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Employee Benefits Security Administration

EBSA Federal Register Notice

Proposed Exemptions; Bangs, McCullen, Butler, Foye & Simmons, L.L.P. Employees Profit Sharing Plan (the Plan) [12/17/2003]

[PDF Version]

Volume 68, Number 242, Page 70307-70311

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DEPARTMENT OF LABOR

Employee Benefits Security Administration

[Application No. D-11198, et al.]

 
Proposed Exemptions; Bangs, McCullen, Butler, Foye & Simmons, 
L.L.P. Employees Profit Sharing Plan (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.

[[Page 70308]]


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.

Bangs, McCullen, Butler, Foye & Simmons, L.L.P. Employees Profit 
Sharing Plan (the Plan) Located in Rapid City, South Dakota

[Application No. D-11198]

Proposed Exemption

    The Department is considering granting an exemption under the 
authority of section 408(a) of the Act and section 4975(c)(2) of the 
Code and in accordance with the procedures set forth in 29 CFR Part 
2570, Subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption 
is granted, the restrictions of sections 406(a), 406(b)(1) and (b)(2) 
of the Act and the sanctions resulting from the application of section 
4975 of the Code, by reason of section 4975(c)(1)(A) through (E) of the 
Code, shall not apply, effective January 1, 2004, to the proposed lease 
by the Plan (the New Lease) of certain improved real property (the 
Property) located in Rapid City, South Dakota, to Bangs, McCullen, 
Butler, Foye & Simmons, L.L.P. (the Employer), the sponsor of the Plan, 
and a party in interest with respect to the Plan; provided that the 
following conditions are satisfied:
    (A) All terms and conditions of the New Lease are at least as 
favorable to the Plan as those which the Plan could obtain in an arm's-
length transaction with an unrelated party;
    (B) The New Lease is a triple net lease under which the Employer is 
obligated to pay for all costs of maintenance, repair, and taxes 
related to the Property;
    (C) The interests of the Plan for all purposes under the New Lease 
are represented by an independent fiduciary, Wells Fargo Bank, N.A., 
Rapid City, South Dakota (the Trustee);
    (D) The rent paid by the Employer under the New Lease is no less 
than the fair market rental value of the Property; and
    (E) If the summary appraisal of the Property (the Summary 
Appraisal), due in mid-December 2003, contains a fair market rental 
value that is higher than the current fair market rental value set 
forth in the New Lease, the Employer will amend the New Lease to pay 
the Plan the higher amount, retroactive to January 1, 2004.
    Effective Date: This exemption, if granted, will be effective as of 
January 1, 2004.

Summary of Facts and Representations

    1. The Plan is a profit sharing retirement plan which was 
established December 31, 1964. As of July 31, 2003, the Plan had 42 
participants and $9,693,762.89 in assets. The Plan is maintained by the 
Employer, which is a South Dakota general partnership engaged in the 
practice of law. Investment discretion over the Plan's assets is 
exercised by Thomas H. Foye, Charles Riter and John H. Raford. Mr. 
Riter and Mr. Raford are partners of the Employer, and Mr. Foye is an 
employee of the Employer. The Plan's assets are held in trust by Wells 
Fargo Bank, N.A., Rapid City, South Dakota (i.e., the Trustee), which 
will also be serving as the independent fiduciary for purposes of the 
New Lease. The Trustee was formerly named Norwest Bank South Dakota, 
N.A. (Norwest Bank). Norwest Bank was acquired by Wells Fargo Bank, 
N.A., effective November 2, 1998. The Trustee represents that it is 
independent of the Employer and its affiliates. In this regard, the 
applicant represents that while the Employer has deposits with the 
Trustee, those deposits constitute less than one percent (1%) of the 
Trustee's total deposits. It is represented that the Trustee does not 
have common officers or directors with the Employer. While the Employer 
may have occasional loans with the Trustee, such loans would be less 
than 1% of the Trustee's total outstanding loans. The Trustee and its 
predecessors have served as trustees for the Plan since the time it was 
adopted in 1964.
    2. Among the assets of the Plan is the Property, a parcel of 
improved real estate which constitutes the Employer's principal place 
of business. The Property is located in downtown Rapid City, South 
Dakota, and is a two-story brick office building containing 
approximately 9,600 square feet of office space. The Employer has 
leased the Property from the Plan under a triple net lease (the Prior 
Lease) with a ten year term commencing January 1, 1994 and ending 
December 31, 2003. The Prior Lease was exempt from the prohibitions of 
section 406 of the Act and section 4975(c) of the Code by virtue of an 
individual administrative exemption, Prohibited Transaction Exemption 
94-25 (PTE 94-25, 59 FR 12355, March 16, 1994), granted by the 
Department. The interests of the Plan under the Prior Lease were 
represented by the Trustee's predecessor, Norwest Bank.
    Under PTE 94-25, Norwest Bank monitored the Employer's performance 
and represented the Plan in enforcing the terms and the conditions of 
the Prior Lease. The Trustee represents that the Employer occupied the 
Property in compliance with all terms and conditions of the Prior Lease 
for its duration. The Prior Lease expires on December 31, 2003.
    3. The Trustee states that the Plan's lease of the Property to the 
Employer

[[Page 70309]]

continues to be a favorable Plan investment because, among other 
things, it provides the Plan with an annual rate of return which is 
better than annual returns produced by other Plan investments at this 
time.
    Therefore, the Trustee concludes that, effective January 1, 2004, 
the continued leasing of the Property by the Plan to the Employer for 
approximately a three (3) year period would be in the best interest of 
the Plan. The Trustee is attempting to sell the Property and has listed 
the Property for sale with the real estate firm of Coldwell Banker 
Kirkeby-Hall. The Property has been listed for sale since May 20, 2003. 
However, no offers have been received to date. The Trustee states that 
a shorter term lease is preferable because a long-term lease may 
dissuade a potential buyer from purchasing the Property, especially if 
the buyer desires to occupy the Property. Therefore, the Trustee and 
the Employer have agreed to a new leasing arrangement (i.e., the New 
Lease), effective January 1, 2004, which will provide for the Plan's 
continued leasing of the Property to the Employer for at least three 
(3) years (as discussed below). Accordingly, the Employer and the 
Trustee are requesting an exemption for the New Lease under the terms 
and conditions described herein.
    4. The New lease is a triple net lease for a term of three (3) 
years commencing January 1, 2004 and terminating December 31, 2006, 
both dates inclusive. The New Lease may be renewed by the Employer as 
the tenant for an additional period of one (1) year (the Option). The 
Option may be exercised upon giving sixty (60) days written notice to 
the Plan, as the landlord.
    The interests of the Plan under the New Lease will be represented 
by the Trustee. In this regard, the Trustee states that it knows of no 
capital repairs or improvements that are required to the Property at 
this time, and does not anticipate any such repairs in the foreseeable 
future. The annual rental under the New Lease is payable in equal 
monthly installments. Initial rental under the New Lease will be $7,200 
per month, or $86,400 annually.
    5. The fair market rental value of the Property has been 
established periodically (pursuant to the terms of the Prior Lease and 
PTE 94-25) by Richard S. Kahler, CCIM, GAA, CFP (Mr. K), a professional 
real estate appraiser with Kahler Appraisal Services, located in Rapid 
City, South Dakota. Mr. K discusses the current fair market rental 
value of the Property in letters dated March 31, 2003 and August 6, 
2003 (the Updates). In the Updates, Mr. K refers to an appraisal 
prepared during the Prior Lease, as required under PTE 94-25. Mr. K 
states, among other things, that in 2002, the fair market rent for the 
Property was increased to $9.00 per square foot. Furthermore, Mr. K 
also states that his market review prepared in March, 2003, did not 
evidence an additional increase in the fair market rental value for the 
Property at that time.
    In anticipation of the New Lease or a possible sale of the Property 
to a third-party buyer, the applicant had Mr. K prepare an immediate 
restricted appraisal report (the Report) of the Property on October 15, 
2003. In the Report, Mr. K relied on the sales comparison approach (SC 
Approach) and the income approach (Inc. Approach) in appraising the 
fair market value of the Property. Mr. K states that the current fair 
market value of the Property under the SC Approach is between $748,000 
and $770,000. Under the Inc. Approach, Mr. K used an appropriate 
capitalization rate (i.e., 9.0%),\1\ to determine an estimated market 
value of between $760,000 and $785,000 for the Property. Therefore, as 
of October 15, 2003, Mr. K determined that the fair market value of a 
fee simple interest in the Property would be in the range of $750,000 
to $800,000.
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    \1\ A capitalization rate is a rate of interest used to convert 
a series of future payments into a single present value.
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    6. Furthermore, Mr. K has represented to the applicant and the 
Department that he will provide a full updated summary appraisal 
(Summary Appraisal) of the fair market value and fair rental value of 
the Property by middle of December, 2003. The New Lease has a provision 
stating that if the Summary Appraisal contains a fair market rental 
value for the Property that is higher than the current fair market 
rental value set forth in the New Lease (i.e., $7,200 per month, or 
$86,400 annually), the Employer will amend the New Lease to pay the 
Plan the higher amount. Any new rental amount will be adjusted 
retroactive to January 1, 2004, to provide for the higher rental value 
as of that date. In addition, commencing January 1, 2004, any 
appropriate higher amount of rent will be paid to the Plan by the 
Employer within 30 days of the receipt of the Summary Appraisal.
    Furthermore, the Trustee states that it will monitor the New Lease 
and its fair market rent provisions annually. The Trustee will obtain 
annual independent determinations of the fair market rental value of 
the Property. The Trustee will ensure that the Plan receives annual 
increases in rents that reflect the fair market rental value of the 
Property.
    Under the New Lease, the Employer will indemnify and hold the Plan 
harmless from all penalties, claims, demands, liabilities, expenses and 
losses of any nature arising from the Employer's use of the Property.
    7. The Trustee will monitor the Employer's performance under the 
New Lease, on behalf of the Plan, and will enforce its terms and 
conditions. As the Plan's independent fiduciary, the Trustee will take 
whatever actions are necessary to protect the interests of the Plan and 
its participants and beneficiaries.
    The Trustee has reviewed and evaluated the Plan's continued leasing 
of the Property to the Employer under the New Lease and has determined 
that the transaction would be in the best interests of the Plan's 
participants and beneficiaries. Specifically, the Trustee states that 
the Employer has proven to be a successful, reliable tenant of the 
Property, and that the Property constitutes a productive Plan asset.
    8. In summary, the applicant represents that the subject 
transaction satisfies the criteria of section 408(a) of the Act 
because:
    (A) The New Lease is a triple net lease requiring the Employer to 
pay all costs for repair, maintenance, taxes and insurance on the 
Property;
    (B) The interests of the Plan under the New Lease are represented 
by the Trustee, an independent fiduciary which will monitor and enforce 
the Employer's performance under the terms and conditions of the New 
Lease;
    (C) The New Lease ensures that the rental payments will remain no 
less than the fair market rental value of the Property for the duration 
of the transaction;
    (D) The New Lease contains a provision stating that if the Summary 
Appraisal, due in mid-December 2003, contains a fair market rental 
value for the Property that is higher that the current fair market 
rental value set forth in the New Lease, the Employer will amend the 
New Lease to pay the Plan the higher amount, retroactive to January 1, 
2004; and
    (E) The Trustee has reviewed the Plan's continued leasing of the 
Property under the New Lease and has determined that the transaction 
would be in the best interests of the Plan and its participants and 
beneficiaries.

For Further Information Contact: Ekaterina A. Uzlyan of the Department 
at (202) 693-8540. (This is not a toll-free number.)

[[Page 70310]]

Painters District Council No. 4 Apprenticeship, Upgrading & Retraining 
Trust Fund (the Plan) Located in Cheektowaga, New York

[Application No. L-11190]

Proposed Exemption

    The Department is considering granting an exemption under the 
authority of section 408(a) of the Act and in accordance with the 
procedures set forth in 29 CFR part 2570, Subpart B (55 FR 32836, 
August 10, 1990). If the exemption is granted, the restrictions of 
section 406(a) of the Act shall not apply to a lease (the Lease) of 
certain space (the Leased Premises) in a building (the Building) owned 
by the Plan to Lipsitz, Green, Fahringer, Roll, Salisbury & Cambria, 
LLP (the Applicant), a party in interest with respect to the Plan; 
provided that the following conditions are satisfied:
    (a) All terms and conditions of the Lease are at least as favorable 
to the Plan as those which the Plan could obtain in an arm's-length 
transaction with an unrelated party;
    (b) The decision by the Plan to enter into the Lease will be made 
by the trustees of the Plan (the Trustees); and
    (c) The fair market rental amount for the Lease will be determined 
by an independent, qualified appraiser as of the date of the 
commencement of the Lease; and
    (d) After commencement of the Lease, an additional fair market 
rental appraisal of the Leased Premises will be performed by an 
independent, qualified appraiser every thirty months with the rental 
rate being adjusted accordingly.

Summary of Facts and Representations

    1. The Plan is a defined contribution plan, covering members of the 
Painters District Council No. 4 whose employers contribute to the Plan 
under the terms of Collective Bargaining Agreements with the Painters 
District Council. The Plan is subject to the provisions of ERISA, and 
became effective on September 25, 1966. The Plan provides 
apprenticeship training and journeyman upgrading to participants. In 
addition, the Plan offers training and certification in the following 
Health and Safety Disciplines: OSHA Hazard Awareness, Scaffolding, 
Welding, Fall Protection, Ergonomics, Confined Space, Respirator Fit 
Testing, Hazwoper, Lead Abatement, Asbestos and CPR-First Aid for the 
Painting and Glazing Industry. The Plan currently has approximately 500 
active participants. The Applicant provides legal services to the Plan 
and to other multi-employer pension and welfare plans.
    The Applicant is a law firm that practices in a broad range of 
legal concentrations. The Applicant has an employment law practice that 
represents a number of jointly administered employee benefit funds. One 
of the Applicant's clients is the Plan.
    2. The Leased Premises and the Building are located at 585 Aero 
Drive, Cheektowaga, New York. The Building is a one-story office and 
warehouse facility containing 11,922 square feet. The Leased Premises 
has 1,500 square feet of office area. On December 11, 2002, the Plan 
purchased the Building for $450,000 from the Niagara Frontier 
Transportation Authority, an unrelated third party. The Plan continues 
to lease the other office space to the same parties to whom it was 
previously subleased including multi-employer funds (the Funds) who are 
parties in interest to the Plan. The Applicant represents that the 
lease agreements with the Funds operate pursuant to the guidelines 
established by Prohibited Transaction Exemption 76-1 (41 FR 12740, 
12744, March 26, 1976) (PTE 76-1).\2\
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    \2\ The Department expresses no opinion herein as to whether the 
lease agreements between the Funds and the Plan satisfy the 
provisions of PTE 76-1.
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    Due to the Applicant's hiring of a new attorney who now seeks to 
rent the Leased Premises, the Applicants will become parties in 
interest with respect to the Plan upon the inception of the Lease. The 
Applicants seek to enter into a five-year lease agreement for the 
Leased Premises. The decision by the Plan to enter into the Lease will 
be made by the Trustees who are independent of the Applicant. The fair 
market rental amount for the Lease will be determined by an 
independent, qualified appraiser. Additionally, fair market rental 
appraisals will be performed at the commencement of the Lease and at 
thirty month intervals thereafter by an independent, qualified 
appraiser. Rental rates will be adjusted in accordance with each 
subsequent appraisal.
    3. The fair market rent of the Leased Premises has been established 
by an appraisal dated February 25, 2003 and will be updated prior to 
the commencement of the Lease. The appraisal was prepared by Howard P. 
Schultz & Associates. The appraisal relied on the market sales 
comparison approach to determine the fair market rental value of the 
Leased Premises. The appraisal states that the fair market rent for the 
Leased Premises is $15/square foot, which equates to $22,500 annually. 
The rental rate includes real estate taxes, insurance, utilities, 
cleaning and janitorial service all of which will be paid by the 
Applicant. The Lease will be on the terms no less favorable to the 
Applicant than an arm's length transaction with an unrelated party.
    4. The Applicant states that the Lease will be protective of the 
Plan and consistent with the Plan's investment needs and objectives. 
The exemption would be protective of the rights of the Plan 
participants and their beneficiaries because the Lease will provide 
rental income to the Plan as owners of the Building. Moreover, the 
Applicant will pay rent in an amount determined to be commercially 
identical to an arm's length business transaction. Not only would the 
Lease constitute an arm's length business transaction, but having legal 
counsel close to the Plan would be beneficial for the Plan fiduciaries. 
Legal issues typically arise with some of the Plan participants that 
require immediate legal attention or advice. Having the Applicant 
located next to the office for the Plan's employees would reduce 
telephone costs and the time needed to get answers for legal questions 
that require immediate assistance.
    The location of the office is also extremely beneficial for trustee 
meetings, and meetings with other Plan officials who normally would 
have to assume the cost for travel for the Applicant's employees. In 
addition, many of the apprenticeship standards and procedures for Plan 
operations are changed on a regular basis. These changes are not made 
effective until legal counsel has reviewed the changes to all of the 
corresponding documents. Having the Applicant within the same Building 
as the Plan's employees would decrease the expenses and time associated 
with multiple mailings. Documents can be reviewed instantly without 
redlined copies having to be mailed back and forth.
    5. In summary, the Applicant represents that the transaction 
satisfies the statutory criteria of section 408(a) of the Act because:
    (a) All terms and conditions of the Lease are at least as favorable 
to the Plan as those which the Plan could obtain in an arm's-length 
transaction with an unrelated party;
    (b) The decision by the Plan to enter into the Lease will be made 
by the Trustees;
    (c) The fair market rental value for the Lease will be determined 
by an independent, qualified appraiser as of the date of the 
commencement of the Lease; and
    (d) Thirty months after commencement of the five year lease an 
additional fair market rental appraisal of the Leased Premises will be 
performed

[[Page 70311]]

by an independent, qualified appraiser every thirty months with the 
rental rate being adjusted accordingly.
    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 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) 693-8540 (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 12th day of December, 2003.
Ivan Strasfeld,
Director of Exemption Determinations, Employee Benefits Security 
Administration, Department of Labor.
[FR Doc. 03-31102 Filed 12-16-03; 8:45 am]

BILLING CODE 4510-29-P