Citation. 122 B.R. 549 (Bankr. W.D. Ark. 1990)
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Brief Fact Summary.
E.I. Parks No. 1 Ltd. Partnership, (Defendant), has an outstanding mortgage debt of $700,000. The holder of the mortgage, Shady Grove, (Plaintiff), objects to Defendant’s plan for reorganization because the interest rate proposed does not allow Plaintiff the present value of its secured claim.
Synopsis of Rule of Law.
If a plan proposes to pay a secured creditor in installments, the present value of the future stream of payments must equal the amount of the creditor’s secured claim. The present value equals the exact amount the debt is worth today plus the rate of interest that the dollar would earn if invested at an appropriate rate. The elements to be considered in arriving at the appropriate market rate of interest should include the terms of the payout period, the quality of the security, and the risk of subsequent default.
Defendant owned and operated a mobile home park. The market value is $700,000. This amount is exactly equal to the mortgage held by Plaintiff. The plan proposes to satisfy Plaintiff’s secured claim by giving Plaintiff a modified note, which will be amortized over a thirty-year period, due and payable in ten years. The plan proposed that interest shall be a rate equal to the rate on a 30-year government securities plus a two per cent risk factor but shall not exceed ten and one-half percent.
Whether a 10.5% to be paid on the secured claim constitutes the appropriate market rate of interest.
Yes. Under the facts of this case, 10.5% constitutes the appropriate market rate of interest to be applied to the payments on Plaintiff’s secured claim.
The court agrees with Plaintiff’s calculation of the market rate using a risk free rate plus a risk factor because it takes into account the terms of the payout period, the quality of the security, and the risk of subsequent default. Plaintiff’s expert showed that a risk free rate based on U.S. government treasury obligations would be 8.1% to 8.3%. Weighing positive and negative risk factors the expert concluded that an additional 2% was appropriate. The total would be between 10.1% and 10.3%. Under the facts, in this case 10.5% constitutes the appropriate interest rat