MEMORANDUM OPINION
Thе case is before the court on a confirmation hearing of debtor Memphis Partners’ plan for reorganization. The former owners, Richard L. Akers, John T. McCal-len, James F. McCallen, Jr., and Gene L. Whitington (the McCallen Group) object to сonfirmation. The McCallen Group holds a first mortgage on the debtor’s principal asset, the Faronia Square Apartments, to secure a wraparound promissory note. The McCallen Group objects to confirmation of the рlan because it asserts it will not get the present value of its claim under the plan.
The following constitutes the finding of fact and conclusions of law in this proceeding under Bankruptcy Rule 7052. This is a core proceeding.
In the fall of 1984, the McCallen Group sold the Faronia Square Apartments to the predecessor of the debtor, Faronia Square Ltd. The sale price was $5,500,000. As part of the sale the McCallen Group took a promissory note in the amount of $5,100,-000 securеd by a mortgage on the Faronia Square Apartments. The interest rate on the promissory note was 10 percent. On December 31, 1985, Faronia Square Ltd. sold the Faronia Square Apartments to the debtor. In the transaction the debtor assumеd the McCallen Group’s note. Both Faronia Square Ltd. and the debtor, Memphis Partners, are limited partnerships es *386 tablished by Freeman Webb Investments, Inc. Freeman Webb Investments, Inc. and William H. Freeman are the general partners of the debtоr. At the time of the filing of the petition, the debtors owed McCallen Group $4 million on its promissory note. The property was also subject to a second mortgage in favor of Metropolitan Life Insurance Company. Metropolitаn Life’s claim on the property at the time of the filing was $800,000. The interest rate on the Metropolitan Life note is 12 percent.
Both the McCallen Group and the debtor submitted expert appraisals of the Apartments. Debtor’s apрraiser estimated the property to be worth $3,900,000. The McCallen Group’s appraiser estimated the value to be $4,200,000. Based on the testimony of two experts and their submissions the court finds the debtor’s appraiser’s estimate to be morе credible and finds the property to be worth $3,900,000. 1 The evidence further indicates that the value is not expected to change appreciably in the foreseeable future.
Under the plan, the McCallen $4,000,000 claim would be paid over ten years through a negative amortization plan designed to pay the McCallen Group the equivalent of a note amortized over 30 years at a rate of 9 percent interest with a balloon payment due in ten years. In the first four years, the debtor would pay 8 percent on the note; in years five and six, the debtor would pay 9.3 percent; in years seven and eight, the debtor would pay 10.83 percent; and in years nine and ten, the debtor would pay 11.7 percent оn the note. The debtor would pay a flat 9 percent on the second mortgage for the first five years, and then 1 percent over prime for the remaining five years. In addition, the first mortgagees would receive a net cash flow from thе operation of the apartment complex after the funding of a reserve for maintenance and upkeep in the amount of $50,000. As that reserve was used it would be replenished before the net operating cash flow would be paid to the McCallen Group.
The McCallen Group, the first mortgagee, has rejected the plan and is the only creditor in an impaired class. Thus, in order to confirm the plan, the plan must meet the requirements of § 1129(b). The McCallen Grouр asserts that the plan is not fair and equitable and does not meet § 1129(b)(2)(A) because they will not receive the present value of their claim. They assert that first, the 9 percent interest rate is too low and, second, the negative amortization denies them the present value of their claim.
I. THE INTEREST RATE
The McCallen Group asserts that, under controlling authority in the Sixth Circuit, the debtor must pay the prevailing market rate for comparable loans made by institutional lenders in order to give the creditor the present value of its secured claim.
Memphis Bank and Trust Company v. Whitman,
The debtor argues that the correct set of similar loans to use to establish a market rate should be seller-financed sales of commercial properties. The testimony of the debtor’s experts, howеver, demonstrate that the loan contemplated here is not similar to seller-financed transactions.
Debtor’s experts, Rudy Thacker and Stephen F. Wood, both testified that sellers who finance sales will often accept interеst rates lower than institutional lenders in exchange for increased, or inflated, sale prices. Such terms still give sellers a rate of return close to the rates charged by *387 institutional lenders. The ten percent rate on the 1984 loan was just such negotiated rate as it was two to three points below institutional rates. Mr. Thacker, who was involved in negotiating the 1984 sale, stated that this lower rate reflected the fact that the sale price, $5,500,000, was $1,000,-000 over the then market value оf the property.
In Chapter 11 proceedings debtor and creditor do not negotiate on either price and interest rates. The debtor is entitled to force the creditor to make a forced loan for 100 percent оf the appraised value of the collateral. This is a new loan, not based on the prior contract.
Whitman,
The quoted rates from institutional lenders arguably are not sufficient to give the creditor the present value. The forced nature of the loan may warrant an additional premium to insure present value. Whitman, however, indicates that this cоurt should use readily available market rates to simplify the process of proof at confirmation. Thus, the correct rate of interest to give present value under Whitman is the rate charged by institutional lenders for similar commercial transactions. Here the evidence showed that rate to be between IIV2 percent and I2V2 percent. 2 The proposed nine percent rate fails to meet the requirements of § 1129(b).
It is true that under this plan the debtor intends to pay thе full $4,000,000 debt back to the McCallen Group, not just $3,900,000, the appraised value. The additional payment of principle would increase the rate of return on the value of the collateral, but there is no showing that this slight payment of additionаl principle will raise the effective rate of return to between IIV2 and 12V2 percent.
The debtor has cited a number of cases in which courts defined the market rate as the rate which a creditor would accept in a transaction with a similar set of risk factors.
In re S.E.T. Income Properties, III,
From these references, the debtor argues that the court should look not at the market rate of interest, but at the rate which a particularized creditor would аccept in a particular transaction. That is not what the Sixth Circuit meant in Whitman. Rather, the Whitman Court was speaking of what creditors in the market generally would accept under the circumstances. In most of the cases cited by the debtor the courts usеd quoted rates from institutional lenders. To the extent the cases disagree with the court’s understanding of Whitman, this court declines to follow them.
The court finds that the proposed 9 percent interest rate is not sufficient to insure the creditor of present value of his claim under Whitman.
II. NEGATIVE AMORTIZATION
Thе McCallen Group also argues that the negative amortization plan denies them the present value of their secured claim. They assert they are at risk because they have to wait until far into the plan to receive the рayments designed to give them the present value of their claim. *388 If the plan should some how fail in the early years, they will have failed to receive the payments sufficient to protect their interest.
The debtor argues that a negative amortization plan meets the requirement of § 1129 because it mathematically provides the creditor with the present value of his secured claim.
The real question before the court is whether negative amortization plans such as this are fair and equitable. The court agrees that, with an appropriate interest rate, a negative amortization plan can mathematically provide present value. The problem is that in the early years of suсh financing the creditor is at risk of not receiving the present value should the plan end prematurely.
See In re Spanish Lake Associates,
As the court in
Spanish Lake
noted, the real question is whether, under the circumstances, is it fair and equitable to place this additional risk on the creditor.
But see In re McCombs Properties VIII, Ltd,.,
In this case the principal owed the creditor increases for six years until it reachеs $4,203,252. The principal does not drop below the original $4,000,000 until over 8V2 years into the loan. At the end of the loan the principle due would be $3,874,000. Requiring the McCallen Group to wait and risk that the plan will work for over 8V2 years to receive the рayments that ensure them the present value of their claim is not fair and equitable. This is especially true since the property contains no equity cushion to reduce those risks. Even at the end of the term the amount owed barely droрs below the value of the property.
CONCLUSION
The court finds that debtor’s plan cannot be confirmed because an impaired creditor that is the only member of a class has rejected the plan, and the proposed treatment of that creditor’s claim fails to meet the requirements of § 1129(b). The proposed 9 percent interest rate fails to provide the secured creditor the present value of its secured claim, and the proposed negative amortization is not fair and equitable in this case.
IT IS THEREFORE SO ORDERED.
Notes
. Debtor had filed a motion to judicially estop the McCallen Group from denying an appraisal that they submitted in a prior state court action. That appraisal estimated the vаlue of the property to be $3,016,000. The court did not address the objection in court and now does not need to since it found the debtor’s appraisal to be correct.
. The ten percent rate charged in the initial contract has no bearing on this new forced loan. There is some language in
In re Colegrove,