Tax-Exempts Challenge Private Fund Sponsors

Private funds continue to be one of the fastest growing and most aggressive segments of the real estate investment industry, with equity raises reaching and exceeding the $5 billion mark. Tax-exempt organizations such as pension funds, university endowments and private foundations are firmly ensconced as a significant source of real estate fund capital and consequently, fund sponsors are faced with coordinating a complex set of rules and regulations in properly structuring their funds.

As U.S. federal tax law limits the type of income that tax-exempt entities can receive on a tax-exempt basis, most tax-exempt organizations are highly motivated to assure that their investment in a real estate fund is structured to avoid the creation of taxable income. Private real estate funds are typically structured as pass-through entities for U.S. federal tax purposes, and sponsors and their counsel face additional complications imposed by pension and securities laws that overlap and often conflict with the tax laws and require a careful balancing of rules and objectives in the design of efficient structuring solutions.

If a real estate fund includes both taxable and tax-exempt investors and will utilize leverage on its underlying investments, income attributable to the debt-financed portion of its investments will constitute unrelated business taxable income (UBTI) [FN1] to the tax-exempt investors unless the fund complies with the detailed restrictions on tax allocations set forth under the so-called 'Fractions Rule' in the Internal Revenue Code (Code) and the related regulations issued thereunder. [FN2] The purpose of the Fractions Rule is to prevent tax avoidance by limiting the transfer of tax attributes from tax-exempt participants to taxable participants and vice versa.

The rule is difficult to apply as it requires the sponsor to anticipate and test every possible allocation of income and loss over the life of the fund. Clawback provisions and punitive mechanisms for addressing contribution defaults by investors, both of which are of particular importance to the real estate fund sponsor and are therefore typical in real estate funds, create uncertainties for Fractions Rule compliance.

Certainty of compliance is particularly important as any violation of the Fractions Rule converts all debt-financed income from the relevant investments to UBTI for any tax-exempt partner. Although the UBTI-cleansing benefits of the Fractions Rule are available to pension funds and university endowments, the rule specifically does not apply to private foundations, which leaves this attractive source of investment capital in need of an alternative tax planning tool.

The REIT Alternative

Real estate investment trusts (REITs) provide an alternative to relying on Fractions Rule compliance.

A REIT is a taxable entity [FN3] that elects REIT status and typically pays little entity-level tax because it can deduct all of its dividends in computing its 'REIT taxable income.' In order to maintain its special tax status, a REIT must satisfy numerous tests (the 'REIT rules') relating to organization and ownership, type of assets, source of income and distribution of income. [FN4]

Notably for the real estate fund sponsor,

(i) other than securities that qualify as real estate assets, governmental securities or securities in certain REIT affiliates, a REIT may not own more than 10 percent (by vote or by value) of the outstanding securities of any one issuer (with certain exclusions);

(ii) it must distribute at least 90 percent of its taxable income;

(iii) it must have at least 100 shareholders for at least 335 days of each taxable year;

(iv) not more than 50 percent of the ownership of the REIT may be held by five or fewer individuals (the '5/50 rule');

(v) it must be managed by one or more trustees or directors; and

(vi) it must have its beneficial ownership evidenced by freely transferable shares.

Because distributions from a REIT are taxed as dividends, which are expressly excluded from UBTI, [FN5] private foundations as well as other tax-exempt participants can invest in real estate funds employing a REIT structure (with certain exceptions) on equal footing with other investors. Nevertheless, the use of a REIT to eliminate UBTI may not be entirely successful in the case of REITs with significant pension fund ownership.

Specifically, if at any time during any taxable year a pension fund holds more than 10 percent, measured at cost, of a 'pension-held REIT,' [FN6] any UBTI that would have been cleansed by the inclusion of a REIT in the structure, will constitute UBTI to the pension fund holding such 10 percent or greater interest.

Complications and Risks

While inclusion of a REIT in the organizational structure of a real estate fund may resolve UBTI concerns, it is not without complications and risk.

As a general matter, fund sponsors are heavily incented to restrict an investor's ability to transfer interest in the fund. The free transferability of ownership required by the REIT rules, however, works in direct opposition to this sponsor preference.

The REIT rules also require ongoing maintenance and monitoring of corporate formalities, which means that annual shareholder meetings must be held and distributions of capital must be made appropriately. In the event the REIT rules cease to be satisfied, the entity will be subject to typical corporate taxation (i.e., two levels), an outcome that could be disastrous for the sponsor counting on receiving its carry after achieving a prescribed level of return for the investors.

In addition to these operational and administrative complications of REIT rule compliance, additional structural challenges are layered on by the Employee Retirement Income Security Act of 1974, as amended (ERISA) and the Investment Company Act of 1940, as amended (ICA).

Benefit plan investors (i.e., pension or profit-sharing plans sponsored by a U.S. or foreign employer or governmental entity, individual retirement accounts or collective investment funds or insurance company accounts deemed to hold pension plan money), present particular issues and require the fund sponsor to coordinate the often competing objectives of ERISA compliance and tax planning.

If 25 percent or more of any class of interests in a privately held real estate fund are owned by benefit plan investors, the fund will be subject to onerous ERISA fiduciary requirements unless the fund qualifies as a 'venture capital operating company' (VCOC) or 'real estate operating company' (REOC). [FN7] A fund will qualify as a VCOC or a REOC if at least 50 percent of its investments, measured at cost, are in 'operating companies,' in the case of a VCOC, or real estate assets, in the case of a REOC, over which the fund has and exercises direct contractual rights to substantially participate in or substantially influence the conduct of such portfolio company's management.

The fund must also actively exercise such management rights on an ongoing basis in the ordinary course of its business. The 50 percent test must be met at the time of the fund's first long-term investment and approximately annually thereafter, and such ongoing monitoring can significantly limit a fund's investment decisions.

A REOC is an 'operating company' for purposes of this test, and real estate assets held through wholly-owned subsidiaries are generally considered good REOC assets as the wholly owned subsidiary is disregarded. The practical implication of these definitions means a VCOC can own a REOC, but not vice versa, and a REOC cannot own another REOC.

Addressing the ICA

The ICA regulates any 'investment company' [FN8] whose primary activity is 'investing in securities' [FN9] of its portfolio companies including entities that directly or indirectly own real estate.

Unless an exemption from the ICA applies to a real estate fund (and to every entity within its corporate structure), the fund will be subject to the regulatory provisions of the ICA, which would require, among other things, filing a registration statement with the SEC, observing complicated restrictions with respect to affiliate transactions, and ensuring that its board (or similar governing body) is comprised of a majority of disinterested persons.

The fund can avoid these burdensome requirements by structuring itself so as to qualify for an exemption, of which the most frequently relied upon are: (i) the 'private investment fund' exemption, [FN10] (ii) the 'qualified purchaser' exemption [FN11] and (iii) the 'real estate' exemption. [FN12]

A fund will be exempt as a private investment fund if it has not more than 100 'beneficial owners' of its securities, subject to specific exclusions for 'knowledgeable employees' [FN13] and has not made (and does not plan to make) a public offering of its securities. Generally speaking, a 'knowledgeable employee' is an employee of the sponsor who is regularly involved in the evaluation and management of investments of the type made by the fund.

Under the qualified purchaser exemption, a fund will be exempt if its outstanding securities are owned exclusively by 'qualified purchasers,' defined as an individual or a family owned entity that owns at least $5 million in investments or any individual or entity that owns and invests not less than $25 million on a discretionary basis.

With respect to both the private fund and the qualified purchaser exemptions, certain 'look through' rules must be applied to investors in the fund (other than individuals) in order to determine whether or not such investor entity is counted as a single investor or whether all of the beneficial owners of that entity will need to be analyzed. The beneficial owners of an investor will need to be examined if such investor both holds a 10 percent or greater 'voting interest' in the fund and is itself relying on either the private investment fund exemption or the qualified purchaser exemption for exemption from the ICA requirements.

Even if the first 'look-through' rule does not apply, the beneficial owners of an investor will nevertheless need to be examined if the entity owner has been 'formed,' 'reformed,' or 'operated' for the purpose of investing in the investment fund entity. These two 'look-through' rules must, in turn, be applied to every upper tier owner until either the very 'top' individual owners (i.e., living persons) have been analyzed or the 'look-through' rules no longer apply.

With respect to the private investment fund exemption, the 'look-through' rules increase the number of beneficial owners for ICA purposes, making the 100 beneficial owner limit harder to satisfy. Similarly, the 'look-through' rules complicate compliance with the qualified purchaser exemption as the investment history of a broader pool is placed under the microscope for examination.

Individual owners who qualify as 'knowledgeable employees' of a fund are ignored for purposes of the 100 beneficial owner limit. Similarly, the general partner (or other manager) of an investment fund entity seeking to rely on the private investment fund exemption is generally ignored for purposes of the 100 beneficial owner limit unless such general partner is being used as a 'device to evade ICA registration.'

Under this 'device' exception, any investors in the general partner that are not active in the management of the investment fund entity will likely be counted towards the 100 beneficial owner limit. If an investment fund is comprised of more than one entity seeking to rely on the private investment fund exemption, then such entities are usually deemed to be 'integrated' and must collectively satisfy the 100 beneficial owner limit. Similarly, knowledgeable employees are disregarded for purposes of examining qualified purchasers.

It is worth noting that an inherent conflict exists between the 100 shareholder requirement under the REIT rules and the 100 beneficial owner limit under the private investment fund exemption to the ICA.

Traditionally, this conflict has been resolved through the presence of 'knowledgeable employees,' who purchase a nominal amount of shares and consequently insure that the 100 shareholder minimum is satisfied, but who are not counted for purposes of the 100 beneficial owner limit. Even in a relatively small shop, the fund sponsor should be able to find enough 'knowledgeable employees' to provide some cushion for the 100 shareholder requirement under the REIT rules.

Although this approach is generally accepted, there is some risk that the IRS could take the position that disregarded persons for ICA purposes should be disregarded as shareholders also. In addition, tax counsel will generally require a per share investment of at least $1,000 to gain comfort that there is economic substance to the shareholders' status as such.

Under the real estate exemption, a fund will be exempt from the ICA if it (i) is not engaged in the business of issuing redeemable securities, face-amount certificates of the installment type or periodic payment plan certificates and (ii) is 'primarily engaged' in the business of 'purchasing or otherwise acquiring mortgages and other liens on and interests in real estate.' [FN14]

No-action letters issued by the SEC have interpreted this exemption to require that an investment fund entity invest (i) at least 55 percent of its assets in mortgages and other liens on and interests in qualifying real estate assets (qualifying interests) and (ii) at least 25 percent of its assets in 'interests in real estate,' meaning the fund must hold at least 55 percent of its assets in 'qualifying interests' [FN15] and at least 25 percent of its assets in 'real estate-related assets,' subject to reduction to the extent that assets constituting 'qualifying interests' exceed 55 percent of the total assets of the entity.

Investment fund entities seeking to qualify under this exemption are thus allowed to hold up to 20 percent of their assets in any form except redeemable securities, face-amount certificates of the installment type or periodic payment plan certificates.

To date there is relatively little interpretation as to what constitutes 'qualifying interests,' and real estate fund sponsors are generally cautious about making investments in assets other than direct fee or leasehold interests in real estate. While preferred equity investments present attractive economics, the legal risks of failing to satisfy an ICA exemption make these opportunities taboo.

Potential Structures

The best way to illustrate the interplay of the REIT rules, ERISA and the ICA is to examine alternative structures.

Three potential fund structures described below demonstrate the competing considerations implicated by these regulatory regimes. Each case assumes that 25 percent of the investors in the fund are benefit plan investors and that the sponsor intends to employ a non pension-held REIT to cleanse UBTI.

A. REIT-Sub Structure. A fund sponsor may elect to mitigate UBTI issues by including a REIT as a wholly-owned subsidiary (REITCo) of the fund partnership (Fund LP).

In this structure (the 'REIT-Sub Structure'), a sponsor-controlled entity acts as general partner to Fund LP, each investor holds limited partnership interests in Fund LP, and REITCo owns real estate assets directly or through its own wholly-owned subsidiaries. For purposes of avoiding the fiduciary requirements imposed by ERISA, Fund LP needs to qualify as a VCOC or REOC.

As Fund LP will own REITCo in this structure, it cannot qualify for REOC status since REITCo will not be considered a good REOC asset. Fund LP will be eligible for VCOC status, however, as a VCOC can own a REOC.

The VCOC management rights requirement is satisfied by having Fund LP control the board of REITCo. REITCo should qualify as a REOC provided 50 percent of its investments are in real estate assets. The requisite REOC management rights over the real estate can be retained even if a third property manager is engaged at the property level.

Although this structure limits REITCo's ability to make investments in joint ventures and other entities, as most entity investments will not be considered qualifying REOC investments, investor sensitivity to investments by a fund in other carried-interest vehicles may constrain sponsor appetite for such opportunities, and this REOC limitation may not in practice impose a substantial restriction on fund operations. If REITCo intends to invest in joint venture arrangements without promote provisions, thereby mollifying investor concern, REOC status may be available, but the Fund general partner will need to carefully monitor the amount of such investments to maintain such status.

Fund LP and REITCo also need to be examined for ICA compliance. Fund LP will need to fall into either the private investment fund exemption or the qualified purchaser exemption as Fund LP's ownership of REIT securities rather than real estate interests makes the real estate exemption unavailable.

In order to qualify for protection under the qualified purchaser exemption, all of the investors in Fund LP must be qualified purchasers, and the 'look-through' rules need to be applied. Depending on the pool of interested investors, this may or may not be possible.

REITCo may also be eligible for the private investment fund exemption if a sufficient number of knowledgeable employees are available to acquire shares. Because wholly-owned fee owner subsidiaries are ignored, REITCo may be able to utilize the real estate exemption provided REITCo's investments satisfy the requisite minimums--a result made all the more likely by the need that REITCo satisfy the asset test under the REIT rules and also qualify as a REOC.

As the asset test requires that at least 75 percent of a REIT's gross income be derived from investments relating to real property, provided the management component of the REOC test is satisfied, an entity that satisfies the REIT rules is also likely to qualify for REOC status and additionally, exemption from the ICA by virtue of being primarily engaged in the business of acquiring interests in real estate. For ICA purposes, a controlling position in a separate joint venture may be a qualifying investment but such an investment may not be a good REOC asset unless adequate rights are built into the joint venture agreement.

The principal advantage to the REIT-Sub Structure is its simplicity, which permits more straightforward ERISA and ICA analyses.

Since Fund LP is the principal shareholder of REITCo and the remaining shareholders required to satisfy the 100 shareholder minimum for REIT purposes are likely affiliates of the fund sponsor, there is little need to worry about the REIT rules' strict limitation on share transfer restrictions and transfer restrictions can be addressed at the Fund LP level in the customary manner.

A major disadvantage is the fact that tax losses are trapped in REITCo. These losses are useful to manage distribution requirements, but are more valuable to taxable investors if they flow through the fund. Moreover, while all of the fund investors will bear the costs of administering and operating the REIT, only certain tax-exempt investors will reap the benefits. Finally, a fund utilizing the REIT-Sub Structure will be limited to investing in assets that satisfy the REIT rules--that is, investments related to real estate.

B. REIT LP Structure. The fund also may be structured with REITCo as a limited partner, through which those tax-exempt investors desiring UBTI-cleansing invest in the fund (the 'REIT LP Structure') while other investors participate directly in Fund LP. Fund LP subsequently holds real estate assets directly or through wholly-owned subsidiaries.

The presence of benefit plan investors means REITCo is required to qualify as a VCOC, and Fund LP must be a REOC. Even if Fund LP's contemplated investments qualify as good REOC assets, Fund LP may not be able to provide sufficient management rights to REITCo (required for REITCo's VCOC status) without creating disproportionate control with respect to the other fund investors - a concept that would clearly be objectionable to investors with direct limited partner interests in Fund LP as well as to the sponsor.

Such requisite management rights might be accomplished by using a limited partnership with a management committee or replacing Fund LP with a limited liability company governed by a board of directors and in either case giving REITCo director or committee member designation rights, but leaving majority control of the committee or board with the sponsor.

It follows that the fund's first investment must be 'qualifying' and that the fund must maintain at least 50 percent 'qualifying investments' going forward. This limits the fund's ability to participate in downstream joint ventures and other entity investments for the reasons discussed with respect to the REIT-Sub Structure.

Under the ICA, it is likely that the private investment fund exemption is the only possible exemption for REITCo.

As with the REIT-Sub Structure, the qualified purchaser exemption will be available only in the unlikely circumstance that all REIT shareholders are qualified purchasers. Provided the accommodation shareholders required to satisfy the 100 shareholder requirement are 'knowledgeable employees,' the qualified purchaser exemption is not sacrificed, as 'knowledgeable employees' are ignored for purposes of the test. This will require identifying enough 'knowledgeable employees' for the required shareholder pool to provide a buffer for the ICA 100 beneficial owner count.

The real estate exemption is not available as REITCo owns limited partnership interests in Fund LP and limited partnership interests are not considered qualifying real estate investments.

Since REITCo is a private investment fund and will likely own more than 10 percent of Fund LP, analyzing Fund LP for ICA purposes requires 'looking through' REITCo in counting the number of Fund LP investors. This 'look through' is likely to make the private investment fund exemption unavailable to Fund LP unless an adequate number of 'knowledgeable employees' are available to be shareholders of REITCo so that there does not have to be a large number of other REIT co-investors.

The real estate exemption will be available to Fund LP if Fund LP (or its wholly-owned subsidiaries) will be making direct investments in real estate.

The principal advantages to the REIT LP Structure include the 'flow through' of losses to taxable fund investors and the ability to shield non-REIT investors from REIT organizational and maintenance expenses. Unlike the REIT-Sub Structure, wherein all investors bear these costs, the REIT LP Structure isolates REIT-related costs with those investors participating through the REIT vehicle.

Among its disadvantages is that complicated voting arrangements will be required if REITCo must qualify as a VCOC. The ERISA analysis is also more difficult at the Fund LP level and requires ongoing monitoring to confirm that 50 percent of the investments are qualifying REOC assets.

Furthermore, the REIT LP Structure will complicate subscription financings, as the REIT will be required to issue 'assessable' shares to contemplate capital calls, or issue additional shares as capital is called, in each case creating more complexity for subscription lenders.

Although REITCo itself will be subject to whatever transfer restrictions are set forth in Fund LP's partnership agreement, this concept will need to be extended to investors' ownership of REITCo in order to keep all investors, whether direct or through REITCo, on equal footing. Naturally this presents difficulty as ownership of a REIT, by definition, must be freely transferable.

C. Parallel Structure. In order to avoid some of the difficulties of the REIT LP Structure and REIT-Sub Structure while preserving structuring flexibility, a fund may utilize a parallel fund structure (Parallel Structure) wherein two partnerships ('Fund LP' and 'Fund LP II') are controlled by a common general partner, and Fund LP II utilizes a REIT subsidiary ('REITCo') for UBTI cleansing.

The two funds would invest pro rata, based on capital commitments in each fund investment. Fund LP I should be able to qualify as a REOC with downstream property investments held in co-tenancy with REITCo.

Since joint venture or other entity investments, mezzanine loans and other alternative investments may not qualify as good REOC investments, they must be limited to less than 50 percent of each entity's investments. Fund LP II should be able to qualify as a VCOC with the underlying REITCo as a REOC.

For ICA purposes, Fund LP I and Fund LP II will likely be integrated. Investors in both limited partnerships would be counted toward the private investment fund exemption's 100 beneficial owner limit, as well as 'investors' in the general partner if the 'device' 'look-through' rule applies. If relying on the qualified purchaser exemption, all investors in both limited partnerships must meet the test.

Integration also means that the ICA analysis for REITCo will count all investors at the limited partnership level (i.e., Fund LP I and Fund LP II, plus shareholders at the REIT level, minus any 'knowledgeable employees'), a calculation unlikely to result in less than 100. This suggests that the fund will need to rely on the real estate exemption from the ICA for REITCo in most instances. As discussed above, the commonalities among the REIT rules, the real estate exemption to the ICA and the REOC qualifications in this limited instance works to the fund's advantage.

The principal advantages to the Parallel Structure are flow through of tax losses to taxable investors in Fund LP I, the segregation of REIT organizational and maintenance expenses in Fund LP II and simplified governance mechanics.

The disadvantages, however, are first, a more complex ICA analysis, second, a more complex ERISA analysis if the Fund LP II side of the structure must comply with plan asset regulations, and finally, the likelihood that the co-tenancy structure, if required by ERISA, will complicate asset level financings.

Conclusion

As competition for investors' dollars becomes more fierce, fund sponsors need to pay particular attention to the impact any chosen structure has on investors.

A fund sponsor can entertain a number of structures utilizing one or more non pension-held REITs for UBTI-cleansing purposes a few of which are described above. In determining the optimal structure, the fund sponsor needs to examine its investor base, business objectives and likely investments while taking into consideration the structuring issues presented by and operational limitations of compliance with the REIT rules, ERISA and the ICA.

Stephen G. Tomlinson and Jennifer M. Morgan are partners at Kirkland & Ellis, and Thaddeus J. Tracy is an associate at the firm. Mr. Tomlinson is resident in the firm's Chicago and New York offices, and Ms. Morgan and Mr. Tracy are resident in the New York office.

FN1. UBTI is defined in §§512(a) and 513 of the Code as (i) gross income received by a tax-exempt organization from the conduct of a trade or business that is not substantially related to the exercise or performance by such tax-exempt organization of the purpose or function constituting basis for its tax exempt status, less (ii) deductions that are directly connected to such unrelated trade or business.

FN2. Section 514(c)(9)(E) of the Code.

FN3. Maryland has become the preferred domicile for entities intending to be considered REITs. Typically these entities are Maryland corporations or Maryland real estate investment trusts.

FN4. In order for a taxable entity to qualify for REIT status, it must satisfy the following requirements: (a) at least 75 percent of the gross income for each taxable year (other than gross income from prohibited transactions) must be derived directly or indirectly from investments relating to real property ('Real Property Gross Income'); (b) at least 95 percent of the gross income for each taxable year (other than gross income from prohibited transactions) must be Real Property Gross Income or derived from dividends and interest and gains on the sale or disposition of stock or securities; (c) at the close of each quarter, at least 75 percent of the value of the REIT's total assets must be represented by real estate assets, cash and cash items and government securities; (d) ownership of securities of any one issuer must be limited to no more than 10 percent by vote or value of the outstanding securities of such issuer (other than securities that qualify as real estate assets, governmental securities or securities in certain REIT affiliates); (e) the REIT must distribute 90 percent of its taxable income to its shareholders in the form of dividends; (f) the REIT must have at least 100 shareholders for at least 335 days of each taxable year; (g) not more than 50 percent of the ownership of the REIT may be held by five or fewer individuals; (h) the REIT must be managed by one or more trustees or directors; and (i) the REIT must have its beneficial ownership evidenced by freely transferable shares. See §§856 to 859 of the Code and the regulations promulgated thereunder.

FN5. Section 512(b) of the Code.

FN6. A 'pension-held' REIT is defined under the Code as a REIT in which either (i) a pension fund owns more than 25 percent, measured at cost, of the interests in the REIT or (ii) one or more pension funds, each of which owns more than 10 percent, measured at cost, of the REIT, hold in the aggregate more than 50 percent, measured at cost, of the interests of the REIT.

FN7. If less than 25 percent of the investors in a fund are benefit plan investors, the sponsor can avoid application of the plan assets regulations altogether, thereby eliminating the need to consider VCOC and/or REOC status for entities in the corporate structure. This may require that participation in the fund be offered only to private foundations and university endowments or other non-benefit plan investors, which, in turn, may complicate satisfaction of the 5/50 rule for REIT purposes, as private foundations, unlike pension funds, are not 'looked through.' On the other hand, if the ERISA concerns are eliminated entirely, the fund achieves greater flexibility for downstream joint ventures and other entity investments.

FN8. See §3 of the ICA generally.

FN9. Section 3(a)(1)(C) of the ICA.

FN10. Section 3(c)(1) of the ICA.

FN11. Section 3(c)(7) of the ICA.

FN12. Section 3(c)(5) of the ICA.

FN13. 'Knowledgeable Employee' generally means a human being who is (a) an executive officer, director, trustee, general partner, advisory board member, or person serving in a similar capacity for the fund of the fund's general partner or certain of its affiliates or (b) an employee of the fund or the fund's general partner or certain of its affiliates (but not a high-level executive described in (a) above), who regularly participates in the investment activities (other than performing solely clerical, secretarial, or administrative functions) of the fund, any other fund, certain insurance companies, certain employee benefit plan trusts, or any investment company managed by the fund's general partner or certain of its affiliates, so long as such person has for at least 12 months so participated in investment activities on behalf of any such entities (whether or not affiliated with the general partner).

FN14. Section 3(C)(5) of the ICA.

FN15. Fee interests in real estate, leasehold interests, interests in loans fully secured by mortgages solely on real estate, and whole-pool certificates issued by FNMA, GNMA or FHLMC have been found to be qualifying interests.

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