SEC Division of Investment Management staff letter: Realex Capital Corporation

LATJER KESSLER
Two Do HAMMARSKJOLD PLAZA
NEW YORK N.Y 10017
212-371- 3710
JEROME STRUMP
________ JOHN STOTSENBURO
IQ.NNE CUPPORD EâON
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1940 Act/3b2
Act/53c5 ubllc /j 1940 Act/6c
Avai1abi11ty
July 27 1983
Office of Chief Counsel
Division of Investment Management Securities and Exchange Commission Washington D.C 20549 We are acting as counsel for The Realex Capital Corporation Realex which has entered into an agreement to purchase for $22500000 49% interest in New York general partnership the General Partnership presently consisting of two general partners the General Partners The sole business of the General Partnership is the owner ship and operation of single office building in New York City the Building The structure proposed to implement this transaction has raised questions under the Investment Company Act of 1940 the Act Facts The Underlying Partnership It is the intention of Realex and the General Partners that the General Partnership the Underlying Partnership be converted to New York limited partnership in which case the General Partners will remain as the two general partners of the Underlying Part nership and the interest to be purchased by Realex would be that of limited partner Such limited partner would be limited partnership the Issuer to be formed by Realex as described in the following section If the Underlying Part nership is not converted to limited partnership the Issuer will purchase general partnership interest in the z/ LOUIS LAUER STEVEN KESSLER EDWARD KLEIN TELEX 225547 tAct 7L Dear Sirs The Realex Capital Corporation

LAtJER KESSLE1
Office of Chief Counsel
Page Two
July 27 1983
Underlying Partnership and the General Partners will be the managing partners of such partnership The only business of the Underlying Partnership will be the ownership and opera tion of the Building The Underlying Partnership will not and under its partnership agreement will not be permitted to acquire or own any other property other than the Build ing except for the acquisition of fee title to portion of the land underlying the Building presently held under lease or engage in any other activity The profits losses and cash flow of the Underlying Partnership shall be allocated 51% to the General Partners and 49% to the Issuer except that partner will first be allocated losses equal to the amount of additional capital contributions it makes to the Underlying Partnership The Issuer Partnership Realex proposes to assign its rights under the purchase agreement to the Issuer limited partnership to be formed solely for the purpose of engaging through its interest in the Underlying Partner ship in the business of owning and operating the Building The Issuer under the terms of its partnership agreement will not be permitted to purchase or own any other property or securities or engage in any other activity and will be required to distribute all cash generated by the Building after payment of expenses and setting aside reserves to its partners The business of the Issuer will be carried out by its general partner the Issuer General Partner which will be newly-formed corporation owned by Realex or the owners of Realex and formed solely for the purpose of act ing as general partner of the Issuer The Issuer General Partner will not engage in any business or activity other than managing the business of the Issuer in engaging in activities relating to the business of the Underlying Part nership the Issuer General Partner will do so solely on behalf of and in its capacity as general partner of the Issuer and not on its own account The Issuer General Part ner is not affiliated with the General Partners of the Underlying Partnership The limited partners of the Issuer will be Accred ited Investors who will purchase limited partnership

LAUER KESSLER
Office of Chief Counsel
Page Three
July 27 1983 interests in the Issuer pursuant to non-public offering under Rule 506 of Regulation The Limited Partnership Interests will be sold in Units anticipated to be $200000 payable in installments Since an insurance company will deliver to the Issuer bond guarantying payment of such installments each limited partner must in addition to being an Accredited Investor meet such other standards as the insurance company will impose as prerequisite to issuing the bond Approximately 250 units will be offered Accordingly the Issuer expects that it may have over 100 limited partners Control of Underlying Partnership The business of the Underlying Partnership will in general be managed by the General Partners and an affiliate of General Partner will manage the building pursuant to management agreement in form and substance satisfactory to the Issuer to be entered into between such affiliate and the Underlying Part nership However the Issuer will not merely be passive investor but will have control over óertain significant aspects of the Underlying Partnership First by reason of limitations in the Underlying Partnerships partnership agreement which limitation may not be amended without the Issuers consent the Underlying Partnerships business is limited to the ownership and oper ation of the Building All earnings of the Underlying Part nership must be reinvested in the Building or distributed to the partners Second neither of the General Partners may trans fer its interest in the Underlying Partnership or withdraw without the consent of the Issuer In addition in the event that the General Partners wish to sell all or more than 50% of their partnership interest in the Underlying Partnership the Issuer has right of first refusal with respect to the purchase thereof Similarly the General Partners have similar right of first refusal with respect to sale of more than 50% of the Issuers interest in the Underlying Partnership Third the Underlying Partnership may not sell the Building without the consent of the Issuer unless upon such sale the Issuer receives net cash proceeds equal to the capital contributions made to the Issuer by its partners

LATJER KESSLER
Office of Chief Counsel
Page Four
July 27 1983
Fourth the Issuer will have the right to require the Underlying Partnership to make an election under Section 754 of the Internal Revenue Code Also the Issuers con sent will be required for any change in the Underlying Part nerships fiscal year or accounting method The Underlying Partnership will be required to furnish audited financial statements to the Issuer on regular basis and the Issuer has the right to approve independent accountants selected for the Underlying Partnership The Issuers consent is also required if the General Partners wish to use Partner ship funds for the purchase of the land underlying the Building In addition to the above situations where the Issuers consent or approval is specifically required the Issuer has the right to enforce the General Partners fidu ciary obligation to the Issuer with respect to the manage ment of the Underlying Partnership Requests
Section 3c5 Request For No Action Letter On
behalf of Realex we respectfully request letter from the Staff stating that it will not recommend that the Commission take any action on the basis of claim that the Issuer is an investment company if the Issuer acts in reliance upon our opinion that it is excepted from the definition of an investment company pursuant to Section 3c5 of the Act Since the Issuer is not purchasing fee interest in the Building or mortgage or lien secured by the Build ing the applicability of the exception contained in Section 3c5 must be determined by consideration of the facts and circumstances of its specific assets Investment Com pany Act Release No 3140 November 29 1960 17 C.F.R
271.3140 In our view the facts and circumstances set
forth above establish that the exemption provided by Section 3c5 is available whether the Underlying Partnership is limited partnership or general partnership because the Issuers interest is in actuality an interest in real estate Our belief is based in particular upon the ele ments of control that the Issuer has with respect to the Underlying Partnership upon the provisions of the partner ship agreement of the Underlying Partnership which require that it have no business or assets other than the Building upon the provisions of the partnership agreement of the

LAUER KESSLEfl
Office of Chief Counsel
Page Five
July 27 1983
Issuer which provide that it have no business or assets other than its interest in the Underlying Partnership and upon the provisions of both such agreements that provide that all monies of the partnerships other than those expend ed on the Building or for the payment of expenses and re serves be distributed to the partners Accordingly we be lieve and ask the Staff to concur that the exception pro vided by Section 3c5 is available under the facts and circumstances of this particular case If the Staff is unwilling to concur with our opinion as expressed above we request that as envisioned by Investment Company Act Release No 8456 August 1974 17 C.F.R 271.8456 the Staff issue no action letter under Section 3a1 of the Act and the Commission issue an order under Section 3b2 of the Act
Section 3a1 Request For No Action Letter On
behalf of Realex we respectfully request letter from the Staff stating that it will not recommend that the Commission take any action on the basis of claim that the Issuer is an investment company within the meaning of Section 3a1 of the Act Since the sole activity of the Issuer will be the ownership of partnership interest in the Underlying Part nership it could be argued that the Issuer proposes to engage primariy in the business of investing reinvesting or trading in securities However as described above the Issuer will not and will not be permitted to acquire any securities other than this one interest in the Underlying Partnership the Issuer will continue to hold such interest and will not be engaged in any reinvesting or trading the Underlying Partnership will not engage and will not be permitted to engage in any activity other than the ownership and operation of the Building the Issuer will not hold such interests as passive investment but will have some control over

LAUER KESSLER
Office of Chief Counsel
Page Six
July 27 1983 certain activities of the Underlying Partnership in particular the Issuers consent is required for any transfer of the General Partnerss interest or except where the Issuer receives proceeds equal to its part nerss capital contributions for any sales of the Property Accordingly we submit that the Issuer proposes to engage primarily in the business of owning and operating the Build ing and does not propose to engage primarily in the busi ness of investing reinvesting or trading in securities
Section 3a3 Application for Order Under Sec
tion 3b2 The Issuer may be considered to be an invest ment company under Section 3a3 since it may be consid ered to propose to engage in the business of holding securities i.e its partnership interest in the Underlying Partnership which will be its only significant asset On behalf of Realex we respectfully make this application for an order by the Commission pursuant to Sec tion 3b2 declaring that the Issuer is primarily en gaged in business or businesses other than that of invest ing reinvesting owning holding or trading in securities either directly or through majority-owned subsidiaries or through controlled companies conducting similar types of businesses On the same basis as set forth in the above dis cussion of Section 3al we submit that the Issuer pro poses to engage primarily in the business of owning and operating single building and therefore qualifies for exemption under Section 3b2 Application for Order Under Section 6c Alterna tively on behalf of Realex we respectfully make this application for an order by the Commission pursuant to Sec tion 6c declaring that the Issuer is exempt from the pro visions of the Act on the ground that such exemption is 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

LAtJER KESSLER
Office of Chief Counsel
Page Seven
July 27 1983
As discussed above each limited partner in the Issuer will be an Accredited Investor and will be required to make substantial investment anticipated to be at least $200000 in the Issuer In addition each investor will be required to demonstrate to the insurance company providing the bond that he is ready willing and able to make all of the installments of his capital contribution when they are due It has been Realex experience in the past and Realex anticipates that it will be the case in connection with this transaction that the insurance company will require that each investor have significantly greater financial assets than would be required for the investor to be an Accredited Investor Accordingly we submit that such investors do not need the protections of the Act even if in fact it is applicable in connection with an investment that is in actuality the purchase of an interest in the Building Please do not hesitate to telephone the undersigned or Joanne Eaton collect to discuss this letter or to indicate any further information that may be required Very tr yours %ss1 SPKnl

LPUBLICJ
FEB16 1934
Xir Ref No 83242CC
RESPONSE OF THE OFFICE OF CHIEF COUNSEL Realex Capital Corporation DIVISION OF INVESIMENT MANAGFX1ENT File No 132-3 We cannot assure you that we would not recommend any enforcement action to the Ccninission if the proposed limited partnership Issuer does not register as an investment company We do not believe that the exception in
section 3c of the Investment Company Act of 1940 exception would
be available to the Issuer which would be formed to invest in limited parther ship interests in an underlying limited parthership that would own and operate building Such limited partnership interests would be interests in the parthership rather than mortgages or interests in real estate See Invest ment Ccipany Act Release No 3140 November 18 1974 For the sthreason the exception would not be available to the Issuer even if the underlying parthership were general partnership This is because the general partnership interests in which the Issuer would invest would be investment contracts and thus secu rities Such general partnership interests would be investment contracts because the Issuer would be relying on the efforts of the managing partners and an af filiate of one of the managing partners of the underlying partnership for the success of the enterprise See Williamson Tucker 645 F.2d 404 423 5th Cir 1981 cert der 454 US 897 1981 where the Fifth Circuit said that general partnership in which some agreement among the partners places the con trolling power in the hands of certain managing partners may be an investment contract with respect to the other partners Th apply for an exemption under section 3b or section 6c of the Act you need to comply with 17 C.F.R 270.02 270.05 and 270.08 Stan7 Judd Deputy Chief Counsel