Proposed Exemptions; Texas Commerce Bank National Association

DEPARTMENT OF LABOR

[Application No. D-09783 et al.]

Proposed Exemptions; Texas Commerce Bank National Association

AGENCY: Pension and Welfare Benefits Administration, Labor.

ACTION: Notice of proposed exemptions.

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SUMMARY: This document contains notices of pendency before the

Department of Labor (the Department) of proposed exemptions from

certain of the prohibited transaction restriction of the Employee

Retirement Income Security Act of 1974 (the Act) and/or the Internal

Revenue Code of 1986 (the Code).

Written Comments and Hearing Requests

All interested persons are invited to submit written comments or

request for a hearing on the pending exemptions, unless otherwise

stated in the Notice of Proposed Exemption, within 45 days from the

date of publication of this Federal Register Notice. Comments and

request for a hearing should state: (1) the name, address, and

telephone number of the person making the comment or request, and (2)

the nature of the person's interest in the exemption and the manner in

which the person would be adversely affected by the exemption. A

request for a hearing must also state the issues to be addressed and

include a general description of the evidence to be presented at the

hearing. A request for a hearing must also state the issues to be

addressed and include a general description of the evidence to be

presented at the hearing.

ADDRESSES: All written comments and request for a hearing (at least

three copies) should be sent to the Pension and Welfare Benefits

Administration, Office of Exemption Determinations, Room N-5649, U.S.

Department of Labor, 200 Constitution Avenue, N.W., Washington, D.C.

20210. Attention: Application No. stated in each Notice of Proposed

Exemption. The applications for exemption and the comments received

will be available for public inspection in the Public Documents Room of

Pension and Welfare Benefits Administration, U.S. Department of Labor,

Room N-5507, 200 Constitution Avenue NW., Washington, D.C. 20210.

Notice to Interested Persons

Notice of the proposed exemptions will be provided to all

interested persons in the manner agreed upon by the applicant and the

Department within 15 days of the date of publication in the Federal

Register. Such notice shall include a copy of the notice of proposed

exemption as published in the Federal Register and shall inform

interested persons of their right to comment and to request a hearing

(where appropriate).

SUPPLEMENTARY INFORMATION: The proposed exemptions were requested in

applications filed pursuant to section 408(a) of the Act and/or section

4975(c)(2) of the Code, and in accordance with procedures set forth in

29 CFR Part 2570, Subpart B (55 FR 32836, 32847, August 10, 1990).

Effective December 31, 1978, section 102 of Reorganization Plan No. 4

of 1978 (43 FR 47713, October 17, 1978) transferred the authority of

the Secretary of the Treasury to issue exemptions of the type requested

to the Secretary of Labor. Therefore, these notices of proposed

exemption are issued solely by the Department.

[[Page 39014]]

The applications contain representations with regard to the

proposed exemptions which are summarized below. Interested persons are

referred to the applications on file with the Department for a complete

statement of the facts and representations.

Texas Commerce Bank National Association (Texas Commerce) Located in

Houston, TX

[Application No. D-09783]

Proposed Exemption

The Department is considering granting an exemption under the

authority of section 408(a) of the Act and section 4975(c)(2) of the

Code and in accordance with the procedures set forth in 29 CFR Part

2570, Subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption

is granted, the restrictions of section 406(a) of the Act and the

sanctions resulting from the application of section 4975 of the Code,

by reason of section 4975(c)(1) (A) through (D) of the Code, shall not

apply to the leasing, since September 15, 1993, of certain office space

in a building (the Building) owned by the Maritime Association--I.L.A.

Pension Fund (the Pension Plan) to Texas Commerce, a party in interest

with respect to the Pension Plan.

This proposed exemption is conditioned on the following

requirements:

(a) The trustees of the Pension Plan (the Trustees), who are

independent of Texas Commerce, believe that the leasing of office space

in the Building by the Plan to Texas Commerce is and will continue to

be in the best interest of the Pension Plan and its participants and

beneficiaries.

(b) The decision by the Pension Plan to enter into and continue

leasing office space in the Building to Texas Commerce has been made

and will continue to be made by the Trustees in consultation with an

independent property manager and an independent fiduciary.

(c) The terms of the lease have remained and will remain at least

as favorable to the Pension Plan as those obtainable in an arm's length

transaction with an unrelated party.

(d) The rental charged by the Pension Plan under the lease has been

based and will continue to be based upon arm's length negotiations with

unrelated parties.

(e) The Trustees, in conjunction with the independent fiduciary,

have and will continue to (i) monitor the terms and conditions of the

lease as well as the terms and conditions of the exemption and (ii)

take all actions that are necessary and proper to safeguard the

interests of the Pension Plan and its participants and beneficiaries.

(f) The subject lease has involved and will continue to involve

less than 25 percent of the Pension Plan's total assets.

Effective Date: If granted, this proposed exemption will be

effective September 15, 1993.

Summary of Facts and Representations

1. The Pension Plan is a multiemployer, Taft-Hartley plan that has

been established and maintained in accordance with section 302(c)(5) of

the Labor Management Relations Act of 1947, as amended, between the

South Atlantic and Gulf Coast District International Longshoremen's

Association (the Union) and the West Gulf Maritime Association (the

Association). The Pension Plan is administered by a board of 16

trustees, one-half of whom are appointed by the Association and one-

half of whom are appointed by the Union. The principal offices of the

Pension Plan are located in Houston, Texas, Investment decisions for

the Pension Plan are made by the Trustees and various investment

consultants. As of September 30, 1994, the Pension Plan had net assets

of $409,325,675. As of August 4, 1994, the Pension Plan had 6,069

participants.

2. The Union and its affiliated locals represent longshoremen from

Lake Charles, Louisiana to Brownsville, Texas. There are 31 affiliated

locals in this geographic area.

3. The Association is a Texas nonprofit corporation exempt from

taxation under section 501(c)(6) of the Code. Its members include

business organizations engaged in the shipping industry from Lake

Charles, Louisiana to Brownsville, Texas. Approximately 35 members of

the Association contribute to the Plan.

4. Texas Commerce is a national banking association with locations

in Houston and other Texas cities. It is a wholly owned subsidiary of

Texas Commerce BrancShares, Inc., which is a wholly owned subsidiary of

the New York City-based Chemical Banking Corporation. Texas Commerce

provides a full range of banking and trust services to its customers.

It currently serves as a fiduciary to the Pension Plan but it has no

investment discretion with respect to the Pension Plan's real estate

assets including the subject Building described herein.

5. First City Bank Texas (First City) was a national banking

association with locations in Houston and other Texas cities. During

1979, First City entered into a lease agreement under which it leased

space in a building located at 11550 Fuqua, Houston, Texas. The

Building is a five-story office building containing 88,678 square feet

of gross space and 83,636 square feet of net rentable space. It is

situated on an approximately 3.5 acre tract of land. The owner of the

Building was Crow-Southpoint #1, Ltd. (Crow), a Texas limited

partnership. First City used the office space in the Building as a bank

lobby.

6. In October 1982, the Plan purchased a 60 percent interest in the

Building from Crow for $3.9 million. This transaction, together with a

loan and lease agreement were covered by Prohibited Transaction

Exemption (PTE) 85-79, (50 FR 18945), an administrative exemption that

was granted by the Department on May 3, 1985. PTE 85-79, which was

retroactive to October 27, 1982, provided for the formation of a joint

venture (the Joint Venture) between the Pension Plan and Crow. Upon the

formation of the Joint Venture, Crow became a party in interest with

respect to the Pension Plan.

The terms of the Joint Venture were negotiated and approved by Mr.

John D. O'Connell of O'Connell and O'Connell, Inc., a real estate

consultant, who was designated by the trustees of the Pension Plan to

serve as the independent fiduciary on behalf of the Pension Plan. Mr.

O'Connell renders investment advice to the Pension Plan with respect to

real estate transactions and supervises the making of real estate

investments on behalf of the Pension Plan.

The terms of the Joint Venture were as follows: (a) Crow would be

the managing general partner of the Joint Venture; (b) Crow would

contribute the Building, a 3.5 acre site improved with a five-story

office building to the Joint Venture in return for a 40 percent

ownership interest; (c) the Pension Plan would be required to make a

$3.9 million capital contribution to the Joint Venture in return for a

60 percent ownership interest; (d) the Pension Plan would be required

to make a loan of $2 million to Crow at 11.25 percent interest only for

a 15 year term, with interest payable annually on the anniversary date

of the loan and principal due upon maturity; (e) the loan would be

secured by Crow's 40 percent ownership interest in the Joint Venture

and would be used to clear complete title to the Building and to repay

Crow the funds it expended for the acquisition of the Building; (f) net

cash flow from the operations of the Joint Venture would be distributed

60 percent to the Pension Plan and 40 percent to Crow; (g) Crow

[[Page 39015]]

would be appointed by the Joint Venture as manager of the Building

receiving from the Joint Venture both a management fee and leasing

commissions pursuing to a Management Agreement between Crow and the

Joint Venture; (h) the Pension Plan would be required to approve leases

in excess of 10,000 square feet or for terms in excess of five years

and any capital expenditure in excess of $50,000 would have to be

submitted to the Pension Plan for approval; and either (i) partner in

the Joint Venture could cause a sale of the project subject to a right

of first offer to the other partner.

Aside from the formation of the Joint Venture, PTE 85-79 provided

specific exemptive relief that permitted the Pension Plan to make the

$2 million loan to Crow under the terms specified above. PTE 85-79 also

allowed Crow to receive lease commissions paid by the Joint Venture

pursuant to the terms of the Management Agreement.

7. Also commencing in October 1982, the Pension Plan began

occupying office space in the Building for its administrative offices

and also leasing space therein to the Maritime Association--I.L.A.

Welfare Fund (the Welfare Plan) and the Maritime Association I.L.A.

Vacation Plan (the Vacation Plan). The Welfare Plan and the Vacation

Plan are not parties in interest with respect to the Pension Plan but

they do have common trustees. The applicant represents that the leasing

arrangement between the Pension Plan, the Welfare Plan and the Vacation

Plan satisfies the terms and conditions of PTE 77-10 (42 FR 33918, July

1, 1977).\1\

\1\ The Department expresses no opinion herein on whether the

leasing arrangement between the Pension Plan, the Welfare Plan and

the Vacation Plan complies with PTE 77-10.

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8. In October 1992, two events occurred involving the Pension Plan.

First, Ameritrust Texas, N.A. (Ameritrust), a national banking

association with locations in Houston and other Texas cities, began

providing custodial, investment management and securities lending

services to the Pension Plan as well as to the Welfare Plan and the

Vacation Plan. At that time, Ameritrust had no relationship to First

City or to Texas Commerce. Second, First City was taken over by the

Federal Deposit Insurance Corporation (the FDIC) due to First City's

insolvency.

9. In December 1992, the Pension Plan acquired the 40 percent

interest in the Building that was held by Crow as a result of Crow's

default, in October 1991, on the $2 million loan and failure to cure

the event of default. The Pension Plan then foreclosed on Crow's

interest in the Joint Venture. The Joint Venture was dissolved and the

Pension Plan assumed exclusive ownership of the Building. The Pension

Plan incurred no loss in connection with the assumption of the

Building.

10. In February 1993, Texas Commerce acquired all of the assets of

First City from the FDIC. The office space became a bank lobby for

Texas Commerce and Texas Commerce executed a new lease with the Pension

Plan effective April 18, 1993. The applicant represents that no

administrative exemptive relief was requested because Texas Commerce

was not a party in interest at the time of the execution of the lease.

11. The terms of the Texas Commerce lease provide for a primary

term of five years with an option to renew and extend for up to three

successive five year terms of five years each. The rentable area is

15,713 square feet of space. The rental amount includes base rent of

$14.67 per square foot or $230,509.58 per year ($19,209.14 per month)

and an operating expense of $6.67 per square foot or $104,805.71 per

year. Thus, the total rent is $21.34 per square foot or $335,315.39 per

year. The lease also includes an alteration allowance of $50,000.\2\ In

the event of a default, Texas Commerce is required to reimburse the

Pension Plan on demand for all costs reasonably incurred by the Pension

Plan on demand for all costs reasonably incurred by the Pension Plan in

connection therewith, including attorney's fees, court costs and

related costs plus interest thereon at an annual rate equal to the

prime rate charged by Texas Commerce to its most creditworthy borrowers

for short-term commercial loans. The same default provisions also apply

in the event of a default by the Pension Plan.

\2\ Article 9.01 of the Texas Commerce lease allows the lessee

to move, relocate or demolish interior walls inside the leased space

and to paint or finish the walls as the lessee may choose. The

lessee is also permitted to add cabinets and fixtures as needed for

its business and to select floor coverings for the area.

Notwithstanding the alteration allowance provision set forth in

the lease, it is represented that the Trustees of the Pension Plan

did not allow the office space currently occupied by Texas Commerce

to be altered in such a manner that such space could be leased only

to certain types of lessees. The applicant states that the original

buildout of the subject space was pursuant to a 1979 lease between

Crow and First City. The applicant further represents that the 1979

lease was negotiated at arm's length by unrelated parties and had a

primary term of 20 years. The applicant notes that the Pension Plan

did not acquire an equity interest in the Building until 1982.

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12. The trustees of the Pension Plan utilized the services of Mr.

Brint Davis of Trammel Crow Houston, Inc., an independent building

property manager and Mr. O'Connell, the independent fiduciary for the

Pension Plan in PTE 85-79, to represent the interests of the Pension

Plan in negotiating the lease with Texas Commerce. The applicant

represents that neither Mr. O'Connell nor Mr. Davis are employees,

officers, or directors of Texas Commerce nor is there any other

relationship or connection between these individuals and Texas

Commerce. Mr. Davis's employer is the exclusive leasing agent and

property manager for the Building. Mr. O'Connell reviews all leases in

the Building on behalf of the Pension Plan to ascertain that the leases

are comparable in terms to the conditions prevailing in the market. Mr.

O'Connell states that he has advised the Pension Plan on real estate

matters for more than 15 years.

13. In negotiating the terms of the lease for which Texas Commerce

pays a base rent of $14.67 per square foot on an ``as is basis,'' Mr.

O'Connell represents that the subject Building is located in an

isolated area with very few comparables and no comparable bank leases.

He explains that office space in this unique area enjoys almost 100

percent occupancy so that rents, if and when available, are about $16

per square foot. He further explains that the closest areas that might

be considered comparable to the Building are the Clearlake area and the

Hobby Airport area where rents are approximately $12 per square foot.

14. On September 15, 1993, Texas Commerce acquired 100 percent of

the stock of Ameritrust. This event caused the existing lease to become

a prohibited transaction in violation of the Act but not under the

Code. Also effective as of September 15, 1993, Ameritrust was renamed

Texas Commerce Trust Company, National Association (Texas Commerce

Trust). Texas Commerce Trust continued to provide to the Plans the same

services initially provided by Ameritrust.

On December 17, 1993, Texas Commerce Trust was dissolved and merged

into the Trust Department of Texas Commerce. As a result of the merger,

the lease became a prohibited transaction under the Code as well as

under the Act.\3\

\3\ According to the applicant, Texas Commerce was a party in

interest with respect to the Pension Plan under section 3(14)(H) of

the Act because it was a 10 percent or more shareholder of Texas

Commerce Trust, which was a service provider to the Pension Plan.

Because section 4975 of the Code does not include 10 percent

shareholders of service providers in the list of disqualified

persons, the applicant represents that the lease transaction was not

subject to the excise tax provisions under section 4975 of the Code

until the merger of Texas Commerce Trust into Texas Commerce in

December 1993. At that time, Texas Commerce became a service

provider to the Plan by reason of section 4975(e)(2)(B) of the Code.

[[Page 39016]]

Neither First City, Texas Commerce, Ameritrust, Texas Commerce

Trust, nor any of their affiliates have ever had any relationship to

the Pension Plan other than as a result of the lease and the services

provided by Ameritrust and its successors, Texas Commerce Trust and

Texas Commerce.

15. Currently, Texas Commerce provides the same custodial,

investment management and securities lending services to the Pension

Plan, the Welfare Plan, the Vacation Plan and certain miscellaneous

accounts (the Accounts) that were provided by Ameritrust and Texas

Commerce Trust. The fees associated with custodial services totaled

$126,100 for the Plans and the Miscellaneous Accounts for the year

ending December 31, 1994. Also for the year ending December 31, 1994,

the fees associated with investment management services totaled

$106,660, excluding the Building. Further, the fees associated with

securities lending services provided the Plans and the Miscellaneous

Accounts by Texas Commerce and its predecessors totaled $48,000 for the

period, October 1, 1993 through July 31, 1994.

16. Since the inception of the lease, Texas Commerce has continued

to pay rent to the Pension Plan in a timely manner without default or

rental delinquencies. However, the applicant is aware of the fact that

a prohibited transaction occurred in violation of the Act on September

15, 1993. Therefore, the applicant has requested exemptive relief with

respect to the past and continued leasing of office space in the

Building by the Pension Plan to Texas Commerce. If granted, the

proposed exemption will be retroactive to September 15, 1993.\4\

\4\ It is represented that once the Trustees and Texas Commerce

realized that a prohibited transaction had occurred, the parties

caused an exemption application to be prepared in January 1994 and

subsequently finalized in July 18, 1994. It is also represented that

the Trustees and Texas Commerce did not initially realize that the

acquisition by Texas Commerce of Ameritrust made the lease a

prohibited transaction. Further, the applicant notes that the

exemption request was not filed as a result of an investigation by

either the Department or the Internal Revenue Service.

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17. Mr. O'Connell notes that the space presently leased to Texas

Commerce was originally leased to First City. In the course of time, he

states that Texas Commerce acquired most of the assets of First City

which resulted in a duplication or overlap of banking facilities in

many areas of Harris County including the area in which the Building is

situated. Mr. O'Connell further notes that he, the Pension Plan

Trustees and Mr. Davis, determined that Texas Commerce was the most

attractive lessee given the failure of First City, the relative

proximity of Texas Commerce and the substantial cost that would be

incurred to renovate the space to a non-bank lessee since the space had

been originally configured for a bank tenant. Mr. O'Connell also

represents that the Texas Commerce lease has required no improvements

or alterations by the lessee and has provided immediate income to the

Pension Plan with no out-of-pocket costs. Moreover, he states that the

presence of the city's largest bank has been a valuable enhancement to

the Building. Given these factors, Mr. O'Connell represents that the

rental charged for the subject space is above fair market value and

that the lease continues to be a valuable asset of the Pension Plan.

Mr. O'Connell also confirms that his firm has continuously

monitored rental rates for other properties comparable to the Building

over the past five years. Further, during this period, he represents

that his firm has continuously monitore the terms and conditions of all

leases involving the Building. Without qualification, he represents

that the terms and conditions of the lease between the Plan and Texas

Commerce have, at all times, been at arm's length and have provided the

Plan with fair market value rent since the inception of the subject

lease to present, including September 15, 1993 when the lease became a

prohibited transaction.

18. In addition to Mr. O'Connell's review of the lease, the

Trustees of the Pension Plan have reviewed the investment needs of the

Pension Plan and the terms and conditions of the Texas Commerce lease.

Based upon their consideration of such matters, the Trustees believe

the lease is in the best interest of the Pension Plan. The Trustees, in

conjunction with Mr. O'Connell, are monitoring the lease on behalf of

the Pension Plan, enforcing the payment of rent and the proper

performance of all other obligations of Texas Commerce thereunder. In

addition, the Trustees have the obligation to assess the prudence of

the continued ownership by the Pension Plan of the Building and to

negotiate, when appropriate, favorable terms with respect to the sale,

lease or other disposition of the Building. Further, the Trustees are

also responsible for ensuring that all terms and conditions of the

exemption are, at all times, satisfied.

19. In summary, it is represented that the transactions satisfy the

criteria for an administrative exemption under section 408(a) of the

Act because:

(a) The Trustees believe that the leasing of office space in the

Building by the Plan to Texas Commerce is and will continue to be in

the best interest of the Pension Plan and its participants and

beneficiaries.

(b) The decision by the Pension Plan to enter into and continue

leasing office space in the Building to Texas Commerce has been made

and will continue to be made by the Trustees in consultation with an

independent property manager and an independent fiduciary.

(c) The terms of the lease have remained and will remain at least

as favorable to the Pension Plan as those obtainable in an arm's length

transaction with an unrelated party.

(d) The rental charged by the Pension Plan under the lease has been

based and will continue to be based upon arm's length negotiations with

unrelated parties.

(e) The Trustees, in conjunction with the independent fiduciary,

have and will continue to (i) monitor the terms and conditions of the

lease as well as the terms and conditions of the exemption and (ii)

take all actions that are necessary and proper to safeguard the

interests of the Pension Plan and its participants and beneficiaries.

(f) The subject lease has involved and will continue to involve

less than 125 percent of the Pension Plan's total assets.

For Further Information Contact: Ms. Jan D. Broady of the

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

Retirement Plan for Employees of Automobile Club of New York, Inc. (the

Plan) Located in Garden City, New York

[Application No. D-09882]

Proposed Exemption

The Department is considering granting an exemption under the

authority of section 408(a) of the Act and section 4975(c)(2) of the

Code and in accordance with the procedures set forth in 29 C.F.R. Part

2570, Subpart B (55 FR 32836, 32847, August 10, 1990.) If the exemption

is granted, the restrictions of sections 406(a), 406(b)(1) and (b)(2)

of the Act and the sanctions resulting from the application of section

4975 of the Code, by reason of section 4975(c)(1) (A) through (E) of

the Code, shall not apply to: (1) the purchase (the Purchase) by the

Plan of a certain office building (the Building) from Automobile Club

of New York, Inc. (the Club), a sponsor of the Plan and a party

[[Page 39017]]

in interest with respect to the Plan; (2) a subsequent leaseback (the

Lease) of the Building by the Plan to the Club; and (3) the potential

future exercise of (a) a repurchase option (the Repurchase Option)

between the Club and the Plan; and (b) a make whole obligation (the

Make Whole Obligation) whereby the Club will pay the Plan the

difference between the original acquisition price paid by the Plan for

the Building, and the price received by the Plan upon the sale of a

Building to a purchaser other than the Club; provided that the

following conditions are satisfied:

(1) all terms and conditions of the Purchase, the Lease, the

Repurchase Option, and the Make Whole Obligation are and will be at

least as favorable to the Plan as those the Plan could obtain in an

arm's-length transaction with an unrelated party;

(2) the Lease will have an initial term of fifteen years with three

five-year renewal options, and will be a triple net lease under which

the Club as the tenant is obligated for all operating expenses,

including real estate taxes, insurance, repairs, maintenance,

electricity and other utilities;

(3) the fair market value of the Building has been determined by an

independent qualified appraiser, and will be updated as of the date of

purchase by the Plan;

(4) with respect to the Lease, the fair market rental amount has

been and will be determined by an independent qualified appraiser,

which amount will never be below the initial fair market annual rental

amount of $470,000;

(5) with respect to the Lease, appraisals of the Building will be

performed at three-year intervals during the initial fifteen-year term

of the Lease, and at five-year intervals with respect to the three

renewal periods for purposes of updating the fair market rental amount

to be received by the Plan;

(6) the fair market value of the Building will not exceed 25% of

the Plan's total assets. Notwithstanding this condition, if the 25%

limitation is ever exceeded the Club will have 60 days to comply with

the 25% limit. In the event the 25% limit cannot be met within the 60

days, the Plan will undertake an orderly disposition of the Building in

such manner as to cure the violation within nine (9) months of the date

when the 25% limit was initially exceeded. If at any time during the 9-

month disposition period, the Building exceeds 30% of the Plan's total

assets, the exemption, if granted, will no longer be available;

(7) an independent fiduciary will be appointed to review, approve

and monitor the transactions described herein, and the fees received by

the independent fiduciary for serving in such capacity, combined with

any other fees derived from the Club or related parties, will not

exceed 1% of its annual income for each fiscal year that it continues

to serve in the independent fiduciary capacity with respect to these

transactions;

(8) U.S. Trust, as the independent fiduciary, will evaluate the

transactions described herein and deemed them to be administratively

feasible, protective and in the interest of the Plan;

(9) U.S. Trust, as the independent fiduciary, will monitor the

terms and the conditions of the exemption and the Lease throughout its

initial term plus the three renewal periods, and will take whatever

action is necessary to protect the Plan's rights;

(10) U.S. Trust, as the independent fiduciary, will monitor the net

subleasing amount received by the Club during any annual period under

the Lease. If such subleasing amount results in a profit to the Club,

the Club will contribute this profit to the Plan; and

(11) the Plan will bear no costs or expenses with respect to the

transactions described herein.

Summary of Facts and Representations

1. The Plan is a defined benefit plan established in 1965. As of

December 31, 1993, the Plan had approximately 703 participants. As of

May 31, 1995, the market value of the Plan's total assets was

$24,185,650. The Plan administrator is the retirement committee which

is appointed by the Board of Directors of the Club. United States Trust

Company of New York (U.S. Trust) is the Plan trustee and the

independent fiduciary with respect to the transactions described

herein. The Club, established in 1934, is a not for profit subchapter

``C'' corporation organized under New York State Law. The Club is

affiliated with the American Automobile Association, and is in the

business of providing certain travel services to its members. The named

fiduciary under the Plan is the Club.

2. The applicant proposes to enter into the following transactions.

First, the Plan will purchase the Building from the Club at fair market

value and hold the title to the Building through a tax exempt 501(c)(2)

corporation. U.S. Trust represents that this will insulate the Plan's

other assets from liabilities associated with owning the Building.

Subsequently, the Club will lease the Building from the Plan at fair

market rental, and sublease certain portions of the Building to parties

unrelated to the Plan.

3. The Building was initially appraised (Initial Appraisal) as of

October 19, 1993, by Martin B. Levine, MAI (Mr. Levine) and Paul

Leprohon (Mr. Leprohon, collectively, the Appraisers). Messrs. Levine

and Leprohon are qualified independent Appraisers with Koeppel Tener

Rigaldi, Inc. (KTR), a national real estate appraisal and consulting

firm. Mr. Levine is a director of the New York appraisal division of

KTR. In the Initial Appraisal, the Appraisers determined the fair

market value of the leased fee interest of the Building to be

$4,700,000. In this regard, it is represented that $32,500 is payable

directly to the Club by the operator of the adjacent Harkness property

as a result of a certain air rights lease, and that this income was a

factor in determining the value of the Building.\5\ Because the

Building is a multi-tenanted income producing facility, the Appraisers

primarily relied on the income capitalization approach supported by the

sales comparison approach. The Building is the property located at 1881

Broadway, New York, New York, and it is situated at the northwest

corner of Broadway and West 62nd Street. The Building is a 4 story plus

basement, class ``B'' office building, with retail space on the grade

floor. The Building contains approximately 24,005 square feet of gross

leasable area, of which 8,405 square feet is retail space comprised of

3,405 square feet at grade level and 5,000 square feet of finished,

non-selling, below grade space.

\5\ The air rights income, in the amount of $32,500 per year, is

the rent due under the air rights lease, which permitted air rights

over 1881 Broadway (i.e., the Building) to be used to erect a larger

building than would otherwise be possible on 1887 Broadway site. The

air rights lease expires in 86 years.

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4. In the Initial Appraisal, the Appraisers also established a fair

market rental for the Building. The Appraisers analyzed recent lease

transactions within the Building itself in conjunction with leases

recently signed within competing buildings which are located on the

West Side of Midtown Manhattan. As such, the Appraisers concluded that

the market rent for the Building's office component is $20.00 per

square foot. For the retail component, the market rent is estimated to

be $85.00 for grade floor space and $12.75 per square foot for below

grade space.

5. On January 10, 1995, the Appraisers prepared a limited scope

appraisal of the Building (Updated Appraisal) as an update to the

Initial Appraisal. In the Updated Appraisal, the Appraisers also relied

on the income

[[Page 39018]]

capitalization and sales comparison approaches, and concluded that as

of December 31, 1994, the free and clear market value of the leased fee

interest in the Building, including the income from the air rights

lease, is $5,200,000. This increase in the fair market value is due to

the market conditions improving in the year 1994, as evidenced by

declining vacancy rate and concessions in the form of free rent, large

tenant improvement allowances and favorable below-market renewal

options becoming less common.

In the Updated Appraisal, the Appraisers stated that the market

rent for the Building's office component is $21 per square foot, and

the market rent for the retail component is estimated to be $90 per

square foot for the grade floor space and $13.50 per square foot for

the below grade space. Therefore, in establishing the fair rental value

of the Building, the Appraisers determined that as of December 31,

1994, the fair market rental of the Building under a triple net lease

is $470,000 for the first year, and that this figure includes the

$32,500 income from leasing the air rights for the next 84 years. The

Appraisers also stated that based upon their market analysis, they

project that all retail and basement rents will increase by 4% per

year, and office rents will increase by 4% per year for renewal

purposes.

6. Once the Plan purchases the Building from the Club, the Plan

will lease (the Lease) the Building back to the Club, and the Club will

sublease portions of the Building to unrelated, third parties. The

Lease will be a triple net lease and will be net of all operating

expenses, including real estate taxes, insurance, repairs, maintenance,

electricity and other utilities.\6\ The Lease will have an initial term

of fifteen (15) years, with three renewable options of five years each

at the discretion of U.S. Trust. Renewal periods of the Lease will

occur upon the Club, as the lessee, notifying the Plan, as lessor, in

writing no later than ten months before the end of the expiring term.

The rental rate will be determined by reference to an independent

qualified appraiser retained by the Plan as the lessor. The fair market

rent will be binding upon the Club as the lessee, unless the Club

disputes it in thirty days. In the case of such a dispute, the matter

would go to arbitration, which according to U.S. Trust, is customary in

commercial lease agreements. If the arbitrators cannot reach an

agreement between themselves within fifteen days, they shall appoint a

third independent appraiser. For purposes of the Lease, appraisals of

the Building are scheduled at 3 year intervals during the initial 15

year term of the Lease, and at five year intervals with respect to the

three renewal periods. Annual appraisals will be required, however, to

determine the annual funding obligation for the Plan, Form 5500

financial statements and to monitor compliance with the 25% limitation.

\6\ The applicant represents that the Lease will provide that

any fees that may be incurred by the Plan in connection with the

Lease, the Building or the transactions described herein, will be

reimbursed to the Plan and/or paid by the Club.

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7. The Lease provides that the annual base rent (Base Rent) during

the initial 15 year term shall be the higher of the annual rental rate

for the preceding three year period, or the appraised rental value.

Therefore, once the Base Rent is established for the first 3 years of

the term of the Lease, the rental rate cannot fall below that amount,

it can only go higher. During the three renewal periods, the Base Rent

will be adjusted every five years and will be increased at least 10%

during each Renewal period. The applicant further represents that

rental amounts under the Lease will never be below the initial fair

market annual rental amount of $470,000, as established by the

Appraisers. The Lease also provides for a security deposit (Security

Deposit) to be paid by the lessee to the lessor, and U.S. Trust

represents that the Security Deposit will be \1/6\ of the Base Rent

payable in a given year. The Lease also provides for certain additional

rent, which is expenses related to the Building that will be borne by

the Club as the tenant. U.S. Trust represents that this is more

protective of the rights and remedies available to the landlord (i.e.,

the Plan) in the event of nonpayment of rent. The Club will also obtain

a fire and hazard/casualty insurance policy for the Building. The Plan

will be the beneficiary and loss payee with respect to the hazard and

liability insurance on the Building.

8. The applicant also represents that if during any annual period

of the Lease, the net subleasing amount received by the Club results in

a profit to the Club, the Club will contribute this profit to the Plan.

In this regard, the total subleasing amounts will be subject to an

annual audit by an independent auditor which is currently Peat Marwick.

Specifically, upon performing annual audits of the Club's books, Peat

Marwick will submit accounting to U.S. Trust, showing total rents

collected from subleases, including recoverables,\7\ and total

operating expenses for the Building during that year.\8\ U.S. Trust has

agreed to provide necessary oversight in this matter.

\7\ Recoverables means any amounts collected over and above

basic rents, such as escalations for light, power, taxes and

maintenance, etc.

\8\ Annual operating expenses for the Building include real

estate taxes, building maintenance and repairs, security, insurance,

air conditioning, power, electricity, carting, water and sewer, etc.

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9. The Plan will also have the right to require the Club to

repurchase the Building, at a price which will be the greater of the

Building's fair market value or the Plan's purchase price (the

Repurchase Option). The Repurchase Option can be exercised under

certain circumstances under discretion of U.S. Trust as the independent

fiduciary, including, material misrepresentations regarding the

Building in the contract for sale; the Building's fair market value

exceeding 25% of the Plan's assets; at the expiration of the Lease;

upon the breach of the Lease by the Club; if the Club defaults on the

Lease; to satisfy the cash needs of the Plan; and, in the event of a

material loss to the Building by fire, condemnation, etc. It is also

represented that the Repurchase Option can be exercised at the end of

the initial 15 year term of the Lease, and at the end of each renewal

period. In the event the Club fails to repurchase the Building under

the Repurchase Option, the Plan has the following remedies. If the Plan

has to sell the Building to a third party for an amount less than

payable by the Club under the Repurchase Option, the Club is obligated

to pay the Plan any difference. Furthermore, the calculation of the

difference between the price paid by the third party and the price

payable by the Club will include the fact that the Club is obligated to

pay all costs and expenses associated with the purchase of the

Building, while in a sale to a third party, the Plan may have to pay

certain expenses related to that sale, as is customary for a seller in

a commercial transaction. In this regard, the applicant represents that

the Club will pay the Plan the fair market rental for the entire

Building, as well as for the space it occupies within the Building.

10. In the event the Club fails to repurchase the Building within

sixty (60) days of the Building being put to it by the Plan under the

Repurchase Option, the Club will pay the Plan the difference (if any)

between the original acquisition price paid by the Plan for the

Building and the price received by the Plan on the sale of the Building

to a purchaser other than the Club (the ``Make Whole Obligation''). In

this regard, U.S. Trust has examined the Club's financial statements

and held discussions with the Club's management, and concluded that the

[[Page 39019]]

Club currently has sufficient net worth to satisfy the Repurchase

Agreement and the Make Whole Obligation by either repurchasing the

Building, or paying the difference between the price paid by the Plan

for the Building and the price realized on the sale of the Building by

the Plan. U.S. Trust will continue to monitor the Club's financial

condition before it finalizes the purchase of the Building by the Plan.

It is also represented that if the Building is to be sold to another

party in interest with respect to the Plan, as defined by section 3(14)

of the Act, the applicant will seek exemptive relief from the

Department prior to the consummation of the sale.

11. The independent fiduciary for the Purchase, the Lease, the

Repurchase Option and the Make Whole Organization will be U.S. Trust, a

bank and trust company formed under the laws of New York and an

experienced employee benefits trust fiduciary with approximately $31

billion in assets under management, and custodial assets of $397

billion.\9\ U.S. Trust and its wholly owned subsidiary, U.S. Trust

Company of California, N.A. have extensive experience serving as

fiduciaries for ERISA plans. U.S. Trust also represents that it has

considerable experience in monitoring ownership interests relating to

leases for large pension plans.

\9\ In this regard, the applicant makes a request regarding a

successor independent fiduciary. Specifically, if it becomes

necessary in the future to appoint a successor independent fiduciary

(the Successor) to replace U.S. Trust, the applicant will notify the

Department sixty (60) days in advance of the appointment of the

Successor. Any Successor will have responsibilities, experience and

independence similar to those of U.S. Trust.

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12. U.S. Trust represents that it has the following relationships

to the Plan and the Club. U.S. Trust was appointed trustee (the

Trustee) of the Plan on November 4, 1965. Under the terms of the Trust

Agreement, U.S. Trust, as the Plan Trustee, has full discretion to

invest the Plan's assets within the framework of the general investment

guidelines provided by the Club. As the Trustee for the Plan, U.S.

Trust may determine the value of any Plan's assets for which there is

no publicly quoted price, and U.S. Trust manages approximately $24

million of assets for the Plan. In addition to the Plan Trustee role,

U.S. Trust manages approximately $1,200,000 in a cash fund for the

Club, which represents 0.004% of the total assets managed by U.S.

Trust.\10\ U.S. Trust also maintains that the income received by it for

serving in the independent fiduciary capacity in these transactions,

combined with any other fees derived from the Club or related parties

will not exceed 1% of its annual income for each fiscal year that U.S.

Trust continues to serve in the independent fiduciary capacity with

respect to the transactions described herein.

\10\ In this regard, U.S. Trust represents that the $1.2 million

do not represent assets of the Club managed by U.S. Trust as the

Plan trustee, but that they are assets managed by U.S. Trust in a

separate capacity.

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13. In its capacity as the independent fiduciary, U.S. Trust has

reviewed the condition of the Building, the financial condition of the

Club, the Plan's current investment portfolio and its general

investment guidelines. U.S. Trust represents that it has been advised

by legal counsel of its ERISA fiduciary responsibilities. U.S. Trust

represents that it will have the following responsibilities under the

Lease and the renewal periods. In this regard, the triple net Lease

places upon the Club, as the tenant, all responsibility with respect to

the Building; its repair, maintenance, etc., and all costs and expenses

related thereto, including without limitation, those costs related to

real estate taxes and insurance. U.S. Trust will monitor the collection

of rent from the Club as the tenant, the Club's compliance with other

Lease obligations, the value of the Plan's assets to make sure the

value of the Building does not exceed 25% of the total Plan assets, and

assure periodic valuations of the Building by an independent appraiser.

14. U.S. Trust has concluded that the transactions described herein

should be structured as follows. The Building purchase price to the

Plan should not exceed fair market value. The base payments under the

triple net Lease should at least equal the Building's fair rental

value. The fair market value and the fair rental value should be

determined by an independent qualified appraiser, and negotiated by the

parties at arm's length. In this regard, U.S. Trust represents that it

reserves the right to negotiate a purchase price below the appraised

fair market value of the Building and with respect to the Lease, and to

negotiate a Base Rent above the fair market rent as established by an

appraiser. U.S. Trust represents that this approach would benefit the

Plan. U.S. Trust also states that the Plan will achieve at least an 11%

return on its investment (the Rate of Return), which will be based on

the purchase price the Plan pays for the Building. The Plan will also

receive the return due to any appreciation in the market value of the

Building. This Rate of Return will exceed the Plan's historical rate of

return which ranged from 9.3% to 9.6%. The applicant states that the

Rate of Return will have an effect on the fair market rent paid by the

Club to the Plan under the Lease. For example, the Updated Appraisal

gives the fair market value of the Building as $5,200,000, and as such

a minimum return of 11% would require that the annual net payment under

the Lease by the Club to the Plan be at least $572,000. However, the

Rate of Return can increase when another appraisal of the Building is

done at closing, and U.S. Trust analyzes the prevailing market

conditions and the Club's financial condition.

15. U.S. Trust compared the risk and rate of return on the Building

with other investments (including real estate investments) available to

the Plan, the expenses and liabilities associated with the acquisition

and ownership of the Building, the Club's financial condition and

prospects, and its ability to satisfy its obligations under the Lease.

U.S. Trust represented that the Plan has sufficient liquidity to

acquire the Building, and that none of the Plan's assets are currently

invested in real property. U.S. Trust also stated that the Club should

have the financial resources to satisfy either the Repurchase Option or

the Make Whole Obligation. U.S. Trust concluded that the transactions

described herein are more favorable to the Plan than similar

transactions with an unrelated party, and are inherently protective of

the Plan.

16. U.S. Trust has evaluated the Plan's total investment portfolio

and the safeguards for this investment, including the Repurchase Option

and the Make Whole Obligation, as well as the Club's ability to satisfy

these obligations. U.S. Trust has determined that the acquisition of

the Building by the Plan will not impair the Plan's ability to pay

benefits and expenses. U.S. Trust has concluded that the acquisition of

the Building by the Plan is consistent with the diversification

requirements of section 404(a)(1) of the Act, as the Building will

represent approximately 21.5% of the Plan's assets.

17. U.S. Trust proposes to monitor that the Building does not

exceed 25% of the Plan's assets in several ways. The Plan will obtain

annual appraisals of the Building's fair market value at the end of the

Plan's fiscal year (December 31) for purposes of complying with the 25%

limitation. U.S. Trust represents that the total plan assets may be

subject to periodic scrutiny for purposes of determining compliance

with the 25% of plan assets' limitation. The Club will have sixty (60)

days to cure any violation of the 25% limitation. In this

[[Page 39020]]

regard, U.S. Trust can request the Club to take one of several remedial

actions. The Club can make additional cash contributions to the Plan,

it can prepay rent to the Plan, it can purchase the Building from the

Plan under the Repurchase Option; or the Club can take other measures

as may be acceptable to U.S. Trust.\11\ Failing these remedies, from

the date the 25% limitation is first exceeded the Plan will undertake

an orderly disposition of the Building in such manner as to cure the

violation within 9 months (the Disposition Period).

\11\ The Department notes that if at any time during the 9 month

Disposition Period, the Building exceeds 30% of the Plan's total

assets, the exemption, if granted, will no longer be available. The

Department further notes that it expects U.S. Trust, consistent with

its fiduciary responsibilities under Title I of the Act, to

periodically monitor the financial condition of the Club in order to

take a remedial action not requiring the disposition of the

Building.

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18. In summary, the applicant represents that the transaction

satisfies the statutory criteria of section 408(a) of the Act and

section 4975(c)(2) of the Code because:

(1) all terms and conditions of the Purchase, the Lease, the

Repurchase Option, and the Make Whole Obligation are and will be at

least as favorable to the Plan as those the Plan could obtain in an

arm's-length transaction with an unrelated party;

(2) the Lease will have an initial term of fifteen years with three

five year renewal options, and will be a triple net lease under which

the Club as the tenant is obligated for all operating expenses,

including real estate taxes, insurance, repairs, maintenance,

electricity and other utilities;

(3) the fair market value of the Building has been determined by an

independent qualified appraiser, and will be updated as of the date of

purchase by the Plan;

(4) with respect to the Lease, the fair market rental amount has

been and will be determined by an independent qualified appraiser,

which amount will never be below the initial fair market annual rental

amount of $470,000;

(5) with respect to the Lease, appraisals of the Building will be

performed at three year intervals during the initial fifteen year term

of the Lease, and at five year intervals with respect to the three

renewal periods for purposes of updating the fair market rental amount

to be received by the Plan;

(6) the fair market value of the Building, generally, will not

exceed 25% of the Plan's total assets;

(7) an independent fiduciary will be appointed to review, approve

and monitor the transactions described herein, and the fees received by

the independent fiduciary for serving in such capacity, combined with

any other fees derived from the Club or related parties, will not

exceed 1% of its annual income for each fiscal year that it continues

to serve in the independent fiduciary capacity with respect to these

transactions;

(8) U.S. Trust, as the independent fiduciary, will evaluate the

transactions described herein and deemed them to be administratively

feasible, protective and in the interest of the Plan;

(9) U.S. Trust, as the independent fiduciary, will monitor the

terms and the conditions of the exemption and the Lease throughout its

initial term plus the three renewal periods, and will take whatever

action is necessary to protect the Plan's rights;

(10) U.S. Trust, as the independent fiduciary, will monitor the net

subleasing amount received by the Club during any annual period under

the Lease. If such subleasing amount results in a profit to the Club,

the Club will contribute this profit to the Plan; and

(11) the Plan will bear no costs or expenses with respect to the

transactions described herein.

Notice to Interested Persons

The applicant represents that, within five (5) days of the

publication of the notice of proposed exemption (the Notice) in the

Federal Register, all interested persons will receive a copy of the

Notice, the beginning and ending information that appears with the

Notice, and a copy of the supplemental statement, as required, pursuant

to 29 CFR 2570.43(b)(2), either by posting on bulletin boards at

locations at which employees covered under the Plan are employed, or by

first class mail to the last known address to all other interested

persons, including retirees, separated vested employees and

beneficiaries of deceased participants. Comments and hearing requests

on the proposed exemption are due thirty-five (35) days after the date

of publication of this proposed exemption in the Federal Register.

For Further Information Contact: Ekaterina A. Uzlyan, U.S.

Department of Labor, telephone (202) 219-8883. (This is not a toll-free

number.)

General Information

The attention of interested persons is directed to the following:

(1) The fact that a transaction is the subject of an exemption

under section 408(a) of the Act and/or section 4975(c)(2) of the Code

does not relieve a fiduciary or other party in interest of disqualified

person from certain other provisions of the Act and/or the Code,

including any prohibited transaction provisions to which the exemption

does not apply and the general fiduciary responsibility provisions of

section 404 of the Act, which among other things require a fiduciary to

discharge his duties respecting the plan solely in the interest of the

participants and beneficiaries of the plan and in a prudent fashion in

accordance with section 404(a)(1)(b) of the act; nor does it affect the

requirement of section 401(a) of the Code that the plan must operate

for the exclusive benefit of the employees of the employer maintaining

the plan and their beneficiaries;

(2) Before an exemption may be granted under section 408(a) of the

Act and/or section 4975(c)(2) of the Code, the Department must find

that the exemption is administratively feasible, in the interests of

the plan and of its participants and beneficiaries and protective of

the rights of participants and beneficiaries of the plan;

(3) The proposed exemptions, if granted, will be supplemental to,

and not in derogation of, any other provisions of the Act and/or the

Code, including statutory or administrative exemptions and transitional

rules. Furthermore, the fact that a transaction is subject to an

administrative or statutory exemption is not dispositive of whether the

transaction is in fact a prohibited transaction; and

(4) The proposed exemptions, if granted, will be subject to the

express condition that the material facts and representations contained

in each application are true and complete, and that each application

accurately describes all material terms of the transaction which is the

subject of the exemption.

Signed at Washington, DC, this 26th day of July, 1995.

Ivan Strasfeld,

Director of Exemption Determinations, Pension and Welfare Benefits

Administration, U.S. Department of Labor.

[FR Doc. 95-18717 Filed 7-28-95; 8:45 am]

BILLING CODE 4510-29-P-M