KAREN BEDELL

CECIL CASTERLINE

WILLIAM CHANEY

CONANT JR

ROBERT COUSINS JR

WILLIAM DOUGLASS

DAVID EVAUL

CHARLES GENTRY

ROGER GOLOBURG

DREW HEARD

LEONARD HOFFMAN III

RICHARD HORNER

IN IRWIN JR

STEVEN METZGER

CHARLES PAULY

JOHN PEPER

ROCKNEY FLETCHER

JAMIE REPLOGLE

FREDERICK .1 RERKO

BRETT RINGLE

ROBERT RULE JR

RALPH SHANK

CHARLES SMITH

RODERIC STEAXLEY

ALLEN WEED

ROBERT WOLIN

WILLIAM WRIGHT

In Reply Respond To

KATHLEEN CLEAVELAND

JOHN HELM

MARK .1 GIMENEZ

SUSAN JONES

LINDA HALE

TJCA HERNS

GARY SHORT

SUSAN ABBOTT

JOSEPH OSBORNE .U ARNOLD III

DALE HENRY JR

JIM

j9ti DONALD LAN JR

o4 DOROTHEA

JOHN BROWNiNG

DAVIDM PRUESSNER

RUSSELL COOLIK

VICT ZANEITI JNM SCOTT.JR

BROOKE LEWIS

DAViD CLUCK

CYNTHIA KEEN

Writers Direct Dial Number

This firm represents Health Facility Credit Corporation HFCC recently formed Texas corporation which proposes

to sell at par its collateral mortgage bonds with face

amount anticipated to be $3300000 in $1000 denominations

the Bonds pursuant to registered public offering the

Offering We respectfully request determination that

the Division of Investment Management would not recommend

that the Commission take any action against HFCC under the

Act if HFCC does not register as an investment company under

the Act in reliance upon the exemption in Section 3c5C

of the Act HFCC is in the process of preparing and intends

to file with the Cornntission in December 1984 Form S-lB

Registration Statement registering the Bonds for sale to the

public Consequently we would appreciate your expedited

review of HFCCs no-action request Concerning HFCC and

the proposed offering we are advised as follows

HFCC has present net worth of approxi

mately $1250000 composed entirely of lessees

interest in thirty 30 nursing homes and when an

anticipated amendment to its Articles of Incorpora

tion has been filed will be substantially limited

thereby to activities relating to the purchase

ownership and sale of interests in and mortgages

and liens on real property

SHANK IRWIN CONANT

ATTORNEYS AT LAW

4100 ThANKSGMNG TOWER

DALLAS TEXAS 75201

214 720-9600

TELECOPIER

214 720.9650

TELEX 73-2760

1100 LTV TOWER

DALLAS TEXAS 75201

214 720-9600

TELEcOPIER

214720-9750

ct

Securities and Exchange

Investment Company Management ..pvision -_-.---

Washington D.C 20549

..

Re Request for Interpretive Advice Pursuant to

Section 3c5C of The Investment Company

Act of 1940 the Act

Dear Sirs
SHANK IRWIN CONANT

Securities and Exchange Commission

November 16 1984

Page

Interest on all Bonds to be issued will

be scheduled for payment on semi-annual basis

commencing on date six months following the

date of issuance payable at rate mutually agreed

upon by HFCC and the underwriter on the date the

issue is cleared for sale by the Missouri Securities

Commission All of the Bonds will mature on date

five years after issue and will be payable

from principal payments received by HFCC on the

Borrowers Notes and ii to the extent of any dif

ference between principal received as payments on

the Borrowers Notes and principal due and payable

to the Bondholders from the general funds of HFCC

The Bonds to be issued will be the general

obligation of HFCC and will be secured by HFCCs

assignment to the trustee of certain collateral

more fully described in paragraph herein

The Bonds will be issued pursuant to

Trust Indenture the Trust Indenture with the

Centerre Trust Company St Louis Missouri as the

Trustee the Trustee which will require among

other things that HFCC fund debt service reserve

account at the date of issue equal to six months

debt service on the issue amount or in lieu thereof

obtain letter of credit from lending institution

approved by the Trustee and the Underwriter in the

same amount drawn in favor of the Trustee for the

benefit of the Bondholders

The Offering will be underwritten by

Heitner Corporation Missouri corporation the

Underwriter which has submitted Letter of

Intent to HFCC evidencing firm commitment to

purchase all of the Bonds At the issue date HFCC

will deliver the Bonds for authentication by the

Trustee under the Trust Indenture against payment

of ninety-five percent 95% of the face amount of

the Bonds The Underwriter will receive fee equal

to five percent 5% of the face amount of the Bonds

HFCC intends to loan approximately

$3100000 of the offering proceeds being substan

tially all of the anticipated net proceeds aftr

taking into account the expenses of the Offering

to Southwest Health Villas of Texas Ltd Texas

limited partnership the Limited Partnership
SHANK IRWIN CONANT

Securities and Exchange Commission

November 16 1984

Page

which engages in the health care business and buys

sells leases and deals in services as well as real

and personal property related and necessary to the

health care industry

The loan to the Limited Partnership will

be evidenced by three non-recourse promissory

notes anticipated to be in the amounts of $1200000

$1000000 and $900000 respectively the Borrowers

Notes bearing interest at rate not less than

the interest rate determined for the Bonds and

calling for semi-annual payments of interest only

corresponding with the schedule of interest payments

on the Bonds The principal and any accrued interest

on the Borrowers Notes shall be due and payable

five years from the closing contemplated by

the Offering The loan to the Limited Partnership

will occur simultaneously with the closing contem

plated by the Offering at which time the Borrowers

Notes and related security will be assigned to the

Trustee as security for repayment of the Bonds

The $1200000 Note will be secured solely

by real property described as first lien deed of

trust granted by the Partnership on its 108-bed

nursing home located in Granbury Texas the

Granbury Nursing Home and an assignment by the

Partnership of its interest as lessor in and to the

Granbury Nursing Home which is under lease to

Southwest Health Villas Inc Texas corporation

which is owned although in different percentages

by the same three individuals who own the various

partnership interests in the Limited Partnership

The $1000000 Note will be secured solely by real

property described as first lien deed of trust

granted by the Partnership on its 78-bed nursing

home located in Grapevine Texas the Grapevine

Nursing Home and an assignment by the Partnership

of its interest as lessor in and to the Grapevine

Nursing Home which is under lease to Southwest

Health Villas Inc The $900000 Note will be

secured solely by real property described as

first lien deed of trust granted by the Partnership

on its 60-bed nursing home located in Austin Taxas

the Austin Nursing Home and an assignment by

the Partnership of its interest as lessor in and to

the Austin Nursing Home which is under lease to

Southwest Health Villas Inc
SHANK IRWIN CONANT

Securities and Exchange Commission

November 16 1984

Page

HFCC will be entitled to prepay all or

portion of the Bonds outstanding from borrowed or

unborrowed funds on any date commencing two

years after the Issue Date This prepayment will

be subject only to HFCCs providing thirty 30

days written notice to the Trustee and Underwriter

The redemption price will be at par plus accrued

interest

10 The Limited Partnership will be entitled

to prepay all or portion of its Borrowers Notes

on any date commencing two years after the date

on which they are executed To the extent prepay

ments are made whether pursuant to foreclosures

under the mortgages or otherwise prepayment shall

also be made to the Bondholders who shall all be

paid in full upon prepayment of the entire amounts

outstanding under the Borrowers Notes In the

event that the Borrowers Notes are only partially

prepaid then certain number of the Bonds shall

be selected by the Trustee at random by lot for

prepayment

11 The actual amount of the Bonds and of each

of the Borrowers Notes may vary from the anticipated

amounts described above as determined in the discre

tion of the Underwriter provided however in no

event will the amount of any Borrowers Note exceed

the value of the collateral securing same as deter

mined to the satisfaction of the Underwriter at

Closing

It is this firms view that HFCC will not by virtue of

the transactions described above be an investment company

subject to the Act by virtue of Section 3c5C which

excludes from the definition of an investment company

Any person who is not engaged in the

business of issuing redeemable securities face

amount securities of the installment type or

periodic payment plan certificates and who is pri

marily engaged in one or more of the following

businesses purchasing or otherwise

acquiring mortgages and other liens on and inter

ests in real estate

HFCC is not engaged in the issuance of face amount cer

tificates of the installment type or periodic payment plan
SHANK IRWIN CONANT

Securities and Exchange Commission

November 16 1984

Page

certificates since the obligations incurred involve rio provi

sions for installment or periodic payment by the holder

Neither is HFCC involved in the issuance of redeemable secu

rities defined as any security other than short-term paper

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 approximately his proportionate share of the issuers

current net assets with cash equivalent thereof The

Bonds may not be redeemed by the Bondholders under any cir

cumstances and the Bondholders will not be entitled to their

proportionate share of HFCCs current net assets but will

only be entitled to the return of the amount loaned to HFCC

plus interest on the terms and conditions set forth in the

Bonds and the Trust Indenture

HFCC intends to lend the anticipated net proceeds from

the Offering to the Limited Partnership and will receive the

Borrowers Notes which will be non-recourse promissory notes

secured solely by first lien mortgages on real property

The characteristics and relationship of the Borrowers Notes

and the Bonds for which they serve as collateral are similar

in many respects to the characteristics and relationship of

other instruments which the Division has recognized in prior

no action letters as interests in real estate Examples

include the mortgage-backed bond offerings reviewed by the

Division e.g Home Finance Corporation April 30

1980 publicly available May 30 1980 Home Finance

and the mortgage pass-through offerings reviewed by the

Division which have been created by number of mortgage

lending institutions See Home Savings and Loan Association

September 16 1980 publicly available October 16 1980

American Home Finance Corporation April 1981 publicly

available May 11 1981 American Home and Merrill Lynch

Pierce Fenner Smith Inc October 1981 publicly avail

able November 1981 Furthermore the staff found under

the facts presented in Premier Mortgage Corporation publicly

available March 14 1983 that Premier Mortgage Corporation Premier although investing in notes which were themselves

secured by pools of notes secured by mortgages on real prop

erty relationship one step removed from the relationship

of the Bonds and the Borrowers Notes which are the subject

of this request would have essentially the same investment

experience that it would have were it directly investing in

the mortgage loans and stated that on the facts presented it

would not recommend that the Commission take any enforcement

action under the Act against Premier
SHANK IRWIN CONANT

Securities and Exchange Commission

November 36 1984

Page

We believe that the Borrowers Notes purchased by HFCC

evidence an interest in real property for purposes of the Act

similar to the outright purchase of mortgage loans described

in Home Finance and no less of an interest in real

estate than the GNMA certificates described in American Home

conclusion that the Borrowers Notes do not evidence an

interest in real estate would elevate substance over form

with respect to the Divisions prior no-action letters and

would appear to take the position that only certain types of

mortgages and interests in real property are eligible for

the 3c5C exception This is certainly not in keeping

with the provisions of the exception as written nor with the

legislative history

Concerning the proposition hereby advanced that the col

lateralization of the Borrowers Notes with the Limited Part

nerships interest as lessor in the Nursing Homes represents

lien on real estate for purposes of the Act we believe

such conclusion to be warranted by positions taken by the

staff of the Division in prior no-action letters The staff

has previously recognized that real estate referred to in

Section 3c5C includes more than the fee interest in

real estate That leases qualify for treatment as real

estate is illustrated by Arthur Little Inc 1971-72

Transfer Binder Fed Sec Rep CCH 78635 November 12

1971 in which the staff expressed its willingness to permit

company broadly empowered to purchase lease or otherwise

acquire estate properties and interests to use

the clause exception Similarly in Apache Petroleum

Mortgage Company publicly available December 31 1981 the

staff granted no-action request of Apache Petroleum Mortgage

Company Apache premised in part upon the opinion of

Apaches counsel that the notes evidencing Apache loans would

be secured solely by mortgages on real estate as defined

under state law Counsel for Apache stated that the oil and

gas leasehold interests of the kind that would sometimes serve

as security for the Apache loans i.e working interests

and in some states overriding royalties constituted real

estate under State law In construing Texas law as it

relates to real property leasehold interests the Texas

Supreme Court has determined that leasehold for more than

one year is an estate or interest in land as those terms

are used in various state statutes See Stroble Tearl

221 S.W.2d 556 Tex 1949 Robertson Scott 172 S.W.2d

478 Tex 1943 Dority Dority 96 Tex 215 71 S.W 950

1903 Based upon the foregoing we are of the opinion that

the interest of the Limited Partnership as lessor of the
SHANK IRWIN CONANT

Securities and Exchange Commission

November 16 1984

Page7

Nursing Homes will qualify as real estate for purposes of

Section 3c5C of the Act

In view of the foregoing the following considerations

require the conclusion that HFCC is primarily engaged in the

business of purchasing liens and mortgages on and other inter

ests in real estate

HFCC will be substantially limited by its

Articles of Incorporation to activities relating

to the purchase ownership and sale of interests

in and mortgages and liens on real property

Repayment of the anticipated $3100000

that HFCC proposes to loan to the Limited Partner

ship will be evidenced by the three non-recourse

Borrowers Notes The $1200000 Note will be secured

by first lien deed of trust on the Granbury Nursing

Home and an assignment by the Partnership of its

interest as lessor in and to the Granbury Nursing

Home the $1000000 Note will be secured solely by

first lien deed of trust on the Grapevine Nursing

Home and an assignment by the Partnership of its

interest as lessor in and to the Grapevine Nursing

Home and the $900000 Note will be secured solely

by first lien deed of trust on the Austin Nursing

Home and an assignment by the Partnership of its

interest as lessor in and to the Austin Nursing

Home The collateral will have value as deter

mined to the satisfaction of the Underwriter at

the closing of the Offering at least equal to the

principal amount of the Borrowers Notes

HFCC will be obligated to prepay on the

Bonds any prepayments made on the Borrowers Notes

Aggregate scheduled interest payments on

the Borrowers Notes will equal or exceed the cor

responding scheduled interest payments to the Bond

holders on the Bonds

The principal and any accrued interest

on the Borrowers Notes shall be due and payable

five years from the closing of the Offering at

which time the Bonds shall also mature and be p.ay

able from the payments received on the Borrowers

Notes and ii to the extent of any difference

between the payments on the Borrowers Notes and
SHANK IRWIN CONANT

Securities and Exchange Commission

November 16 1984

Page

amounts due and payable to the Bondholders from

the general funds of HFCC

HFCC will by virtue of its loans to the

Limited Partnership directly acquire mortgages

on real property

After the proposed acquisition of the

Borrowers Notes interests in real estate and obli

gations secured by liens on real estate are expected

to comprise virtually all of HFCCs assets except

for short-term investments on temporary basis of

the proceeds from the sale or refinancing of EFCCs

real estate interests or from payments on notes

held by HFCC which investments are to be made

pending payment of HFCCs operating expenses and

debt reinvestment in interests in real estate

further loans or purchases of loans secured by

mortgages on real estate or payment of dividends

to the shareholders of HFCC

Immediately after the proposed acquisition

of the Borrowers Notes virtually all of HFCCs

gross revenues are anticipated to be attributable

to interest income from the Borrowers Notes and

revenues from its interest as sublessee and sublessor in thirty 30 nursing homes

It is anticipated and expected that in

the future HFCC will continue to invest in liens

and mortgages secured by real estate through secured

loans or purchases of loans in the secondary market

as well as in additional leasehold interests and

improved fee property

The purchase of liens referred to in Sec.

tion 3c5C of the Act must include an obliga

tion secured by the lien because lien that does

not secure an obligation does not have legal

significance

No distinction should be drawn for pur

poses of Section 3c5C between direct mort

gage on real property securing an obligation and

lien on leasehold interest securing an obligation

In our opinion on the basis of the foregoing HFCC is

not now and after the completion of the transactions described
SHANK IRWIN CONANT

Securities and Exchange Commission

November 16 1984

Page

above will not be an investment company within the meaning

of the Act because the exemption from the definition of in

vestment company provided by Section 3c5C of the Act

is applicable to HFCC We respectfully request your concur

rence in this opinion If for any reason you do not concur

with the conclusions expressed herein we respectfully request

the opportunity to arrange conference with the staff either

in person or by telephone prior to its issuance of any written

response

If you should have any questions relating to this request

please do not hesitate to contact the undersigned or Kathleen

Cleaveland collect at 214 720-9600

Very truly yours

hn Peper

JHP/j at
PUBLIC1

Oir Ref No 84-399-CC

RESPSE OF OFFICE OF CHIEF UNSEL Health Facility Credit Corp

DIVISI OF IN1ESIY1FT MNEMET File No 132-3

On the basis of the facts presented in your letter of Noverrber 16 1984

uld not recarmend that the Commission take any enforcement action under

the Investment Canpany Act of 1940 Act if Health Facility Credit Corporation

does not register under the Act in reliance upon your opinion as counsel that

it is excepted under section 3c5C of the Act from the definition of an

investment company

t4aU Ta

Elibeth Tsai

Special Counsel