[Federal Register Volume 61, Number 108 (Tuesday, June 4, 1996)]
[Notices]
[Pages 28237-28243]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-13916]



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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D-10171, et al.]


Proposed Exemptions; The Everett Clinic Profit Sharing Plan

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, N.W., 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

[[Page 28238]]

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.

The Everett Clinic Profit Sharing Plan and 401(k) Employee Savings Plan 
and Trust (the Plan) Located in Everett, Washington

[Application No. D-10171]

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 to the following proposed transactions 
between the Plan and the Everett Clinic (the Employer), a party in 
interest with respect to the Plan: (1) The exchange of cash and real 
property (Parcel B) owned by the Plan for other real property (Parcel 
C) owned by the Employer; (2) the grant by the Employer to the Plan of 
a perpetual easement to run with the land on the Plan's Parcel B to be 
exchanged and on the Employer's property (Parcel E); (3) the 
modification and extension of an existing lease (the New Lease) of 
improved real property by the Plan to the Employer, so as to include 
Parcel C and, effective January 1, 1997, a parking lot owned by the 
Employer (Parcel D) to be contributed gratuitously 1 to the Plan; 
and (4) the potential future purchase of the leased premises by the 
Employer pursuant to the terms of an option agreement contained in the 
New Lease.
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    \1\  The Department notes the Employer's representation that its 
contribution of Parcel D to the Plan will not be a prohibited 
transaction under the Department's regulation at 29 CFR 2509.94-3 
because the contribution will not be made pursuant to any legal 
obligation of the Employer to contribute. The Plan is a profit- 
sharing plan which provides for a fully discretionary annual 
contribution by the Employer. It is represented that Parcel D will 
be contributed to the Plan on December 31, 1996 for the 1996 Plan 
Year and that no contribution has been declared for the 1996 Plan 
Year; therefore, the Employer has no existing obligation to 
contribute any amounts to the Plan. However, the Department 
expresses no opinion herein as to whether the Employer's 
contribution of Parcel D to the Plan is fully discretionary.
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    This proposed exemption is subject to the following conditions:
    (1) the Plan is represented in all the transactions by a qualified, 
independent fiduciary;
    (2) the terms and conditions of the transactions are at least as 
favorable to the Plan as those the Plan could obtain in comparable 
arm's length transactions with unrelated parties;
    (3) under the purchase agreement (the Purchase Agreement) with 
respect to the exchange of Parcel B for Parcel C, the Plan pays to the 
Employer an amount no more than the difference between the fair market 
values of Parcel B and Parcel C as of the date of the exchange, as 
established by a qualified, independent appraiser, with the Plan 
receiving full market value for Parcel B (notwithstanding its being 
transferred subject to an easement);
    (4) the rent paid to the Plan under the New Lease is and continues 
to be no less than the fair market rental value of the leased premises, 
as established by a qualified, independent appraiser;
    (5) the rent is adjusted every three years, based upon an updated 
independent appraisal, but never falls below the fair market rental 
amount initially established;
    (6) the New Lease is a triple net lease under which the Employer as 
the tenant is obligated for all operating expenses, including 
maintenance, repairs, taxes, insurance, and utilities;
    (7) the independent fiduciary expressly approves any improvements 
over $100,000 to the leased premises and any renewal of the New Lease 
beyond the initial term;
    (8) the New Lease contains a two-way option agreement enabling the 
Plan to sell the leased premises to the Employer (or the Employer to 
purchase the leased premises from the Plan), in the event the 
independent fiduciary determines that such a sale is in the best 
interests of the Plan, for cash in an amount which is the greater of: 
(a) the original acquisition cost of the premises to the Plan plus 
expenses, or (b) the fair market value of the premises as of the date 
of the sale, as established by a qualified, independent appraiser 
selected by the independent fiduciary;
    (9) at all times, the fair market value of the leased premises 
represents no more than 25% of the total assets of the Plan;
    (10) the independent fiduciary determines that all of the 
transactions are appropriate for and in the best interests of the Plan 
and its participants and beneficiaries at the time of the transactions;
    (11) at all times, the independent fiduciary monitors and enforces 
compliance with the terms and conditions of the Purchase Agreement, the 
New Lease, and the exemption; and
    (12) the Plan incurs no commissions, costs, fees, nor other 
expenses relating to any of the transactions.

EFFECTIVE DATE: This exemption, if granted, will be effective as of 
June 1, 1996.

Summary of Facts and Representations

    1. The Plan is a defined contribution, 401(k)/profit sharing plan 
sponsored by the Employer. The Employer, a Washington corporation, is a 
multi-specialty group medical practice with a main campus at 3901 Hoyt 
Avenue, Everett, Washington and five satellite facilities in Snohomish 
County. As of December 31, 1994, the Plan had 627 participants and 
beneficiaries and total assets of $55,469,695. The trustees of the Plan 
are Robert E. Andre, M.D., James R. Pinkham, M.D., John P. Nolan, M.D., 
Patricia J. Slater, Andrea B. Rodewald, Ann Wanner, M.D., Raymond S. 
Wilson, M.D., Rochelle Crollard, and Frederick T. Goset.
    2. Parcel A, which is owned by the Plan, consists of an area of 
74,846 square feet and includes the old clinic building (Old Clinic 
Building). Parcel A is being leased to the Employer (the Current Lease) 
pursuant to an individual administrative exemption granted by the 
Department, Prohibited Transaction Exemption 81- 46 (PTE 81-46, 46 FR 
113, June 12, 1981). The Plan and the Employer initiated a leasing 
arrangement in 1962, prior to passage of the Act. In 1974, the parties 
entered into a revised lease agreement, which was superseded by the 
Current Lease. The 15-year term of the Current Lease will expire on 
June 30, 1996. The rights of the Plan with respect to the Current Lease 
are represented for all purposes by the First Interstate Bank of 
Washington N.A. (First Interstate), successor to the Olympic Bank of 
Everett, Washington (the Olympic Bank). First Interstate will also be 
acting as an independent fiduciary for the Plan with respect to all the 
proposed

[[Page 28239]]

transactions which are the subject of the instant exemption request.
    3. Parcel B, which is owned by the Plan, consists of a rectangular-
shaped parking lot with an area of 28,660 square feet and is located 
directly across the street from the Old Clinic Building. Parcel B 
adjoins property owned by the Employer and is being leased to the 
Employer, along with Parcel A, under the Current Lease. Parcel B is 
paved, marked, and curbed for automobile parking, and has no building 
improvements.
    Parcel C, which is owned by the Employer, consists of an area of 
16,818 square feet and includes a fully improved medical clinic 
facility (the Addition). Parcel C adjoins the Old Clinic Building and 
is otherwise surrounded by property owned by the Plan (primarily space 
used for parking). In its unimproved state, Parcel C originally 
belonged to the Plan. It is represented that Parcel C was sold to a 
partnership Colby Building Associates, on June 14, 1984, in accordance 
with the provisions of section 414(c)(3) of the Act,2 for purposes 
of constructing the Addition. That partnership was later merged with 
the Employer and no longer exists.
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    \2\  The Department expresses no opinion herein as to whether 
the sale of Parcel C complied with the requirements of section 
414(c)(3) of the Act.
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    Parcel D, which is owned by the Employer, consists of a parking lot 
with an area of 4,361 square feet and is adjacent to Parcel A, which, 
as described above, is owned by the Plan.
    4. Parcels A, B, and C were appraised by James D. McCallum, M.A.I., 
and Grant S. Gladow of McCallum & Associates, both independent real 
estate appraisers certified in the State of Washington. Relying 
primarily on the income approach to valuation, Messrs. McCallum and 
Gladow determined that as of July 1, 1996, Parcel A will have a 
prospective fair market value of $4,900,000 and Parcel C, $3,900,000. 
Relying on the cost approach to valuation, Messrs. McCallum and Gladow 
determined that as of that same date, Parcel B will have a prospective 
fair market value of $390,000.3 The appraisal states that the 
total value of $9,190,000 for all three parcels represents a simple 
summation of the values of each of the individual parcels. While the 
available market data does not provide direct evidence that the 
assemblage value of the parcels (under single ownership) is greater 
than the sum of its component parts, in the opinion of the appraisers, 
consolidation of ownership in one entity will enhance the marketability 
of all the parcels.
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    \3\  The appraisal states that the figure of $390,000 represents 
a ``fee simple value'' for Parcel B (i.e., a valuation that does not 
take into account the anticipated transfer of Parcel B subject to an 
easement).
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    Messrs. McCallum and Gladow further determined that as of July 1, 
1996, Parcel A will have a prospective fair market rental value of 
$533,688 per annum ($44,474 per month) and Parcel C, $413,616 per annum 
($34,468 per month). The appraisal states that the zoning status of 
Parcels A, B, and C is R-4, allowing for a variety of uses, including 
multi-family development, commercial activities, and professional 
office/medical facilities. The highest and best use of the subject 
parcels, if vacant, is as medical offices. The highest and best use of 
the subject parcels, as improved, is their continued use as medical 
facilities.
    Parcel D was appraised by Richard J. DeFrancesco of Macaulay & 
Associates, also an independent real estate appraiser certified in the 
State of Washington. Relying primarily on the sales comparison approach 
to valuation, Mr. DeFrancesco determined that the fair market value of 
Parcel D as of July 21, 1995 was $110,000.
    5. An administrative exemption is requested from the Department for 
the following proposed transactions. The Plan trustees desire that the 
Plan acquire Parcel C from the Employer in order to consolidate 
ownership of adjoining Parcels A and C, thus enhancing the 
marketability of property the Plan already owns. The Employer desires 
to acquire Parcel B from the Plan for purposes of constructing a three-
story parking garage on Parcel B and on other contiguous property owned 
by the Employer, namely Parcel E. The parking garage, which will be 
available free of charge to customers of the Employer, will provide 
parking as required under municipal building codes to support the new 
surgery center to be built by the Employer on Parcel E, as well as the 
existing clinic facilities on Parcels A and C. Under the proposed 
Purchase Agreement, the Plan will convey title to Parcel B to the 
Employer, and the Employer will convey title to Parcel C to the Plan. 
The Plan will pay to the Employer additional cash consideration 
representing the difference between the fair market values of Parcel B 
and Parcel C ($3,510,000 as of July 1, 1996), based upon an updated 
independent appraisal as of the date of the exchange. The Employer will 
grant to the Plan, as part of the exchange, a perpetual, non-exclusive 
pedestrian and vehicle parking easement 4 to run with the land on 
Parcels B and E in favor of Parcels A and C to guarantee adequate 
parking for the Plan-owned property following the exchange. The Plan 
will receive full market value for Parcel B, notwithstanding its being 
transferred subject to an easement. Finally, an exemption is requested 
for the New Lease, which will modify the Current Lease to reflect the 
transactions described above, as well as the gratuitous contribution by 
the Employer to the Plan, effective December 31, 1996, of Parcel D (to 
be included among the premises being leased back to the Employer).
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    \4\ The Department notes the Employer's representation that the 
term ``non-exclusive'' refers to an arrangement whereby the Employer 
and the Plan are intended to have joint use, as opposed to the 
Plan's having exclusive use, of the easement (i.e., the Employer 
will reserve the right of access to the new parking garage for all 
purposes not inconsistent nor in interference with the rights 
granted to the Plan).
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    An actuarial consulting firm Trautmann, Maher & Associates, located 
in Mill Creek, Washington, prepared an asset projection report of the 
Plan's assets. The report, dated September 25, 1995, states that the 
fair market value of all employer real property after the Plan's 
divestment of Parcel B and its acquisition of Parcel C will comprise 
12.58% of the Plan's total assets, as of December 31, 1996.5 This 
projected percentage of all employer real property was calculated to be 
the highest level of Plan assets that will be reached for the duration 
of the New Lease.
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    \5\ Due to the fact that the Employer's decision to contribute 
Parcel D (valued at $110,000) to the Plan was made subsequent to 
preparation of the plan assets projection report by Trautmann, Maher 
& Associates, such report does not take into account the Plan's 
acquisition of Parcel D.
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    6. First Interstate, as noted above, will act as an independent 
fiduciary to represent the Plan's interests with respect to all the 
proposed transactions. First Interstate and its predecessor the Olympic 
Bank, have served as non- discretionary custodian of a portion of the 
Plan's assets since approximately December 1980. In addition, the 
Olympic Bank was appointed the Plan's independent fiduciary at the time 
of the filing of the exemption application with respect to the Current 
Lease, whose term began in 1981. First Interstate, whose fees are paid 
by the Employer, represents that it is independent of the Employer and 
that the Bank has less than one percent of its deposits and less than 
one percent of its outstanding loans attributable to deposits and loans 
of the Employer. First Interstate represents that it has extensive 
experience as a fiduciary under the Act, that it is knowledgeable as to 
the subject transactions, and that it acknowledges and accepts its 
duties and

[[Page 28240]]

responsibilities in acting as a fiduciary with respect to the Plan.
    7. Regardless of whether the exchange of Parcel B and Parcel C 
closes by July 1, 1996, the New Lease, which is to extend and modify 
the Current Lease, will begin as of that date. The New Lease provides 
for an initial term of 10 years, which may be extended at the option of 
the lessee in five-year increments, upon the express approval of the 
independent fiduciary. The Employer will pay an initial rent to the 
Plan at the annual rate of $533,688 ($44,474 per month), which is the 
fair market rental value of Parcel A. When Parcel C is added (upon 
closing of the exchange), the rent will increase by an amount equal to 
the fair market rental value of Parcel C as of the date of the exchange 
(appraised at $413,616 per year as of July 1, 1996) to an annual rate 
of approximately $947,304 (approximately $78,942 per month). When 
Parcel D is added, the rent will increase by an amount to be determined 
by the independent fiduciary by reference to a qualified, independent 
appraisal of the fair market rental value of Parcel D as of January 1, 
1997. The total rent for the leased premises is to be adjusted every 
three years, based upon an updated independent appraisal, and is not to 
fall below the fair market rental amounts initially established. The 
New Lease will be a triple-net lease under which the Employer as the 
tenant is obligated for all operating expenses, including maintenance, 
repairs, taxes, insurance, and utilities. The Employer will indemnify 
and hold the Plan harmless for any loss or damages to the leased 
premises.
    The New Lease permits the Employer to remodel and make structural 
changes or additions to the leased premises at the Employer's expense, 
so long as such improvements comply with all applicable government 
regulations. Any expense over $100,000 must be expressly approved by 
the independent fiduciary. The threshold of $100,000 is intended to 
provide the Employer with discretion to make routine renovations, such 
as the installation of new carpeting, without having to consult the 
independent fiduciary. Any improvements or renovations of the property 
will belong to the Plan upon termination of the New Lease.
    The New Lease also contains a two-way option agreement enabling the 
Plan to sell the leased premises to the Employer (or the Employer to 
purchase the leased premises from the Plan), in the event the 
independent fiduciary determines that such a sale is in the best 
interests of the Plan, for an amount which is the greater of: (a) the 
original acquisition cost of the premises to the Plan plus expenses, or 
(b) the fair market value of the premises as of the date of the sale, 
as established by a qualified, independent appraiser selected by the 
independent fiduciary. Any such sale would be a one-time transaction 
for cash, and the Plan would incur no expenses relating to the sale.
    8. The independent fiduciary represents that it has negotiated the 
terms and conditions of the Purchase Agreement and of the New Lease and 
has determined that such terms and conditions are at least as favorable 
to the Plan as those the Plan could obtain in comparable arm's length 
transactions with unrelated parties. The properties involved have been 
independently appraised, as well as having been subjected to an 
environmental audit. The independent fiduciary recognized that because 
of Parcel B's importance to the Employer's plans to construct a parking 
garage and a surgery center, the Plan was entitled to a premium in the 
exchange of Parcel B for Parcel C. Accordingly, the Plan will receive 
from the Employer the benefit of a perpetual parking easement to run 
with the land on Parcels B and E, in addition to the full market value 
of Parcel B. Finally, the independent fiduciary has conducted an 
investigation of the relevant rental market in order to develop 
appropriate terms for the New Lease.
    9. The independent fiduciary represents that it believes the 
proposed transactions are in the best interests of the Plan and its 
participants and beneficiaries. The Plan's acquisition of Parcels C and 
D will combine adjoining Parcels A, C, and D under single ownership, 
providing the Plan with ownership of almost an entire block (the block 
between Hoyt and Colby Avenues), and thus will enhance the value and 
marketability of property that the Plan already owns. Parcel B will be 
transferred to the Employer at its full market value, despite being 
subject to a perpetual parking easement in favor of Plan-owned 
Property. The New Lease will generate income to the Plan in the form of 
rent and thus provide the Plan with a return on its investment in 
addition to any appreciation of the value of the leased property. The 
Plan is bearing none of the expenses with respect to any of the 
proposed transactions.
    The independent fiduciary has also determined that the proposed 
transactions are appropriate for the Plan in light of the Plan's 
overall investment portfolio for the following reasons. The projected 
percentage of all employer real property (Parcels A, C, and D) will not 
exceed approximately 13% of Plan assets for the duration of the New 
Lease. The Plan's acquisition of Parcel C will not create a liquidity 
problem, will provide increased assurance that the Plan will be able to 
sell the adjoining property the Plan now owns, and will return income 
to the Plan. The Plan's divestment of Parcel B will reduce the 
concentration of Plan assets in real estate and the amount that the 
Plan must pay for Parcel C. The Current Lease should be extended 
because of the difficulties involved in finding another tenant or a 
ready purchaser for the leased property at its appraised fair market 
value. The income from the Current Lease has provided the Plan with a 
stable and favorable rate of investment return (over 9% per annum for 
the period covering the 1980's and the first half of the 1990's, 
ranking in the top 5% of the Independent Consultants Cooperative 
database). The stable and predictable returns provided by the Current 
Lease have enabled the Plan trustees to invest the remainder of the 
Plan's assets in more volatile investments offering the potential for 
higher returns. The independent fiduciary has also examined the 
financial viability of the Employer (including the potential impact of 
any substantial malpractice claims), determined that the Employer's 
past performance under the Current Lease has been in accordance with 
its contractual obligations, and concluded that the Employer will 
continue to be a good tenant.
    The independent fiduciary will recommend to the Plan trustees 
execution of the Purchase Agreement and the New Lease only if they 
remain appropriate for and in the best interests of the Plan and its 
participants and beneficiaries at the time of the transactions. 
Further, the independent fiduciary will, at all times, monitor and 
enforce the Employer's compliance with the terms and conditions of the 
Purchase Agreement, the Proposed Lease, and the exemption.
    10. In summary, the applicant represents that the proposed 
transactions satisfy the statutory criteria for an exemption under 
section 408(a) of the Act for the following reasons: (1) The Plan will 
be represented in all the transactions by a qualified, independent 
fiduciary; (2) the terms and conditions of the transactions will be at 
least as favorable to the Plan as those the Plan could obtain in 
comparable arm's length transactions with unrelated parties; (3) the 
Plan will pay to the Employer cash in an amount no more than the 
difference between the fair market

[[Page 28241]]

values of Parcel B and Parcel C as of the date of the exchange, as 
established by a qualified, independent appraiser; (4) the Plan will 
receive in the exchange full market value for Parcel B, while retaining 
a perpetual parking easement granting the Plan access to the new 
parking garage to be constructed; (5) the Plan will have single 
ownership of both portions of the clinic facilities, as well as Parcel 
D, which will enhance the value and marketability of the Plan-owned 
property; (6) the rent paid to the Plan under the New Lease will be no 
less than the fair market rental value of the leased premises, as 
established by a qualified, independent appraiser; (7) the rent will be 
adjusted every three years, based upon an updated independent 
appraisal, but will never fall below the fair market rental amount 
initially established; (8) the New Lease will be a triple net lease 
under which the Employer as the tenant is obligated for all operating 
expenses, including maintenance, repairs, taxes, insurance, and 
utilities; (9) the independent fiduciary will expressly approve any 
improvements over $100,000 to the leased premises and any renewal of 
the New Lease beyond the initial term; (10) the New Lease will contain 
a two-way option agreement enabling the Plan to sell the leased 
premises to the Employer (or the Employer to purchase the leased 
premises from the Plan), in the event the independent fiduciary 
determines that such a sale is in the best interests of the Plan, for 
cash in an amount which is the greater of: (a) the original acquisition 
cost of the premises to the Plan plus expenses, or (b) the fair market 
value of the premises as of the date of the sale, as established by a 
qualified, independent appraiser selected by the independent fiduciary; 
(11) at all times, the fair market value of the leased premises will 
represent no more than 25% of the total assets of the Plan; (12) the 
independent fiduciary will determine that all of the transactions are 
appropriate for and in the best interests of the Plan and its 
participants and beneficiaries at the time of the transactions; (13) at 
all times, the independent fiduciary will monitor and enforce 
compliance with the terms and conditions of the Purchase Agreement, the 
New Lease, and the exemption; and (14) the Plan will incur no 
commissions, costs, fees, nor other expenses relating to any of the 
transactions.

Notice to Interested Persons

    Notice of the proposed exemption shall be given to all interested 
persons by first-class mail and by posting the required information at 
the Employer's offices within 10 days of the date of publication of the 
notice of pendency 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/or to request a hearing with respect to the proposed exemption. 
Comments and requests for a hearing are due within 40 days of the date 
of publication of this notice in the Federal Register.

FOR FURTHER INFORMATION CONTACT: Ms. Karin Weng of the Department, 
telephone (202) 219-8881. (This is not a toll-free number.)

The SUP Welfare Plan (the Plan) Located in San Francisco, California

[Application No. L-10221]

Proposed Exemption

    The Department is considering granting an exemption under the 
authority of section 408(a) of the Act 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 shall not apply to 
the proposed sale by the Plan of the remaining term of a one-hundred 
year pre-paid leasehold interest (the Interest) to the Sailors' Union 
of the Pacific Building Corporation (SUPBC), a party in interest with 
respect to the Plan, provided the following conditions are satisfied: 
a) the sale is a one-time transaction for cash; b) the Plan pays no 
commissions or other expenses in connection with the sale; c) the Plan 
receives the greater of $438,000 or the fair market value of the 
Interest as of the date of the sale; and d) the fair market value of 
the Interest has been determined by a qualified, independent appraiser.

Summary of Facts and Representations

    1. The Plan was created in 1952 to provide welfare benefits to 
eligible unlicensed seamen who work in the West Coast maritime 
industry. The Plan is sponsored by the Sailors' Union of the Pacific 
(the Union). The Plan has approximately 2,500 participants and 
beneficiaries, and as of July 31, 1994, the fair market value of the 
net assets of the Plan was $10,269,079.
    2. During its early years, the Plan acquired facilities in Los 
Angeles, San Francisco, Portland and Seattle to provide temporary 
shelter for participants who were sometimes impoverished and homeless 
between periods of shipboard employment. In 1954, the SUPBC, an 
affiliate of the Union, constructed a building (the Building) at 2505 
First Avenue, Seattle, Washington, for use as the Union's headquarters 
in Seattle.
    3. In exchange for $251,200, SUPBC conveyed to the Plan a pre-paid 
one hundred year lease of the third floor of the Building. The lease 
term began on June 1, 1954. Since 1954, the Plan has used the space to 
provide housing benefits to Plan participants.
    4. The applicants represent that the huge decline in the American 
flag merchant marine has seriously eroded the funding available to the 
Plan. The Plan's trustees desire to eliminate the housing program and 
to concentrate Plan resources for the purpose of providing traditional 
medical benefits. An opportunity currently exists to dispose of the 
Interest because the Union and SUPBC have decided that they no longer 
need to retain their interests in the property. Accordingly, the 
applicants have requested the exemption proposed herein to permit the 
Plan to sell the Interest to SUPBC.
    5. The Plan will receive cash in the amount of the appraised fair 
market value of the Interest. Mr. Allen N. Safer, MAI, of Property 
Counselors, an independent appraiser in Seattle, Washington, appraised 
the Interest as having a fair market value of $375,000 on July 1, 1994. 
In 1995, Mr. Safer updated his appraisal of the Interest and determined 
that the Interest had a fair market value of $405,000 as of December 
14, 1995. However, Mr. Safer represents that he did not take into 
account any premium that the Plan might receive based on its position 
of being able to block the SUPBC's sale of the Building to a third 
party. Mr. James B. Welle, a Senior Broker for the real estate firm of 
Cushman & Wakefield of Washington, located in Bellevue, Washington, has 
determined that a premium of $33,000 to the Plan is appropriate under 
the circumstances. Accordingly, the applicants represent that the Plan 
will receive the greater of $438,000 or the fair market value of the 
Interest as of the date of the sale. The Plan will pay no commissions 
or other expenses in connection with the sale.
    6. In summary, the applicants represent that the proposed 
transaction satisfies the criteria of section 408(a) of the Act 
because: (a) the sale is a one-time transaction for cash; (b) the Plan 
will pay no commissions or other expenses in connection with the sale; 
and (c) the Plan will receive the greater of $438,000 or the fair 
market value of the Interest as of the date of sale as determined by a 
qualified, independent appraiser.

FOR FURTHER INFORMATION CONTACT: Gary H. Lefkowitz of the Department,

[[Page 28242]]

telephone (202) 219-8881. (This is not a toll-free number.)

Cablevision Industries Corporation Profit Sharing Plan (the Plan) 
Located in New York, New York

[Application No. D-10233]

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 F.R. 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 the proposed purchase from 
the Plan by Cablevision Industries Corporation (the Employer), the 
sponsor of the Plan, of the Plan's entire remaining interest (the 
Surviving Claim) in guaranteed investment contract number GCNG8690011A 
(the GIC) issued by the Executive Life Insurance Company (Executive 
Life); provided that the following conditions are satisfied:
    (A) All terms and conditions of the transaction 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 Plan receives a cash purchase price which is no less than 
the greater of (1) the fair market value of the Surviving Claim as of 
the sale date, or (2) the Plan's principal investment attributable to 
the Surviving Claim plus interest through the purchase date at the 
Contract Rate (as defined below); and
    (C) In the event the Employer subsequently receives payments with 
respect to the Surviving Claim from any source in excess of the 
purchase price paid to Plan, such excess will be paid to the Plan.

EFFECTIVE DATE: This exemption, if granted, will be effective as of 
June 17, 1996.

Summary of Facts and Representations

    1. The Employer, an indirect subsidiary of Time Warner, Inc., is a 
New York corporation engaged in the distribution of cable television 
services, with its principal place of business in New York, New York. 
The Plan is a defined contribution profit sharing plan with 1,598 
participants and total assets of approximately $16,810,297 as of 
February 13, 1996. The Plan's assets are held by its trustee, Fleet 
Trust Company in New York, New York (the Trustee), subject to the 
direction of the Plan's investment committee (the Committee). The 
Committee, comprised of officers of Time Warner Inc. (TWI), the parent 
corporation of the Employer, has complete authority to manage and 
control Plan assets and to determine the investment policy of the Plan.
    2. Assets of the Plan are invested by the Trustee pursuant to the 
directions of the Committee. Among the assets in the Plan is an 
interest in a single-deposit guaranteed investment contract (the GIC) 
issued to the Trustee on August 8, 1986 by Executive Life Insurance 
Company of California (Executive Life). The Trustee purchased the GIC 
on behalf of approximately 81 employee benefit plans which were clients 
of the Trustee, including the Plan. At the time the GIC was purchased, 
the Trustee served as investment manager of the Plan. The Plan made an 
initial principal deposit of $49,800, representing a 1.66 percent 
interest in the GIC (the GIC Interest). Under the terms of the GIC, 
which is designated as Executive Life Contract Number GCNG8690011A, the 
principal earns interest at the rate of 8.86 percent per annum (the 
Contract Rate). The GIC terms permit the Plan to make withdrawals (the 
Withdrawals) solely for the purchase of individual annuity contracts 
for retiring Plan participants. Upon the GIC's stated maturity date of 
August 8, 1991 (the Maturity Date), Executive Life was obligated to 
make a lump-sum payment (the Maturity Payment) in the amount of the 
total principal plus interest at the Contract Rate less Withdrawals.
    3. On April 23, 1991 (the Conservatorship Date), Executive Life was 
placed into conservatorship and rehabilitation by order of the Supreme 
Court of New York (the Court), and a rehabilitator (the Rehabilitator) 
was appointed by the Court. Payments and withdrawals with respect to 
all Executive Life guaranteed investment contracts, including the GIC, 
ceased at that time.6
---------------------------------------------------------------------------

    \6\ The Department notes that the decisions to acquire and hold 
the GIC Interest are governed by the fiduciary responsibility 
requirements of Part 4, Subtitle B, Title I of the Act. In this 
proposed exemption, the Department is not proposing relief for any 
violations of Part 4 which may have arisen as a result of the 
acquisition and holding of the GIC Interest.
---------------------------------------------------------------------------

    As of the Conservatorship Date, the accumulated book value 7 
of the GIC Interest was $74,325. As of the Maturity Date the amount of 
the Maturity Payment which was due the Plan under the GIC as determined 
by the Contract Rates was $76,132. On December 16, 1992, the Court 
approved a plan of rehabilitation (the Rehab Plan) of Executive Life 
which provided for the Rehabilitator to set new rates of interest (the 
Rehab Rates) with respect to the GIC. In accordance with the Rehab 
Plan, the Rehabilitator established the following Rehab Rates for the 
principal amounts deposited under the GIC:

    \7\  The accumulated book value of the GIC Interest is the total 
principal deposited plus interest at the Contract Rate less 
Withdrawals.
---------------------------------------------------------------------------

From 8/8/86 to 8/8/91: 8.86 percent
From 8/8/91 to 8/7/92: 6.00 percent
From 8/7/92 to 2/28/93: 3.50 percent
From 2/28/93 to 2/15/94: 3.25 percent
From 2/15/94 to Final Payment: 4.00 percent

Pursuant to the Rehab Plan and a consequent agreement of January 4, 
1994 (the Rehab Agreement) between the Trustee and the Rehabilitator, 
the value of the GIC Interest, determined by the Rehab Rates, was 
disbursed in a 93.7 percent immediate payout with a surviving claim 
(the Surviving Claim) for the remaining 6.3 percent. The Surviving 
Claim continues to earn a Rehab Rate of four percent annual interest 
until payment to the Trustee with respect to the GIC Interest is 
completed. Although the Plan received $79,862.91 on February 15, 1994 
as the 93.7 percent payout with respect to the GIC Interest exclusive 
of the Surviving Claim, the Employer represents that under the Rehab 
Plan and the Rehab Agreement the Plan will not be made whole with 
respect to its investment in the Surviving Claim in accordance with the 
original terms of the GIC. The value of the Plan's interest in the 
Surviving Claim, as determined by the Rehab Rates, was $5,871.67 as of 
April 30, 1996.
    4. Meanwhile, in January 1996 the Employer was acquired by a 
subsidiary of TWI, and became a member of its controlled group of 
entities involved in the cable television industry (the Merger). As a 
result of the Merger, the Employer has determined to merge the Plan 
with the Time Warner Entertainment Company, L.P. Additional Account 
Plan (the New Plan), of which the Fidelity Management Trust Company 
(Fidelity) is the trustee and investment manager. However, the Employer 
represents that Fidelity will be unable to administer the GIC Interest 
as part of the merged trust assets in the New Plan without considerable 
additional cost.
    The Employer desires to facilitate completion of the merger of the 
Plan with the New Plan by providing for total and immediate liquidation 
of the GIC Interest, and to prevent any loss on amounts due the Plan 
under the terms of the GIC. To accomplish these

[[Page 28243]]

objectives, the Employer and the Committee determined that the most 
expeditious means would be the Employer's cash purchase of the Plan's 
remaining interest in the GIC. The Employer requests an exemption for 
this transaction under the terms and conditions described herein.
    5. The Employer proposes that the Plan transfer to the Employer the 
Plan's entire remaining interest in the GIC in exchange for a cash 
purchase price in the amount of the Plan's GIC Interest principal 
investment attributable to the Surviving Claim plus interest at the 
Contract Rate effective August 8, 1986 through the date of the 
purchase. The Plan will incur no expenses with respect to the proposed 
transaction. Subsequent to the purchase, the Employer, as owner of the 
GIC Interest, will receive the Rehab Payments with respect to the 
Surviving Claim, which includes interest at four percent. In the event 
the Employer receives funds from any source with respect to the 
Surviving Claim in excess of the purchase price paid to the Plan by the 
Employer, such excess will be paid to the Plan.
    6. The Employer is requesting that the exemption, if granted, be 
effective as of June 17, 1996. The Employer explains that its 
reorganizational activities commencing with its acquisition by TWI 
subsidiaries in January 1996 have led to a greater number of Plan 
participant terminations than usual. Whereas the Plan has permitted 
distributions only annually, the New Plan enables distributions on a 
monthly basis. Because distributions to many former participants of the 
Plan are pending, the Employer desires to enable distributions to be 
processed in the June 1996 processing cycle of the New Plan. This will 
require the completed liquidation of the GIC Interest by June 17, 1996. 
Accordingly, the Employer intends to consummate the proposed purchase 
transaction on that date under the terms and conditions described 
above.
    7. In summary, the applicant represents that the proposed 
transactions satisfy the criteria of section 408(a) of the Act for the 
following reasons: (1) The transaction will provide the Plan with an 
immediate return on its investment in the Surviving Claim at a rate of 
interest, the Contract Rate, which is higher than the Rehab Rates; (2) 
The proposed transfer of the GIC Interest to the Employer for a cash 
purchase price will be a one- time transaction in which the Plan 
receives no less than the greater of the fair market value of the GIC 
Interest or the Plan's principal investment attributable to the 
Surviving Claim plus interest through the purchase date at the Contract 
Rate; (3) The Plan will incur no expenses with respect to the proposed 
transaction; and (4) In the event the Employer receives payments with 
respect to the GIC Interest in excess of the purchase price paid the 
Plan, such excess will be paid to the Plan.

FOR FURTHER INFORMATION CONTACT: Ronald Willett of the Department, 
telephone (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 that each application 
accurately describes all material terms of the transaction which is the 
subject of the exemption.

    Signed at Washington, DC, this 30th day of May, 1996.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits 
Administration, U.S. Department of Labor.
[FR Doc. 96-13916 Filed 6-3-96; 8:45 am]
BILLING CODE 4510-29-P