[Clifford Chance US LLP Letterhead]
June 23, 2006
VIA EDGAR AND BY HAND
Ms. Rochelle Plesset
United States Securities and Exchange Commission
Division of Investment Management
100 F Street, N.E.
Washington, D.C. 20549-0405
Dear Ms. Plesset:
We are acting as securities counsel to CBRE Realty Finance, Inc. (the “Company”). This letter responds to your telephonic comments given on June 2, 2006 with respect to our supplemental letter to the Staff submitted on May 25, 2006 in connection with Amendment No. 1 to the Registration Statement (the “Registration Statement”) on Form S-11 (Registration No. 333-132186) filed by the Company on April 12, 2006. During this telephone conversation, you asked us to respond to additional questions regarding our analysis of the exception to the definition of “investment company” provided by Section 3(c)(5)(C) and/or Section 3(c)(6) of the Investment Company Act of 1940, as amended (the “1940 Act”), on which CBRE Realty Finance Holdings, LLC, a wholly-owned subsidiary of the Company (“Realty Finance Holdings”), intends to rely. Set forth below are your questions and our corresponding responses.
Question 1:
Explain the role of the directors of the special purpose issuer of collateralized debt obligations (“CDO I”) in which Realty Finance Holdings owns all of the common and preferred shares.
RESPONSE 1:
CDO I is a Cayman exempted company. Under Cayman law and CDO I’s organizational documents, the directors of CDO I have all the powers to manage the business of CDO I. No other party has these powers unless they are delegated by the directors. Like the directors of U.S. corporations, the directors of CDO I have a fiduciary duty to act in the best interests of CDO I, which includes a duty of loyalty, honesty and good faith. Like the directors of U.S. corporations, the directors of CDO I also have an obligation to act with care, diligence and skill. While the directors are not required under Cayman law to meet a certain number of times each year, they do meet from time to time to satisfy their fiduciary duties and to ensure compliance with CDO I’s obligations under its various transaction documents. In addition, the directors are required on an annual basis to provide a certificate to the trustee under the indenture to which CDO I is subject confirming that the directors have reviewed the activities and performance of CDO I and, based on such review, CDO I has fulfilled all of its obligations under the indenture or, if there has been a default, CDO I has not fulfilled all such obligations, specifically describing the default and the nature and status thereof. Finally, the directors of CDO I also are required to confirm that CDO I has paid its annual filing fees with the Cayman regulatory authorities to ensure CDO I remains in good standing.
Pursuant to CDO I’s organizational documents, the directors may delegate any of their powers to such officers or third parties as they consider necessary or appropriate. The directors may revoke this delegation at any time. CDO I is a pooled investment vehicle and, as such, the directors look to a “collateral manager” to manage the assets of CDO I. The directors have approved a collateral management agreement (the “Collateral Management Agreement”), pursuant to which CDO I has engaged CBRE Realty Finance Management, LLC (the “Collateral Manager”) as its collateral manager to manage the portfolio of real estate-related assets owned by CDO I. Pursuant to the Collateral Management Agreement, the Collateral Manager may be terminated by CDO I (i.e., the directors) for cause upon 30 days’ prior written notice. “For cause” is defined to include, among other things (i) the Collateral Manager willfully breaching or violating the Collateral Management Agreement or the indenture of CDO I or (ii) the Collateral Manager declaring bankruptcy or being adjudicated insolvent.
Ms. Rochelle Plesset
June 23, 2006
Page 2
Thus, while the directors have delegated the day-to-day management of the portfolio assets to the Collateral Manager, the directors have all the powers of the directors of any Cayman company and play an important role in supervising the activities of CDO I.
Question 2:
What does Realty Finance Holdings’ statement of assets look like on a consolidated and an unconsolidated basis?
RESPONSE 2:
Attached as Exhibit A are two statements of assets for Realty Finance Holdings – one on a consolidated basis and one on an unconsolidated basis. On a consolidated basis, Realty Finance Holdings’ total assets, as of March 31, 2006, approximated $740.5 million1, of which approximately $465 million consisted of “qualifying real estate assets” (primarily whole loans, joint venture interests in real estate and B-Notes with unilateral foreclosure rights) for purposes of the 55% test of Section 3(c)(5)(C), and approximately $243 million consisted of “real estate-related assets” (primarily mezzanine loans and commercial mortgage-backed securities (“CMBS”)) for purposes of the 25% test of Section 3(c)(5)(C) (see the more detailed discussion in our April 12, 2006 response letter). On an unconsolidated basis, Realty Finance Holdings’ total assets as of March 31, 2006, approximated $259 million, of which approximately $82 million consisted of investments in wholly-owned special purpose subsidiaries, $64 million consisted of investments in real estate (i.e., land and buildings), and $26 million consisted of joint venture investments in qualifying real estate assets.
Realty Finance Holdings will hold itself out as being engaged in the business of investing in whole loans, joint venture interests in real estate, B-Notes, CMBS and mezzanine loans. Each special purpose subsidiary has been set up for the sole business purpose of segregating assets and liabilities in connection with separate borrowing facilities entered into by Realty Finance Holdings and various lenders. Each such lender required Realty Finance Holdings to establish a separate special purpose subsidiary pursuant to the relevant credit documents. Without these borrowing arrangements, these assets would be held directly by Realty Finance Holdings. Thus, it is our view that the real estate assets and real estate-related securities held by these special purpose subsidiaries should be treated as the assets of Realty Finance Holdings for purposes of its compliance with the 55% and 25% tests of Section 3(c)(5)(C) of the 1940 Act. It is our view that Realty Finance Holdings, through these wholly-owned subsidiaries, is engaged in a Section 3(c)(5)(C) business and, therefore, should be able to rely on Section 3(c)(6) for its 1940 Act exemption.
Question 3:
What does CDO I’s statement of assets look like on a consolidated basis?
RESPONSE 3:
Attached as Exhibit B is a consolidated statement of assets for CDO I as of March 31, 2006. The statement shows consolidated assets of approximately $510.5 million1, of which approximately $290 million consisted of qualifying real estate assets (primarily whole loans and B-Notes with unilateral foreclosure rights), and approximately $219 million consisted of real estate-related assets (primarily mezzanine loans and CMBS).
| 1 | As indicated in our April 12th letter, this amount excludes approximately $88.5 million of uninvested cash proceeds resulting from the closing of CDO I on March 28, 2006. Realty Finance Holdings has begun to invest these cash proceeds to satisfy the 55% and 25% tests of Section 3(c)(5)(C) and does not intend to maintain any significant cash assets going forward. |
Ms. Rochelle Plesset
June 23, 2006
Page 3
We reiterate that, while the GAAP accounting treatment of the assets of CDO I is not necessarily dispositive of whether these assets should be consolidated on the balance sheet of Realty Finance Holdings for purposes of the ability of Realty Finance Holdings to rely on Section 3(c)(5)(C) for its 1940 Act exemption, we believe an examination of the CDO I transaction supports the view that the assets of CDO I should be treated as the assets of Realty Finance Holdings for Section 3(c)(5)(C) purposes. Realty Finance Holdings, through its wholly-owned subsidiary, CBRE Realty Finance CDO 2006-1 Depositor, LLC, owns all the common and preferred stock of CDO I and is entitled to appoint and replace the directors of CDO I. In addition, Realty Finance Holdings has the unilateral right to foreclose on a defaulted mortgage included among the collateral assets of CDO I. Realty Finance Holdings’ controlling interest in CDO I and its underlying assets can be contrasted with the facts in theIBF Case (residual interest owned by the defendant did not convey any ownership interest or foreclosure rights in the underlying assets).
Thus, it is the Company’s view that the assets of CDO I should be treated as the assets of Realty Finance Holdings for purposes of Realty Finance Holdings’ ability to rely on Section 3(c)(5)(C) and/or Section 3(c)(6) for its 1940 Act exemption.
* * * * * * *
Please feel free to call either Richard Horowitz at 212-878-8110 or Larry P. Medvinsky at 212-878-8149 if you have any further questions regarding this discussion.
| Sincerely, | ||
/s/ Larry P. Medvinsky
| ||
| cc: | Karen J. Garnett |
| Charito Mittelman |
| Keith Gollenberg |
| Michel Angerthal |
| Richard Horowitz, Esq. |
| Mark Kelson, Esq. |
Exhibit A
CBRE Realty Finance Holdings, LLC (Consolidated)
ASSETS | March 2006 | ||
CASH | |||
Operating Cash—BOA | $ | 77,675 | |
Operating Cash—Joint Ventures | 706,155 | ||
Development Cash—Joint Ventures | 14,042 | ||
Other Cash—Joint Ventures | 660 | ||
Money Market Cash—BOA | 1,030,498 | ||
Money Market Cash—CSFB | 9,048,494 | ||
Money Market Cash—CSFB Sub Acct | 1,382,506 | ||
Security Deposit | 240,631 | ||
CDO #1 Uninvested Proceeds Cash | 88,450,938 | ||
CDO #1 Expense Account Cash | 148,002 | ||
Escrow Cash—Midland | 599,650 | ||
Escrow Cash—GEMSA | 887,560 | ||
TOTAL CASH | 102,586,811 | ||
ACCOUNTS RECEIVABLE | |||
Accrued Interest Receivable—Marketable Securities | 404,456 | ||
Accrued Interest Receivable—Swaps | 34,393 | ||
Accrued Interest & Dividend Receivable | 20,151 | ||
Accrued Interest Receivable—Loans | 1,358,252 | ||
Accrued Interest Receivable—Bridge Loans | 169,653 | ||
Accrued Interest Receivable—Mezzanine Loans | 489,284 | ||
Accrued Interest Receivable—Subordinated Debt | 584,833 | ||
Accrued Interest Receivable—Intercompany | 13,151 | ||
Rent Receivable | 88,333 | ||
Due To / From LaSalle (DBAG Account) | 49,847 | ||
Due To / From Others | 24,060 | ||
TOTAL ACCOUNTS RECEIVABLE | 3,236,412 | ||
INVESTMENTS | |||
Loan Receivable—Intercompany | 25,792,185 | ||
Marketable Securities (CMBS) | 94,748,506 | ||
Loans Receivable (Whole Loans) | 271,658,900 | ||
Bridge Loans Receivable | 16,552,547 | ||
Mezzanine Loans Receivable | 106,309,306 | ||
Subordinate Debt Receivable (B Notes) | 104,667,852 | ||
TOTAL INVESTMENTS | 619,729,296 | ||
INVESTMENT IN UNCONSOLIDATED JOINT VENTURES | |||
Investment in Unconsolidated Joint Ventures | 26,108,029 | ||
TOTAL INVESTMENT IN UNCONSOLIDATED JOINT VENTURES | 26,108,029 | ||
PROPERTY | |||
Land | 15,340,655 | ||
Buildings | 49,315,193 | ||
Depreciation—Buildings | -122,990 | ||
TOTAL PROPERTY | 64,532,858 | ||
A-1
CBRE Realty Finance Holdings, LLC (Consolidated)—(Continued)
ASSETS | March 2006 | ||
DEFERRED ASSETS | |||
Acquisition Fees | 320,000 | ||
Amortization—Acquisition Fees | -22,624 | ||
Financing Fees | 1,574,946 | ||
Amortization—Financing Fees | -202,567 | ||
CDO #1 Costs | 8,567,531 | ||
Amortization—CDO #1 Costs | -11,345 | ||
TOTAL DEFERRED ASSETS | 10,225,941 | ||
DERIVATIVE ASSETS | |||
Swaps Mark to Market Asset | 2,033,094 | ||
Interest Rate Caps | 337,588 | ||
TOTAL DERIVATIVE INSTRUMENTS | 2,370,682 | ||
OTHER ASSETS | |||
Prepaid Taxes | 152,996 | ||
Prepaid Insurance | 35,309 | ||
TOTAL OTHER ASSETS | 188,305 | ||
TOTAL ASSETS | $ | 828,978,335 | |
A-2
CBRE Realty Finance Holdings, LLC (Unconsolidated)
ASSETS | March 2006 | ||
CASH | |||
Operating Cash—BOA | $ | 46,074 | |
Operating Cash—Joint Ventures | 706,155 | ||
Development Cash—Joint Ventures | 14,042 | ||
Other Cash—Joint Ventures | 660 | ||
Money Market Cash—BOA | 1,030,498 | ||
Money Market Cash—CSFB | 9,048,494 | ||
Money Market Cash—CSFB Sub Acct | 1,382,506 | ||
Security Deposit | 240,631 | ||
TOTAL CASH | 12,469,061 | ||
ACCOUNTS RECEIVABLE | |||
Accrued Interest Receivable—Marketable Securities | 22,545 | ||
Accrued Interest & Dividend Receivable | 9,679 | ||
Accrued Interest Receivable—Bridge Loans | 169,653 | ||
Accrued Interest Receivable—Subordinated Debt | 98,998 | ||
Accrued Interest Receivable—Intercompany | 28,700 | ||
Rent Receivable | 88,333 | ||
Due To / From LaSalle (DBAG Account) | 75,000 | ||
Due To / From Others | 24,060 | ||
TOTAL ACCOUNTS RECEIVABLE | 516,969 | ||
INVESTMENTS | |||
Loan Receivable—Intercompany | 25,792,185 | ||
Marketable Securities (CMBS) | 4,263,281 | ||
Bridge Loans Receivable | 16,552,547 | ||
Subordinate Debt Receivable (B Notes) | 17,006,053 | ||
Bonds Receivable Original Balance—Intercompany | 44,250,000 | ||
Bonds Receivable Disc/Prem—Intercompany | -10,884,590 | ||
TOTAL INVESTMENTS | 96,979,476 | ||
INVESTMENT IN UNCONSOLIDATED JOINT VENTURES | |||
Investment in Unconsolidated Joint Ventures | 26,108,029 | ||
TOTAL INVESTMENT IN UNCONSOLIDATED JOINT VENTURES | 26,108,029 | ||
INVESTMENT IN SUBSIDIARIES | |||
CBRE Realty Finance Holdings CDO Funding, LLC | -992,079 | ||
CBRE Realty Finance Holdings II, LLC | 1,563,362 | ||
CBRE Realty Finance Holdings III, LLC | 54,929 | ||
CBRE Realty Finance CDO 2006—1 Depositor, LLC | 55,314,473 | ||
TOTAL INVESTMENT IN SUBSIDIARIES | 55,940,685 | ||
PROPERTY | |||
Land | 15,340,655 | ||
Buildings | 49,315,193 | ||
Depreciation—Buildings | -122,990 | ||
TOTAL PROPERTY | 64,532,858 | ||
A-3
CBRE Realty Finance Holdings, LLC (Unconsolidated)—(Continued)
ASSETS | March 2006 | ||
DEFERRED ASSETS | |||
Acquisition Fees | 320,000 | ||
Amortization—Acquisition Fees | -22,624 | ||
Financing Fees | 1,380,385 | ||
Amortization—Financing Fees | -107,185 | ||
TOTAL DEFERRED ASSETS | 1,570,577 | ||
DERIVATIVE ASSETS | |||
Interest Rate Caps | 337,588 | ||
TOTAL DERIVATIVE INSTRUMENTS | 337,588 | ||
OTHER ASSETS | |||
Prepaid Taxes | 152,996 | ||
Prepaid Insurance | 35,309 | ||
TOTAL OTHER ASSETS | 188,305 | ||
TOTAL ASSETS | $ | 258,643,548 | |
A-4
Exhibit B
CBRE Realty Finance CDO 2006-1, Ltd (Consolidated)
ASSETS | March 2006 | ||
CASH | |||
CDO #1 Uninvested Proceeds Cash | $ | 88,450,938 | |
CDO #1 Expense Account Cash | 148,002 | ||
Escrow Cash—Midland | 599,650 | ||
Escrow Cash—GEMSA | 813,417 | ||
TOTAL CASH | 90,012,007 | ||
ACCOUNTS RECEIVABLE | |||
Accrued Interest Receivable—Marketable Securities | 44,113 | ||
Accrued Interest Receivable—Swaps | 21,267 | ||
Accrued Interest Receivable—Loans | 143,278 | ||
Accrued Interest Receivable—Mezzanine Loans | 81,429 | ||
Accrued Interest Receivable—Subordinated Debt | 59,931 | ||
Accrued Interest Receivable—Intercompany | 6,575 | ||
Due To / From LaSalle (DBAG Account) | 49,483 | ||
TOTAL ACCOUNTS RECEIVABLE | 406,077 | ||
INVESTMENTS | |||
Marketable Securities (CMBS) | 81,809,297 | ||
Loans Receivable (Whole Loans) | 222,569,929 | ||
Mezzanine Loans Receivable | 106,309,306 | ||
Subordinate Debt Receivable (B Notes) | 87,661,800 | ||
TOTAL INVESTMENTS | 498,350,332 | ||
DEFERRED ASSETS | |||
CDO #1 Costs | 8,567,531 | ||
Amortization—CDO #1 Costs | -11,345 | ||
TOTAL DEFERRED ASSETS | 8,556,186 | ||
DERIVATIVE ASSETS | |||
Swaps Mark to Market Asset | 1,153,125 | ||
TOTAL DERIVATIVE INSTRUMENTS | 1,153,125 | ||
TOTAL ASSETS | $ | 598,477,728 | |
B-1
