Section 260.140.117.4 - Forecasts(a) The presentation of predicted future results of operations of real estate programs shall be permitted but not required for specified property programs investing primarily in improved property and shall be prohibited for non-specified property programs or specified property programs investing primarily in unimproved land. The prospectus cover must contain in boldface type one of the following applicable statements:(1) For specified property programs: FORECASTS ARE CONTAINED IN THIS PROSPECTUS. ANY PREDICTIONS AND REPRESENTATIONS, WRITTEN OR ORAL, WHICH DO NOT CONFORM TO THOSE CONTAINED IN THE PROSPECTUS SHALL NOT BE PERMITTED.
(2) For non-specified property and unimproved land programs: THE USE OF FORECASTS IN THIS OFFERING IS PROHIBITED. ANY REPRESENTATIONS TO THE CONTRARY AND ANY PREDICTIONS, WRITTEN OR ORAL, AS TO THE AMOUNT OR CERTAINTY OF ANY PRESENT OR FUTURE CASH BENEFIT OR TAX CONSEQUENCE WHICH MAY FLOW FROM AN INVESTMENT IN THIS PROGRAM IS NOT PERMITTED.
(b) Forecasts for specified property programs shall be included in the prospectus, or sales material of the program only if they comply with the following requirements: (1) Presentation of Forecasts. Forecasts shall be realistic in their predictions and shall clearly identify the assumptions made with respect to all material features of the presentation. Forecasts shall be examined and reported upon by an independent certified public accountant in accordance with the Guide for Prospective Financial Statements and the Statement on Standards for Accountant's Services on Prospective Financial Information as promulgated by the American Institute of Certified Public Accountants, and that person or firm should be identified in the prospectus as being responsible for the examination of the forecasts. The report of the independent certified public accountant must be included in the prospectus. No forecasts shall be permitted in any sales literature which do not appear in the prospectus. If any forecasts are included in the sales literature, all forecasts must be presented.(2) Material Information. If predicted future results of operations are used, they shall be prepared in the form of a forecast meeting the requirements of paragraph (b)(1) and shall include all of the following information:(A) Annual predicted revenue by source, including the occupancy rate used in predicting rental revenue;(B) Annual predicted operating expenses and partnership administration expenses;(C) Debt service, including annual payments of principal and interest and points and financing fees, shown as dollars, not as percentages;(D) The required occupancy rate in order to meet debt service and all expenses;(E) Predicted annual cash flow stating the assumed occupancy rate;(F) Predicted annual depreciation and amortization with full description of methods to be used; and(G) Predicted annual taxable income or loss and a simplified explanation of the tax treatment of such results;(H) Predicted construction costs, including disclosure regarding contracts; and(I) Accounting policies, for example, with respect to points, financing costs and depreciation.(3) Presentation. Forecasts shall be presented in the following manner: (A) Forecasts shall prominently display a statement to the effect that they represent a mere prediction of future events based on assumptions which may or may not occur and may not be relied upon to indicate the actual results which will be obtained.(B) Explanatory notes describing assumptions made and referring to risk factors should be integrated with tabular and numerical information.(C) Any projections that supplement forecasts shall be clearly identified as supplemental projections, and it shall be stated that such projections are not within the scope of the accountant's examination of the forecast.(D) When a sale-leaseback is employed, the statement that the seller is assuming the operating risk and consequently may have charged a higher price for the property must be included.(4) Additional Disclosures and Limitations. The following additional information shall accompany or supplement the forecasts:
(A) Forecasts shall be for a period at least equivalent to the anticipated holding period for the property, or 10 years, whichever is shorter, and project the consequences of a sale of the property, including depreciation recapture, if applicable. The resale price must be reasonable. Normally, the total consideration paid for the properties shall be deemed a reasonable resale price except in special circumstances, e.g., some leasebacks, or subsidized housing. The sponsor may justify the proposed resale price by appropriate analysis of the projected financial characteristics of the property in the assumed year of sale. Sale consequences shall be presented in the following form or such other appropriate form as may be approved by the Commissioner:
HYPOTHETICAL SALE CONSEQUENCES
| ..........................Sale Price, | xxxx |
| ..........................Costs of sale; | xxxx |
| ..........................Net selling price; | xxxx |
| ..........................Taxable gain (loss) on sale with ordinary income and capital gain on each sale separately stated, | xxxx |
| ..........................Net sales proceeds; | xxxx |
| ..........................Less sponsor's participation in net sales proceeds; | xxxx |
| ..........................Net sales proceeds distributable to investors; | xxxx |
| ..........................Income tax liability; | xxxx |
| ..........................Net after tax proceeds to investors; | xxxx |
(B) Adequate disclosure shall be made of the changing economic effects upon the limited partners resulting principally from federal income tax consequences over the life of the partnership property, e.g., tax losses in early years followed by an increasing amount of taxable income in later years.(C) Forecasts shall disclose all possible undesirable tax consequences of an early sale of the program property (such as, depreciation recapture or the failure to sell the property at a price which would return sufficient cash to meet resulting tax liabilities of the participants).(D) In computing the return to investors, no appreciation, so called "equity buildup", or any other benefits from unrealized gains or value shall be shown or included.(E) Forecasts shall not be allowed for unimproved land. Instead, a table of deferred payments specifying the various holding costs, i.e., interest, taxes, and insurance shall be inserted. However, where the program intends to develop and sell the land as its primary business, a detailed cash flow statement showing the timing of expenditures and anticipated revenues shall be required. The consequences of a sale of the property shall be shown. The minimum sales price shall be the total consideration paid for the property, plus the necessary increase to cover all holding costs (and thereby achieve a sale of the property at a break-even price). The sale consequences shall include an expression of the average annual increase in the total consideration paid for the property in order to reach the break-even sales price. Information as to the timing of the sale as well as the sales price shall be included.Cal. Code Regs. Tit. 10, § 260.140.117.4
1. Amendment filed 3-12-74; effective thirtieth day thereafter (Register 74, No. 11).
2. Amendment of subsections (b)(3) and (b)(6) filed 1-22-75; effective thirtieth day thereafter (Register 75, No. 4).
3. Amendment filed 1-27-84; effective thirtieth day thereafter (Register 84, No. 4).
4. Repealer and new section filed 5-18-92; operative 6-17-92 (Register 92, No. 22). Note: Authority cited: Section 25610, Corporations Code. Reference: Section 25140, Corporations Code.
1. Amendment filed 3-12-74; effective thirtieth day thereafter (Register 74, No. 11).
2. Amendment of subsections (b)(3) and (b)(6) filed 1-22-75; effective thirtieth day thereafter (Register 75, No. 4).
3. Amendment filed 1-27-84; effective thirtieth day thereafter (Register 84, No. 4).
4. Repealer and new section filed 5-18-92; operative 6-17-92 (Register 92, No. 22).