December
7, 2010
Ms.
Cicely LaMothe
Branch
Chief
Securities
and Exchange Commission
Washington,
D.C. 20549
|
Re:
|
American
Spectrum Realty, Inc.
Form
10-K for Year Ended December 31, 2009
File
No. 001-16785
|
Dear Ms.
La Mothe:
I and the
others who participated in the conference call with you and Ms. Crittenden on
November 30 appreciate very much your time and attention. We believe
that the call helped us in understanding your questions, and we hope that it,
and our responses, aid in your understanding of the nature of the Evergreen
acquisition and the Company's positions on the issues you have
raised.
We think
it would be useful in this letter first to summarize the nature of the Evergreen
acquisition and then to respond to the particular comments in your letter of
November 5.
The Evergreen
Acquisition
Pursuant
to the Evergreen acquisition, which closed on January 17, 2010, American
Spectrum, through various affiliates, acquired all of Evergreen's right, title
and interest in and to the following assets: (a) management, advisory
and other contracts to which Evergreen was entitled to receive fees (all of
which are referred to throughout this letter as "management contracts") (b)
intangible property such as computer software, trade names and books and
records, (c) office equipment and furnishings, (d) any direct or indirect
interests of Evergreen in any property managed by Evergreen and (e) three
specified office leases or subleases.
With
respect to the acquired assets, American Spectrum has concluded that the assets
described in clauses (b), (c) and (e) above (the intangible property, the
equipment and furnishings and the office leases) had no more than nominal
value. In fact, American Spectrum does not use the "Evergreen" name
or any of the office leases.
AMERICAN
SPECTRUM REALTY, INC.
2401
Fountain View, Suite 510, Houston, TX 77057
PH/
713-706-6200 FX/713-706-6201
www.americanspectrum.com
The
direct or indirect interest of Evergreen in the managed properties were of the
following nature. Certain of Evergreen's principals or affiliates
(the "Evergreen Entities") where the managers of approximately 31 limited
liability companies, each of which was, in turn, the owner of a fractional
tenant-in-common interest in one of the managed properties. In each
of these cases, American Spectrum received an agreement to appoint American
Spectrum as a replacement for the Evergreen Entities as manager of the LLCs,
subject in each case to approval of such replacement by a majority in interest
of the members of the LLC. Although the Evergreen Entity was named as
the "Manager" of each LLC in its Operating Agreement, Evergreen did not have an
equity or economic interest in the LLCs as an equity "member" of the LLCs, and
American Spectrum did not acquire an equity interest in the LLCs from Evergreen,
except for the following membership interests (which is based on American
Spectrum's most recent analysis of the Evergreen accounting records, which have
proven somewhat incomplete): (a) a membership interest of 11.2% in an LLC which
has an 8.9% tenant-in-common interest in one property (for an indirect
"property" interest of approximately 1.0%), (b) a membership interest of 38.2%
in an LLC which has a 2.6% tenant-in-common interest in one property (for an
indirect "property" interest of approximately 1.0%), (c) a membership interest
of 4.7% in an LLC which has a 2.2% tenant-in-common interest in one property
(for an indirect "property" interest of approximately 1.0%), (d) a membership
interest of 46.8% in an LLC which has a 2.1% tenant-in-common interest in one
property (for an indirect "property" interest of approximately 1.0%), (e) a
membership interest of 40.8% in an LLC which has a 1.3% tenant-in-common
interest in one property (for an indirect "property" interest of approximately
0.5%), (f) a membership interest of 80.3% in an LLC which has a 2.8%
tenant-in-common interest in one property (for an indirect "property" interest
of approximately 2.2%), (g) a membership interest of 21.4% in an LLC which has a
4.7% tenant-in-common interest in one property (for an indirect "property"
interest of approximately 1.0%), and (h) a membership interest of 47.6% in an
LLC which has a 2.0% tenant-in-common interest in one property (for an indirect
"property" interest of approximately 1.0%).
In
addition, American Spectrum believes that, with respect to two of the managed
properties, Evergreen had nominal interests of 0.7% and 0.7%, respectively, in
the properties as a tenant-in-common, and those interests were transferred to
American Spectrum. American Spectrum has concluded that the interests
have no more than a nominal value.
The
principal reason why Evergreen had the interests described in the two preceding
paragraphs, and why American Spectrum acquired those interests, was to be able
to veto any attempt by the tenants-in-common of a managed property to replace it
as the property manager, since any such replacement would require unanimity on
the part of the tenants-in-common of a property. By acquiring the
manager position in the 31 LLCs and the nominal tenant-in-common interests in
two other properties, American Spectrum will likely be able to block any attempt
to remove it as property manager. Accordingly, American Spectrum has
concluded that the so-called property "interests" acquired had no material value
independent of the value of the related property management
contracts.
The
acquisition agreement did not require American Spectrum to offer employment to
any Evergreen employees after an initial transition period ending March 15, 2010
(approximately 60 days after the closing), except for a requirement that it
enter into a six-month consulting relationship with one employee, and the
acquisition was not conditioned on the willingness of any employee to accept
employment with American Spectrum. Similarly, American Spectrum was
not required to assume or continue any of Evergreen's employee benefit
plans.
American
Spectrum did offer employment to the Evergreen employees, and employed 237 of
them on an interim basis; none of these employees were former Evergreen
management employees. Since the acquisition, however, 190 of those
former Evergreen employees have ceased to be employed by American Spectrum, and
American Spectrum has employed approximately 183 new employees to handle the
management of the properties formerly managed by Evergreen. Although
the former Evergreen employees were useful during an interim transition period,
they did not have unique skills or knowledge that required their continued
employment, and many were easily replaced by new employees whom American
Spectrum found more qualified and/or desired to train itself to be able to more
effectively execute American Spectrum's management philosophy, style and
methods.
It should
be emphasized as well that each of the acquired management contracts could not
be formally assigned without consent by the tenants-in-common, and those
consents were not obtained prior to the closing. The parties,
therefore, agreed that American Spectrum would manage the properties as a
sub-contractors under Evergreen's management contract until those consents were,
in fact, obtained.
Comment
1
As
indicated above, American Spectrum believes that the only significant assets
acquired by American Spectrum from Evergreen were the management
contracts. Moreover, because consent of the tenants-in-common is
required for the actual assignment of the contracts and has, in most cases, not
yet been obtained, American Spectrum has, to date, acquired the income stream
from the contracts (as a subcontractor to Evergreen), rather than the contracts
themselves. In that respect, American Spectrum did not have in place
all of the "inputs" necessary to conduct the Evergreen management business as it
was conducted by Evergreen.
Furthermore,
we believe that, even if American Spectrum were deemed to have acquired a
business rather than simply the contract assets, we believe that the accounting
entry would have been the same (except for the classification of the asset),
since we do not believe it would be appropriate to allocate any of the purchase
price to any aspects of the business apart from the contracts, such as any
particular know-how or an assembled work force, as described above since the
work force had no material value, if any.
Comment
2
The
interests which were acquired in the limited liability companies were not equity
"membership" interests, except for the nominal interests described
above. The LLC interests acquired consisted instead only of the right
to manage the entities as the designated "manager" of the limited liability
companies. That right to manage does not have any economic value in
itself. It is a valuable right only in that it enables American
Spectrum to veto any attempt to terminate the underlying property management
contracts. As such, this right has no value apart from the value of
the underlying management contracts. We believe, therefore, that
these management rights should not be accounted for independent of the
contracts.
Furthermore,
at the time of the acquisition and at the time of the first quarter 10-Q,
American Spectrum had not yet become the designated "manager" of the
LLCs. It has done so in some cases only later, after consents of a
majority-in-interest of the members of the individual LLCs were
obtained.
Comment
3
American
Spectrum was not the manager of the LLC entities either at the time of the
closing or on March 31, 2010, since the required consents had not then been
obtained. Subsequently, after those consents were obtained, American
Spectrum did become the "manager" of certain of the LLCs and could perhaps be
deemed to have a "control" relationship for that reason, but it did not even
then have a controlling equity interests in the LLCs. In fact, it had
no equity interest at all in the LLCs.
We
acknowledge that American Spectrum incorrectly indicated in Note 4 on page 10 of
our 2010 first quarter 10-Q that it had acquired, in some cases, an interest as
a "general partner" rather than as a "manager" in an entity which owned a
tenant-in-common property interest. We also acknowledge that the
disclosure may have suggested that this interest was perhaps an equity
interest. American Spectrum will revise its disclosure in subsequent
filings to make the nature of its interests in these entities
clearer.
Comment
4
American
Spectrum acquired the management contracts on the basis of its belief that they
were valuable assets with an indefinite life, and the value that it placed on
those assets reflected this belief. This belief was, in turn, based
on American Spectrum's assessment of the value of the underlying properties,
which it valued as it would a property which it might purchase. As
with its investment properties, American Spectrum looked for long-term value and
was not interested in properties with an economic useful life of fewer than 40
years, the period during which it depreciates all of its owned
properties.
If the
Staff believes that it is inappropriate to assign an indefinite life to the
management contracts, American Spectrum submits that the useful life should be
40 years, which it believes to be an appropriate economic useful life for the
underlying properties, just as it is for the properties owned by American
Spectrum. American Spectrum would not have paid the value it did for
the management contracts if it had believed, based on economic, competitive and
other relevant factors, that they had shorter useful lives.
American
Spectrum proposes that it henceforth amortize the management contracts on the
basis of a 40-year useful life. As indicated in the analysis below,
American Spectrum does not believe the amortization of the management contracts
over 40 years would have materially impacted any of its prior
filings. It therefore does not believe that a restatement of prior
periods is required and proposes that the amortization for prior periods be
caught up in its next filing.
|
|
|
As
Filed
|
|
|
As
Revised
|
|
|
Change
|
|
|
%
Chg.
|
|
|
Three Months Ended
March 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization expense
|
|
$ |
3,570,000 |
|
|
$ |
3,645,000 |
|
|
$ |
75,000 |
|
|
|
2.1 |
% |
|
Deferred
income tax benefit
|
|
$ |
1,134,000 |
|
|
$ |
1,164,000 |
|
|
$ |
30,000 |
|
|
|
2.6 |
% |
|
Loss
from continuing operations
|
|
$ |
(1,872,000 |
) |
|
$ |
(1,905,000 |
) |
|
$ |
(33,000 |
) |
|
|
1.8 |
% |
|
Net
income attributable to noncontrolling interests
|
|
$ |
466,000 |
|
|
$ |
478,000 |
|
|
$ |
12,000 |
|
|
|
2.6 |
% |
|
Net
income attributable to American Spectrum Realty, Inc.
|
|
$ |
509,000 |
|
|
$ |
476,000 |
|
|
$ |
(33,000 |
) |
|
|
6.5 |
% |
|
Loss
from continuing operations per share
|
|
$ |
(0.53 |
) |
|
$ |
(0.54 |
) |
|
$ |
(0.01 |
) |
|
|
1.9 |
% |
|
Net
income per share
|
|
$ |
0.18 |
|
|
$ |
0.17 |
|
|
$ |
(0.01 |
) |
|
|
5.6 |
% |
|
|
|
As
Filed
|
|
|
As
Revised
|
|
|
Change
|
|
|
%
Chg.
|
|
|
Three Months Ended
June 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization expense
|
|
$ |
3,579,000 |
|
|
$ |
3,692,000 |
|
|
$ |
113,000 |
|
|
|
3.2 |
% |
|
Deferred
income tax benefit
|
|
$ |
1,762,000 |
|
|
$ |
1,803,000 |
|
|
$ |
41,000 |
|
|
|
2.3 |
% |
|
Loss
from continuing operations
|
|
$ |
(2,933,000 |
) |
|
$ |
(2,981,000 |
) |
|
$ |
(48,000 |
) |
|
|
1.6 |
% |
|
Net
loss attributable to noncontrolling interests
|
|
$ |
878,000 |
|
|
$ |
902,000 |
|
|
$ |
24,000 |
|
|
|
2.7 |
% |
|
Net
loss attributable to American Spectrum Realty, Inc.
|
|
$ |
(2,055,000 |
) |
|
$ |
(2,103,000 |
) |
|
$ |
(48,000 |
) |
|
|
2.3 |
% |
|
Loss
from continuing operations per share
|
|
$ |
(0.70 |
) |
|
$ |
(0.72 |
) |
|
$ |
(0.02 |
) |
|
|
2.9 |
% |
|
Net
loss per share
|
|
$ |
(0.70 |
) |
|
$ |
(0.72 |
) |
|
$ |
(0.02 |
) |
|
|
2.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization expense
|
|
$ |
3,608,000 |
|
|
$ |
3,721,000 |
|
|
$ |
113,000 |
|
|
|
3.1 |
% |
|
Deferred
income tax benefit
|
|
$ |
1,697,000 |
|
|
$ |
1,738,000 |
|
|
$ |
41,000 |
|
|
|
2.4 |
% |
|
Loss
from continuing operations
|
|
$ |
(3,245,000 |
) |
|
$ |
(3,291,000 |
) |
|
$ |
(46,000 |
) |
|
|
1.4 |
% |
|
Net
loss attributable to noncontrolling interests
|
|
$ |
1,092,000 |
|
|
$ |
1,117,000 |
|
|
$ |
25,000 |
|
|
|
2.3 |
% |
|
Net
loss attributable to American Spectrum Realty, Inc.
|
|
$ |
(2,153,000 |
) |
|
$ |
(2,199,000 |
) |
|
$ |
(46,000 |
) |
|
|
2.1 |
% |
|
Loss
from continuing operations per share
|
|
$ |
(0.73 |
) |
|
$ |
(0.75 |
) |
|
$ |
(0.02 |
) |
|
|
2.7 |
% |
|
Net
loss per share
|
|
$ |
(0.73 |
) |
|
$ |
(0.75 |
) |
|
$ |
(0.02 |
) |
|
|
2.7 |
% |
Comment
5
As
indicated above, the only direct or indirect real estate assets acquired from
Evergreen were nominal membership interests in eight investor LLCs and nominal
tenant-in-common interests in two properties. Based on the fair
market value of these properties, American Spectrum's interests are
immaterial.
___________________
Thank you
again for your attention and your consideration.
|
|
Sincerely
yours,
/s/
Anthony Eppolito
Anthony
Eppolito
CFO
|
|
cc:
|
William
J. Carden
Yolanda
Crittendon
Chip
Werlein
Ben
Bongiorno
Howard
F. Hart
|