[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