SANTA FE FINANCIAL CORPORATION
820 Moraga Drive
Los Angeles, CA 90049
Telephone: (310) 889-2500
Facsimile: (310) 889-2525
Via EDGAR
August 24, 2009
Robert Telewicz
Senior Staff Accountant
Howard Efron
Staff Accountant
Securities and Exchange Commission
Division of Corporation Finance, Mail Stop 3010
Washington, D.C. 20549
Re: Santa Fe Financial Corporation.
Form 10-KSB for the fiscal year ended June 30, 2008
File No. 0-06877
Dear Mr. Telewicz and Mr. Efron:
This letter is in response to your further comment letter dated August 18,
2009 regarding the Form 10-KSB for the fiscal year ended June 30, 2008 of
Santa Fe Financial Corporation ("Santa Fe" or the "Company"). Our responses
below correspond to each of the comments set forth in your letter. For
convenience, we have set forth the comment or question asked prior to each of
our responses.
Form 10-KSB for the fiscal year ended June 30, 2008
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Financial Statements
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Notes to Consolidated Financial Statements
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Note 1 - Significant Accounting Policies
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Minority Interest, page 32
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1. We note your response to our prior comment 1. Based on your response it
does not appear that the limited partners have a contractual obligation to
fund the accumulated deficit in Justice Enterprises, Inc. As such, we
continue to believe these losses should be charged to the majority interest
in accordance with paragraph 15 of ARB 51. Please revise your financial
statements accordingly.
RESPONSE:
We believe that the staff's interpretation of the provisions of Paragraph 15
of FASB ARB No. 51, and the exceptions thereto, is too narrow and does not
fully take into considerations the unique structure and provisions of the
Justice Investors limited partnership ("Justice" or the "Partnership"). From
our reading of Paragraph 15, it was enacted to apply to entities that are more
than 50% owned, with a primary emphasis on corporations. Thus, the wording of
both Paragraph 15 and the exceptions thereto, speak in terms of majority and
minority interests and reference "minority shareholders". We do not believe
that those provisions contemplated a limited partnership in which there were
two general partners (Evon Corporation and Portsmouth Square, Inc.) and no
majority owner. The structure of Justice is further unique in that a minority
interest holder, Evon Corporation, is a general partner and served as the
managing general partner until December 1, 2008. That is significant in terms
of legal obligations to make good on such losses.
We read the exception to Paragraph 15 as being broader and less clear
regarding limited partnerships than interpreted by the staff. The relevant
wording is "except in rare cases when the minority shareholders have a binding
obligation to make good on such losses." There is no mention of the words
"present", "legal" or "contractual" and we could not find any guidance or
interpretation that would impose those specific requirements, especially as it
relates to limited partnerships. The inclusion of the words "minority
shareholders" also shows that the primary focus was on corporations and not
limited partnerships. While we agree that it would be a rare case in which
minority shareholders would have a binding obligation to make good on the
losses of a corporation, such an obligation would be quite common in the
instance of general partners.
As discussed in our original response submitted on March 16, 2009, Evon
Corporation, as the managing general partner, is jointly liable for the debts
and losses of Justice if Partnership assets are not sufficient to cover those
obligations. There are no provisions in the Limited Partnership Agreement that
would negate that binding obligation of a general partner under California
law. While Evon might not be required fund such amounts as long as the
Partnership is operationally profitable, it is still a binding obligation
under law. We are not aware of any requirement under Paragraph 15 that would
require such obligation to be presently enforceable.
The exception to Paragraph 15 also talks in terms of an obligation to make
good on "losses", not to make good on any partnership deficit. That is an
important distinction since there are other components that might make up a
deficit in a partnership capital account other than operating losses. For
example, a partnership could make cash distributions to its limited partners
from its positive operating cash flows even though it is not showing net
income under GAAP due to large non-cash items such as significant depreciation
and amortization expenses. Under partnership accounting, the amount of cash
distributions would be a charge against the partnership capital account,
inflating the amount of the deficit. Such is the case with Justice, which
historically has paid significant amounts of distributions to its limited
partners and generated substantial net income. Although the Partnership has
recorded net losses under GAAP in recent years due to the temporary closing of
the Hotel and the significant depreciation and amortization expenses resulting
from its renovation and repositioning, the Hotel has generated positive cash
flows since June 2006. As a result, Justice has been able to make additional
distributions to its limited partners.
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In our prior responses, we should have made a clearer presentation as to the
nature of the components that make up the deficit in partners' capital at the
Justice level. The following schedule sets forth a historical re-cap of the
Justice partners' capital account showing net income (loss) of the Partnership
and the amount of Partnership distributions for the years 1996 through 2008,
and an accumulation of those components as of December 31, 2008. Since Justice
is a limited partnership and is required to file tax returns and report
Partnership net income (loss) and distributions on a calendar year, the
following schedule is presented as such. Although, Portsmouth and the Company
file their audited financial statements on a June 30 fiscal year end, the six
month differential is not material to this presentation.
JUSTICE INVESTORS
PARTNERS' CAPITAL ACCOUNT
1996 1997 1998 1999
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Net Income (Loss) $ 3,735,321 $ 5,142,178 $ 6,068,028 $ 6,947,363
Partners' Capital beginning of period 1,828,740 3,044,061 3,776,240 4,804,265
Less Partnership Distributions (2,520,000) (4,409,999) (5,040,003) (6,020,010)
---------- ---------- ---------- -----------
Partners' Capital end of period $ 3,044,061 $ 3,776,240 $ 4,804,265 $ 5,731,618
2000 2001 2002 2003
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Net Income (Loss) $ 8,341,261 $ 6,319,703 $ 3,275,123 $ 2,508,534
Partners' Capital beginning of period 5,731,618 5,252,877 4,852,580 3,759,703
Less Partnership Distributions (8,820,002) (6,720,000) (4,368,000) (3,225,602)
---------- ---------- ---------- -----------
Partners' Capital end of period $ 5,252,877 $ 4,852,580 $ 3,759,703 $ 3,042,635
2004 2005 2006 2007
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Net Income (Loss) $ 5,365,836 $(7,347,463) $(6,780,297) $ (4,334,691)
Partners' Capital beginning of period 3,042,635 7,770,071 422,608 (6,357,689
Less Partnership Distributions (638,400) - - (2,000,025)
---------- ---------- ---------- -----------
Partners' Capital end of period $ 7,770,071 $ 422,608 $(6,357,689) $(12,692,405)
CUMULATIVE
2008 TOTAL 1996-2008
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Net Income (Loss) $( 1,468,236) $ 27,772,660
Partners' Capital beginning of period (12,692,405) 1,828,740
Less Partnership Distributions (1,300,017) (45,062,058)
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Partners' Capital end of period $(15,460,658) $(15,460,658)
The above historical results show that Justice has generated significant net
income since 1996 with an accumulated total of $27,772,660 through December
31, 2008. The schedule also shows Partnership distributions, in the total
amount of $45,062,058, are the reasons why the Justice partners' capital
account is showing an accumulated deficit.
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In our response submitted on July 21, 2009, we discussed the obligations of
Evon Corporation and its related limited partners (as successor to Justice
Enterprises) under the following provision of the Limited Partnership
Agreement:
"If after allocation of all gain or loss to the partners' accounts,
there shall be a deficit in the general partner's account, than
it shall contribute the amount of its deficit to the partnership
which shall distribute such sum among the limited partners in the
proportion in which they are entitled to share in the partnership
profits."
We also discussed several ways in which the binding obligations of Evon and
its related limited partners can be triggered, including a Partnership capital
call, sale of the Partnership asset and/or liquidation of the Partnership. We
pointed out that, since the Hotel has continued to generate positive cash
flows to meet its debt service and ongoing operating expenses, Justice has not
had to resort to any capital call despite a challenging economy. As discussed
in our prior submissions, there is also substantial equity in the Hotel
available to the Partnership to meet its current and future obligations and to
address any deficits in the Partnership accounts.
It is not clear from the staff's comment why it has taken the position that it
does not appear that there is a contractual obligation for Evon and its
related shareholders to fund the accumulated deficit in Justice. If the
staff's position is based on a necessity of immediate enforceability of such
obligation, it is our belief that such is a not a requirement under Paragraph
15, as long as there is a "binding obligation to make good on such losses". We
submit that under the terms of the Partnership agreement, such an obligation
clearly exists. Such a binding obligation also applies to Evon as a general
partner under California law.
If the staff's position is based on the extent of the obligation to "make
good", that obligation should only extend to the portion of the accumulated
partnership deficit attributable to losses and not to the portion attributable
to distributions, which are not losses. As discussed above, the accumulated
deficit in the Justice partners' capital account is attributable to
partnership distributions.
CONCLUSION
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We submit that the Company has properly applied the guidance set forth in
Paragraph 15 of FASB ARB No. 51, and the exceptions thereto, and that no
revisions of the Company's financial statements are necessary. We believe that
we have established in this response and in our prior submissions that:
* There is a binding obligation under California law for a minority
interest holder, Evon Corporation, to make good on the losses and debts of the
Partnership;
* There is a binding obligation under the terms of the Partnership
agreement for Evon and its related limited partners to contribute the amount
of their partnership deficit to be distributed among the other limited
partners and thus make good on any losses that might exist; and
* The accumulated deficit in the Justice partners' capital account is
attributable to partnership distributions and not accumulated losses.
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We apologize to the staff for any confusion we might have created in our prior
responses by not detailing the nature and components of the accumulated
deficit at Justice and remain available to answer any questions that the staff
might have.
We also note that ARB No. 51 has been amended by FASB Statement No. 160, which
will become effective for the Company's fiscal year beginning July 1, 2009.
According to the FASB, Statement No. 160 results in "more transparent
reporting of the net income attributable to the noncontrolling interest."
Statement No. 160 was also enacted to address and clarify the many gaps,
conflicts and uncertainties in the guidance that existed under ARB No. 51.
Although the Company prepared its financial statements in accordance with that
prior guidance, it looks forward to the implementation of Statement No. 160.
We submit that any revisions to the Company's previously issued financial
statements to charge all of the losses of Justice to the Company would result
in financial statements that are not transparent and which do not fairly
represent the Company's financial position.
In connection with responding to your comments, the Company acknowledges that:
* the Company is responsible for the adequacy and accuracy of the
disclosure in the filings;
* staff comments or changes to disclosure in response to staff comments do
not foreclose the Commission from taking any action with respect to the
filings; and
* the Company may not assert staff comments as a defense in any proceeding
initiated by the Commission or any person under the federal securities
laws of the United States.
If you require further information or have further comments, please feel free
to call me at my direct number at (310) 889-2511 or you can reach me at my
direct facsimile number (310) 496-1606.
Sincerely,
/s/ David T. Nguyen
David T. Nguyen
Treasurer and Controller
Principal Financial Officer
cc: John V. Winfield
Michael G. Zybala
Burr, Pilger & Mayer LLP
Audit Committee
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