[Federal Register Volume 60, Number 146 (Monday, July 31, 1995)]
[Notices]
[Pages 39013-39020]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-18717]



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DEPARTMENT OF LABOR
[Application No. D-09783 et al.]


Proposed Exemptions; Texas Commerce Bank National Association

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, N.W., Washington, D.C. 
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, D.C. 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.

[[Page 39014]]

    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.

Texas Commerce Bank National Association (Texas Commerce) Located in 
Houston, TX

[Application No. D-09783]

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 section 406(a) 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 (D) of the Code, shall not 
apply to the leasing, since September 15, 1993, of certain office space 
in a building (the Building) owned by the Maritime Association--I.L.A. 
Pension Fund (the Pension Plan) to Texas Commerce, a party in interest 
with respect to the Pension Plan.
    This proposed exemption is conditioned on the following 
requirements:
    (a) The trustees of the Pension Plan (the Trustees), who are 
independent of Texas Commerce, believe that the leasing of office space 
in the Building by the Plan to Texas Commerce is and will continue to 
be in the best interest of the Pension Plan and its participants and 
beneficiaries.
    (b) The decision by the Pension Plan to enter into and continue 
leasing office space in the Building to Texas Commerce has been made 
and will continue to be made by the Trustees in consultation with an 
independent property manager and an independent fiduciary.
    (c) The terms of the lease have remained and will remain at least 
as favorable to the Pension Plan as those obtainable in an arm's length 
transaction with an unrelated party.
    (d) The rental charged by the Pension Plan under the lease has been 
based and will continue to be based upon arm's length negotiations with 
unrelated parties.
    (e) The Trustees, in conjunction with the independent fiduciary, 
have and will continue to (i) monitor the terms and conditions of the 
lease as well as the terms and conditions of the exemption and (ii) 
take all actions that are necessary and proper to safeguard the 
interests of the Pension Plan and its participants and beneficiaries.
    (f) The subject lease has involved and will continue to involve 
less than 25 percent of the Pension Plan's total assets.
    Effective Date: If granted, this proposed exemption will be 
effective September 15, 1993.

Summary of Facts and Representations

    1. The Pension Plan is a multiemployer, Taft-Hartley plan that has 
been established and maintained in accordance with section 302(c)(5) of 
the Labor Management Relations Act of 1947, as amended, between the 
South Atlantic and Gulf Coast District International Longshoremen's 
Association (the Union) and the West Gulf Maritime Association (the 
Association). The Pension Plan is administered by a board of 16 
trustees, one-half of whom are appointed by the Association and one-
half of whom are appointed by the Union. The principal offices of the 
Pension Plan are located in Houston, Texas, Investment decisions for 
the Pension Plan are made by the Trustees and various investment 
consultants. As of September 30, 1994, the Pension Plan had net assets 
of $409,325,675. As of August 4, 1994, the Pension Plan had 6,069 
participants.
    2. The Union and its affiliated locals represent longshoremen from 
Lake Charles, Louisiana to Brownsville, Texas. There are 31 affiliated 
locals in this geographic area.
    3. The Association is a Texas nonprofit corporation exempt from 
taxation under section 501(c)(6) of the Code. Its members include 
business organizations engaged in the shipping industry from Lake 
Charles, Louisiana to Brownsville, Texas. Approximately 35 members of 
the Association contribute to the Plan.
    4. Texas Commerce is a national banking association with locations 
in Houston and other Texas cities. It is a wholly owned subsidiary of 
Texas Commerce BrancShares, Inc., which is a wholly owned subsidiary of 
the New York City-based Chemical Banking Corporation. Texas Commerce 
provides a full range of banking and trust services to its customers. 
It currently serves as a fiduciary to the Pension Plan but it has no 
investment discretion with respect to the Pension Plan's real estate 
assets including the subject Building described herein.
    5. First City Bank Texas (First City) was a national banking 
association with locations in Houston and other Texas cities. During 
1979, First City entered into a lease agreement under which it leased 
space in a building located at 11550 Fuqua, Houston, Texas. The 
Building is a five-story office building containing 88,678 square feet 
of gross space and 83,636 square feet of net rentable space. It is 
situated on an approximately 3.5 acre tract of land. The owner of the 
Building was Crow-Southpoint #1, Ltd. (Crow), a Texas limited 
partnership. First City used the office space in the Building as a bank 
lobby.
    6. In October 1982, the Plan purchased a 60 percent interest in the 
Building from Crow for $3.9 million. This transaction, together with a 
loan and lease agreement were covered by Prohibited Transaction 
Exemption (PTE) 85-79, (50 FR 18945), an administrative exemption that 
was granted by the Department on May 3, 1985. PTE 85-79, which was 
retroactive to October 27, 1982, provided for the formation of a joint 
venture (the Joint Venture) between the Pension Plan and Crow. Upon the 
formation of the Joint Venture, Crow became a party in interest with 
respect to the Pension Plan.
    The terms of the Joint Venture were negotiated and approved by Mr. 
John D. O'Connell of O'Connell and O'Connell, Inc., a real estate 
consultant, who was designated by the trustees of the Pension Plan to 
serve as the independent fiduciary on behalf of the Pension Plan. Mr. 
O'Connell renders investment advice to the Pension Plan with respect to 
real estate transactions and supervises the making of real estate 
investments on behalf of the Pension Plan.
    The terms of the Joint Venture were as follows: (a) Crow would be 
the managing general partner of the Joint Venture; (b) Crow would 
contribute the Building, a 3.5 acre site improved with a five-story 
office building to the Joint Venture in return for a 40 percent 
ownership interest; (c) the Pension Plan would be required to make a 
$3.9 million capital contribution to the Joint Venture in return for a 
60 percent ownership interest; (d) the Pension Plan would be required 
to make a loan of $2 million to Crow at 11.25 percent interest only for 
a 15 year term, with interest payable annually on the anniversary date 
of the loan and principal due upon maturity; (e) the loan would be 
secured by Crow's 40 percent ownership interest in the Joint Venture 
and would be used to clear complete title to the Building and to repay 
Crow the funds it expended for the acquisition of the Building; (f) net 
cash flow from the operations of the Joint Venture would be distributed 
60 percent to the Pension Plan and 40 percent to Crow; (g) Crow 

[[Page 39015]]
would be appointed by the Joint Venture as manager of the Building 
receiving from the Joint Venture both a management fee and leasing 
commissions pursuing to a Management Agreement between Crow and the 
Joint Venture; (h) the Pension Plan would be required to approve leases 
in excess of 10,000 square feet or for terms in excess of five years 
and any capital expenditure in excess of $50,000 would have to be 
submitted to the Pension Plan for approval; and either (i) partner in 
the Joint Venture could cause a sale of the project subject to a right 
of first offer to the other partner.
    Aside from the formation of the Joint Venture, PTE 85-79 provided 
specific exemptive relief that permitted the Pension Plan to make the 
$2 million loan to Crow under the terms specified above. PTE 85-79 also 
allowed Crow to receive lease commissions paid by the Joint Venture 
pursuant to the terms of the Management Agreement.
    7. Also commencing in October 1982, the Pension Plan began 
occupying office space in the Building for its administrative offices 
and also leasing space therein to the Maritime Association--I.L.A. 
Welfare Fund (the Welfare Plan) and the Maritime Association I.L.A. 
Vacation Plan (the Vacation Plan). The Welfare Plan and the Vacation 
Plan are not parties in interest with respect to the Pension Plan but 
they do have common trustees. The applicant represents that the leasing 
arrangement between the Pension Plan, the Welfare Plan and the Vacation 
Plan satisfies the terms and conditions of PTE 77-10 (42 FR 33918, July 
1, 1977).\1\

    \1\ The Department expresses no opinion herein on whether the 
leasing arrangement between the Pension Plan, the Welfare Plan and 
the Vacation Plan complies with PTE 77-10.
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    8. In October 1992, two events occurred involving the Pension Plan. 
First, Ameritrust Texas, N.A. (Ameritrust), a national banking 
association with locations in Houston and other Texas cities, began 
providing custodial, investment management and securities lending 
services to the Pension Plan as well as to the Welfare Plan and the 
Vacation Plan. At that time, Ameritrust had no relationship to First 
City or to Texas Commerce. Second, First City was taken over by the 
Federal Deposit Insurance Corporation (the FDIC) due to First City's 
insolvency.
    9. In December 1992, the Pension Plan acquired the 40 percent 
interest in the Building that was held by Crow as a result of Crow's 
default, in October 1991, on the $2 million loan and failure to cure 
the event of default. The Pension Plan then foreclosed on Crow's 
interest in the Joint Venture. The Joint Venture was dissolved and the 
Pension Plan assumed exclusive ownership of the Building. The Pension 
Plan incurred no loss in connection with the assumption of the 
Building.
    10. In February 1993, Texas Commerce acquired all of the assets of 
First City from the FDIC. The office space became a bank lobby for 
Texas Commerce and Texas Commerce executed a new lease with the Pension 
Plan effective April 18, 1993. The applicant represents that no 
administrative exemptive relief was requested because Texas Commerce 
was not a party in interest at the time of the execution of the lease.
    11. The terms of the Texas Commerce lease provide for a primary 
term of five years with an option to renew and extend for up to three 
successive five year terms of five years each. The rentable area is 
15,713 square feet of space. The rental amount includes base rent of 
$14.67 per square foot or $230,509.58 per year ($19,209.14 per month) 
and an operating expense of $6.67 per square foot or $104,805.71 per 
year. Thus, the total rent is $21.34 per square foot or $335,315.39 per 
year. The lease also includes an alteration allowance of $50,000.\2\ In 
the event of a default, Texas Commerce is required to reimburse the 
Pension Plan on demand for all costs reasonably incurred by the Pension 
Plan on demand for all costs reasonably incurred by the Pension Plan in 
connection therewith, including attorney's fees, court costs and 
related costs plus interest thereon at an annual rate equal to the 
prime rate charged by Texas Commerce to its most creditworthy borrowers 
for short-term commercial loans. The same default provisions also apply 
in the event of a default by the Pension Plan.

    \2\ Article 9.01 of the Texas Commerce lease allows the lessee 
to move, relocate or demolish interior walls inside the leased space 
and to paint or finish the walls as the lessee may choose. The 
lessee is also permitted to add cabinets and fixtures as needed for 
its business and to select floor coverings for the area.
    Notwithstanding the alteration allowance provision set forth in 
the lease, it is represented that the Trustees of the Pension Plan 
did not allow the office space currently occupied by Texas Commerce 
to be altered in such a manner that such space could be leased only 
to certain types of lessees. The applicant states that the original 
buildout of the subject space was pursuant to a 1979 lease between 
Crow and First City. The applicant further represents that the 1979 
lease was negotiated at arm's length by unrelated parties and had a 
primary term of 20 years. The applicant notes that the Pension Plan 
did not acquire an equity interest in the Building until 1982.
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    12. The trustees of the Pension Plan utilized the services of Mr. 
Brint Davis of Trammel Crow Houston, Inc., an independent building 
property manager and Mr. O'Connell, the independent fiduciary for the 
Pension Plan in PTE 85-79, to represent the interests of the Pension 
Plan in negotiating the lease with Texas Commerce. The applicant 
represents that neither Mr. O'Connell nor Mr. Davis are employees, 
officers, or directors of Texas Commerce nor is there any other 
relationship or connection between these individuals and Texas 
Commerce. Mr. Davis's employer is the exclusive leasing agent and 
property manager for the Building. Mr. O'Connell reviews all leases in 
the Building on behalf of the Pension Plan to ascertain that the leases 
are comparable in terms to the conditions prevailing in the market. Mr. 
O'Connell states that he has advised the Pension Plan on real estate 
matters for more than 15 years.
    13. In negotiating the terms of the lease for which Texas Commerce 
pays a base rent of $14.67 per square foot on an ``as is basis,'' Mr. 
O'Connell represents that the subject Building is located in an 
isolated area with very few comparables and no comparable bank leases. 
He explains that office space in this unique area enjoys almost 100 
percent occupancy so that rents, if and when available, are about $16 
per square foot. He further explains that the closest areas that might 
be considered comparable to the Building are the Clearlake area and the 
Hobby Airport area where rents are approximately $12 per square foot.
    14. On September 15, 1993, Texas Commerce acquired 100 percent of 
the stock of Ameritrust. This event caused the existing lease to become 
a prohibited transaction in violation of the Act but not under the 
Code. Also effective as of September 15, 1993, Ameritrust was renamed 
Texas Commerce Trust Company, National Association (Texas Commerce 
Trust). Texas Commerce Trust continued to provide to the Plans the same 
services initially provided by Ameritrust.
    On December 17, 1993, Texas Commerce Trust was dissolved and merged 
into the Trust Department of Texas Commerce. As a result of the merger, 
the lease became a prohibited transaction under the Code as well as 
under the Act.\3\

    \3\ According to the applicant, Texas Commerce was a party in 
interest with respect to the Pension Plan under section 3(14)(H) of 
the Act because it was a 10 percent or more shareholder of Texas 
Commerce Trust, which was a service provider to the Pension Plan. 
Because section 4975 of the Code does not include 10 percent 
shareholders of service providers in the list of disqualified 
persons, the applicant represents that the lease transaction was not 
subject to the excise tax provisions under section 4975 of the Code 
until the merger of Texas Commerce Trust into Texas Commerce in 
December 1993. At that time, Texas Commerce became a service 
provider to the Plan by reason of section 4975(e)(2)(B) of the Code.

[[Page 39016]]

    Neither First City, Texas Commerce, Ameritrust, Texas Commerce 
Trust, nor any of their affiliates have ever had any relationship to 
the Pension Plan other than as a result of the lease and the services 
provided by Ameritrust and its successors, Texas Commerce Trust and 
Texas Commerce.
    15. Currently, Texas Commerce provides the same custodial, 
investment management and securities lending services to the Pension 
Plan, the Welfare Plan, the Vacation Plan and certain miscellaneous 
accounts (the Accounts) that were provided by Ameritrust and Texas 
Commerce Trust. The fees associated with custodial services totaled 
$126,100 for the Plans and the Miscellaneous Accounts for the year 
ending December 31, 1994. Also for the year ending December 31, 1994, 
the fees associated with investment management services totaled 
$106,660, excluding the Building. Further, the fees associated with 
securities lending services provided the Plans and the Miscellaneous 
Accounts by Texas Commerce and its predecessors totaled $48,000 for the 
period, October 1, 1993 through July 31, 1994.
    16. Since the inception of the lease, Texas Commerce has continued 
to pay rent to the Pension Plan in a timely manner without default or 
rental delinquencies. However, the applicant is aware of the fact that 
a prohibited transaction occurred in violation of the Act on September 
15, 1993. Therefore, the applicant has requested exemptive relief with 
respect to the past and continued leasing of office space in the 
Building by the Pension Plan to Texas Commerce. If granted, the 
proposed exemption will be retroactive to September 15, 1993.\4\

    \4\ It is represented that once the Trustees and Texas Commerce 
realized that a prohibited transaction had occurred, the parties 
caused an exemption application to be prepared in January 1994 and 
subsequently finalized in July 18, 1994. It is also represented that 
the Trustees and Texas Commerce did not initially realize that the 
acquisition by Texas Commerce of Ameritrust made the lease a 
prohibited transaction. Further, the applicant notes that the 
exemption request was not filed as a result of an investigation by 
either the Department or the Internal Revenue Service.
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    17. Mr. O'Connell notes that the space presently leased to Texas 
Commerce was originally leased to First City. In the course of time, he 
states that Texas Commerce acquired most of the assets of First City 
which resulted in a duplication or overlap of banking facilities in 
many areas of Harris County including the area in which the Building is 
situated. Mr. O'Connell further notes that he, the Pension Plan 
Trustees and Mr. Davis, determined that Texas Commerce was the most 
attractive lessee given the failure of First City, the relative 
proximity of Texas Commerce and the substantial cost that would be 
incurred to renovate the space to a non-bank lessee since the space had 
been originally configured for a bank tenant. Mr. O'Connell also 
represents that the Texas Commerce lease has required no improvements 
or alterations by the lessee and has provided immediate income to the 
Pension Plan with no out-of-pocket costs. Moreover, he states that the 
presence of the city's largest bank has been a valuable enhancement to 
the Building. Given these factors, Mr. O'Connell represents that the 
rental charged for the subject space is above fair market value and 
that the lease continues to be a valuable asset of the Pension Plan.
    Mr. O'Connell also confirms that his firm has continuously 
monitored rental rates for other properties comparable to the Building 
over the past five years. Further, during this period, he represents 
that his firm has continuously monitore the terms and conditions of all 
leases involving the Building. Without qualification, he represents 
that the terms and conditions of the lease between the Plan and Texas 
Commerce have, at all times, been at arm's length and have provided the 
Plan with fair market value rent since the inception of the subject 
lease to present, including September 15, 1993 when the lease became a 
prohibited transaction.
    18. In addition to Mr. O'Connell's review of the lease, the 
Trustees of the Pension Plan have reviewed the investment needs of the 
Pension Plan and the terms and conditions of the Texas Commerce lease. 
Based upon their consideration of such matters, the Trustees believe 
the lease is in the best interest of the Pension Plan. The Trustees, in 
conjunction with Mr. O'Connell, are monitoring the lease on behalf of 
the Pension Plan, enforcing the payment of rent and the proper 
performance of all other obligations of Texas Commerce thereunder. In 
addition, the Trustees have the obligation to assess the prudence of 
the continued ownership by the Pension Plan of the Building and to 
negotiate, when appropriate, favorable terms with respect to the sale, 
lease or other disposition of the Building. Further, the Trustees are 
also responsible for ensuring that all terms and conditions of the 
exemption are, at all times, satisfied.
    19. In summary, it is represented that the transactions satisfy the 
criteria for an administrative exemption under section 408(a) of the 
Act because:
    (a) The Trustees believe that the leasing of office space in the 
Building by the Plan to Texas Commerce is and will continue to be in 
the best interest of the Pension Plan and its participants and 
beneficiaries.
    (b) The decision by the Pension Plan to enter into and continue 
leasing office space in the Building to Texas Commerce has been made 
and will continue to be made by the Trustees in consultation with an 
independent property manager and an independent fiduciary.
    (c) The terms of the lease have remained and will remain at least 
as favorable to the Pension Plan as those obtainable in an arm's length 
transaction with an unrelated party.
    (d) The rental charged by the Pension Plan under the lease has been 
based and will continue to be based upon arm's length negotiations with 
unrelated parties.
    (e) The Trustees, in conjunction with the independent fiduciary, 
have and will continue to (i) monitor the terms and conditions of the 
lease as well as the terms and conditions of the exemption and (ii) 
take all actions that are necessary and proper to safeguard the 
interests of the Pension Plan and its participants and beneficiaries.
    (f) The subject lease has involved and will continue to involve 
less than 125 percent of the Pension Plan's total assets.
    For Further Information Contact: Ms. Jan D. Broady of the 
Department, telephone (202) 219-8881. (This is not a toll-free number.)
Retirement Plan for Employees of Automobile Club of New York, Inc. (the 
Plan) Located in Garden City, New York

[Application No. D-09882]

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 C.F.R. 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 to: (1) the purchase (the Purchase) by the 
Plan of a certain office building (the Building) from Automobile Club 
of New York, Inc. (the Club), a sponsor of the Plan and a party 

[[Page 39017]]
in interest with respect to the Plan; (2) a subsequent leaseback (the 
Lease) of the Building by the Plan to the Club; and (3) the potential 
future exercise of (a) a repurchase option (the Repurchase Option) 
between the Club and the Plan; and (b) a make whole obligation (the 
Make Whole Obligation) whereby the Club will pay the Plan the 
difference between the original acquisition price paid by the Plan for 
the Building, and the price received by the Plan upon the sale of a 
Building to a purchaser other than the Club; provided that the 
following conditions are satisfied:
    (1) all terms and conditions of the Purchase, the Lease, the 
Repurchase Option, and the Make Whole Obligation are and will be at 
least as favorable to the Plan as those the Plan could obtain in an 
arm's-length transaction with an unrelated party;
    (2) the Lease will have an initial term of fifteen years with three 
five-year renewal options, and will be a triple net lease under which 
the Club as the tenant is obligated for all operating expenses, 
including real estate taxes, insurance, repairs, maintenance, 
electricity and other utilities;
    (3) the fair market value of the Building has been determined by an 
independent qualified appraiser, and will be updated as of the date of 
purchase by the Plan;
    (4) with respect to the Lease, the fair market rental amount has 
been and will be determined by an independent qualified appraiser, 
which amount will never be below the initial fair market annual rental 
amount of $470,000;
    (5) with respect to the Lease, appraisals of the Building will be 
performed at three-year intervals during the initial fifteen-year term 
of the Lease, and at five-year intervals with respect to the three 
renewal periods for purposes of updating the fair market rental amount 
to be received by the Plan;
    (6) the fair market value of the Building will not exceed 25% of 
the Plan's total assets. Notwithstanding this condition, if the 25% 
limitation is ever exceeded the Club will have 60 days to comply with 
the 25% limit. In the event the 25% limit cannot be met within the 60 
days, the Plan will undertake an orderly disposition of the Building in 
such manner as to cure the violation within nine (9) months of the date 
when the 25% limit was initially exceeded. If at any time during the 9-
month disposition period, the Building exceeds 30% of the Plan's total 
assets, the exemption, if granted, will no longer be available;
    (7) an independent fiduciary will be appointed to review, approve 
and monitor the transactions described herein, and the fees received by 
the independent fiduciary for serving in such capacity, combined with 
any other fees derived from the Club or related parties, will not 
exceed 1% of its annual income for each fiscal year that it continues 
to serve in the independent fiduciary capacity with respect to these 
transactions;
    (8) U.S. Trust, as the independent fiduciary, will evaluate the 
transactions described herein and deemed them to be administratively 
feasible, protective and in the interest of the Plan;
    (9) U.S. Trust, as the independent fiduciary, will monitor the 
terms and the conditions of the exemption and the Lease throughout its 
initial term plus the three renewal periods, and will take whatever 
action is necessary to protect the Plan's rights;
    (10) U.S. Trust, as the independent fiduciary, will monitor the net 
subleasing amount received by the Club during any annual period under 
the Lease. If such subleasing amount results in a profit to the Club, 
the Club will contribute this profit to the Plan; and
    (11) the Plan will bear no costs or expenses with respect to the 
transactions described herein.

Summary of Facts and Representations

    1. The Plan is a defined benefit plan established in 1965. As of 
December 31, 1993, the Plan had approximately 703 participants. As of 
May 31, 1995, the market value of the Plan's total assets was 
$24,185,650. The Plan administrator is the retirement committee which 
is appointed by the Board of Directors of the Club. United States Trust 
Company of New York (U.S. Trust) is the Plan trustee and the 
independent fiduciary with respect to the transactions described 
herein. The Club, established in 1934, is a not for profit subchapter 
``C'' corporation organized under New York State Law. The Club is 
affiliated with the American Automobile Association, and is in the 
business of providing certain travel services to its members. The named 
fiduciary under the Plan is the Club.
    2. The applicant proposes to enter into the following transactions. 
First, the Plan will purchase the Building from the Club at fair market 
value and hold the title to the Building through a tax exempt 501(c)(2) 
corporation. U.S. Trust represents that this will insulate the Plan's 
other assets from liabilities associated with owning the Building. 
Subsequently, the Club will lease the Building from the Plan at fair 
market rental, and sublease certain portions of the Building to parties 
unrelated to the Plan.
    3. The Building was initially appraised (Initial Appraisal) as of 
October 19, 1993, by Martin B. Levine, MAI (Mr. Levine) and Paul 
Leprohon (Mr. Leprohon, collectively, the Appraisers). Messrs. Levine 
and Leprohon are qualified independent Appraisers with Koeppel Tener 
Rigaldi, Inc. (KTR), a national real estate appraisal and consulting 
firm. Mr. Levine is a director of the New York appraisal division of 
KTR. In the Initial Appraisal, the Appraisers determined the fair 
market value of the leased fee interest of the Building to be 
$4,700,000. In this regard, it is represented that $32,500 is payable 
directly to the Club by the operator of the adjacent Harkness property 
as a result of a certain air rights lease, and that this income was a 
factor in determining the value of the Building.\5\ Because the 
Building is a multi-tenanted income producing facility, the Appraisers 
primarily relied on the income capitalization approach supported by the 
sales comparison approach. The Building is the property located at 1881 
Broadway, New York, New York, and it is situated at the northwest 
corner of Broadway and West 62nd Street. The Building is a 4 story plus 
basement, class ``B'' office building, with retail space on the grade 
floor. The Building contains approximately 24,005 square feet of gross 
leasable area, of which 8,405 square feet is retail space comprised of 
3,405 square feet at grade level and 5,000 square feet of finished, 
non-selling, below grade space.

    \5\ The air rights income, in the amount of $32,500 per year, is 
the rent due under the air rights lease, which permitted air rights 
over 1881 Broadway (i.e., the Building) to be used to erect a larger 
building than would otherwise be possible on 1887 Broadway site. The 
air rights lease expires in 86 years.
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    4. In the Initial Appraisal, the Appraisers also established a fair 
market rental for the Building. The Appraisers analyzed recent lease 
transactions within the Building itself in conjunction with leases 
recently signed within competing buildings which are located on the 
West Side of Midtown Manhattan. As such, the Appraisers concluded that 
the market rent for the Building's office component is $20.00 per 
square foot. For the retail component, the market rent is estimated to 
be $85.00 for grade floor space and $12.75 per square foot for below 
grade space.
    5. On January 10, 1995, the Appraisers prepared a limited scope 
appraisal of the Building (Updated Appraisal) as an update to the 
Initial Appraisal. In the Updated Appraisal, the Appraisers also relied 
on the income 

[[Page 39018]]
capitalization and sales comparison approaches, and concluded that as 
of December 31, 1994, the free and clear market value of the leased fee 
interest in the Building, including the income from the air rights 
lease, is $5,200,000. This increase in the fair market value is due to 
the market conditions improving in the year 1994, as evidenced by 
declining vacancy rate and concessions in the form of free rent, large 
tenant improvement allowances and favorable below-market renewal 
options becoming less common.
    In the Updated Appraisal, the Appraisers stated that the market 
rent for the Building's office component is $21 per square foot, and 
the market rent for the retail component is estimated to be $90 per 
square foot for the grade floor space and $13.50 per square foot for 
the below grade space. Therefore, in establishing the fair rental value 
of the Building, the Appraisers determined that as of December 31, 
1994, the fair market rental of the Building under a triple net lease 
is $470,000 for the first year, and that this figure includes the 
$32,500 income from leasing the air rights for the next 84 years. The 
Appraisers also stated that based upon their market analysis, they 
project that all retail and basement rents will increase by 4% per 
year, and office rents will increase by 4% per year for renewal 
purposes.
    6. Once the Plan purchases the Building from the Club, the Plan 
will lease (the Lease) the Building back to the Club, and the Club will 
sublease portions of the Building to unrelated, third parties. The 
Lease will be a triple net lease and will be net of all operating 
expenses, including real estate taxes, insurance, repairs, maintenance, 
electricity and other utilities.\6\ The Lease will have an initial term 
of fifteen (15) years, with three renewable options of five years each 
at the discretion of U.S. Trust. Renewal periods of the Lease will 
occur upon the Club, as the lessee, notifying the Plan, as lessor, in 
writing no later than ten months before the end of the expiring term. 
The rental rate will be determined by reference to an independent 
qualified appraiser retained by the Plan as the lessor. The fair market 
rent will be binding upon the Club as the lessee, unless the Club 
disputes it in thirty days. In the case of such a dispute, the matter 
would go to arbitration, which according to U.S. Trust, is customary in 
commercial lease agreements. If the arbitrators cannot reach an 
agreement between themselves within fifteen days, they shall appoint a 
third independent appraiser. For purposes of the Lease, appraisals of 
the Building are scheduled at 3 year intervals during the initial 15 
year term of the Lease, and at five year intervals with respect to the 
three renewal periods. Annual appraisals will be required, however, to 
determine the annual funding obligation for the Plan, Form 5500 
financial statements and to monitor compliance with the 25% limitation.

    \6\ The applicant represents that the Lease will provide that 
any fees that may be incurred by the Plan in connection with the 
Lease, the Building or the transactions described herein, will be 
reimbursed to the Plan and/or paid by the Club.
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    7. The Lease provides that the annual base rent (Base Rent) during 
the initial 15 year term shall be the higher of the annual rental rate 
for the preceding three year period, or the appraised rental value. 
Therefore, once the Base Rent is established for the first 3 years of 
the term of the Lease, the rental rate cannot fall below that amount, 
it can only go higher. During the three renewal periods, the Base Rent 
will be adjusted every five years and will be increased at least 10% 
during each Renewal period. The applicant further represents that 
rental amounts under the Lease will never be below the initial fair 
market annual rental amount of $470,000, as established by the 
Appraisers. The Lease also provides for a security deposit (Security 
Deposit) to be paid by the lessee to the lessor, and U.S. Trust 
represents that the Security Deposit will be \1/6\ of the Base Rent 
payable in a given year. The Lease also provides for certain additional 
rent, which is expenses related to the Building that will be borne by 
the Club as the tenant. U.S. Trust represents that this is more 
protective of the rights and remedies available to the landlord (i.e., 
the Plan) in the event of nonpayment of rent. The Club will also obtain 
a fire and hazard/casualty insurance policy for the Building. The Plan 
will be the beneficiary and loss payee with respect to the hazard and 
liability insurance on the Building.
    8. The applicant also represents that if during any annual period 
of the Lease, the net subleasing amount received by the Club results in 
a profit to the Club, the Club will contribute this profit to the Plan. 
In this regard, the total subleasing amounts will be subject to an 
annual audit by an independent auditor which is currently Peat Marwick. 
Specifically, upon performing annual audits of the Club's books, Peat 
Marwick will submit accounting to U.S. Trust, showing total rents 
collected from subleases, including recoverables,\7\ and total 
operating expenses for the Building during that year.\8\ U.S. Trust has 
agreed to provide necessary oversight in this matter.

    \7\ Recoverables means any amounts collected over and above 
basic rents, such as escalations for light, power, taxes and 
maintenance, etc.
    \8\ Annual operating expenses for the Building include real 
estate taxes, building maintenance and repairs, security, insurance, 
air conditioning, power, electricity, carting, water and sewer, etc.
---------------------------------------------------------------------------

    9. The Plan will also have the right to require the Club to 
repurchase the Building, at a price which will be the greater of the 
Building's fair market value or the Plan's purchase price (the 
Repurchase Option). The Repurchase Option can be exercised under 
certain circumstances under discretion of U.S. Trust as the independent 
fiduciary, including, material misrepresentations regarding the 
Building in the contract for sale; the Building's fair market value 
exceeding 25% of the Plan's assets; at the expiration of the Lease; 
upon the breach of the Lease by the Club; if the Club defaults on the 
Lease; to satisfy the cash needs of the Plan; and, in the event of a 
material loss to the Building by fire, condemnation, etc. It is also 
represented that the Repurchase Option can be exercised at the end of 
the initial 15 year term of the Lease, and at the end of each renewal 
period. In the event the Club fails to repurchase the Building under 
the Repurchase Option, the Plan has the following remedies. If the Plan 
has to sell the Building to a third party for an amount less than 
payable by the Club under the Repurchase Option, the Club is obligated 
to pay the Plan any difference. Furthermore, the calculation of the 
difference between the price paid by the third party and the price 
payable by the Club will include the fact that the Club is obligated to 
pay all costs and expenses associated with the purchase of the 
Building, while in a sale to a third party, the Plan may have to pay 
certain expenses related to that sale, as is customary for a seller in 
a commercial transaction. In this regard, the applicant represents that 
the Club will pay the Plan the fair market rental for the entire 
Building, as well as for the space it occupies within the Building.
    10. In the event the Club fails to repurchase the Building within 
sixty (60) days of the Building being put to it by the Plan under the 
Repurchase Option, the Club will pay the Plan the difference (if any) 
between the original acquisition price paid by the Plan for the 
Building and the price received by the Plan on the sale of the Building 
to a purchaser other than the Club (the ``Make Whole Obligation''). In 
this regard, U.S. Trust has examined the Club's financial statements 
and held discussions with the Club's management, and concluded that the 


[[Page 39019]]
Club currently has sufficient net worth to satisfy the Repurchase 
Agreement and the Make Whole Obligation by either repurchasing the 
Building, or paying the difference between the price paid by the Plan 
for the Building and the price realized on the sale of the Building by 
the Plan. U.S. Trust will continue to monitor the Club's financial 
condition before it finalizes the purchase of the Building by the Plan. 
It is also represented that if the Building is to be sold to another 
party in interest with respect to the Plan, as defined by section 3(14) 
of the Act, the applicant will seek exemptive relief from the 
Department prior to the consummation of the sale.
    11. The independent fiduciary for the Purchase, the Lease, the 
Repurchase Option and the Make Whole Organization will be U.S. Trust, a 
bank and trust company formed under the laws of New York and an 
experienced employee benefits trust fiduciary with approximately $31 
billion in assets under management, and custodial assets of $397 
billion.\9\ U.S. Trust and its wholly owned subsidiary, U.S. Trust 
Company of California, N.A. have extensive experience serving as 
fiduciaries for ERISA plans. U.S. Trust also represents that it has 
considerable experience in monitoring ownership interests relating to 
leases for large pension plans.

    \9\ In this regard, the applicant makes a request regarding a 
successor independent fiduciary. Specifically, if it becomes 
necessary in the future to appoint a successor independent fiduciary 
(the Successor) to replace U.S. Trust, the applicant will notify the 
Department sixty (60) days in advance of the appointment of the 
Successor. Any Successor will have responsibilities, experience and 
independence similar to those of U.S. Trust.
---------------------------------------------------------------------------

    12. U.S. Trust represents that it has the following relationships 
to the Plan and the Club. U.S. Trust was appointed trustee (the 
Trustee) of the Plan on November 4, 1965. Under the terms of the Trust 
Agreement, U.S. Trust, as the Plan Trustee, has full discretion to 
invest the Plan's assets within the framework of the general investment 
guidelines provided by the Club. As the Trustee for the Plan, U.S. 
Trust may determine the value of any Plan's assets for which there is 
no publicly quoted price, and U.S. Trust manages approximately $24 
million of assets for the Plan. In addition to the Plan Trustee role, 
U.S. Trust manages approximately $1,200,000 in a cash fund for the 
Club, which represents 0.004% of the total assets managed by U.S. 
Trust.\10\ U.S. Trust also maintains that the income received by it for 
serving in the independent fiduciary capacity in these transactions, 
combined with any other fees derived from the Club or related parties 
will not exceed 1% of its annual income for each fiscal year that U.S. 
Trust continues to serve in the independent fiduciary capacity with 
respect to the transactions described herein.

    \10\ In this regard, U.S. Trust represents that the $1.2 million 
do not represent assets of the Club managed by U.S. Trust as the 
Plan trustee, but that they are assets managed by U.S. Trust in a 
separate capacity.
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    13. In its capacity as the independent fiduciary, U.S. Trust has 
reviewed the condition of the Building, the financial condition of the 
Club, the Plan's current investment portfolio and its general 
investment guidelines. U.S. Trust represents that it has been advised 
by legal counsel of its ERISA fiduciary responsibilities. U.S. Trust 
represents that it will have the following responsibilities under the 
Lease and the renewal periods. In this regard, the triple net Lease 
places upon the Club, as the tenant, all responsibility with respect to 
the Building; its repair, maintenance, etc., and all costs and expenses 
related thereto, including without limitation, those costs related to 
real estate taxes and insurance. U.S. Trust will monitor the collection 
of rent from the Club as the tenant, the Club's compliance with other 
Lease obligations, the value of the Plan's assets to make sure the 
value of the Building does not exceed 25% of the total Plan assets, and 
assure periodic valuations of the Building by an independent appraiser.
    14. U.S. Trust has concluded that the transactions described herein 
should be structured as follows. The Building purchase price to the 
Plan should not exceed fair market value. The base payments under the 
triple net Lease should at least equal the Building's fair rental 
value. The fair market value and the fair rental value should be 
determined by an independent qualified appraiser, and negotiated by the 
parties at arm's length. In this regard, U.S. Trust represents that it 
reserves the right to negotiate a purchase price below the appraised 
fair market value of the Building and with respect to the Lease, and to 
negotiate a Base Rent above the fair market rent as established by an 
appraiser. U.S. Trust represents that this approach would benefit the 
Plan. U.S. Trust also states that the Plan will achieve at least an 11% 
return on its investment (the Rate of Return), which will be based on 
the purchase price the Plan pays for the Building. The Plan will also 
receive the return due to any appreciation in the market value of the 
Building. This Rate of Return will exceed the Plan's historical rate of 
return which ranged from 9.3% to 9.6%. The applicant states that the 
Rate of Return will have an effect on the fair market rent paid by the 
Club to the Plan under the Lease. For example, the Updated Appraisal 
gives the fair market value of the Building as $5,200,000, and as such 
a minimum return of 11% would require that the annual net payment under 
the Lease by the Club to the Plan be at least $572,000. However, the 
Rate of Return can increase when another appraisal of the Building is 
done at closing, and U.S. Trust analyzes the prevailing market 
conditions and the Club's financial condition.
    15. U.S. Trust compared the risk and rate of return on the Building 
with other investments (including real estate investments) available to 
the Plan, the expenses and liabilities associated with the acquisition 
and ownership of the Building, the Club's financial condition and 
prospects, and its ability to satisfy its obligations under the Lease. 
U.S. Trust represented that the Plan has sufficient liquidity to 
acquire the Building, and that none of the Plan's assets are currently 
invested in real property. U.S. Trust also stated that the Club should 
have the financial resources to satisfy either the Repurchase Option or 
the Make Whole Obligation. U.S. Trust concluded that the transactions 
described herein are more favorable to the Plan than similar 
transactions with an unrelated party, and are inherently protective of 
the Plan.
    16. U.S. Trust has evaluated the Plan's total investment portfolio 
and the safeguards for this investment, including the Repurchase Option 
and the Make Whole Obligation, as well as the Club's ability to satisfy 
these obligations. U.S. Trust has determined that the acquisition of 
the Building by the Plan will not impair the Plan's ability to pay 
benefits and expenses. U.S. Trust has concluded that the acquisition of 
the Building by the Plan is consistent with the diversification 
requirements of section 404(a)(1) of the Act, as the Building will 
represent approximately 21.5% of the Plan's assets.
    17. U.S. Trust proposes to monitor that the Building does not 
exceed 25% of the Plan's assets in several ways. The Plan will obtain 
annual appraisals of the Building's fair market value at the end of the 
Plan's fiscal year (December 31) for purposes of complying with the 25% 
limitation. U.S. Trust represents that the total plan assets may be 
subject to periodic scrutiny for purposes of determining compliance 
with the 25% of plan assets' limitation. The Club will have sixty (60) 
days to cure any violation of the 25% limitation. In this 

[[Page 39020]]
regard, U.S. Trust can request the Club to take one of several remedial 
actions. The Club can make additional cash contributions to the Plan, 
it can prepay rent to the Plan, it can purchase the Building from the 
Plan under the Repurchase Option; or the Club can take other measures 
as may be acceptable to U.S. Trust.\11\ Failing these remedies, from 
the date the 25% limitation is first exceeded the Plan will undertake 
an orderly disposition of the Building in such manner as to cure the 
violation within 9 months (the Disposition Period).

    \11\ The Department notes that if at any time during the 9 month 
Disposition Period, the Building exceeds 30% of the Plan's total 
assets, the exemption, if granted, will no longer be available. The 
Department further notes that it expects U.S. Trust, consistent with 
its fiduciary responsibilities under Title I of the Act, to 
periodically monitor the financial condition of the Club in order to 
take a remedial action not requiring the disposition of the 
Building.
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    18. In summary, the applicant represents that the transaction 
satisfies the statutory criteria of section 408(a) of the Act and 
section 4975(c)(2) of the Code because:
    (1) all terms and conditions of the Purchase, the Lease, the 
Repurchase Option, and the Make Whole Obligation are and will be at 
least as favorable to the Plan as those the Plan could obtain in an 
arm's-length transaction with an unrelated party;
    (2) the Lease will have an initial term of fifteen years with three 
five year renewal options, and will be a triple net lease under which 
the Club as the tenant is obligated for all operating expenses, 
including real estate taxes, insurance, repairs, maintenance, 
electricity and other utilities;
    (3) the fair market value of the Building has been determined by an 
independent qualified appraiser, and will be updated as of the date of 
purchase by the Plan;
    (4) with respect to the Lease, the fair market rental amount has 
been and will be determined by an independent qualified appraiser, 
which amount will never be below the initial fair market annual rental 
amount of $470,000;
    (5) with respect to the Lease, appraisals of the Building will be 
performed at three year intervals during the initial fifteen year term 
of the Lease, and at five year intervals with respect to the three 
renewal periods for purposes of updating the fair market rental amount 
to be received by the Plan;
    (6) the fair market value of the Building, generally, will not 
exceed 25% of the Plan's total assets;
    (7) an independent fiduciary will be appointed to review, approve 
and monitor the transactions described herein, and the fees received by 
the independent fiduciary for serving in such capacity, combined with 
any other fees derived from the Club or related parties, will not 
exceed 1% of its annual income for each fiscal year that it continues 
to serve in the independent fiduciary capacity with respect to these 
transactions;
    (8) U.S. Trust, as the independent fiduciary, will evaluate the 
transactions described herein and deemed them to be administratively 
feasible, protective and in the interest of the Plan;
    (9) U.S. Trust, as the independent fiduciary, will monitor the 
terms and the conditions of the exemption and the Lease throughout its 
initial term plus the three renewal periods, and will take whatever 
action is necessary to protect the Plan's rights;
    (10) U.S. Trust, as the independent fiduciary, will monitor the net 
subleasing amount received by the Club during any annual period under 
the Lease. If such subleasing amount results in a profit to the Club, 
the Club will contribute this profit to the Plan; and
    (11) the Plan will bear no costs or expenses with respect to the 
transactions described herein.

Notice to Interested Persons

    The applicant represents that, within five (5) days of the 
publication of the notice of proposed exemption (the Notice) in the 
Federal Register, all interested persons will receive a copy of the 
Notice, the beginning and ending information that appears with the 
Notice, and a copy of the supplemental statement, as required, pursuant 
to 29 CFR 2570.43(b)(2), either by posting on bulletin boards at 
locations at which employees covered under the Plan are employed, or by 
first class mail to the last known address to all other interested 
persons, including retirees, separated vested employees and 
beneficiaries of deceased participants. Comments and hearing requests 
on the proposed exemption are due thirty-five (35) days after the date 
of publication of this proposed exemption in the Federal Register.
    For Further Information Contact: Ekaterina A. Uzlyan, U.S. 
Department of Labor, telephone (202) 219-8883. (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 that each application 
accurately describes all material terms of the transaction which is the 
subject of the exemption.

    Signed at Washington, DC, this 26th day of July, 1995.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits 
Administration, U.S. Department of Labor.
[FR Doc. 95-18717 Filed 7-28-95; 8:45 am]
BILLING CODE 4510-29-P-M