96-1639. Walnut Properties Limited Partnership, et al.; Notice of Application  

  • [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.
    
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        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
    
    

Document Information

Published:
01/30/1996
Department:
Securities and Exchange Commission
Entry Type:
Notice
Action:
Notice of application for an order under the Investment Company Act of 1940 (the ``Act'').
Document Number:
96-1639
Dates:
The application was filed on December 15, 1995.
Pages:
3069-3071 (3 pages)
Docket Numbers:
Rel. No. IC-21698, 812-9912
PDF File:
96-1639.pdf