[Federal Register Volume 61, Number 20 (Tuesday, January 30, 1996)]
[Notices]
[Pages 3069-3071]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-1639]



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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-21698; 812-9912]


Walnut Properties Limited Partnership, et al.; Notice of 
Application

January 23, 1996.
AGENCY: Securities and Exchange Commission (``SEC'').

ACTION: Notice of application for an order under the Investment Company 
Act of 1940 (the ``Act'').

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APPLICANTS: Walnut Properties Limited Partnership (the 
``Partnership''), and John J. Hansman (``Hansman'') and Summit 
Investment Services, Inc. (``Summit'') (collectively, the ``General 
Partners'').

RELEVANT ACT SECTIONS: Order requested under section 6(c) for an 
exemption from all provisions of the Act.

SUMMARY OF APPLICATION: Applicants request an order to permit the 
Partnership to invest in limited partnerships that engage in the 
ownership and operation of apartment complexes for low and moderate 
income persons.

FILING DATE: The application was filed on December 15, 1995.

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 February 20, 
1996, and should be accompanied by proof of service on 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 may request 
notification of a hearing by writing to the SEC's Secretary.

ADDRESSES: Secretary, SEC, 450 Fifth Street NW., Washington, D.C. 
20549. Applicants, 600 Stewart Street, Suite 1704, Seattle, Washington 
98101.

FOR FURTHER INFORMATION CONTACT:
Marianne H. Khawly, Staff Attorney, at (202) 942-0654, 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. The Partnership was formed as a Washington limited partnership 
on August 11, 1995. The Partnership will operate as a ``two-tier'' 
partnership, i.e., the Partnership, as a limited partner, will invest 
in other limited partnerships (the ``Property Partnerships''). The 
Property Partnerships will be managed by general partners (the 
``Developer General Partners'') that are not affiliated with the 
Partnership or the General Partners. The Property Partnerships, in 
turn, will engage in the ownership and operation of apartment complexes 
(``Properties'') expected to qualify for low income housing tax credits 
(``Credits'') under the Internal Revenue Code of 1986 (the ``Code'').
    2. The objectives of the Partnership are to: (a) provide tax 
benefits, including Credits and passive activity losses, which 
investors may use to offset their Federal income tax liabilities; (b) 
distribute proceeds from liquidation, sale, or refinancing 
transactions; and (c) to the extent permitted by the terms of 
applicable local, state, and/or federal government assistance, 
distribute cash from operating the Properties.
    3. Units of limited partnership interest in the Partnership (the 
``Units'') will be offered and sold without registration under the 
Securities Act of 1933 (the ``Securities Act'') in reliance on section 
4(2) of the Securities Act and Regulation D thereunder. No Units will 
be sold unless subscriptions to purchase at least six Units (the 
``Minimum Offering'') are received and accepted by the General Partners 
prior to September 30, 1996. If the Minimum Offering has not been sold 
by such date, no Units will be sold and all funds received from 
subscribers will be refunded with interest.
    4. Until the Minimum Offering has been sold, offering proceeds will 
be deposited and held in trust for the benefit of purchasers in an 
escrow account with Seattle-First National Bank in Seattle, Washington, 
to be used only for the specific purposes set forth in the Confidential 
Private Placement Memorandum dated November 21, 1995 (the 
``Memorandum''). The Partnership intends to apply offering proceeds to 
the acquisition of limited partnership interests in the Property 
Partnerships as promptly as possible (although such proceeds may be 
invested temporarily in bank time deposits, certificates of deposit, 
money market accounts, and government certificates). The Partnership 
will not trade or speculate in temporary investment.
    5. The Partnership will require that each purchaser of Units 
represent in writing that such purchase meets the applicable 
suitability standards. Each individual subscriber must represent that 
he or she has: (a) a net worth (exclusive of home, home furnishings, 
and automobiles) of at least $200,000 per Unit; or (b) a net worth 
(exclusive of home, home furnishings and automobiles) of not less than 
$125,000 per Unit and annual income of at least $100,000 ($75,000 in 
the case of a purchase of one-half of a Unit). Units will be sold in 
certain states only to persons who meet different standards, as set 
forth in the Memorandum. The Partnership will also allow certain 
corporate subscribers to purchase Units.

[[Page 3070]]

    6. Although the Partnership will not have responsibility for the 
day-to-day management of the Properties, the Partnership's ownership of 
limited partnership interests in the Property Partnerships will, in an 
economic sense, be tantamount to direct ownership of each Property. 
Typically, the Partnership will acquire at least a 98% interest in the 
profits, losses, Credits, and cash flow of each Property Partnership. 
In addition, the General Partners anticipate that the Partnership will 
receive approximately 49.99% of any gain and residual proceeds 
generated by the Property Partnerships. A small percentage interest in 
these items will be allocated to Summit as the special limited partner, 
and the remaining interest in such items will be allocated to the 
Developer General Partner.
    7. In some cases, however, the Partnership and Summit may acquire 
smaller aggregate percentage interests in a particular Property 
Partnership. In those cases where the Partnership acquires less than a 
98% interest in the profits, losses, Credits, and cash flow of a 
Property Partnership: (a) the Partnership will own a minimum of 49.49% 
of such Property Partnership items; and (b) the balance of the limited 
partnership interest in such Property Partnership, after the allocation 
of a .01% interest to Summit, will be owned by a single affiliated 
``upper-tier'' limited partnership of which Hansman and Summit will 
also be the general partners. Moreover, the Partnership's investment in 
any Property Partnership in which it owns less than 50% (but more than 
49.49%) of the profits, losses, Credits, and cash flow will not 
constitute more than 15% of its aggregate investment in all Property 
Partnerships.
    8. The Partnership and Summit will have rights under the terms of 
the limited partnership agreements for the Property Partnerships to 
consent to certain fundamental decisions, which will generally include: 
(a) the right to approve or disapprove any sale or refinancing of a 
Property; (b) the right to replace the Developer General Partner on the 
basis of the Developer General Partner's performance and discharge of 
its obligations; (c) any borrowing of money or encumbering of Property 
Partnership assets; (d) any change in identity of the Developer General 
Partner; (e) any tax elections; and (f) any admission of additional 
partners.
    9. The Partnership will be managed by the General Partners pursuant 
to a partnership agreement (the ``Partnership Agreement''). Holders of 
Units in the Partnership (``Investor Limited Partners''), consistent 
with their limited liability status, will not be entitled to 
participate in the control of the Partnership's business. However, a 
majority-in-interest of the Investor Limited Partners will have rights: 
(a) to amend the Partnership Agreement (subject to certain limitations; 
(b) to remove any General Partner and elect a replacement; (c) to 
dissolve the Partnership; (d) to consent to the sale or refinancing of 
a Property; and (e) to designate a replacement for Summit as the 
special limited partner of each Property Partnership. In addition, 
under the Partnership Agreement, each Investor Limited Partner is 
entitled to review all books and records of the Partnership.
    10. The Partnership Agreement and Memorandum contain numerous 
provisions designed to ensure fair dealing by the General Partners with 
the Investor Limited Partners. All fees and compensation to be paid to 
the General Partners and their affiliates are specified in the 
Partnership Agreement and Memorandum. While the fees and other forms of 
compensation that will be paid to the General Partners and their 
affiliates will not have been negotiated at arm's length, applicants 
believe that the compensation and fees are reasonable and comparable to 
those that would be charged by third parties for the services provided 
by the General Partners and their affiliates.
    11. The Partnership Agreement also contains various provisions 
designed to significantly reduce conflicts of interest between the 
Partnership and the General Partners and their affiliates. For example, 
in the event an investment in a Property Partnership becomes available 
which would satisfy the investment criteria of the Partnership and any 
other partnership in which the General Partners and/or their affiliates 
have an interest, the General Partners will analyze each opportunity in 
relation to the investment objectives of each partnership and will 
consider such factors as cash available for investment, maximum 
investment limit per acquisition, estimated income tax effects, 
leverage policies, any regulatory restrictions on investment policies, 
and the length of time funds have been available for investment. The 
General Partners will then determine which partnership should have the 
opportunity to make the particular investment and, if a particular 
investment is suitable for more than one partnership, the General 
Partners will recommend such investment to the partnership which has 
had the most funds available for investment for the longest period of 
time.

Applicants' Legal Analysis

    1. Applicants believe that the Partnership is not an investment 
company under sections 3(a)(1) or 3(a)(3) of the Act. If the 
Partnership is deemed to be an investment company, however, applicants 
request an exemption under section 6(c) from all provisions of the Act.
    2. Section 3(a)(1) of the Act provides that an issuer is an 
investment company if it is, or holds itself out as being, engaged 
primarily, or proposes to engage primarily, in the business of 
investing, reinvesting, or trading in securities. Applicants believe 
that the Partnership is not an investment company under section 3(a)(1) 
because the Partnership will be in the business of investing in, and 
being beneficial owner of, the Properties, not securities.
    3. Section 3(a)(3) of the Act provides that an issuer is an 
investment company if it is engaged or proposes to engage in the 
business of investing, reinvesting, owning, holding, or trading in 
securities, and owns or proposes to acquire investment securities 
having a value exceeding 40% of the value of such issuer's total assets 
(exclusive of Government securities and cash items). Applicants believe 
that the Partnership's interests in the Property Partnerships should 
not be considered investment securities because such interests are not 
readily marketable, have no value apart from the value of the 
Properties owned by the Property Partnerships, and cannot be sold 
without severe adverse tax consequences.
    4. Applicants believe that the two-tier structure is consistent 
with the purposes and criteria set forth in the SEC's release 
concerning two-tier real estate partnerships (the ``Release'').\1\ The 
Release states that two-tier real estate partnerships that invest in 
limited partnerships engaged in the development and operation of 
housing for low and moderate income persons may qualify for an 
exemption from the Act under section 6(c). Section 6(c) provides that 
the SEC may exempt any person 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.

    \1\Investment Company Act Release No. 8456 (Aug. 9, 1974).
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    5. The Release lists two requirements, designed for the protection 
of investors, which must be satisfied by two-tier partnerships to 
qualify for an exemption 

[[Page 3071]]
under section 6(c). First, interests in the issuer should be sold only 
to persons for whom investments in limited profit, essentially tax-
shelter, investments would not be unsuitable. Second, requirements for 
fair dealing by the general partner of the issuer with the limited 
partners of the issuer should be included in the basic organizational 
documents of the company.
    6. Applicants state, among other considerations, that the 
suitability standards set forth in the Memorandum, the requirements for 
fair dealing provided by the Partnership Agreement, and pertinent 
governmental regulations imposed on each Property Partnership by 
various Federal, state, and local agencies provide protection to 
Unitholders comparable to that provided by the Act. In addition, 
applicants assert that the requested exemption is both necessary and 
appropriate in the public interest.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-1639 Filed 1-29-96; 8:45 am]
BILLING CODE 8010-01-M