The §3(c)(5)(C) asset test runs the qualifying-interest framework against the fifty-five-percent floor and the real-estate-related framework against the eighty-percent floor on each measurement date. This article walks the five-step framework against the fund’s balance sheet on the quarterly cycle.

Step 1: Build the asset inventory

The fund runs the asset inventory against the balance sheet on the measurement date. The inventory runs against each whole mortgage loan — note number, unpaid principal balance, position (first or subordinate), collateral class, and the loan-level value. The inventory runs against each B-note and mezzanine position — instrument, unpaid balance, position framework, and the loan-level value. The inventory runs against each MBS position — issuer, CUSIP, face amount, market value, and the security class. The inventory runs against each fee-interest holding — property address, ownership framework, and the fair-market value. The inventory runs against cash and Treasury balances on a separate framework against the asset categories.

Step 2: Classify each asset

The fund runs the classification framework against each asset on the inventory. The first classification runs the qualifying-interest framework — whole mortgage loans on a senior secured framework against real estate, fee interests in real estate, and other interests classified as qualifying under the SEC no-action framework. The second classification runs the real-estate-related framework — qualifying interests plus B-notes, mezzanine loans, agency MBS, equity interests in real-estate-operating companies, and other real-estate-related interests under the no-action framework. The third classification runs the miscellaneous framework — cash, Treasuries, and other non-real-estate assets. The fund runs the classification against the SEC no-action position framework on each asset and runs the documented rationale against each classification.

Step 3: Run the two-tier test

The fund runs the two-tier asset test against the balance sheet. The first-tier test runs the qualifying-interest framework against the fifty-five-percent floor — qualifying-interest dollar value divided by total assets dollar value. The result runs at or above the fifty-five-percent floor on the measurement date. The second-tier test runs the real-estate-related framework against the eighty-percent floor — real-estate-related dollar value (qualifying plus broader category) divided by total assets dollar value. The result runs at or above the eighty-percent floor on the measurement date. The fund runs the two-tier test result against the measurement-date balance sheet on the quarterly cycle.

Step 4: Document the test result

The fund runs the documentation framework against the test result. The documentation runs the asset inventory on the measurement date, the classification framework against each asset, the two-tier ratio against the fifty-five-percent and eighty-percent floors, and the documented rationale against the SEC no-action position framework on each classification. The documentation runs against the fund’s auditor and the fund’s SEC counsel on each measurement date.

Step 5: Run the annual review

The fund runs the annual review framework against the fund’s auditor and SEC counsel on the calendar-year cycle. The annual review runs the four-quarter test result against the auditor’s independent review, runs the asset-classification framework against SEC counsel’s independent review, and runs the documented no-action-position framework against each classification. The annual review runs the corrective-action framework against any test result that runs below the fifty-five-percent or eighty-percent floor and runs the asset-rebalancing framework against the subsequent measurement date.

Related Topics

This article is educational and does not constitute legal advice. The §3(c)(5)(C) framework runs under the Investment Company Act of 1940 against an entity primarily engaged in the business of purchasing or acquiring mortgages and other liens on and interests in real estate. The qualifying-interest classification runs against the SEC no-action position framework. Consult qualified SEC counsel on the specific asset-classification and operational framework against any private mortgage fund.

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