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

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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