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principal. Properties’ bookkeeping entries reflected Bottlers’
failure to pay the full amount of rent and Properties’
corresponding failure to repay principal on the loan.
The management group had not anticipated that it would take
G&K so long to obtain the financing. Given this delay, the
management group decided not to pay the full amount of rent for
two reasons. First, they were concerned that paying the portion
of the rent corresponding to the principal Properties owed would
enable Properties, which was owned by the management group, to
build equity in the facilities, which might alarm the limited
partners. Second, the important net zero cashflow effect of the
transaction would be destroyed if Bottlers paid Properties the
rent corresponding to the principal. Properties would have an
interest deduction for the portion of the rent corresponding to
the interest but no deduction for the portion of the rent
corresponding to the principal. Properties would therefore have
net income and would be exposed to income tax.
Buyer Financing Collapses
Unexpectedly, G&K’s purchase of the bottling facilities fell
through in early 1995. The insurance company G&K expected to
provide the bulk of the financing was unable to complete the
deal. Bottlers searched fruitlessly for alternate buyers.
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Last modified: May 25, 2011