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previously worked. G&K was interested in expanding its real
estate holdings by buying the facilities. G&K and Bottlers
drafted a letter of intent formalizing G&K’s intent to purchase
the bottling facilities for approximately $18 million. G&K had
identified a life insurance company in Davenport, Iowa, as a
potential source of financing but needed time to work out the
details.
While G&K was obtaining the necessary financing, the
management group worked on avoiding the rent escalators in the
CPA7 lease and approached CPA7 regarding a sale. Initially CPA7
requested $22 million for the bottling facilities, but Bottlers
and CPA7 ultimately agreed on a $17.8 million price. To lock in
the $17.8 million price tag and avoid further rent escalators,
the management group found a short-term, interim solution to give
G&K the time it needed to obtain the financing. The management
group decided to create a third-party company to own the assets
temporarily until G&K’s financing came through.
Neither Bottlers nor CPA7 appraised the underlying
facilities during their negotiations. Instead, the lease
payments drove the price, which was based on the present value of
the future stream of payments. Bottlers recognized that this
price included a premium over fair market value because of the
unfavorable lease terms. The management group knew it needed to
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Last modified: May 25, 2011