[Federal Register Volume 59, Number 11 (Tuesday, January 18, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-1043]
[[Page Unknown]]
[Federal Register: January 18, 1994]
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DEPARTMENT OF LABOR
[Application No. D-9414, et al.]
Proposed Exemptions; Cascade West Sportswear, Inc. Profit Sharing
Plan, et al.
AGENCY: Pension and Welfare Benefits Administration, Labor.
ACTION: Notice of proposed exemptions.
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SUMMARY: This document contains notices of pendency before the
Department of Labor (the Department) of proposed exemptions from
certain of the prohibited transaction restriction of the Employee
Retirement Income Security Act of 1974 (the Act) and/or the Internal
Revenue Code of 1986 (the Code).
Written Comments and Hearing Requests
All interested persons are invited to submit written comments or
request for a hearing on the pending exemptions, unless otherwise
stated in the Notice of Proposed Exemption, within 45 days from the
date of publication of this Federal Register Notice. Comments and
request for a hearing should state: (1) The name, address, and
telephone number of the person making the comment or request, and (2)
the nature of the person's interest in the exemption and the manner in
which the person would be adversely affected by the exemption. A
request for a hearing must also state the issues to be addressed and
include a general description of the evidence to be presented at the
hearing. A request for a hearing must also state the issues to be
addressed and include a general description of the evidence to be
presented at the hearing.
ADDRESSES: All written comments and request for a hearing (at least
three copies) should be sent to the Pension and Welfare Benefits
Administration, Office of Exemption Determinations, room N-5649, U.S.
Department of Labor, 200 Constitution Avenue, NW., Washington, DC
20210. Attention: Application No. stated in each Notice of Proposed
Exemption. The applications for exemption and the comments received
will be available for public inspection in the Public Documents Room of
Pension and Welfare Benefits Administration, U.S. Department of Labor,
room N-5507, 200 Constitution Avenue, NW., Washington, DC 20210.
Notice to Interested Persons
Notice of the proposed exemptions will be provided to all
interested persons in the manner agreed upon by the applicant and the
Department within 15 days of the date of publication in the Federal
Register. Such notice shall include a copy of the notice of proposed
exemption as published in the Federal Register and shall inform
interested persons of their right to comment and to request a hearing
(where appropriate).
SUPPLEMENTARY INFORMATION: The proposed exemptions were requested in
applications filed pursuant to section 408(a) of the Act and/or section
4975(c)(2) of the Code, and in accordance with procedures set forth in
29 CFR part 2570, subpart B (55 FR 32836, 32847, August 10, 1990).
Effective December 31, 1978, section 102 of Reorganization Plan No. 4
of 1978 (43 FR 47713, October 17, 1978) transferred the authority of
the Secretary of the Treasury to issue exemptions of the type requested
to the Secretary of Labor. Therefore, these notices of proposed
exemption are issued solely by the Department.
The applications contain representations with regard to the
proposed exemptions which are summarized below. Interested persons are
referred to the applications on file with the Department for a complete
statement of the facts and representations.
Cascade West Sportswear, Inc. Profit Sharing Plan (the Plan) Located in
Puyallup, WA
[Application No. D-9414]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the procedures set forth in 29 CFR part
2570, subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption
is granted, the restrictions of sections 406(a) and 406(b) (1) and (2)
of the Act and the sanctions resulting from the application of section
4975 of the Code, by reason of section 4975(c)(1) (A) through (E) of
the Code, shall not apply to the sale for cash of certain limited
partnership units (the Units) from the Plan to Cascade West Sportswear,
Inc. (the Employer), a party in interest with respect to the Plan,
provided that the following conditions are met:
1. The fair market value of the Units is established by an
appraiser independent of the Plan and the Employer;
2. The Employer pays the greater of $131,560 or the current fair
market value of the Units plus an ``opportunity loss'' of no less than
$171,000;
3. The sale is a one-time transaction for cash; and
4. The Plan pays no commissions or other expenses in relation to
the sale.
Summary of Facts and Representations
1. The Employer is engaged in the business of outerwear garment
manufacturing. Eric Hilf, a 50-percent shareholder of the Employer, is
the trustee of the Plan. The Plan is a profit sharing plan which had
approximately 119 participants and total assets of $221,364 as of
December 31, 1992. The board of directors of the Employer voted in 1992
to terminate the Plan. The last contribution to the Plan was made for
the Plan year ended December 31, 1992.
2. In July 1980 the Plan acquired the Units which represented a
28.6 percent interest in the Good Sam Investors limited partnership
(the Partnership). Following its formation, the Partnership acquired an
undeveloped parcel of real estate (the Property) near downtown
Puyallup, Washington. The Plan initially paid $51,667 for the Units.
Since the purchase of the Units, the Plan has contributed additional
amounts to the Partnership for its share of the carrying costs of the
Property. The Plan also borrowed money from an unrelated commercial
bank to pay off the Plan's share of the original seller-financed
acquisition of the Property by the Partnership. The Partnership has
made a distribution to the Plan totaling $49,028. Net of such
distributions, the total amount expended by the Plan in regard to
acquiring and holding the Units (including the above $51,667) was
$239,730 as of December 31, 1992.
3. The Plan acquired the Units because they originally appeared to
represent a good investment. The applicant represents that neither the
Employer nor any of its officers has invested separately in the
Partnership. The other investors in the Units are unrelated parties.
The Property is not adjacent to any property owned by the Employer and
has not been used by the Employer or any other party in interest with
respect to the Plan since the time of the purchase of the Units.
Several business and residential developments in the area near the
Property were underway at the time the Partnership was formed. The
Partnership consulted with real estate and engineering firms during the
early 1980s to determine the requirements to make the Property salable
at an attractive price. However, the City of Puyallup later withdrew a
determination statement which would have permitted development of the
Property. In 1986 the Partnership sold a portion of the Property to an
unrelated party for $180,000, resulting in the above mentioned
distribution of $49,028 to the Plan. Since then the Partnership has
listed the Property on three occasions with three different real estate
brokers but has been unable to sell the Property. A significant portion
of the Property has now been classified as wetlands and cannot be
developed without substantial additional expense. Plan fiduciaries have
concluded that the Property could not be sold to an unrelated party
without a substantial price concession or considerable additional
expense.1
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\1\The Department expresses no opinion as to whether plan
fiduciaries violated any of the fiduciary responsibility provisions
of part 4 of title I of the Act in acquiring and holding the Units.
Section 404(a)(1) of the Act requires, among other things, that a
plan fiduciary must act prudently and that plan investments must be
properly diversified.
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4. The Plan obtained an appraisal on the Property dated March 12,
1993, from Roger D. Ockfen, MAI (Ockfen), a real estate appraiser
located in Tacoma, Washington. The applicant represents that Ockfen is
independent of the Plan and the Employer. Placing emphasis on the
comparable sales approach to value, Ockfen estimated the fair market
value of the usable land area of the Property as of February 18, 1993,
to be approximately $460,000. Based on this amount, the value of the
Units representing the Plan's 28.6 percent interest in the Partnership
totaled $131,560.
5. The applicant represents that there is no market for the Units
and that they are not expected to appreciate in value. However, the
Plan cannot make liquidating distributions to its participants without
first selling the Units. Accordingly, the Plan proposes to sell the
Units to the Employer. The Employer will pay the Plan the greater of
$131,560 or the fair market value of the Units as of the date of sale,
based on an updated independent appraisal of the Property, in addition
to an ``opportunity loss'' of approximately $171,000. The ``opportunity
loss'' amount, to be adjusted at the time of sale, was calculated
assuming a six percent annual rate of return on the Plan's investment
in the Partnership since the initial time of that investment.
The total payments to the Plan will thus exceed the Plan's original
acquisition and subsequent net carrying costs of the Units (which
totaled $239,730 at the end of 1992). The sale of the Units will be a
one-time transaction for cash and the Plan will pay no commissions or
fees in regard to the transaction. The applicant represents that any
amounts received by the Plan as a result of the proposed transaction
which are in excess of the fair market value of the Units will be
treated as a contribution to the Plan. However, such contribution will
not exceed the limitations of section 415 of the Code.
6. In summary, the applicant represents that the proposed
transaction will satisfy the statutory criteria of section 408(a) of
the Act because: (1) The fair market value of the Units will be
established by an appraiser independent of the Employer; (2) the
Employer will pay the greater of $131,560 or the fair market value of
the Units on the date of sale plus an ``opportunity loss'' of
approximately $171,000; (3) the sale will be a one-time transaction for
cash; and (4) the transaction will remove from the Plan an investment
which is not liquid and which is not expected to appreciate in value.
Tax Consequences of Transaction
The Department of the Treasury has determined that, if a
transaction between a qualified employee benefit plan and its
sponsoring employer (or affiliate thereof) results in the plan either
paying less or receiving more than fair market value, such excess may
be considered to be a contribution by the sponsoring employer to the
plan and thus must be examined under the applicable provisions of the
Code, including sections 401(a)(4), 404 and 415.
FOR FURTHER INFORMATION CONTACT: Paul Kelty of the Department,
telephone (202) 219-8883. (This is not a toll-free number.)
Linton Industries, Inc. Retirement Plan (the Plan) Located in Edmonds,
WA
[Application No. D-9496]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the procedures set forth in 29 CFR part
2570, subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption
is granted, the restrictions of sections 406(a), 406(b)(1), and
406(b)(2) of the Act and the sanctions resulting from the application
of section 4975 of the Code, by reason of section 4975(c)(1) of the
Code, shall not apply to the proposed loan (the New Loan) of $485,000
from the Plan to Linton Industries, Inc. (the Employer), a party in
interest with respect to the Plan.
This proposed exemption is conditioned upon the following
requirements: (a) The terms of the New Loan are at least as favorable
to the Plan as those obtainable in an arm's-length transaction with an
unrelated party; (b) the New Loan will not exceed twenty-five percent
of the assets of the Plan at any time during the duration of the New
Loan; (c) the New Loan is secured by a first lien interest on certain
equipment (the Equipment), which has been appraised by a qualified,
independent appraiser to ensure that the fair market value of the
Equipment is at least 200 percent of the amount of the New Loan; (d)
the fair market value of the Equipment remains at least equal to 200
percent of the outstanding balance of the New Loan throughout the
duration of the New Loan; (e) an independent, qualified fiduciary
determines on behalf of the Plan that the New Loan is in the best
interests of the Plan and protective of the Plan and its participants
and beneficiaries; and (f) the independent, qualified fiduciary
monitors compliance by the Employer with the terms and conditions of
the New Loan and the exemption throughout the duration of the
transaction, taking any action necessary to safeguard the Plan's
interest, including foreclosure on the Equipment in the event of
default.
Summary of Facts and Representations
1. The Plan is a defined contribution plan sponsored by the
Employer, who is engaged in the business of precision and general metal
fabrication. As of December 31, 1992, the Plan had total assets of
$1,942,187 and eighteen participants. The trustee of the Plan is Robert
Linton, the sole shareholder of the Employer. Mr. Linton has the sole
investment discretion with respect to the Plan assets.
2. On January 26, 1988, the Department granted Prohibited
Transaction Exemption (PTE) 88-12 at 53 FR 2103. PTE 88-12 permitted
the Plan to lend $240,000 to the Employer (the Original Loan). The
Original Loan, made on March 1, 1988, has a ten year term and carries
interest at the rate of one and one-half percentage points over the
prime rate of Rainier National Bank of Seattle, Washington. It has been
amortized in equal monthly installments of principal and interest. The
Original Loan is secured by certain other equipment (the Other
Equipment) of the Employer. The Original Loan is being monitored by
Sidney J. Starr, CPA (Mr. Starr) of Kirkland, Washington, who is
serving on behalf of the Plan as the independent, qualified fiduciary.
As of October 1, 1993, the remaining principal balance due under the
Original Loan was $136,062.
3. The Employer requests an administrative exemption from the
Department to permit the Plan to lend $485,000 to the Employer under
the terms and conditions described herein. The Employer represents that
a portion of the New Loan proceeds will be used to repay the
outstanding balance on the Original Loan. The remaining balance of the
New Loan proceeds will be used to finance a portion of the $582,400
purchase price of a new 60'' Shear Genius Punching/Shearing Cell (the
Cell) manufactured by E.W. Bliss Company. The Cell will be utilized by
the Employer in its manufacturing operation.
4. The New Loan will be in the principal amount of $485,000. The
applicant states that at no time will the amount of the New Loan
represent more than twenty-five percent of the Plan's total assets. The
New Loan will be secured by a first lien interest on the Equipment,
which consists of two pieces of unencumbered machinery owned by the
Employer. UCC-1 Filing Statements and a Security Agreement will be
filed with the Secretary of State of Washington to reflect the Plan's
security interest in the Equipment. In addition, the Employer will
insure the Equipment against casualty loss and will designate the Plan
as the loss payee of such insurance.
5. The New Loan will have a ten year term and will be evidenced by
a promissory note (the Note). The Note will require the Employer to
make equal monthly installments of principal and interest amortized
over the ten year period. Interest will accrue on the New Loan at the
rate of one and one-half percentage points above the prime rate of
CityBank (CityBank) of Lynnwood, Washington, an unrelated entity. The
interest rate will be adjusted quarterly by the Plan's independent
fiduciary in accordance with the prime rate offered by CityBank. The
Plan will not incur any fees, commission, or other expenses in
connection with the New Loan.
By letter dated July 12, 1993, the Employer received a loan
commitment in the amount of $485,000 from CityBank. The terms offered
by CityBank are the same as the terms of the Loan, including the
quarterly adjustment of the interest rate to one and one-half
percentage points above the prime rate.
6. The Equipment consists of a Finn-Power FMC Line and a Bliss 500
ton press. Based upon appraisals performed by Jim Birdsall and Theodore
Egleston (the Appraisals), the total fair market value of the Equipment
is $1,228,000, which is in excess of 200 percent of the amount of the
New Loan.
Jim Birdsall, the president of Nor Star Machine Tools, Inc. located
in Bellevue, Washington, appraised the Finn-Power FMC Line. Mr.
Birdsall represents that he has experience with Finn-Power presses and
the present market for this type of equipment. Mr. Birdsall represents
that both he and Nor Star Machine Tools, Inc. are unrelated to and
independent of the Employer. In an appraisal report dated June 4, 1993,
Mr. Birdsall placed the fair market value of the Finn-Power FMC Line at
$792,000, approximately eighty percent of its acquisition price of
$990,000.
In a subsequent letter dated December 3, 1993, Mr. Birdsall
describes certain factors he considered in determining the fair market
value. Mr. Birdsall states that the twenty percent discount of the
acquisition price is attributable to two years of equal amounts of
depreciation on the Finn-Power FMC Line.
Theodore Egleston, a national sales manager for E.W. Bliss Company
located in Hastings, Michigan, appraised the Bliss 500 ton press. Mr.
Egelston states that he has twenty-five years of experience in
appraising used Bliss equipment for insurance companies and lending
institutions. Mr. Egelston represents that he is unrelated to and
independent of the Employer. In appraisal reports dated July 12, 1993
and December 3, 1993, Mr. Egleston placed the fair market value of the
Bliss 500 ton press at $436,000, or eighty-four percent of its $520,000
acquisition price. Mr. Egelston's valuation takes into consideration
six years of equal amounts of depreciation on the Bliss 500 ton press's
acquisition price.
7. Mr. Starr will serve as the qualified, independent fiduciary for
the Plan with respect to the New Loan. Mr. Starr represents that he has
extensive experience in business and loan transactions. Mr. Starr
represents that he is unrelated to and independent of the Employer and
its affiliates, including Mr. Linton. Mr. Starr states that he
understands and acknowledges his duties, responsibilities, and
liabilities in acting as a fiduciary with respect to the Plan, based
upon consultation with counsel experienced with the fiduciary
responsibility provisions of the Act.
Mr. Starr represents that all payments under the Original Loan have
been paid in a timely manner and that there have been no delinquencies.
Mr. Starr also states that the collateral to loan ratio under the
Original Loan has always been maintained.
Mr. Starr has reviewed the terms of the New Loan and all of the
documents and relevant information in connection with the New Loan,
including the Appraisals. Mr. Starr states that the terms of the New
Loan compare favorably with the terms of similar transaction between
unrelated parties and would be an arm's-length transaction as evidenced
by the terms offered by CityBank (see Item #4 above). In addition, Mr.
Starr adds that the Loan will be secured by a first lien interest on
the Equipment, which has been valued in excess of 200 percent of the
New Loan amount. Mr. Starr acknowledges his responsibility to quarterly
review the Loan and make the necessary adjustments to the interest rate
based upon the prime rate of CityBank.
Mr. Starr has reviewed the current investment portfolio of the Plan
and considered the diversification of the Plans assets as well as the
liquidity needs of the Plan. Based on this analysis, Mr. Starr believes
that the proposed transaction would be in the best interest of the Plan
and its participants and beneficiaries as an investment for the Plan's
portfolio. Mr. Starr states that the New Loan would be an appropriate
and desirable investment for the plan, based on the New Loan's rate of
return, the collateral securing the New Loan, the character and
diversification of the Plan's other assets, and the projected liquidity
needs of the Plan.
Mr. Starr has reviewed the financial condition of the Employer in
order to establish its ability to repay the New Loan. In this regard,
Mr. Starr states that he has examined the most recent financial
statements from the Employee and its credit history. Mr. Starr
concludes that the Employer is credit-worthy and, based upon its
current ratio and current assets to debt ratio, is financially capable
of making the monthly payments required by the New Loan without such
payments having an adverse impact on its cash flow.
Mr. Starr represents that he will monitor the New Loan through its
entire duration and will take any appropriate action necessary to
protect the interests of the Plan and its participants and
beneficiaries, include a foreclosure on the Equipment in event of
default. Mr. Starr will monitor the condition and adequacy of the
Equipment as collateral for the Plan to ensure that the New Loan
remains secured by collateral worth at least 200 percent of the New
Loan at all times.
Mr. Starr will monitor the Plan's assets to ensure that the amount
of the Plan's assets will at all times remain less than twenty-five
percent of the Plan's total assets. Mr. Starr will require the Employer
to provide additional payments on the New Loan to the Plan, if
necessary, to reduce the principal amount of the New Loan to maintain
an appropriate ratio between the outstanding principal balance of the
New Loan and the Plan's total assets. Mr. Starr has acknowledged his
responsibility to monitor compliance of all parties with terms and
conditions of the proposed exemption, including the twenty-five percent
limitation.
8. In summary, it is represented that the proposed transaction will
satisfy the statutory criteria for an exemption under section 408(a) of
the Act because: (a) The terms of the New Loan will be at least as
favorable to the Plan as those obtainable in an arm's-length
transaction with an unrelated party; (b) the New Loan will not exceed
twenty-five percent of the assets of the Plan at any time during the
duration of the New Loan; (c) the New Loan will be secured by a first
lien interest on the Equipment, which has been appraised by a
qualified, independent appraiser to ensure that the fair market value
of the Property is at least 200 percent of the amount of the New Loan;
(d) the fair market value of the Equipment will remain at least equal
to 200 percent of the outstanding balance of the New Loan throughout
the duration of the New Loan; (e) Mr. Starr, as independent, qualified
fiduciary for the Plan, will determine that the New Loan is in the best
interests of the Plan and protective of the Plan and its participants
and beneficiaries; and (f) Mr. Starr will monitor compliance by the
Employer with the terms and conditions of the New Loan and the
exemption throughout the duration of the transaction, taking any action
necessary to safeguard the Plan's interest, including foreclosure on
the Equipment in the event of default.
FOR FURTHER INFORMATION CONTACT: Kathryn Parr of the Department,
telephone (202) 219-8971. (This is not a toll-free number.)
Jacobs Corporation Profit Sharing Plan and Trust (the Plan) Located in
Harlan, IA
[Application No. D-9561]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the procedure set forth in 29 CFR part
2570, subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption
is granted, the restrictions of section 406(a) and 406(b)(1) and (b)(2)
of the Act and the sanctions resulting from the application of section
4975 of the Code, by reason of section 4975(c)(1)(A) through (E) of the
Code shall not apply to the proposed cash sale of certain assets of the
Plan (the Assets), to occur over two (2) consecutive years, by the Plan
to the Jacobs Corporation (the Employer), a party in interest with
respect to the Plan; provided that: (1) The aggregate purchase price
paid by the Employer for all of the Assets is no less than $683,384;
(2) the purchase price paid by the Employer in each of the two
consecutive years will be at least $341,692; (3) the purchase price
paid by the Employer in each of the two consecutive years upon
execution of the sale of such Assets is not less than the fair market
value of such Assets on the date of each sale; (4) the terms of each of
the sales are no less favorable to the Plan than those negotiated in
similar circumstances with unrelated third parties; and (5) the Plan
will incur no fees, commissions, or expenses as a result of either of
the sales.2
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\2\For purposes of this proposed exemption, references to
specific provisions of title I of the Act, unless otherwise
specified refer also to the corresponding provisions of the Code.
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Temporary Nature of Exemption
The proposed exemption is temporary and, if granted, will become
effective on the date of publication of the grant of this proposed
exemption in the Federal Register and will expire upon the earlier to
occur of the date which is two years from the grant of this proposed
exemption or the date when the Plan no longer owns any of the Assets
which are the subject of this proposed exemption.
Summary of Facts and Representations
1. The Plan is a defined contribution profit sharing plan which
provides for employee contributions to be held in employee directed
accounts, pursuant to section 401(k) of the Code. As of December 31,
1991, there were 62 participants in the Plan. The assets of the Plan
consist of the Assets which are the subject of this proposed exemption
and certain guaranteed insurance contracts (GICs). It is represented
that, as of September 30, 1993, the value of all of the assets held in
the Plan was approximately $1,549,134.
The Employer and sponsor of the Plan is an Iowa corporation, with
offices in Harlan, Iowa. The Employer is engaged in the manufacture of
mill supplies and trencher parts. Todd Plumb is the sole shareholder of
the common stock of the Employer. Since 1990, Todd Plumb has served as
the sole trustee for the Plan. Prior to that time, the trustees of the
Plan were the Southgate Trust Company, Todd Plumb, and Max Plumb.
Further, the GICs were held on behalf of the Plan in the past by
Southgate Trust and are now held by First Trust MidAmerica. Norwest
Bank Iowa, N.A., located in Des Moines, Iowa is currently acting as
administrator of the Plan and will assume the duties of trustee of the
Plan, as soon as this proposed exemption is granted.
2. It is represented that since 1983, the Plan held participation
interests in a fund which provided debt financing to a series of
separate trusts (the Trusts) which engaged in commercial real estate
development. In addition, since 1984, the Plan also held equity
participation interests in such Trusts. In October 1985, all of the
Trusts were merged into the Master Mortgage Fund Trust VII in which the
Plan retained ownership interests. Subsequently, on December 15, 1988,
Master Mortgage Fund Trust VII was converted into a Master Mortgage
Investment Fund, Inc., a real estate investment trust (the REIT). The
Plan acquired the Assets through certain transfers of the Plan's
holdings in Master Mortgage Fund Trust VII to the REIT.3
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\3\ The Department notes that the decisions of the fiduciaries
on behalf of the Plan, in connection with the acquisition and
holding of the Assets are governed by the fiduciary responsibility
requirements of part 4, subpart B, of title I. The Department
expresses no opinion, herein, as to whether any of the relevant
provisions of part 4, subpart B, of title I have been violated
regarding the Plan's investment in and subsequent holding of the
Assets, and no exemption from such provisions is proposed herein. In
this regard, the Department is expressing no views with respect to
the establishment, administration, or operation of the REIT, nor has
any relief been requested in that regard.
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3. The Assets which are the subject of this proposed exemption
consist of the Plan's holdings of participation interests in three
funds (the Funds). One of the Funds holds the Preferred Stock of the
REIT (the Preferred Fund), another holds Common Stock of the REIT (the
Common Fund), and the third fund (the Secured Note I Fund; formerly the
Guaranteed Plus Fund) holds notes of the REIT collateralized by
mortgages. The REIT, a Delaware corporation, has offices in Overland
Park, Kansas. The investors in the REIT include the Plan and other
qualified retirement plans. The REIT was organized for the primary
purpose of realizing income from investing in and originating short-
term loans, junior real estate mortgage loans, wrap around mortgage
loans, first mortgage loans with and without participation features,
construction loans and pre-development loans to real estate developers,
secured by income producing real property.
The REIT completed its initial one-year public offering on November
18, 1989, selling a total of 2,756,474 shares of preferred stock (the
Preferred Stock) and 841,542 shares of common stock (the Common Stock)
for subscriptions in the amount of $35,980,160. As of December 31,
1990, the REIT had 2,491,522 shares of Preferred Stock and 1,308,669
shares of Common Stock outstanding. It is represented that the change
in outstanding stock of the REIT reflects shares issued under the
Dividend Reinvestment Plan and the conversion of Preferred Stock to
Common Stock.
4. It is represented that between 1984 and 1990, the rate of return
received by the Plan on its interest in these Assets or in the Trusts
fluctuated from a high of 15.8% in 1984 to a low of 5.8% in 1990.
During the period between 1983 to 1991, the percentage of the Plan's
portfolio involved with these Assets or with the Trusts varied from a
low of 8.66% in 1983, to a high of 63% in October 1991. Through its
investment in the Preferred Fund, the Plan owns approximately 43,848
shares of Preferred Stock of the REIT, as of December 31, 1992.
Likewise, through its investment in the Common Fund, the Plan owns
approximately 211 shares of Common Stock of the REIT, as of the same
date.
5. The Secured Note I Fund was established on January 31, 1988, by
Master Mortgage Fund Trust VII for the purpose of providing secured
debt financing to the related Trusts. After the REIT was established in
1989, the Secured Note I Fund offered a $10,000,000 line of credit to
the REIT. Under this line of credit, as of December 31, 1990, the
Secured Note I Fund had extended $8,344,522 to the REIT, payable on
January 31, 1991. Due to the inability of the REIT to repay this debt
on January 31, 1991, the Secured Note I Fund again extended credit to
the REIT, in the form of two notes (the Notes) in the amounts,
respectively, of $1,677,044 and $6,805,340 and extended the date of
repayment under the terms of these Notes to January 310, 1992, which in
turn was extended to January 31, 1993. It is represented that as of
September 7, 1993, the Notes had not been repaid.
The Notes bear interest at nine percent (9%) per annum adjusted
from time to time in accordance with certain interest rates charged by
the Merchants Bank of Kansas City and are collateralized by the assets
of the REIT, primarily mortgages which are subordinated to unrelated
third party notes. The total outstanding balance of these Notes, as of
September 30, 1991, was $8,862,016.
The Plan acquired a participation interest in the Secured Note I
Fund as a result of a transfer of funds from the Master Mortgage Fund
VII at the end of 1989, and another such transfer from the Preferred
Fund at the beginning of 1990.
6. On April 17, 1992, the Board of Directors of the REIT
unanimously approved the filing by the REIT for financial
reorganization under Chapter 11 of the U.S. Bankruptcy Code. Since that
time the REIT has been operating as debtor-in-possession under the
protection of the U.S. Bankruptcy Court. On its balance sheet for the
period ending December 31, 1992, the REIT lists total assets of
$23,321,456 and total liabilities of $18,814,132.
7. The Employer has proposed to purchase the Plan's interests in
the Preferred Fund, the Common Fund, and the Secured Note I Fund. It is
represented that there is no market for the Assets and that the income
potential and the market value of such Assets has declined. Further,
Todd Plumb, as trustee for the Plan, has been repeatedly unsuccessful
in attempting to sell such Assets to a third party purchaser or in
having the Assets redeemed by the REIT. For this reason, the applicant
believes it will be in the best interest of the Plan to invest the
proceeds of the Asset sales to the Employer in other securities, the
return rate of which will significantly exceed the rate of earnings on
the Assets. It is represented that, if such Assets were retained in the
Plan, there may not be sufficient liquidity in the Plan to pay cash to
beneficiaries or to participants withdrawing from the Plan. In this
regard, the sales of the Assets to the Employer will avoid an in-kind
distribution of an undivided interest in the Assets to the participants
and beneficiaries which would have no immediate value and little long
term value. The Assets are valued at a book value to the Plan of
$683,384, as of June 30, 1993. In accordance with this value, as of
September 30, 1993, the Assets represented approximately 44% of the
assets of the Plan. The applicant represents that the book value is
approximately the amount invested by the Plan in the Assets.
The Employer proposes, over a period of two (2) years, to purchase
annually a portion of such Assets at a price each year of $341,692.
This amount is one half of the book value of the Assets, as of June 30,
1993. It has been represented that immediately following the execution
of the first sale of the Assets to the Employer, the book value of the
Assets remaining in the Plan will constitute no more than 22.06% of the
assets held at that time by the Plan, without taking into consideration
in determining the value of the Plan's assets either projected
contributions by the Employer or by its employees or anticipated income
to the Plan from other assets. The Employer has agreed to pay the costs
of the exemption application, including providing notice to all
interested persons. Further, it is represented that the Plan will incur
no fees, commissions, or expenses as a result of the sales of the
Assets to the Employer.
8. In an appraisal, dated September 7, 1993, Cyril Ann Mandelbaum,
CPA (Ms. Mandelbaum) estimated the fair market value of the Assets
which are the subject of this proposed exemption. Ms. Mandelbaum
represents that she is qualified to appraise the Assets in that she is
a certified public accountant and a member of the American Society of
Appraisers. Further, Ms. Mandelbaum represents her independence in that
she does not have any present or contemplated future interest in the
Assets or any other interest which might tend to prevent her from
making a fair and unbiased appraisal of such Assets. According to Ms.
Mandelbaum, the estimated value of the Preferred Stock and the Common
Stock is $1.19 and $1.18 per share, respectively. Taking into
consideration a 28% discount for the minority interest held by the Plan
in the Preferred Stock and the Common Stock and a discount of 35% for
the lack of marketability of such stock, Ms. Mandelbaum reached a value
for the Plan's interest in both the Preferred Stock and the Common
Stock at between zero and $.53 per share. With respect to the value of
the Secured Note I Fund, Ms. Mandelbaum indicates that there is little
likelihood of Notes issued by the Secured Note I Fund ever being paid.
Accordingly, in the opinion of Ms. Mandelbaum the Plan's interest in
the Secured Note I Fund is assumed to be worthless.
9. In summary, the applicant, represents that the proposed
transactions meet the statutory criteria for an exemption under section
408(a) of the Act because:
(a) The Plan will be able to invest the proceeds from such sales in
more profitable assets;
(b) The Plan will receive no less than fair market value of such
Assets on the date of each sale and in the aggregate the Plan will
receive no less than $683,384 for the sale of all of the Assets to the
Employer;
(c) Each of the sales will be a one time transaction for cash;
(d) The Plan will incur no costs, fees, commissions, or other
expenses as a result of the sales of the Assets to the Employer; and
(e) The proposed sales will avoid an in-kind distribution of an
undivided interest in the Assets to the participants and beneficiaries.
Tax Consequences of Transaction
The Department of the Treasury has determined that if a transaction
between a qualified employee benefit plan and its sponsoring employer
(or affiliate thereof) results in the plan either paying less than or
receiving more than fair market value, such excess may be considered to
be a contribution by the sponsoring employer to the plan and therefore
must be examined under applicable provisions of the Code, including
section 401(a)(4), 404, and 415.4
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\4\The applicant represents that to the extent the Plan will
receive greater than the fair market value for the Assets, the
limitations, as set forth in section 415 of the Code, if applicable,
will not be exceeded. It is further represented that the allocation
of any gain on the sale of the shares will not violate the
discrimination provisions of sections 404 and 401(a)(4) of the Code.
Inasmuch as interpretations of sections 401, 404 and 415 of the Code
are within the jurisdiction of the Internal Revenue Service, the
Department expresses no opinion with respect to the applicant's
representations of compliance. However, the Department does note
that the applicant also represents that the sale of the Assets is
being completed solely to prevent an investment loss which might
result to the Plan by virtue of the Plan's holding of the Assets and
to avoid, without admitting, any possible fiduciary liability with
respect to the holding of the Assets by the Plan.
FOR FURTHER INFORMATION CONTACT: Angelena C. Le Blanc of the
Department, telephone (202) 219-8883. (This is not a toll-free number.)
Bangs, McCullen, Butler, Foye & Simmons Employees' Retirement Plan (the
Plan) Located in Rapid City, SD
[Application No. D-9598]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the procedures set forth in 29 CFR part
2570, subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption
is granted the restrictions of sections 406(a), 406(b)(1) and (b)(2) of
the Act and the sanctions resulting from the application of section
4975 of the Code, by reason of section 4975(c)(1)(A) through (E) of the
Code, shall not apply, effective January 1, 1994, to the proposed lease
by the Plan (the Lease) of certain improved real property located in
Rapid City, South Dakota (the Property) to Bangs, McCullen, Butler,
Foye & Simmons (the Employer), the sponsor of the Plan; provided that
the following conditions are satisfied:
(A) All terms and conditions of the Lease are at least as favorable
to the Plan as those which the Plan could obtain in an arm's-length
transaction with an unrelated party;
(B) The Lease is a triple net lease under which the Employer is
obligated for all costs of maintenance and repair, and all taxes,
related to the Property;
(C) The interests of the Plan for all purposes under the Lease are
represented by an independent fiduciary, Norwest Bank South Dakota,
N.A.; and
(D) The rent paid by the Employer under the Lease is no less than
the fair market rental value of the Property.
EFFECTIVE DATE: This exemption, if granted, will be effective as of
January 1, 1994.
Summary of Facts and Representations
1. The Plan is a profit sharing plan with 35 participants and total
assets of approximately $6,492,809 as of December 1, 1993. The Plan is
maintained by the Employer, which is a South Dakota general partnership
engaged in the practice of law in Rapid City, South Dakota. Investment
discretion over the assets of the Plan is exercised by the Plan's three
named fiduciaries: Thomas H. Foye, Charles L. Riter, and Patrick K.
Duffy, each of whom is a partner in the Employer. The Plan's assets are
held in trust by the Norwest Bank South Dakota, N.A. (the Trustee),
which was formerly named Norwest Capital Management and Trust Company.
The Trustee represents that aside from its function as Trustee, it is
independent of the Employer, although the Employer has deposits in, and
a current installment loan with, the Trustee's commercial department
totalling substantially less than one percent of the total deposits and
total loans of its commercial department. Additionally, the Trustee
states that the Employer performs professional services for the
Trustee, and that total fees paid by the Trustee to the Employer for
such services constitute less than one percent of the Employer's gross
income.
2. Among the assets of the Plan is the Property, a parcel of
improved real property which constitutes the Employer's principal place
of business. The Property is located in downtown Rapid City, South
Dakota and is improved with a two-story brick office building (the
Building) containing approximately 9,600 square feet of office space.
The Employer has leased the Property from the Plan under a triple net
lease (the Prior Lease) with a term of ten years commencing January 1,
1984 and ending December 31, 1993. The Employer's lease of the Property
from the Plan under the Prior Lease was exempt from the prohibitions of
section 406 of the Act and section 4975(c) of the Code by virtue of an
individual administrative exemption, Prohibited Transaction Exemption
83-172 (PTE 83-172, 48 FR 48880, October 21, 1983).5 The interests
of the Plan for all purposes under the Prior Lease were represented by
the Trustee, which served to monitor, on behalf of the Plan, the
performance of the Employer under the Prior Lease, and to represent the
Plan in the enforcement of its terms and conditions. The Trustee
represents that the Employer occupied the Property in compliance with
all terms and conditions of the Prior Lease for its duration. The Prior
Lease expired on December 31, 1993.
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\5\A proposed amendment to the Prior Lease was the subject of an
additional individual administrative exemption, PTE 86-113 (51 FR
32556, September 12, 1986), involving the proposed construction of
an addition to the Building and its proposed purchase by the Plan.
The Employer represents that the subject amendment to the Prior
Lease was never consummated because the Employer chose not to
construct the addition to the Building.
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3. Because the Plan's lease of the Property to the Employer
continues to constitute a favorable Plan investment, providing the Plan
with a good rate of return under protective arrangements, and because
it continues to constitute an advantageous arrangement for the
Employer, the Trustee and the Employer desired that the Plan continue
leasing the Property to the Employer after December 31, 1993, under
substantially the same conditions as those of the Prior Lease.
Accordingly, the Trustee and the Employer have agreed to a new lease
(the New Lease), effective January 1, 1994, which provides for the
Plan's continued lease of the Property to the Employer, and they are
requesting an exemption for the New Lease under the terms and
conditions described herein.
4. The New Lease is a triple net lease for a term of ten years
commencing January 1, 1994 and ending December 31, 2003. The interests
of the Plan under the New Lease for all purposes are represented by the
Trustee. The annual rental under the New Lease is payable in equal
monthly installments. Initial rental under the New Lease is $6,000 per
month, which is the fair market rental value of the Property as of the
commencement of the New Lease, as determined by Richard Kahler
(Kahler), a professional real property appraiser in Rapid City, South
Dakota. The amount of annual rental paid under the New Lease will be
reevaluated every year by the Trustee, and will be increased in
accordance with any increases in the Property's fair market rental
value, as determined by the Trustee. In no event will the annual rental
be decreased under the New Lease. On the fifth anniversary of the New
Lease, the Trustee will provide for a new appraisal of the Property and
its fair market rental value by an independent professional real estate
appraiser of the Trustee's choice. The New Lease requires the Employer
to pay all repair and maintenance costs of the Property except with
respect to necessary major capital improvements to the Building, its
roof, or its electrical, heating, cooling or plumbing systems in excess
of $5,000 in any calendar year. Any such excess over $5,000 will be the
responsibility of the Plan. The New Lease requires the Employer to pay
all real estate taxes on the Property and to carry fire, extended
coverage, and public liability insurance on the Property in amounts
acceptable to the Trustee with the Plan as the named insured. Under the
New Lease the Employer will indemnify and hold the Plan harmless from
all penalties, claims demands, liabilities, expenses and losses of any
nature arising from the Employer's use of the Property.
5. The Trustee, which represents the Plan for all purposes under
the New Lease, will monitor on behalf of the Plan the Employer's
performance under the New Lease and will represent the Plan in the
enforcement of its terms and conditions. The Trustee represents that it
has reviewed and evaluated the Plan's continued lease of the Property
to the Employer under the New Lease and has determined that it is in
the best interests of the participants and beneficiaries of the Plan.
Specifically, the Trustee states that the Employer has proven to be a
successful, reliable tenant of the Property and that the Property
constitutes the best and most highly productive of all Plan asset
investments. The Property was appraised for its fair market value as of
December 1, 1993 by Kahler, who represents that as of that date the
Property had a fair market value of $607,500.
6. In summary, the applicants represent that the subject
transaction satisfies the criteria of section 408(a) of the Act for the
following reasons: (1) The New Lease is a triple net lease requiring
the Employer to pay costs of repair and maintenance and all taxes and
insurance on the Property; (2) The interests of the Plan under the New
Lease are represented by the Trustee, an independent fiduciary which
will monitor and enforce the Employer's performance under the New
Lease; (3) The New Lease ensures that the rental payments will remain
no less than the fair market rental value of the Property for the
duration of the New Lease; and (4) The Trustee has reviewed the Plan's
continued lease of the Property to the Employer under the New Lease and
has determined that it is a highly desirable investment for the Plan.
FOR FURTHER INFORMATION CONTACT: Ronald Willett of the Department (202)
219-8881. (This is not a toll-free number.)
General Information
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption
under section 408(a) of the Act and/or section 4975(c)(2) of the Code
does not relieve a fiduciary or other party in interest of disqualified
person from certain other provisions of the Act and/or the Code,
including any prohibited transaction provisions to which the exemption
does not apply and the general fiduciary responsibility provisions of
section 404 of the Act, which among other things require a fiduciary to
discharge his duties respecting the plan solely in the interest of the
participants and beneficiaries of the plan and in a prudent fashion in
accordance with section 404(a)(1)(b) of the Act; nor does it affect the
requirement of section 401(a) of the Code that the plan must operate
for the exclusive benefit of the employees of the employer maintaining
the plan and their beneficiaries;
(2) Before an exemption may be granted under section 408(a) of the
Act and/or section 4975(c)(2) of the Code, the Department must find
that the exemption is administratively feasible, in the interests of
the plan and of its participants and beneficiaries and protective of
the rights of participants and beneficiaries of the plan;
(3) The proposed exemptions, if granted, will be supplemental to,
and not in derogation of, any other provisions of the Act and/or the
Code, including statutory or administrative exemptions and transitional
rules. Furthermore, the fact that a transaction is subject to an
administrative or statutory exemption is not dispositive of whether the
transaction is in fact a prohibited transaction; and
(4) The proposed exemptions, if granted, will be subject to the
express condition that the material facts and representations contained
in each application are true and complete and accurately describe all
material terms of the transaction which is the subject of the
exemption. In the case of continuing exemption transactions, if any of
the material facts or representations described in the application
change after the exemption is granted, the exemption will cease to
apply as of the date of such change. In the event of any such change,
application for a new exemption may be made to the Department.
Signed at Washington, DC, this 11th day of January 1994.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, U.S. Department of Labor.
[FR Doc. 94-1043 Filed 1-14-94; 8:45 am]
BILLING CODE 4510-29-P