Bankruptcy Court's Use Of Unimproved Airport Terminal Space's Value As A Guide To Improved Space's Value Was Error
UNITED AIRLINES, INC. v. REGIONAL AIRPORTS IMPROVEMENT CORPORATION (May 5, 2009)
When United Airlines reorganized in bankruptcy, several issues remained unresolved. One of those issues involved $60 million of secured loans to United for terminal improvements at Los Angeles International Airport. United is under an obligation to pay to the lenders the full value of the secured asset, up to the $60 million. The bankruptcy court used a discounted-cash-flow analysis to value the asset, mainly because there was little evidence in the record on the market value of improved airport terminal space. The court's analysis resulted in a value of approximately $35 million. The lenders appeal.
In their opinion, Chief Judge Easterbrook and Judges Bauer and Manion reversed and remanded. The Court addressed two aspects of the court's analysis -- the appropriate annual rental rate and the appropriate discount rate. With respect to the rental rate, the Court rejected the court's use of a $17 per square foot rental rate. The Court noted that the evidence of the $17 rate represented unimproved airport terminal space. The security for the $60 million loan, however, is improved airport terminal space. There is evidence in the record that improved space at Los Angeles International Airport is rented for as much as $63 a foot. The Court recognized that the United space may not be worth as much as $63 because of several factors that distinguish it from the actual space rented. The Court noted that any rental revenue in excess of $30 would result in a full repayment of the $60 million loan. The Court concluded that the space could be leased for at least $30 a foot. With respect to the discount rate, the Court also took issue with the bankruptcy court’s approach. The court simply averaged the rate suggested by the lenders and the rate suggested by United. Relying on the fact that Los Angeles International Airport is currently operating at full capacity and can itself raise money at 8%, the Court concluded that the discount rate should not exceed 8%. The reduced discount rate also reduced the rental amount at which the lenders would fully recover the amount of their loans to $23 a foot. The Court concluded that the lenders were entitled to that full recovery.
Michael Rigney practices in the law offices of GVC Ltd. in Chicago. In this blog, he reports on select