SecProbe.io

CORRESP
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    Brian
                                            S. Korn

Manatt, Phelps &
Phillips, LLP

Direct Dial: (212)
790-4510

BKorn@manatt.com

 

 

    May 10, 2024
     

 

 

 

Via EDGAR

 

U.S. Securities and Exchange Commission

Division of Corporation Finance

100 F Street, N.E.

Washington, D.C. 20549-6010

 

 Attention: Benjamin Holt and David Link

Office of Real Estate and Construction

 Re: YS RE RAF I LLC

Offering Statement on Form 1-A POS

Post-qualification Amendment

Filed November 6, 2023

File No. 024-11755

 

Dear All:

 

We are submitting this letter
on behalf of our client, YS RE RAF I LLC (the “Company”), in response to the written comments of the staff (the “Staff”)
of the United States Securities and Exchange Commission (the “SEC”) contained in your letter dated February 9, 2024 (the “Comment
Letter”) in connection with the Company’s Post-Qualification Offering Statement on Form 1-A, as submitted with the SEC on
November 6, 2023 (the “Offering Circular Amendment”).

 

For your convenience, our
responses are set forth below, with the headings and numbered items of this letter corresponding to the headings and numbered items contained
in the Comment Letter. Each of the comments from the Comment Letter is restated in bold and italics prior to the Company’s response.
Capitalized terms used but not defined in this letter shall have the respective meanings given to such terms in the Offering Circular
Amendment. All page number references in the Company’s responses are to page numbers in the Offering Circular Amendment, which is
being refiled concurrently with this response.

 

General

 

1.       We
note your response to prior comment 1 and your response to comment 3 of our comment letter dated July 21, 2023. Please provide information
and an analysis under Section 3 of the Investment Company Act of 1940 (the "40 Act") with respect to whether the Company is
an investment company within the meaning of the 40 Act. As part of your response, please identify and explain (including a detailed calculation
on an unconsolidated basis) what assets held by the Company are “investment securities” for the purposes of Section 3 of the
40 Act, as well as identifying the percentage of the value of the Company’s total assets that are “investment securities.”

 

 

     

     

 

 

May 10, 2024

Page 2

 

 

Response: A.	Section
3(a)(1)(C)

 

In conducting an analysis
of the Company for purposes of the definition of “investment company” in Section 3(a)(1)(C) of the Investment Company Act
of 1940, as amended (the “Investment Company Act”), we have concluded that the existing assets of the Company may be treated
in the following manner: (i) the Company’s four investments in joint ventures, as well as its indirect investments in fee interests
in real estate, are not “investment securities,” as defined in Section 3(a)(2) of the Investment Company Act; (ii) the Company’s
investment in the Vertical Ventures mortgage loan should be treated as an “investment security”; and (iii) the Company’s
investment in the Scottsdale B note mortgage loan participation should be treated as an “investment security.” As of the date
hereof, the Company had no other assets. Our reasons for treating the Company’s assets in the manner described above and the analysis
of the Company under Section 3(a)(1)(C) are set forth below.

 

We have determined that the
Company is not an “investment company,” as defined in Section 3(a)(1)(C) of the Investment Company Act. This conclusion is
based on our determination that the Company is engaged in a real estate business (not the business of investing, reinvesting, owning,
holding or trading in securities). In addition, we have determined that no more than 40% of the value of the Company’s total assets,
on an unconsolidated basis (exclusive of cash items and Government securities), consists of “investment securities.”

 

In drawing the conclusion
above regarding the Company’s status under Section 3(a)(1)(C), we have taken the position that the Company’s investment in
each of the joint ventures is not a “security,” as defined in Section 2(a)(36) of the Investment Company Act and, therefore,
is not an “investment security.” This position was based principally on our view that the Company, as co-venturer in each
of the joint ventures, has rights under the related operating agreement that give it the power to exercise a controlling influence over
the business and affairs of the joint venture. Like a general partner in a general partnership, the Company is not a mere passive investor
in the joint ventures, but is very involved in their affairs. The Company’s investment in each joint venture, therefore, is not
an investment contract under the Howey investment contract test of a security. See SEC v. W.J. Howey, 328 U.S. 293 (1946).
For a discussion of these rights, please see our response to the Staff’s Comment No. 2 below.

 

 

 

 

     

     

 

 

May 10, 2024

Page 3

 

 

Our conclusion that the Company’s
joint venture interests should not be treated as “securities” is well established. It is supported by court decisions. See
e.g., Williamson v. Tucker, 645 F.2d 404 (5th Cir. 1981) (concluding that a venturer’s interests in joint ventures that owned
a parcel of real property were not securities under the Howey investment contract test where there was evidence to show that the
venturers were not mere passive investors but were involved in the business and affairs of the joint venture). It is also supported by
statements of the Commission and its staff. See e.g., Testimony Concerning Initial Public Offerings of Investment Managers of Hedge Fund
and Private Equity Funds Before the U.S. Senate Committee on Finance, by Andrew J. Donahue, Director, Division of Investment Management
(July 1, 2007) (citing Williamson v. Tucker for the proposition that an investment adviser’s general partnership interests
in underlying private funds for which it serves as investment adviser are not securities and, thus, investment securities under the Investment
Company Act); Investment Company Release No. 22597, n. 80 and accompanying text (adopting rules under Section 3(c)(7) of the Investment
Company Act and citing Williamson v. Tucker with respect to the non-securities treatment of general partnership interests in investment
funds relying on the exclusion in Section 3(c)(7)).

 

We have also concluded that
the fee interests in real property held directly by the joint ventures are not “securities” for purposes of the Investment
Company Act and, therefore, are not “investment securities.” We base this conclusion on the long-held staff position that
it “would not consider fee interests in real estate to be securities,” unless the interests are considered to be investment
contracts under the Howey investment contract test of a security. See Arizona Property Investors, Limited, SEC Staff No-Action
Letter, 1979 WL 14220 (Aug. 9, 1979). There is nothing to indicate that the fee interests in real estate held by the joint ventures should
be treated as investment contracts under the Howey investment contract test.

 

In determining the value
to ascribe to joint venture interests that are not treated as securities, we have taken the approach described in NAB Asset Corporation,
SEC Staff No-Action Letter (1991) (the “NAB Letter”). In that letter, the staff granted no-action relief to permit a corporation
that proposed to acquire mortgage loans directly or indirectly through a general partnership (with up to five partners) to rely on the
exclusion from the definition of “investment company” contained in Section 3(c)(5)(C) of the Investment Company Act. In granting
relief, the staff agreed that the corporation could treat its proportionate interests in general partnerships that owned or held fee
interests in real estate as the functional equivalent of owning these interests directly for purposes of the Investment Company Act.
We have determined, on the basis of the position taken in the NAB Letter, that it is appropriate to treat the Company’s interests
in the joint ventures similarly.

 

In light of the foregoing,
we have applied the following values and drawn the following conclusions regarding the Company’s status as an investment company
under Section 3(a)(1)(C):

 

 · As of the date hereof, the value of the Company’s adjusted total assets (total assets less cash
items and Government securities, as defined in Section 2(a)(16) of the Investment Company Act) equaled $31,543,438;

 

     

     

 

 

May 10, 2024

Page 4

 

 · As of this date, the value of the Company’s aggregate investment, through the joint venture interests,
in fee interests in real estate equaled $23,321,076, which comprised 73.93% of the value of the Company’s adjusted total assets;

 

 · Therefore, as of the date hereof, the Company is not an “investment company,” as defined in
Section 3(a)(1)(C) of the Investment Company Act because it is not engaged in the business of investing, reinvesting, owning, holding
or trading in securities, and no more than 40% of the value of its adjusted total assets consists of “investment securities.”

 

2.       We
note your response to prior comment 1 and your response to comment 3 of our comment letter dated July 21, 2023. The Company refers to
 “control rights” that give it the ability to exert a controlling influence over the business and affairs of the joint ventures.
Please elaborate on the control rights to which the Company is referring.

 

Response: The
Company is a co-venturer in joint ventures that own fee interests and other interests in real property. In connection with this investment,
the Company has retained some or all of the following rights under the terms of the governing agreement for each joint venture that give
it the power to exert a controlling influence over the business and affairs of the joint venture:

 

a.       To
be an independent contractor for or to transact business with, including being a contractor for or to be an agent of, the joint venture;

 

b.       To
consult with or advise the other co-venturer or any other person with respect to any matter, including the business of the joint venture,
or to act or cause the joint venture or any other person to take or refrain from taking any action, including by proposing, approving,
consenting, or disapproving, by voting or otherwise, with respect to any matter, including the business of the joint venture;

 

c.       To
act as surety, guarantor or endorser for the joint venture, to guarantee or assume one or more obligations of the joint venture, to borrow
money from the joint venture, to lend money to the joint venture, or to provide collateral for the joint venture;

 

d.       To
call, request, or attend or participate at a meeting of the co-venturer of the joint venture;

 

e.       To
wind up the joint venture;

 

f.       To
serve on a committee of the joint venture or the co-venturer or to appoint, elect or otherwise participate in the choice of a representative
or another person to serve on such a committee, and to act as a member of any such committee directly or by or through any such representative
or other person;

 

 

     

     

 

 

May 10, 2024

Page 5

 

 

g.       To
act or cause the taking or refraining from the taking of any action, including by proposing, approving, consenting or disapproving, by
voting or otherwise, with respect to one or more of the following matters:

 

i.       The
dissolution and winding up of the joint venture or an election to continue the joint venture or the business of the joint venture;

 

ii.       The
sale, exchange, lease, mortgage, assignment, pledge or other transfer of, or granting of a security interest in, any asset or assets of
the joint venture;

 

iii.       The
incurrence, renewal, refinancing, or payment or other discharge of indebtedness by the joint venture;

 

iv.       A
change in the nature of the business of the joint venture;

 

v.       The
admission, removal or retention of a co-venturer;

 

vi.       A
transaction or other matter involving an actual or potential conflict of interest;

 

vii.       An
amendment to the governing agreement of the joint venture;

 

viii.       The
merger or consolidation of the joint venture;

 

ix.       The
indemnification of any co-venturer;

 

x.       The
making of, or calling for, or the making of other determinations in connection with, contributions to the joint venture; and

 

xi.       The
making of, or the making of other determinations in connection with or concerning, investments, including investments in property, whether
real or personal or mixed, either directly or indirectly, by the joint venture.

 

These rights entitle the Company
to actively manage the investment, and the Company and its manager do manage the investments. They are not perfunctory. The Company and
its manager are intensely involved in the day-to-day functioning of the business and in each underlying real estate investment. Strategic
decisions regarding each property are discussed with the Company on an ongoing basis.

 

3.       We
note your response to comment 3 of our comment letter dated July 21, 2023. The Company states that it intends to “meet the portfolio
test set forth by the Commission in no-action letters.” Please discuss the no-action letters that support the Company’s position,
including a discussion of the portfolio test and an analysis of how the Company would meet the portfolio test.

 

     

     

 

 

May 10, 2024

Page 6

 

Response: In various letters, the
Commission staff has stated that in order to meet the portfolio test of Section 3(c)(5)(C) of the Investment Company Act, the following
requirements must be met: (a) at least 55% of the issuer’s total assets must consist of “qualifying interests” (the
 “55% test”); and (b) the remaining 45% must consist primarily of real estate-type interests (the “45% test”).
See e.g., Redwood Trust, Inc., SEC Staff No-Action Letter (Aug. 15, 2019) (“Redwood Trust Letter”); Great Ajax Funding,
LLC, SEC Staff No-Action Letter (Feb. 12, 2018) (the “Ajax Funding Letter”); the NAB Letter; Salomon Brothers, Inc.,
SEC Staff No-Action Letter (June 17, 1985); United Bankers, Inc., SEC Staff No-Action Letter (Mar. 23, 1988) (“United Bankers
Letter”); Citytrust, SEC Staff No-Action Letter (Dec. 19, 1990) (“Citytrust Letter”); LaQuinta Motor Inns,
Inc., SEC Staff No-Action Letter (May 23, 1988) (“La Quinta Letter”); SEC, The Treatment of Structured Finance under
the Investment Company Act, Protecting Investors: A Half Century of Investment Company Regulation (1992) Ch. 1, at n. 345 and accompanying
text (“50th Anniversary Report”).

 

The Commission staff has stated
that to meet the 45% test, a company must invest at least 25% of its total assets in real estate-type assets or interests (subject to
reduction to the extent that it invests more than 55% of its total assets in assets meeting the 55% qualifying interests test), and it
may not invest more than 20% of its total assets in miscellaneous investments. See e.g., NAB Letter; Citytrust Letter; La Quinta Letter;
United Bankers.

 

The Commission staff has stated
that the following assets may be treated as “qualifying interests” for purposes of Section 3(c)(5)(C):

 

a.       a
mortgage loan secured exclusively by real estate in which the value of the real estate was equal to or greater than the note evidencing
the loan;

 

b.       a
mortgage loan in which 100% of the principal amount of the loan was fully secured by real estate at the time of origination and 100% of
the market value of the loan was fully secured by real estate at the time of acquisition;

 

c.       fee
interests in real estate;

 

d.       second
mortgages;

 

e.       deeds
of trust on real property;

 

f.       installment
land contracts;

 

 

     

     

 

 

May 10, 2024