The Office of General Counsel issued the following informal opinion on November 15, 2001, representing the position of the New York State Insurance Department.
Re: Proposed CAPCO Investment
Would the proposed investment constitute a proper investment for a Certified Capital Company ("CAPCO")?
The proposed investment would not constitute a "qualified investment" under the CAPCO statute.
An inquirer (an organization) advised the Department that it is currently considering an investment in ABC Business Centers, LLC ("ABC"). The inquirer described ABC as a "business center" or "executive suite", whose activities are as follows: it leases raw office space at a building located at 304 Park Avenue South, New York, into which it installs high speed internet capabilities, telephone systems, pantry, mailroom, photocopying, and receptionist services, in addition to other services geared toward small businesses. ABC then subleases office space, offering the package of their services to the subtenants. The target market is small businesses who cannot afford long term lease commitments, companies interested in establishing satellite offices, companies looking for short term space, or companies that wish to avoid the trouble of set-up and employee expenses.
The inquirer stated that ABC earned $1,972,006 in 1999, of which $640,710 was attributable to service income and $1,331,296 to rental income. In 2000, ABC earned $2,320,812, which consisted of $736,420 in service income and $1,557,392 in rental income.
Under the CAPCO statute, N.Y. Tax Law §11 (McKinney Supp. 2001), CAPCOs are required to make "qualified investments", which are defined in N.Y. Tax Law §11(a)(9) (McKinney Supp. 2001) as follows:
"Qualified investment" the investment of cash by a certified capital company in a qualified business for the purchase of any debt, equity or hybrid security, of any nature and description whatever, including a debt instrument or security which has the characteristics of debt but which provides for conversion into equity or equity participation instruments such as options or warrants.
The term "qualified business" is in turn defined in N.Y. Tax Law §11(a)(6) (McKinney Supp. 2001), in pertinent part, as follows:
"Qualified business" an independently owned and operated business that meets all of the following conditions as of the time of the first investment in the business:
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( C ) It is involved in commerce for the purpose of developing and manufacturing products and systems, including but not limited to high technology products and systems such as computers, computer software, medical equipment, biotechnology, telecommunications equipment and products, processing or assembling all types of products, conducting research and development of all types of products or providing services, but excluding real estate, real estate development, insurance and businesses predominantly engaged in professional services provided by accountants, lawyers or physicians.
As indicated by the above-quoted statute, "real estate" and "real estate development" investments are expressly excluded.
In a previous letter to the inquirer, in which additional information regarding ABCs business operation was requested, it was noted that an investment in the type of business operated by ABC could possibly constitute a "qualified investment". Following a review of the materials sent to the Department, and taking into account the allocation of ABCs revenues, however, it is this Offices conclusion that ABCs business is essentially the subleasing of real property, with the added enhancement of the provision of certain business services. Given this situation, an investment in ABC would not constitute a qualified investment under the CAPCO statute.
For further information you may contact Supervising Attorney Michael Campanelli at the New York City Office.