[Federal Register Volume 59, Number 136 (Monday, July 18, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-17319]


[[Page Unknown]]

[Federal Register: July 18, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-20393; 812-8988]

 

Presidential Associates I Limited Partnership, et al.; 
Application

July 11, 1994.
AGENCY: Securities and Exchange Commission (``SEC'').

ACTION: Notice of Application for Exemption under the Investment 
Company Act of 1940 (the ``Act'').

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APPLICANT: Presidential Associates I Limited Partnership (the 
``Partnership'') and Winthrop Financial Co., Inc. (the ``Managing 
General Partner'').

RELEVANT ACT SECTIONS: Exemption requested under section 6(c) from all 
provisions of the Act.

SUMMARY OF APPLICATION: Applicants seek an order to amend a prior order 
(the ``Prior Order'') issued under section 6(c) of the Investment 
Company Act of 1940.\1\ The Prior Order exempts the Partnership from 
all provisions of the Act and permits the Partnership to invest in 
another partnership, Presidential Towers, Ltd. (the ``Operating 
Partnership''), which owns and operates residential apartments for 
moderate income persons. Applicants seek to amend the Prior Order to 
permit a new investor to invest in the Operating Partnership.

    \1\Presidential Associates I Limited Partnership, Investment 
Company Act Release Nos. 13483 (Sept. 2, 1983) (notice) and 13538 
(Sept. 27, 1983) (order).
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FILING DATES: The application was filed on May 11, 1994.

HEARING OR NOTIFICATION OF HEARING: An order granting the application 
will be issued unless the SEC orders a hearing. Interested persons may 
request a hearing by writing to the SEC's Secretary and serving 
applicants with a copy of the request, personally or by mail. Hearing 
requests should be received by the SEC by 5:30 p.m. on August 5, 1994, 
and should be accompanied by proof of service on the applicants, in the 
form of an affidavit or, for lawyers, a certificate of service. Hearing 
requests should state the nature of the writer's interest, the reason 
for the request, and the issues contested. Persons who wish to be 
notified of a hearing may request notification by writing to the SEC's 
Secretary.

ADDRESSES: Secretary, SEC, 450 5th Street, NW., Washington, DC 20549. 
Applicants, One International Place, Boston, Massachusetts 02110.

FOR FURTHER INFORMATION CONTACT:
James M. Curtis, Senior Counsel, at (202) 942-0563 or Robert A. 
Robertson, Branch Chief, at (202) 942-0564 (Division of Investment 
Management, Office of Investment Company Regulation).

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application may be obtained for a fee at the 
SEC's Public Reference Branch.

Applicants' Representations

    1. Because of the Partnership's investment in the Operating 
Partnership, the Partnership may be an investment company under 
sections 3(a)(1) or 3(a)(3) of the Act. The Prior Order granted 
applicants an exemption under section 6(c) of the Act from all 
provisions of the Act permitting the Partnership to invest in the 
Operating Partnership, which in turn would own and operate a 
residential project (the ``Project'') for moderate income persons in 
accordance with the purposes and criteria set forth in Investment 
Company Act Release No. 8456 (August 9, 1974) (``Release 8456''). 
Release 8456 states that an exemption for a two-tier partnership, such 
as the Partnership, is appropriate if two criteria are met: (a) The 
interests in the partnership must be sold only to persons for whom 
investment in limited profit, essentially tax shelter, investments 
would not be unsuitable and (b) requirements for fair dealing by the 
general partner of the partnership with the limited partners should be 
included in the basic organizational documents of the partnership.
    2. Applicants propose to effect two changes that would change the 
structure of the Project's ownership from that represented in the 
application for the Prior Order. These changes would dilute the 
Partnership's interest in the Operating Partnership to less than 50% of 
the total interests in the Operating Partnership and effectively 
transfer to a new investor in the Operating Partnership, as the new 
majority partner, certain rights concerning the Operating Partnership 
currently held by the Partnership. Applicants seek to amend the Prior 
Order to permit these changes.
    3. The Partnership was formed in 1983 for the sole purpose of 
acquiring and holding a limited partner interest in the Operating 
Partnership. The Operating Partnership's sole asset is 100% of the 
beneficial interest in an Illinois land trust that holds title to the 
Project.
    4. The Partnership offered 590 units of limited partnership 
interest in the Partnership (the ``Units'') at $100,000 per Unit to `` 
Accredited Investors'' as defined in Regulation D under the Securities 
Act of 1933 and to not more than 30 other ``Non-Accredited Investors'' 
who met certain suitability requirements. Each prospective limited 
partner also was required to provide certain certifications in his 
subscription agreement to insure that the investment was suitable for 
such prospective limited partner.
    5. The Partnership currently has approximately 573 limited partners 
(the ``Limited Partners'') holding 590 Units. The Limited Partners 
collectively hold a 99% interest in the Partnership. The Managing 
General Partner and an affiliate of the Managing General Partner each 
hold a 0.5% general partner interest in the Partnership. The 
Partnership holds a 94.99% limited partner interest in the Operating 
Partnership. WFC Realty Co., Inc. (``WFC Realty''), an affiliate of the 
Managing General Partner, holds a 0.01% limited partner interest in the 
Operating Partnership, and McHugh Levin Associates Venture, the 
managing general partner of the Operating Partnership, and Madison-
Canal Company collectively hold a 5% general partner interest in the 
Operating Partnership.
    6. Due to lower than projected occupancy and rental rates and 
higher than projected real estate taxes, the Project has been unable to 
generate sufficient income to meet debt service on the approximately 
$185 million mortgage (the ``Mortgage'') upon the Project currently 
held by the United States Department of Housing and Urban Development 
(``HUD''). To prevent foreclosure of the Mortgage, the Operating 
Partnership, with the concurrence of the Managing General Partner, has 
entered into a workout agreement with HUD (the ``Workout Agreement'') 
and, to implement the Workout Agreement, has developed a comprehensive 
debt and ownership restructuring plan (the ``Restructuring Plan'').
    7. The Workout Agreement provides for the replacement of the note 
evidencing the indebtedness secured by the Mortgage with a new $127 
million first note and a second note in the amount of the balance of 
the principal and accrued interest secured by the Mortgage 
(approximately $58 million). The Workout Agreement also provides that 
monthly payments of principal and interest will be payable only on the 
first $71 million of the new first note, thereby reducing the mandatory 
monthly mortgage payment for the Project by more than 50%. Additional 
payments of principal and interest on the first note will be payable 
semiannually in an amount of 80% of the Project's net cash flow 
remaining after a specified priority payment to the Operating 
Partnership. The Workout Agreement further provides that the Operating 
Partnership will raise and pay to HUD $13 million to reduce the 
outstanding principal of the new first note and to fund a deficit 
escrow. In addition, HUD has required that the Operating Partnership 
set aside and subsidize seven percent of the apartments in the Project 
for occupancy by very low and low income tenants.
    8. To raise $13 million required by HUD, the Operating Partnership 
proposes to admit, as a general partner of the Operating Partnership, 
Penguin Presidential Partners (the ``New Investor''). The New Investor 
will contribute $14 million to the capital of the Operating Partnership 
(the $13 million required by the Workout Agreement plus $1 million to 
pay costs and expenses) in exchange for a general partner interest 
constituting a 79% interest in the Operating Partnership and specified 
preferential interests in cash flow, losses, and proceeds from a sale 
or refinancing.
    9. In recognition of the New Investors's majority interest in the 
Operating Partnership, the New Investor will receive certain rights to 
propose and approve actions of the Operating Partnership, including the 
right to direct the sale of all or substantially all of the assets of 
the Operating Partnership, the right to approve all annual capital 
expenditure budgets for the Project, and the right, under specified 
circumstances, to designate a replacement managing general partner for 
the Operating Partnership or to remove and replace the management agent 
for the Project. These provisions will grant the New Investor rights 
similar to, but more extensive then, rights now held by the Partnership 
or WFC Realty.
    10. To implement the Workout Agreement and facilitate the entry of 
the New Investor into the Operating Partnership, the Managing General 
Partner will seek the approval of the Limited Partners to implement the 
Restructuring Plan through a proxy statement and consent solicitation 
made in accordance with the requirements of Regulation 14A and Schedule 
14A promulgated under the Securities Exchange Act of 1934. The 
principal provisions of the Restructuring Plan are: (a) Restructuring 
the Mortgage indebtedness pursuant to the terms of the Workout 
Agreement; (b) amending the limited partnership agreement of the 
Partnership to, among other things, remove a provision concerning 
dilution and rights to participate in additional capital contributions; 
and (c) adopting an amended and restated limited partnership agreement 
of the Operating Partnership that, among other things, will (i) admit 
the New Investor as a general partner with a 79% interest in the 
Operating Partnership, thus diluting each of the present partner's 
interests and leaving the Partnership with a 19.998% interest in the 
Operating Partnership, and (ii) grant the New Investor the rights 
discussed above.

Applicants' Legal Analysis

    1. Section 6(c) provides that the SEC may exempt any person, 
security or transaction from any provision of the Act and any rule 
thereunder, if, and to the extent that, such exemption is necessary or 
appropriate in the public interest and consistent with the protection 
of investors and the purposes fairly intended by the policy and 
provisions of the Act.
    2. The Partnership provides a vehicle for private investment in 
government assisted low and moderate housing in accordance with the 
express Congressional policy to encourage the widest possible 
participation by private enterprise in the provision of housing for low 
and moderate income families. Pursuant to the provisions of the Workout 
Agreement, the Project's original target population of moderate income 
persons and families will be supplemented by a commitment to provide, 
at the expense of the owner of the Project, rent-subsidized housing for 
a substantial number of very low and low income persons or families.
    3. The application for the Prior Order noted that both the 
Partnership Agreement and the Confidential Offering Memorandum relating 
to the Units contained numerous provisions designed to insure fair 
dealing by the general partners of the Partnership with the Limited 
Partners. In addition, the Units were offered only to persons for whom 
investment in limited profit, tax-sheltered investments would be 
suitable. The Restructuring Plan does not in any way modify any of 
these suitability or fair dealing provisions.
    4. The failure of the Operating Partnership to implement the 
Restructuring Plan will almost certainly result in the foreclosure of 
the Mortgage by HUD. Foreclosure will result in a total loss of the 
Partnership's indirect ownership interest in the Project. In addition, 
a foreclosure as of December 31, 1993 would have produced approximately 
$133,300,000 of non-cash taxable income to the Operating Partnership, 
resulting in an allocation of taxable income per Unit of approximately 
$217,800. Thus, foreclosure would produce a substantial tax bill for 
the limited partners--a tax bill that would not be accompanied by a 
distribution of any cash with which to pay the tax. It also will 
deprive the Limited Partners of a chance to share in the net cash flow 
projected to be produced by the Project after the Restructuring Plan is 
implemented and the opportunity to share, should the Project be sold or 
refinanced, in any proceeds of such a sale or refinance paid to the 
Operating Partnership. The application is being made in the context of 
a workout of a financial troubled, existing project that faces 
virtually certain foreclosure if the workout is not consummated. 
Accordingly, applicants believe that it would be consistent with the 
public interest and the protection of investors for the SEC, pursuant 
to section 6(c), to issue the requested order.

Applicants' Condition

    Applicants agree that the order granting the requested relief shall 
be subject to the following condition:
    The Restructuring Plan shall be approved by the holders of not less 
than 51% of the Units by written consents obtained by a proxy statement 
and consent solicitation in accordance with the requirements of 
Regulation 14A and Schedule 14A promulgated under the Securities 
Exchange Act of 1934.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-17319 Filed 7-15-94; 8:45 am]
BILLING CODE 8010-01-M