[Federal Register Volume 89, Number 140 (Monday, July 22, 2024)]
[Notices]
[Pages 59161-59167]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-16035]


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DEPARTMENT OF LABOR

Employee Benefits Security Administration

[Exemption Application No. L-12006]


Proposed Exemption for Associated General Contractors of America, 
San Diego Chapter, Inc. Apprenticeship and Training Fund, Located in 
San Diego, CA

AGENCY: Employee Benefits Security Administration, Labor.

ACTION: Notice of proposed exemption.

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SUMMARY: This document provides notice of the pendency before the 
Department of Labor (the Department) of a proposed individual exemption 
from certain of the prohibited transaction restrictions of the Employee 
Retirement Income Security Act of 1974, as amended (ERISA or the Act). 
This proposed exemption would permit the leasing of certain improved 
real property located in San Diego, California by the Associated 
General Contractors of America, San Diego Chapter, Inc. Apprenticeship 
and Training Fund (the Plan or the Applicant), from the Associated 
General Contractors of America, San Diego Chapter, Inc. (the Chapter).

DATES: 
    Comments due: Written comments and requests for a public hearing on 
the proposed exemption should be submitted to the Department by 
September 5, 2024.
    Exemption date: If granted, this exemption will be in effect 
beginning on October 1, 2020.

ADDRESSES: All written comments and requests for a hearing should be 
submitted to the Employee Benefits Security Administration (EBSA), 
Office of Exemption Determinations, Attention: Application No. L-12006 
via email to [email protected] or online through https://www.regulations.gov. Any such comments or requests should be sent by 
the end of the scheduled comment period. The application for exemption 
and the comments received will be available for public inspection in 
the Public Disclosure Room of the Employee Benefits Security 
Administration, U.S. Department of Labor, Room N-1515, 200 Constitution 
Avenue NW, Washington, DC 20210. See SUPPLEMENTARY INFORMATION below 
for additional information regarding comments.

FOR FURTHER INFORMATION CONTACT: Mr. Frank Gonzalez of the Department 
at (202) 693-8553 (this is not a toll-free number).

SUPPLEMENTARY INFORMATION: 

Comments

    Persons are encouraged to submit all comments electronically and 
not to follow with paper copies. Comments should state the nature of 
the person's interest in the proposed exemption and how the person 
would be adversely affected by the exemption, if granted. Any person 
who may be adversely affected by an exemption can request a hearing on 
the exemption. A request for a hearing must state: (1) the name, 
address, telephone number, and email address of the person making the 
request; (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; and (3) a statement of the issues to be addressed and a 
general description of the evidence to be presented at the hearing. The 
Department will grant a request for a hearing made in accordance with 
the requirements above where a hearing is necessary to fully explore 
material factual issues identified by the person requesting the 
hearing. A hearing notice will be published by the Department in the 
Federal Register. The Department may decline to hold a hearing if: (1) 
the request for the hearing does not meet the requirements above; (2) 
the only issues identified for exploration at the hearing are matters 
of law; or (3) the factual issues identified can be fully explored 
through the submission of evidence in written (including electronic) 
form.
    Warning: All comments received will be included in the public 
record without change and may be made available online at https://www.regulations.gov, including any personal information provided, 
unless the comment includes information claimed to be confidential or 
other information whose disclosure is restricted by statute.
    If you submit a comment, EBSA recommends that you include your name 
and other contact information in the body of your comment, but DO NOT 
submit information that you consider to be confidential, or otherwise 
protected (such as a Social Security number or an unlisted phone 
number) or confidential business information that you do not want 
publicly disclosed. However, if EBSA cannot read your comment due to 
technical difficulties and cannot contact you for clarification, EBSA 
might not be able to consider your comment. Additionally, the https://www.regulations.gov website is an ``anonymous access'' system, which 
means EBSA will not know your identity or contact information unless 
you provide it in the body of your comment. If you send an email 
directly to EBSA without going through https://www.regulations.gov, 
your email address will be automatically captured and included as part 
of the comment that is placed in the public record and made available 
on the internet.

Proposed Exemption

    The Department is considering granting an exemption under the 
authority of section 408(a) of ERISA, and in accordance with the 
procedures set forth in 29 CFR part 2570, subpart B (76 FR 66637, 
66644, October 27, 2011).\1\ If granted, this proposed exemption would 
permit, effective October 1, 2020, the leasing of certain improved real 
property located in San Diego, California by the Associated General 
Contractors of America, San Diego Chapter, Inc. Apprenticeship and 
Training Fund (the Plan or the Applicant), from the Associated General 
Contractors of America, San Diego Chapter, Inc. (the Chapter), provided 
that the conditions described below are met.
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    \1\ This proposed exemption would not provide relief from the 
requirements of, or specific sections of, any law not noted herein. 
Accordingly, the applicant is responsible for ensuring compliance 
with any other laws applicable to this transaction.
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Summary of Facts and Representations 2
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    \2\ The Summary of Facts and Representations is based on the 
Applicant's representations and does not reflect factual findings or 
opinions of the Department, unless indicated otherwise. The 
Department notes that the availability of this exemption, if 
granted, is subject to the express condition that the material facts 
and representations contained in application L-12006 (the 
Application) are true and complete and accurately describe all 
material terms of the transactions covered by the exemption. If 
there is any material change in the transaction covered by this 
proposed exemption or in a material fact or representation described 
in the Application, the exemption will cease to apply as of the date 
of the change.
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The Plan

    1. The Plan provides apprenticeship training for construction trade

[[Page 59162]]

employees within five Southern California counties. The Plan is funded 
by participating employers (contributing approximately 90% of the 
Plan's annual funding) and the State of California (contributing 
approximately 10% of the Plan's annual funding). Apprentices do not 
contribute to the Plan. The Plan's most recent audited financial 
statements reflect that the Plan's total assets were $13,725,754 as of 
March 31, 2023.
    2. The Plan's Board of Trustees (the Board) is comprised of six 
individual members (the Trustees) of participating construction trade 
employers. The Trustees make all the Plan's administrative and 
investment decisions including decisions about the lease that is the 
subject of this proposed exemption.

The Plan Sponsor: The Chapter

    3. The Plan is sponsored by the Chapter, which is a trade 
organization founded in 1927 to promote the interests of employers in 
the construction industry located in San Diego, California. A Board of 
Directors comprised of construction trade employers manages the 
Chapter.

The Plan's Facilities Before October 1, 2020

    4. The Applicant represents that before October 1, 2020, the Plan 
leased three different properties from unrelated parties comprising 
11,293 square feet that were used for administrative, educational, and 
training purposes. According to the Applicant, the facilities on these 
properties lacked adequate square footage and had outdated training 
technology, which resulted in increased costs and wasted resources for 
the Plan. In addition, one of the properties was located more than 
three miles from the other two properties.

The Chapter's Property

    5. On January 18, 2018, the Chapter and the Plan entered into a 
Memorandum of Understanding (MOU) documenting their shared interest in 
providing a ``world class apprenticeship program'' in a ``modernized 
facility.'' Following execution of the MOU, the Chapter acquired 
unimproved real property located at 10140 Riverford Road, Lakeside, 
California (the Parcel) from Lakeside Land Co., a California limited 
liability corporation (the LLC). The LLC is not a member of the 
Chapter, there are no common directors between the LLC and the Chapter, 
and no LLC directors are Plan Trustees. The LLC has neither contributed 
nor participated in the Plan, nor does the LLC participate in the 
Plan's apprenticeship training programs.
    6. In 2020, the Chapter utilized the Parcel to construct a high-
ceiling training space comprising approximately 43,600 square feet (the 
Building). The Chapter's acquisition of the Parcel, and subsequent 
construction of the Building, was based on the Plan's intent expressed 
in the MOU to sign a 10-year lease to use both the Building once 
constructed and an unimproved exterior lot (the Property).

The Lease

    7. On April 25, 2019, the Plan Trustees, acting on behalf of the 
Plan, caused the Plan to enter into an agreement with the Chapter to 
lease both a portion of the Building (once constructed) and an 
unimproved exterior lot located in the Parcel (the Lease), subject to 
the review and approval of both a qualified independent fiduciary 
(described below, the Independent Fiduciary) and the Department.
    8. The Lease's term is for 10 years, under which the Plan holds a 
leasehold interest to occupy and use 90 percent of the Building's 
rentable space (39,115 square feet of the Building's total space of 
43,600 square feet) and an unimproved exterior lot along with rights to 
use the Property's common areas. The Chapter utilizes the remaining 10 
percent, and it has no present plans to change its Building's space 
allocation.
    9. The Plan's initial base rent under the Lease is $40,000 per 
month or approximately $1.02 per square foot (the Base Rent). This 
expense during a twelve (12) month period is about 3.5 percent of the 
Plan's total assets as reflected in the Plan's audited financial 
statements for accounting year ending March 31, 2023. The Base Rent is 
subject to annual increases that are discussed further below.

The Independent Appraiser

    10. On May 17, 2019, the Plan engaged Cushman & Wakefield Western 
Inc. as the Independent Appraiser to determine the Property's fair 
market rental value. Trevor G. Chapman, a California licensed Certified 
General Real Estate Appraiser, who is an employee of the Independent 
Appraiser, performed the appraisal.
    11. Mr. Chapman represents that the Independent Appraiser has no 
present or prospective interest in the Property that is subject to the 
Lease, and no personal interest with respect to the Plan and the 
Chapter. In addition, Mr. Chapman represents that the Independent 
Appraiser's annual gross revenues derived from parties in interest with 
respect to the Plan represented 0.37% of its gross revenues for the 
2020 tax year. Furthermore, the Independent Appraiser's agreement with 
the Plan does not contain any provisions that provide for the direct or 
indirect indemnification or reimbursement of the Independent Appraiser 
by the Plan or any other party for any failure to adhere to its 
contractual obligations or to state or Federal laws applicable to the 
Independent Appraiser's work, or that waive any rights, claims or 
remedies of the Plan or its participants and beneficiaries under ERISA, 
the Code, or other Federal and state laws against the Independent 
Appraiser with respect to the transaction(s) that are the subject of 
the exemption.
    12. Mr. Chapman inspected the Property on July 1, 2019, to collect 
primary and secondary data related to the Property, investigate the 
general trends in the regional economy and local area, analyzed rental 
data where appropriate, and reviewed (i) the cost estimates based upon 
submitted architects' plans, and (ii) the proposed Lease using 
generally accepted market-derived appropriate methods and procedures. 
In a written report (the Independent Appraisal Report) dated October 
23, 2019, Mr. Chapman determined that the Property's fair market rental 
rate was $44,443 per month, which represented $1.14 per square foot of 
the Plan's rentable space.
    13. According to the Independent Appraiser, the Lease is a triple 
net lease.\3\ Notwithstanding the types of commercial leases that may 
exist in any given marketplace, the Independent Appraiser informed the 
Department that the Property subject to the Lease is located in a 
market area in which commercial leases are typically written on a 
triple-net basis with tenants

[[Page 59163]]

responsible for all operating expenses, including common area 
maintenance, taxes, and insurance. Lease terms within the Property's 
market are generally between 3 and 7 years for industrial tenants and 
contain annual escalations of 3.0 percent.
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    \3\ The Independent Appraiser notes that a triple net lease is a 
type of commercial lease wherein the lessee is responsible for their 
pro rata share of expenses for common area maintenance, taxes, and 
insurance. Also, in addition to a base rent, tenants subject to 
triple net leases are often required to reimburse the landlord for 
certain expenses; recovery clauses for expenses range from 
absolutely net (whereby the tenant pays all property expenses) to 
fully gross (in which tenant pays no expenses), which provisions can 
vary by property type, locale, and can fall anywhere within the net 
to gross range.
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The Independent Fiduciary

    14. On October 27, 2019, the Plan Trustees retained the services of 
Prudent Fiduciary Services, LLC (PFS) of Los Angeles, California, to 
serve as the Plan's Independent Fiduciary with respect to the Lease. 
Specifically, Mr. Miguel Paredes, a principal with PFS, was appointed 
to undertake the duties and responsibilities on behalf of PFS in its 
role as the Plan's Independent Fiduciary to ensure that the Lease 
arrangement complied with ERISA.
    15. The Independent Fiduciary represents that neither Mr. Paredes 
nor PFS had a pre-existing relationship with the Plan or the Chapter. 
The Independent Fiduciary also represents that Mr. Paredes and PFS 
expect to derive approximately 0.55 percent of their combined annual 
gross revenues from the Plan and parties in interest with respect to 
the Plan. The Independent Fiduciary's agreement with the Plan did not 
contain any provisions that violated ERISA Section 410 or the 
Department's Regulations codified at Sec.  2509.75-4; \4\ and did not 
contain any provision providing for the direct or indirect 
indemnification or reimbursement of the Independent Fiduciary by the 
Plan or other party for any failure to adhere to its contractual 
obligations or to state or Federal laws applicable the Independent 
Fiduciary`s work, or waiving any rights, claims, or remedies of the 
Plan under ERISA, state, or Federal law against the Independent 
Fiduciary with respect to the transaction(s) that are the subject of 
the exemption.
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    \4\ ERISA section 410 provides, in part, that ``except as 
provided in ERISA Sections 405(b)(1) and 405(d), any provision in an 
agreement or instrument which purports to relieve a fiduciary from 
responsibility or liability for any responsibility, obligation, or 
duty under this part [meaning Part 4 of Title I of ERISA] shall be 
void as against public policy.''
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    16. The Independent Fiduciary examined whether the Lease would be 
reasonable, prudent, in the interest of, and protective of the Plan and 
of the Plan's participants. To perform this examination, the 
Independent Fiduciary: (a) reviewed various documents provided by the 
Plan, such as trust agreements, IRS Forms 990, financial statements, 
written policies, guidelines, and procedures, lease agreements, and the 
Plan Trustees' meeting minutes; (b) interviewed and/or held discussions 
with representatives of the Plan; (c) reviewed the Independent 
Appraisal Report; (d) conducted an in-person visit of the Property 
site; (e) reviewed applicable laws and guidance; and (f) considered the 
Plan Trustees' decision-making process with respect to entering into 
the Lease.\5\
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    \5\ The Independent Fiduciary represents that the Trustees 
appeared to have undertaken a reasonable and thorough process before 
making this decision. The Independent Fiduciary represents that the 
Trustees had explored other alternatives and real estate properties 
in the area. Specifically, starting in year 2015 the Trustees began 
searching for new facilities. The Trustees evaluated 12 real 
properties, comprised of six existing buildings, three parcels of 
open land for building, two properties for operating engineer usage, 
and the additional annex near the then current facility.
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    17. In a report dated October 28, 2019 (the Independent Fiduciary 
Report), the Independent Fiduciary noted that the Property allows for 
onsite heavy equipment operator training, which was not an option in 
the Plan's former location due to space constraints. Plus, the new 
location represents an upgrade in size and quality, which should 
translate into better training programs. The Independent Fiduciary 
stated that having the classrooms and apprenticeship/training offices 
in the same location as the Chapter offices potentially improves the 
operation and efficiency of the training programs because the Chapter's 
oversight and resources are nearby. The Independent Fiduciary also 
noted that the Plan and Chapter share an interest in providing high 
quality apprenticeship and continuing training education programs 
because the Plan would be able to provide excellent benefits to its 
participants and the Chapter would be able to use the training programs 
to promote Chapter membership.
    18. The Independent Fiduciary reviewed the Independent Appraiser's 
specific qualifications, including his education, prior experience, and 
professional licenses, memberships, and affiliations. Based upon its 
review, the Independent Fiduciary determined that the Independent 
Appraiser possessed the appropriate training, experience, and 
facilities to provide a qualified appraisal report on behalf of the 
Trust Fund regarding the subject property.
    19. The Independent Fiduciary next examined the Independent 
Appraiser's independence. The Independent Fiduciary represents that it 
did not find any relationship between Chapman or Cushman, or any 
affiliates, to the parties that would be engaging in the transaction 
contemplated by the Lease Agreement. The Independent Fiduciary's review 
also did not reveal any other information that would call into question 
the Independent Appraiser's independence.
    20. The Independent Fiduciary next determined whether the payments 
from the Plan to the Chapter under the Lease would be reasonable. To do 
this, the Independent Fiduciary reviewed the methodology provided by 
the Independent Appraiser to calculate the fair market rent, which 
included comparing comparable rental properties, having discussions 
with local brokers, and testing the Independent Appraiser's conclusions 
through a return on cost analysis. The Independent Fiduciary adjusted 
the Lease's base rent of $1.02 per square foot upwards by $0.07 per 
square foot, to account for the Plan's additional $2,579 monthly 
payments to the Reserve Fund, and determined that even with the 
adjusted rate, the Lease's adjusted monthly rent of $1.09 per square 
foot is less than its appraised fair market value of $1.14 per square 
foot. Additionally, the Independent Fiduciary noted in the Independent 
Fiduciary Report that leases in the Property's subject market are 
typically written on a triple net basis, which is consistent with the 
structure of the Lease. The Independent Fiduciary stated that it also 
reviewed the properties and key lease information used in the 
Independent Appraisal Report analysis of rental activity for comparable 
space in similar properties in the Property's subject market and found 
that the selected comparable properties were appropriate and reasonably 
similar. The Independent Fiduciary noted how other lease terms, such as 
rent escalation clauses, duration, and tenant improvement allowances, 
contained in the comparable leases that the Independent Appraiser 
identified compared to those in the Lease. For the reasons set forth 
above, the Independent Fiduciary determined that the arrangements 
provided under the Lease are necessary for the operation of the Plan 
and that the compensation to be paid by the Plan to the Chapter is 
reasonable. It also determined that entering into the Lease was 
reasonable, prudent, and in the Plan's interest.
    21. On July 28, 2020, the Independent Fiduciary issued an addendum 
and supplement to the Independent Fiduciary Report. In the addendum, 
the Independent Fiduciary agreed to perform the following additional 
duties on behalf of the Plan: (a) monitor the terms of this exemption, 
if granted, on an ongoing basis and take all actions that are necessary 
and proper to enforce the Plan's rights under the Lease to protect the 
Plan's participants and

[[Page 59164]]

beneficiaries; (b) review and approve the material terms and conditions 
of the Lease and make any adjustments thereto; (c) engage the 
Independent Appraiser and/or other service providers as they reasonably 
determine to be necessary; (d) monitor the Lease, including during any 
subsequent renewal period; and (e) ensure that all conditions of this 
exemption, if granted, are met. The obligations in the addendum have 
been subsumed into the Independent Fiduciary's duties below.
    22. The proposed exemption requires the Independent Fiduciary to 
engage a qualified independent appraiser to perform an independent 
appraisal of the Property following the beginning date of the Lease, on 
a periodic basis as prudence requires, to ensure the Plan does not pay 
more than fair market value under the Lease. The Independent Fiduciary 
must regularly evaluate the prudence of the Plan's continued 
participation in the Lease and ensure that participation in the Lease 
remains in the interest of and protective of the interests of the 
Plan's participants. The Plan's ongoing participation in the Lease 
requires the ongoing approval and consent of the Independent Fiduciary. 
The Independent Fiduciary is responsible for the selection of the 
independent appraiser, the frequency of appraisals, and the assessment 
of the reliability of the appraisals in determining fair market value. 
The Plan may continue to participate in the Lease during any period 
only to the extent the Independent Fiduciary has affirmatively 
determined that participation in the Lease remains in the interest of 
and protective of the Plan and its participants and beneficiaries. The 
amounts that the Plan has paid or will continue to pay under the Lease 
may not exceed fair market value.
    23. In the July 28, 2020, supplement to the Independent Fiduciary 
Report, the Independent Fiduciary stated that the Plan needed more 
space to comply with social distancing requirements and guidelines in 
the COVID-19 environment and to enable the Plan to offer sufficient 
classes in a manner compliant with State Division of Apprenticeship 
Standards Guidelines. In the supplement, the Independent Fiduciary 
confirmed that the Plan's entering into the Lease was reasonable, 
prudent, and in the interest of the Plan.
    24. On October 1, 2020, the Independent Appraiser conducted another 
appraisal of the Property and determined that the Property's fair 
market rental value under the Lease was $48,890 per month as of that 
date.\6\ The Plan moved into the Building on the same day, stating that 
it urgently needed larger space due to the COVID-19 health pandemic. On 
January 14, 2022, the Independent Fiduciary represented to the 
Department that for the period beginning on October 1, 2020, the terms 
of the Lease, including the base monthly rent of $40,000 per month, are 
in the interest of, and protective of, the Plan and its participants 
and beneficiaries, and reflect a below fair market rent for the subject 
premises.
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    \6\ This determination is set forth in the Independent 
Appraiser's written report, dated December 16, 2021.
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Other Duties of the Independent Fiduciary

    25. The Independent Fiduciary must ensure that the Lease is in the 
interest and protective of the Plan and its participants and 
beneficiaries, including with respect to any amendment or renewal of 
the Lease. Further, the Independent Fiduciary must take all necessary 
and proper steps to ensure that the Plan and its participants and 
beneficiaries are protected in connection with the Lease, including by 
approving any amendment or renewal thereof, and beginning on the day 
that the notice of exemption is published in the Federal Register, the 
Independent Fiduciary must ensure that the Plan's total payments under 
the Lease during a twelve (12) month period do not exceed ten (10) 
percent of the Plan's total assets as reflected in the most recently 
issued report from the independent accounting firm responsible for 
auditing the Plan's financial statements.
    In order to ensure that the Lease and its terms continue to be in 
the interest of participants and beneficiaries of the Plan, this 
proposal requires the Independent Fiduciary to give prior written 
notice to the Department's Office of Exemption Determinations at least 
60 days before the Lease is amended, modified, or extended, unless such 
delay would cause imminent harm to the Plan in which case the notice 
must be provided immediately. The notification must include a complete 
description of the amendment, modification, or extension, including all 
material terms.\7\ Additionally, the Independent Fiduciary must notify 
the Chapter of the Plan's intention to extend the Lease beyond the 
initial 10-year term, and any subsequent renewal must not exceed five-
years.
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    \7\ Because the proposed exemption provides retroactive 
exemptive relief, within 60 days of the date of publication of the 
notice of exemption in the Federal Register (the Publication Date), 
the Independent Fiduciary will provide a summary of all amendments, 
modifications, or extensions of the Lease made between October 1, 
2020, and the Publication Date.
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    The Independent Fiduciary, while acting on the Plan's behalf with 
respect to the Lease, must not be directly or indirectly controlled by 
or through one or more intermediaries, or under common control with 
either the Chapter, the Plan, or any related employers' members.
    26. The Independent Fiduciary has not entered into and must not 
enter into any agreement or instrument that violates either ERISA 
Section 410 or the Department's Regulations codified at Sec.  2509.75-
4; \8\ and has not entered and must not enter into any agreement, 
arrangement, or understanding that includes any provision that provides 
for the direct or indirect indemnification or reimbursement of the 
Independent Fiduciary by the Plan or other party for any failure to 
adhere to its contractual obligations or to state or Federal laws 
applicable the Independent Fiduciary`s work, or that waives any rights, 
claims, or remedies of the Plan under ERISA, state, or Federal law 
against the Independent Fiduciary with respect to the transaction(s) 
that are the subject of the exemption.
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    \8\ ERISA section 410 provides, in part, that ``except as 
provided in ERISA Sections 405(b)(1) and 405(d), any provision in an 
agreement or instrument which purports to relieve a fiduciary from 
responsibility or liability for any responsibility, obligation, or 
duty under this part [meaning Part 4 of Title I of ERISA] shall be 
void as against public policy.''
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Other Lease Terms

    27. The Lease defines the formula to be used in determining the 
Base Rent annual increases as follows:

    ``Beginning on the date that is one (1) year after the 
Commencement Date [Lease's start date], and on each successive one-
year anniversary thereof (each an `Adjustment Date') throughout the 
[t]erm, the Base Rent shall be increased by the amount of increase 
in the CPI . . . [s]uch increase shall be calculated by multiplying 
the then-current Base Rent by a fraction, the numerator of which 
shall be the CPI for the Adjustment Date and the denominator of 
which shall be the CPI for the previous Adjustment Date (or the CPI 
for the Commencement Date in case of the adjustment for the first 
Adjustment Date). If there is no increase in CPI, or a decrease in 
CPI, the Base Rent shall remain unchanged.'' \9\
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    \9\ CPI means the Consumer Price Index; the Department's Bureau 
of Labor Statistics publishes the CPI. The Lease also provides that 
``. . . [t]he CPI for any Adjustment Date shall be the CPI for the 
most recent month for which it is published before the Adjustment 
Date (or before the Commencement Date, as the case may be).'' The 
Department understands such Base Rent increase calculation to mean 
that the Base Rent may increase annually based on the published CPI 
for the applicable period.


[[Page 59165]]


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    28. Notwithstanding the Lease's CPI Base Rent annual increases 
provision discussed above, and as further described below, the 
Independent Fiduciary must ensure that the total amount paid by the 
Plan in connection with the Lease does not exceed the fair market 
rental value.
    29. In addition to the Base Rent, the Lease requires the Plan to 
pay certain operating expenses (the Operating Expenses).\10\ The 
Operating Expenses are subject to both an annual reconciliation process 
(the Annual Reconciliation) and to the Plan's exercise of audit rights, 
because of the Building's 90/10 allocation ratio between the Plan and 
the Chapter, respectively. The computation of the Operating Expenses 
must be made in accordance with fair and reasonable accounting 
principles customarily applied by owners of similar properties located 
in San Diego, California.\11\
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    \10\ The Lease defines Operating Expenses as additional rent for 
costs that the Chapter incurs, which include the following: (1) 
operation, repair, maintenance, and replacement of the common areas; 
(2) trash disposal, janitorial and security services; (3) any 
service provided by the Chapter that is an operating expense under 
the Lease; (4) the cost of the premiums for the liability and 
property insurance policies required to be maintained by the Chapter 
under the Lease; (5) the cost of water, sewer, gas, electricity, 
solar panels, and other publicly mandated services; (6) labor, 
salaries and applicable fringe benefits and costs, materials, 
supplies and tools, used in maintaining and/or cleaning the 
premises, and accounting and management fees attributable to the 
operation of the premises; (7) replacing and/or adding improvements 
mandated by any governmental agency and any repairs or removals 
necessitated thereby; (8) replacements of equipment or improvements, 
as amortized over such equipment or improvements' useful life for 
depreciation purposes according to federal income tax guidelines; 
(9) reserves set aside for maintenance, repair and/or replacement of 
common area improvements and equipment as set forth in the Lease's 
Addendum; (10) environmental damages and earthquake coverage to the 
extent not recovered by Chapter directly from any tenants; and (11) 
all taxes, assessments and charges levied on or with respect to the 
facility, or any personal property of the Chapter used in the 
operation thereof and payable by the Chapter.
    \11\ The Independent Fiduciary's duties include reviewing and 
approving the Lease's Operating Expenses provisions.
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    30. The Lease requires both the Plan and the Chapter to make 
monthly payments into a Capital Replacement Reserve Fund (the Reserve 
Fund); both the Plan and the Chapter must pay their pro rata monthly 
amount to the Reserve Fund based on their space utilization under the 
Lease--the Chapter must pay $136 per month for occupying 4,485 square 
feet while the Plan must pay $2,579 per month for occupying 39,115 
square feet.\12\ The Reserve Fund's monthly amounts will remain the 
same throughout the Lease's duration, including extensions.
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    \12\ As noted above, the Independent Fiduciary determined that 
these payments had the effect of adjusting the Lease's base rent of 
$1.02 per square foot upward by $0.07 per square foot.
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    31. The Reserve Fund is intended to segregate payments for future 
replacement needs and its calculations are based on reasonable life 
expectancy \13\ and anticipated replacement costs of the Reserve Fund 
Items; as such, the Reserve Fund is not subject to the Annual 
Reconciliation provision.
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    \13\ The Lease provides a life cycle costs analysis for the 
Reserve Fund Items, which considers all costs of acquiring, 
operating, maintaining, and disposing of a building component or 
system.
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    32. The Reserve Fund may only be used for the replacement of 
certain items (such as roofing, doors, frames and hardware, flooring, 
asphalt and concrete paving and resealing, fencing and gates, etc.) 
that are listed in the Lease's addendum, and the Reserve Fund may not 
be used for any other purpose unless agreed to by both the Chapter and 
the Plan, subject to the Independent Fiduciary's approval.\14\
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    \14\ The Reserve Fund includes the following additional items: 
backflow preventers on site utilities; casework and countertops; 
sheet metal, caulking, joint sealants; roofing maintenance and re-
roofing; doors, frames, and hardware; operable walls in classroom; 
coiling service doors; glass and glazing storefront system; ceramic 
tile; flooring carpet replacement and base; paint and coatings; 
elevator; plumbing; HVAC equipment; electrical and site lighting; 
and fire alarm and security system.
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    33. Further, the Lease requires the Chapter to keep the Property, 
including interior and exterior walls, roof, and common areas, in good 
condition and repair except that the Plan is responsible for day-to-day 
maintenance and repairs to the interior of its allocated rented space 
to the extent such cost is attributable to causes beyond normal wear 
and tear. The Lease requires the Chapter to keep the moneys in the 
Reserve Fund in a restricted account that may not be used for any 
purpose other than to fund the replacement of the items described 
above. Amounts paid by the Plan into the Reserve Fund constitute a 
portion of the Plan's overall consideration paid to the landlord, and 
once the amounts are paid into the Reserve Fund, the Plan has no legal 
right to such amounts beyond what is described in the Lease. The 
Lease's termination ends the Plan's right under the Lease.\15\
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    \15\ As described in more detail above, the Independent 
Fiduciary determined that the aforementioned Lease terms, including 
the Reserve Fund provision, were prudent, and in the interest of the 
Plan. Moreover, this proposed exemption prohibits the Plan's 
participants from paying any Plan operating expenses, including 
amounts paid into the Reserve Fund.
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Exemptive Relief Requested and Analysis

    34. Absent an administrative exemption, the Lease would violate 
ERISA Sections 406(a)(1)(A) and (D) and 406(b)(2). ERISA Section 
406(a)(1)(A) prohibits the sale, exchange, or lease, of any property 
between a plan and a party in interest. The Chapter is a party in 
interest with respect to the Plan under ERISA Section 3(14)(D) because 
it is an employee organization whose members are covered by the Plan. 
Therefore, the Lease would violate ERISA section 406(a)(1)(A).
    35. Additionally, ERISA section 406(a)(1)(D) prohibits the transfer 
to or use of any plan assets by or for the benefit of a party in 
interest of a plan. Because the Lease requires monthly cash payments 
from the Plan's assets to the Chapter, the payments would be considered 
a transfer of Plan assets to a party in interest in violation of ERISA 
section 406(a)(1)(D).
    36. Finally, the Lease would violate ERISA section 406(b)(2), which 
prohibits a plan fiduciary acting in their individual capacity or in 
any other capacity in a transaction involving the plan on behalf of a 
party (or representing a party) whose interests are adverse to the 
interests of the plan or its participants or beneficiaries. Because 
both the Trustees and the Board are comprised of individuals 
representing participating employers who are the Chapter's members, 
these individuals are involved on both sides of the Lease in violation 
of ERISA Section 406(b)(2).

Conditions for Exemptive Relief 16
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    \16\ The Department notes that this is a summary of the 
conditions intended for the convenience of a reader; however, the 
governing conditions for the Proposed Transaction are those 
reflected in section II of the proposed exemption.
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    37. In addition to the protections described above, the Plan's 
participants must not pay any of the Plan's operating expenses. The 
terms and conditions of the Lease must be at least as favorable to the 
Plan as those that the Plan could obtain in a comparable lease from an 
unrelated party in an arm's-length transaction. If granted, this 
exemption will not cover any type of service that is otherwise covered 
under an administrative class exemption or a statutory exemption of 
ERISA, such as ERISA section 408(b)(2).
    38. In the event that the Independent Fiduciary retains an 
Independent Appraiser in connection with the Lease, such Independent 
Appraiser must not have entered into, and must not enter into, any 
agreement, arrangement, or understanding that includes any

[[Page 59166]]

provision that provides for the direct or indirect indemnification or 
reimbursement of the Independent Appraiser by the Plan or any other 
party for any failure to adhere to its contractual obligations or to 
state or Federal laws applicable to the Independent Appraiser's work, 
or that waives any rights, claims or remedies of the Plan or its 
participants and beneficiaries under ERISA, the Code, or other Federal 
and state laws against the Independent Appraiser with respect to the 
transaction(s) that are the subject of the exemption.
    39. Finally, this proposed exemption would require the Plan to 
adhere to the material facts and representations described in the 
proposed exemption and set forth in the exemption application, 
including the Plan's representations made pursuant to the Department's 
Regulations codified in 29 CFR 2570.34-35.

Statutory Findings

    40. ERISA Section 408(a) provides, in part, that the Department may 
not grant an exemption unless the Department finds that the exemption 
is administratively feasible, in the interest of affected plans and of 
their participants and beneficiaries, and protective of the rights of 
such plan and its participants and beneficiaries, which criteria are 
discussed below.
    a. The Proposed Exemption Is ``Administratively Feasible.'' The 
Department has tentatively determined that the proposed exemption is 
administratively feasible because, among other things, the Independent 
Fiduciary must represent the Plan for all purposes relating to the 
proposed transaction. This representation includes: reviewing and 
approving the Lease terms and conditions; and ensuring that the Plan's 
entering into the Lease and continuation of the Lease, including any 
amendment to or renewal thereof, is reasonable, prudent, and in the 
interests of, the Plan and its participants and beneficiaries.
    b. The Proposed Exemption Is ``In the Interests of the Plan.'' The 
Department has tentatively determined that the proposed exemption is in 
the Plan's interest because the Lease permits the Plan to rent a modern 
facility located in a central location with updated equipment that can 
accommodate a large group of apprentices for an amount not exceeding 
fair market value.
    c. The Proposed Exemption Is ``Protective of the Plan.'' The 
Department has tentatively determined that the proposed exemption is 
protective of the rights of the Plan and its participants, and 
beneficiaries, because the Independent Fiduciary must represent the 
Plan's interests for all purposes with respect to the Lease in 
accordance with ERISA's fiduciary duties of prudence and loyalty, 
including prudently monitoring the terms of the Lease on an ongoing 
basis and ensuring that the protective conditions of the exemption are 
fully met.

Notice to Interested Persons

    Notice of the proposed exemption will be given to all Interested 
Persons within 15 days of the publication of the notice of proposed 
exemption in the Federal Register, by first class U.S. mail, to the 
last known address of all such individuals. The notice will contain a 
copy of the notice of proposed exemption, as published in the Federal 
Register, and a supplemental statement, as required pursuant to 29 CFR 
2570.43(a)(2). The supplemental statement will inform interested 
persons of their right to comment on the pending exemption. Written 
comments are due within 45 days of the publication of the notice of 
proposed exemption in the Federal Register. All comments will be made 
available to the public.
    Warning: If you submit a comment, the Department recommends that 
you include your name and other contact information in the body of your 
comment, but DO NOT submit information that you consider to be 
confidential, or otherwise protected (such as a Social Security number 
or an unlisted phone number) or confidential business information that 
you do not want publicly disclosed. All comments may be posted on the 
internet and can be retrieved by most internet search engines.

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 ERISA section 408(a) does not relieve a fiduciary or other party 
in interest or disqualified person from certain other provisions of 
ERISA and/or the Code, including any prohibited transaction provisions 
to which the exemption does not apply and the general fiduciary 
responsibility provisions of ERISA section 404, which, among other 
things, require a fiduciary to discharge their duties respecting the 
plan solely in the interest of the participants and beneficiaries of 
the plan and in a prudent fashion in accordance with ERISA section 
404(a)(1)(b); nor does it affect the requirement of Code section 401(a) 
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 ERISA section 408(a) 
and/or Code section 4975(c)(2), 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 exemption, if granted, will be supplemental to, 
and not in derogation of, any other provisions of ERISA 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 exemption, if granted, will be subject to the 
express condition that the material facts and representations contained 
in each application are true and complete at all times, and that each 
application accurately describes all material terms of the transaction 
which is the subject of the exemption.

Proposed Exemption

Section I. Covered Transaction

    If the proposed exemption is granted, the restrictions of ERISA 
sections 406(a)(1)(A), (D), and 406(b)(2) shall not apply, effective 
October 1, 2020, to the leasing of office, classroom, and training 
facilities (the Lease) located on an improved parcel of real property 
(the Property) by the Associated General Contractors of America, San 
Diego Chapter, Inc. Apprenticeship and Training Fund (the Plan) from 
the Associated General Contractors of America, San Diego Chapter, Inc. 
(the Chapter), to provide construction trade apprenticeship training to 
Plan participants, as long as the conditions set forth in section II 
are met.

Section II. General Conditions

    (a) The Plan has paid, and will continue to pay, no more than the 
fair market rental value in connection with the Lease;
    (b) The Plan's participants do not contribute to the Plan;
    (c) A qualified independent fiduciary (the Independent Fiduciary) 
represents the Plan's interests in all respects to the Lease, including 
by approving the Lease and, if warranted, any amendment to or renewal 
of the Lease. Additionally, the Independent Fiduciary, acting on the 
Plan's behalf with respect to the Lease:

[[Page 59167]]

    (1) Must not be directly or indirectly controlled by or through one 
or more intermediaries, or under common control with either the 
Chapter, the Plan, or any related employers' members;
    (2) Reviewed the Lease, including the terms and conditions, and 
determined that the Lease was reasonable and in the interest of and 
protective of the Plan and its participants and beneficiaries in 
accordance with ERISA's fiduciary duties of prudence and loyalty;
    (3) Confirmed that the initial base rent did not exceed the current 
fair market rental value of the Property by reviewing an appraisal 
performed by a qualified independent appraiser (the Independent 
Appraiser) both when the Plan entered into the Lease, and when the Plan 
began occupying the Property;
    (4) Determined in advance of the Plan's entering into the lease for 
the Property, that the Lease is reasonable, prudent, in the interest 
of, and protective of the Plan and its participants and beneficiaries 
in accordance with ERISA's fiduciary duties of prudence and loyalty;
    (5) Must engage a qualified independent appraiser to perform an 
independent appraisal of the Property following the beginning date of 
the Lease, on a periodic basis as prudence requires, to ensure the Plan 
does not pay more than fair market value under the Lease. The 
Independent Fiduciary is responsible for the selection of the 
Independent Appraiser, the frequency of appraisals, and the assessment 
of the reliability of the appraisals in determining fair market value;
    (6) Must regularly evaluate the prudence of the Plan's continued 
participation in the Lease and ensure that participation in the Lease 
remains in the interest of and protective of the interests of the 
Plan's participants;
    (7) Must monitor the parties' compliance with the terms and 
conditions of the exemption, if granted, and take all necessary and 
proper steps to ensure that the Plan and its participants and 
beneficiaries are completely protected throughout the Lease's term and 
any related transactions (including any renewal thereof);
    (8) Must review and approve the Lease's operating expenses on an 
ongoing basis, including but not limited to ensuring that the Plan 
undergoes both an annual reconciliation for such accrued expenses and 
it exercises its audit rights when prudently needed.
    (9) Must give prior written notice to the Chapter of the Plan's 
intention to extend the Lease beyond the initial 10-year term;
    (10) Has not entered into and must not enter into any agreement or 
instrument that violates either ERISA section 410, or the Department's 
Regulations codified at 29 CFR 2509.75-4; \17\ and
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    \17\ ERISA section 410 provides, in part, that ``except as 
provided in ERISA Sections 405(b)(1) and 405(d), any provision in an 
agreement or instrument which purports to relieve a fiduciary from 
responsibility or liability for any responsibility, obligation, or 
duty under this part [meaning Part 4 of ERISA] shall be void as 
against public policy.''
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    (11) Has not entered into and must not enter into any agreement, 
arrangement, or understanding that includes any provision that provides 
for the direct or indirect indemnification or reimbursement of the 
Independent Fiduciary by the Plan or other party for any failure to 
adhere to its contractual obligations or to state or Federal laws 
applicable to the Independent Fiduciary's work, or that waives any 
rights, claims, or remedies of the Plan under ERISA, state, or Federal 
law against the Independent Fiduciary with respect to the 
transaction(s) that are the subject of the exemption;
    (d) The Plan's ongoing participation in the Lease requires the 
continuing approval and consent of the Independent Fiduciary and the 
Plan may continue to participate in the Lease during any period only to 
the extent the Independent Fiduciary has affirmatively determined that 
participation in the Lease remains in the interest of and protective of 
the Plan and its participants and beneficiaries;
    (e) Any adjustments to the base rent under the Lease must be linked 
to the Consumer Price Index for All Urban Consumers for the San Diego, 
California area, as published by the Department's Bureau of Labor 
Statistics;
    (f) Any renewal of the Lease's initial 10-year term must be made 
solely at the Plan's discretion subject to approval by the Independent 
Fiduciary and if the Lease is renewed, the Lease term must not exceed 
five-years;
    (g) The Independent Appraiser must not have entered into, and must 
not enter into, any agreement, arrangement, or understanding that 
includes any provision that provides for the direct or indirect 
indemnification or reimbursement of the Independent Appraiser by the 
Plan or any other party for any failure to adhere to its contractual 
obligations or to state or Federal laws applicable to the Independent 
Appraiser's work, or that waives any rights, claims or remedies of the 
Plan or its participants and beneficiaries under ERISA, the Code, or 
other Federal and state laws against the Independent Appraiser with 
respect to the transaction(s) that are the subject of the exemption;
    (h) The exemption does not cover any type of service that is 
otherwise covered under an administrative class exemption or a 
statutory exemption from ERISA's prohibited transaction provisions;
    (i) Beginning on the day that the notice of exemption is published 
in the Federal Register, the Plan's total payments under the Lease 
during any given twelve (12) month period must not exceed ten (10) 
percent of the Plan's total assets as reflected in the most recently 
issued report from the independent accounting firm that audited the 
Plan's financial statements;
    (j) The terms and conditions of the Lease are at least as favorable 
to the Plan as those which the Plan could obtain in a comparable lease 
from an unrelated party in an arm's-length transaction;
    (k) All of the material facts and representations set forth in the 
Summary of Facts and Representations are true and accurate; and
    (l) Within 60 days of the date of publication of the notice of 
exemption in the Federal Register (the Publication Date), the 
Independent Fiduciary will provide a summary of all amendments, 
modifications, or extensions of the Lease made between October 1, 2020, 
and the Publication Date. After the Publication Date, on an ongoing 
basis, the Independent Fiduciary must inform the Department's Office of 
Exemption determinations if the Lease is amended, modified, or extended 
at least 60 days before the amendment, modification, or extension 
unless such delay would cause imminent harm to the Plan in which case 
the notice must be provided immediately. The notification must include 
a complete description of the amendment, modification, or extension, 
including all material terms thereof.
    Exemption Date: The proposed exemption would be effective October 
1, 2020.

    Signed at Washington, DC, this 16th day of July 2024.
George Christopher Cosby,
Director, Office of Exemption Determinations, Employee Benefits 
Security Administration, U.S. Department of Labor.
[FR Doc. 2024-16035 Filed 7-19-24; 8:45 am]
BILLING CODE 4510-29-P