Company Name: Freedom Village Ltd.
Public Availability Date: 08-08-1983
INQUIRY LETTER 1Jacobs, Robbins, Gaynor, Hampp, Burns, Cole & Shasteen, P.A.
One Plaza Place Northeast
St. Petersburg, Florida 33201
TELEPHONE(813) 895-1971 May 05, 1983 Mr. Peter J. Romeo, Chief Counsel
Securities and Exchange Commission
Division of Corporation Finance
450 5th Street, N.W., Room 3018
Washington, D.C. 20549 Dear Mr. Romeo: On behalf of our client, Freedom Village Limited, a Florida limited partnership,
we request that the Division of Corporation Finance not recommend any
enforcement action to the Commission if the transaction described herein takes
place without registration under the Securities Act of 1933 (the "Securities
Act"). In our opinion, based upon the facts set forth below, nontransferable
beneficial interests in a trust, which will be established to provide financing
for a retirement center, to be acquired by persons who will enter into residency
and care agreements entitling them to life-time occupancy and care in the
retirement facility, are not "securities" as that term is defined in Section
2(1) of the Securities Act. FACTS Freedom Village Limited, a Florida limited partnership (the "Limited
Partnership") plans to build a residential life care retirement center in
Bradenton, Florida (the "Retirement Center"). The Retirement Center will be
leased to Freedom Village Management Company, a Florida corporation (the
"Management Company") which will operate the Retirement Center. The lease will
be for a period of thirty (30) years with one (1) ten-year renewal option, and
will provide for a minimum rental plus additional rent in an amount equal to a
percentage of the Management Company's gross profits. The stock of the
Management Company will be owned by the same persons who are the general
partners of the Limited Partnership and/or their affiliates. A trust to be known as the Freedom Village Master Trust (the "Master Trust")
will be established for the benefit of the residents of the Retirement Center
for the purpose of providing permanent financing for the Retirement Center by
paying off the construction loan which will have been obtained by the Limited
Partnership. The permanent loan which will be provided by the Master Trust will
be evidenced by a promissory note bearing interest at a rate of eleven percent
(11%) per annum, and will be amortized in 480 equal monthly installments
(including principal and interest). The promissory note will be without recourse
to the Limited Partnership, but will be secured by a first mortgage lien on the
Retirement Center's properties. The trustee of the Master Trust will be an
independent financial institution having trust powers. The residents will enter into Residency and Case Agreements with the Management
Company whereby the resident will be entitled to life-time occupancy and care.
The Residency and Care Agreement obligates the resident to pay to the Management
Company a monthly maintenance and care fee for meals, housekeeping, nursing care
and other services, plus a deferred entrance fee which is payable upon
termination of the Residency and Care Agreement by death or otherwise. Chapter
651 of the Florida Statutes regulates the rate at which the deferred entrance
fee may be earned. As a condition to entering into the Residency and Care Agreement, the resident
must agree to join in the execution of the Master Trust Agreement and agree to
contribute certain funds to the Master Trust for the purpose of providing
permanent financing for the Retirement Center. The amount required to be
contributed to the Master Trust will vary depending on the size of the apartment
unit to be occupied by the resident in the Retirement Center and roughly
approximates the construction costs attributable to that apartment unit. When the Residency and Care Agreement is entered into, each resident will be
required to pay one-half (1/2) of the amount of money which the resident is
required to contribute to the Master Trust. In accordance with the requirements
of Chapter 651, Florida Statutes, these funds will be placed in escrow with a
Florida bank or trust company as escrow agent, pending receipt by the Management
Company of a final Certificate of Authority to operate the Retirement Center
from the Department of Insurance, State of Florida. Upon receipt of the Final
Certificate of Authority by the Management Company, the escrowed funds will be
paid over to the trustee of the Master Trust. Any interest earned on the monies
held in escrow will be paid to the Management Company at that time. Upon
occupancy of an apartment unit in the Retirement Center, the resident will be
required to contribute to the Master Trust the other one-half (1/2) of the
monies due. No person other than the residents will have a beneficial interest in the Master
Trust. Such interest will be nontransferable except in the case of a jointly
held Residency and Care Agreement, which, by operation of law vests in the
survivor resident upon the death of the first joint tenant. On a monthly basis, the trustee of the Master Trust will compute the Trust's
distributable cash flow and distribute to each resident his proportionate share
of the distributable cash flow. Under the Master Trust Agreement, the term
distributable cash flow means the net income of the Master Trust plus the
principal payments paid on the promissory note less all expenses and costs
charged to such payments. The monthly distributions to residents will
approximate in amount of portion of the resident's fees paid to the Management
Company, which will be applied by the Limited Partnership after having received
the funds from the Management Company as a portion of the monthly lease payment,
to cover debt service on the Retirement Center's permanent financing after the
permanent loan is fully funded. Upon termination of a resident's Residency and Care Agreement with the
Management Company, the resident's interest in the Master Trust will be
extinguished by a distribution for the Master Trust of an amount equal to the
original amount contributed by the resident to the Master Trust less any amount
of the principal of the Master Trust distributed to the resident while a
beneficiary of the Master Trust. When a resident dies or otherwise terminates his Residency and Care Agreement
with the Management Company, the Management Company will enter into a Residency
and Care Agreement with a new resident who desires to occupy the apartment unit
vacated by the former resident. The second generation resident, as a condition
to entering into the Residency and Care Agreement, will also be required to join
in the Master Trust Agreement and contribute to the Master Trust the amount of
money which was required to be distributed to the first generation resident upon
termination of his interest in the Trust. The second generation resident will
receive the same distributions from the Master Trust as did his predecessor. Upon termination of the Master Trust, all funds held in trust will be
distributed to the residents in accordance with their respective interests. DISCUSSION Section 2(1) of the Securities Act defines a "security" to mean "any...
certificate of interest or participation in any profit-sharing
arrangement...investment contract...or, in general, any interest or instrument
commonly known as a `security'..." In determining whether an instrument is a
"security," the courts have not attempted to fit the instrument into one of the
statutes' terms. A literal application of these statutes was rejected by the
Supreme Court in United Housing Foundation, Inc. v. Forman,
421 U.S. 837 (1975),
and by the Fifth Circuit in Bellah v. First National Bank, 495 F.2d 1109 (5th
Cir. 1974), and National Bank of Commerce v. All American Assurance Co., 583
F.2d 1295 (5th Cir. 1978). Rather, the test is what character the instrument is
given in commerce by the terms of the offer, the plan of distribution, and the
economic inducements held out for the prospect. Securities and Exchange
Commission v. C.M. Joiner Leasing Corp.,
320 U.S. 344, 352 (1943). Therefore,
searching for the meaning and scope of the word security, requires that "the
emphasis should be on economic reality" instead of on the form of the
transaction and the letter of the statute. United Housing Foundation, Inc. v.
Forman, 421 U.S. 837, 848 (1974). The Supreme Count's analysis in the recent
decision Marine Bank v. Weaver, 102 S. Ct. 1220, 71 L. Ed.2d 409 (1982),
confirms that the determination whether an instrument is a security does not
turn on whether it answers to the particular terms of the statute. The test generally cited for determining whether an instrument or transaction is
a security was articulated by the Supreme Court in Securities and Exchange
Commission v. W.J. Howey,
328 U.S. 293 (1946), which held that an "investment
contract," for purposes of the Securities Act, "was an investment of money in a
common enterprise with profits to come solely from the efforts of others." Id.
at 301. The Court described this as a "flexible" definition designed to "meet
the countless and variable schemes devised by these who seek the use of money of
others on the promise of profits." Id. at 299. Some courts have assumed that the Howey test defines not only investment
contracts, but the entire universe of securities. See e.g. United American Bank
v. Gunter, supra, at 1116-9 (5th Cir. 1980); Goodman v. Epstein, 582 F.2d 388,
406 (7th Cir. 1978), cert denied, 440 U.S. 939 (1979); Hendrickson v.
Buchbinder, 465 F. Supp. 1250, 1252 (S.D. Fla. 1979). The Supreme Court itself
encouraged this understanding of Howey by stating in United Housing Foundation,
Inc. v. Forman, supra, that the Howey test... in shorthand form, embodies the essential attributes that run through all of the
Court's decisions defining a security. The touchstone is the presence of an
investment in a common venture premised on a reasonable expectation of profits
to be derived from the entrepreneurial or managerial efforts of others. By
profits, the Court has meant either capital appreciation resulting from the
development of the initial investment, as in Joiner, supra (sale of oil leases
conditioned on promoters' agreement to drill exploratory well), or a
participation in earnings resulting from the use of investors' funds, as in
Tcherepnin v. Knight, supra (dividends on the investment based on savings and
loan association's profits). In such cases, the investor is attracted solely by
the prospects of a return on his investment. 421 U.S. at 852. In Forman, purchasers of cooperative apartments in a low-cost
housing project were required to purchase stock in proportion to the number of
rooms acquired. The payment for the stock was treated as a downpayment on the
apartment. The shares were not transferable to a non-tenant, carried no voting
rights, and entitled the holder to no financial return. The shares thus plainly
have none of the investment, profit or risk attributes of a security. Following
this logic, the Second Circuit in Grenader v. Spitz, 537 F.2d 612 (1976), hold
that the shares in a housing cooperative, even where profits were likely, did
not constitute "securities" because the economic reality was that the motive for
housing was predominate over any investment motive. A common theme central to a line of cases from Howey to Forman and beyond, is
that a court will find the elements of a security lacking where the investor
receives something of intrinsic value which he intends to use or consume.
Forman, 421 U.S. at 852-53; Howey, 328 U.S. at 300; see also, B. Rossenberg &
Sons, Inc. v. St. James Sugar Cooperative, Inc., 447 F.Supp. 1, 4 (E.D. LA
1976), aff'd, 565 F.2d 1213 (5th Cir. 1977); Fogel v. Sellamerica, Ltd., 445
F.Supp. 1269, 1277-78 (S.D.N.Y. 1978); Joyce v. Ritchie Tower Properties, 417
F.Supp. 53 (N.D. Ill. 1976); Contract Buyers League v. F & F Investment, 300
F.Supp. 210, 224 (N.D. Ill. 1969), aff'd, 420 F.2d 1191 (7th Cir. 1970), cert.
denied, 400 U.S. 821 (1970). The main point in Forman was that the shareholders
received something of intrinsic value -- a place to live; the absence of an
expectation of financial return was not crucial to the Court's decision. The
motives of the elderly residents of Freedom Village will be akin to the
shareholders in Forman. The residents who receive beneficial interests in the
Master Trust, which is being utilized as a financing vehicle for construction of
the Retirement Center, coupled with their entering into Residency and Care
Agreements, are motivated by the desire to move into the Retirement Center and
receive life-care services, not by any expectation of profit or financial
return. The residents of Freedom Village are like those tenants in Forman who
"were attracted solely by the prospect of acquiring a place to live, and not by
the financial returns on their investments." 421 U.S. at 853. In determining whether a particular instrument is a security, courts will focus
upon the "economic realities underlying the transaction," United Housing
Foundation, Inc. v. Forman, supra, at 849, and "each transaction must be
analyzed and evaluated on the basis of...the factual setting as a whole." Marine
Bank v. Weaver, supra, at 1225 n. 11. Such an analysis of the structure of
Freedom Village compels the conclusion that a security does not exist: (1) As a condition to entering into a life-care contract in which the resident
agrees to pay a deferred entrance fee and the stated monthly charges, the
resident must agree to join in the execution of the Master Trust Agreement; (2) The interests in the Master Trust acquired by residents will be
nontransferable except by operation of law to the joint owner of a Residency and
Care Agreement upon the death of the other joint owner. A resident's interest in
the Master Trust can only be extinguished upon termination of a resident's
Residency and Care Agreement. It is contemplated that a resident will remain in
the facility for the remainder of his life; (3) Repayment of the monies contributed to the Master Trust, which will be used
to permanently finance the Retirement Center, will be made in full to a resident
of Freedom Village or his estate within 120 days upon termination of his
Residency and Care Agreement. The funds to pay such a resident will be generated
by the funds deposited in the Master Trust by the next occupant of the vacated
apartment. There is no possibility, therefore, for the trust interest to
appreciate in value; (4) The monthly distributions to residents will approximate in amount a portion
of the resident's fees paid to the Management Company, which will be applied by
the Limited Partnership after having received the funds from the Management
Company as a portion of the monthly lease payment, to cover debt service on the
Retirement Center's permanent financing after the permanent loan is fully
funded. As a result, residents will pay monthly fees to the Management Company
that exceed in amount the monthly distributions they receive from the Trust. (5) The Master Trust's permanent financing loan to the Limited Partnership will
be secured by a first mortgage lien on the Retirement Center, giving residents
enhanced protection if either the Limited Partnership or the Management Company
defaults on its obligations. An examination of the intended use of the Master Trust indicates its commercial
nature as a vehicle to finance construction of the Retirement Center. Moreover,
the Master Trust affords protection to the residents by providing the security
of a first mortgage lien on the Retirement Center. The factual situation described herein is similar to that contained in two
recent requests for no-action letters concerning the issuance of life-care
contracts without registration under the Securities Act. In Cloisters Retirement
Home and Freedom Square Retirement Center, residents who would enter into
life-care contracts would purchase bonds as a vehicle to finance the retirement
facility. Under the residency agreements, any monthly interest received by a
bondholder resident would be offset by a corresponding monthly charge payable by
the bondholder for residing in the retirement home. Hence, residents could never
receive more than the initial purchase price of the bonds. In arriving at its
no-action positions, the staff gave particular consideration to the fact that
there would be no net investment income from the bonds. In the case of the
Retirement Center, since the residents will be paying to the Management Company
amounts in excess of the monthly distributions from the Master Trust, there is
also no net income to the resident. It is our opinion that the transaction as outlined above constitutes a real
estate transaction whereby the purchaser is acquiring the right to occupy for
life a unit in the retirement facility and, therefore, the interest in the Trust
does not constitute a security as defined under Section 2(1) of the Securities
Act. The deposits into the Trust will be made with no expectation of profit; the
interests will be nontransferable, and each resident will pay fees to the
Management Company that exceed the amount of the distributions from the Trust. In view of the foregoing, we respectfully request your confirmation that the
staff of the Division of Corporation Finance will not recommend any enforcement
action to the Commission if the transaction described herein takes place without
registration under the Securities Act. Please do not hesitate to call me if you have any questions with respect to this
matter. I would appreciate being informed of the staff's position prior to any
written response being sent. Very truly yours, JACOBS, ROBBINS, GAYNOR, HAMPP, BURNS, COLE & SHASTEEN, P.A. Edwin B. Kagan EBE/tks INQUIRY LETTER 2Jacobs, Robbins, Gaynor, Hampp, Burns, Cole & Shasteen, P.A.
One Plaza Place Northeast
St. Petersburg, Florida 33201
TELEPHONE(813) 895-1971 July 06, 1983 Mr. Norman R. Schou, Special Counsel
Securities and Exchange Commission
Division of Corporation Finance
450 5th Street, N.W., Room 3030
Washington, D.C. 20549 Dear Mr. Schou: This letter confirms our recent telephone conversation, concerning our letter
dated May 5, 1983, with respect to an interpretive request on behalf of our
client, Freedom Village Limited, a Florida limited partnership, that the
Division of Corporation Finance concur with our opinion that nontransferable
beneficial interests in a trust, which will be established to provide financing
for a Retirement Center, to be acquired by persons who will enter into residency
and care agreements entitling them to life-time occupancy and care in the
retirement facility, are not "securities" as that term is defined in Section
2(1) of the Securities Act of 1933. Defined terms used in our earlier letter are
used herein with the same meanings. Pursuant to your request, there are enclosed copies of promotional literature
and financial projections for the Management Company and Master Trust, prepared
for analysis in conjunction with the project. These documents, in all material
respects, comport with the description of the transaction presented in our
earlier letter and, in our view, justify the same interpretive positions we have
sought. However, in order to address your comments, and for your convenience, we
enumerate the following points as matters with respect to which the enclosed
documents clarify our earlier correspondence: 1. The residents' average monthly fee paid to the Management Company will be
$1,200.00 during 1984, the projected first year of operations. This payment will
be comprised of a maintenance or care service portion and a debt coverage
service portion. The average monthly maintenance portion will be $792.00 per
occupied unit during 1984 and is projected to increase by eight percent (8%) in
1985 and each year thereafter. The monthly portion used to cover debt service on
the retirement center's permanent financing is projected to average $408.00 per
unit after the loan has been fully funded in 1985 and will not increase
throughout the life of the Master Trust. 2. The debt service portion of a resident's monthly fee is exactly equal to the
monthly distribution from the Master Trust to that resident. Projected
distributions to the residents will average $408.00 per unit per month after the
full funding of the permanent loan. Prior to the permanent loan being fully
funded, the debt service portion of the residents' fees will be equal to the
residents' earnings on their trust funds. 3. The investment and reinvestment powers of the Trustee under the Master Trust
will be strictly limited. Principally, the Trustee will be obligated to provide
the permanent financing for the Retirement Center. Any funds not used to provide
permanent financing (as well as any principal and interest payments received on
the permanent mortgage) may be invested only in evidence of deposits in, or
obligations of, banking institutions, state institutions which are members of
and insured by the Federal Deposit Insurance Corporation or of the Federal Home
Loan Bank System, having a maturity date on or before the next date that the
Trustee will be required to distribute funds to the beneficiaries of the Master
Trust. Under the Master Trust, funds (i.e., principal and interest received on
the permanent loan less expenses) will be required to be distributed monthly to
the residents who are beneficiaries of the Master Trust. Again, we submit that the proposed transaction is predominantly and primarily a
real estate transaction whereby the purchaser will be acquiring the right to
occupy for life a unit in the Retirement Center. A Freedom Village resident's
acquisition of an interest in the Master Trust coupled with the execution of a
Residency and Care Agreement will be motivated by his or her right to receive
life-time occupancy and care as a resident of the Retirement Center. Moreover, a
resident will pay monthly fees to the Management Company which will exceed in
amount the monthly distributions to such resident. Accordingly, there is no net
income to the resident. It is this absence of an expectation of profit coupled
with the commercial or financing nature of the Master Trust which cause the
proposed real estate transaction not to constitute a security as defined under
Section 2(1) of the Securities Act. Very truly yours, JACOBS, ROBBINS, GAYNOR, HAMPP, BURNS, COLE & SHASTEEN, P.A. Edwin B. Kagan EBK/rs
Enclosures STAFF REPLY LETTERJuly 8, 1983 RESPONSE OF THE OFFICE OF CHIEF COUNSEL
DIVISION OF CORPORATION FINANCE Re: Freedom Village Limited
Incoming letters dated May 5 and July 6, 1983 On the basis of the facts presented, this Division will not recommend any
enforcement action to the Commission if Freedom Village Limited, in reliance
upon your opinion as counsel that registration is not required, issues
non-transferable beneficial interests in the Master Trust as described in your
letter without registration under the 1933 Act. In arriving at this position we
have given particular consideration to the following facts: (1) purchasers of
the Master Trust interests will acquire them for the purpose of obtaining
life-care services, (2) the Master Trust interests will be nontransferable and
will not appreciate in value, and (3) there will be no net investment income
from the Master Trust interests. Because this position is based upon the representations made to the Division in
your letter, it should be noted that any different facts or conditions might
require a different conclusion. Moreover, this letter merely expresses the
Division's position regarding enforcement action and does not purport to express
any legal conclusion with respect to the question presented. Sincerely, Norman R. Schou
Special Counsel
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