SEC Company Response from CASTLE ARCH REAL ESTATE INVESTMENT COMPANY, LLC (CIK 0001321742) — Aug 19, 2005
CASTLE ARCH REAL ESTATE INVESTMENT COMPANY, LLC (CIK 0001321742)
Date: Aug. 19, 2005 · CIK: 0001321742 · Accession: 0001078782-05-000355
AI Filing Summary & Sentiment
Referenced dates: June 2, 2005
Letter
Securities And Exchange Commission Castle Arch Real Estate Investment Company, L.L.C. Registration Statement on Form 10SB/A Amendment Filed May 31, 2005 File No. 0-51230
Dear Mss. McCusker, Luckey, Mittelman and Kim:
We are submitting our third amended registration statement on Form 10SB/A. This letter consolidates our responses to the 5 comments in your letter dated June 2, 2005 which contained the accounting comments inadvertently omitted by your office and the 34 comments contained in the June 14, 2005 letter. In order to expedite your review of the filings, we are pleased to provide the following itemized responses to your comments. Note that bold/underlined text throughout this response letter reflects a majority of the specific language that was added to the Form 10SB/A No.2. To further aid your review a black-lined copy comparing the latest amendment to the prior amendment is being submitted:
General
1.
Please contact filer support to revise the EDGAR tag to reflect that the filing is now on Form 10SB rather than Form 10.
Per our discussions with filer support and Ms. Kim we will continue to file amendments with an “SB” caption and file requested that the EDGAR tag be revised to reflect that the filing is on Form 10SB rather than Form 10.
2.
Please revise your website to delete any references to investment opportunities in Castle Arch, such as those contained in the “Opportunities” section or tell us why you believe those statements do not constitute an offer to sell securities under Section 2(a)(l) of the Securities Act of 1933 to the public in violation of Section 5 of the Securities Act of 1933. Further, we reissue that part of our previous comment asking that you provide us with hard copies of the screen shots from the password-protected site.
We have deleted references to investment opportunities. Per your request, hard copies of the screen shots from the password-protected site are included in the FedEx.
3.
As a related matter, we note the text on your homepage, “Our vision strength and unprecedented capitalization model provide the Castle Arch investor with a unique and fortified opportunity.” (emphasis added) Please tell us how your capitalization model is “unprecedented.”
We have removed the word “unprecedented” from the text on our homepage. Our Web site was created as part of logo design, letterhead and other company image materials. Our Web site is not used to raise capital or conduct our business or sell product. Therefore, we have no objections to removing language that can be perceived as puffery or needlessly promotional.
Risk Factors---Beginning on Page 2
4.
In light of your response to previous comment 41, please add a risk factor describing the impact on common unit holders as a result of the preferred dividend and liquidation rights of preferred unit holders.
We now add a risk factor stating that:
Holders of common units have a greater risk than holders of our preferred member units because preferred units have liquidation preferences over common units.
Holders of our preferred member units have liquidation preferences over our common units. The result is that in the event of any liquidation, dissolution or winding up of our affairs, whether voluntary or involuntary, the holders of record of our preferred member units will be entitled to recover their investment prior and in preference to any distribution of any of our remaining assets or surplus funds, if any remain, to the holders of our common units.
Need for substantial additional funds
5.
Expand your response to previous comment 5 to quantify the amount of funding needed to complete the purchase of properties in Fresno and for employment compensation for the coming year. Provide estimates where actual figures are not available.
We have added the following language after the first sentence of the risk factor: Our executives collectively earn $80,000 per month or a collective total of $960,000 per year. In addition, other employees bring our estimated total employment compensation outlays for the next 12 months at approximately $1,150,000. Cash requirements for property purchases in the next 12 months are likely to be in the tens of millions of dollars.
We cannot accurately quantify the exact amounts that we will need for land transactions due to the fact that we are not yet familiar with many of the likely land purchase opportunities that we are likely to consider executing upon in the next 12 months.
The Success of Our Company Depends on the Continuing Efforts...page 6
6.
Expand your response to previous comment 7 to briefly describe the “other obligations." We note that some of those obligations relate to other real estate ventures that may pose conflicts of interest for management members in dividing their time among other ventures that may yield greater income or fees for them. For example, information previously on your website revealed that Mr. Geringer owns and manages at least two other properties and that Mr. Child is a managing member of two other real estate and holding companies. As a related matter, consider specifying any risks posed by the fact that your CEO may also devote as much time as he may deem necessary in fulfilling his obligations to Castle Arch whi1e he simultaneously serves as CEO for Covol Technologies.
We have added the following language:
For example, Mr. Geringer owns and manages other properties and Mr. Child is a managing member of two other real estate and holding companies and our CEO is a board member and officer of several other companies.
Please note that Mr. Cochran is no longer CEO of Covol Technologies.
Supermajority – Page 6
7.
In your response to previous comment 8, expand to disclose that your CEO currently holds 42% of your voting common stock so investors can evaluate the level of influence your CEO has in achieving the super-majority vote required for the various actions by members. We note that he currently holds enough voting stock to prevent his own removal from office. Please also list the other actions requiring super-majority vote as mentioned in section 6.14 of your May 12, 2005 Amended Operating Agreement.
We now state that:
Proposals to make amendments to our operating agreement, change our company into another legal form, or merge with another entity must be approved by the affirmative vote of members holding at least 70% of our outstanding common units. In addition, we now state that our chief executive officer may only be removed by the vote of a 70% supermajority of our members, but currently holds enough common units, 42%, to unilaterally vote down any other measure requiring supermajority vote, including a vote to remove him from office.
Business
8.
We note your response to comment nine in our prior letter, however, we reissue our previous comment asking you to include a description and timetable of the specific steps required in order to generate revenues and to quantify the costs to achieve each step. For example, describe the steps and associated costs in connection with your formation and organization, your capital raising and financing efforts, property acquisition, property design, construction and development, and disposition of developed properties. Currently, your disclosure focuses on the process for obtaining government approvals.
We have broadened the disclosure to further describe our formation and organization and our capital raising and financing efforts. In addition, we have clarified that In the past six months, our primary operational focus has been identifying raw land which we can entitle and resell without doing any physical development. Thus, currently property design, construction and development and disposition of developed properties, other than entitled properties, is outside of our operational focus and we believe misleading to discuss as anything more than a possible future business activity.
9.
Please expand your disclosure to reveal the amount of earnest money and other costs expended on the two larger parcels in Fresno to date. Also, clarify your intentions with respect to those two parcels in light of your statement that you will demand a refund of purchase money. The statement implies that you will cease further efforts to acquire those properties, however, your reference in the last paragraph on page 10 to the four properties being sufficient to generate income for you implies otherwise. Please clarify yon intentions relating to the larger properties throughout your filing.
We now disclose $200,000 in earnest money for the two properties. In addition, we clarify that “While we believe that we will ultimately purchase and resell the two Fresno properties, we anticipate that we will demand a refund of purchase money on a majority of our future purchase contracts.”
10.
We note your response to comment 10 in our prior letter. Please further describe what you mean by “growth stage.” For example, disclose whether you are referring to the time period until you generate revenues or become profitable. Please briefly describe your borrowing and leveraging policies after the growth stage.
We used the term “growth phase” but have now deleted it. We now state that “In addition, we may use appropriate levels of debt to finance and close on properties that we have under contract where we estimate that the debt would not jeopardize our ability to meet our current obligations, maintain sufficient capital reserves for the subsequent 12 months and allow us to be considered economically viable by traditional banks and investment banks.”
11.
We note your response to comment 12 in our prior letter. Please revise each bullet to briefly describe your basis for the disclosure. In addition, it is unclear how your management concluded that one competitive advantage is the “upside return potential from land development" given all the risks you disclose are involved in deve1oping, securing land use permits and approvals, and maintaining the property.
We have removed each bullet point and its accompanying statement as we do not believe it helps the investor as it contains statements redundant do other disclosures in the document.
12.
As a related matter, it is unclear how you determined that you maintain a diversified real estate portfolio given your concentration on the retail, commercial and industrial sectors in a limited area. Tell us also how presenting loans to your members that are secured by the land purchased represents a competitive advantage. In your response you should consider comparing your strategies with industry, standard; on these subjects.
We have removed statements that reference a diversified real estate portfolio or our managers’ collective ability to deliver such. In addition, we have removed statements relating to any competitive advantage to our investments being in land (as opposed to capital deployments on technology, R&D or manufacturing which our management considers to lack the security of a land investment).
13.
We note your response to previous comment 14. Please revise to clarify your business plan by describing the material terms of each purchase option contract that you have entered into, disclosing the purchase options you intend to exercise and the ones for which you will demand a refund. Please discuss the likelihood of receiving a refund under the terms of the agreements. We note that in Note L to the Financial Statements, you state that $100,000 was paid as an earnest money deposit and that upon expiration of the review period the deposits become non-refundable. Please file these purchase option contracts as exhibits.
We do not actually enter into option contracts, but rather place deposits on land to hold it while we consider whether or not to purchase it. Thus, we have the option to fully purchase the land, but we are not actually entering into an option contract per se. We have added disclosures to identifying the location, size, purchase price and deposits paid and deposit date on each of the properties upon which we have paid deposits. Excepting the Fresno properties, we are not bound to pay, nor have we paid, more than 15% of our $4,419,412 in assets. Our largest deposit was $200,000. Based on our assets, we calculate that contracts that “will be performed” must exceed $650,000 before the contract must be filed as an exhibit. Thus, we do not believe that we are required to file these contracts under Regulation SB, Item 601(10)(i)(c).
14.
As a related matter, please expand your discussion to disclose specifically why you will be demanding refunds for purchase money on most of your purchase contracts. Specify the time that has lapsed since you provided the purchase money, the amount paid, and the foreseeable entitlement difficulties you encountered.
As stated in our response to comment 13, we have added disclosures to identifying the location, size, purchase price and deposits paid and deposit date on each of the properties upon which we have paid deposits. We do not currently believe that we will be demanding refunds on the majority of those properties. Other than our general disclosures about the difficulties in working properties through the entitlement process, we do not see any specific material difficulties. As was the case with the properties located in Bakersfield and Nashville, if unforeseen difficulties do arise we will not complete the purchase and will attempt to receive a refund on our deposit.
15.
We note your response to previous comment 16 and issue the comment. Please note that where applicable you may submit a request for confidential treatment on certain information contained in any exhibits you file pursuant to Item 601 of Regulation S-B. Refer to Rule 24b-2 under the Securities and Exchange Act of 1934 and Staff Legal Bulletin No. 1 which is available on our website at www.sec.gov. Please note that generally disclosure required by Regulation S-B is not an appropriate subject for confidential treatment, regardless of an exemption under FOIA. Refer to Section ILB2. of Staff Legal Bulletin No. l.
We have addressed previous comment 16 in our responses to present comments 14 and 15. We also add that “it is possible to flip the property during the entitlement process.”
16.
With respect to your response to previous Comment 17, your statement that you have encountered no significant or unexpected regulatory restrictions or problems in gaining approval appears to conflict with your statement in response to comment 14 indicating that you will be demanding a refund of purchase money on a majority of your contracts due to foreseeable entitlement difficulties discovered by management. Please advise.
We do not believe that that language was contradictory. Nevertheless, neither phrase appears in this amendment.
17.
Please also expand your response to previous comment 17 to provide support for management’s belief of patterns of resistance among local groups. Please give specific examples of such resistance where possible.
Our management has not encountered any specific resistance. However, resistance to changes in the status quo are common. Especially, where larger parcels are being developed. We reference this type of resistance in our competition section to detail how a larger company may have an advantage over us because they may have the funds to change their plans, take on a resistance group, or wait our a resolution from a lawsuit, etc. The Fresno detail is no longer relevant as we are in the process of selling
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CORRESP 1 filename1.htm Messrs David S. Hunt email: dh@hunt-pc.com The Hunt Law Corporation A Professional Corporation 66 Exchange Place Salt Lake City, Utah 84111 Telephone: (801) 355-7878 Facsimile: (801) 906-6164 August 18, 2005 Kelly McCusker Cicely Luckey Peggy Kim, Esq. Charito A. Mittelman, Esq. Securities And Exchange Commission 450 Fifth Street, N.W. Washington D.C. 20549 Mail Stop 0409 Re: Castle Arch Real Estate Investment Company, L.L.C. Registration Statement on Form 10SB/A Amendment Filed May 31, 2005 File No. 0-51230 Dear Mss. McCusker, Luckey, Mittelman and Kim: We are submitting our third amended registration statement on Form 10SB/A. This letter consolidates our responses to the 5 comments in your letter dated June 2, 2005 which contained the accounting comments inadvertently omitted by your office and the 34 comments contained in the June 14, 2005 letter. In order to expedite your review of the filings, we are pleased to provide the following itemized responses to your comments. Note that bold/underlined text throughout this response letter reflects a majority of the specific language that was added to the Form 10SB/A No.2. To further aid your review a black-lined copy comparing the latest amendment to the prior amendment is being submitted: General 1. Please contact filer support to revise the EDGAR tag to reflect that the filing is now on Form 10SB rather than Form 10. Per our discussions with filer support and Ms. Kim we will continue to file amendments with an “SB” caption and file requested that the EDGAR tag be revised to reflect that the filing is on Form 10SB rather than Form 10. 1 2. Please revise your website to delete any references to investment opportunities in Castle Arch, such as those contained in the “Opportunities” section or tell us why you believe those statements do not constitute an offer to sell securities under Section 2(a)(l) of the Securities Act of 1933 to the public in violation of Section 5 of the Securities Act of 1933. Further, we reissue that part of our previous comment asking that you provide us with hard copies of the screen shots from the password-protected site. We have deleted references to investment opportunities. Per your request, hard copies of the screen shots from the password-protected site are included in the FedEx. 3. As a related matter, we note the text on your homepage, “Our vision strength and unprecedented capitalization model provide the Castle Arch investor with a unique and fortified opportunity.” (emphasis added) Please tell us how your capitalization model is “unprecedented.” We have removed the word “unprecedented” from the text on our homepage. Our Web site was created as part of logo design, letterhead and other company image materials. Our Web site is not used to raise capital or conduct our business or sell product. Therefore, we have no objections to removing language that can be perceived as puffery or needlessly promotional. Risk Factors---Beginning on Page 2 4. In light of your response to previous comment 41, please add a risk factor describing the impact on common unit holders as a result of the preferred dividend and liquidation rights of preferred unit holders. We now add a risk factor stating that: Holders of common units have a greater risk than holders of our preferred member units because preferred units have liquidation preferences over common units. Holders of our preferred member units have liquidation preferences over our common units. The result is that in the event of any liquidation, dissolution or winding up of our affairs, whether voluntary or involuntary, the holders of record of our preferred member units will be entitled to recover their investment prior and in preference to any distribution of any of our remaining assets or surplus funds, if any remain, to the holders of our common units. 2 Need for substantial additional funds 5. Expand your response to previous comment 5 to quantify the amount of funding needed to complete the purchase of properties in Fresno and for employment compensation for the coming year. Provide estimates where actual figures are not available. We have added the following language after the first sentence of the risk factor: Our executives collectively earn $80,000 per month or a collective total of $960,000 per year. In addition, other employees bring our estimated total employment compensation outlays for the next 12 months at approximately $1,150,000. Cash requirements for property purchases in the next 12 months are likely to be in the tens of millions of dollars. We cannot accurately quantify the exact amounts that we will need for land transactions due to the fact that we are not yet familiar with many of the likely land purchase opportunities that we are likely to consider executing upon in the next 12 months. The Success of Our Company Depends on the Continuing Efforts...page 6 6. Expand your response to previous comment 7 to briefly describe the “other obligations." We note that some of those obligations relate to other real estate ventures that may pose conflicts of interest for management members in dividing their time among other ventures that may yield greater income or fees for them. For example, information previously on your website revealed that Mr. Geringer owns and manages at least two other properties and that Mr. Child is a managing member of two other real estate and holding companies. As a related matter, consider specifying any risks posed by the fact that your CEO may also devote as much time as he may deem necessary in fulfilling his obligations to Castle Arch whi1e he simultaneously serves as CEO for Covol Technologies. We have added the following language: For example, Mr. Geringer owns and manages other properties and Mr. Child is a managing member of two other real estate and holding companies and our CEO is a board member and officer of several other companies. Please note that Mr. Cochran is no longer CEO of Covol Technologies. 3 Supermajority – Page 6 7. In your response to previous comment 8, expand to disclose that your CEO currently holds 42% of your voting common stock so investors can evaluate the level of influence your CEO has in achieving the super-majority vote required for the various actions by members. We note that he currently holds enough voting stock to prevent his own removal from office. Please also list the other actions requiring super-majority vote as mentioned in section 6.14 of your May 12, 2005 Amended Operating Agreement. We now state that: Proposals to make amendments to our operating agreement, change our company into another legal form, or merge with another entity must be approved by the affirmative vote of members holding at least 70% of our outstanding common units. In addition, we now state that our chief executive officer may only be removed by the vote of a 70% supermajority of our members, but currently holds enough common units, 42%, to unilaterally vote down any other measure requiring supermajority vote, including a vote to remove him from office. Business 8. We note your response to comment nine in our prior letter, however, we reissue our previous comment asking you to include a description and timetable of the specific steps required in order to generate revenues and to quantify the costs to achieve each step. For example, describe the steps and associated costs in connection with your formation and organization, your capital raising and financing efforts, property acquisition, property design, construction and development, and disposition of developed properties. Currently, your disclosure focuses on the process for obtaining government approvals. We have broadened the disclosure to further describe our formation and organization and our capital raising and financing efforts. In addition, we have clarified that In the past six months, our primary operational focus has been identifying raw land which we can entitle and resell without doing any physical development. Thus, currently property design, construction and development and disposition of developed properties, other than entitled properties, is outside of our operational focus and we believe misleading to discuss as anything more than a possible future business activity. 4 9. Please expand your disclosure to reveal the amount of earnest money and other costs expended on the two larger parcels in Fresno to date. Also, clarify your intentions with respect to those two parcels in light of your statement that you will demand a refund of purchase money. The statement implies that you will cease further efforts to acquire those properties, however, your reference in the last paragraph on page 10 to the four properties being sufficient to generate income for you implies otherwise. Please clarify yon intentions relating to the larger properties throughout your filing. We now disclose $200,000 in earnest money for the two properties. In addition, we clarify that “While we believe that we will ultimately purchase and resell the two Fresno properties, we anticipate that we will demand a refund of purchase money on a majority of our future purchase contracts.” 10. We note your response to comment 10 in our prior letter. Please further describe what you mean by “growth stage.” For example, disclose whether you are referring to the time period until you generate revenues or become profitable. Please briefly describe your borrowing and leveraging policies after the growth stage. We used the term “growth phase” but have now deleted it. We now state that “In addition, we may use appropriate levels of debt to finance and close on properties that we have under contract where we estimate that the debt would not jeopardize our ability to meet our current obligations, maintain sufficient capital reserves for the subsequent 12 months and allow us to be considered economically viable by traditional banks and investment banks.” 11. We note your response to comment 12 in our prior letter. Please revise each bullet to briefly describe your basis for the disclosure. In addition, it is unclear how your management concluded that one competitive advantage is the “upside return potential from land development" given all the risks you disclose are involved in deve1oping, securing land use permits and approvals, and maintaining the property. We have removed each bullet point and its accompanying statement as we do not believe it helps the investor as it contains statements redundant do other disclosures in the document. 12. As a related matter, it is unclear how you determined that you maintain a diversified real estate portfolio given your concentration on the retail, commercial and industrial sectors in a limited area. Tell us also how presenting loans to your members that are secured by the land purchased represents a competitive advantage. In your response you should consider comparing your strategies with industry, standard; on these subjects. 5 We have removed statements that reference a diversified real estate portfolio or our managers’ collective ability to deliver such. In addition, we have removed statements relating to any competitive advantage to our investments being in land (as opposed to capital deployments on technology, R&D or manufacturing which our management considers to lack the security of a land investment). 13. We note your response to previous comment 14. Please revise to clarify your business plan by describing the material terms of each purchase option contract that you have entered into, disclosing the purchase options you intend to exercise and the ones for which you will demand a refund. Please discuss the likelihood of receiving a refund under the terms of the agreements. We note that in Note L to the Financial Statements, you state that $100,000 was paid as an earnest money deposit and that upon expiration of the review period the deposits become non-refundable. Please file these purchase option contracts as exhibits. We do not actually enter into option contracts, but rather place deposits on land to hold it while we consider whether or not to purchase it. Thus, we have the option to fully purchase the land, but we are not actually entering into an option contract per se. We have added disclosures to identifying the location, size, purchase price and deposits paid and deposit date on each of the properties upon which we have paid deposits. Excepting the Fresno properties, we are not bound to pay, nor have we paid, more than 15% of our $4,419,412 in assets. Our largest deposit was $200,000. Based on our assets, we calculate that contracts that “will be performed” must exceed $650,000 before the contract must be filed as an exhibit. Thus, we do not believe that we are required to file these contracts under Regulation SB, Item 601(10)(i)(c). 14. As a related matter, please expand your discussion to disclose specifically why you will be demanding refunds for purchase money on most of your purchase contracts. Specify the time that has lapsed since you provided the purchase money, the amount paid, and the foreseeable entitlement difficulties you encountered. As stated in our response to comment 13, we have added disclosures to identifying the location, size, purchase price and deposits paid and deposit date on each of the properties upon which we have paid deposits. We do not currently believe that we will be demanding refunds on the majority of those properties. Other than our general disclosures about the difficulties in working properties through the entitlement process, we do not see any specific material difficulties. As was the case with the properties located in Bakersfield and Nashville, if unforeseen difficulties do arise we will not complete the purchase and will attempt to receive a refund on our deposit. 6 15. We note your response to previous comment 16 and issue the comment. Please note that where applicable you may submit a request for confidential treatment on certain information contained in any exhibits you file pursuant to Item 601 of Regulation S-B. Refer to Rule 24b-2 under the Securities and Exchange Act of 1934 and Staff Legal Bulletin No. 1 which is available on our website at www.sec.gov. Please note that generally disclosure required by Regulation S-B is not an appropriate subject for confidential treatment, regardless of an exemption under FOIA. Refer to Section ILB2. of Staff Legal Bulletin No. l. We have addressed previous comment 16 in our responses to present comments 14 and 15. We also add that “it is possible to flip the property during the entitlement process.” 16. With respect to your response to previous Comment 17, your statement that you have encountered no significant or unexpected regulatory restrictions or problems in gaining approval appears to conflict with your statement in response to comment 14 indicating that you will be demanding a refund of purchase money on a majority of your contracts due to foreseeable entitlement difficulties discovered by management. Please advise. We do not believe that that language was contradictory. Nevertheless, neither phrase appears in this amendment. 17. Please also expand your response to previous comment 17 to provide support for management’s belief of patterns of resistance among local groups. Please give specific examples of such resistance where possible. Our management has not encountered any specific resistance. However, resistance to changes in the status quo are common. Especially, where larger parcels are being developed. We reference this type of resistance in our competition section to detail how a larger company may have an advantage over us because they may have the funds to change their plans, take on a resistance group, or wait our a resolution from a lawsuit, etc. The Fresno detail is no longer relevant as we are in the process of selling