SKADDEPI ARPS SLATE MEAGHER FLOM

919 THIRD AVENUE

NEW YORK 10022-9931

CASLE ADDRESS OWE IEAW S1REET

SIIARSLAW NEW YORSI 212735-3000 .0510W $USEt1S 02108

m-ooo

TELECOPItR III EIGHTEENTH STREET N.W

812 752-1054 .SHlNGTON D.C 20008

9105453-800

DIRECT OI OWE 10OWET 1ORE

735 IU4NIGT0W OCLRE 91101

005

515 SOUTh F1OUCR05 $ThEET

LOS ANGELES CAUFORNIA $0071

023415-4500

REST CW D91VE

November 12 1986 oooLuNoIseoeoe 1302 4O000

4o 1940 Act/3 5C csX

Thomas Lemke Esq ui 4i

Chief Counsel ub1ic

Division of Investment Maa4thbt

Securities and -Exchange ommifiib

450 Fifth Street N.W

Washington D.C 20549

Re M.D.C Holdings Inc

Dear Mr Lemke

On behalf of our client M.D.C Holdings Inc M.D.C we respectfully request your confirmation

that the Securities and Exchange Commission will take no

action if the REIT as defined below invests in Qualifled Residual Interests as defined below Based upon

and subject to our analysis set forth herein and recog

nizing that there appears to be no controlling legal

precedent on the issue we believe that such Qualified

Residual Interests should be treated as mortgages and

other liens on and iflterests in real estate under Sec

tion 3c5C of the Investment Company Act of 1940 as

amended the p1940 Act

The Real Estate investment Trust --

LOC has formed subsidiary corporation the UIT ich intends to offer substantially all of its

common stock to Lnveto in registered public offering

thr� tS OiO r.gi$t.red broktr-deal.rs under the

Securities Exchange Act of 1934 as amended and to qual

ify as real estate investment trust under Sections 856-

860 of the Internal Revenue Code of 1986 the lR
Thomas Lemke Esq

November 12 1986

Page Two

The REIT expects to generate income principally

by investment directly or thrrugh one or more of its

subsidiaries in conventional or governmentally insured

fixed rate mortgage loans secured by single-family resi

dential properties the Mortgage Loans and in other

mortgage-related assets including but not limited to

fully modified pass-through mortgage-backed certifi

cates guaranteed by the Government National Mortgage

Association Mortgage Participation Certificates issued

by the Federal Home Loan Mortgage Corporation Guaranteed

Mortgage Pass-Through Certificates issued by the Federal

National Mortgage Association or privately issued mort

gage certificates collectively the Mortgage Certifi

cates The REIT may sell to third parties such Mort

gage Loans or Mortgage Certificates directly or through

one or more of it.s subsidiaries or pledge them directly

or through such entities as collateral for the issuance

of collateralized mortgage obligations the Bonds

which it intends to sell

II The Proposed Transactions

The REIT also proposes to purchase participa

tions Residual Interests which evidence fractional

undivided interests in certain entities organized by nonaffiliates the Entities which have issued Bonds se

cured by Mortgage Loans Mortgage Certificates and cer

tain other funds and accounts the Collateral Each

such Entity will have been formed as either trust or

partnership under state law Each such Entity whether

trust or partnership will be exempt from registration

under the 1940 Act because either it is primarily

engaged in apurcbaeing or otherwise acquiring mortgages

and other liens on and interests in real estate and is

not in the business of issuing redeemable securities

face-amount certificates of the installment type or peri

odic payment plan certificates under Section 3c5 of

the 1940 Act andd at the time that it issued its Bonds

it received an opinion of counsel to that effect or

it or another entity on its behalf has received an

order undr Section 6c of the 1940 Act exempting it

from 111 the basis Of certain

representations made by it in an application for such

order In the former case the assets of the Entity will

consist of under the requirements of present law at
Thomas Lemke Esq

November 12 1986

Page Three

least 55 percent Mortgage Loans or Mortgage Certificates

which represent 100 percent the fractional undivided

interests in the mortgage loans which make up such cer

tificates Whole Pool Mortgage Certificates In the

latter its assets will likely not consist of at least 55

percent Mortgage Loans or Whole Pool Mortgage Certif

cates The PElT at all times intends to have more than

55 percent of its assets which must be countered under

the asset test under Section 3c5C of the 1940 Act

invested in Mortgage Loans Whole Pool Mortgage Certifi

cates or Qualified Residual Interests

Each trust will have been formed pursuant to

trust agreement the Trust Agreement entered into by

depositor and trustee the Owner Trustee while each

partnership will have been formed pursuant to partner

ship agreement the Partnership Agreement entered into

between the partners Hereinafter tue Trust Agreement

and the Partnership Agreement are known collectively as

Entity Agreemeniza

Trust Entities

In the case of an Entity which is trust under

state law the Trust Agreement will have established the

trust and authorLzed the Owner Trustee to issue the Re

sidual Interests and the Bonds purchase or otherwise

acquire the Collateral pledge such Collateral to an

indenture trustee the Indenture Trustee and enter

into or cause its designee to enter into an underwriting

agreement to selL the Bonds Generally the Trust Agree

ment will have aLso provided that the Owner Trustee will

pay to the holders of such Residual Interests their pro

rata share of the excess of principal and interest income

from the Collateral over the sum of principal and inter

est expense on the Bonds plus other expenses associated

with the ongoing maintenance of the Bonds the Residual

Income The Trust Agreement can provide that more than

one series of Bonds may be issued by any one trust and

that any such trust will be dissolved when all of the

Bonds arepaid

Currently the Trust Agreement also includes

certain provisions which permit the Entity to be viewed

as either partnership or grantor trust under the Code
Thomas Lemke Esq

November 12 1986

Page Four

thus permitting Lt to forego federal income taxation on

its Residual Income at the trust level These provisions

generally include the following First the Trust Agree

ment provides that Residual Interests may only be trans

ferred to holders which meet certain minimum net worth

requirements Second it provides that holders of Resid

ual Interests are liable for all expenses of the Entity

except for debt service on the Bonds Third it provides

that holders of Residual Interests representing some

percentage greater than or equal to 50% of the fractional

undivided interests in the Entity the Applicable Per

centage control all non-ministerial activities of the

Entity Included in these activities are for example

the decision to effect any optional redemption of the

Bonds and the decision to remove the Indenture Trustee

Fourth it provides that the Entity will not terminate on

the bankttiptcy death or incapacity of any holder of

Residual Interest Finally it provides that the Entity

must meet certain eg$ty requirements at the time that it

issues the Bonds and continue to meet them on an ongoing

basis The Entity may meet the latter limitation by

either creating reserve fund when substantial portion

of the Residual Interests are sold or creating it over

time from Residual Income which would otherwise have been

paid to the holders of such Residual Interests

Partnership Entities

In the case of an Entity which is partnership

under state law the Partnership Agreement will generally

be written to comply with the Uniform Limited Partnership

Act of the state where the partnership is formed The

purposes of the partnership will likely be limited to

acquiring Mortgage Loans or Mortgage Certificates and

issuing and selling one or more series of Bonds secured

thereby and any activity incidental thereto or connected

therewith Normally the Partnership Agreement will

designate one partner as the general partner of the part

nership and the others as limited partners thereof The

limited partners will not be liable thereunder for the

debts of the partnership though the general partner will

be so liable Certain provisions of the Partnership

Agreement will establish the method by which credits and

charges will be made to each of the partners capital

accounts The Partnership Agreement will provide that
Thomas temke Esq

November 12 1986

Page Five

management of the affairs of the partnership will be

controlled exclusively by theHgeneral partner and that

the general partner will have no authority to act in

contravention of the limited purposes of the partnership

stated in the Partnership Agreement The Partnership

Agreement will provide that an Applicable Percentage of

the holders of Residual Interests in the partnership may

remove the general partner and that the death dissolu

tion bankruptcy or incapacity of any limited partner

will not act to terminate the partnership However such

acts of the general partner will so terminate it except

in certain instances during any period when the Bonds

are still outstanding The Partnership Agreement will

place other limitations on the ability of any partner to

transfer his Residual Interest

Currently the Partnership Agreement includes

certain provisions which will permit the Entity to quali

fy as partnership subject to taxation under Subchapter

of the Code First as has been stated any Residual

Interest of the partnership will be transferable only

under certain circumstances Second the general partner

wilL be required always to hold more than de minimis

Residual Interest in the partnership probably greater

than 10 percent interest And third the general part

ner will be liabLe for debts of the partnership

The Tax Reform Act of 1986

On October 22 1986 the Tax Reform Act of 1986

the TRA of 1986 was enacted The TRA of 1986 makes

certain changes to the scheme of federal income taxation

of Residual Interests In general the TRA of 1986 per

mits Entities which have been formed prior to December

31 1991 to continue to forego federal income taxation at

the Entity level In addition it permits Entities to

elect under new Section 860D of the Code to be taxed as

real estate mortgage investment conduits or REMICs

Generally 8peaking REMIC is also not treated as an

entity sAb3ect to taxation under the Code Moreover the

REMIC provisions explicitly grant real estate-related

asset statue to such interests under the Code as long as

the assets which make up the entity represent real-estate

related assets Entities which elect REMIC status gener

ally are not required to comply with the additional tax-
Thomas Leake Esq

November 12 1986

Page Six

related requirements outlined above which are necessary

for them not to be viewed as association taxable as

corporation under the Code though some or all of these

provisions may be included for other reasons in the Enti

ty Agreements

The REIT Purchases

The RET only intends to purchase Residual

Interests from Entities which have the characteristics

specified above such interests being referred to as

Qualified Residual Interests Qualified Residual

Interests of EntLties which have elected to qualify as

REMICs are referred to hereinafter as REMIC Qualified

Residual Interests while Qualified Residual Interests

which have not so elected are referred to hereinafter as

Non-REMIC Qualified Residual Interests

III Analysis

Based upon and subject to our analysis set

forith herein and recognizing that there appears to be no

controlling lega.L precedent on the issue it is our opin

ion that REMIC Qualified and Non-REMIC Qualified Residual

Interests should be treated as mortgages and other liens

on and interests in real estate under Section 3c5C

of the 1940 Act As more fully discussed below the TRA

of 1986 and its legislative history undoubtedly indicate

Congressional policy to clarify the definition of

real estate-related asset under federal law This crys

tallization in Congressional thinking should not be un

dermined by adopting contrary position under the 1940

Act Were such position adopted real estate invest

ment trust such as the REIT would be substantially

inhibited from acquiring REMIC Qualified Residual Inter

ests Furthermore there appears to be no substantial

economic differences between REMIC Qualified Residual

Interests and Non-REMIC Qualified Residual Interests

Both will produce the same after-tax net cash flow to

holder and the entities in which they represent-an
--

.--- -- __--

Thomas Lemke Esq

November 12 1986

Page Seven

interest are considered for the purposes of the Code as

pass-through entities i.e entities which are not sub

ject to federal income taxes Therefore there should

be no reasonable basis for distinguishing between the two

for the purposes of Section 3c5C of the 1940 Act

QLlified Residual Interests

Any Qualified Residual Interest should be con

sidered mortgage and other liens on and interests in

the real estate as that term is defined under Section 3c5C of the 1940 Act because of the recent clarifi

cation of Congressional intent regarding the nature of

residual interests as real estate-related assets under

federal law evidenced in the TEA of 1986 In this re

gard it is instructive first to look generally at the

applicable provisions of the TEA of 1986 Section 671 of

the TEA of 1986 defines residual interest as any

interest in pool of real estate-related assets which

has elected to be treated as REMIC and which is not

regular interest The term regular interest means

an interest in REMIC the terms of which are

fixed on the startup day and which --

unconditionally entitles the holder to

receive specified principal airiount or other

similar amount and

There appears to be two limited exceptions to this

rule First the Conference Agreement interpretting

new Section 860E of the Code appears to indicate

that if the value of the residual interest of

REMIC is lens than two percent of the combined value

of such interest and its regular interests then

thrift institution with net operating losses may not

offset those losses against its income from such

REMIC residual iflterest Second for an entity

subject to tax under Section 51 of the Code which

holds an interest in real estate investment trust

which in turn holds REMIC residual interest

income from such interest is unrelated business

taxable income
Thomas Lemke Esq

November 12 1986

Page Eight

provides that interest payments or

other similar amounts if any at or before

maturity are payable based on fixed rate or

to the extent provided in regulations at

variable rate

An interest shall not fail to meet the require

ments of subparagraph merely because the

timing but not the amount of the principal

payments or other similar amounts may be

contingent on the extent of prepayments on

qualified mortgages and the amount of income

from permitted investments

REMIC is any entity

to which an election to be treated as

REMIC applies for the taxable year and all

prior taxable years

all of the interests in which are

regular interests or residual interests

which has and only class of

residual interests and all distributions if

any with respect to such interests are pro

rata

as of the close of the 4th month

ending after the startup day and each quarter

ending thereafter substantially all of the

assets of which consist of qualified mortgages

and permitted investments and

which has taxable year which is

calendar year

REMIC status is governed by an election under new Section

860Db of the Code The REMIC provisions apply to regu

lar and residual interests issued after January 1987

Assuming proper election Bonds issued after that time

will clearly be regular interests under the Code and the

REMIC Qualified Residual Interests associated therewith

will clearly be residual interests
Thomas Lemke Esq

November 12 1986

Page Nine

REMIC Qualified Residual Interests

Clarification of the real estate-related asset

status of residual interests under federal law and there

by REMIC Qualified Residual Interests occurs as the re

suit of change in Section 856c6C of the Code

Section 856c6C of the Code defines an interest in

real property for the purposes of Part III Subchapter

of the Code regarding real estate investment trusts To

qualify as real estate investment trust under the Code

an entity must at the close of each quarter of any tax

able year have at least 75 percent of the value of its

total assets represented by real estate assets including

interests in real property cash and cash items includ

ing receivables or government securities Subject to an

exception not here relevant Section 671b1 of the TRA

of 1986 modifies the definition of an interest in real

property by inserting subparagraph after said

subparagraph New subparagraph states that

regular or residual interest in REMIC shall

be treated as an interest in real property and

any amount includible in gross income with

respect to such an interest shall be treated as

interest

Emphasis added The Conference Agreement for the TRA

of 1986 confirms this characterization It states that

regular and residual interests are treated as

real estate assets under section 856c6 For

the purposes of applying the asset test stated in Section

856c5 of the Code the amount of the real estate

investment trusts investment in the residual interest is

the value allocable to such interest In that regard

the Conference Agreement likewise states that the

case of residual interest the fair market value of the

residual interest and not the fair market value of all

of the REMICs assets is used in applying the asset test

of Section 856c5

As the test under Section 3c5C of the 1940 Act

is basically also an asset test we believe that

Qualified Residual Interests should be evaluated

under such section on essentially the same basis

Footnote continued
Thomas Lemke Eag

November 12 1986

Page Ten

Thus as result of the changes effectuated by

the TRA of 1986 the Code undoubtedly permits real

estate investment trust to invest solely in residual

interests that have qualified as REMICs We believe that

this recent expression of Congressional policy permitting

real estate investment trust to invest in REMIC residu

al interests is not frustrated by other federal laws

including Section 3c5C of the 1940 Act Were one

to conclude that REMIC residual interests were not mort

gages and other liens on and interests in real estate

emphasis added real estate investment trust would be

substantially inhibited in its ability to acquire REMIC

residual interests In such case the enactment into

law by Congress of this crystallization of its policy

regarding real estate related assets would not have the

intended effect of decreasing the uncertainty with re

spect to investment in such assets For this reason we

believe that REMIC Qualified Residual Interests should

clearly be treated as such interests in real estate

under Section 3c5C of the 1940 Act

In further support of this proposition we note

that Congress intent is reflected in at least three

other changes to the Code made in the TRA of 1986 Sec

tion 671b2 states that REMIC residual interests shall

be treated as qualifying real property loans for the

purposes of Section 593 of the Code Section 593 of the

Code defines the method by which any mutual savings bank

domestic building and loan association or cooperative

bank without capital stock may calculate its reserves for

bad debts Such reserves are used to calculate its bad

debt deductions under Section 166 of the Code Section

671b3 states that REMIC residual interests shall be

Footnote continued from previous page

Since Entities are by their nature fairly highly

leveraged we believe that it would be unfair to

credit the REIT with the value ofthe Mortgage Loans

or Mortgage Certificates owned by them rather than

the net value of the REITs investment in them in

determining whether the REIT is principally en

gaged in permitted activities under Section 3c5C thereof
Thomas Lemke Esq

November 12 1986

Page Eleven

treated as qualifying properties for the purposes of

Section 7701a19 of the Code which defines domestic

building and loan assodiation for the purposes of the

Code Finally Section 671b4 of the TRA of 1986

amends Section 582c of the Code by providing that REMIC

residual interests shall be treated as an evidence of

indebtedness thereunder Section 582 of the Code defines

certain special rules applicable to banks regarding their

deductions for bad debt losses under Section 166 of the

Code Without question Congress has seen fit to state

clearly and emphatically that REMIC residual interests

for all purposes of the Code and by implication for all

purposes of federal law are real estate-related assets

Non-REMIC Qualified Residual Interests

With respect to Non-REMIC Qualified Residual

Interests we believe that such interests should also be

treated as mortgages and other liens on and interests in

real estate because there is no substantial difference

between them and REMIC Qualified Residual Interests In

both cases the pre-tax cash flow of holder of such

interests will be determined on the basis of the differ

ences between principal and interest receipts on the

Collateral over the sum of principal and interest pay

ments on the Bonds plus other administrative expenses of

the Entities In both cases federal income taxes will

not be imposed on the Entities so that all other vari

ables being equal after-tax cash flows to such holders

will not differ Furthermore in both cases the Enti

ties will be structured identically for state law pur

poses although in the case of Entities which issue Non

REMIC Qualified Residual Interests certain provisions in

their Entity Agreements which permit them to be treated

as pass-through entities for federal income tax purposes

need not be included in the Entity Agreements of Entities

which issue REMIC Qualified Residual Interests However

these provisions may be included for other reasons such

as for rating agency purposes or to insure prudent admin

istration of the Entities by their equity holders

Lastly in both cases since the Entities only differ

See footnote on page seven hereof
Thomas Lemke Esq

November 12 1986

Page Twelve

with respect to their election as to REMIC status under

the federal income tax laws the holders of interests in

the Entities will have virtually identical rights in the

Collateral held by the Entities and vis-a-vis holders of

Bonds

We believe that it would clearly contradict

recent Congressional policy which has been enacted into

law to conclude that Qualified Residual Interests which

are issued by Entities which have not elected or cannot

elect to be REMICs do not qualify as mortgages and

other liens on and interests in real estate Quite to

the contrary it is clear that because Non-REMIC Quali

fied Residual Interests represent virtually the same

economic interests as REMIC Qualified Residual Interests

Congress looking to the substance of the relationship

between the holders of such interests and the real estate

assets held by the Entities which issued them intended

that such interests should also be treated as mortgages

and other liens on and interests in real estate for the

purposes of Section 3c5C of the 1940 Act

IV Conclusion

For the reasons stated above we believe that

the Qualified Residual Interests acquired by the REIT are

qualified real estate-related assets under Section 3c5C of the 1940 Act For your convenience we

have enclosed copies of the applicable provisions of the

TRA of 1986 and the applicable sections of the Conference

Agreement If you have any questions concerning the

foregoing please do not hesitate to contact the under

signed at 212 735-3840 or Richard Kadlick at

212 735-2716 both of this office

Sincerely

Gtie
P1 JAN

LXir Ref No 86608CC

RESPONSE OF Onici ui CriuFtOUNSEL M.D .C Ho Inc

DIVISION OF INVES94ENT MANAGEMENT File No 132-3

In your letter of November 12 1986 you request our assurance that we

would not recommend any enforcement action to the Commission under the

Investment Cctnpany Act of 1940 Act if M.D.C Holdings Inc.s subsidiary

corporation the REIT invests in various mortgagerelated assets including

participations Residual Interests in various partnerships and trusts

Entities which invest in real estaterelated assets and treats these

Residual Interests as mortgages and other liens on and interests in real

estate for purposes of Section 3c

You argue that to the extent these Residual Interests comply with new

Section 860D of the Internal Revenue Code Code they should be deemed

to be mortgages and other liens on and interests in real estate under

Section 3c of the Act In addition you assert that in amending

the Code Congress did not intend companies investing in these Residual

Interests to be subject to regulation under the Act

We are unable to assure you that we would not recommend any enforcement

action to the Commission if the REIT treats Residual Interests as mortgages

and other liens on and interests in real estate for purposes of Section

3c Although the Entities may not be deemed to be investment

companies by virtue of exemptive orders under Section 6c of the Act or in

reliance on Section 3c of the Act 1/ the staff has not viewed

interests in similar entities to cane within the phrase mortgages and

other liens on and interests in real estate under Section 3c 2/

In the past the staff has granted noaction requests where an issuer acquired

wholepool Government National Mortgage Association GNMA certificates

i.e certificates comprising an undivided interest in the entire pool

of mortgages backing the certificates wholepool Federal National

Mortgage Association FNMA certificates and wholepool Federal Home

Loan Mortgage Corporation FHL certificates to permit these certif

cates to be treated as mortgages and other liens on and interests in real

real estate for purposes of Section 3c of the Act See e.g

Landmark Funding Corp pub avail Sept 20 1984 American Home Finance

Mortgage Corp pub avail May 11 1981 However the Division has

declined to grant noaction with respect to issuers treating partialpool

GNMA FNMA or FHMLC certificates as mortgages and other liens on and

interests in real estate for purposes of Section 3c See e.g

Nottingham Realty Securities Inc pub avail Apr 19 1984 Arlington

Investment Ccinpany pub avail Aug 31 1974

2/ See e.1 Realex Capital Corp pub avail Mar 19 1984 holding that

limited partnership interest in partnership relying on Section 3c

does not come within the phrase Urban Land Investments Inc pub avail

Nov 1971 see also Investment Company Act Rel No 3140 Nov 29 1960

stating that trust investing to substantial extent in other real estate

investment trusts or in companies engaged in the real estate business might

not qualify for the exception set forth in Section 3c
In addition although Congress amended the Code to provide passthrough tax

treatment to entities electing to be taxed as real estate mortgage investment

conduits RE74ICs neither the legislation nor the legislative history addresses

the regulation of RE1ICs or similar entities under the Act Thus although the

action of Congress may evidence an intent to facilitate the development of the

market in mortgages and mortgagerelated assets we cannot conclude that Congress

intended either RE7ICs to be excepted fran the definition of an investment

company under the Act or interests in RE74ICs to be deemed mortgages and other

liens on and interests in real estate under Section 3c

Our position on this question is supported by other recent Congressional

action regarding the market in mortgages and mortgagerelated assets In

enacting the Secondary rtgage Market Enhancement Act of 1984 3/ Congress

intended to broaden the market in mortgages and mortgagerelated assets 4/

However the Senate Committee on Banking Housing and Urban Affairs rejected

proposed amendment to exclude certain companies investing in real estaterelated

securities fran the Acts coverage stating that the Act facilitates development

of the private secondary mortgage market adequately and contains important

protections for investors coming within the definition of the term investment

company .. 5/ treover the Committee believed that the Commissions power

under Section 6c of the Act would permit the Commission to deal with any

problems that arise under the Investment Company Act in the area of mortgage

backed securities in manner that assures adequate investor protection ... 6/

Accordingly we are unable to agree with your conclusion that interests

in the Entities would constitute mortgages and other liens on and interests in

real estate under Section 3c of the Act

Gerald Lins

Attorney

3/ Pub 98440 98 Stat 1689 1984

4/ The report of the Senate Ccmmittee on Banking Housing and Urban Affairs

states that bill is expressly designed to encourage this broadening

of the market for mortgagebacked securities by encouraging more extensive

involvement of the private sector in the formation of conduits for the

flow of mortgage capital ran investors to lenders and homebuyers Rep

No 293 98th Cong 1st Sess 1983

5/ Id at

6/ Id