The debtor planned to build a southwest Texas urban development in 2006—but by 2010, it defaulted on over $32 million in notes and filed for bankruptcy. A real estate equity group purchased the notes at an auction (and at a discount) and then objected to the debtor’s proposed reorganization plan in favor of its own ownership. To assess the debtor’s plan, the U.S. Bankruptcy court heard from several appraisal experts, including Paul French (Lain Faulkner & Co.), who estimated the required interest rate to return the present value of the equity investors’ claims.
Starting with the five-year T-bill rate of 1.71% as his risk-free rate, French adjusted it to account for specific risk factors associated with the debtor, the property, and the loan agreements, and then adjusted it further for each tranche (senior, junior, and equity) to reach “final” rates, as applied to two different appraisals of the property, of 6.25% and 7.75%. Without detailing the data from which French derived his numbers, “suffice it to say that his research was extensive and well-planned,” the court noted, adding that “his opinions are defensible under the most rigorous Daubert analysis.”
To reach his opinions, French used the Butler Pinkerton Calculator—Total Risk Calculator (BPC). In addition to the court’s approving his methodology, his “BPC calculations, along with all of my work, were entered into evidence without objections,” French tells the ’Wire. After making its own adjustments for some of French’s assumptions, the court ultimately concluded that it would accept a “cramdown” rate between 6.27% and 6.59%. We’ll have the complete digest of In re Village at Camp Bowie I, No. 10-45097 (Bankr. N.D. Tex.)(August 4, 2011) in a future Business Valuation Update; the court’s opinion will be available soon at BVLaw.
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