[JAFFE LETTERHEAD]
PSUGAR@JAFFELAW.COM
248.727.1456
August 3, 2006
Daniel L. Gordon, Branch Chief
Eric C. McPhee, Staff Accountant
United States Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549
Re: Sun Communities, Inc. -- 10-K for 2005
The Staff has requested in telephone calls with Sun's CFO that Sun
Communities, Inc. and Sun Communities Operating Limited Partnership ("SCOLP",
and both registrants together, "Sun") explain why the 2001 and 2002 columns in
the 5-year Selected Financial Data included in Sun's Annual Report for the Year
Ended December 31, 2005 on Form 10-K,1 have not been restated to conform to the
findings in the Commission's Administrative Order entered on February 27, 2006
(the "Order"). By separate letter dated July 13, 2006, the Staff has requested
that Sun explain why certain disclosures regarding the Order were not made in
Sun's Quarterly Report for the Quarter Ended March 31, 2006. Essentially, this
latter inquiry is directly tied to resolution of the restatement issue raised by
the Staff's telephone calls and Sun proposes to resolve the disclosure issues
regarding it's 10-Q reports in a manner consistent with the resolution of the
10-K restatement issue.
This response to the Staff's request is submitted on behalf of Sun. Sun's
response communicated by telephone to members of the Staff was that Sun did not
believe restatement was required because the findings in the Order applied
accounting principles and suggested understatements of losses in amounts that
(a) were determined by the Staff, (b) were never
- -------------------------
1 Item 301 of Regulation S-K requires the registrant to supply selected
financial data for each of the last five fiscal years for the purpose of
highlighting "significant trends in the registrant's financial condition
and results of operations."
August 3, 2006
Page 2
explained to Sun, (c) to Sun's knowledge are unsupported and unsupportable by
GAAP and (d) were never admitted by Sun. The Corporation Finance Staff now
suggests that if Sun did not agree with the findings it never should have
consented to the Order. This position is in total contradiction to the
foundational understanding and basis for the Order, which specifically states
that Sun neither admits nor denies the findings in the Order. The issue of
restatement was not overlooked nor ignored during negotiation of the terms of
the Order. The Staff and Sun disagreed over the appropriate loss
calculations and the position that Sun would not restate the 2001 and
2002 financial information was explicitly expressed in conversations leading to
the offers by Sun resulting in the Order. It is akin to double jeopardy for the
Enforcement Staff to recommend entry of a Consent Order without any specific
requirement or suggestion that the Selected Financial Data be restated and then
have the Corporation Finance Staff demand that a restatement be made in
accordance with the Order.
Nevertheless, Sun has agreed to present to the Corporation Finance Staff
for its consideration, revised Selected Financial Data for 2001 and 2002, and
related explanatory disclosure that fully reflects the accounting conclusions
contained in the findings in the Order. That presentation is enclosed.
The presentation reflects the following elements of the Order (with
references to paragraph numbers in the Order):
1. The presentation applies equity method accounting in accordance
with SOP 78-9 and its requirement that losses should only be
allocated to outside investors if it is probable that those
investors will bear their share of the losses associated with
that portion of the ownership. The Order finds that the
non-recourse promissory notes portion of 3 of the 4 investors'
purchases ($6m of the total $13.2m purchased) do not support
the conclusion that the outside investors will bear their
share of the losses associated with that portion of ownership.
(Order, para. 4,b and 5). The $7.2m in non-refundable,
completely forfeitable cash paid by these investors would
unequivocally satisfy the probability test and allocation of
losses to that portion of the investment by these investors is
appropriate under SOP 78-9.
2. The presentation considers and applies FAS 66 to the sales in the
manner suggested in the Order. The Order concludes that the sales
do not transfer the usual risks and rewards of ownership due to
SCOLP's continuing involvement with the properties. 2 (Order,
para. 4,c). Despite the clear instruction of SOP 78-9 set forth
in paragraph 1 above, that at least the cash portion of the
transfers is
- -------------------------
2 Respecting its commitment to neither admit nor deny the Commission's
findings in proceedings before the Commission, Sun respectfully asserts
that these conclusions are neither supported by the underlying agreements,
which are mischaracterized in the Order, nor are they an appropriate
interpretation of FAS 66, since, among other defects, there is no guidance
supporting the Order's conclusion that "a continuing involvement with the
underlying SunChamp real estate properties constitutes a continuing
involvement with the members' interests sold by SCOLP to the investors,"
and that conclusion contradicts the facts of the underlying agreements,
expectations and conduct of the parties. Order, para. 4, c, (2).
August 3, 2006
Page 3
respected for the purpose of allocating losses, the presentation
disregards the sales to investors for the purpose of allocating
losses and fully allocates to Sun 50% of the losses. (Order,
para. 6).
3. The presentation reflects the SunChamp losses in the periods
incurred, rather than applying the 90-day lag. 3 (Order, para.
7,a).
4. As the presentation disregards the sales to investors for the
purpose of allocating SunChamp losses, the timing of recognition
of these sales is irrelevant. (Order, para. 7,b).
5. Since the booking of the reserves and countervailing offset of
expenses against the reserves had no impact on the year-end
statements in 2001 or 2002, no adjustment for these items is
reflected in the presentation. (Order para. 7,c).
6. The presentation allocates to Sun 50% of the total losses of
SunChamp in each period based on SunChamp's internal financial
statements adjusted as required by GAAP. 4 (See Order, para. 8).
The enclosed presentation is an attempt to reflect the findings in the
Order in recalculated Selected Financial Data for 2001 and 2002. Schedule I
reflects the adjusting entries and the effect on the reported data. Schedule II
presents a draft of the revised Selected Financial Data reflecting the
adjustments.
We had discussed the notion that if the Staff agrees with this
presentation, Sun would amend its 2005 10K to include the presentation. Further,
Sun would amend its Q1 2006 (and Q2 2006) 10Q to fully describe its approach to
reflecting the Order in the Selected Financial Data chart. However, in the
process of completing the attached calculations, Sun has concluded that it
cannot follow the proposed procedure we discussed. Among other concerns, it is
not clear to us whether the typical 3.02 and 9.06 certifications would apply to
the unaudited 2000 and 2001 columns in a 5-year summary ("other financial
information" contained in the report). We are concerned that no officer of Sun
could provide those certifications with respect to these adjustments. We would
like to discuss this dilemma with you and hear your thoughts as to possible
solutions. We also would like to discuss the materiality issues at that time.
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3 Respecting its commitment to neither admit nor deny the Commission's
findings in proceedings before the Commission, Sun respectfully asserts
that use of the 90-day lag in Q1 2000 was completely justified and
consistent with GAAP requirements and that once the 90-day lag was
employed, GAAP requires that it be continued for subsequent periods.
4 The allegedly understated loss figures in the Order - $4.7m in 2001 and
$2.7m in 2002 - have no basis discernable to Sun. For example, the total
SunChamp losses for 2001 were $4.6m. Sun's maximum portion would have been
$2.3m. Similarly, the adjusted total SunChamp losses for 2002 were $5.4m.
Sun's maximum portion would have been $2.8m. Sun recognized and reported
$0.8m of equity losses from SunChamp during 2002. This means the maximum
possible understatement for 2002 was $2.0m ($2.8m less the $0.8m reported).
Further, reversing interest income recognized on the disregarded notes in
these years still would not produce the loss figures in the Order.
August 3, 2006
Page 4
Once you have had the opportunity to review the presentation, please call
me and we can arrange a discussion of the issues and your thoughts and response.
Very truly yours,
JAFFE, RAITT, HEUER & WEISS
Professional Corporation
/s/ Peter Sugar
Peter Sugar
PS/
August 3, 2006
Page 5
SCHEDULE I
YEAR 2001 YEAR 2002
---------- ----------
GAAP Loss(1)................................. (4,594,287)(1) (5,402,848)(1)
========== ==========
50% allocation .............................. (2,297,144) (2,828,616)(5)
Remove:
Note Interest(2)............................. (338,112)(2) (277,900)(2)
Seasonal Expense Adj - POM(3)................ -- (3) -- (3)
Sale reserve(4).............................. -- (4) -- (4)
Adjust Minority Interest allocation ......... 351,000 300,000
--------------------------
Potential Adjustment ........................ (2,284,256) (2,806,516)
==========================
Reported Net Income ......................... 33,910 13,592
Add: Recorded loss .......................... -- 762
Subtract: Recalculated Loss ................. (2,297) (2,829)
Subtract: Note Interest ..................... (338)(2) (278)(2)
Adjust: Minority Interest allocation ........ 351 300
---------- ----------
Adjusted Net Income ......................... 31,626 11,547
========== ==========
Potential Earnings Overstatement - (in 000's) 2,284 2,045
NOTES:
1. Reflects overall SunChamp loss computed in accordance with GAAP.
2. Reverses interest income on investor notes recorded during the period.
3. Seasonal expense adjustments have no effect on reported annual results as
the reserves were offset by expenses in the subsequent quarter.
4. The reserve against gain on sale for anticipated expenses has no effect on
reported annual results as the reserves were offset by expenses during the
year.
5. Sun purchased Champion's interest in SunChamp LLC in December 2002.
Accordingly, loss allocation is 50% for January - November 2002 and 100%
for December 2002.
August 3, 2006
Page 6
SCHEDULE II
ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31,
unaudited unaudited
2005(c) 2004(b,c) 2003(b,c) 2002(b)(d) 2001(b)(d)
--------- --------- --------- --------- ---------
REVENUES
Income from rental property ................................ $ 178,985 $ 167,145 $ 158,546 $ 149,335 $ 136,455
Revenues from home sales ................................... 18,385 17,667 19,516 -- --
Rental home revenue ........................................ 9,084 4,558 2,881 -- --
Ancillary service revenues, net ............................ 741 532 530 -- --
Interest ................................................... 4,359 6,633 11,354 7,712 9,967
Gain on sale of land ....................................... -- 5,879 -- -- --
Other income (loss) ........................................ (689) 934 676 2,304 3,695
--------- --------- --------- --------- ---------
Total revenues ................................... 210,865 203,348 193,503 159,351 150,117
COSTS AND EXPENSES
Property operating and maintenance ......................... 45,091 41,544 39,562 33,516 29,022
Real estate taxes .......................................... 15,173 13,753 11,678 10,148 9,095
Cost of home sales ......................................... 13,861 14,242 13,879 -- --
Rental home operating and maintenance ...................... 7,372 3,368 1,620 -- --
General and administrative ................................. 20,310 21,229 16,563 7,722 7,373
Depreciation and amortization .............................. 54,330 45,217 43,940 37,720 32,540
Extinguishment of debt ..................................... -- 51,643 -- -- --
Deferred financing costs related to extinguished ........... -- 5,557 -- -- --
debt
Interest ................................................... 59,972 48,193 38,737 32,375 31,016
Impairment charge .......................................... -- -- 4,932 -- --
--------- --------- --------- --------- ---------
Total expenses ................................... 216,109 244,746 170,911 121,481 109,046
Equity income (loss) from affiliates ....................... (908) (151) 667 (18,694)(a) (2,166)
--------- --------- --------- --------- ---------
Income (loss) from operations ............... (6,152) (41,549) 23,259 19,176 38,905
Less income (loss) allocated to minority ................... 124 (944) 9,557 9,298 12,794
interest:
Income (loss) from continuing operations ................... (6,276) (40,605) 13,702 9,878 26,111
Income from discontinued operations ........................ 824 137 10,012 1,669 5,515
--------- --------- --------- --------- ---------
Net income (loss) ........................... $ (5,452) $ (40,468) $ 23,714 $ 11,547 $ 31,626
========= ========= ========= ========= =========
Weighted average common shares outstanding:
Basic ................................................. 17,716 18,318 18,206 17,595 17,258
========= ========= ========= ========= =========
Diluted ............................................... 17,716 18,318 18,345 17,781 17,440
========= ========= ========= ========= =========
Basic earnings (loss) per share:
Continuing operations ................................. $ (0.35) $ (2.22) $ 0.75 $ 0.56 $ 1.51
Discontinued operations ............................... $ 0.04 $ 0.01 $ 0.55 $ 0.10 $ 0.32
--------- --------- --------- --------- ---------
Net income (loss) ..................................... $ (0.31) $ (2.21) $ 1.30 $ 0.66 $ 1.83
========= ========= ========= ========= =========
Diluted earnings (loss) per share:
Continuing operations ................................. $ (0.35) $ (2.22) $ 0.75 $ 0.56 $ 1.50
Discontinued operation................................. $ 0.04 $ 0.01 $ 0.54 $ 0.09 $ 0.32
--------- --------- --------- --------- ---------
Net income (loss) ..................................... $ (0.31) $ (2.21) $ 1.29 $ 0.65 $ 1.82
========= ========= ========= ========= =========
Distributions per common share ............................. $ 2.50 $ 2.44 $ 2.41 $ 2.29 $ 2.18
========= ========= ========= ========= =========
August 3, 2006
Page 7
SCHEDULE II
ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
unaudited unaudited
2005 2004 2003 2002(d) 2001(d)
---------- ---------- ---------- ---------- ----------
(In thousands except for per share and other data)
BALANCE SHEET DATA:
Rental property, before accumulated depreciation $1,458,122 $1,380,553 $1,220,405 $1,174,837 $ 969,936
Total assets ................................... $1,320,536 $1,403,167 $1,221,574 $1,163,698 $ 991,814
Total debt ..................................... $1,123,468 $1,078,442 $ 773,328 $ 667,373 $ 495,198
Stockholders' equity ........................... $ 143,257 $ 211,746 $ 326,610 $ 317,487 $ 327,357
OTHER DATA (AT END OF PERIOD):
Total properties ............................... 135 136 127 129 116
Total sites .................................... 47,385 46,856 43,875 43,959 40,544
(a) Included in equity income (loss) from affiliates in 2002 is a $13.6 million
valuation adjustment of the Company's investment in Origen.
(b) Revenues and expenses for the years ended December 31, 2004, 2003, 2002 and
2001 have been restated to reflect the reclassification required under SFAS
No. 144 for the properties sold in 2005. Also, revenues and expenses for the
years ended December 31, 2002 and 2001 have been restated to reflect the
reclassifications required under SFAS No. 144 for the properties sold in
2003.
(c) Selected financial data for 2005, 2004 and 2003 includes amounts from SHS
which was consolidated during 2003.
(d) Interest income and equity loss from affiliates (and related data) for the
years ended 2002 and 2001 have been restated to give effect to the
application of FAS 66 in the manner set forth in the findings of the
Securities and Exchange Commission in the Consent Order entered by the SEC
and the Company on February 27, 2006. The Company neither admitted nor
denied the findings in the Order.