MISSION WEST PROPERTIES, INC.
10050 Bandley Drive, Cupertino, CA 95014
Ph. 408-725-0700 Fax 408-725-1626
November 30, 2006
Ms. Linda van Doorn
Senior Assistant Chief Accountant
United States Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549
Re: Mission West Properties, Inc.
Response to Comments from the SEC on Form 10-K for Fiscal Year Ended
December 31, 2005, filed March 16, 2006
Forms 10-Q for the Fiscal Quarters Ended March 31, June 30 and September
30, 2006, filed May 10, August 8 and November 8, 2006
File No. 0-25235
Dear Ms. van Doorn:
This letter sets forth responses of Mission West Properties, Inc. (the
"Company") to your comments relating to the Company's Annual Report on Form 10-K
and Quarterly Reports on Form 10-Q contained in your letter dated November 20,
2006. The Staff comment is repeated in bold type below, and the Company's
response appears immediately beneath each comment.
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2006
FINANCIAL STATEMENTS
NOTE 5. VARIABLE INTEREST ENTITY, PAGE 7
1. PLEASE PROVIDE US WITH ADDITIONAL INFORMATION AS TO HOW YOU DETERMINED M&M
REAL ESTATE CONTROL & RESTRUCTURING, LLC IS A VIE AND THAT YOU ARE THE
PRIMARY BENEFICIARY IN ACCORDANCE WITH FIN 46(R).
Following the dramatic loss of jobs in the Silicon Valley created by the
dot.com bust there has been very modest job creation as a result of the
impact of outsourcing and off-shoring of jobs and increasing productivity.
This has resulted in a very gradual recovery in the Silicon Valley real
estate market. As a result of these market conditions, M&M Real Estate
Control & Restructuring, LLC ("M&M") was formed by two individuals,
unrelated to Mission West Properties, L.P. ("MSW"), for the purpose of
completing transactions similar to the one described below for landlords
that want to have the ability to lease buildings on a
long-term basis and would be prevented from doing so since those buildings
are leased by tenants who have vacated the buildings, have no plans to
re-occupy the buildings, and have been unable to sublease all or a portion
of these buildings. One of the M&M principals is a licensed real estate
agent.
In late 2005, M&M held discussions with MSW regarding a potential business
opportunity whereby in the case of a MSW tenant that is not occupying space
that it leases from MSW, the tenant may be interested, subject to certain
conditions and incentives, in assigning their lease to M&M in order to
remove the lease from their financial reporting and day to day management.
M&M proposed: (i) MSW consent to the assignment of lease from the MSW
tenant to M&M for the leased premises; (ii) MSW would release the MSW
tenant from any liability, except for third party claims and any hazardous
materials during the lease term prior to the assignment, if the MSW tenant
paid M&M the balance of its future lease obligation net of a modest
discount (approximately 3% to 4%); (iii) following the assignment of the
MSW tenant's lease to M&M, M&M would immediately commence marketing efforts
to sub-lease the space; and (iv) in the event M&M found another tenant
acceptable to MSW, M&M would receive a leasing commission.
Under FIN 46 (R) for an entity to qualify as a VIE one or more of the
following three characteristics must exist:
1. The equity investment at risk is not sufficient to permit the entity
to finance its activities without additional subordinated financial
support by any parties, including the equity holders.
2. The equity investors lack one or more of the following essential
characteristics of a controlling financial interest:
a. The direct or indirect ability to make decisions about the
entity's activities through voting or similar rights
b. The obligation to absorb the expected loss of the entity
c. The right to receive the expected residual returns of the entity.
3. The equity investors have voting rights that are not proportionate to
their economic interests, and the activities of the entity involve or
are conducted on behalf of an investor with a disproportionately small
voting interest.
Factors considered by management in determining whether M&M should be
considered a VIE for financial reporting purposes included the following:
- No equity was contributed by the partners in the formation of M&M.
- At present, the MSW assignment of a lease is the only property under
management by M&M.
- Because M&M is a newly formed entity it does not have an operating
history that demonstrates its ability to finance its activities
without additional subordinated financial support.
- All revenues, other than interest income, are generated by M&M from
MSW in the form of fees or commissions.
- MSW remains at risk, because if M&M's operating expenses exceed its
interest income, fees and commissions there would be insufficient
funds to meet the assigned lease obligation without additional
financial support from equity holders or other parties. MSW, which had
released the original tenant from its obligations under the lease,
would have to absorb the majority of any loss, making it the primary
beneficiary of M&M's activities.
Based on the proposed structure, MSW determined, and our independent
accountants (BDO Seidman LLP and Burr, Pilger & Mayer LLP) concurred, that
the most appropriate financial accounting for this transaction would be to
account for M&M as a VIE since it met characteristic number 1 outlined
above under FIN 46(R) resulting in recording the lease assignment to M&M as
a lease termination and recording the funds received by M&M from the MSW
tenant as restricted cash on MSW's balance sheet. As each month's rent is
paid by M&M under the assigned lease to MSW, the restricted cash balance is
reduced.
ITEM 4. CONTROLS AND PROCEDURES, PAGE 24
2. WE NOTE YOUR STATEMENT THAT "IN DESIGNING AND EVALUATING THE DISCLOSURE
CONTROLS AND PROCEDURES, MANAGEMENT RECOGNIZES THAT ANY CONTROLS AND
PROCEDURES, NO MATTER HOW WELL DESIGNED AND OPERATED, CAN PROVIDE ONLY
REASONABLE ASSURANCE OF ACHIEVING THE DESIRED CONTROL OBJECTIVES AND
MANAGEMENT NECESSARILY IS REQUIRED TO APPLY ITS JUDGMENT IN EVALUATING THE
COST-BENEFIT RELATIONSHIP OF POSSIBLE CONTROLS AND PROCEDURES." PLEASE
CONFIRM TO US AND REVISE IN FUTURE FILINGS TO DISCLOSE, IF TRUE, THAT YOUR
DISCLOSURE CONTROLS AND PROCEDURES ARE DESIGNED TO PROVIDE REASONABLE
ASSURANCE OF ACHIEVING THEIR OBJECTIVES AND THAT YOUR OFFICERS CONCLUDED
THAT YOUR DISCLOSURE CONTROLS AND PROCEDURES ARE EFFECTIVE AT THAT
REASONABLE ASSURANCE LEVEL. IN THE ALTERNATIVE, YOU MAY REMOVE THE
REFERENCE TO THE LEVEL OF ASSURANCE OF YOUR DISCLOSURE CONTROLS AND
PROCEDURES IN FUTURE FILINGS. PLEASE REFER TO SECTION II.F.4 OF
MANAGEMENT'S REPORTS ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND
CERTIFICATION OF DISCLOSURE IN EXCHANGE ACT PERIODIC REPORTS, SEC RELEASE
NO. 33-8238, AVAILABLE ON OUR WEBSITE AT
http://www.sec.gov/rules/final/33-8238.htm. PLEASE PROVIDE US WITH THE SAME
CONFIRMATION AS IT RELATES TO YOUR OFFICERS' CONCLUSIONS ON YOUR CONTROLS
AND PROCEDURES AS OF JUNE 30, 2006 AND SEPTEMBER 30, 2006.
We confirm to you our officers' conclusions on our controls and procedures
as of March 31, 2006, June 30, 2006 and September 30, 2006 were designed to
provide reasonable assurance of achieving their objectives and that our
officers concluded that our disclosure controls and procedures were
effective at that reasonable assurance level.
We will revise our disclosure in future filings to remove the reference to
the level of assurance of our disclosure controls and procedures.
In connection with the foregoing responses to your comments, the Registrant
acknowledges:
- The Company is responsible for the adequacy and accuracy of the
disclosure in the filing;
- SEC staff comments or changes to disclosure in response to SEC staff
comments do not foreclose the SEC from taking any action with respect
to the filing; and
- The Company may not assert SEC staff comments as a defense in any
proceeding initiated by the SEC or any person under the federal
securities laws of the United States.
Sincerely,
Mission West Properties, Inc.
/s/ Carl E. Berg
Carl E. Berg
Chairman and CEO