Dissenting:
In order to secure its investment, Great Northern7 took more than the typical lien on the Debtors’ dry cleaning equipment. It also obtained an assignment of the lease for the Debtors’ business premises. In the event of default, the creditor could evict the Debtors and sell the equipment in combination with the premises lease as an ongoing dry cleaning business. The court below and the majority decision today strip the creditor of the value of its bargain. Because I believe the bankruptcy court made a clearly erroneous mistake of fact as well as a mistake of law, I respectfully dissent.
ERROR OF FACT
Great Northern sells and finances laundromat and dry cleaning equipment. Few of its customers default, but Great Northern is not naive about its loans or credit sales; as an experienced vendor, Great Northern secures itself to the greatest extent possible against loss. Not only does Great Northern take back a security interest in everything it sells to a customer, it also takes an additional step: it makes the purchaser sign over the lease to the premises and obtains the right to reassign the lease from the landlord. The effect of this combination should not be underestimated. By perfecting its priority in the equipment, the lease, and, by virtue of the lease, the leasehold improvements, Great Northern captures everything of value; it secures itself with all the fixed assets necessary to generate an income stream. In the event of default, rather than having to step in and tear the equipment out, Great Northern can step in and kick the debtors out.
In the case at bar, the court viewed Great Northern’s security interest otherwise. The court said “[w]ell, it doesn’t look like you’d have a security interest in the business, sir. You have a security interest in equipment and you have a security interest in a lease.” Later, the court said: “you [Great Northern] don’t seem to have a security interest in income-producing potential either. All you have is the security interest in equipment and — the income-producing potential seems to belong to the Debtor.” And when Great Northern explained it planned to market the business as a turn-key operation, the court explicitly ruled Great Northern lacked a “turn-key situation”.
*247What more could Great Northern possibly need to obtain a turn-key operation? True, it lacked any interest in the accounts receivable, the sundry dry cleaning supplies, and the business name. And true, Great Northern had no right to the chapter 13 Debtors’ managerial skills. But Great Northern had plenty to market. Stated plainly, good will in a dry cleaning business belongs to the situs — if the manager walks away, the customers stay. Great Northern, by securing its loan with every one of the fixed assets of the business, assured itself that, in the event of default, it could market the site as a dormant business waiting for an entrepreneur willing to add labor. Neither the court nor the Debtors (nor the majority) points to a single additional piece of collateral Great Northern might need before it could sell the site as such. As discussed below, this holding, that Great Northern lacked a “turn-key situation,” led the bankruptcy court to neglect the most relevant evidence offered as to the market value of Great Northern’s secured claim.8
ERROR OF LAW
The court below also made a mistake of law. Great Northern contended its collateral should be valued in its proposed use: as part of an income-producing going concern. The court instead endorsed the Debtors’ valuation methodology. However, the Debtors’ valuation amounted to a liquidation. First, the Debtors separately valued the leasehold, as if marketed as an empty, unimproved site. After finding the lease to be of no value in this hypothesized sale, the Debtors then proceeded to another hypothesized sale: a separate auction of the dry-cleaning equipment, “off location on the street, not income producing.” This is the “reasonable disposition” approach and the Ninth Circuit has rejected it.
Section 506(a), the section that governs the classification of a creditor’s claim as secured or unsecured, uses very flexible language and a court has wide latitude in how it may approach a valuation task. However, § 506(a) valuations are not completely ad hoc; bankruptcy courts see recurring types of collateral in recurring situations and legal standards have developed to create some uniformity in claim valuations. The Ninth Circuit recently discussed appropriate standards in In re Taffi, 96 F.3d 1190 (9th Cir.1996) (en banc). The court stated:
When a Chapter 11 debtor or a Chapter 13 debtor intends to retain property subject to a lien, the purpose of a valuation under section 506(a) is not to determine the amount the creditor would receive if it hypothetically had to foreclose and sell the *248collateral.... Instead, when the proposed use of the property is continued retention by the debtor, the purpose of the valuation is to determine how much the creditor will receive for the debtor’s continued possession.
Id. at 1192.
In a reorganization, the Debtor’s “proposed use” is to keep the collateral plugged in as a component of a continuing business. Consequently, “if the debtor retains the property as part of a reorganization, the proper measurement of the estate’s interest in the property is the ‘going-concern’ value of the collateral to the debtor’s reorganization.” In re Taffi, 68 F.3d 306, 308 (9th Cir.1995) (quoting Matter of Rash, 31 F.3d 325, 329 (5th Cir.1994)) (emphasis added).9 See also In re Chateaugay Corp., 154 B.R. 29, 33 (Bankr.S.D.N.Y.1993) (going concern valuation applied to the claims of bondholders secured by selected “hard assets” used in the debtor’s operations); In re Wendy’s Food Systems, Inc., 82 B.R. 898, 900 (Bankr. S.D.Ohio 1988) (going concern or “in-place” standard used to value the claim of a creditor secured by equipment used in the debtor’s restaurants); In re Penz, 102 B.R. 826, 828 (Bankr.E.D.Okla.1989) (creditor’s secured claim is entitled to be valued to the extent of its contribution to the entire estate vis-a-vis going concern value); In re Winthrop Old Farm Nurseries, Inc., 50 F.3d 72, 75 (1st Cir.1995) (a court must consider the debtor’s use of the collateral to generate an income stream in a chapter 11 business reorganization); National Rural Utilities Co-op. Finance Corp. v. Wabash Valley Power Ass’n., Inc., 111 B.R. 752, 768-770 (S.D.Ind.1990) (“willing buyer-willing seller” standard applied in the context of a going concern); In re Bellanca Aircraft Corp., 56 B.R. 339, 386-387 (Bankr.D.Minn.1985) (going concern valuation incorporates more than a summation of market values attributable to an entity’s various assets; only where a business is wholly inoperative will going concern valuation be abandoned in favor of an item by item valuation) rev’d in part on other grounds, 850 F.2d 1275 (8th Cir.1988).
Of particular note, the Ninth Circuit explicitly rejected the alternative “reasonable disposition” approach, stating: “[w]e overrule In re Mitchell, 954 F.2d 557 (9th Cir.1992) to the extent that it held the valuation under section 506(a) should be based on determining “what the creditor would obtain if the creditor were to make a reasonable disposition of the collateral.’ Id. at 560.” 96 F.3d at 1193. Some courts had viewed this as an acceptable method by which to value secured claims. However, the vice in this method (as demonstrated by the case at bar) was that it created an improper incentive in reorganization cases. By permitting debtors to strip down the liens of secured creditors, piece by piece, to the “commercially reasonable disposition”10 (i.e. liquidation) price of the separate collateral components, debtors were able to capture for themselves or their unsecured creditors the surplus value of the organization which, before the bankruptcy filing, belonged to the secured creditors. In re Winthrop Old Farm Nurseries, Inc., 50 F.3d at 76; Matter of Rash, 90 F.3d at 1073 (Smith, J., dissenting). In short, it allowed debtors to usurp the equity inherent in a going concern. To permit the Debtors to usurp the equity in this case is particularly egregious, because Great Northern bargained for the lease, assignment for the very purpose of protecting the going concern value of its equipment.
Both the parties, and the majority, agree that Taffi supplies the appropriate standard for this case. However, the timing of the decision is critical. The court completed its valuation hearings before the Ninth Circuit published its en banc decision, the one that explicitly overruled the “reasonable disposi*249tion” approach.11 Unless able to correctly divine the implication of the Ninth Circuit Panel’s opinion in Taffi, (which itself was published in the midst of the three valuation hearings in the court below), the court simply had no reason to suspect that “reasonable disposition” pricing represented an improper valuation standard. Consequently, the appropriate adjudication of this case is to remand it for reconsideration in light of the Ninth Circuit’s intervening decision. See Apple Computer, Inc. v. Microsoft Corp., 35 F.3d 1435, 1448 (9th Cir.1994).
That the court used the “reasonable disposition” method is obvious from the hearing transcripts. The court explicitly endorsed the method in the following exchange:
[GREAT NORTHERN]: When he [the Debtors] speaks of $34,000 as the value of the equipment, that’s off location on the street, not income producing.
THE COURT: Well, that’s the way you have it, sir.”
In other words, the court valued the claim at the price Great Northern would receive if it removed its equipment from the leasehold and sold it off-site. That is a hypothetical sale; it is not the Debtors’ “proposed use”, and it amounts to de facto foreclosure or liquidation pricing. It was error as a matter of law for the court to value the equipment “off location on the street, not income producing” when the Debtors planned on retaining the equipment in their reorganized business.
When Great Northern presented evidence valuing the equipment based on its income-producing potential as a part of the Debtors’ business, the court rejected the evidence, stating “[a]ll you have is the security interest in equipment and — the income-producing potential seems to belong to the Debtor.” Again, that was error as a matter of law. Great Northern was entitled to have its claim valued to the extent of its contribution to the business vis-a-vis going concern value; at least a portion (if not all) of the income-producing potential did belong to Great Northern.
And, in its ruling, stated on the record, the court held:
The court finds that the other evidence [Great Northern’s] does not relate to what the value of the equipment is apart from the value of the business.... (emphasis added).
In other words, the court failed to consider the Debtors’ “proposed use” for the collateral; the Debtors planned to assume the lease, retain the equipment, and continue to operate the reorganized dry cleaners. The value of the equipment, as a part of the value of the business, was exactly how Great Northern’s collateral should have been valued.
THE EVIDENCE IN THE COURT BELOW
The impact of the foregoing errors is seen in the bankruptcy court’s evidentiary rulings. Great Northern introduced extensive (and competent) evidence valuing the dry cleaning equipment and lease as a turn-key operation. The bankruptcy court rejected this evidence, but not due to any technical failing in its admissibility. Rather, believing Great Northern lacked any security interest in “income-producing potential”, and believing the collateral components should be separately valued at their disposition price, the court viewed Great Northern’s evidence as irrelevant.
For example, the court gave no weight to the estimate of Robin Rix, Great Northern’s expert. Rix has twenty-six years of experience in the dry cleaning industry. He began by servicing machines, later sold dry cleaning supplies, then advanced into management. He has since built, installed, consulted on, owned, and now sells turn-key dry-cleaning businesses for a living. In the past nine years, Rix closed over three hundred and *250fifty sales of dry-cleaning businesses. In the last year alone, he averaged eleven sales per quarter, roughly one a week. The Debtors themselves employed Rix to sell their dry-cleaning business in 1992.
Based upon his familiarity with both the business and its location (from his previous employment with the Debtors), and after reviewing the Debtors’ schedule of business income and expenditures, Rix estimated the business would sell for $165,000. The key here is that neither the Debtors nor the court took issue with the quality of Rix’s testimony. Instead, the court took the view that, because Great Northern lacked a security interest in the business itself, Rix’s estimate, based on the value of the business, warranted no consideration. In other words, the court did not weigh the evidence, it rejected it outright as irrelevant12, premised on its view of the scope of the creditor’s security interest. As discussed above, that factual premise is clearly erroneous, and the error led the court to neglect highly relevant evidence.
Similarly, Weiner’s declaration valued the collateral as part of a going concern. As to his competency, it is difficult to conceive of anyone more qualified to estimate the value of dry-cleaning equipment or the value of a dry-cleaning business than Weiner. He has built, equipped, and sold laundromat locations for over forty-two years. He has been in the business of building, equipping, selling, and financing dry-cleaning operations for thirteen years. He is the chief executive officer of a company whose sole function is to sell and finance dry-cleaning equipment.
Before valuing the collateral, Weiner assessed the lease terms for the premises, the leasehold improvements at the site, the location of the facility, the equipment held by the Debtors, and the Debtors’ schedule of business income and expenditures. Based on what he viewed as a conservative gross income figure, Weiner estimated that the value of the collateral fell within a range of $125,-000 to $165,000. He explicitly stated that he did not include, for purposes of the estimate, any elements of the business not encompassed by his company’s security interest. But he did view the collateral as a package, marketable as an income producing dry-cleaning business. Again, the court gave no weight to Weiner’s testimony, not because of any failing in Weiner’s competency, but because the court held the creditor lacked any claim to the “income-producing potential” of the business.
The majority opinion gives the impression that the court below rejected Weiner’s entire declaration for lack of foundation. But a close reading of the record reveals that the court made only two, very limited, evidentia-ry rulings. First, the court excluded Weiner’s estimate that the equipment would sell for $45,000 if torn out of the existing operation and sold off-site. Given that Weiner himself stated that selling the equipment off-site would amount to “economic disaster” and, given that Weiner’s company, in its entire history, never attempted to first remove equipment from the leasehold before selling it, it is hardly surprising that the court excluded Weiner’s estimate of an off-site sales price. What is so surprising is that the court, in the next breath, accepted the Debtors’ estimate of value premised upon the same imaginary course of action the court had just rejected when proposed by the creditor. The Debtors, too, had never conducted an off-site sale of dry cleaning equipment. For that matter, the Debtors (unlike Weiner or Rix) had never sold any dry-cleaning equipment at all. More importantly, the Debtors had no intent of separately selling the equipment, they planned on using it in a going concern and that is how it should have been valued.
*251In the other evidentiary ruling, the court excluded Great Northern’s evidence of comparable sales. In his declaration, Weiner included the sales figures for the eleven repossessed businesses resold by his company in the three years preceding the hearings. Significantly, in every instance, Great Northern, because it held both the lease and the equipment, marketed the site as a “turn-key” package. Never had it needed anything more than the lease, the leasehold improvements, and the dry-cleaning equipment to successfully resell a location based on its income-producing potential. The court noted that Weiner failed to include the exact locations, the dates of sale, or names of the purchasers. I fail to see why that information is vital and I believe the court abused its discretion in denying the creditor a continuance. But that is to lose sight of the bigger picture: the court only excluded limited pieces of evidence. As for the bulk of Weiner’s testimony, the court simply neglected it because the court held Great Northern lacked a “turn-key situation”. That finding is a misconception of Great Northern’s security interest and is reversible error.
Finally, it is interesting to contrast the above rulings with the evidence the court ultimately endorsed when valuing Great Northern’s claim: the unadorned statement of value listed by chapter 13 debtors in their inventory of personal property on Schedule B. The Debtors simply inserted the number “$34,000” as the value of the dry cleaning equipment when they filled out their twenty-plus pages of schedules and forms, and the court accepted it as dispositive. Not a single question was asked of the Debtors as to how they came up with that amount. No examination of the Debtors’ factual basis and no probing of the Debtors’ methodology appears anywhere in the record. On appeal, the Debtors point out that Schedule B asks for “Current Market Value”. That, and the fact that courts have held a debtor is competent to give an opinion as to the value of estate property is all that supports the court’s valuation of Great Northern’s secured claim.
CONCLUSION
The court held that Great Northern lacked a turn-key operation or any security interest in the business as a whole. That is a clearly erroneous finding of fact which deprived Great Northern of its carefully bargained for rights. The court then valued each component of Great Northern’s collateral as if detached from the business and separately sold “off-site” in a “reasonable disposition”. That was an error of law. Because of these errors, the court below rejected Great Northern’s evidence as irrelevant when such evidence was, in fact, the most relevant offered. For the foregoing reasons, I would remand the case for further hearings consistent with the Ninth Circuit’s decision in In re Tajfi. Consequently, I respectfully dissent.
. This dissent focuses on the security interest held by Great Northern as opposed to that of Ardmor Plan since Ardmor Plan's security interest is junior to Great Northern’s.
. The Debtors and the majority make much of the estimate by the Debtors' expert, Basmajian, on the value of the lease. Basmajian surmised that the lease was worthless, and perhaps might have a negative value. But Basmajian misconceived the nature of the valuation task at hand; he based his estimate on the marketability of the leasehold as an empty, unimproved site. Neither the Debtors nor Great Northern ever proposed a separate sale of the lease. Instead, the Debtors planned to retain the lease. By failing to account for this proposed use, Basmajian rendered his lease valuation legally irrelevant, and the court should have given it no consideration. In re Taffi, 96 F.3d 1190 (9th Cir.1996), petition for cert. filed, 65 U.S.L.W. 3433 (U.S. Oct. 31, 1996) (No. 96-881).
Basmajian’s estimate was factually irrelevant as well. Prospective purchasers of a business or income-producing property (as opposed to purchasers of unimproved leaseholds) price an operation by estimating its potential for generating a net income stream. The net income stream is then capitalized using a discount factor sufficient to compensate the purchasers for their investment and risk taking. In re SM 104 Ltd., 160 B.R. 202, 211 (Bankr.S.D.Fla.1993); In re Montgomery Court Apartments of Ingham County, Ltd., 141 B.R. 324, 338 (Bankr.S.D.Ohio 1992). Only actual rent has any impact on that analysis: it is a recurring, fixed, monthly expense which must be deducted from expected earnings. The higher the fixed cost, the lower the expected net income stream, and the lower the business price. Only if the rent at the leasehold site was so high as to completely swamp out any potential for a positive net income stream would the business have no value to a prospective purchaser. What “market” rent the leasehold might fetch in some hypothetical or imaginary use, while perhaps significant in theoretical economic models, is of no pertinence to a small-business valuation of the type at issue. The. clearest demonstration of the truth of this proposition comes from the Debtors themselves: despite, their own expert's declaration, the Debtors appear quite ready and willing to assume the lease. The bankruptcy court erred in giving any weight to an estimate of the separate sales price for an unimproved leasehold. The object to be valued was the leased premises with the installed equipment, i.e., a business opportunity.
. The Fifth Circuit, sitting en banc, reversed the Fifth Circuit panel decision quoted above. Matter of Rash, 90 F.3d 1036 (5th Cir.1996). However, the Ninth Circuit, in its en banc rehearing of Taffi, sided with the en banc dissent in Matter of Rash. In re Taffi, 96 F.3d at 1192.
. Taffi rejected the use of a foreclosure sale price when valuing a creditor’s claim secured by real properly. A “commercially reasonable disposition'' is the personal properly analog to a foreclosure sale. See Cal.Com.Code § 9504(3); In re Crosby, 176 B.R. 189 (9th Cir. BAP 1994), aff'd, 85 F.3d 634 (9th Cir.1996).
. The trial court held a brief hearing on the valuation question on September 11, 1995, but continued the matter. On October 10, 1995, the Ninth Circuit Panel decided In re Taffi, 68 F.3d 306 (9th Cir.1995). The trial court held two additional valuation hearings, one on November 13, and the other on December 4, 1995. However, neither party brought the Taffi decision to the court's attention. On September 17, 1996, after this appeal was taken, the Ninth Circuit, sitting en banc, decided In re Taffi, 96 F.3d 1190 (9th Cir.1996). The en banc decision explicitly overruled In re Mitchell, 954 F.2d 557 (9th Cir.1992).
. The participants at the hearings focused on claim objections, but the proceedings also served as plan confirmation hearings. Even if Rix’s valuation of $165,000 for the entire business was irrelevant for the purpose of valuing Great Northern's claim under § 506(a), Rix's valuation was still relevant for the purpose of plan confirmation and remained uncontradicted. The Debtors’ amended chapter 13 plan proposed total payments of approximately $81,500, with the unsecured creditors to receive roughly thirty-one cents on the dollar. If the business were sold as a turn-key for a price of $165,000, all creditors, secured and unsecured, could be paid in full. See 11 U.S.C. § 1325(a)(4). In effect the Debtors have purchased the business at a 50% discount to the detriment of all creditors.