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Employee Benefits Security Administration

EBSA Federal Register Notice

ARINC Incorporated Retirement Income Plan (the Plan) Located in Annapolis, MD [11/24/2004]

[PDF Version]

Volume 69, Number 226, Page 68391-68398

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DEPARTMENT OF LABOR

Employee Benefits Security Administration

[Prohibited Transaction Exemption (PTE) 2004-19; Exemption Application 
No. D-11220]

 
ARINC Incorporated Retirement Income Plan (the Plan) Located in 
Annapolis, MD

AGENCY: Employee Benefits Security Administration, U.S. Department of 
Labor.

ACTION: Grant of individual exemption.

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SUMMARY: This document contains a final exemption issued by the 
Department of Labor (the Department) from certain prohibited 
transaction restrictions of the Employee Retirement Income Security Act 
of 1974 (ERISA or the Act) and from certain taxes imposed by the 
Internal Revenue Code of 1986 (the Code). The exemption permits: (1) 
The in-kind contribution of the property described as the 27.5 acre 
headquarters

[[Page 68392]]

of ARINC Incorporated (ARINC or the Applicant) situated in Annapolis, 
MD or the ownership interests of a special purpose entity (SPE) whose 
only asset is this property (collectively, the Property) to the Plan by 
ARINC, the plan sponsor and a party in interest with respect to the 
Plan (the Contribution); (2) the holding of the Property by the Plan; 
(3) the leaseback of the Property by the Plan to ARINC (the Lease or 
Leaseback); (4) the repurchase of the Property by ARINC (the 
Repurchase) pursuant to (a) a right of first offer to ARINC should the 
Plan wish to sell the Property to a third party or (b) a voluntary 
agreement under which the Plan agrees to sell the Property to ARINC at 
any time during the Lease; and (5) any payments to the Plan by ARINC 
made pursuant to a make whole obligation as specified below (the Make 
Whole Payment or Obligation) (collectively, the Exemption 
Transactions). The exemption affects participants and beneficiaries of, 
and fiduciaries with respect to, the Plan.

DATES: This exemption is effective on or after November 24, 2004.

FOR FURTHER INFORMATION CONTACT: Wendy M. McColough of the Office of 
Exemption Determinations, Employee Benefits Security Administration, 
U.S. Department of Labor, telephone (202) 693-8540. (This is not a 
toll-free number.)

SUPPLEMENTARY INFORMATION: On September 13, 2004, the Department 
published a notice in the Federal Register (69 FR 55179) of a proposed 
individual exemption (the Proposed Exemption). The Proposed Exemption 
was requested in an application filed on behalf of ARINC pursuant to 
section 408(a) of the Act and section 4975(c)(2) of the Code, and in 
accordance with the procedures set forth in 29 CFR part 2570, subpart B 
(55 FR 32836, August 10, 1990). Effective December 31, 1978, section 
102 of Reorganization Plan No. 4 of 1978, 5 U.S.C. App. at 214 (2000 
ed.) transferred the authority of the Secretary of the Treasury to 
issue exemptions of the type requested to the Secretary of Labor. 
Accordingly, this final exemption is issued solely by the Department.
    The notice set forth a summary of the facts and representations 
contained in ARINC's application for exemptive relief (Application) and 
referred interested persons to the Application for a complete statement 
of the facts and representations. The Application has been available 
for public inspection at the Department in Washington, DC.
    The notice also invited interested persons to submit comments on 
the Proposed Exemption and/or to request that a public hearing be held. 
In response to the solicitation of comments from interested persons, 
the Department received: Comments from ARINC; comments from Independent 
Fiduciary Services, Inc (IFS), the Independent Fiduciary retained to 
represent the Plan in connection with the exemption request; and 
comments from two other interested persons. None of the comments 
requested that a public hearing be held on the Proposed Exemption. The 
ARINC and IFS comments provided further information on the Exemption 
Transactions and are discussed below.
    One comment was received from the Secretary-Treasurer of Teamsters 
Local 986 (Teamsters). The Teamsters represent 70 ARINC employees who 
participate in the Plan. The Teamsters' comment supports the Proposed 
Exemption, the protective conditions imposed on the Contribution by the 
Department, and finalizing the exemption as proposed. The other comment 
expressed concern about the rental rate of the Lease described in the 
Proposed Exemption. This concern was addressed in a response from ARINC 
that is summarized below.
    Additionally, the following updated versions of documents discussed 
in the Proposed Exemption were submitted to the Department by ARINC and 
IFS subsequent to the publication of the Proposed Exemption in the 
Federal Register. The final transfer agreement that governs the terms 
upon which the Property will be contributed to and held by the Plan and 
is between ARINC (the Transferor), Aeronautical Radio, Inc. (ARI), a 
wholly-owned subsidiary of ARINC, and the Plan through its agent, IFS, 
executed on October 12, 2004 (the Transfer Agreement), was received by 
the Department on October 19, 2004. On November 5, 2004, the Department 
received the November 4, 2004 second addendum to the December 8, 2004 
letter agreement between IFS, ARINC, and the Pension Committee of the 
Plan concerning the engagement of IFS as the Independent Fiduciary, as 
amended July 30, 2004 (the IF Agreement).
    The final lease that governs the terms upon which the Property will 
be leased back to ARINC by the Plan (Lease) was received by the 
Department on November 15, 2004. In correspondence, dated November 11 
and November 15, 2004, ARINC submitted the Lease and stated that the 
Lease is consistent with the material terms and conditions of the lease 
term sheet, as revised on June 11, 2004 (Lease Term Sheet). By letter 
dated November 15, 2004, ARINC provided additional information to the 
Department summarizing the provisions in the Lease that supplement the 
provisions of the Lease Term Sheet described in the Proposed Exemption.
    The Lease is an agreement by and between ARINC as Tenant and 2551 
Riva Road, Inc., an SPE. ARINC states that under the Lease, 2551 Riva 
Road, Inc., a Delaware corporation, will be the Landlord. This 
corporation is initially being established as a subsidiary of ARI, 
which currently holds title to the Property. ARI will transfer title to 
the Property to 2551 Riva Road, Inc. on or before the date of closing 
when the proposed Contribution and Leaseback transactions are 
consummated in accordance with the Transfer Agreement (the Closing). On 
the date of Closing, ARI will convey all of the stock of 2551 Riva 
Road, Inc. to the Plan so that the Landlord will be a wholly owned 
subsidiary of the Plan. The Certificate of Incorporation of 2551 Riva 
Road, Inc. was filed in the State of Delaware on November 15, 2004. The 
initial officers and directors are ARINC employees. ARINC expects that 
new officers and directors will be appointed by IFS on behalf of the 
Plan the day of or the day after Closing.
    ARINC notes that the Department described certain provisions of the 
Lease Term Sheet at Paragraph 6 of the Summary of Facts and 
Representations in the Proposed Exemption at column 3 of 69 FR 55181. 
ARINC represents that these descriptions in the Proposed Exemption 
generally remain accurate. However, as applicable, ARINC provides the 
following additional information based on modifications to the terms 
and conditions of the Lease Term Sheet as agreed to in the Lease.

Bondable/Triple Net Lease Structure

    As noted in the ARINC comment below, during the bondable period, 
the Lease Term Sheet and the Lease provide for an abatement of rent in 
the event of a partial condemnation at article 14.4(b) of the Lease and 
the right to terminate the Lease under certain circumstances in the 
condemnation and casualty contexts (Lease, arts. 13 and 14).
    The Lease Term Sheet provides that there shall be a commercially 
reasonable standard for determining whether capital improvements (or 
repair or replacement) are required for the Property during the 
bondable period. The Lease provides the commercially reasonable 
standard by requiring the preparation of a reasonable annual budget to 
be approved by Landlord and Tenant for items needing repair, 
maintenance or replacement over the coming year (Lease, art. 8.1), 
based on an annual inspection by a reputable building inspector and an 
agreed

[[Page 68393]]

standard of keeping the buildings in good condition and repair, in a 
manner befitting that of comparable buildings in the Annapolis, 
Maryland area and in accordance with all applicable laws and the Lease 
(Lease, art. 8.2). Disagreements regarding the timing or scope of any 
repair, maintenance or replacement, if any, are resolved in accordance 
with a neutral third-party arbitration process that is binding on the 
parties (Lease, art. 23.4).

Rental Rate

    The Lease provides for base rent of $4,290,189 during the first 
year of the Lease (Lease, art. 1.5), increased by 2.5% annually (Lease, 
art. 4.2), with an increase to $6,488,302 for the first year of the 
non-bondable period (Lease, art. 4.1), increased by 2.5% annually 
(Lease, art. 4.2). ARINC notes that these figures are consistent with 
those described in the Proposed Exemption.
    The terms of the Exemption Transactions, however, require an 
updated appraisal prior to Closing, and ARINC states that the rental 
amounts may be modified based on such updated appraisal. ARINC believes 
that a substantial change in the rent is not expected.

The Right of First Offer (ROFO)

    ARINC states that article 21 of the Lease provides an additional 
right for the Landlord in the event the ROFO is triggered from or after 
the 15th anniversary of the Lease commencement date (the date of 
Closing under the Transfer Agreement) and a three-appraiser method is 
used for the determination of fair market value for the Property. In 
this situation, the Landlord has the right, exercisable within 10 days 
following the appraisers' determination, to withdraw its notice of 
transfer and continue to hold the Property (Lease, art. 21.2).
    The Lease includes a provision whereby if the Tenant elects to 
purchase under the ROFO, the parties are to enter into a purchase and 
sale agreement that incorporates the terms of the right of first offer 
but is otherwise in substantially the same form as the Transfer 
Agreement for the initial transfer of the Property to Landlord, except 
that (i) no additional appraisal is required (inapplicable, since it is 
not necessary to set any rent), (ii) only a subset of the 
representations and warranties provided to the Landlord upon the 
initial transfer shall be required to be provided to the Tenant/
purchaser (Exhibit F of the Lease), and (iii) Tenant/purchaser will not 
be entitled to any study period as long as title to the Property has 
not changed in any manner other than as previously approved by Tenant 
(Lease, art. 21.4).
    ARINC provides that in article 21.6 of the Lease, the ROFO terms 
have been clarified so that it is not applicable with respect to 
easements and the like, as well as to any (i) transfer to an affiliate 
of the Landlord, (ii) transfer to Landlord's lender (or a third party) 
as a result of a foreclosure or deed in lieu of foreclosure, or (iii) 
transfer to a third party in a condemnation proceeding, however, in the 
event of a transfer described in clause (i), the ROFO shall apply to 
the first transfer by the affiliate of the Landlord, and in the event 
of a transfer described in clause (ii), the ROFO shall apply to the 
first transfer by the lender/third party. The Tenant loses its rights 
altogether in the event of a transfer described in clause (iii).
    Article 21 of the Lease adds a provision whereby if the purchase 
price of the unsolicited offer that Tenant elects to match is to be 
paid by other than cash, the Tenant will be required to pay the fair 
market value of the non-cash consideration (Lease, art. 21.7).

Indemnification

    ARINC represents that the Tenant's indemnification of the Landlord 
during the non-bondable period has been broadened in the Lease to 
include violations of environmental laws, the Americans with 
Disabilities Act and other health and/or safety laws resulting from 
acts or omissions of any invitee, agent, employee, affiliate, 
subtenant, assignee, contractor, client, family member, licensee, 
customer or guest of Tenant (collectively, Invitees) as opposed solely 
to acts or omissions of Tenant or any sublessee or assignee (Lease, 
art. 12.2). Additionally, article 12.6 of the Lease provides that the 
liability of the Landlord is limited to its interest in the Property 
and any sales proceeds, rents, insurance proceeds and condemnation 
awards related thereto.

ARINC Default

    In the event of a Tenant payment default, the Proposed Exemption 
stated that the Lease would contain commercially reasonable provisions 
regarding late fees and default interest. To address this, the Lease 
provides for a late fee of $1,000 if the Tenant fails to make any 
payment within five days after due without regard to any notice and 
cure period otherwise provided under the Lease (Lease, art. 15.7) and 
default interest on such overdue payment from the date due until 
payment at the lesser of (i) one percentage point above the prime rate 
or (ii) the highest lawful rate per annum (Lease, arts. 15.6 and 15.7). 
Article 15.7 provides that the Landlord waives the late charge and 
default interest the first time in any 12-month period that Tenant 
fails to make a payment when due, provided the payment is made prior to 
the expiration of the five-business day notice and cure period.
    By correspondence dated November 11, 2004, ARINC's real estate 
counsel provided the following Lease provisions that counsel believes 
expanded the protections for the Plan from that contemplated by the 
Lease Term Sheet.

Hazardous Materials

    Article 6.3 of the Lease provides that ARINC take substantially 
increased liability for hazardous materials. The ARINC real estate 
counsel asserts that ARINC is taking virtually all liability for 
asbestos, tanks and transformers, whether or not caused by ARINC or its 
Invitees, and taking expanded liability for other hazardous materials 
violations not caused by ARINC.

Insurance

    In article 11.1 of the Lease, ARINC has agreed to obtain a 
substantially larger amount of liability insurance from that specified 
in the Lease Term Sheet. The umbrella liability coverage has been 
increased from $5,000,000 to $25,000,000 in the Lease. ARINC's all-risk 
property insurance coverage has been increased to include $5,000,000 of 
ordinance or law coverage and in addition, ARINC has agreed to purchase 
a separate liability policy for the Plan with excess umbrella coverage 
of $10,000,000.

Casualty

    ARINC's real estate counsel states that ARINC has agreed to a 
substantial additional condition to its ability to terminate the Lease 
in the event of a casualty during the non-bondable period as provided 
in article 13.2 of the Lease. If the Property is totally or partially 
damaged or destroyed, the remainder of the Property must be unsuitable 
for ARINC's business purposes for ARINC to have the right to terminate 
the Lease.

Reporting Requirements

    In article 23.3 of the Lease, ARINC has agreed to additional 
ongoing reporting requirements by notifying the Landlord regarding 
defaults under ARINC loans that could materially adversely affect 
ARINC's ability to perform its obligations under the Lease.

Discussion of the Comments

IFS Comment

    By letters dated October 19 and November 5, 2004, IFS provided the

[[Page 68394]]

following comments and additional information to the Department.
1. Diversification of the Plan's Assets Condition
    IFS observes that subsection (h) of section II of the Proposed 
Exemption describes one of the duties of IFS as Independent Fiduciary 
as follows:

    (h) The Independent Fiduciary determines on an ongoing basis 
that the amount of plan assets invested in employer real property 
and employer securities, including its interests in the Property, 
complies with ERISA;

IFS believes that its specific obligations in regard to the 
diversification of plan assets are set forth in the July 20, 2004 
amendment and addendum to the IF Agreement, and as described at the 
first bullet in the second column at 69 FR 55187 of the Proposed 
Exemption, as follows:

    In considering whether and on what terms to seek prudently to 
sell the Property, IFS shall consider the nature, value and other 
relevant aspects of the Property in isolation, as well as the nature 
and diversification of the Plan's overall investment portfolio. 
Insofar as IFS determines that continued ownership of the Property 
poses undue risk to the Plan of over concentration from an 
investment perspective, IFS shall determine and take appropriate 
action to seek prudently to reduce such risk.

    IFS' concern is that section II(h) in the Proposed Exemption 
overstates IFS'' authority. IFS notes that while IFS is required to 
consider the other assets of the Plan, including any employer real 
property and employer securities, in determining whether and to what 
extent continued ownership of the Property may adversely affect the 
diversification of the Plan's overall portfolio, the IF Agreement does 
not give IFS any responsibility for or authority over those other 
assets. Section II(h), however, could be read to mean that IFS must 
determine on an ongoing basis whether all investments by the Plan in 
employer real property and employer securities, not just the Property, 
comply with any aspect of ERISA, not just diversification. Under that 
reading, IFS would be obligated to take action if, for example, the 
Plan has invested in employer securities that are not qualifying 
employer securities under ERISA section 407. IFS asserts that this goes 
beyond IFS'' role as contemplated by the IF Agreement, as amended.
    To clarify that the objective of section II(h) is to require 
compliance with the fiduciary responsibility provision of ERISA, IFS 
proposes that the phrase ``employer real property and employer 
securities, including its interests in'' be deleted and that the phrase 
``section 404(a)(1) of'' be inserted in section II(h), so that the 
provision would read as follows:

    (h) The Independent Fiduciary determines on an ongoing basis 
that the amount of Plan assets invested in the Property complies 
with section 404(a)(1) of ERISA;

IFS believes that this would be sufficient to make clear that IFS is 
obligated to determine on an ongoing basis that the concentration of 
Plan assets in the Property is consistent with the ERISA fiduciary duty 
of diversification, without requiring IFS to make determinations as to 
Plan investments other than the Property.
    The Department has determined that it would be appropriate to 
modify section II(h) as requested by IFS.
2. Make Whole Payment Condition
    IFS notes that subsection (i) of section II of the Proposed 
Exemption describes the Make Whole Payment using language that is based 
on the IFS report to the Department on June 18, 2004 (the IFS Report). 
The two elements of the Make Whole Payment are set forth in section 
II(i) as follows:

    The actual return component--``the combination of the proceeds 
from a sale of the Property (or the change in the value of the 
Property if the Plan continues holding it over the full five years) 
plus the Plan's net income on the Property under the Lease prior to 
the sale (or over the full five years)''
    The target return component--``the Property's value as of the 
date of the Contribution plus a 5% compounded rate of return on that 
value plus the costs of holding and maintaining the Property''

    If the target return component exceeds the actual return component 
at the time for determining the Make Whole Payment, then ARINC is 
obligated to contribute the difference to the Plan.
    IFS explains that the description in the IFS Report was based on an 
early version of the Make Whole Payment provision of the Lease Term 
Sheet, which has since been refined. IFS states that the final version 
is contained in article 22 of the Lease and that the language in 
section II(i), while less detailed than the final provision in the 
Lease, is generally consistent with that provision, except in one 
respect: The target return component in the Lease provision does not 
include the costs of holding and maintaining the Property. The reason 
is that these costs have already been deducted from the actual return 
component, as reflected in the use of the term ``net income'' in the 
above language. The Lease provision itself refers to the rental income 
received by Landlord under this Lease up to the Make-Whole Date, ``less 
expenses incurred by Landlord with respect to the Premises and this 
Lease.'' To deduct the costs from the actual return, and then add them 
to the target return, would be to count them twice.
    Accordingly, IFS requests that section II(i) be amended to delete 
the phrase ``plus the costs of holding and maintaining the Property'' 
from subparagraph (ii) in the second paragraph. To the extent the IFS 
Report does not accurately reflect this provision, IFS states that it 
hereby amends the IFS Report to be consistent with this discussion and 
that this change does not affect the conclusions in the IFS Report.
    The Department has determined that it would be appropriate to 
modify section II(i) as requested by IFS.
3. Status of the Monetization
    IFS comments that Paragraph 11 of the Summary of Facts and 
Representations in the Proposed Exemption at column 3 of 69 FR 55191, 
in describing the IFS Report, states the following regarding the status 
of proposals to monetize the lease payment stream:

    IFS notes that while they continue to engage financial 
institutions in discussions of various proposals, they do not expect 
that a monetization transaction will occur.

    Since the date of the IFS Report, IFS represents that it has ceased 
to engage financial institutions in discussions. IFS remains open to 
proposals to monetize the stream of lease payments, but is not actively 
pursuing that course at this time. IFS continues to expect that it is 
unlikely that a monetization transaction will occur, for the reasons 
described in the IFS Report.
4. Status of Due Diligence
    IFS notes that, in Paragraph 5 of the Summary of Facts and 
Representations in the Proposed Exemption at column 3 of 69 FR 55180, 
under the terms of the Transfer Agreement, the Plan will have a 60-day 
Review Period after execution of the Transfer Agreement to undertake a 
review and examination of all aspects of the Property prior to closing 
the transaction, should IFS approve going forward with the transaction.
    IFS reports that the Transfer Agreement has now been executed, 
effective October 12, 2004, so that the 60-day review period runs until 
December 11th. However, prior to the execution date, and consistent 
with the intent of the Transfer Agreement, ARINC and ARI made the 
requested Property documents available to IFS for review, and IFS' 
representatives and consultants were permitted to enter upon the 
Property to conduct specific examinations, such as structural

[[Page 68395]]

examinations of buildings and environmental testing. If IFS completes 
its due diligence to its satisfaction prior to the expiration of the 
60-day Review Period, it may waive any remaining portion of the Review 
Period, in order to close the transaction sooner so that the Plan may 
begin to benefit from receipt of the rental income.
    By letter dated November 5, 2004, IFS informed the Department that 
Custer Environmental, Inc. (Custer), retained by IFS to conduct a 
``Phase One Environmental Site Assessment'' of the Property, provided a 
final environmental report to IFS dated October 25, 2004. On the basis 
of its review of the Custer report, IFS states that it is satisfied 
that there are no environmental issues that would cause it not to close 
on the acquisition of the Property and the lease to ARINC in accordance 
with the provisions of the Transfer Agreement and the Lease.
5. Liability Insurance
    IFS notes that in addition to the expenses that may be Incurred by 
the special purpose entity owned by the Plan (the SPE) as the Landlord 
under the terms of the Lease, and by the Plan pursuant to the IF 
Agreement, the Plan will be incurring the expense of directors' and 
officers' liability insurance in connection with the ongoing operation 
of the SPE. This expense is presently estimated to be $18,000 per year, 
which may change over time in accordance with market conditions.

ARINC Comment

    By letter dated October 19, 2004, the Department received the 
following comments from ARINC.
1. Effective Date of the Exemption
    ARINC explains that, at the request of ARINC, the Proposed 
Exemption provides that, if granted, the final exemption will have an 
effective date of September 7, 2004. This effective date was requested 
to allow ARINC to make the Contribution prior to the grant of a final 
exemption. ARINC considered making the Contribution before September 
15, 2004 to, among other considerations, avoid having to make a 
variable rate premium payment to the Pension Benefit Guaranty 
Corporation in the amount of $910,000. However, ARINC reports that it 
has subsequently decided not to Contribute the Property until after the 
grant of a final exemption. By doing so, ARINC avoids the possibility 
that a final exemption would be granted on terms different than 
provided for in the Proposed Exemption, which could expose ARINC to 
excise tax penalties under Code section 4975. As a result of ARINC's 
decision, the relief necessary under the exemption need be only 
prospective since the transaction will not occur until after a final 
exemption is granted. ARINC adds that the decision to delay the 
transaction, while made by ARINC, is supported by IFS, the Plan's 
Independent Fiduciary.
    The Department concurs with the ARINC comment and has determined 
that the effective date of the exemption will be on or after the date 
of publication of this final exemption in the Federal Register.
2. The Lease Terms
    ARINC notes that the Proposed Exemption was issued based on a Lease 
Term Sheet, which was submitted to the Department while ARINC and IFS 
negotiated the more detailed terms of the Lease. However, ARINC 
represented that the Lease Term Sheet would accurately reflect the 
provisions of the more detailed final Lease.
    ARINC submits two clarifications regarding the description of the 
Lease in the Proposed Exemption. In Paragraph 6 of the Summary of Facts 
and Representations in the Proposed Exemption at column 1 of 69 FR 
55182, under the discussion entitled ``Bondable/Triple Net Lease 
Structure,'' the Department states ``Under the bondable lease 
structure, the rent payable by ARINC to the Plan remains payable under 
all circumstances * * *.'' (emphasis added). ARINC states that this is 
consistent with the Lease Term Sheet, but ARINC notes that the Lease 
Term Sheet also provides for an abatement of rent in the event of 
partial condemnation (based on the portion of the property subject to 
condemnation) as well as a tenant right to terminate the lease under 
certain circumstances, such as in the event of condemnation or 
casualty.
    Secondly, at column 2 of 69 FR 55183, under the Department's 
discussion entitled ``The Right of First Offer,'' ARINC and the IFS 
Report described the fair market value determination for the purchase 
price as changing for year 15 of the Lease and beyond. ARINC clarifies 
that this is not entirely accurate, because the Lease Term Sheet and 
the Lease provides for the fair market value determination to change 
from and after the 15th anniversary of the Lease commencement date 
(which would actually be year 16 and beyond). Accordingly, the two 
references in the Proposed Exemption at 69 FR 55183 to ``14'' should 
instead refer to ``15,'' and the two references to ``15'' should 
instead refer to ``16.''
3. Liability for Hazardous Substances
    ARINC states that section II(m) of the Proposed Exemption includes 
a condition which provides that ``ARINC indemnifies the Plan with 
respect to all liability for hazardous substances released on the 
Property prior to the execution and closing of the Contribution of the 
Property.'' ARINC requests that the Department confirm ARINC's 
understanding that the provisions of the Transfer Agreement satisfy 
this condition. In particular, under section 5(a)(12) of the Transfer 
Agreement, ARINC has represented that to its knowledge no hazardous 
substances have been released on the Property as of the closing date of 
the Transfer Agreement. Section 5(f) of the Transfer Agreement provides 
an indemnity in the event that ARINC breaches this representation.
    ARINC notes that in response to a request by IFS, the Plan's 
Independent Fiduciary, ARINC agreed to modify its representation in 
section 5(a)(12) of the Transfer Agreement to state that, to ARINC's 
knowledge, the construction and condition of certain rooms in buildings 
on the Property that were not accessible to Custer Environmental, Inc. 
(IFS's environmental consultant), are the same in all material respects 
as other rooms in the same buildings that were inspected by Custer, and 
that the inaccessible rooms do not have any Hazardous Substances in 
violation of Environmental Laws. This change is an improvement from the 
Plan's perspective and provides greater assurance to IFS and the Plan 
of the condition of the Property. As stated previously, on the basis of 
IFS's review of the Custer report, IFS is satisfied that there are no 
environmental issues that would cause it not to close on the Exemption 
Transactions.
    The Department confirms that the provisions of the Transfer 
Agreement and the Lease, IFS's due diligence regarding the Property as 
stated in the IFS Report, and IFS's approval of the Custer 
Environmental Site Assessment (as described above) appears to satisfy 
the condition of section II(m) of the Proposed Exemption.
4. The Make Whole Payment Condition
    ARINC represents that the Make Whole Payment condition provided 
under the Proposed Exemption is consistent with the agreement of ARINC 
and IFS in the Lease Term Sheet and the Lease. ARINC notes, however, 
that both the Lease Term Sheet and the Lease provide ARINC 180 days 
from the date that is the earlier of the date of sale of the Property 
by the Plan or five years

[[Page 68396]]

from the closing of the transaction to make the Make Whole Payment. 
However, the 180-day period is not specifically reflected in the 
language of the Make Whole Payment condition in section II(i) of the 
Proposed Exemption. ARINC ask that the Department confirm ARINC's 
understanding that, consistent with the Lease Term Sheet, the Lease, 
and the Summary of Facts and Representations in the Proposed Exemption 
at column 2 of 69 FR 55183, ARINC will have 180 days to make a Make 
Whole Payment if any such payment is required.
    The Department confirms that the Lease Term Sheet, the Lease, and 
the language of the Proposed Exemption provide that ARINC will have 180 
days to make the Make Whole Payment.
5. Diversification of the Plan Assets Condition
    ARINC states that subsection (h) of section II of the Proposed 
Exemption includes a condition that requires that the ``Independent 
Fiduciary determines on an ongoing basis that the amount of plan assets 
invested in employer real property and employer securities, including 
its interest in the Property, complies with ERISA.'' ARINC notes that 
ARINC's engagement of IFS grants IFS the discretion to determine 
whether the holding of the Property satisfies ERISA's fiduciary 
requirements, and the engagement letter requires that IFS evaluate the 
nature and diversification of the Plan's overall investment portfolio 
in making this judgment. However, IFS has not been appointed 
Independent Fiduciary of the Plan to make decisions with respect to 
real property or securities other than the Property. As such, ARINC 
believes that this condition should be narrowed somewhat. ARINC 
understands that IFS concurs with this comment, and has filed its own 
letter requesting that this condition be narrowed. ARINC supports their 
request.
6. Plan Contributions Update
    ARINC confirms that it made $18 million in contributions for the 
2003 Plan Year. In addition, ARINC still expects to fully fund the Plan 
to the ABO level after all cash contributions and the Property 
contribution are made for the 2004 Plan Year (subject to any unexpected 
declines in the market value of assets or further declines in interest 
rates). To date, ARINC represents that it has already contributed $6 
million for the 2004 Plan Year, which exceeds the minimum required 
contribution of $2.224 million for the Plan Year.
    By letter to the Department, dated November 2, 2004, ARINC further 
updated its contribution information and stated that on October 29, 
2004, ARINC contributed an additional $2 million to the Plan for a 
cumulative total contribution of $8 million thus far for the 2004 plan 
year. ARINC noted that these contributions far exceed the minimum 
required contribution of $2.24 million for the 2004 Plan Year.

Rental Rate Comment

    By letter to the Department, dated October 8, 2004, one commenter 
objected to the annual base rent of $12.40 per square foot under the 
bondable structure at column 2 of 69 FR 55182.
    The commenter stated that the independent appraiser, Deloitte & 
Touche LLP (Deloitte), recommended that the initial rate for the 
bondable period be set at a higher rate of $13.35 per square foot, and 
provided the opinion that ``[t]here is no justification for ARINC to 
not pay the full amount recommended by the independent appraiser.''
    By letter to the Department, dated November 2, 2004, ARINC 
responded to the October 8, 2004 comment. ARINC explained that the 
$13.35 initial rent for the bondable period was set forth in the 
Deloitte draft report dated May 25, 2004. That appraisal set an overall 
property value of the ARINC headquarters Property at $52 million. The 
final report by Deloitte, dated June 17, 2004, reduced the overall 
Property value to $49 million. The reductions were made in response to 
specific concerns raised by IFS that the $52 million valuation was too 
high as described in the Proposed Exemption at 69 FR 55189 to 55190. 
ARINC states that when Deloitte reduced the Property's appraised value, 
it also reduced the rental rate. For the bondable period, the reduction 
was from $13.35 per square foot to $12.40 per square foot. ARINC notes 
that this change in lease rates is discussed in the Proposed Exemption 
in the first column at 69 FR 55190. The summary table that appears on 
the same page did not include the changed lease rates. ARINC emphasizes 
that the IFS Report concludes that the $49 million property valuation, 
and the corresponding $12.40 per square foot rental rate, are 
appropriate and the transaction is in the interest of the Plan.

Determination of the Department

    Accordingly, based upon the representations made by the Applicant, 
the additional documents submitted to the Department, the written 
comments received in response to the Proposed Exemption, and the 
analysis conducted by the Independent Fiduciary, the Department has 
determined to grant the exemption subject to the modifications 
discussed above. The Department has, in transactions of this nature, 
placed emphasis on the need for an Independent Fiduciary and on such 
Independent Fiduciary's considered and objective evaluation of the 
transactions. In its deliberations, which included its analysis of all 
aspects of the transactions, the Independent Fiduciary has consistently 
represented for the record that no transactions concerning the Property 
will be accepted on behalf of the Plan unless such transactions are 
found by the Independent Fiduciary to be in the interests of the Plan. 
Finally, the Department notes that the Independent Fiduciary's 
satisfaction of its obligations in connection with the determination of 
the fair market value of the Property, the ongoing determination that 
the amount of Plan assets invested in the Property complies with 
section 404(a)(1) of ERISA as described above, and other obligations as 
previously described by the Department in the Summary of Facts and 
Representations in the Proposed Exemption is a critical factor in the 
Department's decision to grant a final exemption.
    The Application pertaining to the exemption, the Proposed 
Exemption, the comments submitted to the Department and the responses 
to the comments, and all other documents submitted to the Department 
concerning this exemption have been included as part of the public 
record of the Application. The complete Application file, including all 
supplemental submissions received by the Department, is available for 
public inspection in the Public Disclosure Room of the Employee 
Benefits Security Administration, U.S. Department of Labor, Room N-
1513, 200 Constitution Avenue, NW., Washington, DC 20210.
    For a complete statement of the facts and representations 
supporting the Department's decision to grant this exemption, refer to 
the September 13, 2004 Notice of Proposed Exemption at 69 FR 55179.

General Information

    The attention of interested persons is directed to the following:
    (1) The fact that a transaction is the subject of an exemption 
under section 408(a) of the Act and section 4975(c)(2) of the Code does 
not relieve a fiduciary or other party in interest or disqualified 
person from certain other provisions of the Act and the Code, including 
any prohibited transaction provisions to which the exemption does not 
apply and the general fiduciary responsibility provisions of section 
404 of the Act,

[[Page 68397]]

which require, among other things, that a fiduciary discharge his or 
her duties respecting the plan solely in the interest of the 
participants and beneficiaries of the plan and in a prudent fashion in 
accordance with section 404(a)(1)(B) of the Act; nor does it affect the 
requirements of section 401(a) of the Code that the plan operate for 
the exclusive benefit of the employees of the employer maintaining the 
plan and their beneficiaries;
    (2) The exemption will not extend to transactions prohibited under 
section 406(b)(3) of the Act and section 4975(c)(1)(F) of the Code;
    (3) In accordance with section 408(a) of the Act and section 
4975(c)(2) of the Code and the procedures set forth in 29 CFR Part 
2570, Subpart B (55 FR 32836, 32847, August 10, 1990) and based upon 
the entire record, the Department finds that the exemption is 
administratively feasible, in the interests of the plans and their 
participants and beneficiaries and protective of the rights of the 
participants and beneficiaries of the plans;
    (4) This exemption is 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
    (5) The availability of this exemption is subject to the express 
condition that the material facts and representations contained in the 
Application are true and complete and accurately describe all material 
terms of the transactions that are the subjects of the exemption.

Exemption

    In accordance with section 408(a) of the Act and section 4975(c)(2) 
of the Code and the procedures set forth in 29 CFR Part 2570, Subpart B 
(55 FR 32836, 32847, August 10, 1990) and based upon the entire record, 
the Department finds that the exemption is:
    (a) Administratively feasible;
    (b) In the interests of the Plan and its participants and 
beneficiaries; and
    (c) Protective of the rights of the participants and beneficiaries 
of the Plan.

Section I. Covered Transactions

    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(a) and (b) of the Code, by reason of section 4975(c)(1)(A) 
through (E) of the Code, shall not apply to:
    (a) the transfer of the property described as the 27.5 acre 
headquarters of ARINC Incorporated (ARINC) situated in Annapolis, MD or 
the ownership interests of a special purpose entity (SPE) whose sole 
asset is this property (collectively, the Property) to the Plan through 
the in-kind contribution of such Property by ARINC, the plan sponsor 
and a party in interest with respect to the Plan (the Contribution);
    (b) the holding of the Property by the Plan;
    (c) the leaseback of the Property by the Plan to ARINC (the Lease 
or Leaseback);
    (d) the repurchase of the Property, by ARINC (the Repurchase) 
pursuant to (1) a right of first offer as specified in the Lease should 
the Plan wish to sell the Property to a third party or (2) a voluntary 
agreement under which the Plan agrees to sell the Property to ARINC at 
any time during the Lease; and
    (e) any payments to the Plan by ARINC made pursuant to the make 
whole obligation as specified in the Lease (Make Whole Payment) 
(collectively, the Exemption Transactions).

Section II. Conditions

    This exemption is conditioned upon adherence to the material facts 
and representations described herein and upon satisfaction of the 
following requirements:
    (a) A qualified independent fiduciary (the Independent Fiduciary) 
acting on behalf of the Plan, represents the Plan's interests for all 
purposes with respect to the Contribution and determines, prior to 
entering into any of the Exemption Transactions described herein, that 
each such transaction is in the interests of the Plan;
    (b) The Independent Fiduciary negotiates and approves the terms of 
any of the transactions between the Plan and ARINC that relate to the 
Property;
    (c) The Independent Fiduciary manages the holding, leasing, and 
disposition of the Property and takes whatever actions it deems 
necessary to protect the rights of the Plan with respect to the 
Property;
    (d) The terms and conditions of any transactions between the Plan 
and ARINC concerning the Property are no less favorable to the Plan 
than terms negotiated at arm's length under similar circumstances 
between unrelated third parties;
    (e) The contribution value of the Property is the fair market value 
of the Property as determined by the Independent Fiduciary on the date 
the Property is contributed to the Plan. In determining the fair market 
value of the Property, the Independent Fiduciary obtains an updated 
appraisal from a qualified, independent appraiser selected by the 
Independent Fiduciary, and ensures that the appraisal is consistent 
with sound principles of valuation;
    (f) The Lease has an initial term of twenty years, with a three-
year renewal term. The Lease is a bondable lease for the first ten 
years of the Lease (or such earlier date specified in the Lease as 
agreed to between the Lessor and ARINC). During the bondable period 
ARINC, as lessee, pays, in addition to the base rent, all costs 
associated with the Property, including capital expenditures. After the 
bondable period expires, the Lease shall convert to a traditional 
triple net lease under which ARINC, as lessee, pays, in addition to the 
base rent, all normal operating expenses of the Property, including 
taxes, insurance, maintenance, repairs, and utilities, but does not pay 
capital expenditures;
    (g) The Independent Fiduciary has sole authority to determine if it 
is in the interest of the Plan to enter into a transaction to sell the 
stream of lease income on the Property to a third party for cash (the 
Monetization);
    (h) The Independent Fiduciary determines on an ongoing basis that 
the amount of Plan assets invested in the Property complies with 
section 404(a)(1) of ERISA;
    (i) At the earlier of: (i) The date the Plan sells the Property for 
fair market value or (ii) the date five years from the date of the 
Contribution, ARINC will transfer to the Plan a Make Whole Payment, as 
described below, in order to guarantee the Plan a minimum rate of 
return of 5% compounded per annum on the initial contributed value of 
the Property; provided that, if a Make Whole Payment is due and if, for 
the taxable year of ARINC in which the Make Whole Payment is to be 
made, such Make Whole Payment (i) would not be deductible under section 
404(a)(1) of the Code or (ii) would result in the imposition of an 
excise tax under section 4972 of the Code, such Make Whole Payment 
would not be made until the next taxable year of ARINC for which the 
Make Whole Payment is deductible under section 404(a)(1) of the Code 
and does not result in an excise tax under section 4972 of the Code;
    ARINC will guarantee a minimum return of 5% to the Plan by agreeing 
that if (i) the combination of the proceeds from a sale of the Property 
(or the change in the value of the Property if the Plan continues 
holding it over the full five years) plus the Plan's net

[[Page 68398]]

income on the Property under the Lease prior to the sale (or over the 
full five years) is less than (ii) the Property's value as of the date 
of the Contribution plus a 5% compounded rate of return on that value, 
then (iii) ARINC will contribute to the Plan the difference necessary 
to provide the 5% return. The calculation of the Make Whole Payment 
will take into account the status of any Monetization of the lease 
payments as of the time of sale or five-year anniversary of the 
Contribution.
    (j) If the Plan desires to sell or convey the Property or its 
interest therein during the Lease Term, the Plan must first offer ARINC 
the right to purchase or otherwise acquire the Property or such 
interest therein on such terms and conditions as the Plan proposes to 
market the Property or such interest therein for sale (the Right of 
First Offer). If ARINC fails to exercise such right to purchase, the 
Plan generally is free to sell the Property to a third party. The right 
of first offer shall terminate upon the commencement of the exercise by 
the Plan of its remedies under the Lease as the result of a monetary 
event of default by ARINC as described in the Lease that continues 
uncured following notice and the expiration of applicable cure periods 
(and a second notice and cure period provided fifteen (15) days before 
the loss of such right on account of such default);
    (k) The Plan pays no commissions or fees in connection with the 
Contribution, the Lease, the Repurchase, or the Monetization of the 
Property. This condition does not preclude the Plan from paying the 
ongoing costs associated with the holding of the Property that are not 
the responsibility of ARINC under the Lease;
    (l) Subject to ARINC's Right of First Offer, the Plan retains the 
right to sell or assign, in whole or in part, any of its Property 
interests to any third party purchaser; and
    (m) ARINC indemnifies the Plan with respect to all liability for 
hazardous substances released on the Property prior to the execution 
and closing of the Contribution of the Property.

Section III. Definitions

    (a) The term ``Independent Fiduciary'' means a fiduciary who is:
    (1) independent of and unrelated to ARINC or its affiliates, and
    (2) appointed to act on behalf of the Plan for all purposes related 
to, but not limited to (i) the in-kind contribution of the Property by 
ARINC to the Plan, and (ii) other transactions between the Plan and 
ARINC related to the Property.
    For purposes of this exemption, a fiduciary will not be deemed to 
be independent of and unrelated to ARINC if:
    (1) such fiduciary directly or indirectly controls, is controlled 
by or is under common control with ARINC,
    (2) such fiduciary directly or indirectly receives any compensation 
or other consideration in connection with any transaction described in 
this exemption; except that an Independent Fiduciary may receive 
compensation for acting as an Independent Fiduciary from ARINC in 
connection with the transactions contemplated herein if the amount or 
payment of such compensation is not contingent upon or in any way 
affected by the Independent Fiduciary's ultimate decision, and
    (3) the annual gross revenue received by such fiduciary, during any 
year of its engagement, from ARINC and its affiliates exceeds 5 percent 
(5%) of the fiduciary's annual gross revenue from all sources for its 
prior tax year.
    (b) The term ``affiliate'' means:
    (1) Any person directly or indirectly through one or more 
intermediaries, controlling, controlled by, or under common control 
with the person;
    (2) Any officer, director, employee, relative, or partner of any 
such person; and
    (3) Any corporation or partnership of which such person is an 
officer, director, partner, or employee.
    (c) The term ``control'' means the power to exercise a controlling 
influence over the management or policies of a person other than an 
individual.

    Signed at Washington, DC, this 19th day of November 2004.
Ivan L. Strasfeld,
Director, Office of Exemption Determinations, Employee Benefits 
Security Administration, U.S. Department of Labor.
[FR Doc. 04-26067 Filed 11-23-04; 8:45 am]

BILLING CODE 4510-29-P