[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
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\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
