Current through Register 2024 Notice Reg. No. 38, September 20, 2024
(a) The
presentation of predicted future results of operations of real estate programs
shall be permitted but not required for specified property programs investing
primarily in improved property and shall be prohibited for non-specified
property programs or specified property programs investing primarily in
unimproved land. The prospectus cover must contain in boldface type one of the
following applicable statements:
(1) For
specified property programs:
FORECASTS ARE CONTAINED IN THIS PROSPECTUS. ANY
PREDICTIONS AND REPRESENTATIONS, WRITTEN OR ORAL, WHICH DO NOT CONFORM TO THOSE
CONTAINED IN THE PROSPECTUS SHALL NOT BE PERMITTED.
(2) For non-specified property and unimproved
land programs:
THE USE OF FORECASTS IN THIS OFFERING IS PROHIBITED.
ANY REPRESENTATIONS TO THE CONTRARY AND ANY PREDICTIONS, WRITTEN OR ORAL, AS TO
THE AMOUNT OR CERTAINTY OF ANY PRESENT OR FUTURE CASH BENEFIT OR TAX
CONSEQUENCE WHICH MAY FLOW FROM AN INVESTMENT IN THIS PROGRAM IS NOT
PERMITTED.
(b)
Forecasts for specified property programs shall be included in the prospectus,
or sales material of the program only if they comply with the following
requirements:
(1) Presentation of Forecasts.
Forecasts shall be realistic in their predictions and shall clearly identify
the assumptions made with respect to all material features of the presentation.
Forecasts shall be examined and reported upon by an independent certified
public accountant in accordance with the Guide for Prospective Financial
Statements and the Statement on Standards for Accountant's Services on
Prospective Financial Information as promulgated by the American Institute of
Certified Public Accountants, and that person or firm should be identified in
the prospectus as being responsible for the examination of the forecasts. The
report of the independent certified public accountant must be included in the
prospectus. No forecasts shall be permitted in any sales literature which do
not appear in the prospectus. If any forecasts are included in the sales
literature, all forecasts must be presented.
(2) Material Information. If predicted future
results of operations are used, they shall be prepared in the form of a
forecast meeting the requirements of paragraph (b)(1) and shall include all of
the following information:
(A) Annual
predicted revenue by source, including the occupancy rate used in predicting
rental revenue;
(B) Annual
predicted operating expenses and partnership administration expenses;
(C) Debt service, including annual payments
of principal and interest and points and financing fees, shown as dollars, not
as percentages;
(D) The required
occupancy rate in order to meet debt service and all expenses;
(E) Predicted annual cash flow stating the
assumed occupancy rate;
(F)
Predicted annual depreciation and amortization with full description of methods
to be used; and
(G) Predicted
annual taxable income or loss and a simplified explanation of the tax treatment
of such results;
(H) Predicted
construction costs, including disclosure regarding contracts; and
(I) Accounting policies, for example, with
respect to points, financing costs and depreciation.
(3) Presentation. Forecasts shall be
presented in the following manner:
(A)
Forecasts shall prominently display a statement to the effect that they
represent a mere prediction of future events based on assumptions which may or
may not occur and may not be relied upon to indicate the actual results which
will be obtained.
(B) Explanatory
notes describing assumptions made and referring to risk factors should be
integrated with tabular and numerical information.
(C) Any projections that supplement forecasts
shall be clearly identified as supplemental projections, and it shall be stated
that such projections are not within the scope of the accountant's examination
of the forecast.
(D) When a
sale-leaseback is employed, the statement that the seller is assuming the
operating risk and consequently may have charged a higher price for the
property must be included.
(4) Additional Disclosures and Limitations.
The following additional information shall accompany or
supplement the forecasts:
(A)
Forecasts shall be for a period at least equivalent to the anticipated holding
period for the property, or 10 years, whichever is shorter, and project the
consequences of a sale of the property, including depreciation recapture, if
applicable. The resale price must be reasonable.
Normally, the total consideration paid for the
properties shall be deemed a reasonable resale price except in special
circumstances, e.g., some leasebacks, or subsidized housing. The sponsor may
justify the proposed resale price by appropriate analysis of the projected
financial characteristics of the property in the assumed year of sale. Sale
consequences shall be presented in the following form or such other appropriate
form as may be approved by the Commissioner:
HYPOTHETICAL SALE CONSEQUENCES
| ..........................Sale
Price, | xxxx |
|
| ..........................Costs of
sale; | xxxx |
|
| ..........................Net selling
price; | xxxx |
|
| ..........................Taxable gain
(loss) on sale with ordinary income and capital gain on each sale separately
stated, | xxxx |
|
| ..........................Net sales
proceeds; | xxxx |
|
| ..........................Less
sponsor's participation in net sales proceeds; | xxxx |
|
| ..........................Net sales
proceeds distributable to investors; | xxxx |
|
| ..........................Income tax
liability; | xxxx |
|
| ..........................Net after tax
proceeds to investors; | xxxx |
(B) Adequate disclosure shall be made of the
changing economic effects upon the limited partners resulting principally from
federal income tax consequences over the life of the partnership property,
e.g., tax losses in early years followed by an increasing amount of taxable
income in later years.
(C)
Forecasts shall disclose all possible undesirable tax consequences of an early
sale of the program property (such as, depreciation recapture or the failure to
sell the property at a price which would return sufficient cash to meet
resulting tax liabilities of the participants).
(D) In computing the return to investors, no
appreciation, so called "equity buildup", or any other benefits from unrealized
gains or value shall be shown or included.
(E) Forecasts shall not be allowed for
unimproved land. Instead, a table of deferred payments specifying the various
holding costs, i.e., interest, taxes, and insurance shall be inserted. However,
where the program intends to develop and sell the land as its primary business,
a detailed cash flow statement showing the timing of expenditures and
anticipated revenues shall be required. The consequences of a sale of the
property shall be shown. The minimum sales price shall be the total
consideration paid for the property, plus the necessary increase to cover all
holding costs (and thereby achieve a sale of the property at a break-even
price). The sale consequences shall include an expression of the average annual
increase in the total consideration paid for the property in order to reach the
break-even sales price. Information as to the timing of the sale as well as the
sales price shall be included.
1.
Amendment filed 3-12-74; effective thirtieth day thereafter (Register 74, No.
11).
2. Amendment of subsections (b)(3) and (b)(6) filed 1-22-75;
effective thirtieth day thereafter (Register 75, No. 4).
3.
Amendment filed 1-27-84; effective thirtieth day thereafter (Register 84, No.
4).
4. 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.
