California Code of Regulations
Title 10 - Investment
Chapter 3 - Commissioner of Financial Protection and Innovation
Subchapter 2 - Corporate Securities
Article 4 - Standards for the Exercise of the Commissioner's Authority
Subarticle 10 - Real Estate Programs
Conflicts of Interest and Investment Restrictions
Section 260.140.114.9 - Investments in or With Other Programs

Universal Citation: 10 CA Code of Regs 260.140.114.9

Current through Register 2024 Notice Reg. No. 38, September 20, 2024

(a) The program shall be permitted to invest in general partnerships or joint ventures with non-affiliates that own and operate one or more particular properties if the program, alone or together with any publicly registered affiliate of the program meeting the requirements of paragraph (b) of this Section, acquires a controlling interest in such a general partnership or joint venture, but in no event shall duplicate fees be permitted. For purposes of this Section, "controlling interest" means an equity interest possessing the power to direct or cause the direction of the management and policies of the general partnership or joint venture, including the authority to:

(1) Review all contracts entered into by the general partnership or joint venture that will have a material effect on its business or property;

(2) Cause a sale or refinancing of the property or its interest therein subject in certain cases where required by the partnership or joint venture agreement, to limits as to time, minimum amounts and/or right of first refusal by the joint venture partner or consent of the joint venture partner;

(3) Approve budgets and major capital expenditures, subject to a stated minimum amount;

(4) Veto any sale or refinancing of the property, or, alternatively, to receive a specified preference on sale or refinancing proceeds; and

(5) Exercise a right of first refusal on any desired sale or refinancing by the joint venture partner of its interest in the property except for transfer to an affiliate of the joint venture partner.

(b) The program shall be permitted to invest in general partnerships or joint ventures with other publicly registered affiliates of the program if all of the following conditions are met:

(1) The programs have substantially identical investment objectives.

(2) There are no duplicate fees.

(3) The compensation to sponsors is substantially identical in each program.

(4) Each program must have a right of first refusal to buy if the other programs wish to sell property held in the joint venture.

(5) The investment of each program is on substantially the same terms and conditions.

(6) The prospectus must disclose the potential risk of impasse on joint venture decisions since no program controls and the potential risk that while a program may have the right to buy the property from the partnership or joint venture it may not have the resources to do so.

(c) The program shall be permitted to invest in general partnership or joint ventures with affiliates other than publicly registered affiliates of the program only under the following conditions:

(1) the investment is necessary to relieve the sponsor from any commitment to purchase a property entered into in compliance with Section 260.140.114.1(a)(4) of these Rules prior to the closing of the offering period of the program;

(2) there are no duplicate fees;

(3) the investment of each entity is on substantially the same terms and conditions;

(4) the program must have a right of first refusal to buy if the sponsor wishes to sell property held in the joint venture; and

(5) the prospectus discloses the potential risk of impasse on joint venture decisions.

(d) Other than as specifically permitted in paragraphs (b) and (c) above, the program shall not be permitted to invest in general partnerships or joint ventures with affiliates.

(e) A program shall be permitted to invest in general partnership interests of limited partnerships only if the program, alone or together with any publicly registered affiliate of the program meeting the requirements of paragraph (b) above, acquires a "controlling interest" as defined in paragraph (a) of this Section, no duplicate fees are permitted, no additional compensation beyond that permitted by Sections 260.140.113.1 through 260.140.113.9 of these Rules shall be paid to the sponsor, and the program agreement shall comply with Sections 260.140.114.1 through 260.140.114.14.

(f) A program that is a limited partnership (the "Upper-Tier Partnership") shall be permitted to invest in limited partnership interests of other limited partnerships (the "Lower-Tier Partnerships") only if all of the following conditions are met:

(1) If the general partner of the Lower-Tier Partnership is a sponsor of the Upper-Tier Partnership, the program agreement of the Upper-Tier Partnership shall:
(A) Prohibit the program from investing in such Lower-Tier Partnership unless the partnership agreement of the Lower-Tier Partnership contains provisions required by Section 260.140.119.1 of these Rules and provisions acknowledging privity between the Lower-Tier general partner and the participants; and

(B) Provide that compensation payable in the aggregate from both levels shall not exceed the amounts permitted under Sections 260.140.113.1 through 260.140.113.9 of these Rules.

(2) If the general partner of the Lower-Tier Partnership is not a sponsor of the Upper-Tier Partnership, the program agreement of the Upper-Tier Partnership shall prohibit the program from investing in the Lower-Tier Partnership unless the partnership agreement of the Lower-Tier Partnership contains provisions complying with Sections 260.140.111.5 and 260.140.111.6; 260.140.115.5; 260.140.116.1 - 260.140.116.9; and 260.140.118.3; and shall provide that the compensation payable at both tiers shall not exceed the amounts permitted by Sections 260.140.113.1 - 260.140.113.9 herein.

(3) Each Lower-Tier Partnership shall have as its limited partners only publicly registered Upper-Tier Partnerships; provided, however, that special limited partners not affiliated with the sponsor shall be permitted if the interests taken result in no diminution in the control exercisable by the other limited partners.

(4) No program may be structured with more than two tiers.

(5) The program agreement of the Upper-Tier Partnership must contain a prohibition against duplicate fees.

(6) The program agreement of the Upper-Tier Partnership must provide that the limited partners of the Upper-Tier Partnership can, upon the vote of majority in interest and without the concurrence of the sponsor, direct the general partner of the Upper-Tier Partnership (acting on behalf of the Upper-Tier Partnership) to take any action permitted to a limited partner (e.g., the Upper-Tier Partnership) in the Lower-Tier Partnership.

(7) The prospectus must fully and prominently disclose the two-tiered arrangement and any risks related thereto.

(g) Notwithstanding subparagraphs (f)(2) through (7) hereof, if the general partner of the Lower-Tier Partnership is not a sponsor of the Upper-Tier Partnership, an Upper-Tier Partnership may invest in a Lower-Tier Partnership that owns and operates a particular property to be qualified pursuant to Section 42(g) of the Internal Revenue Code of 1986, as amended, if limited partners at both tiers are provided all of the rights and obligations required by Section 260.140.116.1 through 260.140.116.9 and the program agreement of the Upper-Tier Partnership contains a prohibition against payment of duplicate fees.

(h) Nothing contained in this Section may be used to circumvent or abrogate the restrictions and requirements of these Rules, including, but not limited to, Section 260.140.114.1 hereof. However, no provision contained in this Section is intended to restrict or prohibit any payment to a person who is not an affiliate of the sponsor otherwise permitted by these Rules.

1. Amendment filed 3-12-74; effective thirtieth day thereafter (Register 74, No. 11).
2. Amendment filed 1-27-84; effective thirtieth day thereafter (Register 84, No. 4).
3. Repealer and new section filed 5-18-92; operative 6-17-92 (Register 92, No. 22).

Note: Authority cited: Section 25610, Corporations Code. Reference: Section 25140, Corporations Code.

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