EBSA Federal Register Notice
Proposed Exemptions; The National Electrical Benefit Fund (the Plan) [09/29/2003]
[PDF Version]
Volume 68, Number 188, Page 56006-56016
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
[Application No. D-11136, et al.]
Proposed Exemptions; The National Electrical Benefit Fund (the
Plan)
AGENCY: Employee Benefits Security 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
All interested persons are invited to submit written comments or
requests for a hearing on the pending exemptions, unless otherwise
stated in the Notice of Proposed Exemption, within 45 days from the
date of publication of this Federal Register Notice. Comments and
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 requests for a hearing (at least
three copies) should be sent to the Employee Benefits Security
Administration (EBSA), 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. Interested persons are also invited to submit
comments and/or hearing requests to EBSA via e-mail or FAX. Any such
comments or requests should be sent either by e-mail to: ``moffitt.betty@dol.gov'', or by FAX to (202) 219-0204 by the end of
the scheduled comment period. The applications for exemption and the
comments received will be available for public inspection in the Public
Documents Room of the Employee Benefits Security Administration, U.S.
Department of Labor, Room N-1513, 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
Register. Such notice shall include a copy of the notice of proposed
exemption as published in the Federal Register and shall inform
interested persons of their right to comment and to request a hearing
(where appropriate).
SUPPLEMENTARY INFORMATION: The proposed exemptions were requested in
applications filed pursuant to section 408(a) of the Act and/or section
4975(c)(2) of the Code, and in accordance with procedures set forth in
29 CFR part 2570, subpart B (55 FR 32836, 32847, August 10, 1990).
Effective December 31, 1978, section 102 of Reorganization Plan No. 4
of 1978, 5 U.S.C. App. 1 (1996), transferred the authority of the
Secretary of the Treasury to issue exemptions of the type requested to
the Secretary of Labor. Therefore, these notices of proposed exemption
are issued solely by the Department.
The applications contain representations with regard to the
proposed exemptions which are summarized below. Interested persons are
referred to the applications on file with the Department for a complete
statement of the facts and representations.
The National Electrical Benefit Fund (the Plan) Located in Rockville,
Maryland
[Application No. D-11136].
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, August 10, 1990). If the exemption is
granted, the restrictions of sections 406(a) of the Act and the
sanctions resulting from the application of section 4975 of the Code,
by reason of section 4975(c)(1) (A) through (D) of the Code, shall not
apply effective October 17, 2002 to Bank of America, N.A. (the Bank)
providing a guaranty of repayment for the benefit of the bondholders in
the form of an Irrevocable Direct Draw Letter of Credit No. 3051512
(Letter of Credit) and the Partnership's subsequent reimbursement to
the Bank of amounts advanced by the Bank pursuant to the Letter of
Credit in connection with the investment by the Plan in Colma Apartment
Associates, L.P. (the Partnership), provided that the following
conditions are met:
(a) The Plan's investment in the Partnership is on terms no less
favorable to the Plan than those which the Plan could obtain in arm's
length transactions with unrelated parties;
(b) The decisions on behalf of the Plan to invest in the
Partnership and consent to the terms of the reimbursement agreement in
favor of the Bank are made by fiduciaries, which are not included
among, and are independent of and unaffiliated with, the Bank;
(c) The investment in the Partnership represents no more than .5%
of the total assets of the Plan; and
(d) The general partners of the Partnership are independent of the
Plan and of the Bank of America.
(e) The Plan shall have no obligation to fund its capital
contribution unless and until (i) all conditions imposed by the
construction lender regarding disbursement to the Partnership of
$25,950,000 of the tax-exempt bond construction financing proceeds have
been satisfied by the Partnership; and (ii) the Department grants the
proposed exemption; and
(f) The Plan's capital contribution will be used solely for the
purpose of reimbursing Bank of America for the draw on the Letter of
Credit.
Effective Date of Exemption: The effective date of this exemption
is October 17, 2002.
[[Page 56007]]
Summary of Facts and Representations
1. The Plan is a multiemployer defined benefit plan covering
approximately 491,520 participants and beneficiaries. The fair market
value of the total assets of the Plan was over $9,700,000,000 as of
December 31, 2001. The transaction that is the subject of this proposed
exemption involves less than .08% of the fair market value of the total
assets of the Plan.
2. The fiduciaries generally responsible for investment decisions
in real estate matters on behalf of the Plan are the Trustees, John M.
Grau and Jeremiah J. O'Connor (the Trustees). The Trustees were
responsible for reviewing and authorizing the investment in the
transaction, as detailed below. In addition, the Plan utilizes an
independent outside fiduciary, CS Capital Management, Inc., to review
and make recommendations regarding real estate transactions.
3. The Plan has become a limited partner in the Partnership which
is leasing 2.18 acres of land (the Land) located in San Mateo County,
California on which four (4) five-story apartment buildings with retail
space and related improvements (the Improvements) are proposed to be
built. (The Land and the Improvements are referred to collectively
herein as the Project). The Project will have approximately 153 rental
units, with 31 of these units (or 20%) being set aside for lower income
residents. The Land is owned by San Mateo Transit District, a San Mateo
County governmental agency, and is leased to the Partnership under a
long term ground lease. The investment proposal involves the
Partnership's continued lease of the Land and the construction of the
Improvements. Because the Project will provide low income housing, the
Partnership is eligible for a grant from San Mateo County and for
favorable interest rates on construction and long-term financing. Some
of the construction financing, which will be derived from the issuance
of tax-exempt and taxable bonds, has been guaranteed, through credit
enhancement and liquidity support, by a financial institution that is a
party in interest to the Plan. It is the arrangement with respect to
the redemption of the taxable bonds that is the subject of the proposed
exemption.
4. The Partnership was formed by JSM Enterprises Inc., a commercial
real estate developer based in San Jose, California (the Developer),
pursuant to the laws of the State of Delaware for the sole purpose of
leasing the Land and developing and operating the Project. At this
time, the sole limited partner of the Partnership is the Plan. There
are two general partners of the Partnership, Colma BART Investors, L.P.
(the Co-General Partner) and Affordable Housing Access, Inc. (the
Managing General Partner). (The Co-General Partner and the Managing
General Partner (the General Partners) are, together with the Plan,
sometimes referred to collectively herein as the Partners).
5. The Project has a budget for construction of approximately
$36,373,000. Of these costs, $25,950,000 (or 71.3% of the total project
budget costs) will be funded in the form of tax-exempt bond
construction financing (the Tax-Exempt Bond Financing) from the sale of
tax-exempt, multi-family housing revenue, variable rate bonds (the Tax-
Exempt Bonds) issued by the ABAG Finance Authority for Nonprofit
Corporations (the Issuer), which is a State of California governmental
entity (the proceeds of the Tax-Exempt Bond Financing would then be
disbursed to the Partnership in the form of a construction loan which
will convert into long-term financing). An additional $589,000 of these
costs (or 1.6% of the total project budget costs) will be funded from
interest expected to be earned on the bond proceeds from the deposit of
such proceeds into a guaranteed investment contract, and $630,000 of
these costs (or 1.7%) will be funded from income projected to be earned
by the Project during the lease-up period. An additional $310,000 (or
.9% of the total project budget costs) will be funded by a grant from
San Mateo County.
6. The remaining $8,894,000 in project budget costs, $1,779,000 (or
4.9% of the total project budget costs) will be funded by the Co-
General Partners' capital contribution to the Partnership and
$7,115,000 (or 19.6% of the total project budget costs) will be funded
by the Plan's capital contribution to the Partnership. The closing of
the Co-General Partners' capital contribution occurred substantially
simultaneously with the closing of the Tax-Exempt Bond Financing. As to
the ``timing'' of the funding of the Plan's capital contribution, the
parties have agreed that the Plan will not be obligated to make its
capital contribution until both the Co-General Partners' capital
contribution and the Tax-Exempt Bond Financing proceeds have been fully
funded for project budget costs, which is expected to occur
approximately fifteen (15) months from the date of the closing, or
January 2004.
It is contemplated that additional construction financing will come
from the proceeds of taxable bonds in the amount of $7,115,000 (i.e.,
an amount identical to the amount of the Fund's capital contribution)
which is issued by the Issuer (the Taxable Bonds) and loaned to the
Partnership in the form of a construction loan.
7. In order to achieve a favorable rating for the Taxable Bonds,
the Bank, a party in interest to the Plan, has provided a guaranty of
repayment for the benefit of the bondholders in the form of a Letter of
Credit, dated October 17, 2002. The Bank is a national banking
association engaged in consumer banking, commercial banking and trust
business and offers a wide range of banking services. The services
provided by the Bank to the Plan are limited to those associated with a
checking and depository account held by the Plan in connection with the
distribution of benefit payments to the Plan's participants and
beneficiaries. The Bank primarily provides services to the Plan by
acting as the drawee with respect to checks issued by the Plan for
certain benefit and other payments made by the Plan, by acting as the
originating bank with respect to payments transmitted through the
Automated Clearinghouse network, and by providing general depository
account services with respect to these payments, such as full
reconciliation of the Plan's account.
In addition, a few local branches of the Bank provide depository
services for accounts established by local collection agents utilized
by the Plan for the purpose of collecting contributions from local
employers. In this regard, the Plan utilizes approximately 115
collection agents around the country, each of which is responsible for
collecting contributions from covered employers who work in its
jurisdiction and for depositing those contributions with a local bank
into an account held in the Plan's name. On a regular basis, the Plan
sweeps the accounts held by these banks of all the contributions that
have been accumulated. A few local collection agents may use the Bank.
The Letter of Credit will be issued pursuant to a Reimbursement
Agreement, dated as of October 1, 2002, by and between the Borrower and
the Bank (the Reimbursement Agreement), which obligates the
Partnership, among other things, to reimburse the Bank for funds
advanced by the Bank under the Letter of Credit.
The proceeds of the Taxable Bonds have been deposited with Wells
Fargo Bank (the Bond Trustee) pursuant to a Trust Indenture, dated as
of October 1, 2002, by and between the Issuer and Wells Fargo Bank,
National Association, as trustee (Indenture Agreement).
[[Page 56008]]
Assuming that this proposed exemption is granted, the Taxable Bond
proceeds would be released by the Bond Trustee and used by the
Partnership to help finance a portion of the costs of the construction
of the Project. During the duration of the Letter of Credit, the Bond
Trustee would make timely payments of draws against the Taxable Bonds.
As a condition to the conversion of the Tax-Exempt Bond Financing to
long-term financing upon the Project's achievement of certain leasing
criteria, the Taxable Bonds (which will not convert into long-term
financing) will be fully redeemed by Bank of America pursuant to the
Letter of Credit, and the Plan would become obligated to fund its
$7,115,000 capital contribution to the Partnership. The Partnership
would then use the Plan's capital contribution to reimburse Bank of
America for the draw on the Letter of Credit. The Plan's capital
contribution will be used by the Partnership for the exclusive purpose
of reimbursing Bank of America for the draw on the Letter of Credit.
8. The Plan desires to participate in the Project as it is expected
to earn an attractive investment and it fits well within the Plan's
investment objectives. With respect to the issuance of the Taxable
Bonds and the ultimate repayment of the bondholders with the Plan's
capital contribution, the contemplated arrangement will allow the
Partnership to take advantage of over $7 million in construction
financing at a very favorable interest rate. Such favorable financing
would not be available but for the fact that the Project involves the
construction of low income housing units.
If the proposed exemption is not granted, the Partnership will not
be able to take advantage of the favorable interest rates available to
it as an incentive for constructing low income housing. If this
proposed exemption is denied, the proceeds of the Taxable Bonds will be
returned by the Bond Trustee from the Indenture Account to the Issuer
(together with interest) and neither the Partnership nor the Plan will
have any further obligation with respect thereto. The Plan would then
fund its $7,115,000 to the Partnership for Project budget costs once
the proceeds of the Tax-Exempt Bonds and the Co-General Partners'
capital contribution were fully disbursed. This, of course, will result
in an overall lower return to the Plan on its investment in the
Partnership than if the arrangement with respect to the Taxable Bonds
were allowed to proceed.
9. In summary, the applicant states that the transaction has
satisfied the statutory criteria of section 408(a) of the Act because:
(a) The Plan's investment in the Partnership is on terms no less
favorable to the Plan than those which the Plan could obtain in arm's
length transactions with unrelated parties; (b) the decisions on behalf
of the Plan to invest in the Partnership and consent to the terms of
the Reimbursement Agreement in favor of the Bank are made by
fiduciaries, which are not included among, and are independent of and
unaffiliated with, the Bank; (c) the investment in the Partnership
represents no more than 20% of the total assets of the Plan; (d) the
general partners of the Partnership are independent of the Plan and of
the Bank of America; (e) The Plan shall have no obligation to fund its
capital contribution unless and until (i) all conditions imposed by the
construction lender regarding disbursement to the Partnership of
$25,950,000 of the tax-exempt bond construction financing proceeds have
been satisfied by the Partnership; and (ii) the Department grants the
proposed exemption; and (f) The Plan's capital contribution will be
used solely for the purpose of reimbursing Bank of America for the draw
on the Letter of Credit.
Effective Date: This exemption, if granted, is effective as of
October 17, 2002.
Notice to Interested Persons: Notice of the proposed exemption
shall be given to all interested persons in the manner agreed upon by
the applicant and Department within 15 days of the date of publication
in the Federal Register. Comments and requests for a hearing are due
forty-five (45) days after publication of the notice in the Federal
Register.
FOR FURTHER INFORMATION CONTACT: Mr. Khalif I. Ford of the Department,
telephone (202) 693-8540. (This is not a toll-free number.)
Bank of America, N.A., Located in Charlotte, North Carolina
[Exemption Application No. D-11147].
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).
Section I--Covered Transactions
If the exemption is granted, the restrictions of section 406(a) of
the Act and the sanctions resulting from the application of section
4975 of the Code, by reasons of section 4975(c)(1)(A) through (D) of
the Code, shall not apply, as of January 1, 2003, to:
(A) the granting to Bank of America, N.A. (Bank), either as an
agent (the Agent) for a group of financial institutions (Lender(s)), or
as a sole Lender, that will fund a so-called ``credit facility''
(Credit Facility) providing credit to certain investment funds
(Fund(s)), by the Fund of a security interest in and lien on the
capital commitments (Capital Commitments), reserve amounts, and capital
contributions (Capital Contributions) of certain investors, including
employee benefit plans (a Covered Plan, as defined in Section III (A)),
investing in the Fund;
(B) any collateral assignment and pledge by the Fund to the Agent,
or to the Bank as sole Lender, of its security interest in each
Investor's equity interest, including a Covered Plan's equity interest,
in the Fund;
(C) the granting by the Fund to the Agent, or to the Bank as sole
Lender, of a security interest in a Borrower Collateral Account to
which all Capital Contributions in the Fund will be deposited when paid
(except in certain limited circumstances);\1\
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\1\ In most cases, all Investors will make Capital Contributions
into the Borrower Collateral Account. However, in some cases,
investors that are not plans may be directed to make Capital
Contributions to the Agent, for the benefit of the Lenders, after an
event of default, in some other manner.
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(D) the granting by the Fund to the Agent, or to the Bank as sole
Lender, of its right to make calls on Investors for Capital
Contributions (Capital Call), which shall be in cash, under the
operative Fund Agreements (as defined in Section III (C)), enforce the
Capital Calls, collect the Capital Contributions, and apply them to any
amount due under the Credit Facility;
(E) the execution by a Covered Plan of an agreement (Investor
Consent) consenting to the Fund's assignment to the Agent, or to the
Bank as sole Lender, of the Fund's right to make Capital Calls, which
may contain: (i) An acknowledgment by the Covered Plan of the Fund's
assignment to the Agent, or to the Bank as sole Lender, of the right to
make Capital Calls upon the Covered Plan, enforce the Capital Calls,
collect the Capital Contributions, and apply them to any amount due
under the Credit Facility; (ii) a consent (as either part of the Fund
Agreements or as a separate agreement) by the Covered Plan to make
Capital Contributions to the Fund without counterclaim, setoff, or
defense, for the purpose of repayment of the Credit Facility; (iii) a
representation that the Covered Plan has no knowledge of claims,
offsets or defenses that would adversely affect its obligation to fund
Capital Contributions under the Fund Agreements; and (iv) an agreement
that the Covered Plan will fund Capital
[[Page 56009]]
Contributions only into the Borrower Collateral Account; provided that
with respect to all transactions described above, the conditions set
forth below in Section II are met.
Section II--Conditions
(A) The transaction must be on terms that are no less favorable to
the Covered Plans than those which the Covered Plans could obtain in
arm's-length transactions with unrelated parties;
(B) The decision to invest in the Fund on behalf of each Covered
Plan and to execute an Investor Consent in favor of the Bank (either as
sole Lender or Agent), must be made by fiduciaries of the Covered Plan
that are not included among, are independent of, and are unaffiliated
with, the Lenders (including the Bank) and the Fund;
(C) At the time of the execution of an Investor Consent, a Covered
Plan must have assets of not less than $100 million. In the case of
multiple plans maintained by the same employer, or by members of a
controlled group of corporations (within the meaning of Code section
414(b)) or members of a group of trades or businesses under common
control (within the meaning of Code section 414(c)) (hereafter,
referred to as ``members of a controlled group''), whose assets are
invested on a commingled basis (e.g., through a master trust), this
$100 million threshold will be applied to the aggregate assets of the
commingled entity;
(D) Not more than five (5) percent of the assets of any Covered
Plan, measured at the time of the execution of an Investor Consent, may
be invested in the Fund. In the case of multiple plans maintained by
the same employer, or by members of a controlled group, whose assets
are invested on a commingled basis (e.g., through a master trust), the
five (5) percent limit will be applied to the aggregate assets of the
commingled entity;
(E) Neither the Bank nor any Lender has discretionary authority or
control with respect to a Covered Plan's investment in the Fund nor
renders investment advice (within the meaning of 29 CRF 2510.3-21(c))
with respect to such investment;
(F) Upon request, the Covered Plan fiduciaries must receive from
the Bank a copy of this notice of proposed exemption and a copy of the
final exemption, if granted. In addition, fiduciaries of Covered Plans
will receive a copy of this proposed exemption, as published in the
Federal Register, for Covered Transactions (as defined in Section
III(D) below) that occur during the period from January 1, 2003 until
the date of the final exemption, if granted;
(G) The Bank must receive from the Covered Plan fiduciaries a
written representation that the conditions set forth above in Section
II (B), (C), and (D) are satisfied for such transaction with respect to
the Covered Plan for which they are fiduciaries; and
(H) None of the Covered Transactions shall be part of an
arrangement, agreement or understanding, designed to benefit a party in
interest with respect to a Covered Plan.
Section III--Definitions
(A) The term ``Covered Plan'' means an investor in a Fund (as
defined below) that is an employee benefit plan, as defined in section
3 (3) of the Act, that satisfies the conditions set forth herein in
Section II;
(B) The term ``Fund'' means an investment opportunity or venture
capital fund (organized as a corporation, limited partnership, limited
liability company, or another business entity authorized by applicable
law) in which one or more investors invest, including employee benefit
plans or special purpose entities holding ``plan assets'' subject to
the Act, as described herein, by making capital contributions in cash
to such Fund, pursuant to specific capital commitments as established
by the Fund Agreement(s) and other operative documents executed by the
parties, for purposes of making certain real estate investments
(including real estate-related investments, such as venture capital
investments) or non-real estate investments;
(C) The terms ``Fund Agreement'' or ``Fund Agreements'' mean the
written agreements under which a Fund (as defined above) will be formed
(such as a limited partnership agreement, a limited liability company
agreement or articles of incorporation, together with ancillary related
agreements, such as subscription agreements) that will obligate each
investor to make cash contributions of capital with respect to Capital
Commitments, upon receipt of a call for Capital Contributions; and
(D) The terms ``Covered Transaction'' or ``Covered Transactions''
mean any combination of transactions described in Section I(A)-(D), in
conjunction the Investor Consent described in Section I(E).
Effective Date: This proposed exemption, if granted, will be
effective as of January 1, 2003. Such retroactive effective date was
requested by the Applicant so that the Bank would be able to close on
one or more Credit Facilities during a time period after such date,
without the need for obtaining separate individual exemptions for such
transactions, prior to the date that this exemption would be granted.
Summary of Facts and Representations
1. Administrative Necessity for Exemption. The Bank is a market
leader in arranging and syndicating credit facilities that are secured
by capital commitments in investment opportunity and venture capital
funds (i.e., a Fund). In the past, the Bank has applied for individual
exemptions with respect to transactions that are similar to the
transactions described herein.\2\
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\2\ For example, see Prohibited Transaction Exemption (PTE)
2001-21, 66 FR 34466 (June 28, 2001); PTE 2000-22, 65 FR 33376 (May
23, 2000); and PTE 2000-10, 65 FR 10826 (February 29, 2000).
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The Bank anticipates that it will continue to enter into such
credit facility transactions. However, rather than continuing to submit
individual exemption requests for transactions on a case by case basis,
the Bank requests that it be granted a more general exemption which
would permit the Bank to engage in a series of transactions without the
need for recurring, administrative approvals.
2. Parties to Credit Facilities. The Bank represents that each
transaction will consist at a minimum of: (i) One or more Funds; (ii)
one or more investors (i.e., the Investors) in the Fund that may be an
employee benefit plan subject to the Act; and (iii) a Lender or group
of Lenders. In each instance involving a group of Lenders, the Credit
Facility will be arranged by the Bank, which will also be the Agent
under the Credit Facility.
3. Funds. The borrower under the Credit Facility will be a Fund. A
Fund may be a corporation, a limited partnership, a limited liability
company, or another business entity authorized by applicable law.
The Fund's underlying assets will not consist of plan assets, and
the Bank requests no determination with respect thereto.\3\
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\3\ The Department notes that 29 CFR 2510.3-101, et seq.
describes what constitutes assets of a plan with respect to a plan's
investment in another entity for purposes of subtitle A, and Parts 1
and 4 of subtitle B, of Title I of the Act, and section 4975 of the
Code. However, the Department expresses no opinion in this proposed
exemption regarding whether the underlying assets of any Fund, as
described herein, would be considered the assets of a plan under
such regulations. In this regard, the Department notes that it is
providing no relief for either internal transactions involving the
operation of the Fund or for transactions involving the Fund and
third parties other than the specific relief proposed herein. In
addition, the Department encourages potential Plan investors and
their independent fiduciaries to examine carefully all aspects of
the Fund's organization, operation and investment programs in order
to determine whether the requirements of the Department's
regulations will be met.
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[[Page 56010]]
Each Fund will be organized and operated through the Fund's
organizing and governing documents (i.e., Fund Agreements, as defined
in Section III(c) above) such as a partnership agreement, subscription
agreements, and other agreements or documents that govern the rights
and responsibilities of each party in the Fund. The Fund will generally
target equity or debt real estate investments or non-real estate
investments. The investments may include, but will not be limited to,
the following:
(i) operating company ventures, both public and private;
(ii) the acquisition and development of office, retail, industrial,
multi-family, single family, parking garage, corporate real estate
assets, and other types of real estate assets;
(iii) the acquisition of interests in real estate or the
acquisition of interests in public or private real estate investment
trusts and corporations, limited partnerships and limited liability
companies whose primary assets will be commercial real estate; or
(iv) the acquisition of publicly-traded or privately-traded debt or
equity securities of issuers whose primary assets are real estate.
Although it is contemplated that the Funds will generally target
real estate investments exclusively or in combination with non-real
estate investments, some Funds may not target any real estate-related
investments.\4\
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\4\ The proposal of this exemption should not be interpreted as
an endorsement by the Department of the transactions described
herein. The Department notes that the fiduciary responsibility
provisions of Part 4 of Title I of the Act will apply to a Covered
Plan fiduciary's decision to invest in a Fund. Specifically, section
404(a)(1) of the Act requires, among other things, that a plan
fiduciary act prudently, solely in the interest of the plan's
participants and beneficiaries, and for the exclusive purpose of
providing benefits to participants and beneficiaries when making
investment decisions on behalf of the plan. In this regard, the
Department is not providing any opinion as to whether a particular
investment strategy or arrangement would be considered prudent or in
the best interests of a plan, as required by section 404 of the Act.
The determination of the prudence of a particular investment must be
made by a plan fiduciary after appropriate consideration to those
facts and circumstances that, given the scope of such fiduciary's
investment duties, the fiduciary knows or should know are relevant
to the particular investment involved, including the plan's
potential exposure to losses and the role a particular investment
plays in that portion of the plan's investment portfolio with
respect to which the fiduciary has investment duties and
responsibilities (see 29 CFR 2550.404a-1).
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4. Investors; Covered Plans. The investors in the Fund
(Investor(s)) may generally include, but not be limited to, private or
public corporations, educational institutions, charitable trusts or
foundations, tax-exempt trusts or other tax-exempt organizations,
governmental employee benefit plans, insurance company general
accounts, private individuals or trusts, and other private or public
persons, entities, or associations. Such Investors will include
``plans'' subject to the provisions of the Act and the Code, including
Covered Plans. The term ``Covered Plan'' means a ``plan'' that meets
the requirements of section II(C) and (D). Any reference to a Covered
Plan should be deemed, where appropriate, to include a reference to the
Covered Plan's fiduciary, representative, agent or investment vehicle,
such as a trust, through which the plan's assets are invested in the
Fund. An Investor may invest directly in a Fund or indirectly, such as
an investment through a special purpose vehicle, an intermediate
limited partnership, an insurance company separate account, or
otherwise. In some instances, these entities may contain ``plan
assets'' subject to the Act as a result of investments made by Covered
Plans. For purposes of this proposed exemption, a fiduciary of a
Covered Plan is not included among, is independent of, and unaffiliated
with, a Lender (including the Bank) or a Fund, as applicable, if: (i)
The fiduciary is not, directly or indirectly, through one or more
intermediaries, controlling, controlled by, or under common control
with such Lender or Fund,\5\ (ii) the fiduciary is not an officer,
director, employee or relative of, or partner in, such Lender or Fund;
and (iii) the fiduciary is not a corporation or partnership in which a
person affiliated with the Fund or a Lender, as appropriate, is an
officer, director, partner, or employee.
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\5\ For purposes of determining whether a fiduciary is not
included among, is independent of, and unaffiliated with, a Fund,
the term ``Fund'' shall be deemed, as appropriate, to include the
governing entity of the Fund or a member of the governing body of
the Fund, as appropriate, e.g. a general partner of a partnership, a
manager of a limited liability company, a member of a member-managed
limited liability company, or a member of the board of directors of
a corporation.
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5. Lenders; Agent. In each transaction, the Bank will arrange the
Credit Facility. For each Credit Facility, there will be one or more
Lenders. The Bank will either be the sole Lender for the Credit
Facility or will serve as the administrative agent (i.e., the Agent)
under the Credit Facility, acting for the benefit of a group of Lenders
that participate in the Credit Facility. In any event, one or more of
the Lenders, including the Bank, may be a party in interest with
respect to one or more of the Covered Plans invested in the Fund.
6. Credit Facility. The ``Credit Facility'' refers to an
arrangement entered into by and among: (i) A Fund or Funds, as
borrower(s); (ii) the Bank, as agent or the sole Lender; and/or (iii)
the Lenders. Under this arrangement, the Fund may be provided credit
through direct or indirect borrowings, letters of credit and similar
forms of credit arrangements. Generally, the Fund Agreements will
permit the Fund to incur indebtedness (typically, for a term of three
to seven years) for the acquisition of investments and for working
capital purposes. For purposes of the transactions described herein,
such indebtedness will include the Credit Facility. The Credit Facility
will allow the Fund to consummate investments quickly without having to
finalize the debt/equity structure for an investment or arrange for
interim or permanent financing prior to making an investment, and will
have additional advantages to the Investors and the Fund.
The Fund will be able to use its credit under the Credit Facility
by direct or indirect borrowings, by requesting that letters of credit
be issued, by other similar forms of credit arrangements, or a
combination of any of the foregoing. All Lenders will participate on a
pro rata basis with respect to all loans, letters of credit, or other
credit arrangements. All loans, letters of credit, and other credit
arrangements will be issued to the Fund or an entity in which the Fund
owns a direct or indirect interest (Qualified Borrower),\6\ and not to
any individual Investor. All payments of principal and interest made by
the Fund or a Qualified Borrower will be allocated pro rata among all
Lenders.
---------------------------------------------------------------------------
\6\ The Bank represents that Qualified Borrowers will be
entities the indebtedness of which may be guaranteed by the Fund.
When extensions of credit are made to a Qualified Borrower, the Fund
will provide a guaranty agreement to the Lenders, under the terms of
the Credit Facility.
---------------------------------------------------------------------------
The Credit Facility will have a stated maturity date and, until
such time, only interest will be payable on the facility. Generally, at
the maturity date, the entire unpaid principal balance of, plus any
accrued but unpaid interest on, the debt under the Credit Facility will
be due and payable, unless the facility is extended. Whether or not an
extension of the facility is requested, the manner of repayment of the
debt will be generally a combination of Capital Calls on the Investors,
proceeds from mortgage financings, and proceeds from liquidation of
investments. The Fund will not typically make a lump-sum Capital Call
on the day the debt is due.
[[Page 56011]]
Generally, no Fund will attempt to liquidate all of its properties to
pay the Credit Facility without making any Capital Calls.
In most instances, the Credit Facility will be a recourse
obligation of the Fund. The recourse obligation of a Covered Plan to
the Fund will not exceed the Covered Plan's initial capital commitment.
Repayment of the Credit Facility may be secured by, among other things,
a security interest in and lien on the Capital Commitments, the right
to make Capital Calls, the right to collect and enforce the same, and a
collateral account in the name of the Fund, into which Capital
Contributions are funded (i.e., the Borrower Collateral Account), or
any combination of the foregoing. In the event of a default under the
Credit Facility, the Agent will have the right to make Capital Calls on
the Investors to the extent of unfunded Capital Commitments and will
apply Capital Contributions received from such Capital Calls to any
amount due to any Lender under the Credit Facility.
7. Investor Consent. In connection with the Credit Facility, each
of the Investors will be required to execute an agreement which may
contain:
(i) An acknowledgment by the Investor of the Fund's assignment to
the Bank, acting as Agent for the benefit of Lenders or as sole Lender,
of the right to make Capital Calls upon the Investors, and to collect
and enforce the same;
(ii) An agreement by the Investor to make Capital Contributions to
the Fund without counterclaim, setoff, or defense, for the purpose of
repayment of the Credit Facility;
(iii) A representation that the Investor has no knowledge of
claims, offsets or defenses that would adversely affect its obligation
to fund Capital Contributions under the Fund Agreement; and
(iv) An agreement that the Investor will fund Capital Contributions
only into the Borrower Collateral Account.
Prior to obtaining Capital Commitments from the Investors, the Fund
may negotiate with the Bank to provide the Credit Facility. With
respect to the Fund and its activities, the only direct relationship
between an Investor and the Bank or any Lender in connection with a
Covered Transaction will be the execution of an Investor Consent. In
this regard, the only provision in the Investor Consent which is not
merely an acknowledgment of already-existing rights and obligations is
the Investor's separate agreement that, in the event of default under
the Credit Facility, the Investor will make its Capital Contribution to
the Borrower Collateral Account in response to a Capital Call for
repayment of the Credit Facility without counterclaim, setoff, or
defense. However, the Investor does retain its right to assert any such
claim or defense in a separate action. Some Funds may not include such
a waiver of defenses to the funding of Capital Contributions by the
Investors within the Fund Agreements, in which case the Investor will
provide the Agent, or the Bank entity as sole Lender, with a separate
document that will simply contain an acknowledgment of such agreement.
All other aspects of the transaction, including the negotiation of all
terms of the Credit Facility, will be exclusively between the Agent
(for the benefit of the Lenders) or the Bank (as a sole Lender) and the
Fund.
8. Investor Consent Integral to Credit Facility. The Bank
represents that the delivery by each Investor of an Investor Consent is
integral to the Credit Facility, and the Credit Facility will be an
integral part of the Fund's investment program. Prior to, or at the
time of, the decision by the fiduciaries of a plan to invest in the
Fund, such fiduciaries will be aware that the Fund will have the power
to borrow money and enter into a loan agreement under which the Fund
may pledge its assets, including the Capital Commitments of the
Investors and the right to make Capital Calls (giving the secured party
the right, under certain circumstances, to make Capital Calls
directly). In addition, the Fund Agreements will provide, or each
fiduciary of a plan that becomes a Covered Plan will be notified prior
to its decision to invest in the Fund, that each Investor may be
required to execute documents that are customary for the type of
financing involved in the class of transactions described herein. These
documents will include an Investor Consent, pursuant to which the
Investor agrees to make Capital Contributions to the Fund without
counterclaim, setoff, or defense, for the purpose of repayment of the
Credit Facility. If a fiduciary of a plan that may become a Covered
Plan considers these provisions overly-restrictive, it may decline to
invest in the Fund. If the Investors refuse to execute the Investor
Consent, the terms of the Credit Facility will be less favorable to the
Fund. The result will be an increase in the cost of credit to a Fund.
In addition, the Credit Facility may no longer be made available to the
Fund by the Lender. Thus, the Credit Facility structure without
Investor Consent could result in an increase in the cost of financing
the operations of the Fund and reduce the Investors' overall rate of
return on their investments.
9. Credit Facility and Investor Consent Do Not Alter Plans' Risks.
The Bank represents that the Investor Consent does not alter the
Covered Plans' risk of investment in the Fund. If the Credit Facility
were not provided, the Investor's Capital Contributions would be
required for the Fund to make investments. The Covered Plan's Capital
Commitment to the Fund is an unconditional obligation to make Capital
Contributions to the Fund upon receipt of a Capital Call. Absent any
malfeasance on the part of the Fund that would give rise to a defense
in favor of the Covered Plan, the Covered Plan will be required
unconditionally to honor a Capital Call from the Fund. The Covered
Plan's payment of Capital Contributions upon receipt of a Capital Call
alters the Covered Plan's risk of the Fund's malfeasance. Any
malfeasance occurring prior to the Capital Call will allow the Covered
Plan to raise any defenses arising from the malfeasance and refuse to
honor the Capital Call. The payment of Capital Contributions upon
receipt of a Capital Call subjects the Covered Plan to greater risk. If
the Covered Plan later had a claim based on mismanagement or fraud by
the Fund, it could not limit its risk by withholding the Capital
Contributions for such investment because they would have already been
made in response to earlier Capital Calls. The Covered Plan's recourse
would be to sue for damages, for recovery of Capital Contributions, or
other remedies.
In lieu of making Capital Calls, the Fund will enter into a Credit
Facility with the Bank to obtain financing for its investments and
operations. With the liquidity from the Credit Facility, the Fund can
defer or forego issuing Capital Calls. Absent the Investor Consent,
this reduces the Covered Plan's risk of the Fund's wrongful actions. At
the time it executes the Investor Consent, the Plan has committed its
capital to the Fund. Although the Covered Plan agrees in the Investor
Consent to pay its Capital Commitment in the event of a Capital Call by
the Agent, without counterclaim, setoff, or defense, the only
circumstances under which a Capital Call to repay the Credit Facility
could be required is when advances were made thereunder to the Fund, to
make investments which, absent the Credit Facility, would otherwise
have been made with Capital Contributions of the Investors. Therefore,
the Covered Plan would not otherwise have the opportunity to refuse to
honor a Capital Call based on any counterclaim, setoff, or defense, but
would have to pursue available remedies to recover against the
[[Page 56012]]
Fund. The Covered Plan retains the right to assert any such claim or
defense in a separate action. The later repayment of the Credit
Facility by making Capital Calls on the Investors permits the Fund to
replace the Credit Facility with Capital Contributions. Thus, the Bank
states that the Plan is exposed to the same risk whether or not the
Fund enters into the Credit Facility.
10. Credit Facility Will Not Generally Affect Right of Plan to
Withdraw From Fund. The Bank states that the Fund's provisions
concerning assignment of Capital Commitments and covenants to honor
Capital Calls unconditionally will generally not affect the ability of
an Investor to withdraw from the Fund. Under the Fund Agreements,
Investors generally will not be able to withdraw except in limited
circumstances. Such circumstances would relate to changes that would
cause adverse outcomes to the Investors under applicable law. Although
the Credit Facility will typically require notice of any intent to
withdraw, it will not prohibit withdrawals. The Credit Facility will be
structured so that, in most cases, an allocable portion of the facility
will be repaid at the time of any withdrawal or the Investor's interest
will be transferred to an entity that meets certain financial or legal
requirements.
Under the Fund Agreements, transfers of interests in the Fund by
Investors are usually also restricted. Generally, Investors will have
the right to transfer their interests only with the consent of the
Fund, or only to entities that meet certain financial or legal
requirements that will be specified in the Fund Agreements. The Credit
Facility typically requires the Fund to agree that no transfer of an
Investor's interest will be made without prior written consent of the
Agent, except for transfers permitted by the Fund Agreements. This
provision is put in place so that the Agent will know the identity of
the transferee, and is typically coupled with a requirement that
repayment of an allocable portion of the Credit Facility be made in
connection with the effectiveness of any transfer.
11. Benefits of Credit Facility and Investor Consent. The Bank
represents that, absent the requested exemption, the economic loss
resulting to the Covered Plans and their participants and beneficiaries
results from the more onerous and expensive financing terms and
conditions that would be required, absent the Investor Consent, for
those plans to invest in these types of investment ventures. The Bank
states that the types of Funds involved in the covered transactions are
an important element of a large diversified investment portfolio of a
qualified plan. The advantages of investments in real estate and other
investments provided through such Funds are numerous, including long-
term appreciation, hedges against inflation, and cash flow from
operations. However, the Bank states that to minimize the risks
involved in real estate investments, investment in a large diversified
limited partnership or similar entity has many advantages over direct
ownership of real estate properties and other securities, including
limited liability with respect to such property. Most diversified real
estate and other investment programs are carried out through
partnerships or limited liability companies that are substantially
similar to the Funds. The $100 million minimum net asset value of a
Covered Plan makes it likely the Covered Plans will be sponsored by
large businesses and will have relationships with an extensive number
of service providers, investment managers, and other entities that are
related to financial institutions.
Although the Agent, for the benefit of the Lenders, will receive a
pledge of the Capital Commitments of the Investors, the right to make
Capital Calls, and the right to collect and enforce the same, in the
event of default, the Agent would be required, without the Investor
Consent, to foreclose on the collateral in order to effect a Capital
Call for repayment of the Credit Facility. The Investor Consent permits
the Agent to avoid the delay and expense of foreclosure proceedings,
and to make a Capital Call immediately on the Investors for repayment.
In addition, when the Fund Agreements themselves do not contain the
agreement of the Investors to make Capital Commitments without
counterclaim, setoff or defense, the Investor Consent contains such
agreement, and permits Lenders to be repaid for amounts that were
extended to the Fund prior to the time Capital Contributions are
called, without the risk of repayment being challenged or delayed by
claims the Investors may have against the Fund. The Bank states that
this arrangement keeps the risk of the Fund's investment transactions
between the Fund and the Investors.
Thus, if the Credit Facility were not provided, the Investor's
Capital Contributions would be required for the Fund to make
investments. In such instances, the Investor's capital would be used to
make investments, and would be immediately at risk. If the Investor
later had a claim based on mismanagement or fraud by the Fund, it could
not limit its risk by withholding the Capital Contributions for such
investment, since those contributions would have already been made in
response to earlier Capital Calls. The Investors' recourse would be to
sue for damages, for recovery of Capital Contributions, or other
remedies.
The Fund will draw on the Credit Facility in lieu of making Capital
Calls to fund investments. The later repayment of the Credit Facility
by making Capital Calls on the Investors permits the Fund to replace
the Credit Facility with Capital Contributions. Therefore, the Bank
represents that the agreement in the Investor Consent to repay the
Lenders without counterclaim, setoff or defense keeps the risk of Fund
mismanagement or fraud between the Fund and the Investors, where it
would be were the Credit Facility not in place.
The Bank represents further that no more than five (5) percent of
the assets of any Covered Plan, measured at the time of the execution
of an Investor Consent, may be invested in the Fund. In the case of
multiple plans maintained by the same employer, or by members of a
controlled group, whose assets are invested on a commingled basis
(e.g., through a master trust), this five (5) percent limit will be
applied to the aggregate assets of the commingled entity.
12. Lender Will Not Be a Fiduciary of the Plan With Respect to
Investment in the Fund. The Bank represents that, with respect to each
Credit Facility covered by this proposed exemption, no Lender which
will participate, including the Bank, will be a fiduciary for any of
the Covered Plans in connection with their investment in the Fund. The
fiduciaries for Investors that may become Covered Plans will have to
satisfy the conditions set forth in Section II(B), (C), and (D) above.
In this regard, this proposed exemption requires that the applicable
fiduciaries provide a representation to the Bank that includes a
statement that the fiduciary responsible for making the investment
decision on behalf of the Covered Plan to invest in the Fund will be
independent of the Lenders and their affiliates. In addition, neither
the Lenders nor any of their affiliates will have any influence,
authority or control over such Investor's investment in the Fund. Such
letter will demonstrate that the fiduciaries responsible for investment
decisions are completely independent of any Lender. Moreover, the Bank
states that the independent decision of the fiduciaries of those plans
that may become Covered Plans to enter into the transaction, with full
knowledge of the Credit Facility and the Investor Consent, will be
protective of
[[Page 56013]]
the rights of participants and beneficiaries of Covered Plans.
The Bank represents that because the Lenders will be generally
large, national and international financial institutions, it is likely
that, in any given Credit Facility, one or more Lenders will have a
relationship with a Covered Plan making it a party in interest with
respect to the Plan. A Lender's status as a party in interest to a
Covered Plan may cause a transaction proposed herein to be a prohibited
transaction under the Act, even though all relationships between the
Covered Plan and the Lender will be unrelated to the transaction and do
not involve any conflict of interest or opportunity for improper
benefit for the Lender. The Bank states that the affected Covered
Plans' fiduciaries will be sophisticated investors represented by
sophisticated investment advisors. Thus, all participants and
beneficiaries of the affected Covered Plans will be adequately
protected with respect to the transactions described herein. Finally,
the Bank states that none of the Covered Transactions will be part of
an overall arrangement, agreement or understanding designed to benefit
a party in interest with respect to a Covered Plan.
13. Summary. In summary, the applicant represents that the proposed
transactions will satisfy the statutory criteria of section 408(a) of
the Act for the following reasons:
(i) Each transaction will be on terms that are no less favorable to
the Covered Plans than those which the Covered Plans could obtain in
arm's-length transactions with unrelated parties;
(ii) The decision to invest on behalf of each Covered Plan, and the
decision to execute an agreement for consent to the Fund's assignment
to the Bank of the Fund's right to make Capital Calls, will be made by
fiduciaries of the Covered Plan that are independent of, and
unaffiliated with, the Lenders and the Fund;
(iii) At the time of the execution of an Investor Consent, a
Covered Plan must have assets of not less than $100 million (other than
situations involving multiple plans maintained by the same employer or
by members of a controlled group, whose assets are invested on a
commingled basis, where this $100 million threshold can be met by
aggregating assets of the commingled entity);
(iv) Not more than five (5) percent of the assets of any Covered
Plan, measured at the time of the execution of an Investor Consent,
will be invested in the Fund (other than in the case of multiple plans
maintained by the same employer, or by members of a controlled group,
whose assets are invested on a commingled basis, wherein this five (5)
percent limit will be applied to the aggregate assets of all such
commingled entities);
(v) Neither the Bank nor any Lender has any fiduciary authority of
control with respect to a Covered Plan's investment in a Fund nor
renders investment advice within the meaning of 29 CFR 2510.3-21(c);
(vi) The Covered Plan fiduciaries will receive from the Bank, upon
request, a copy of this notice of proposed exemption and a copy of the
final exemption, if granted. In addition, fiduciaries of Covered Plans
will receive a copy of this proposed exemption, as published in the
Federal Register, for Covered Transactions that occur during the period
from January 1, 2003 until the date of the final exemption, if granted;
and
(vii) The Bank will receive from the Covered Plan Fiduciaries a
written representation that the conditions set forth in Section II(B),
(C), and (D) above are satisfied for each transaction with respect to
the Covered Plan for which they are fiduciaries.
Notice to Interested Persons: The applicant states, with regard to
the Covered Transactions (as defined in Section III (D), above) for
which retroactive relief is requested, that fiduciaries of Covered
Plans will receive a copy of this proposed exemption, as published in
the Federal Register, for those Covered Transactions occurring during
the period from January 1, 2003 until the date of the final exemption,
if granted. In addition, with respect to Covered Transactions occurring
in the future, for which prospective relief has been requested, the
applicant represents that such fiduciaries will be notified by
publication of this notice in the Federal Register.
The applicant represents that because potentially interested
fiduciaries of employee benefit plans that may invest in a Fund in the
future cannot all be identified, the only practical means of notifying
such fiduciaries is by the publication of this notice in the Federal
Register. However, the applicant states that Covered Plan fiduciaries
will receive from the Bank a copy of this notice of proposed exemption,
upon request, and a copy of the final exemption, if granted.
Comments relating to this notice of proposed exemption must be
received by the Department not later than 45 days from the date of
publication of this notice in the Federal Register.
FOR FURTHER INFORMATION CONTACT: Janet L. Schmidt of the Department, at
telephone (202) 693-8540. (This is not a toll-free number.)
Lodgian, Inc. 401(k) Plan and Trust Agreement (the Plan) Located in
Atlanta, Georgia
[Application No. D-11180]
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, August 10, 1990). If the exemption is
granted, the restrictions of sections 406(a), 406(b)(1) and (b)(2) and
407(a) of the Act and the sanctions resulting from the application of
section 4975 of the Code, by reason of section 4975(c)(1)(A) through
(E) of the Code, shall not apply, effective December 3, 2002, to (1)
the past acquisition and holding by the Plan of certain warrants (the
Warrant(s)) issued by Lodgian, Inc. (Lodgian), a party in interest with
respect to the Plan, which would permit the purchase of new common
stock (New Lodgian Stock); (2) the cancellation payment (the
Cancellation Payment) by Lodgian to the Plan in exchange for the
Warrants (i) at the election of active participants (ii) at the
election of the terminated vested participants whose vested interests
exceed $5,000, or (iii) in accordance with the procedures for the
automatic cash out of the value of Warrants held in the accounts of
terminated vested participants whose vested interests are $5,000 or
less, for an amount that represents the highest value of the Warrants
determined by an independent, qualified, appraiser between December 31,
2002 and the date of the individual election; (3) the sale of the
Warrants from Plan participants to Lodgian to cash out active and
terminated vested participants; and (4) the potential exercise of the
Warrants into the New Lodgian Stock, provided that the following
conditions were met:
(a) The acquisition and holding of the Warrants by the Plan
occurred in connection with Lodgian's bankruptcy proceeding (the
Bankruptcy);
(b) The Plan had no ability to affect the Plan of Reorganization
filed by Lodgian on December 20, 2001 under Chapter 11 of Title 11 of
the United States Code (the Bankruptcy Code), or the First Amended Plan
of Reorganization, subsequently filed under the Bankruptcy Code by
Lodgian on November 1, 2002 (The First Amended Plan of Reorganization);
[[Page 56014]]
(c) The Warrants were acquired automatically and without any action
on the part of the Plan;
(d) The Warrants were acquired by the Plan with the same terms and
conditions as non-Plan shareholders;
(e) The Plan did not pay any fees or commissions in connection with
the acquisition of the Warrants;
(f) Any decision to cancel the Warrants and accept a Cancellation
Payment from Lodgian will be made by the participant in the case of
active participants and terminated vested participants whose vested
interests exceed $5,000;
(g) The Warrants have been and will continue to be valued annually
on the 31st of December by an independent, qualified, appraiser;
(h) With Respect to those Plan participants who cash out the
Warrants, the value of the Warrants will be determined by using the
highest value determined by an independent, qualified, appraiser
between December 31, 2002 and the most recent valuation date prior to
the date of the distribution;
(i) An independent fiduciary will monitor the Cancellation
Payments, and confirm the valuation of the Warrants;
(j) Lodgian is required to purchase the Warrants upon request by a
Plan participant provided that on the day of the request the price of
the New Lodgian Stock is less than the exercise price of the Warrants;
and
(k) If the Warrant is listed on an established trading market
Lodgian is not required to purchase the Warrant from the Plan.
Effective Date: This exemption, if granted, will be effective as of
December 3, 2002.
Summary of Facts and Representations
1. Lodgian is a Delaware corporation maintaining its principal
place of business in Atlanta, Georgia. Lodgian is a hotel ownership and
management company, and currently operates approximately 97 hotels in
the hospitality industry, nearly all of which are located in the United
States. On December 20, 2001, Lodgian and 82 of its subsidiaries filed
for Chapter 11 Bankruptcy protection. Reasons for the filing included
excessive debt and substantial weaknesses in the hotel industry
following the events of September 11, 2001. The First Amended Plan of
Reorganization (POR) was filed on November 1, 2002 and confirmed by the
United States Bankruptcy Court for the Southern District of New York on
November 5, 2002. The POR became effective November 25, 2002.
2. As of the date of this filing, Lodgian employs approximately
7,000 employees who are eligible to participate in the Plan upon
satisfying the Plan's age and service eligibility requirements. The
Plan is a tax qualified defined contribution retirement plan that
provides for employee pre-tax contributions under section 401(k) of the
Code, and employer matching contributions under Code section 401(m).
The Plan was adopted effective as of July 1, 1984 by Servico, Inc.
Subsequently, Servico, Inc. and Impac Hotel Group, LLC combined their
respective businesses through a series of corporate mergers that
resulted in Servico and Impac becoming wholly-owned subsidiaries of
Lodgian, Inc. effective as of December 11, 1998. Effective January 1,
1999, Lodgian assumed sponsorship of the Plan and changed the Plan's
name to the Lodgian, Inc. 401(k) Plan and Trust Agreement. As of
December 31, 2002, the Plan had total assets of approximately
$6,363,693 and 1,580 participants, including active and former
employees.
The Plan permits participants to direct the investment of their
Plan accounts into a variety of investment funds, including, until
December 6, 2001, investment in old Lodgian stock (Old Lodgian Stock).
Lodgian's matching contributions to the Plan previously were made in
the form of shares of Old Lodgian Stock following the end of each plan
year. The last contribution in the form of Old Lodgian Stock was made
for the 2000 plan year. Matching contributions were required to remain
invested in Old Lodgian Stock until December 6, 2001 when participants
were permitted to direct that all or a part of the matching
contributions be invested in another investment fund offered under the
Plan. If a participant's own contributions were invested in Old Lodgian
Stock, such investments were always permitted to be liquidated and
invested in another Plan investment fund.
3. Daniel E. Ellis, Senior Vice President and General Counsel of
Lodgian, also serves as the trustee of the Plan. The administrator of
the Plan is Lodgian, which administers the Plan through its
Administrative Committee. Lodgian, as the Plan sponsor, selects the
investment funds available for participant-directed investments.
4. When the Old Lodgian Stock was cancelled in connection with the
effectiveness of the POR on November 25, 2002, shareholders, including
the Plan, received one share of the New Lodgian Stock for each 137
shares of Old Logian Stock, along with the Warrants to purchase a share
of New Lodgian Stock. The New Lodgian Stock and Warrants were deposited
into the Plan's trust on December 3, 2002. For each 1,000 shares of Old
Lodgian Stock, a shareholder received the following Warrants:
----------------------------------------------------------------------------------------------------------------
Warrant
exercise price Expiration
Type of warrant Number of per share of date of
warrants New Lodgian warrant
Stock
----------------------------------------------------------------------------------------------------------------
Class A......................................................... 8 $18.29 11/25/07
Class B......................................................... 27 25.44 11/25/09
----------------------------------------------------------------------------------------------------------------
Under the POR, the Plan received 9,096.0370 Class A Warrants and
28,108.2435 Class B Warrants. The Warrants are not traded on an
exchange, and there are no plans for such trading. A total of
approximately 7,000,000 shares of New Lodgian Stock are available for
issuance to shareholders of which approximately 6,600,000 shares have
been issued to date. The Plan held 7,509.169 shares of New Lodgian
Stock as of December 31, 2002, which was approximately 0.11% of the
approximately 7,000,000 shares of New Lodgian Stock expected to be
issued. The Plan's 7,509.169 shares of New Lodgian Common Stock
represent approximately 0.39% of the fair market value of the total
assets of the Plan on December 31, 2002. As of that date, New Lodgian
Stock was held in the individual accounts of 836 participants.
Accordingly, as of December 31, 2002, 836 participants have an interest
in the Warrant Funds. Currently 754 participants have an interest in
the Warrant Funds. Currently, the cash value of Warrants distributed
this far to terminated vested participants totals $389.41, ranging in
amount from $.02 to $31.52 per participant.
5. Shares of Old Lodgian Stock were traded on the New York Stock
Exchange
[[Page 56015]]
until trading was suspended on November 26, 2001. Due to Lodgian's
filing of the voluntary bankruptcy petition on December 20, 2001, the
Old Logian Stock was ``delisted'' from that exchange on December 31,
2001. Subsequent trading took place on the ``over the counter'' market,
until November 25, 2002. The New Lodgian Stock was issued in exchange
for Old Lodgian Stock, which was cancelled as part of the approved POR
on November 25, 2002. Between November 25, 2002 and January 27, 2003,
trades of shares of New Lodgian Stock were reported on the ``pink
sheets.'' Shares of New Lodgian Stock began trading on the American
Stock Exchange on January 28, 2003 under the symbol ``LGN.'' The
opening price per share on that date was $5.25. The trading prices have
ranged from a high of $5.50 per share on January 28, 2003 (the opening
date on the American Stock Exchange) to a low of $2.50 per share. The
current trading price is in the range of $3.19 per share.
Effective as of January 1, 2003, the Plan permits participants to
defer up to 15% (increased from 10% in prior years) of their eligible
compensation subject to other applicable limits in the Code. The Plan
was amended and restated to comply with recent tax law changes in
December 2002. The amendment and restatement included the creation of
two separate funds, Warrant Fund A and Warrant Fund B, to hold the
Warrants which are the subject of this exemption application. These two
Warrant Funds are ``frozen'' as described in the Plan document, meaning
that participants may not invest new amounts in the Warrant Funds or
direct a transfer from the Warrant Funds to other Plan investment funds
\7\. A Participant whose Plan account included an investment in Old
Lodgian Stock on December 3, 2002 (the date the New Lodgian Stock and
Warrants were issued to the Plan) received a proportionate interest in
the New Lodgian Stock Fund and the frozen Warrant Funds.
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\7\ The Department notes that investment decisions regarding the
Warrants are subject to section 404 of the Act. In this regard,
section 404(a) of the Act requires, among other things, that a plan
fiduciary discharge his duties with respect to a plan solely in the
interest of the plan's participants and beneficiaries and in a
prudent fashion.
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6. It is represented that the Warrants do not constitute qualifying
employer securities for purposes of section 407(d)(5) of the Act.
Lodgian represents that the Warrants held by the Plan would constitute
an ``employer security'' within the meaning of 407(d)(1) of the Act but
not a ``qualifying employer security'' under section 407(d)(5) of the
Act inasmuch as the Warrants do not fall within any of the covered
categories.\8\
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\8\ Section 407(d)(1) of the Act defines an ``employer
security'' as a security issued by an employer of employees covered
by the plan, or by an affiliate of such employer. Section 407(d)(5)
of the Act defines a ``qualifying employer security'' as an employer
security which is (a) stock; (b) a marketable obligation; or (c) an
interest in certain publicly-traded partnerships, but only if such
partnership is an existing partnership.
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Therefore, Lodgian requests retroactive exemptive relief from the
Department.
7. The decision as to whether to exchange the Warrants before their
respective expiration dates for the Cancellation Payment from Lodgian
will be made independently by each active participant. Further,
terminated vested participants whose interests in the Plan exceed
$5,000 will also have the option to exchange the Warrants for the
Cancellation Payment.
The applicant represents that the terminated vested participants
whose vested interests are $5,000 or less will automatically be cashed
out pursuant to the Cancellation Payment and paid their vested
interests as soon as administratively possible following their
employment termination. In this case, the cash value of any Warrants
held in their Plan accounts will be included in the distribution, using
the highest value determined by an independent, qualified, appraiser
between December 31, 2002 and the most recent valuation date prior to
the date of the distribution.
Although the Warrants have been valued by an independent,
qualified, appraiser in March, April and May of 2003, in the future, as
long as Warrants remain in the Plan, the Warrants will be valued
annually on the 31st of December. Pursuant to the Cancellation Payment,
active participants and terminated participants who are not
automatically cashed out because their vested interests exceed $5,000
will have an ongoing right to elect to cash in their Warrants, and, in
the case of terminated vested participants whose vested interests are
less than $5,000, these participants will receive cash for the
surrendered Warrants based on the highest independent appraisal prior
to the cash in. The cash value will be held in the active participant's
Plan account for investment direction into another Plan investment
option. In the case of the terminated vested participant, the cash
value will be included in the distribution of his or her vested
interest.
An independent fiduciary will monitor the Cancellation Payments and
confirm the valuation of the Warrants.
8. Lodgian's obligation to purchase the Warrants is effective at a
time when the New Lodgian Stock price is greater than the Warrant
exercise price. When the Warrant exercise price is equal to or less
than the fair market value of a share of the New Lodgian Stock, Lodgian
will not be required to purchase the Warrant(s) from Plan participants.
The Plan participant will be permitted to exercise the Warrant(s) and
obtain the New Lodgian Stock by paying the exercise price. The exercise
price will be paid from the proceeds of a sale of another Plan
investment as directed by the Plan participant. Following the exercise
of the Warrant, the participant can retain the New Lodgian Stock or
direct a sale of some or all of the New Lodgian Stock shares, with the
sales proceeds invested in another Plan investment fund selected by the
Plan participant. The determination of whether or not Lodgian is
obligated to purchase a Warrant would be made on the basis of the
closing stock price of a share of the New Lodgian Stock on the day the
Plan participant directs a sale of the Warrant.
If the Warrants are traded on an established market, the Plan
participant would be allowed to direct the sale of the Warrants on the
market, and Lodgian would not be required to purchase the Warrants. The
Plan participant would receive cash proceeds from the sale of the
Warrant, and this cash sale would represent a market transaction and
would not involve Lodgian.
9. In summary, it is represented that the proposed transaction
meets the statutory criteria of section 408(a) of the Act because:
(a) The acquisition and holding of the Warrants by the Plan
occurred in connection with Lodgian's Bankruptcy;
(b) The Plan had no ability to affect the Plan of Reorganization
filed by Lodgian on December 20, 2001 under the Bankruptcy Code, or the
First Amended Plan of Reorganization;
(c) The Warrants were acquired automatically and without any action
on the part of the Plan;
(d) The Warrants were acquired by the Plan with the same terms and
conditions as non-Plan shareholders;
(e) The Plan did not pay any fees or commissions in connection with
the receipt of the Warrants, nor did the Plan pay any fees or
commissions in connection with the holding of the Warrants;
(f) Any decision to cancel the Warrants and accept a Cancellation
Payment from Lodgian will be made by the Participant in the case of
active participants and terminated vested
[[Page 56016]]
participants whose vested interests exceed $5,000;
(g) The Warrants have been and will continue to be valued annually
on the 31st of December by an independent, qualified, appraiser;
(h) The value of the Warrants will be determined by using the
highest value determined by an independent, qualified, appraiser
between December 31, 2002 and the most recent valuation date prior to
the date of the distribution; and
(i) An independent fiduciary will monitor the Cancellation
Payments, and confirm the valuation of the Warrants;
(j) Lodgian is required to purchase the Warrants upon request by a
Plan participant provided that on the day of the request the price of
the New Lodgian Stock is greater than the exercise price of the
Warrants; and
(k) If the Warrants are listed on an established trading market,
Lodgian is not required to purchase the Warrants from the Plan.
Notice to Interested Persons: Notice of the proposed exemption
shall be given to all interested persons in the manner agreed upon by
Lodgian and Department within 15 days of the date of publication in the
Federal Register. Comments and requests for a hearing are due forty-
five (45) days after publication of the notice in the Federal Register.
For Further Information Contact: Khalif Ford of the Department,
telephone (202) 693-8563 (this is not a toll-free number).
General Information
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption
under section 408(a) of the Act and/or section 4975(c)(2) of the Code
does not relieve a fiduciary or other party in interest or disqualified
person from certain other provisions of the Act and/or the Code,
including any prohibited transaction provisions to which the exemption
does not apply and the general fiduciary responsibility provisions of
section 404 of the Act, which, among other things, require a fiduciary
to discharge his duties respecting the plan solely in the interest of
the participants and beneficiaries of the plan and in a prudent fashion
in accordance with section 404(a)(1)(b) of the Act; nor does it affect
the requirement of section 401(a) of the Code that the plan must
operate for the exclusive benefit of the employees of the employer
maintaining the plan and their beneficiaries;
(2) Before an exemption may be granted under section 408(a) of the
Act and/or section 4975(c)(2) of the Code, the Department must find
that the exemption is administratively feasible, in the interests of
the plan and of its participants and beneficiaries, and protective of
the rights of participants and beneficiaries of the plan;
(3) The proposed exemptions, if granted, will be supplemental to,
and not in derogation of, any other provisions of the Act and/or the
Code, including statutory or administrative exemptions and transitional
rules. Furthermore, the fact that a transaction is subject to an
administrative or statutory exemption is not dispositive of whether the
transaction is in fact a prohibited transaction; and
(4) The proposed exemptions, if granted, will be subject to the
express condition that the material facts and representations contained
in each application are true and complete, and that each application
accurately describes all material terms of the transaction which is the
subject of the exemption.
Signed at Washington, DC, this 24th day of September, 2003.
Ivan Strasfeld,
Director of Exemption Determinations, Employee Benefits Security
Administration, Department of Labor.
[FR Doc. 03-24595 Filed 9-26-03; 8:45 am]
BILLING CODE 4510-29-P