Notice of Proposed Amendment to Prohibited Transaction Exemption (PTE) 93-8 Involving the Fortunoff Pension Plans (the Plans) Located in Westbury, NY

DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration

[Application Nos. D-10461, D-10462 and D-10463]

Notice of Proposed Amendment to Prohibited Transaction Exemption

(PTE) 93-8 Involving the Fortunoff Pension Plans (the Plans) Located in

Westbury, NY

AGENCY: Pension and Welfare Benefits Administration, U.S. Department of

Labor.

ACTION: Notice of proposed amendment to PTE 93-8.

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SUMMARY: This document contains a notice of pendency before the

Department of Labor (the Department) of a proposed individual exemption

which, if granted, would amend PTE 93-8 (58 FR 7258, February 5, 1993),

a purchase, leaseback and license exemption involving Plans sponsored

by Fortunoff Fine Jewelry and Silverware, Inc. (FFJ) and M. Fortunoff

of Westbury Corporation (M. Fortunoff) and parties in interest. These

transactions are described in a notice of pendency that was published

in the Federal Register on May 8, 1992 at 57 FR 19951. The proposed

exemption, if granted, would affect participants and beneficiaries of,

and fiduciaries with respect to the Plans.

EFFECTIVE DATE: If granted, this proposed exemption would be effective

as of the date the notice granting the exemption is published in the

Federal Register.

DATES: Written comments and requests for a public hearing must be

received by the Department on or before February 2, 1998.

ADDRESSES: All written comments and requests for a public hearing

(preferably, three copies) should be sent to the Office of Exemption

Determinations, Pension and Welfare Benefits Administration, Room N-

5649, U.S. Department of Labor, 200 Constitution Avenue, NW.,

Washington, DC 20210, Attention: Application Nos. D-10461, D-10462 and

D-10463. The application pertaining to the proposed exemption and the

comments received will be available for public inspection in the Public

Documents Room of the Pension and Welfare Benefits Administration, U.S.

Department of Labor, Room N-5507, 200 Constitution Avenue, NW.,

Washington, DC 20210.

FOR FURTHER INFORMATION CONTACT:

Ms. Jan D. Broady, Office of Exemption Determinations, Pension and

Welfare Benefits Administration, U.S. Department of Labor, Washington,

DC 20210, telephone (202) 219-8881. (This is not a toll-free number.)

SUPPLEMENTARY INFORMATION: Notice is hereby given of the pendency

before the Department of proposed exemption that would amend PTE 93-8.

PTE 93-8 provides an exemption from certain prohibited transaction

restrictions of section 406 of the Employee Retirement Income Security

Act of 1974 (the Act) and from the sanctions resulting from the

application of section 4975 of the Internal Revenue Code of 1986 (the

Code), as amended, by reason of section 4975(c)(1) of the Code. The

proposed exemption was requested in an application filed on behalf of

M. Fortunoff and FFJ (collectively), the Applicants) pursuant to

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, 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.

Accordingly, this proposed exemption is being issued solely by the

Department.

I. Background

PTE 93-8 provides prospective exemptive relief from 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 with

respect to (1) the purchase by the Fortunoff Pension Plan--Employer

Group A Plan (the Employer Group A Plan), the Fortunoff Pension Plan--

Employer Group B Plan (the Employer Group B Plan) and the Fortunoff

Fine Jewelry and Silverware, Inc. Profit Sharing Plan (the Profit

Sharing Plan) of undivided interests in certain improved real property

(the Property), for the total

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cash consideration of $6 million, from M. Fortunoff, the sponsor of the

Group B Plan and a retailer of rugs, furniture and household items; (2)

the leasing of the Property by the Plans, under the provisions of an

amended lease (the Amended Lease), to FFJ, the sponsor of the Group A

Plan and the Profit Sharing Plan as well as retailer of fine jewelry,

silverware, glassware and crystal; and (3) the use of space in the

Property by Fortunoff Information Services (FIS), a partnership

providing data processing services to FFJ and M. Fortunoff pursuant to

the terms of a license agreement (the License) between FFJ and FIS.

As noted in the Summary of Facts and Representations underlying PTE

93-8, the subject Property, which is located at One MH Plaza, Axinn

Avenue, Garden City East, Nassau County, New York has the following

legal description:

All that certain plot, piece or parcel of land, situate, lying

and being near Westbury, Town of Hempstead, County of Nassau and

State of New York, being the northerly 367.04 feet more or less of

Lot 44 Block 73 on the Nassau County land and tax map as same

existed on the date hereof.

The Property consists of a one story office and warehouse building

containing approximately 116,000 square feet of gross building area on

a site of approximately 4.0663 acres of land. There is also a parking

area. The Property was originally leased by M. Fortunoff to FFJ for its

warehouse and data processing services under the provisions of a

written, triple net lease (the Lease) that commenced on March 1, 1989.

The annual rental under the Lease was $554,232 and was payable in

monthly installments of $46,186. In addition to the Lease, FFJ granted

its affiliate, FIS, an exclusive right to use, for $3,850 per month,

approximately 8,041 square feet in the building area for FIS's

information systems and data processing operations. The term of the

License coincided with the term of the Lease.

Upon the granting of PTE 93-8, the Plans purchased the Property,

which was unencumbered by a mortgage, from M. Fortunoff for the total

cash consideration of $6 million. The purchase price was less than the

independently appraised value of the Property. The Property was then

allocated among the Plans such that the Group A Plan and the Group B

each acquired 40 percent interests in the Property with each Plan

paying $2.4 million. The Profit Sharing Plan acquired the remaining 20

percent interest in the Property for $1.2 million. At the time of

acquisition, the Property represented approximately 19 percent of the

Group A Plan's assets, 22 percent of the Group B Plan's assets and 13

percent of the assets of the Profit Sharing Plan. With the exception of

mandatory title insurance charges, no Plan paid any real estate fees or

commissions in connection with its acquisition of an interest in the

Property.

Following the purchase transaction, the Lease and License were

assigned to the Plans. As modified by the Lease Assignment and

Assumption Agreement, the Amended Lease between the Plans and FFJ, has

a twelve year term that will expire on February 29, 2004. The annual

rental under the Amended Lease, which is the same as that paid under

the Lease, is $554,232 (the Base Rent). The Base Rent is payable in

monthly installments of $46,186. Commencing on March 1, 1993 and

including the year ending February 29, 2004, FFJ is required to pay, in

addition to the Base Rent, and annual Escalation Amount based upon the

fair market rental value of the Property as determined by a qualified,

independent appraiser. Effective October 1, 1997, FFJ has commenced

paying an annual Escalation Amount of $35,048 on a monthly basis in

equal installments of $2,920.67. Therefore, the total rental amount

being paid is $589,280 annually of $49,107 monthly. In the event that

the fair market rental value of the Property should decline to an

amount which is less than the Base Rent, the Amended Lease provides

that the Plans will be paid the Base Rent. As with the Lease, the

Amended Lease is also a triple net lease.

The License between FFJ and FIS, which was similarly modified by

the Lease Assignment and Assumption Agreement, required FIS to pay its

proportionate share of utilities as well as repair and maintain that

portion of apace that it occupied, also on triple net basis. Although

the License had a term that was commensurate with that of the Amended

Lease and required that FIS pay FFJ a base fee that was proportional to

the amount that FFJ paid the Plans under the Amended Lease, it was

terminated on or about January 1, 1995 after FIS vacated the Property.

Currently, FFJ occupies that space.

To secure its obligations under the Amended Lease, FFJ obtained a

one year, irrevocable letter of credit (the Letter of Credit) in favor

of the Plans. The Letter of Credit, which was in the face amount of

$550,000, provided that Sanford Browde, the independent fiduciary for

the Plans with respect to the transactions, could draw upon amounts

available thereunder the FFJ ever defaulted in its rental payments

under the Amended Lease and the default continued for more than ten

days after notice of the default had been given. On February 25, 1994,

the Letter of Credit expired.

To further secure FFJ's obligations to the Plans under the Amended

Lease, M. Fortunoff entered into an escrow agreement (the Escrow

Agreement) with the Plans whereby at least one year's rental under the

Amended Lease would be maintained through the sixth anniversary date of

the Property's assignment to the Plans. In this regard, M. Fortunoff

established a $1.65 million special escrow account (the Escrow Account)

over which it would have no withdrawing power or authority. If, at any

time the Escrow Account were depleted, M. Fortunoff would be required

to make up the shortfall.

Funds in the Escrow Account would not be disbursed if there had

been a default under the Amended Lease during the initial six year term

of the Escrow Agreement. Instead, the Escrow Agreement would continue

until the end of the term of the Amended Lease. Assuming there were no

defaults after this period, the balance of the Escrow Account would be

delivered to M. Fortunoff after 1999.

As noted above, the transactions described in PTE 93-8 are being

monitored by Mr. Browde, the independent fiduciary for the Plans.

Further, as additional safeguards, the exemption contains a number of

specific conditions. For example, (1) the terms of the transactions

must be at least as favorable to the Plans as those obtainable in arm's

length transactions with an unrelated party; (2) the independent

fiduciary must (a) determine that the transactions are in the best

interests of the Plans, (b) monitor and enforce compliance with the

terms and the conditions of the transactions and exemption at all

times, and (c) appoint one or more independent fiduciaries to resolve

any conflicts of interest which may develop between the Plans with

respect to the Amended Lease, the Escrow Agreement, the Property, or

each Plan's interest therein; (3) the value of the proportionate

interests in the Property that are acquired by each Plan must not

exceed 25 percent of each Plan's assets; and (4) the Base Rent must be

adjusted annually by the independent fiduciary based upon an

independent appraisal of the Property.

II. Proposed Modification to PTE 93-8

According to the Applicants, the subject Property is irregularly-

shaped and resembles a flagpole or a flag lot. Corporate Property

Investors (CPI), which is not affiliated with either the

[[Page 66687]]

Applicants or Mr. Browde, is the owner of two neighboring lots to the

immediate east and west of the ``pole'' area of the Property which has

been designated by the Applicants for employee parking. The Property

currently separates the two parcels owned by CPI.

By eliminating the pole portion of the Property, the Applicants

represent that the Property will become regular in shape and more

suitable for expansion. If reconfigured, the Property will also provide

additional parking for employees of FFJ and for others using the

warehouse facility.

Therefore, the applicants propose to modify PTE 93-8 by having the

Plans exchange the pole portion of the Property (the Exchange Property)

for nearly equivalent portions of the two lots that are owned by CPI

(the Substitute Property).\1\ The Substitute Property is contiguous

with the existing northern border of the flag portion of the Property

and is subject to a ground lease that is currently held by CPI as

ground lessor. The Substitute Property is used by CPI for parking

purposes and has the following legal description:

\1\ The Substitute Property that will be acquired by the Plans

measures approximately 358 feet by 47 feet and 70 feet by 43 feet

for a total of 19,836 square feet. The approximate dimensions of the

Exchange Property are 50 feet by 367 feet or a total of 18,350

square feet.

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All that certain plot, piece or parcel of land, situate, lying

and being near Westbury, Town of Hempstead, County of Nassau and

State of New York, being the southerly 47.50 feet, more or less, of

Lots 23 and 25 in section 44 Block 73 on the Nassau County Land and

Tax Map as same existed on the date hereof.

The proposed exchange will be conducted on the basis of a tax free

exchange of like-kind property under section 1031 of the Code. The

Substitute Property will be acquired by the Plans in fee simple and

will not be subject to the ground lease. At the time of closing, CPI

will transfer the Substitute Property to the Plans free of the rights

of any person or entity under the ground lease. After the land

exchange, the total area of the Property will be essentially the same

as at present but the land will be more regular in shape. As for CPI,

the proposed exchange will allow it to own one continuous parcel of

land, thus enhancing the utility of its land holdings.

The Plans propose to effect the real property exchange with CPI

under the terms of a Real Estate Exchange Agreement. The proposed

exchange is also contingent upon the Department's approval of the

arrangement and requires that the parties warrant or adhere to

environmental laws and regulations affecting the respective Properties.

It is represented that the exchange will not affect the present use of

the Property, the Amended Lease, or M. Fortunoff's obligations under

the Escrow Agreement.

Because of the nature of the modification discussed above, the

Department has determined that the exemptive relief provided under PTE

93-8 is no longer available. Therefore, the Department has decided to

publish a new exemption which, if granted, would amend PTE 93-8 by

allowing the Plans to lease the Substitute Property to FFJ along with

the remaining Property under the provisions of the Amended Lease. In

effect, the new proposed exemption will incorporate by reference many

of the facts, representations and continuing conditions that are

contained in PTE 93-8. However, the proposed exemption will not cover

FIS's use of space in the Property pursuant to the terms of the License

as such arrangement has been terminated.

III. Independent Appraisal

Bernard Goodman, MAI, CRE, and Matthew J. Guzowski, MAI,

independent appraisers (the Appraiser), who are affiliated with the

appraisal firm of Goodman-Marks Associates, Inc., located in Mineola,

New York, have addressed the economic impact of the Exchange Property

and the Substitute Property in an appraisal report dated September 9,

1997. The Appraisers note that the Exchange Property and the Substitute

Property are currently part of larger parcels of real property that are

zoned for industrial use. The Appraisers state that it is rare that

parcels of such size are marketed in industrial-zoned areas and that

their utility can only be realized by the adjoining land users.

Further, because there are no comparable sales of similarly-sized

parcels of real property in the area to formulate the basis for

determining the fair market values of the Substitute Property and the

Exchange Property, as ``standalone parcels,'' the Appraisers state that

neither parcel would have any marketable value and that to determine

such values would be very speculative. However, because both parcels

are of virtually the same size and are located in the same immediate

area, the Appraisers conclude that they are of equal value.

In addition to opining on the respective fair market values of the

Exchange Property and the Substitute Property, the Appraisers have

determined that as of September 6, 1997, the Property would have a fair

market value of $6.2 million. Moreover, as of that date, the Appraisers

have estimated the fair market rental value of the Property at $8.50,

gross, per square foot of building area, or $5.08 net rent per square

foot of building area.

Thus, as a result of the unmarketability of the Substitute Property

as a stand alone strip of real property and its size in relation to the

Property, the Appraisers have determined that the acquisition by the

Plans of the Substitute Property will have a minimal effect on the fair

market value or the fair market rental value of the Property. The

Appraisers note that the benefit to be derived by the Plans from the

exchange will be the availability of additional parking spaces which

will be in closer proximity to the warehouse facility. The squaring off

of the Property will create a more convenient use for those accessing

the warehouse.

IV. Views of the Independent Fiduciary

Mr. Browde represents that he has investigated real estate and

economic considerations relating to the proposed exchange transaction

and has concluded that it will benefit the Plans by enhancing the value

of the Property. In this regard, Mr. Browde notes that the Substitute

Property and the Exchange Property are of nearly the same size. After

the land exchange, the total land area of the Property essentially will

be the same but will result in a net increase of approximately 2,300

square feet of space. By eliminating the pole, the Property will become

regular in shape and more suitable for use.

Mr. Browde also states that a regular-shaped parcel of real estate

has more value than one that is oddly-shaped. In this regard, he states

that the Substitute Property would allow two rows of parking in the

same space which formerly accommodated only one row of parallel

parking, thereby increasing the number of legal parking spaces at the

Property by 26. This additional benefit would be a desirable

consequence of the exchange.

Further, Mr. Browde represents that the warehouse on the Property

could be expanded to a greater extent than at present because the land

exchange would now provide a greater distance between the new property

line and the exterior walls of the building's north side. He also notes

that the land exchange would be without cost to the Plans, other than

transaction costs which are not expected to exceed $3,000.

Finally, Mr. Browde notes that since the granting of PTE 93-8, all

of the terms and conditions of the Amended Lease, the Letter of Credit

and the Escrow Agreement have been complied with by the parties. Mr.

Browde also

[[Page 66688]]

represents that there have been no defaults or delinquencies under the

Amended Lease.

V. Other Modifications

A. Plan Information

In addition to the above, the Applicants have provided updated

information concerning the Plans. In this regard, the Applicants note

that the Group A Plan had 1,328 participants as of December 31, 1996

and total assets having a fair market value of $19,983,124 as of August

31, 1997. In addition, the Applicants represent that the Group B had

1,302 participants as of December 31, 1996 and total assets having a

fair market value of $10,680,155 as of August 31, 1997. Further, the

Applicants state that the Profit Sharing Plan had 1,098 participants as

of January 31, 1997 and total assets having a fair market value of

approximately $10,471,276 as of August 31, 1997.\2\

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\2\ Based upon these valuations, it should be noted that the

property, valued at $6.2 million by the Appraisers as of September

6, 1997, represents 12.41 percent of the assets of the Group A Plan,

23.22 percent of the assets of the Group B Plan and 11.84 percent of

the assets of the Profit Sharing Plan.

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B. Stock Ownership

The Applicants state that subsequent to the granting of PTE 93-8,

FFJ underwent a stock reclassification to create two classes of stock--

Class A voting stock and Class B non-voting stock. On June 24, 1994, a

stock dividend of 408 Class B shares was declared to holders of Class A

shares. Mr. Fortunoff gifted 236 of these shares to the Alan Fortunoff

Grantor Retained Annuity Trust and sold seven shares to each of his six

children. Mrs. Fortunoff gifted 88 Class B shares to the Helene

Fortunoff Grantor Retained Annuity Trust and sold seven shares to each

of the Fortunoff children. The Fortunoff children are beneficiaries

under both trusts.

At present, the Applicants note that all of the Class A voting

shares are owned by Alan and Helene Fortunoff. The FFJ Class B non-

voting shares are distributed as follows: Alan Fortunoff Grantor

Retained Annuity Trust, 236 shares; Helene Fortunoff Grantor Retained

Annuity Trust, 88 shares; and each of the Fortunoff children, 14

shares. Leonard Leibman is the sole trustee of each of the trusts.

Also since PTE 93-8 was granted, the Applicants point out that M.

Fortunoff has had a change in stock ownership. Although Mr. Fortunoff

does not hold any elective offices with M. Fortunoff and does not

directly own any shares of its capital stock, the Applicants explain

that he is one of three co-executors of the Estate of Marjorie Mayrock,

which owns 49.6 percent of M. Fortunoff's capital stock. The Applicants

further explain that both Mr. and Mrs. Fortunoff are co-trustees under

three trusts which each hold 5\2/3\ shares of Mr. Fortunoff's capital

stock for the benefit of the Mayrock children. On July 31, 1996, a

distribution of 4.25 shares was made from the Estate of Marjorie

Mayrock to each of the Mayrock children for a total distribution of

12.75 shares.

Notice to Interested Persons

Notice of the proposed exemption will be sent by first class mail

to each participant in the Plans within 15 days of the publication of

the pending exemption in the Federal Register. The notice will contain

a copy of the proposed exemption as published in the Federal Register

and a supplemental statement, as required pursuant to 29 CFR

2570.43(b)(2). The supplemental statement will inform interested

persons of their right to comment on and/or to request a hearing with

respect to the pending exemption. Comments and hearing requests

regarding the proposed exemption will be due 45 days from the

publication of the notice of proposed exemption in the Federal

Register.

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 section 4975(c)(2) of the Code does

not relieve a fiduciary or other party in interest or disqualified

person from certain other provisions of the Act and 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 require, among other things, a fiduciary to

discharge his or her 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 requirements of section 401(a) of the Code that the plan

operate for the exclusive benefit of the employees of the employer

maintaining the plan and their beneficiaries;

(2) The proposed exemption, if granted, will not extend to

transactions prohibited under section 406(b)(3) of the Act and section

4975(c)(1)(F) of the Code;

(3) Before an exemption can be granted under section 408(a) of the

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

the exemption is administratively feasible, in the interest of the plan

and of its participants and beneficiaries and protective of the rights

of participants and beneficiaries of the plan;

(4) This proposed exemption, if granted, will be supplemental to,

and not in derogation of, any other provisions of the Act and the Code,

including statutory or administrative exemptions. 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

(5) This proposed exemption, if granted, is subject to the express

condition that the Summary of Facts and Representations set forth in

the notice of proposed exemption relating to PTE 93-8, as amended by

this notice, accurately describe, where relevant, the material terms of

the transactions consummated pursuant to that exemption.

Written Comments and Hearing Requests

All interested persons are invited to submit written comments or

requests for a hearing on the pending exemption to the address above,

within 15 days after the publication of this proposed exemption in the

Federal Register. All comments will be made a part of the record.

Comments received will be available for public inspection with the

referenced applications at the address set forth above.

Proposed Exemption

Based on the facts and representations set forth in the

application, the Department is considering granting the requested

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, August 19, 1990).

If the proposed exemption is granted, 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 leasing

by the Plans to FFJ, under the provisions of the Amended Lease

described in PTE 93-8, of certain Substitute Property, acquired by the

Plans through a third party exchange, as well as all remaining real

estate which constitutes the Property, provided the following

conditions are met:

(a) The terms of the Amended Lease remain at least as favorable to

the Plans

[[Page 66689]]

as those obtainable in an arm's length transaction with an unrelated

party.

(b) The independent fiduciary--

(i) Determines that the acquisition and subsequent leasing of the

Substitute Property by the Plans under the Amended Lease are in the

best interest of the Plans and their participants and beneficiaries;

(ii) Monitors and enforces compliance with the terms and conditions

of the Amended Lease, the Escrow Agreement and the new exemption, at

all times; and

(iii) Appoints one or more independent fiduciaries to resolve any

conflicts of interest which may develop among the Plans with respect to

the Amended Lease, the Escrow Agreement, the Property, or the Plans'

respective interests therein.

(c) The fair market value of the proportionate interests held by

each Plan in the Property as a whole following the exchange transaction

does not exceed 25 percent of each Plan's assets.

(d) The Property, the Exchange Property and the Substitute Property

are all appraised by qualified, independent appraisers prior to the

consummation of the exchange transaction.

(e) The Base Rent for the Property is adjusted annually by the

independent fiduciary based upon an independent appraisal of such

Property.

(f) FFJ incurs all real estate taxes and other costs which are

incident to the Amended Lease.

(g) The Escrow Agreement is maintained by M. Fortunoff, in favor of

the Plans, as security for FFJ's rental obligations under the Amended

Lease.

The availability of this proposed exemption is subject to the

express condition that the material facts and representations contained

in the application for exemption are true and complete and accurately

describe all material terms of the transactions. In the case of

continuing transactions, if any of the material facts or

representations described in the application change, the exemption will

cease to apply as of the date of such change. In the event of any such

change, an application for a new exemption must be made to the

Department.

For a more complete statement of the facts and representations

supporting the Department's decision to grant PTE 93-8, refer to the

proposed exemption, grant notice and technical correction notice which

are cited above.

Signed at Washington, D.C., this 16th day of December 1997.

Ivan L. Strasfeld,

Director of Exemption Determinations, Pension and Welfare Benefits

Administration, U.S. Department of Labor.

[FR Doc. 97-33180 Filed 12-18-97; 8:45 am]

BILLING CODE 4510-29-M