Industry: Real Estate Investing

Subject: A wholly owned subsidiary of a West Coast investment group specializing in mortgage- and real estate-related assets. The subsidiary consisted of a portfolio of sub-leasehold interests in freestanding retail stores.

Circumstance: After having been turned down by several other investors, the owner of the investment group approached Summit about raising capital to expand other business lines within the company, offering the sub-leases as collateral for a loan. The master leases had been written more than 20 years prior and reflected market pricing from that time. Current pricing for the subleases was valued at a significantly higher price, giving the portfolio a value equal to the difference between the master lease and sub-lease payments.

Solution: After careful examination, Summit determined that because the master leases lacked ownership of any tangible asset, collateralization would be impossible. Instead, Summit proposed an outright purchase of the subsidiary, but because of the increasing value of the sub-leases and the portfolio’s value, the company’s owner was not inclined to sell the subsidiary outright. As a compromise, Summit and the investment group came to an agreement that Summit would purchase the subsidiary for $8.5 million, with the current owner having a purchase option that could be exercised when financial conditions allowed.

Outcome: Today, the investment group is making its quarterly option payments to purchase back its former subsidiary. In addition, Summit structured a management agreement with the investment group, who continues to provide day-to-day management of the portfolio on a fee basis, enabling them to maintain and enhance the portfolio’s value.