SEC Division of Investment Management staff letter: Citytrust

250 PARK AVENUE NEW YORK 0177 cl 70 PENNSYLVANIA AVE WASHINGTON 20006 LOWER STREET LOS ANGELES 90071 PLACE VENDDME 75001 PARIS c_ ST OLAVES HOUSE IRONMONGER LANE LONDON EC2V 8EY 40 WILLIAM STREET MELBOURNE 3000 2-JCHI ICHOME CHIYODAKUTOKTO 100 Securities and Exchange Commission 450 Fifth Street N.W Washington D.C 20549 Attention Office of Chief Counsel Division of Investment Management Re Citytrust Ladies and Gentlemen On behalf of Citytrust and Goldman Sachs Co we are writing to request advice to the effect that the Division of Investment Management will not recommend that the Commission take any action if without effecting registration under the Investment Company Act of 1940 as amended the 1940 Act with respect to any person in reliance upon Sections 3c5A and 3c5C thereof Citytrust Connecticut chartered bank acts as sponsor of passthrough trust the Trust in connection with the transaction more fully described below This letter is intended to restate the letters of September 11 1990 of the SULLIVAN CROMWELL NEW YORK TELEPHONE 212 556-4000 TELEX 62694 INTERNATIONAL 127616 .DOME5TIC CABLE ADDSESS LADYCOUPT NEW YORK FACSIMILE 212 556 3568 125 BROAD STREET 212 558- 1940 Act/3c5 f2/ va1 ihii4ty 12 1990

Securities and Exchange Commission -2- undersigned and of October 16 1990 of Gerald Slevin to the Division Citytrust will transfer to the Trust its entire ownership interests in assets consisting principally of commercial mortgage loans in the form of tax exempt industrial development bonds Commercial Mortgage Loan IDB5 and to much lesser extent equipment loans in the form of tax exempt industrial development bonds Equipment Loan IDB5 and together with the Commercial Mortgage Loan IDB5 IDBs The Commercial Mortgage Loan IDB5 are from Citytrusts perspective traditional commercial mortgage loans Accordingly like commercial mortgage loans generally they may in some cases be secured not only by mortgage on real estate but also by security interest in other collateral generally equipment or guarantee generally issued by an affiliate or an individual proprietor The equipment included as other collateral consists of equipment located on the real estate premises which were the subject of the mortgage financing Although equipment is the common type of collateral where there is collateral other than mortgages on real estate in some instances the additional collateral consists of other assets

Securities and Exchange Commission -3- such as certificate of deposit or security interest in receivables With respect to any guarantee issued by an affiliate or an individual proprietor in the case of soite IDBs the parent or other related corporation of the borrowing corporation or the principals or individual owner/operators of the borrowing corporation furnished guarantees as additional collateral Nevertheless real estate mortgages in the case of the Commercial Mortgage Loan IDBs are the principal collateral as set forth below and at least 55% of the initial value of the Trust assets meet the tests for Class Real Estate set forth below The Trust will be established pursuant to pooling and servicing agreement PS Agreement among Citytrust as seller an unaffiliated bank as trustee the Trustee and Citytrust as servicer the Servicer The Trust plans to issue passthrough certificates Certificates to investors in public offering registered under the Securities Act of 1933 as amended the 1933 Act The net proceeds received from the investors The PS Agreement like pooling and servicing agreements used in passthrough securitizations generally will not be qualified under the Trust Indenture Act of 1939 in reliance on Section 304a thereof The Trust will be subject to the reporting requirements of the Securities Exchange Act of 1934 pursuant to Section 15d thereof for at least one year

Securities and Exchange Commission -4- will be used by the Trust to purchase the assets described below from Citytrust The Trusts assets based upon book value as shown on the Trusts opening balance sheet prepared in accordance with generally accepted accounting principles GAAP will initially have the following composition and be subject to the following tests Class Real Estate and Eauient Loan IDBs 55% At least 55% of the initial value of the Trust assets will consist of Commercial Mortgage Loan IDBs and Equipment Loan IDBs The Commercial Mortgage Loan IDB5 included in such 55% will meet the following criteria such Commercial Mortgage Loan IDBs and This will actually be accomplished in two steps First Citytrust will deposit IDBs with an independent trustee under the PS Agreement pursuant to which the Trust is formed and will receive in return 100% of the Certificates evidencing ownership of the Trust Second Citytrust will sell through Goldman Sachs Co as underwriter the passthrough certificates to investors in public offering registered under the 1933 Act Because condition to consummating the transaction is that the sale by Citytrust to the Trust of the Assets as hereinafter defined be treated by Citytrust as sale for accounting purposes the book value of all of the Assets on the opening balance sheet of the Trust will be their market value Due to the difficulty of predicting prepayments the tests are applied at the initiation of the Trust The Trust will not be permitted to substitute assets

Securities and Exchange Commission -5- related collateral sometimes being referred to herein as Class Real Estate the original principal amount of the loan did not exceed 100% of the value of the real estate col.ateralizing the loan at the time the loan was extended j.the original loan-to￾value ratio LTV was less than 100% the value of the real estate collateral for purposes of confirming the LTV ratio for the loan was confirmed by an appraisal prepared in connection with the original loan by qualified independent thirdparty appraiser not directly employed by Citytrust Each such appraiser was retained to appraise the particular properties and the underwriting criteria applied by Citytrust with respect to the loans secured by real estate collateral was the same for those loans secured exclusively by real estate as for those which in addition to being secured by real estate benefitted by either security interest in other collateral or guarantee Additionally the PS Agreement under which the Trust is formed and the Certificates are

Securities and Exchange Commission -6- issued will limit the ability of the Trustee or Servicer to realize upon nonreal estate collateral in connection with Commercial Mortgage Loan IDB5 which go into default Specifically Commercial Mortgage Loan 1DB benefitting from non￾real estate collateral will be disqualified as Class Real Estate if in connection with default the amount recovered from non-real estate collateral including guarantees exceeds 40% of the original principal amount of such loan the 40% test The PS Agreement will require that recovery may be made against nonreal estate collateral on particular Commercial Mortgage Loan 1DB otherwise qualifying as Class Real Estate if after giving effect to such recovery the 40% test will be violated with respect to such Commercial Mortgage Loan 1DB and ii the consequence of such violation and related disqualification of such Commercial Mortgage Loan 1DB as Class Real Estate would be to cause the Trust based upon the Commercial Mortgage Loan IDBB which continue to qualify as Class Real Estate and the Equipment Loan IDBs not to satisfy the requirement that at least 55% of the value of

Securities and Exchange Commission 7- the Trust assets at the time the Certificates were issued consisted of Class Real Estate and Equipment Loan IDB5 Finally in order to qualify as Class Real Estate or an Equipment Loan 1DB includable for purposes of this paragraph the related 1DB must represent the entire issuance of IDBs j. whole interest The Equipment Loan IDBs will all represent loans made through State or municipal developmental authority to business to fund the purchase price of equipment and costs specifically related to the equipment acquisition such as installation expenses The Equipment Loan IDBs represent less than 7% of the initial value of the Trusts assets Class II Real Estate 25% Up to 25% of the initial value of the Trust assets subject to reduction below 25% of the value of the Trust assets to the extent that the initial value of the Class Real Estate and Equipment Loan IDB5 exceeds 55% of the Trust assets may consist of Commercial Mortgage Loan IDBs which do not qualify as Class Real Estate because they do not meet one of the criteria for Class Real Estate outlined above Class II Real Estate

Securities and Exchange Commission -8- Other 20% Up to 20% of the initial value of the Trust assets may consist of loans or assets other than Class Real Estate Class II Real Estate and Equipment Loan IDBs Class III Assets The Class Real Estate and the Class II Real Estate are sometimes referred to collectively herein as the Real Estate Assets and the Real Estate Assets Equipment Loan IDBs and Class III Assets are sometimes referred to collectively herein as the Assets or the Pool Citytrusts objective in proceeding with the transaction is to sell all or substantial part of its 1DB portfolio In excess of 75% of the portfolio of the Trust based upon the outstanding principal amount of the IDBs at the date hereof consist of Commercial Mortgage Loan IDBs The balance of the Trusts portfolio consists of either IDBs secured by combination of real estate and equipment or of Equipment Loan IDBs Accordingly notwithstanding the tests and standards outlined above Citytrust anticipates that substantially all of the Assets in the Trust will consist of IDBs and will consist principally of Commercial Mortgage Loan IDBs Citytrust may sponsor two separate Trusts one of which will acquire the IDB5 relating to Connecticut and the other of which will acquire the IDB5 relating to New York

Securities and Exchange Commission -9- If two separate Trusts are sponsored in reliance upon Sections 3c5A and 3c5C of the 1940 Act all representations made herein with respect to the Trust will be applicable with equal force to each such Trust Background of CommercIal Xortaaa Loan and auiBment Loan IDBs The IDBs will be tax-exempt industrial development bonds with fixed final remaining maturities ranging generally from five to 20 years The IDBs will vary with respect to interest rate maturity and redemption or prepayment provisions and will range generally in outstanding principal amount from $100000 to $6600000 Commercial mortgage loans funded by banks are often made through governmental development programs which promote local industry by enabling borrowers to get the benefit of lower tax-free interest rates available to governmental development agencies financings Commercial mortgage loans particularly where the borrowers are middle market companies usually benefit to some degree by whatever other collateral may be available such as security interests in equipment or guarantees of the owners or corporate affiliates of the borrower Taking lien on other available collateral is simply matter of prudent lending standards and practices These mortgage loans are

Securities and Exchange Commission 10- nevertheless loans made to purchase or improve real estate where the lender looks primarily to the real estate as the source of repayment On continuum from commercial and industrial loans on the one hand to traditional real estate loans on the other hand these loans are from the lenders perspective at the real estate end of the spectrum The role assigned by the lender to the non-real estate colla teral is generally insignificant and is certainly less significant than for example the FNMA FHLMC or GNMA guarantee each of which may be viewed as an additional form of collateral attached to pools of residential mortgage loans packaged with those agencies guarantees for collateralized mortgage obligations secured by GNMA FNMA or FHLMC certificates Loans to middlemarket companies to finance the acquisition of equipment similarly are often made in an 1DB format in order to get the benefit of lower tax-free interest rates available to governmental agencies financings The characteristics of Citytrusts portfolio of IDBS are illustrative All of the IDBs which Citytrust will transfer to the Trust were issued by Connecticut or New York developmental authorities which are authorized to make loans

Securities and Exchange Commission -11 only for the purpose of financing the acquisition or improvement of real estate or equipment All of the Commercial Mortgage Loan IDBs which Citytrust proposes to sell to the Trust are IDB5 where Citytrust makes loan to the issuing development authority by purchasing an 1DB of the development authority issued under trust indenture the 1DB Indenture with Citytrusts corporate trust department generally serving as trustee the 1DB Trustee ii the issuing developmental authority in accordance with its statutory authorization makes loan to borrower generally middlemarket commercial enterprise secured by mortgage or deed of trust on real estate and the proceeds of which are used to acquire or improve real estate or itself acquires fee title to the real estate and leases the real estate to the borrower iii the issuing developmental authority assigns the underlying mortgage or deed of trust to the 1DB Trustee if the 1DB is structured in loan format with the underlying borrower having title to the real estate or grants mortgage on the real estate to the 1DB trustee if the 1DB is structured in lease format with the issuing developmental authority having title to the real estate and iv Citytrusts recourse as holder of the Commercial Mortgage Loan 1DB is limited to the underlying real estate

Securities and Exchange Commission 12- loan and any related collateral or guarantees j.the IDB5 are without recourse to the issuing developmental authority In almost all cases Citytrusts mortgage is first mortgage Generally speaking in the case of Commercial Mortgage Loans IDB5 the assignment or grant of mortgage contemplated by clause iii of the preceding sentence is not set forth in separate document but instead is incorporated in and is part of the 1DB Indenture The entire 1DB Indenture has in each case been recorded in the appropriate real estate recording office Accordingly re-assignment of mortgage or deed of trust to the Trustee under the PS Agreement or an assignment of mortgage granted by the issuing developmental authority whichever is applicable would have to be effected by causing the Trustee or another banks trust department acting on behalf of the Trustee to become 1DB Trustee on each underlying Commercial Mortgage Loan 1DB with the document pursuant to which the new 1DB Trustee is appointed being recorded in the appro priate real estate recording office The Equipment Loan IDBs are structurally identical except that the proceeds of the IDB5 are used by the issuing developmental authority to make loan to borrower the proceeds of which are used to acquire equipment

Securities and Exchange Commission 13- At the time Citytrust originates Commercial Mortgage Loan IDBs Citytrust applies the same underwriting criteria to the IDBs as it applies to its other commercial mortgage loans not made through developmental authority intermediary As general matter Citytrust requires an original LTV ratio for commercial mortgage loans including the IDBs of not more than 80% in most cases based upon an appraisal by qualified appraiser The LTV exceeds 80% only where to do so is necessary in order to cover costs strictly related to the real estate being financed such as closing costs As in the case of its other commercial mortgage loans the appraisal analyzes the underlying property as an income producing property based upon anticipated rentals that could be achieved in leasing the property to new tenant Accordingly the appraisal does not solely rely on the present corporate tenant and its ability to pay to establish the appraised amount of the underlying property The additional collateral securing Commercial Mortgage Loan IDBs generally consists of the guarantee of proprietor or corporate parent or ii equipment located on the real estate premises In no case is Generally the Commercial Mortgage Loan IDB5 had original LTVs of not more than 80%

Securities and Exchange Commission -14- additional collateral principal source of repayment of the loan Like any prudent lender Citytrust attempts to take whatever ancillary collateral it can to support commercial mortgage loans Moreover because real estate is often held in special purpose corporations owned by the actual property user generally for state tax reasons the guarantor which generally is also the owner of all of the special purpose corporations stock is often the user of the property and is the primary cash source for servicing the loan absent selling the property Descrintion of the Transaction The Trust will be formed pursuant to PS Agreement to be entered into between Citytrust as Seller an unaffi.iated bank as Trustee and Citytrust as Servicer Pursuant to the PS Agreement the Trust at its formation will issue to investors the Holders the Certificates representing fractional undivided interests in the Pool The Trustee will use the proceeds of the Certificates to buy from Citytrust the Assets to be included in the Pool Responsibility for administering the Assets including collecting on the Assets and making determinations as to when real estate loans should be foreclosed or real estate sold will reside with the Servicer pursuant to the PS Agreement The Servicer will have responsibility for

Securities and Exchange Commission -15- liquidating and collecting upon the Assets preparing financial information for the Trust and preparing on behalf of the Trust other filings and reports required under the PS Agreement or applicable law including the Securities Exchange Act of 1934 as amended The Trustee acting on behalf of the Holders will have authority to substitute another Servicer if the Servicer defaults in its obligations under the PS Agreement Under the PS Agreement the Trust will irrevocably instruct the Servicer to remit all payments and collections on the Assets directly to the Trustee after deducting the servicing fee Cash collections so remitted to the Trustee will be maintained by the Trustee in collateral account the Collateral Account under the PS Agreement and used from time to time to make payments on the Certificates to the Holders The Trust will not engage in any investment activity with respect to the Assets or any of the proceeds thereof or otherwise except that the Trustee will be directed in the PS Agreement to temporarily invest payments received on the Assets in certain Permitted Investments until they are passed-through to the Holders on the next succeeding payment date on the Certificates Permitted Investments are high grade obligations customary for

Securities and Exchange Commission 16 temporary investment of funds pending distributions in asset-backed transactions and must mature not later than the next succeeding payment date Payments and collections with respect to the Assets will be passed through to the Holders monthly or quarterly The Trust will have neither employees officers managers board of directors board of trustees or an investment advisor nor the need for any of those parties because the Trust will not conduct any activities requiring their services The Pool will be fixed at the time Citytrust conveys the Pool to the Trust No substitution or exchange of the Assets of the Pool will be permitted The Trust will conduct only the business relating to its ownership and liquidation of the Assets and issuance of the Certificates The Trust is expected to terminate promptly after the date on which less than designated percentage expected to be 5% of the total original principal amount of all of the IDBs in the Pool is outstanding Any Assets remaining in the Pool at such time are expected to be liquidated into cash with the proceeds of such liquidation then distributed to the Holders The Certificates are not redeemable or otherwise payable at the election of Holders The only source of liquidity for investors who require more liquidity

Securities and Exchange Commission 17- than that provided by the pass-through of regular payments as the IDBs will by the sale of their Certificates The Certificates will evidence fractional undivided interests in the corpus of the Trust which will be comprised of the Assets The Certificates will not be redeemable at the option of the Holders Each Commercial Mortgage Loan 1DB will be in the form of bond issued under an indenture that is the 1DB itself with an 1DB Trustee with the 1DB in turn secured by the loan from the issuing developmental authority to the ultimate borrower as well as the mortgage or deed of trust in each case herein called mortgage securing that loan Because the IDBs are securities for purposes of the Unifornt Commercial Code the transfer of the IDB5 from Citytrust to the Trustee at closing will be accomplished by delivering certificates evidencing the IDB5 to the Trustee together with endorsements to the Trustee permitting ultimate regis tration of the IDBs in the name of the Trustee Promptly after the closing each 1DB will be re-registered in the name of the Trustee The Trustee as holder of the 1DB by virtue of its right to direct actions taken by the 1DB trustee effectively becomes the beneficiary of the mortgage or deed of trust

Securities and Exchange Commission -18- It will be condition to closing for the issuance of the Certificates with respect to each Trust that Citytrust and Goldman Sachs Co receive an opinion of independent counsel acceptable to them to the effect that if receiver were appointed for Citytrust under the applic able provisions of the Connecticut banking law the property held by Citytrust as 1DB Trustee including the related mortgages or assignments of mortgages would not be assets business or property of Citytrust which would be subject to disposition by such receiver pursuant to the applicable provisions of the Connecticut General Statutes Citytrust has authorized us to confirm that it will use its best efforts to cause the Trustee or the trust department of another acceptable commercial bank other than Citytrust to become 1DB Trustee for each Commercial Mortgage Loan 1DB by not later than 120 days after the closing The Trustee will be required to monitor the performance of the Servicer on behalf of the Holders In the event of default by the Servicer in the performance of its obligations the Trustee will have the right on behalf of the Holders to remove the Servicer and ii to assume all of the rights and obligations of the Servicer or to appoint another appropriate entity to act as Servicer

Securities and Exchange Commission -19- Legal AnalYsis
Section 3c of the 1940 Act exempts from the
definition of investment company and therefore from the registration requirements of the 1940 Act any person who is not engaged in the business of issuing redeemable securities face amount certificates of the installment type or periodic payment plan certificates and who is primarily engaged in one or more of the following busi nesses purchasing or otherwise acquiring notes drafts acceptances open accounts receivable and other obligations reDresentina Dart or all of the sales Drice of merchandise insurance and services and purchasing or otherwise acquiring mortaages and other liens on and interests in real estate Emphasis added If the Trust despite its passivity were to be deemed to be person engaged in an activity sufficient to bring it within the definition of an investment company under
Section 3a of the 1940 Act in our opinion the Trust will
nonetheless be excluded from that definition by clauses and of Section 3c of the 1940 Act and therefore from the registration requirements of the 1940 Act because it will be engaged primarily in the businesses of purchasing notes and other obligations representing the sales price of merchandise and purchasing or otherwise acquiring mortgages and other liens on and interests in real estate

Securities and Exchange Commission 20- As discussed below we do not think that there is any question but that the Trust as described herein should not be deemed to be issuing redeemable securities face amount certificates of the installment type or periodic payment plan certificates Rather we think this proposal raises only two issues first does the Class Real Estate as described above qualify as mortgages and other liens on and interests in real estate within the meaning of clause of Section 3c5 and second may an issuer which holds both notes and other obligations representing part or all of the sales price of merchandiset qualifying under clause of Section 3c5 such as Equipment Loan IDBs and mortgages and other liens on and interests in real estate qualifying under clause of
Section 3c5 such as the Class Real Estate aggregate
such assets for purposes of reaching determination that the issuer is primarily engaged in one or more of the businesses described in clauses and of Section 3c Face-Amount Certificates of the Installment TvDe Periodic Payment Plan Certificates The Trust will not be engaged in the business of issuing face-amount certificates of the installment type or periodic payment plan certificates The term face-

Securities and Exchange Commission 21- amount certificates of the installment type is defined in
Section 2a5 of the 1940 Act as any certificate
investment contract or other security which represents an obligation on the part of its issuer to pay stated or determinable sum or sums at fixed or determinable date or dates more than twenty-four months after the date of issuance in consideration of the payment of periodic installments of stated or determinable amount
Section 2a27 of the 1940 Act defines periodic payment
plan certificate as any certificate investment contract or other security providing for series of periodic payments by the holder and representing an undivided interest in certain specified securities or in unit or fund of securities purchased wholly or partly with the proceeds of such payments and any security the issuer of which is also issuing securities of the character described in clause and the holder of which has substantially the same rights and privileges as those which holders of securities of the character described in clause have upon completing the periodic payments for which such securities provide Since the Certificates do not provide for periodic payments or installments to be made by the Holders the Trust will not be engaged in the

Securities and Exchange Commission -22- business of issuing face amount certificates of the installment type or periodic payment plan certificates Redeemable Securities Likewise the Trust will not be engaged in the business of issuing redeemable securities Sec tion 2a32 of the 1940 Act defines redeemable security as any security other than shortterm paper under the terms of which the holder upon its presentation to the issuer or to person designated by the issuer is entitled to receive approximately his proportionate share of the issuers current net assets or the cash equivalent thereof In the proposed transaction the Trust will be modeled after closed end investment company not an open end investment company As set forth above the Holders of Certificates will not have the right to force any early payment or redemption Mortaages and Other Liens on and Interest in Real Estate The description of proposed transactions in three noaction requests seeking confirmation that the Division would not recommend enforcement action to the Commission if the requesting party proceeded in reliance upon
Section 3c described the real estate assets as
being secured exclusively by real estate at least as to 55%

Securities and Exchange Commission 23- in the case of the two most recent letters and 65% in the oldest letter of the assets described in the requests Merrill Lynch Pierce Fenner Smith Inc pub avail November 1981 involving IDBs United Bankers Inc pub avail May 23 1988 involving variety of different types of assets in connection with banks proposed spin off of low quality assets and La Quinta Motor Inns Inc pub avail January 1989 involving IDBs The letters raise concern as to whether traditional commercial mortgage loan which benefits from nonreal estate collateral such as security interest in equipment or guarantee as consequence fails to qualify in the Staffs view as good interest in real estate for purposes of Section 3c We submit that the Real Estate Assets under the circumstances described above should be considered qualifying interests in real estate for purposes of Section 3c5C All of the Commercial Mortgage Loan IDB5 were originated from Citytrusts perspective as traditional commercial mortgage loans Their proceeds were used to finance the acquisition or improvement of real estate they are secured by real estate and Citytrust applied its customary criteria for commercial mortgage loans in underwriting the loans Although Citytrust views all of the

Securities and Exchange Commission -24- Commercial Mortgage Loan IDB5 as traditional commercial mortgage loans the criteria described above for the Class Real Estate are even more stringent and are intended to demonstrate unequivocably that those Commercial Mortgage Loan IDBs are mortgages on or other interests in real estate within the meaning of Section As indicated Class Real Estate together with Equipment Loan IDB5 will constitute at least 55% of the Assets of each Trust Moreover although Citytrust proposes to have the flexibility to have up to 20% of Trusts Assets not qualify under either clause or clause of
Section 3c5 consistent with the standards outlined in
United Bankers Inc supra Citytrust in fact expects that substantially all of the Assets in each Trust will consist of Class Real Estate Class II Real Estate or Equipiiient Loan IDBs Aaareaation for PurDoses of Clauses and of
Section 3c5
Section 3c exempts any person who is
primarily engaged in one or more of the businesses described in clauses and Although we are not aware of any interpretive or noaction letter addressing whether person can rely on combination of clauses and for particular transaction as opposed to only

Securities and Exchange Commission 25-- one of such clauses the introductory language to Section 3c5 clearly and unequivocally states on its face by referring to one or more of the following businesses that combination of the three clauses may be relied upon Moreover assuming an entity does not issue redeemable securities face amount certificates of the installment type or periodic payment plan certificates and accordingly is passive investment vehicle we are aware of no policy reason why reliance on combination of the sub-clauses in Section 3c5 should not be permitted Accordingly we believe the Trust should qualify under Section 3c5 if at least 55% of the Assets consist of Class Real Estate or Equipment Loan IDBs Investment Comanv Act Exemption We believe that the Trust should be regarded as falling within the exemption provided in Section 3c of the Investment Company Act We believe that none of the other aspects of the proposed transaction gives rise to concerns resulting in regulation appropriate under the Investment Company Act We therefore respectfully request the Staff to indicate that it will not recommend action to the Commission if registration under the 1940 Act is not effected with respect to any person

Securities and Exchange Commission -26- Because Citytrust and Goldman Sachs Co are anxious to proceed with the formation of the Pool and the distribution of the Certificates we would appreciate response to the request made hereby as promptly as practic able If for any reason the Staff is disposed not to grant the requested no-action positions we request an opportunity to discuss this situation with the Staff prior to the issuance of any formal letter We thank you for your attention to this matter If you have any questions or if we may provide further information please telephone John Bauingardner Jr 2125583866 Mark Welshimer 2125583669 or Gerald Slevin 2125583855 of this office Very truly yours Mark Welshimer cc Jordan Yarett

PUBiIC

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Our Ref No 90-470-CC
RESPorl vi inr urlICE OF CHIEF COUNSEL Citytrust DIVISION OF INVESTMENT MANAGEMENT File No 132-3 By letter of December 12 1990 you request that we not recommend any enforcement action to the Commission if Citytrust Connecticut chartered bank sponsors trust Trust that will issue non-redeemable certificates Certificates .2 without registering the Trust or anything else under the Investment Company Act of 1940 1940 Act in reliance on clauses and of section 3c5 of the 1940 Act 21 The Trust will be formed under pooling and servicing agreement PS Agreement between Citytrust as seller and servicer and an unaffiliated bank as trustee Trustee Citytrust will transfer to the Trust commercial mortgage loans in the form of industrial development bonds Mortgage IDBs and equipment loans in the form of industrial development bonds Equipment IDBs The Equipment IDBs represent loans made to fund the purchase price of equipment and costs specifically related to equipment acquisition such as installation expenses .J The Mortgage IDBs represent loans made to finance the acquisition or improvement of real estate they are secured by real estate and generally had an original loantovalue ratio of not more than 80% In some cases the Mortgage IDBs are also secured by other collateral generally equipment located on the real estate premises which were the subject of the mortgage The Certificates which will be issued in minimum denomination of $100000 will be registered under the Securities Act of 1933 and the Trust will be subject to the reporting requirements of the Securities Exchange Act of 1934 for at least one year 21 Section 3c of the 1940 Act in part excepts from the definition of an investment company any person that is not engaged in the business of issuing redeemable securities and is primarily engaged in one or more of the following businesses purchasing or otherwise acquiring obligations representing part or all of the sales price of merchandise insurance and services and purchasing or otherwise acquiring mortgages and other liens on and interests in real estate Emphasis added ./ In State of Israel pub avail Aug 12 1988 the staff took noaction position under section 3c with respect to trusts that would issue certificates the proceeds of which would be used to refinance loans made for the purchase of defense articles defense services design and construction services and related expenses

financing and in some instances by other assets such as certificate of deposit and security interest in receivables or guarantee issued by the parent another related corporation the principals or the individual owner/operators of the borrowing corporation You represent that on the basis of market value at least 55% of the Trusts assets .4/ will consist of Mortgage IDBs and Equipment Loan IDBs Each Mortgage 1DB included in the 55% will meet the following criteria Class Real Estate the original principal amount of the loan did not exceed 100% of the value of its real estate collateral when the loan was made the value of the real estate collateral was confirmed by an appraisal prepared in connection with the original loan by qualified independent third-party appraiser retained to appraise the particular properties Citytrust applied the same underwriting criteria whether the loan was secured exclusively by real estate or additionally by other collateral or guarantee and Mortgage 1DB benefitting from non-real estate collateral will be disqualified as Class Real Estate if in connection with default the amount recovered from non￾real estate collateral including guarantees exceeds 40% of the original principal amount of the loan the 40% test The PS Agreement will require that recovery may not be made against nonreal estate collateral on Mortgage 1DB otherwise qualifying as Class Real Estate if after giving effect to such recovery the 40% test will be violated with respect to such Mortgage 1DB and ii the consequence of such violation and related disqualification would be to cause the Trust based upon the Mortgage IDBs that continue to qualify as Class Real Estate and the Equipment Loan IDB5 to fail the requirement that at least 55% of the value of the Trust assets at the time of the issuance of the Certificates consisted of Class Real Estate and Equipment Loan IDBs 4/ Because condition to consummating the transaction is that the sale by Citytrust to the Trust of the assets be treated by Citytrust as sale for accounting purposes the book value of all of the Trust assets on the opening balance sheet of the Trust will be their market value

Further to qualify as Class Real Estate or an Equipment Loan 1DB includable in the 55% the related 1DB must represent the entire issuance of IDBs Up to 25% of the Trusts assets subject to reduction below 25% to the extent that the Class Real Estate and Equipment IDB8 exceeds 55% of the Trusts assets will consist of Mortgage IDBs that do not qualify as Class Real Estate because they do not meet one of the criteria for Class Real Estate Class II Real Estate Up to 20% of the Trusts assets may consist of assets other than Class Real Estate Class II Real Estate and Equipment IDBs The Trusts assets will be fixed at the time Citytrust conveys them to the Trust and no substitution of Trust assets will be permitted You assert that assets in the Class Real Estate category will qualify as mortgages and other liens on and interests in real estate within the meaning of section 3c5C 2J In We take the view that company is not excepted under
section 3c5C unless at least 55% of its assets consist
of mortgages and other liens on and interests in real estate 55% test and the remaining 45% of its assets consist primarily of real estate-type interests 45% test e.g Prudential-BaChe Securities Inc pub avail Aug 19 1985 Salomon Brothers Inc pub avail June 17 1985 To meet the 45% test company must invest at least 25% of its total assets in real estate-type interests subject to reduction to the extent that it invests more than 55% of its total assets in assets meeting the 55% test and may invest no more than 20% of its total assets in miscellaneous investments .g United Bankers Inc pub avail March 23 1988 La Quinta Motor Inns Inc pub avail May 23 1988 We understand that the conveyance of the assets to the Trust and the issuance of the Certificates will occur simultaneously 1/ You state that the mortgage or deed of trust securing each Mortgage 1DB was assigned or granted to Citytrmist as the 1DB trustee under trust indenture and that the assignment or grant is not set forth in separate document but is incorporated in the trust indenture that has been recorded in the appropriate real estate office You further state that it will be condition to closing for the issuance of the Certificates that Citytrust and the underwriter Goldman Sacha Co receive an opinion of independent counsel that if receiver were appointed for Citytrust under the Connecticut banking law the property held by Citytrust as 1DB trustee including the related mortgages or continued..

Iv telephone conversation with Elizabeth Tsai of the staff on December 13 1990 you represented that with respect to this category the Trustee as holder of 100% of the issuance of each Mortgage 1DB will have the right unilaterally to direct the 1DB trustee to foreclose the mortgage securing the 1DB in the event of default You confirmed that Citytrust will use its best efforts to cause the Trustee or another unaffiliated trustee other than Citytrust to become 1DB trustee for each Mortgage 1DB by not later than 120 days after the closing In telephone conference with the staff on December 1990 Jordan Yarett representative of Citytrust stated his belief that it will be possible to substitute trustees You also assert that the introductory language to section 3c5 by referring to one or more of the following businesses indicates that person may rely on combination of clauses and of section 3c5 You believe that the Trust will be excepted under clauses and of section 3c5 because it will not be issuing redeemable securities and it will be primarily engaged in the businesses described in clauses and On the basis of the facts and representations made to us orally and in your letter we would not recommend any enforcement action to the Commission if Citytrust sponsors the Trust without registering it under the 1940 Act in reliance on clauses and of section 3c5 Because this response is based on representations made to the Division you should note that any different facts or circumstances might require different conclusion Further this response expresses only the enforcement position of the Division and does not purport to express any legal conclusions on the questions presented Thomas Harman Chief Counsel 2/C .continued assignments of mortgages would not be assets business or property of Citytrust subject to disposition by such receiver