Question
From: (redacted)
Sent: Friday, January 27, 2006 10:13 AM
To: Verne, B. Michael
Subject:Exempt assets under Sec. 802.4
Mike:
We represent a buyer who ispurchasing a controlling interest in an LLC. The LLC's only assets are acontrolling interest in another LLC. The assets held by that LLC consist forthe most part of a hotel/casino that was heavily damaged by Hurricane Katrina.Construction of the hotel/casino was completed and an occupancy permit wasgranted was few days before the hurricane hit. The hotel/casino never went intooperation. A restaurant on the premises opened for business and operated for afew days. Its did not derived revenues of $5 million. The LLC's other principalassets are potential insurance claims which it carries on its balance sheet asan account receivable.
With respect to the hotel/casino,the question is whether it qualifies as an exempt asset under Section 802.(c)as unproductive real property. The facility meets the definition ofunproductive real property set out in Section 802.2(c)(1). The issue is whetherthe exclusion in Section 802.2(c)(2) that relates to non-manufacturingfacilities that have not yet begun operation applies. Section 802.2 (c) is thecorollary to Section 802.2(a) which exempts new facilities capable ofcommencing operations immediately with minimal additional capital investmentprovided that the facility is held by a person who held the facility at alltimes solely for resale. The SBP to Section 802.2(c) makes clear that theexclusion set out in Section 802.2(c)(2) was designed to exclude new facilities(turnkey facilities) that are held by a person who neither constructed thefacility for sale nor held the facility at all times for resale.
Because the hotel/casinonever commenced operation and is not capable of commencing operationsimmediately without substantial additional capital investment, the exclusionset out in Section 802.2 (c)(2) arguably does not apply. Further support forthis conclusion is set out in a statement in the SBP that provides "[ A]new facility that is partially complete, is not ready to commence operation inthe immediate future and requires substantial additional capital investment isnot yet a manufacturing or non-manufacturing facility within the .... (meaningof the rule)." Granted the hotel/casino was completed and received an occupancypermit the day before Katrina hit, but the current condition of the facility issuch that it is not ready to commence operations without substantial additionalcapital investment and thus does not fall within the exclusion.
The other principal assetheld by the LLC are potential insurance claims covering the losses sustained bythe hurricane. The claims are in dispute and it is not certain what theproceeds will be ultimately. The potential insurance proceeds arguably are theequivalent of cash and thus qualify as exempt assets.
Please let me know whetheryou agree with the above analysis and the conclusions that the hotel/casino andpotential insurance proceeds qualify as exempt assets under these facts.