% discount rate.
Applying the 12% discount rate to future cash flows as found by the court, the court found a present value over the ten-year period of $30.0 million, as follows:
Estimated Cash
Year Flow Present Value
Ending (in $ thousands) (discounted at 12%)
1996 4,100 3,661
1997 5,700 4,545
1998 5,300 3,772
1999 5,700 3,621
2000 6,900 3,916
2001 7,300 3,698
2002 1,000 452
2003 3,800 1,538
2004 6,500 2,344
2005 7,700 2,479
___________________________________________________________
Total 54,000 30,026
The court then calculated the present value of the reversion, based on stabilized income in the eleventh year of $8.2 million, capitalized at 10%, as $25.8 million, as follows:
Estimated Stabilized Income 8,200
(in $ thousands)
Capitalization Rate .10
Gross Reversionary Value 82,000
Estimated Disposition Cost 1,845 (2.25%)
Net Reversionary Value 80,155
Discount Rate .12
Present Value 25,806
The bankruptcy court thus calculated the value of the Property, at the time of the confirmation hearing, as $55.8 million.
The claims and interests in the Plan are divided into the...
To continue reading
Request your trial
-
In re Creditors Service Corp., Bankruptcy No. 94-50019. Adv. No. 95-0038.
... ... an office building located at 6450 East Broad Street, Columbus, Ohio 43213 ("Broad Street building"). At least ... In the schedules, loans to Bank One and Fifth Third were detailed, and Ms. Cooley and Mr ... , it was never incorporated and it is not a partnership. Throughout her lengthy testimony, Ms. Cooley was unable to ... ...