SEC Division of Investment Management staff letter: United States Property Investment N.V.

GARDNER CARTON DOUGLAS
SUITE 3400-QUAKER TOWER WASHINGTON DC 321 NORTH CLARK STREET LIBERTYVILLE ILLINOIS WRITERS DIRECT DIAL NUMBER CHICAGO ILLINOIS 60610-4795 SOUTHFIELD MICHIGAN 312 644-3000 DENVER COLORADO THOMAS LANCTOT TELEX 25-3628 312 2458450 TELECOPIER 312 644-3381 Investment Company Act/2a32 Investment Company Act/3c5 April 14 1989 ---- ----- zo__ Re No-Action Letter Request on Behalf of United States Property Investments N.y Concerning Sections 2a32 and 3c5 of the Investment Company Act of 1940 On behalf of our clients United States Property Investments N.y tobe-formed Netherlands AnUlles corpo ration the Company and the Companys to-beformed United States subsidiary USPI Ralty Inc the Subsidiary we request that the staff the Staff of the Securities and Exchange Commission the Commission concur in our position that for the reasons described below the securities issued by the Company and the Subsidiary will not constitute redeemable securities for purposes of Sections 2a32 and 3c5 of the Investment Company Act of 1940 as amended the Act and that the Company and the Subsidiary will not be required to register as investment companies under the Act The Company will own 100% of the voting stock of the Subsidiary The Company will offer shares of its preferred stock the Shares on paired basis with an offering of debt securities the Bonds by the Subsidiary The Shares and the Bonds will be sold primarily outside the United States The Shares and the Bonds also may be sold in the United States VIA FEDERAL EXPRESS Office of Chief Counsel Division of Investment Man Securities and Exchange Commissi 450 Fifth Street N.W Washington DC 20549 Attention Mr Thomas Harman Ladies and Gentlemen The Company and the Subsidiary

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pursuant to Rule 506 of Regulation promulgated under the Securities Act of 1933 as amended Offers and sales of the Shares and the Bonds only will be made to investors who are not residents or citizens of the United States and who qualify as accredited investors as that term is defined in Rule 501a of Regulation Offers of Shares and Bonds will be made in the United States solely for the convenience of foreign investors who have assets and investment advisers or securities brokers located in the United States The minimum investment for each investor will be $50000 and will be allocated ap proximately 30% to Shares and 70% to Bonds It is expected that initially there will be more than 100 holders of Shares and Bonds The proceeds from the sale of Shares will be transferred by the Company to the Subsidiary as capital contribution and together with the proceeds from the sale of Bonds will be invested by the Subsidiary in fee and joint venture inter ests in real estate located in the United States and iiin mortgage loans secured by real estate located in the United States and interests in joint ventures formed to make mortgage loans secured by real estate located in the United States It is expected that the Subsidiarys mortgage loan investments will have shared appreciation features whereby the Subsidiary will be entitled to participate in any appreciation in the value of the underlying property The Subsidiary presently expects to invest its assets equally in fee interests in real properties and mortgages although the actual allocation be tween properties and mortgages has not been firmly established and is subject to change At least 55% of the Subsidiarys assets will be invested in fee interests in real estate joint venture interests in fee interests in real estate mortgage loans secured exclusively by real estate and interests in joint ventures formed to make mortgage loans secured exclusively by real estate or some combination of the foregoing collectively referred to below as the Qualifying Assets The remaining portion of the Subsidiarys assets will be invested in mortgage loans secured primarily by real estate additional security for these mortgage loans may include other assets of borrower or guarantees The Subsidiarys joint venture investments will exclusively consist of general partnership interests in joint ventures formed to own fee interests in real estate or ii own mortgage loans secured by real estate In joint venture that makes mortgage loan the joint venture partners each will contribute funds which will be loaned to borrower in connection with the borrowers acquisition or ownership of

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real property and the borrowers obligation to repay the loan will be secured by mortgage on the real property In any mortgage loan joint venture the Subsidiary will have the right by itself to foreclose the mortgage securing the loan in the event of default While it is unlikely that the Subsidiary will make such joint venture investment in property or mortgage loan with more than one partner it is possible that such joint venture could include two or three partners The Subsidiary primarily intends to enter into joint ventures with affiliates of Balcor Realty Company Inc the Advisor which will serve as investment adviser to the Subsidiary It also is possible though less likely that joint venture in vestment would be made with partner not affiliated with the Advisor In the case of investments in fee interests in real estate the most likely unaffiliated joint venture partner would be seller of property The Subsidiarys interest in joint venture investment will be determined on the basis of its capital contribution to the joint venture The Subsidiary will acquire at least 10% interest in each mortgage loan joint venture included as part of the Subsidiarys Qualifying Assets although it is expected that the Subsidiary typically will acquire much higher owner ship interest in each mortgage loan In the event that joint venture investment is made with an affiliate of the Advisor the Subsidiarys ownership percentage in the joint venture in
part may be determined in accordance with investment priority
rules applicable to the affiliate that were imposed by various state securities regulators The Subsidiary will be active in the management and operation of each joint venture investment in fee interests in real estate and the agreement of the Subsidiary will be required for all major decisions affecting each such joint venture The Subsidiary will have right of first refusal to acquire the interest of its partners in each joint venture We believe that these factors support the conclusion that the Subsidiarys joint venture investments will be the functional equivalents of direct ownership by the Subsidiary in fee interests in real estate and loans secured by mortgages on real estate The Company does not expect to pay dividends on the Shares during the initial years of operation because of the high degree of leverage including the Bonds to be incurred by the Subsidiary in acquiring its investments This expectation will be disclosed in the offering memorandum the Offering Memorandum delivered to the purchasers of Shares and Bonds The Bonds will bear interest from the date of issuance through the termination date of the offering at rate of 10% per annum

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and thereafter at rate of 12% per annum An amount equal to 10% per annum on the Bonds will be paid on semi-annual basis and the remaining 2% will be accrued and paid no later than upon liquidation of the Subsidiarys investments No market for Shares or Bonds presently exists or is expected to develop although it is possible that at some time in the future the Shares and/or Bonds would be listed on the Luxembourg stock exchange Unlike classic open-ended mutual fund the Subsidiarys investments in real properties and mortgage loans will be illiquid and will not be susceptible to prompt sale or liquida tion As result an investment in Shares and Bonds is intended to be long-term investment This intention also will be disclosed in the Offering Memorandum However because market for Shares and Bonds is unlikely to develop an inves tor who is faced with need for cash or change in his in vestment objectives or financial circumstances may be unable to liquidate his investment in Shares and Bonds Proposed Limited Purchase Option Credit Facility and Optional Redemption Feature rchase of Shares and Bonds The Company and the Subsidiary intend to offer an arLangement the Limited Purchase Option whereby holders of Shares and Bonds may request that the Subsidiary purchase their securities subject to the terms and conditions described below An investors opportunity to request that his Shares and Bonds be purchased would commence 24 months after the termination of the offering of Shares and Bonds Purchases only will be made in April of each year and an investor must submit his purchase request no later than December of the preceding year For example an investor who in February requests that the Subsidiary purchase his Shares and Bonds would have to wait until April of the following year for the purchase to take place Any redemption of Shares and Bonds will be made by the Subsidiary in its sole discretion and there will be no obligation on the part of the Company or the Subsidiary to purchase any or all of the Shares or Bonds tendered

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Purchases of Shares and Bonds by the Company and the Subsidiary will be made on first-come firstserved basis and only to the extent that funds are available after payment of current expenses and ii adequate provision has been made for the next semiannual interest payment due on the Bonds No separate fund will be established to finance the purchase of Shares and Bonds at the request of investors The purchase price paid will be 85% of the net asset value of the Shares and Bonds The net asset value of the Shares and Bonds will be deter mined by the Advisor The net asset value of the Bonds will be equal to the face value of the Bonds plus any accrued and unpaid interest to the date of the calcula tion The net asset value of the Shares will be determined on the basis of annual independent property appraisals and the annual audited consolidated financial statements of the Company and the Subsidiary The Subsidiary will obtain appraisals as of December 31 of each year for each property that it owns and for each property underlying its mortgage loans These appraisals will be prepared by independent qualified real estate appraisers The net asset value of the Shares will equal iA the aggregate appraised value of the properties owned by the Subsidiary plus the principal amount of the Subsidiarys mortgage loans and the appraised value of any shared appreciation feature re lating to such mortgage loans plus the amount of all other assets as shown on the most recent audited consolidated balance sheet of the Company and the Subsidiary less ii all liabilities including the Bonds outstanding as shown on the audited consolidated balance sheet of the Company and the Subsidiary As result the calculation of the net asset value of the Shares will be based upon independent appraisals and financial statements audited by independent certified public accountants Credjt_Faciljti The Company intends to establish an ar rangement the Credit Facility whereby holder of Shares and Bonds may borrow up to 50% of the net asset value of his securities This would be nonrecourse loan secured by the investors Shares and Bonds and would bear interest at two per centage points over the prime commercial bank lending rate It

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is possible that the Credit Facility could be operated by The Balcor Company Balcor or an affiliate Balcor is the spon sor of the Company and the Advisor is an affiliate of Balcor Balcor or an affiliate would use its own funds to operate the Credit Facility and would not utilize any funds of the Company or the Subsidiary Each loan will have term of no more than three years and any interest not paid from distributions to investors will accrue and be payable at maturity The availability of the Credit Facility would not be auto matic The lender under the Credit Facility will have no obligation to make any loans to holders of Shares and Bonds If Balcor or an affiliate provides the Credit Facility loans generally will be available to investors Primarily because the amount of loan will be limited to 50% of the net asset value determined as described above of the Shares and Bonds securing the loan Balcor or its affiliate will not require credit checks or establish any other requirements for borrowers If Balcor or an affiliate does not provide the Credit Faility it is not possible to predict what if any loan underwriting requirements an independent lender would es tablish There will be no limitations on the number of investors who may utilize the Credit Facility Of course the availability of the Credit Facility will depend upon the avail ability of funds and the willingness of the lender to make loans on the terms described above Interest and principal on loan will be paid from the following sources interest paid on the Bonds and divi dends paid on the Shares and ii payments by the borrower It is expected that the interest and portion of the principal on each loan will be repaid from the interest paid on the Bonds Loans under the Credit Facility will be non-recourse to investors so that if the loan is not fully satisfied by the proceeds of the Shares and Bonds securing the loan the lender will have no right to seek recovery against the borrower Any proceeds received from the sale of the Shares and Bonds secur ing defaulted loan that exceed the amount of the outstanding loan plus any related expenses will be paid to the Borrower Optional Redemption Provisions All or portion of the Bonds will be redeemable at any time and from time to time at the option of the Subsidiary but only from the sources de scribed below Regular payments of principal on the Subsidiarys mortgage loan investments

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Full or partial prepayments of the Subsidiarys mortgage loan investments Proceeds from the liquidation of the Subsidiarys investments in mortgages and properties The Subsidiarys investments only will be liquidated in accordance with its investment objectives and no investments will be liquidated for the specif ic purpose of funding an optional redemption of Bonds for any reason including request by holder of Bonds Discussion The Company and the Subsidiary do not intend to register under the Act in reliance on Sections 3c5C and 3c6 of the Act Section 3c5 excludes from the definition of an investment company Any person who is not engaged in the business of issuing redeemable securities. .and who is primarily engaged in purchasing or otherwise acquiring mortgages and other liens on and interests in real estate The direct ownership by the Subsidiary of fee interests in real estate and mortgage loans secured exclusively by real estate falls within the literal language of Section 3c5C of the Act We also believe that the Subsidiarys joint venture in vestments are the functional equivalents of direct ownership by the Subsidiary and would not constitute securities under the investment contract test used for securities law purposes Because the Subsidiarys joint venture investments in fee in terests in real estate will consist of general partnership interests iiwill include only one or limited number of partners iiiwill give the Subsidiary right of first re fusal to purchase the interest of its joint venture partners iv will actively involve the Subsidiary in the management and operation of the joint venture will require the agreement of the Subsidiary for all major decisions affecting the joint venture and vi will primarily involve as partners either affiliates of the Advisor or property sellers we believe that these joint venture investments will satisfy the conditions described in the Staffs NoAction letter issued to MSA Realty Corporation available March 19 1984 Because in connection with its joint venture investments in mortgage loans the Subsidiary will have the right by itself to foreclose the mortgage securing loan in the event of default ii the

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loans included in the Subsidiarys Qualifying Assets will be secured exclusively by real property and iii the Subsidiary will own at least 10% interest in each mortgage loan joint venture included in the Subsidiarys Qualifying Assets we also believe that the Subsidiarys joint venture interests in mortgage loans will satisfy the conditions established by the Staff in NoAction letters issued to Dayton Area Building and Construction Industry Foundation available May 1987 Baton Rouge Building and Construction Industry Foundation available August 31 1984 Northwestern Ohio Building and Construction Trades Foundation available May 21 1984 and MGIC Mortgage Corporation available August 1974 As result of these and other facts stated earlier in this letter we believe that the Subsidiary would be primarily engaged in purchasing or oth erwise acquiring mortgages and other liens on and interests in real estate within the meaning of Section 3c5C of the Act In addition Section 3c6 of the Act excludes from the definition of an investment company company that primarily engages through majority-owned subsidiary in the business described in Section 3c5 Because the business of the Subsidiary will consist exclusively of the activities described in Section 3c5C and at least 55% of the Subsidiarys assets will be invested in fee interests in real estate joint venture interests in fee interests in real estate mortgage loans secured exclusively by mortgages on real estate and joint venture interests in mortgage loans secured exclusively by real estate and because the sole business of the Company will con sist of owning 100% of the voting stock of the Subsidiary we believe that the Company satisfies the requirements of Section 3c6 of the Act In order to qualify for the exclusions from the definition of investment company contained in Sections 3c5C and 3c6 of the Act the Limited Purchase Option Credit Facility and optional redemption feature described above must not cause the Shares and Bonds to constitute redeemable securities for purposes of Section 3c5 of the Act
Section 2a32 of the Act defines redeemable security as
Any security under the terms of which the holder upon its presentation to the issuer or to person designated by the issuer is entitled whether absolutely or only out of surplus to receive approxi mately his proportionate share of the issuers current net assets or the cash equivalent thereof

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We believe that the reasons described below support the conclusion that the Limited Purchase Option Credit Facility and optional redemption feature described above should not cause the Shares and the Bonds to be deemed redeemable securities for purposes of Section 3c5 of the Act Limited Purchase Option An investor will not be entitled to receive pay ment for his Shares and Bonds upon presen tation of his securities because no purchases will be made until 24 months after the termination of the offering and iiShares and Bonds only would be purchased once year there after upon at least four months prior notice As discussed above an investor could wait as long as 16 months to have his securities pur chased The Subsidiary will not liquidate its investments in properties and mortgage loans in order to fi nance the purchase of Shares and Bonds and purchases only will be made out of available funds limited as described above on first come firstserved basis No separate purchase fund will be established An investor only will be entitled to 85% of the net asset value of his investment and not his proportionate share of net assets Because an investment in Shares and Bonds is intended to be longterm investment the Company believes that investors who wish to withdraw their investment prior to the liquidation of the Subsidiarys in vestments should be penalized The remaining investors in the Company and the Subsidiary will benefit since withdrawing investor will forfeit 15% of the net asset value of his investment which will accrue to the benefit of the remaining investors In addition withdrawing investor also will forfeit any future appreciation in the value of the Subsidiarys real property and shared appreciation mortgage loan investments The legislative history of Section 3c5 supports the conclusion that the Shares and Bonds are not redeemable securities In adopting an amendment to Section 3c5 that added the

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April 14 1989 language concerning redeemable securities the Senate Committee Report stated The amendment applies only to those com panies which purport to model themselves after open-end companies by issuing secur ity redeemable at the option of the holder Report of the Senate Committee on Banking and Currency dated May 21 1969 1970-73 U.S Code Cong Adm News page 4933 Nothing about the Company or the Subsidiary re sembles an openend mutual fund The Subsidiarys investments will be illiquid and once acquired will be held until sale or maturity and the liquidation proceeds will not be reinvested The considerable conditions and limitations described above contrast sharply with the immediate redemption features offered by open-end mutual funds Moreover the Company and the Subsidiary will not engage in the continuous offering and repurchase of Shares and Bonds We believe that the Limited Purchase Option closely resembles the one discussed in the Staffs NoAction letter issued to Breen Mortgage Company available January 20 1988 Credit Facility Because it does not involve the redemption or purchase of securities or the use of any funds of the Company or the Subsidiary we believe that the availability of the Credit Facility should not cause the Shares and the Bonds to be deemed redeemable securities Even if Shares and Bonds are acquired by Balcor or an affiliate pursuant to the foreclosure of defaulted loan this arms length lending ar rangement should not be considered redemption or purchase feature Moreover the availability of the Credit Facility will not be automatic and is subject to the availability of funding independent of the Company or the Subsidiary The amount of loan will be limited to 50% of the net asset value of borrowers securities As discussed above the Company and the Subsidiary will not engage in the continuous offering and repurchase of Shares and Bonds

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Optional Redemption Provisions
We believe that the definition of redeemable se curity contained in Section 2a32 of the Act is intended to apply only to redemptions initiated by the holder of securities and not to optional redemptions by an issuer While it is possible to construe Section 2a32 as applica ble to optional issuer redemptions because pre sentation of the Bonds to the Subsidiary presumably would be necessary in order for holder of Bonds to receive his optional redemption payment we believe that this would be strained and artificial interpretation of provision clearly intended to apply to investor￾initiated redemptions Because the source of funds for any optional redemptions would be principal payments on mort gages mortgage prepayments or the proceeds from the liquidation of the Subsidiarys investments in accordance with its investment objectives the optional redemption feature is consistent with those considered in the following NoAction Letters issued by the Staff Premier Mortgage Corporation available March 14 1983 American Home Finance Corporation available May 11 1981 and U.S Home Finance Corporation available May 30 1980 Conclusion We believe that the reasons discussed above support the conclusion that the Limited Purchase Option Credit Facility and optional redemption feature will not cause the Shares and the Bonds to be deemed redeemable securities for purposes of
Section 3c5 of the Act and that as result the Company
and the Subsidiary will not be required to register under the Act We request that the Staff issue letter stating that it concurs in our conclusion and that it will not recommend that action be taken by the Commission if the Limited Purchase Option Credit Facility and optional redemption feature

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April 14 1989 described above are utilized Please contact Thomas Lanctot 3122458450 in our Chicago office with any questions or requests for additional information Very truly yours Thomas Lanctot TEL dir cc Ms Hope Lewis Mr Jerry Ogle Mr Frank Ball Mr Gerald Penner 56511

TAY 11989
Our Ref No 89-231CC
United States Property
RESPONSE OF OFFICE OF CHIEF COUNSEL Investments N.y DIVISION OF INVESTMENT MANAGEMENT File No 13 2-3 Your letter dated April 14 1989 requests that we concur in your position that the proposed securities to be issued by United States Property Investments N.y the Company and its proposed United States subsidiary USPI Realty Inc the Subsidiary will not constitute redeemable securities for purposes of sections 2a32 and 3c5 of the Investment Company Act of 1940 the Act and that as result the Company and the Subsidiary will not be required to register as investment companies in reliance upon the exceptions from the definition of investment company in sections 3c6 and 3c respectively of the Act We understand from your letter that the Company will own 100% of the voting stock of the Subsidiary and ownership thereof will be the sole business of the Company The Company will issue shares of its preferred stock Shares on paired basis with an offering of debt securities the Bonds by the Subsidiary While the Shares and Bonds will be sold primarily outside the United States they may be sold also in the United States pursuant to Rule 506 of Regulation under the Securities Act of 1933 Offers and sales of the Shares and Bonds will be made only to accredited investors as defined in Rule 501a of Regulation who are not U.S residents or citizens The proceeds from the sale of Shares will be transferred by the Company to the Subsidiary as capital contribution and together with the proceeds from the sale of Bonds will be invested by the Subsidiary only in fee interests in real estate located in the United States and interests in joint ventures formed to acquire fee interests in real estate located in the United States and iiin mortgage loans secured by real estate located in the United States and interests in joint ventures formed to make mortgage loans secured by real estate located in the United States At least 55% of the Subsidiarys assets will be invested in fee interests in real estate mortgage loans secured exclusively by real estate interests in joint ventures formed to acquire fee interests in real estate interests in joint ventures formed to make mortgage loans secured exclusively by real estate or some combination of the foregoing The remaining assets of the Subsidiary will be invested in mortgage loans secured primarily but not exclusively by real estate The Subsidiarys interests in joint ventures will consist exclusively of general partnership interests in joint ventures with up to three partners and in which the Subsidiarys proportionate interest will depend on its capital contribution to

the joint venture The Subsidiary will have right of first refusal to acquire the interests of the other partners The Subsidiary will be active in the management and operation of each joint venture formed to acquire fee interests in real estate and the agreement of the Subsidiary will be required for all major decisions affecting each such joint venture In joint ventures formed to make mortgage loans each partner will contribute funds to be loaned and each loan will be secured exclusively by mortgage on real estate Even though the Subsidiary will acquire as little as 10% interest in these mortgage loan joint ventures you represent that the Subsidiary will have the right by itself to foreclose the mortgage securing the loan in the event of default Three plans would be available to holders of Shares and Bonds the Limited Purchase Option the Credit Facility and Optional Redemption Provisions Under the Limited Purchase Option no investor request to have Shares and Bonds purchased by the Company and the Subsidiary will be honored for 24 months after the termination of the offering of Shares and Bonds thereafter if an investor has submitted his purchase request no later than December he may request that the Company and the Subsidiary purchase such Shares and Bonds only in April of the following year there will be no obligation on the
part of the Subsidiary or the Company to redeem any or all of the
Shares or Bonds tendered purchases of Shares and Bonds by the Company and the Subsidiary will be made on first-come first-served basis and only to the extent that they have funds available after payment of current expenses and ii adequate provision has been made for the next semiannual interest payment due on the Bonds no separate fund will be established to finance the purchase of Shares and Bonds of investors seeking liquidation and the purchase price paid will be 85% of the net asset value of the Shares and Bonds .j You state that the availability of credit to holders of Shares and Bonds through use of the Credit Facility will .1J The net asset value of the Shares and Bonds will be determined by the Subsidiarys investment adviser Ba.cor Realty Company Inc The net asset value of the Bonds will be equal to the face value of the Bonds plus any accrued and unpaid interest to the date of the calculation The net asset value of the Shares will be determined on the basis of annual independent property appraisals and the annual consolidated financial statements of the Company and the Subsidiary as audited by independent certified public accountants

involve only funding independent of the Company and the Subsidiary the Credit Facility will have no contractual obligation to make loans to investors and the amount of any loan will be limited to 50% of the net asset value of the Shares and Bonds securing the loan Redemptions of Bonds under the Optional Redemption Provisions will be made only at the option of the Subsidiary and solely from regular payment of principal on the Subsidiarys mortgage loan investments full or partial prepayinents of the Subsidiarys loan investments and proceeds from the liquidation of the Subsidiarys investments in mortgages and properties The Subsidiarys investments in mortgages and properties will not be liquidated to meet investor requests for redemption but rather will be liquidated only for purposes of meeting investment objectives On the basis of the representations in your letter we would not recommend that the Commission take any enforcement action against the Company or the Subsidiary if the Company issues the Shares and the Subsidiary issues the Bonds without registering under the Act Because this position is based on the representations you made to the Division you should note that any different facts or conditions might require different conclusion Further this response expresses only the Divisions position on enforcement action and does not purport to express any legal or interpretive conclusion on the issues presented Hope Lewis Attorney