Proposed Exemptions; RREEF America L.L.C. (RREEF)

Federal RegisterJun 3, 1999

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DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration

[Application No. D09708, et al.]

Proposed Exemptions; RREEF America L.L.C. (RREEF)

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 restrictions 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

Unless otherwise stated in the Notice of Proposed Exemption, all

interested persons are invited to submit written comments, and with

respect to exemptions involving the fiduciary prohibitions of section

406(b) of the Act, requests for hearing within 45 days from the date of

publication of this Federal Register Notice. Comments and requests 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.

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, NW, Washington, DC 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, DC 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

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.

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.

[[Page 29896]]

RREEF America L.L.C. (RREEF), Located in San Francisco, California

[Application No. D-9708]

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.)

Part I--Exemption for Payment of Certain Fees to RREEF

The restrictions of sections 406(b)(1) and (b)(2) of the Act and

the taxes imposed by section 4975 of the Code, by reason of section

4975(c)(1)(E) of the Code, shall not apply, effective as of (i) May 16,

1994, with respect to a single client, separate account established on

behalf of the Shell Pension Trust (the Shell Account), and (ii) the

date the final exemption is published in the Federal Register, with

respect to any single client, separate account (Single Client Account)

or any multiple client account (Multiple Client Account) formed on, or

after, such a date, to the payment of certain initial investment fees

(the Investment Fee), annual management fees based upon net operating

income (the Asset Management Fee), and performance fees (the

Performance Fee) to RREEF by employee benefit plans for which RREEF

provides investment management services (the Client Plans) 1

pursuant to an investment management agreement (the Agreement) entered

into between RREEF and the Client Plans either individually, through an

establishment (or amendment) of a Single Client Account, or

collectively as participants in a newly established Multiple Client

Account (collectively, the Accounts), provided that the conditions set

forth below in Part III are satisfied.

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\1\ The Client Plans (including employee benefit plans that may

become Client Plans in the future) consist of various pension plans

as defined in section 3(2) of the Act and other plans as defined in

section 4975(e)(1) of the Code with respect to which RREEF serves as

a trustee or an investment manager.

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Part II--Exemption for Investments in a Multiple Client Account

The restrictions of section 406(a)(1)(A) through (D) of the Act and

the taxes imposed by section 4975(c)(1)(A) through (D) of the Code,

shall not apply to any investment by a Client Plan in a Multiple Client

Account managed by RREEF formed on, or after, the date the final

exemption is published in the Federal Register, provided that the

conditions set forth below in Part III are satisfied.

Part III--General Conditions

(a)(1) The investment of plan assets in a Single or Multiple Client

Account, including the terms and payment of any Investment Fee, Asset

Management Fee and Performance Fee (collectively; the Fees), shall be

approved in writing by a fiduciary of a Client Plan which is

independent of RREEF and its affiliates (the Independent Fiduciary).

(2) For purposes of the Fees, the fair market value of the

Accounts' real property assets (other than in the case of actual sales)

will be based on appraisals prepared by independent qualified

appraisers that are Members of the Appraisal Institute (MAI

Appraisers). In this regard, every agreement by which an appraiser is

retained will include the appraiser's representation that: (1) Its

ultimate client is the Account and its underlying Client Plan (and non-

Plan) investors, and (2) it will perform its duties in the interest of

such Account (and investors). In addition, following the date this

proposed exemption is granted, every agreement shall advise the

appraiser that it owes a professional obligation to the Account when

making an appraisal for properties held by the Account.

(b) The terms of any investment in an Account and of the Fees,

shall be at least as favorable to the Client Plans as those obtainable

in arm's-length transactions between unrelated parties.

time of any subsequent investment of assets (including the reinvestment

of assets) in such Account:

(1) Each Client Plan in a Single Client Account shall have total

net assets with a value in excess of $100 million, and each Client Plan

that is an investor in a Multiple Client Account shall have total net

assets with a value in excess of $50 million; and provided that

seventy-five percent (75%) or more of the units of beneficial interests

in a Multiple Client Account are held by Client Plans or other

investors having total assets of at least $100 million. In addition, 50

percent (50%) or more of the Client Plans investing in a Multiple

Client Account shall have assets of at least $100 million. A group of

Client Plans maintained by a single employer or controlled group of

employers, any of which individually has assets of less than $100

million, will be counted as a single Client Plan if the decision to

invest in the Account (or the decision to make investments in the

Account available as an option for an individually directed account) is

made by a fiduciary other than RREEF, who exercises such discretion

with respect to Client Plan assets in excess of $100 million.

(2) No Client Plan shall invest, in the aggregate, more than 5% of

its total assets in any Account or more than 10% of its total assets in

all Accounts established by RREEF.

(d) Prior to making an investment in any Account (or amending an

existing Account), the Independent Fiduciary of each Client Plan

investing in an Account shall have received offering materials from

RREEF which disclose all material facts concerning the purpose,

structure, and operation of the Account, including any Fee arrangements

(provided that, in the case of an amendment to the Fee arrangements,

such materials need address only the amended fees and any other

material change to the Account's original offering materials).

(e) With respect to its ongoing participation in an Account, each

Client Plan shall receive the following written information from RREEF:

(1) Audited financial statements of the Account prepared by

independent public accountants selected by RREEF no later than 90 days

after the end of the fiscal year of the Account;

(2) Quarterly and annual reports prepared by RREEF relating to the

overall financial position and operating results of the Account and, in

the case of a Multiple Client Account, the value of each Client Plan's

interest in the Account. Each such report shall include a statement

regarding the amount of fees paid to RREEF during the period covered by

such report;

(3) Periodic appraisals (as agreed upon with the Client Plans)

indicating the fair market value of the Account's assets as established

by an MAI appraiser independent of RREEF and its affiliates. In the

case of any appraisal that will serve as the basis for any ``deemed

sale'' of such property for purposes of calculating the Performance Fee

payable to RREEF (as discussed in paragraph (j) below), then:

(i) In the case of any Single Client Account, such MAI appraiser

shall be either (A) Selected by the Independent Fiduciary of the Client

Plan subject to the affirmative approval of RREEF, or (B) selected by

RREEF subject to approval by the Independent Fiduciary of the Client

Plan;

(ii) In the case of any Multiple Client Account, such MAI appraiser

shall be approved in advance by the Responsible Independent Fiduciaries

(as defined in Part IV(e) below) owning a majority of the interests in

the Accounts, determined according to the latest

[[Page 29897]]

valuation of the Account's assets performed no more than 12 months

prior to such appraisal, which approval may be by written notice and

deemed consent by such Fiduciaries' failure to object to the appraiser

within 30 days of such notice; and

(iii) In either case, the selected MAI appraiser shall acknowledge

in writing that the Client Plan(s) and other investors (in the case of

a Multiple Client Account), rather than RREEF, is (are) its clients,

and that in performing its services for the Account it shall act in the

sole interest of such Client Plan(s) and other investors. In addition,

following the date this proposed exemption is granted, every appraiser

selected shall acknowledge that it owes a professional obligation to

the Client Plan(s) and other investors in the Account in performing its

services as an appraiser for properties in the Account. If an MAI

appraiser selected by RREEF, or an appraisal performed by a previously

approved appraiser, is rejected by the Independent Fiduciary for a

Single Client Account or the Responsible Independent Fiduciaries for

the Multiple Client Account, determined according to the latest

valuation of the Account's assets performed no more than 12 months

prior to such appraisal, the fair market value of the assets for any

``deemed sale'', relating to the payment of a Performance Fee (as

described in paragraphs (i) and (j) below) shall be determined as

follows: (A) the Client Plans shall appoint a second appraiser and, if

the value established for the property does not deviate by more than

10% (or such lesser amount as may be agreed upon between RREEF and the

Client Plan(s)), then the two appraisals shall be averaged; (B) if the

values differ by more than 10%, then the two appraisers shall select a

third appraiser, that is independent of RREEF and its affiliates, who

will attempt to mediate the difference; (C) if the third appraiser can

cause the first two to reach an agreement on a value, that figure shall

be used; however, (D) if no agreement can be reached, the third

appraiser shall determine the value based on procedures set out in the

governing agreements of the Account or, if no such procedures are

established, shall conduct its own appraisal and the two closest of the

three shall be averaged;

(4) In the case of any Multiple Client Account, a list of all other

investors in the Account;

(5) Annual operating and capital budgets with respect to the

Account, to be distributed to a Client Plan within 60 days prior to the

beginning of the fiscal year to which such budgets relate; and

(6) An explanation of any material deviation from the budgets

previously provided to such Client Plan for the prior year.

(f) The total fees paid to RREEF shall constitute no more than

``reasonable compensation'' within the meaning of section 408(b)(2) of

the Act.

(g) The Investment Fee shall be equal to a specified percentage of

the net value of the Client Plan assets allocated to the Account which

shall be payable either:

(1) At the time assets are deposited (or deemed deposited in the

case of reinvestment of assets) in the Account; or

(2) In periodic installments, the amount (as a percentage of the

aggregate Investment Fee) and timing of which have been specified in

advance based on the percentage of the Client Plan's assets invested in

real property as of the payment date; provided that (i) The installment

period is no less than three months, and (ii) if the percentage of the

Client Plan assets which have actually been invested by a payment date

is less than the percentage required for the aggregate Investment Fee

to be paid in full through that date (both determined on a cumulative

basis), the Investment Fee paid on such a date shall be reduced by the

amount necessary to cause the percentage of the aggregate Investment

Fee paid to equal only the percentage of the Client Plan assets

actually invested by that date. The unpaid portion of such Investment

Fee shall be deferred to and payable on a cumulative basis on the next

scheduled payment date (subject to the percentage limitation described

in the preceding sentence).

(h) The Asset Management Fee shall be payable for each quarter from

the net operating income (NOI) of the Account. The amount of the Asset

Management Fee, expressed as a percentage of the NOI of the Account,

shall be established by the Agreement and agreed to by the Independent

Fiduciaries of the Client Plans:

(1) The Asset Management Fee for any Account will be calculated as

follows. The Asset Management Fee for a specific Account real property

will be based solely on items of operating income and expense that are

identified as line items on an operating budget for such property

disclosed to each Client Plan that participates in the Account. The

disclosures have to be made at least 30 days in advance of the fiscal

year to which the budget relates, and approved in the manner described

in (2) below;

(2) Each Client Plan must provide affirmative approval of the

operating budget. Specifically, when the proposed budget (or any

material deviation therefrom) is sent to a Client Plan, it will be

accompanied by a written notice that the Client Plan may object to the

budget or any specific line item therein, for purposes of calculating

the Asset Management Fees for the next fiscal year. The written notice

will contain a statement that affirmative approval of the budget is

required prior to the end of the 30-day period following such

disclosure. In the case of a Multiple Client Account, affirmative

approval by a majority of investors (by interest) will constitute

approval of the proposed budget (or deviation); and

(3) In the event of any subsequent decrease in previously approved

budgeted operating expenses for the fiscal year in excess of the limits

previously described (15% for any line item, 5% overall), then the

resulting increase in NOI (i.e., over and above the allowable

deviation) will not be taken into account in calculating RREEF's

management fee unless affirmative approval for the payment of such fee

is obtained in writing from the Independent Fiduciary for the Client

Plan in the Single Client Account or the Responsible Independent

Fiduciaries for the Multiple Client Account.

(i) In the case of any Multiple Client Account, the Performance Fee

shall be payable after the Client Plan has received distributions from

the Account in excess of an amount equal to 100% of its invested

capital plus a pre-specified annual compounded cumulative rate of

return (the Threshold Amount or Hurdle Rate). However, in the case of

RREEF's removal or resignation, RREEF shall be entitled to receive a

Performance Fee payable either at the time of removal or, in the event

of RREEF's resignation, upon sale of the assets to which the

Performance Fee is allocable or upon termination of the Account as the

case may be, subject to the requirements of paragraph (l) below, as

determined by a deemed distribution of the assets of the Account based

on an assumed sale of such assets at their fair market value (in

accordance with independent appraisals), only to the extent that the

Client Plan would receive distributions from the Account in excess of

an amount equal to the Threshold Amount at the time of RREEF's removal

or resignation. Both the Threshold Amount and the amount of the

Performance Fee, expressed as a percentage of the net proceeds from a

capital event distributed (or deemed distributed) from the Account in

excess of the Threshold Amount, shall be established by the Agreement

and agreed to by the Independent Fiduciaries of the Client Plans.

[[Page 29898]]

(j) In the case of any Single Client Account, the Performance Fee

shall be determined and paid either: (1) In the same manner as in the

case of a Multiple Client Account, as described in paragraph (i) above;

or (2) at the end of any pre-specified period of not less than one

year, provided that such Fee is based upon the sum of all actual

distributions from the Account during such period, plus deemed

distributions of the assets of the Account based on an assumed sale of

all such assets at their fair market value as of the end of such period

(in accordance with independent appraisals performed within 12 months

of the calculation) which are calculated to be in excess of the

Threshold Amount or the Hurdle Rate through the end of such period. For

this purpose, the Performance Fee measuring period shall be established

by the Agreement and agreed to by the Independent Fiduciary of the

Client Plan, provided that such period is not less than one year. In

addition, RREEF shall provide notice to the Client Plan within 60 days

of each Performance Fee calculation for a Single Client Account that

the Independent Fiduciary of the Client Plan has the right to request

updated appraisals of the properties held by the Account if such

Fiduciary determines that the existing independent appraisals

(performed within 12 months of the calculation) are no longer

sufficient.

(k) The Threshold Amount for any Performance Fee shall include at

least a minimum rate of return to the Client Plan, as defined below in

Part IV, paragraph (f).

(l) In the event RREEF resigns as investment manager for an

Account, the Performance Fee shall be calculated at the time of

resignation as described above in paragraph (i) above and allocated

among each property, based on the appraised value of such property in

relationship to the total appraised value of the Account. Each amount

arrived at through this calculation shall be multiplied by a fraction,

the numerator of which will be the actual sales price received by the

Account on subsequent disposition of the property (or in the case of a

property which has not been sold prior to the termination of a Multiple

Client Account, the appraised value of the property as of the

termination date), and the denominator of which will be the appraised

value of the property which was used in connection with determining the

Performance Fee at the time of resignation, provided that this fraction

shall never exceed 1.0. The resulting amount for each property shall be

the Performance Fee payable to RREEF upon the sale of such property or

termination of the Multiple Client Account, as the case may be.

(m) In cases where RREEF does have discretion to reinvest proceeds

from capital events, the reinvested amount shall not be treated as a

new contribution of capital by the Client Plan for purposes of the

Investment Fee, as described above in paragraph (g), or having been

distributed for purposes of the payment of Performance Fee as described

above in paragraphs (i) and (j);

(n) RREEF or its affiliates shall maintain, for a period of six

years, the records necessary to enable the persons described in

paragraph (o) of this Part III to determine whether the conditions of

this exemption have been met, except that:

(1) A prohibited transaction will not be considered to have

occurred if, due to circumstances beyond the control of RREEF or its

affiliates, the records are lost or destroyed prior to the end of the

six year period; and (2) no party in interest, other than RREEF, shall

be subject to the civil penalty that may be assessed under section

502(i) of the Act or the taxes imposed by section 4975(a) and (b) of

the Code if the records are not maintained or are not available for

examination as required by paragraph (o) below.

(o)(1) Except as provided in paragraph (o)(2) and notwithstanding

any provisions of section 504(a)(2) and (b) of the Act, the records

referred to in paragraph (n) of this Part III shall be unconditionally

available at their customary location for examination during normal

business hours by:

(i) Any duly authorized employee or representative of the

Department or the Internal Revenue Service;

(ii) Any fiduciary of a Client Plan or any duly authorized employee

or representative of such fiduciary;

(iii) Any contributing employer to a Client Plan or any duly

authorized employee or representative of such employer; and

(iv) Any participant or beneficiary of a Client Plan or any duly

authorized employee or representative of such participant or

beneficiary;

(2) None of the persons described above in paragraph (o)(1)(ii)-

(iv) shall be authorized to examine the trade secrets of RREEF and its

affiliates or any commercial or financial information which is

privileged or confidential.

(p) RREEF shall provide a copy of the proposed exemption and a copy

of the final exemption to all Client Plans that invest in any Single

Client Account or any Multiple Client Account formed on, or after, the

date the final exemption is published in the Federal Register.

Part IV--Definitions

(a) An ``affiliate'' of a person includes:

(1) Any person directly or indirectly, through one or more

intermediaries, controlling, controlled by, or under common control

with the person;

(2) Any officer, director, employee, relative of, or partner of any

such person; and

(3) Any corporation or partnership of which such person is an

officer, director, partner or employee.

(b) The term ``control'' means the power to exercise a controlling

influence over the management or policies of a person other than an

individual.

(1) Development of an investment strategy for the Account and

identification of suitable real estate-related investments;

(2) Directing the investments of the assets of the Account,

including the determination of the structure of each investment, the

negotiation of its terms and conditions and the performance of all

requisite due diligence;

(3) Determination of the timing of, and directing, the disposition

of assets of the Account and directing the liquidation of the Account

upon termination;

(4) Administration of the overall operation of the investments of

the Account, including all applicable leasing, management, financing

and capital improvement decisions;

(5) Establishing and maintaining accounting records of the Account

and distributing reports to Client Plans as described in Part III; and

(6) Selecting and directing all service providers of ancillary

services as defined in this Part IV; provided, however, that some or

all of the foregoing management services may be subject to the final

discretion of the Independent Fiduciary(ies) for the Client Plan(s).

(d) The term ``ancillary services'' means:

(1) Legal services;

(2) Services of architects, designers, engineers, construction

managers, hazardous materials consultants, contractors, leasing agents,

real estate brokers, and others in connection with the acquisition,

construction, improvement, management and disposition of investments in

real property;

(3) Insurance brokerage and consultation services;

(4) Services of independent auditors and accountants in connection

with auditing the books and records of the Accounts and preparing tax

returns;

[[Page 29899]]

(5) Appraisal and mortgage brokerage services; and

(6) Services for the development of income-producing real property.

(e) The term ``Independent Fiduciary'' with respect to any Client

Plan means a fiduciary (including an in-house fiduciary) independent of

RREEF and its affiliates. With respect to a Multiple Client Account,

the terms ``Independent Fiduciary'' or ``Responsible Independent

Fiduciaries'' mean the Independent Fiduciaries of the Client Plans

invested in the Account and other authorized persons acting for

investors in the Account which are not employee benefit plans as

defined under section 3(3) of ERISA (such as governmental plans,

university endowment funds, etc.) that are independent of RREEF and its

affiliates, and that collectively hold more than 50% of the interests

in the Account.

(f) The terms ``Threshold Amount'' or ``Hurdle Rate'' mean, with

respect to any Performance Fee, an amount which equals all of a Client

Plan's capital invested in an Account plus a pre-specified annual

compounded cumulative rate of return that is at least a minimum rate of

return determined as follows:

(1) A ``floating'' or non-fixed rate which is at least equal to the

lesser of seven percent, or the rate of change in the consumer price

index (CPI), during the period from the deposit of the Client Plan's

assets into the Account until the determination date; or

(2) A fixed rate which is at least equal to the lesser of seven

percent or the average rate of change in the CPI over some period of

time specified in the Agreement, which shall not exceed 10 years.

(g) The terms ``Net Operating Income'' or ``NOI'' means all

operating income of the Account (i.e., rents, interest, and other

income from day-to-day investment activities of the Account) less

operating expenses, determined on an accrual basis in accordance with

generally accepted accounting principles, but without regard to

depreciation (or other non-cash) expense and capital expenditures and

without regard to payments of interest and principal with respect to

any acquisition indebtedness relating to the property.

(h) The term ``Net Proceeds of a Capital Event'' means all proceeds

from capital events of an Account (i.e., sales or non-recourse

refinances of real property investments owned by the Account) less

repayment of debt with respect to such property, closing expenses paid,

and reasonable reserves established in connection therewith, whether

such reserves are for repayment of existing or anticipated obligations

or for contingent liabilities.

EFFECTIVE DATE: This proposed exemption, if granted, will be effective

as of (i) May 16, 1994, with respect to the Shell Account, and (ii) the

date the final exemption is published in the Federal Register, with

respect to any Single Client Account and any Multiple Client Account

formed on, or after, such date.

Summary of Facts and Representations

1. RREEF America L.L.C. and its affiliate, RREEF Management

Company, provide investment and property management services to

institutional investors, including employee benefit plans and other

tax-exempt entities, through various separate accounts and commingled

accounts.

On January 27, 1998, RREEF America L.L.C. and its affiliate, RREEF

Corporation (collectively, RREEF), were acquired by RoProperty

Services, B.V. (RoProperty), a major Dutch investment advisory firm. As

a result, the RREEF entities were combined into a newly created

Delaware limited liability company which continues to use the name

``RREEF America L.L.C.'' RREEF operates as an autonomous entity which

continues to provide investment management services, and its affiliate,

RREEF Management Company, continues to provide property management

services.

2. RREEF is generally appointed as an investment manager (the

Manager) as defined in section 3(38) of the Act with respect to each

Client Plan that invests in a Single Client Account or a Multiple

Client Account. Although RREEF has discretion with respect to the day-

to-day operation of each Account and, in many cases, RREEF has full

discretion over Account acquisition and/or disposition decisions, in

certain cases final investment authority may remain with the Client

Plans.

3. A Client Plan may enter into one or more separate account

relationships with RREEF (each, a Single Client Account) pursuant to

one or more individually negotiated investment management agreements

with RREEF, or by investing in a commingled investment fund (Multiple

Client Account, collectively; the Accounts) managed by

RREEF.2 The Accounts to date have been blind investment

relationships established for the purpose of identifying and acquiring

real property investments that meet certain investment criteria.

However, specified-property investment relationships may be established

to invest in pre-identified real property investments. The

responsibilities of RREEF in a typical blind discretionary Account

would include:

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\2\ The applicant represents that in some instances a Client

Plan's investment in a Multiple Client Account that is a common or

collective trust fund maintained by a bank would be exempt from the

restrictions of section 406(a) of the Act by reason of section

408(b)(8). The Department expresses no opinion herein whether all

the conditions of section 408(b)(8) will be satisfied in such

transactions.

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(a) Development of an investment strategy for the Account and

identification of suitable real estate investments.

(b) Directing the investment of the assets of the Account,

including the determination of the structure of each investment, the

negotiation of its terms and conditions, and the performance of

requisite due diligence.

assets of the Account and directing the liquidation of the Account upon

termination.

(d) Administering the overall operation of the investments of the

Account, including all applicable leasing, management, financing, and

capital improvement decisions.

(e) Establishing and maintaining accounting records of the Account,

and distributing reports to Client Plans.

(f) RREEF also has complete discretion in the selection and

direction of the ancillary services (Ancillary Services) defined in

Part IV, paragraph (d) above.3

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\3\ RREEF or its affiliates may, from time-to-time, provide

certain Ancillary Services to the Accounts, such as in connection

with the development or redevelopment of real property, preparation

of tax returns, environmental consulting, or other services.

Occasionally, RREEF has provided construction management and

development services with respect to non-ERISA governmental plan

accounts. However, upon special request from a client, RREEF may

agree to provide ancillary services, such as construction management

or development services based upon its knowledge of the Client

Plan's investments and its particular expertise. It represented that

the Ancillary Services are provided in accordance with section

408(b)(2) and the regulations thereunder (see 29 CFR 2550.408b-2).

However, the Department expresses no opinion as to whether the

selection of RREEF to provide Ancillary Services or the payment of

fees for such Ancillary Services, as described herein, would meet

the conditions of section 408(b)(2) of the Act.

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RREEF's primary investment objective is to acquire income-producing

real property which will generate current return through cash

distributions and will offer a potential for profit through gain on

resale.

Currently, Multiple Client Accounts consist primarily of tax-exempt

group trusts organized pursuant to IRS Revenue Ruling 81-100 and

limited partnerships. However, other Multiple Client Accounts may be

organized in the

[[Page 29900]]

future, including, but not limited to, title-holding corporations, real

estate investment trusts, or limited liability corporations. In the

case of Multiple Client Accounts that are group trusts, individual

principals and officers of RREEF generally serve as trustees thereof.

Similarly, RREEF principals and officers may serve as directors and/or

officers of other vehicles. RREEF currently does not serve as general

partner with respect to any of its limited partnership accounts that

are subject to ERISA. Typically, the general partner is a corporation

owned by one or more of the limited partners. However, in each case,

the primary investment discretion is delegated to RREEF pursuant to an

investment management agreement between RREEF and the Account (the

Agreement).

4. RREEF proposes to have the Client Plans pay for investment

management services it renders to the Accounts based upon a multi-fee

structure which will be approved in advance by the Independent

Fiduciaries of the Client Plans.4 Each Client Plan in a

Single Client Account shall have total net assets with a value in

excess of $100 million, and each Client Plan that is an investor in a

Multiple Client Account shall have total net assets with a value in

excess of $50 million. In addition, seventy-five percent (75%) or more

of the units of beneficial interests in a Multiple Client Account must

be held by Client Plans or other investors having total assets of at

least $100 million, and 50 percent (50%) or more of the Client Plans

investing in a Multiple Client Account must have assets of at least

$100 million. A group of Client Plans maintained by a single employer

or controlled group of employers, any of which individually has assets

of less than $100 million, will be counted as a single Client Plan if

the decision to invest in the Account (or the decision to make

investments in the Account available as an option for an individually

directed account) is made by a fiduciary other than RREEF, who

exercises such discretion with respect to Client Plan assets in excess

of $100 million. No Client Plan shall invest, in the aggregate, more

than 5% of its total assets in any Account or more than 10% of its

total assets in all Accounts established by RREEF.

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\4\ Section 404 of the Act requires, among other things, that a

plan fiduciary act prudently and solely in the interest of the

plan's participants and beneficiaries. Thus, the Department expects

a plan fiduciary, prior to entering into any performance based

compensation arrangement with an investment manager, to fully

understand the risks and benefits associated with a compensation

formula following disclosure by the investment manager of all

relevant information pertaining to the proposed arrangement. In

addition, a plan fiduciary must be capable of periodically

monitoring the actions taken by the investment manager in the

performance of its duties. The plan fiduciary must consider prior to

entering into any such arrangement, whether it is able to provide

adequate oversight of the investment manager during the course of

the arrangement.

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The relief provided by this proposed exemption for the multi-fee

structures described herein will apply prospectively to any newly

formed Multiple Client Account, if such arrangement is approved in

advance by the appropriate Independent Fiduciaries of the Client Plans

and other investors that invest in the Account. In addition, the relief

provided by this proposed exemption will apply retroactively to the

Shell Pension Trust for its existing Single Client Account (i.e., the

Shell Account), as of May 16, 1994, and prospectively for other Single

Client Accounts if the conditions of the exemption are met. Therefore,

with regard to any Account, the Independent Fiduciary(ies) of the

Client Plan(s) will have final approval as to whether the Agreement

between the Client Plan(s) and RREEF will provide for any Investment

Fees, Asset Management Fees, or Performance Fees. Similarly, in the

case of any Account, the final decision to invest the assets of any

Client Plan in such Account will be made by an Independent Fiduciary.

RREEF will not exercise its discretion with respect to any Single

Client Account to invest those assets in any Multiple Client Account.

With respect to the Shell Account, RREEF represents that this Single

Client Account has complied with all the applicable conditions

contained herein for, among other things, approval by an Independent

Fiduciary for investment in such an Account, the payment of any Fees to

RREEF, the retention of any appraiser (as discussed further below) for

the valuation of properties held in the Account,5 and the

minimum plan asset size required for participation in such

Accounts.6

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\5\ RREEF's Quarterly Report for the Shell Account, dated

December 31, 1998, describes a portfolio consisting of the following

six properties: (1) the Bellaire Place Apartments, a residential

property located in Redmond, Washington, with a fair market value of

approximately $18.6 million; (2) the San Diego Business Center, an

industrial property located in San Diego, California, with a fair

market value of approximately $17.7 million; (3) the West Sacramento

Industrial Center, an industrial property located in Sacramento,

California, which was sold on December 23, 1998 for $6.4 million;

(4) the Broadway Business Park, an industrial property located in

Phoenix, Arizona, with a fair market value of $26.5 million; (5)

1627 K Street, N.W., an office building located in Washington, D.C.,

with a fair market value of approximately $9.4 million; and (6)

Wendemere at the Ranch Apartments, a residential property located in

Westminster, Colorado, with a fair market value of approximately $16

million. The fair market value of the properties still held in the

Shell Account, as of December 31, 1998, was approximately

$88,268,000.

\6\ The Shell Pension Trust contained approximately $5.7 billion

in total assets, of which approximately 2% were invested in real

estate, as of January, 1999. These real estate assets are managed by

three primary investment managers, one of which is RREEF.

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5. The multi-fee structure will include: (i) The Investment Fee, a

one-time initial fee paid either at the time the Client Plan invests

in, or allocates additional assets to, the Account, or in periodic

installments while such assets are invested by the Account, as

described below; (ii) the Asset Management Fee, an annual fee for asset

management charged as a percentage of the net operating income produced

by properties held in the Account (defined below), which will be

payable to RREEF without regard to the return to the Client Plans of

their invested capital; and (iii) the Performance Fee, a fee charged

upon actual or deemed distributions of capital proceeds from the

Account in excess of a Client Plan's invested capital, plus a

negotiated cumulative, compounded annual hurdle rate of return on such

invested capital (i.e., the Threshold Amount or Hurdle Rate). In a

Single Client Account, an Independent Fiduciary may agree to allow

RREEF to receive a periodic Performance Fee based on the Account's

performance prior to the Client Plan receiving actual distribution of

capital back from the Account in amounts which exceed the prescribed

Threshold Amounts. Such Fees will be based on deemed distributions of

the assets in such Accounts at periodic intervals, with all property

valuations determined by qualified real estate appraisers independent

of RREEF and its affiliates. Any property valuation used in the

calculation of the Performance Fee will be performed within 12 months

of that calculation.

6. RREEF requests an individual exemption for Client Plans that

invest in an Account to pay an Investment Fee, Asset Management Fee,

and a Performance Fee to RREEF under circumstances described below.

RREEF represents that Fee rates and Threshold Amounts will be

negotiated on an Account-by-Account basis.

The Investment Fee will be a one-time fee intended to cover the

expense of organizing the Account, identifying suitable investments,

and completing the initial purchases of real properties for the

Account, based on the assets invested by the Client Plan in the

Account. The Investment Fee may be paid either (i) At the time the

Client

[[Page 29901]]

Plan invests assets in the Account, or (ii) in installments at the end

of pre-specified periods of not less than three months (over a

specified period of years). However, if the pre-specified percentage of

the Account's assets has not been invested by the payment date for the

Investment Fee, the amount of such fee payable on that date will be

reduced to reflect the percentage of assets which have been invested by

that date. In such instances, the remainder of the Investment Fee will

be deferred until the next pre-specified installment date. At that

time, the Investment Fee for the current and past installment dates

will be paid (subject to further deferral if the relevant assets in the

Account have not been invested at that time). The Investment Fees will

generally range from 0% to 2% of the capital committed for investment

by the Client Plans. However, the exact percentage for any Investment

Fee will be negotiated between RREEF and the relevant Client Plans in

the Account.

7. The Asset Management Fee will be paid quarterly throughout the

term of the Account. As with the Investment Fee, the exact terms of the

Asset Management Fee will be negotiated between RREEF and the Client

Plan(s) prior to the initial investment of any Client Plan(s)' assets

in the Account. The Asset Management Fee will be calculated with

respect to the net operating income (NOI) from properties owned by the

Account. In this regard, NOI will not include gains made on properties

from capital events. The Asset Management Fee will be paid without

regard to the return of the Client Plan's invested capital.

The Asset Management Fee will compensate the Investment Manager for

the following services: (i) Selection of properties and other assets

for acquisition or disposition in an Account, (ii) day-to-day

investment and administrative operations of an Account, (iii)

performance of property management and leasing services for the

properties held by the Account, (iv) obtaining and maintaining

insurance for the properties and other assets in the Account, (v)

establishing tax-exempt title-holding corporations under section 501(a)

of the Code for the properties, (vi) obtaining independent MAI

appraisals of the properties every three years, and performing annual

internal valuations of the properties, as necessary; and (vii)

preparing quarterly and annual written reports concerning assets,

receipts, and disbursements of the Account.

As stated above, the Asset Management Fee will be charged as a

percentage of the NOI on the properties held by the Account for each

quarter. The Asset Management Fees are determined by negotiation for

each Account, but generally will be between 5% to 8% of the NOI per

quarterly payment period for properties in the Account. NOI for an

Account will be determined on the basis of recurring operating (non-

capital) income (i.e., rents, interest, and other income from the day-

to-day investments of the Account) less recurring operating expenses

(i.e., utilities, taxes, insurance and maintenance) determined on an

accrual basis in accordance with generally accepted accounting

principles. RREEF states that these recurring revenue items and

operating expenses will be set forth in annual budgets that are

reviewed and approved in advance by the Client Plans and other

investors.

The NOI for an Account will be determined without regard to capital

expenditures and non-cash expenditures for the Account, such as

depreciation on properties held by the Account or amortization of

capital expenditures. In addition, NOI will not be reduced by debt

service. Therefore, capital items, such as debt service and non-cash

expense items, will have no effect on RREEF's Asset Management Fees.

Instead, as discussed more fully below, these items will be reflected

in the Performance Fee because any capital expenditure will increase

the Threshold Amount for purposes of any subsequent Performance Fee

calculation, and any capital distribution will reduce the Threshold

Amount.7

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\7\ As noted above, the determinations of which items are

``operating'' and which are ``capital'' will be determined by

generally accepted accounting principles. Such determinations are

subject to annual review and confirmation by independent Certified

Public Accountants retained to audit RREEF's annual financial

statements.

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With respect to each Account, RREEF will prepare annual operating

and capital budgets for each of the Account's properties, which will be

distributed to each Client Plan invested in the Account, within 60 days

prior to the beginning of the fiscal year to which such budgets apply.

At the end of each year, RREEF will also distribute to each Client Plan

an explanation of any material deviation from the budgets previously

provided to the Client Plan for such year.

8. RREEF agrees that in calculating its Asset Management Fee for

any Account, the Fee for any individual real property in the Account

will be determined solely on the basis of those items of operating

income and expense that are identified as line items in the operating

budget for such property, which shall be disclosed to each Client Plan

that participates in the Account. Such disclosures have to be made at

least 30 days in advance of the fiscal year to which the budget

relates, and approved by the Client Plans in the manner described

below.

If, during such year for any previously disclosed line item of

operating expense in the budget for a property, there is any material

deviation between such line item and the actual amount of such expense

for the current year, such deviation will not be taken into account in

calculating the Asset Management Fee unless it is first disclosed to,

and approved by, the Client Plan(s) in the same manner as the original

budgeted line item. For this purpose, a determination of what is

considered a ``material'' deviation will be established by the

investment or property management agreement between RREEF and the

Client Plan(s) for any real property held by the Account. Property

management agreements used by RREEF permit no more than a 15% variance

between any individual line item expense in the operating budget from

year to year. In addition, overall budgeted expenses may vary no more

than 5% from year to year.

If the requisite percentage of investors in an Account fails to

approve the proposed budget or any line item therein, then RREEF will

continue to utilize the prior year's budget figures (generally with a

permitted deviation of 5%). In the event of any subsequent material

deviation from a line item expense in a previously approved budget, or

the addition of a new line item, RREEF would use the expense figures as

budgeted for purposes of its fee calculation, and the variance would

have no effect on its current Asset Management Fee calculation, unless

a revised budget reflecting the deviation (or new line item) is

approved. Any such variance would be reflected only in the subsequent

Performance Fee calculation (by increasing or decreasing the Threshold

Amount).8

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\8\ For example, if RREEF were to budget landscaping expenses at

$100 for an Account, but the actual figure turns out to be $80,

unless RREEF obtains the approval of its Client Plans, the amount it

uses for calculating its Asset Management Fee would be limited to

$85 (applying the 15% deviation, as described above). Although the

additional $5 cost savings directly benefits the Client Plans, it

would not be reflected in the Asset Management Fee. Rather, to the

extent that this cost savings increases the amount available for

distribution to the Client Plans, it would be reflected in the

Threshold Amount for purposes of calculating RREEF's future

Performance Fee.

---------------------------------------------------------------------------

The Client Plan approval for these purposes will be by an

affirmative approval in advance by the Independent Fiduciary of a

Single Client Account or

[[Page 29902]]

the Responsible Independent Fiduciaries for a Multiple Client Account

representing at least a majority of the interests in such

Account.9 Specifically, when the proposed budget (or any

material deviation therefrom) is sent to a Client Plan, it will be

accompanied by a written notice that the Client Plan must approve the

budget, and any specific line item therein, for purposes of calculating

the Asset Management Fees for the next fiscal year. The written notice

will contain a statement that affirmative approval of the current

budget is required prior to the end of the 30-day period following such

disclosure. In the case of a Multiple Client Account, affirmative

approval by a majority of investors (by interest) will constitute

approval of the proposed budget (or deviation). In the event of any

subsequent decrease in previously approved budgeted operating expenses

for the fiscal year in excess of the limits previously described (15%

for any line item, 5% overall), then the resulting increase in NOI

(i.e., over and above the allowable deviation) will not be taken into

account in calculating RREEF's management fee unless affirmative

approval for the payment of such fee is obtained in writing from

Independent Fiduciary for the Client Plan in the Single Client Account

or the Responsible Independent Fiduciaries for the Client Plans and

other investors in the Multiple Client Account.

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\9\ In this regard, the Department notes that an Independent

Fiduciary for a Single Client Account should closely scrutinize

budget estimates for both the NOI of the Account and the Asset

Management Fees payable to RREEF each year based on the actual NOI.

With respect to a Multiple Client Account, the Responsible

Independent Fiduciaries should collectively scrutinize such budgets

and NOI-based Fees, and raise appropriate objections to those Fees

which result from actual operating expenses that materially deviate

from previously approved budgets for such expenses. Thus, the

Department emphasizes that an Independent Fiduciary for a Client

Plan investing in either a Single or Multiple Client Account must

adequately monitor the payment of any Asset Management Fees to RREEF

by closely reviewing how the NOI that results from each property

held by the Account may be affected by any actions taken by RREEF

for such property.

---------------------------------------------------------------------------

With respect to the Shell Account, RREEF represents that annual

budgets have been presented to an Independent Fiduciary for the Shell

Pension Trust for review and approval each year since May 16, 1994. In

this regard, RREEF states that although the annual budget approvals for

properties held in the Shell Account may not have been in writing in

all cases, both parties (i.e., RREEF and the Independent Fiduciary for

the Shell Account) have made contemporaneous written confirmations of

their discussions regarding the annual budgets.

9. The applicant states that in lieu of the Investment Fee and/or

the Asset Management Fee, RREEF and the Client Plans may agree to an

alternative fee arrangement for an Account (the Alternative Fee) which

is based either upon a fixed amount or amounts, or an objective formula

to be negotiated (in either case) between RREEF and the Client Plan

prior to the initial investment of any Client Plan assets in an

Account. RREEF represents that any Alternative Fee will be covered by

section 408(b)(2) and the regulations thereunder (29 CFR 2550.408b-2).

Accordingly, no exemption is being requested by RREEF for any

Alternative Fees.

10. In a Single Client Account, the Performance Fee will be

determined and paid either (i) In the same manner as in the case of a

Multiple Client Account, or (ii) at the end of any pre-specified period

of not less than one-year, provided that the Fee is based upon the sum

of all actual distributions from the Account during such period, plus

deemed distributions of the assets of the Account based on an assumed

sale of all such assets at their fair market value as of the end of

such period (in accordance with independent appraisals performed within

12 months of the calculation) which are calculated to be in excess of

the Threshold Amount through the end of such period.

In the case of a Multiple Client Account, the Performance Fee will

be charged against all distributions of net proceeds from capital

events, as defined in Part IV(h), only after the Client Plans and other

investors have received distributions (from all sources) from the

Account in excess of the Threshold Amount agreed to by the Responsible

Independent Fiduciaries.

Most of RREEF's Single Client Accounts are long-term open-ended

relationships under which the Client Plans may continue to invest new

funds on an ongoing basis. For this reason, RREEF states that certain

Client Plans that invest in Single Client Accounts will negotiate for

the payment of a Performance Fee that would be calculated and payable

periodically, not less frequently than once a year (generally, every

three years, commencing on the third anniversary of the first

acquisitions of properties made by the Account). As noted above, this

periodic Performance Fee would be based on all actual sales of

properties by the Account and distributions made back to the investors

during such period, as well as deemed or constructive sales of all

properties held in the Account at their most recent appraised values,

and the deemed distributions of the net proceeds from such constructive

sales plus earnings which are considered to be at or above the

Threshold Amount.10 In such instances, the periodic

Performance Fee will take into account both realized and unrealized net

gains on properties held in a Single Client Account, and would be

payable to RREEF for deemed distributions of unrealized net gains on

properties held by the Account for a pre-specified period. Therefore,

if agreed to by the Independent Fiduciary for the Client Plan, RREEF

would earn a Performance Fee based on the Single Client Account's

performance which occurs prior to a return to the Client Plan of its

invested capital plus earnings at or above the designated Threshold

Amount or Hurdle Rate.

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\10\ In this regard, RREEF represents that while it anticipates

that most Client Plans establishing a Single Client Account will

elect to pay a periodic Performance Fee based on deemed

distributions, RREEF will not preclude any such Client Plan from

paying a Performance Fee only after the Client Plan has received

actual distributions from an Account equal to its initial invested

capital plus earnings at the Threshold Amount. However, a periodic

Performance Fee arrangement will not be available for Multiple

Client Accounts.

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11. For purposes of the Fees, the fair market value of the

Accounts' real property assets (other than in the case of actual sales)

will be based on appraisals prepared by independent MAI appraisers. In

this regard, every agreement by which an appraiser is retained will

include the appraiser's representation that: (1) Its ultimate client is

the Account and its underlying Plan (and non-Plan) investors, and (2)

it will perform its duties in the interest of such Account (and

investors). The applicant states that in the case of any appraisal that

will serve as the basis for any ``deemed sale'' of such property for

purposes of calculating the periodic Performance Fee payable to RREEF,

then the following procedure shall be utilized:

(a) In the case of any Single Client Account, such MAI appraiser

shall be either (i) Selected by the Independent Fiduciary of the Client

Plan subject to the approval of RREEF, or (ii) selected by RREEF

subject to the affirmative approval by the Independent Fiduciary of the

Client Plan;

(b) In the case of any Multiple Client Account, such MAI appraiser

shall be approved in advance by the Responsible Independent Fiduciaries

(as defined in Part IV(e) above) owning a majority of the interests in

the Account according to the latest valuation of the Account's assets

performed no more than 12 months prior to such appraisal, which

[[Page 29903]]

approval may be by written notice and deemed consent by such

Fiduciaries' failure to object to the appraiser within 30 days of such

notice; and

writing that the Client Plan(s) and other investors (in the case of a

Multiple Client Account), rather than RREEF, is (are) its clients, and

that in performing its services for the Account it shall act in the

sole interest of such Client Plan(s) and other investors. In addition,

following the date this proposed exemption is granted, every appraiser

selected shall acknowledge that it owes a professional obligation to

the Client Plans and other investors in the Account in performing its

services as an appraiser for properties in the Account.

If an MAI appraiser selected by RREEF, or an appraisal performed by

a previously approved appraiser, is rejected by the Independent

Fiduciary for a Single Client Account or the Responsible Independent

Fiduciaries for the Client Plans owning the majority of the interests

in the Multiple Client Account according to the latest valuation of the

Account's assets performed no more than 12 months prior to such

appraisal, the fair market value of the assets for any ``deemed sale''

relating to the payment of a Performance Fee will be determined as

follows: (i) The Client Plans shall appoint a second appraiser and, if

the value established for the property does not deviate by more than

10% (or such lesser amount as may be agreed upon between RREEF and the

Client Plan(s)), then the two appraisals shall be averaged; (ii) if the

values differ by more than 10%, then the two appraisers shall select a

third appraiser, that is independent of RREEF and its affiliates, who

will attempt to mediate the difference; (iii) if the third appraiser

can cause the first two to reach an agreement on a value, that figure

shall be used; however, (iv) if no agreement can be reached, the third

appraiser shall determine the value based on procedures set out in the

governing agreements of the Account or, if no such procedures are

established, shall conduct its own appraisal and the two closest of the

three shall be averaged.

In all cases, the Client Plan will retain the right to challenge

any appraiser or appraisal. In the case of a Single Client Account, the

frequency and timing of the required appraisals will be determined by

the Independent Fiduciary of the Client Plan at the time it enters into

an Account relationship with RREEF. However, all Performance Fee

calculations will be based on contemporaneous appraisals of properties

held by the Account, which will be performed within 12 months of the

calculation. Thus, for example, RREEF maintains that a three year

appraisal cycle will correspond to a three year periodic Performance

Fee measuring period for an Account. In addition, RREEF will provide

notice to the Client Plan within 60 days of each Performance Fee

calculation for a Single Client Account that the Independent Fiduciary

of the Client Plan has the right to request updated appraisals of the

properties held by the Account if such Fiduciary determines that the

existing independent appraisals (performed within 12 months of the

calculation) are no longer sufficient.

12. With respect to the calculation of any Threshold Amount for the

payment of a Performance Fee, RREEF states that a bookkeeping account

will be maintained for each Client Plan which will show at all times

the amount that has to be distributed to satisfy the Threshold Amount.

When a certain amount is invested in the Account on a particular date,

this bookkeeping account will initially equal the invested amount and

will thereafter be increased to reflect the hurdle/threshold rate of

return for the Account compounded on an annual basis. Whenever a

distribution (from any source) is made from the Account to the Client

Plan, the amount of this bookkeeping account will be reduced by the

full amount of the distribution. Thereafter, the Threshold Amount will

be calculated with respect to and added to this reduced amount. Only

when the bookkeeping account is reduced to zero will the Threshold

Amount be satisfied. With all Multiple Client Accounts, and those

Single Client Accounts that elect to have a Performance Fee paid only

after actual distributions are paid from the Account, once the

Threshold Amount has been satisfied, the Performance Fee will be

payable to RREEF with respect to all further distributions of net

proceeds from capital events from the Account. With respect to any

Single Client Accounts which elect to pay periodic Performance Fees

based upon deemed distributions of the proceeds from an assumed sale of

the properties by the Account, any such deemed distribution would

reduce the Threshold Amount only for purposes of such Fee payment.

Thus, immediately after such calculation, the Threshold Amount would be

increased by the full amount of the deemed distribution for purposes of

determining any later Performance Fee based on either deemed or actual

distributions to the Client Plans.

13. The applicant submitted hypothetical examples of how the

Performance Fee would work in a Multiple Client Account and a Single

Client Account context.

In the first example, RREEF establishes a Multiple Client Account

to which the Client Plans contribute $100 million (Initial

Contribution) and agree to pay RREEF a Performance Fee equal to 15% of

all amounts distributable from the Account after the investors have

received distributions equal to their initial invested capital plus a

real (CPI-adjusted) annual Threshold Amount of return of 4%. Assuming

that CPI remains constant at 4% annually, the nominal annual Threshold

Amount is 8% (the Threshold Amount). The Multiple Client Account

acquires two real properties at a cost of $90 million (Property I) and

$10 million (Property II, collectively; the Properties). Annual cash

flow from operations is 7% of the Initial Contribution of $100 million,

or 7% million (Annual Cash Flow).

For a Multiple Client Account, the Threshold Amount is calculated

as follows: 11

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\11\ This example has been simplified. In reality, distributions

would be made periodically throughout the year, reducing the amount

on which the hurdle is calculated.

----------------------------------------------------------------------------------------------------------------

Threshold

amount (in

Calculation millions of

----------------------------------------------------------------------------------------------------------------

Year 1................................... 100.00+(.08 x 100.00)-7 = $101.00

Year 2................................... 101.00+(.08 x 101.00)-7 = 102.08

Year 3................................... 102.08+(.08 x 102.08)-7 = 103.25

Year 4................................... 103.25+(.08 x 103.25)-7 = 104.51

Year 5................................... 104.51+(.08 x 104.51)-7 = 105.87

[[Page 29904]]

Year 6................................... 0

----------------------------------------------------------------------------------------------------------------

At the end of year 5, Property I is sold for $110 million, and

there is an actual distribution of $110 million. Accordingly, RREEF

will receive a Performance Fee of 15% times $110 million less $106

million (i.e., the approximate Threshold Amount at year 5), or

$600,000. Numerically, this is as follows: ($110 million-$106 million)

x 15% = $600,000. Because the Threshold Amount has been reduced to $0

at year 6, an additional Performance Fee will be payable with respect

to any subsequent distribution of cash from a capital event, i.e., any

sale or refinancing of the remaining property. Accordingly, if Property

II is sold in year 10 for $15 million, RREEF will receive an additional

Performance Fee of 15% times $15 million, or $2.25 million.

Numerically, as follows: $15 million x 15% = $2.25 million.

Therefore, the total Performance Fee received by RREEF in this example

is $2,850,000.

In the second example, a large Client Plan establishes a Single

Client Account with RREEF to which it contributes $100 million (Initial

Contribution), and agrees to pay RREEF a Performance Fee every five

years equal to 15% of all amounts distributed or deemed distributed

from the Account after the Client Plan has received actual or deemed

distributions equal to its invested capital plus a real (CPI-adjusted)

annual Threshold Amount of return of 4%. If CPI remains constant at 4%

annually, the nominal annual rate is 8% (the Threshold Amount). The

Account acquires two real property assets at a cost of $90 million

(Property I) and $10 million (Property II). Annual cash flow from

operations is 7% of the Initial Contribution of $100 million, or 7%

million (Annual Cash Flow).

For a Single Client Account, the Threshold Amount is calculated as

follows:

----------------------------------------------------------------------------------------------------------------

Threshold

amount (in

Calculation millions of

----------------------------------------------------------------------------------------------------------------

Year 1................................... 100.00+(.08 x 100.00)-7 = $101.00

Year 2................................... 101.00+(.08 x 101.00)-7 = 102.08

Year 3................................... 102.08+(.08 x 102.08)-7 = 103.25

Year 4................................... 103.25+(.08 x 103.25)-7 = 104.51

Year 5................................... 104.51+(.08 x 104.51)-7 = 105.87

Year 6................................... 120.00 12 +(.08 x 120.00)-7 = 122.60

Year 7................................... 122.60+(.08 x 122.60)-7 = 125.41

Year 8................................... 125.41+(.08 x 125.41)-7 = 128.44

Year 9................................... 128.44+(.08 x 128.44)-7 = 131.72

Year 10.................................. 131.72+(.08 x 131.72)-7 = 135.25

----------------------------------------------------------------------------------------------------------------

After five years, the Threshold Amount will increase to

approximately $106 million. At this time, if the two Properties are

appraised for $110 million and $10 million, respectively, the deemed

distributions are $120 million. Accordingly, at this time RREEF will

receive a Performance Fee of: 15% x ($120 million--$106 million) =

$2.1 million.

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\12\ $120.00 is the amount of deemed distributions.

---------------------------------------------------------------------------

After the first periodic Performance Fee is paid out, the Threshold

Amount is calculated as follows: First, the Threshold Amount is

restored by the full amount of the deemed distribution, i.e., to $120

million, for purposes of the next five-year Performance Fee

calculation. At the end of 10 years, the Threshold Amount will be

approximately $135 million, and no additional Performance Fee will be

payable unless the combined appraised value of the two Properties

exceeds that amount.

14. All proceeds from capital events of an Account (i.e., sales or

refinancings of real property investments owned by the Account) will be

first applied to pay expenses of the Account. These expenses will

include repayment of debt, payment of closing expenses, and

establishment of reasonable reserves in connection with the Account's

assets, whether such reserves are for repayment of existing or

anticipated obligations or for contingent liabilities, other than the

Performance Fee. Such proceeds, net of these expenses and reserves,

generally will be the distributable net proceeds of capital events upon

which the Performance Fee may be payable.

15. With respect to its Single Client Accounts, RREEF generally

does not have discretion to reinvest proceeds from capital events, and

any such reinvestment will occur at the direction of the Client Plan's

Independent Fiduciary. The amount reinvested will be treated as having

been recontributed by the Client Plan for purposes of the Investment

Fee and the Performance Fee. Thus, RREEF represents that where capital

proceeds are reinvested they will be treated as new invested capital

for the purpose of the Threshold Amount and the payment of any future

Performance Fee. RREEF also states that where it does not have

reinvestment discretion, capital proceeds will be distributed to the

Client Plan, unless such Client Plan affirmatively consents to the

reinvestment. In cases where RREEF does have discretion to reinvest

proceeds from capital events, the reinvested amount would not be

treated as a new contribution of capital by the Client Plan for

purposes of the Investment Fee, or having been distributed for purposes

of the payment of Performance Fee. Therefore, such reinvested amounts

will not be considered distributions under the bookkeeping account

maintained for the Client Plan for purposes of calculating whether the

Threshold Amount has been reached.

16. RREEF may be removed as the investment Manager for an Account

at any time (generally upon 30 days notice), without cause, upon

delivery of a notice of removal to RREEF by the Client Plan in the case

of a Single Client

[[Page 29905]]

Account, or by the Client Plans owning at least a majority of the

interests in a Multiple Client Account. In addition, a Multiple Client

Account may terminate upon failure to appoint a replacement investment

manager following the removal or resignation of RREEF. The details and

mechanics of the removal or resignation process will vary from Account

to Account. In the case of an Account procedure for removal for cause

(e.g., breach of contract), removal generally will be immediate. In

most cases, however, removal will result from a desire to appoint a

replacement manager and RREEF may be asked or required to stay on for a

period of time (e.g., up to 120 days) until a replacement is in place.

Similarly, if RREEF resigns, it may be asked to stay on until a

replacement is appointed.

Upon removal of RREEF as investment Manager, RREEF will be entitled

to receive the Performance Fee as if: (a) The assets of an Account had

been sold at a price which is then-agreed to by RREEF and the Client

Plan (or, with respect to a Multiple Client Account, Client Plans and

other investors owning at least a majority of the interests in the

Multiple Client Account); and (b) the deemed proceeds from the deemed

sale were to be distributed from the Account. If RREEF and the Client

Plan(s) cannot agree on a price, then the price shall be determined by

an independent MAI appraiser mutually agreed to by RREEF and the Client

Plan(s). If RREEF and the Client Plan(s) cannot agree on an appraiser,

then the governing documents of the Account will provide for a means of

selecting one or more appraisers or for seeking binding arbitration, as

discussed more fully in paragraph 11 above.

In addition, RREEF may generally resign as investment Manager with

respect to any Account at any time, without cause, by providing written

notice to the Client Plan(s) with an interest in the Account. In this

event, the Performance Fee will be tentatively calculated in the same

manner as if RREEF were removed as investment manager, and allocated

among each real property investment of the Account in proportion to the

respective differences in their appraised values from their original

cost (i.e., deemed unrealized appreciation, if any, for each property).

The amount of the Performance Fee tentatively allocated to each

property will be multiplied by a fraction, the numerator of which will

be the actual sales price of the property received by the Account upon

the disposition/sale of the property, and the denominator of which will

be the appraised value of the property which was used in connection

with determining the Performance Fee at the time of resignation,

provided that this fraction will never exceed 1.0 (that is, the

Performance Fee may be decreased to reflect any subsequent decline in

the value of a property, but not increased to reflect any subsequent

increase in value).13 No Performance Fee will be payable

until distributions (deemed or actual) from the Account exceed the

Threshold Amount.

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\13\ If a Multiple Client Account is terminated prior to the

sale of all the Account's assets (i.e., each Client Plan is

distributed an undivided interest in each such asset), each

remaining asset in the Account at the time of termination will be

treated as having been sold at its then-appraised value.

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The Performance Fee will be calculated with respect to each

property held by an Account at the time of resignation. However, the

Performance Fee will not be paid for any property until the earlier of:

(i) The sale of the property from the Account, or (ii) with respect to

a Multiple Client Account, the termination of the Account. The

Performance Fee will be paid only after the Client Plans have received

their initial invested capital plus earnings at the Threshold Amounts.

The replacement investment manager of the Account (unrelated to RREEF)

will have discretion as to when the property is sold or when the

Account is terminated.

17. A Single Client Account generally may be terminated at any time

by the Client Plan upon not more than 30 days written notice to RREEF,

by RREEF's resignation, or by expiration of the period of years

specified in the investment management agreement governing the Account

(unless extended at the request of the Client Plan). In the case of a

Single Client Account termination, the assets of the Account may be

liquidated for cash or distributed in-kind to the Client Plan.

A Multiple Client Account generally may be terminated upon: (a) The

affirmative decision of the Client Plans and other investors owning at

least a majority of the interests in the Multiple Client Account, or

(b) expiration of the period of years specified in the Account's

organizational documents. In addition, a Multiple Client Account may

terminate upon failure to appoint a replacement investment manager

following the removal or resignation of RREEF. Upon termination of a

Multiple Client Account, RREEF is generally obligated to dispose of its

assets and distribute net sales proceeds in an orderly fashion.

In the case of the Multiple Client or Single Client Account

termination, RREEF's Performance Fee would be calculated in the same

manner as discussed above with respect to the removal of RREEF.

18. Each Client Plan will receive throughout the term of the

Account the following information:

(a) Quarterly and annual reports prepared by RREEF relating to the

overall financial position and operating results of the Account (annual

reports are audited by independent certified public accountants as

required by the terms of the Account's governing documents), a

statement regarding the total amount of fees paid by the Account to

RREEF for the period, and, in the case of a Multiple Client Account,

the value of the Client Plan's interest in the Account;

(b) An annual statement of the current fair market value of all

properties owned by the Account based most recent MAI appraisals of

such properties;

in the Account and, when applicable, a notice of any change thereto;

and

(d) Operating and capital budgets for the subsequent year, plus

(where applicable) an explanation of any material deviation from the

prior year's budgets.

Any fiduciary for the Client Plan, as well as other authorized

persons described above in paragraph (o)(1) of Part III, will have

access during normal business hours to RREEF's records concerning the

Accounts in which such persons have an interest, subject to the

condition that each such person agree in writing that the information

contained in such records shall be kept confidential except to the

extent disclosure is authorized in writing by RREEF or is necessary to

preserve or protect the assets of an Account or the interests of the

Client Plans. The Department and the Internal Revenue Service will have

access to all RREEF records concerning the Accounts. The Client Plan(s)

having an interest in an Account will also, upon request, be provided

with a report of all compensation paid to RREEF by the Account.

19. 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:

(a) The investment of plan assets in a Single or Multiple Client

Account, including the terms and payment of any Investment Fee, Asset

Management Fee and Performance Fee, shall be approved in writing by an

Independent Fiduciary of a Client Plan which is independent of RREEF

and its affiliates.

[[Page 29906]]

(b) At the time any Account is established (or amended) and at the

time of any subsequent investment of assets (including the reinvestment

of assets) in such Account:

(1) Each Client Plan in a Single Client Account shall have total

net assets with a value in excess of $100 million, and each Client Plan

that is an investor in a Multiple Client Account shall have total net

assets with a value in excess of $50 million, subject to certain

additional requirements as stated in paragraph (1) of Part III(c)

above; and