Proposed Exemptions; RREEF America L.L.C. (RREEF) [Notices] [06/03/1999]
Proposed Exemptions; RREEF America L.L.C. (RREEF) [06/03/1999]
Volume 64, Number 106, Page 29895-29920-----------------------------------------------------------------------
DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D09708, et al.]
Proposed Exemptions; RREEF America L.L.C. (RREEF)
AGENCY: Pension and Welfare Benefits Administration, Labor.
ACTION: Notice of Proposed Exemptions.
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SUMMARY: This document contains notices of pendency before the
Department of Labor (the Department) of proposed exemptions from
certain of the prohibited transaction restrictions of the Employee
Retirement Income Security Act of 1974 (the Act) and/or the Internal
Revenue Code of 1986 (the Code).
Written Comments and Hearing Requests
Unless otherwise stated in the Notice of Proposed Exemption, all
interested persons are invited to submit written comments, and with
respect to exemptions involving the fiduciary prohibitions of section
406(b) of the Act, requests for hearing within 45 days from the date of
publication of this Federal Register Notice. Comments and requests for
a hearing should state: (1) The name, address, and telephone number of
the person making the comment or request, and (2) the nature of the
person's interest in the exemption and the manner in which the person
would be adversely affected by the exemption. A request for a hearing
must also state the issues to be addressed and include a general
description of the evidence to be presented at the hearing.
ADDRESSES: All written comments and request for a hearing (at least
three copies) should be sent to the Pension and Welfare Benefits
Administration, Office of Exemption Determinations, Room N-5649, U.S.
Department of Labor, 200 Constitution Avenue, NW, Washington, DC 20210.
Attention: Application No. stated in each Notice of Proposed Exemption.
The applications for exemption and the comments received will be
available for public inspection in the Public Documents Room of Pension
and Welfare Benefits Administration, U.S. Department of Labor, Room N-
5507, 200 Constitution Avenue, NW, Washington, DC 20210.
Notice to Interested Persons
Notice of the proposed exemptions will be provided to all
interested persons in the manner agreed upon by the applicant and the
Department within 15 days of the date of publication in the Federal
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 (43 FR 47713, October 17, 1978) transferred the authority of
the Secretary of the Treasury to issue exemptions of the type requested
to the Secretary of Labor. Therefore, these notices of proposed
exemption are issued solely by the Department.
The applications contain representations with regard to the
proposed exemptions which are summarized below. Interested persons are
referred to the applications on file with the Department for a complete
statement of the facts and representations.
[[Page 29896]]
RREEF America L.L.C. (RREEF), Located in San Francisco, California
[Application No. D-9708]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the procedures set forth in 29 CFR part
2570, subpart B (55 FR 32836, 32847, August 10, 1990.)
Part I--Exemption for Payment of Certain Fees to RREEF
The restrictions of sections 406(b)(1) and (b)(2) of the Act and
the taxes imposed by section 4975 of the Code, by reason of section
4975(c)(1)(E) of the Code, shall not apply, effective as of (i) May 16,
1994, with respect to a single client, separate account established on
behalf of the Shell Pension Trust (the Shell Account), and (ii) the
date the final exemption is published in the Federal Register, with
respect to any single client, separate account (Single Client Account)
or any multiple client account (Multiple Client Account) formed on, or
after, such a date, to the payment of certain initial investment fees
(the Investment Fee), annual management fees based upon net operating
income (the Asset Management Fee), and performance fees (the
Performance Fee) to RREEF by employee benefit plans for which RREEF
provides investment management services (the Client Plans) <SUP>1</SUP>
pursuant to an investment management agreement (the Agreement) entered
into between RREEF and the Client Plans either individually, through an
establishment (or amendment) of a Single Client Account, or
collectively as participants in a newly established Multiple Client
Account (collectively, the Accounts), provided that the conditions set
forth below in Part III are satisfied.
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\1\ The Client Plans (including employee benefit plans that may
become Client Plans in the future) consist of various pension plans
as defined in section 3(2) of the Act and other plans as defined in
section 4975(e)(1) of the Code with respect to which RREEF serves as
a trustee or an investment manager.
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Part II--Exemption for Investments in a Multiple Client Account
The restrictions of section 406(a)(1)(A) through (D) of the Act and
the taxes imposed by section 4975(c)(1)(A) through (D) of the Code,
shall not apply to any investment by a Client Plan in a Multiple Client
Account managed by RREEF formed on, or after, the date the final
exemption is published in the Federal Register, provided that the
conditions set forth below in Part III are satisfied.
Part III--General Conditions
(a)(1) The investment of plan assets in a Single or Multiple Client
Account, including the terms and payment of any Investment Fee, Asset
Management Fee and Performance Fee (collectively; the Fees), shall be
approved in writing by a fiduciary of a Client Plan which is
independent of RREEF and its affiliates (the Independent Fiduciary).
(2) For purposes of the Fees, the fair market value of the
Accounts' real property assets (other than in the case of actual sales)
will be based on appraisals prepared by independent qualified
appraisers that are Members of the Appraisal Institute (MAI
Appraisers). In this regard, every agreement by which an appraiser is
retained will include the appraiser's representation that: (1) Its
ultimate client is the Account and its underlying Client Plan (and non-
Plan) investors, and (2) it will perform its duties in the interest of
such Account (and investors). In addition, following the date this
proposed exemption is granted, every agreement shall advise the
appraiser that it owes a professional obligation to the Account when
making an appraisal for properties held by the Account.
(b) The terms of any investment in an Account and of the Fees,
shall be at least as favorable to the Client Plans as those obtainable
in arm's-length transactions between unrelated parties.
(c) At the time any Account is established (or amended) and at the
time of any subsequent investment of assets (including the reinvestment
of assets) in such Account:
(1) Each Client Plan in a Single Client Account shall have total
net assets with a value in excess of $100 million, and each Client Plan
that is an investor in a Multiple Client Account shall have total net
assets with a value in excess of $50 million; and provided that
seventy-five percent (75%) or more of the units of beneficial interests
in a Multiple Client Account are held by Client Plans or other
investors having total assets of at least $100 million. In addition, 50
percent (50%) or more of the Client Plans investing in a Multiple
Client Account shall have assets of at least $100 million. A group of
Client Plans maintained by a single employer or controlled group of
employers, any of which individually has assets of less than $100
million, will be counted as a single Client Plan if the decision to
invest in the Account (or the decision to make investments in the
Account available as an option for an individually directed account) is
made by a fiduciary other than RREEF, who exercises such discretion
with respect to Client Plan assets in excess of $100 million.
(2) No Client Plan shall invest, in the aggregate, more than 5% of
its total assets in any Account or more than 10% of its total assets in
all Accounts established by RREEF.
(d) Prior to making an investment in any Account (or amending an
existing Account), the Independent Fiduciary of each Client Plan
investing in an Account shall have received offering materials from
RREEF which disclose all material facts concerning the purpose,
structure, and operation of the Account, including any Fee arrangements
(provided that, in the case of an amendment to the Fee arrangements,
such materials need address only the amended fees and any other
material change to the Account's original offering materials).
(e) With respect to its ongoing participation in an Account, each
Client Plan shall receive the following written information from RREEF:
(1) Audited financial statements of the Account prepared by
independent public accountants selected by RREEF no later than 90 days
after the end of the fiscal year of the Account;
(2) Quarterly and annual reports prepared by RREEF relating to the
overall financial position and operating results of the Account and, in
the case of a Multiple Client Account, the value of each Client Plan's
interest in the Account. Each such report shall include a statement
regarding the amount of fees paid to RREEF during the period covered by
such report;
(3) Periodic appraisals (as agreed upon with the Client Plans)
indicating the fair market value of the Account's assets as established
by an MAI appraiser independent of RREEF and its affiliates. In the
case of any appraisal that will serve as the basis for any ``deemed
sale'' of such property for purposes of calculating the Performance Fee
payable to RREEF (as discussed in paragraph (j) below), then:
(i) In the case of any Single Client Account, such MAI appraiser
shall be either (A) Selected by the Independent Fiduciary of the Client
Plan subject to the affirmative approval of RREEF, or (B) selected by
RREEF subject to approval by the Independent Fiduciary of the Client
Plan;
(ii) In the case of any Multiple Client Account, such MAI appraiser
shall be approved in advance by the Responsible Independent Fiduciaries
(as defined in Part IV(e) below) owning a majority of the interests in
the Accounts, determined according to the latest
[[Page 29897]]
valuation of the Account's assets performed no more than 12 months
prior to such appraisal, which approval may be by written notice and
deemed consent by such Fiduciaries' failure to object to the appraiser
within 30 days of such notice; and
(iii) In either case, the selected MAI appraiser shall acknowledge
in writing that the Client Plan(s) and other investors (in the case of
a Multiple Client Account), rather than RREEF, is (are) its clients,
and that in performing its services for the Account it shall act in the
sole interest of such Client Plan(s) and other investors. In addition,
following the date this proposed exemption is granted, every appraiser
selected shall acknowledge that it owes a professional obligation to
the Client Plan(s) and other investors in the Account in performing its
services as an appraiser for properties in the Account. If an MAI
appraiser selected by RREEF, or an appraisal performed by a previously
approved appraiser, is rejected by the Independent Fiduciary for a
Single Client Account or the Responsible Independent Fiduciaries for
the Multiple Client Account, determined according to the latest
valuation of the Account's assets performed no more than 12 months
prior to such appraisal, the fair market value of the assets for any
``deemed sale'', relating to the payment of a Performance Fee (as
described in paragraphs (i) and (j) below) shall be determined as
follows: (A) the Client Plans shall appoint a second appraiser and, if
the value established for the property does not deviate by more than
10% (or such lesser amount as may be agreed upon between RREEF and the
Client Plan(s)), then the two appraisals shall be averaged; (B) if the
values differ by more than 10%, then the two appraisers shall select a
third appraiser, that is independent of RREEF and its affiliates, who
will attempt to mediate the difference; (C) if the third appraiser can
cause the first two to reach an agreement on a value, that figure shall
be used; however, (D) if no agreement can be reached, the third
appraiser shall determine the value based on procedures set out in the
governing agreements of the Account or, if no such procedures are
established, shall conduct its own appraisal and the two closest of the
three shall be averaged;
(4) In the case of any Multiple Client Account, a list of all other
investors in the Account;
(5) Annual operating and capital budgets with respect to the
Account, to be distributed to a Client Plan within 60 days prior to the
beginning of the fiscal year to which such budgets relate; and
(6) An explanation of any material deviation from the budgets
previously provided to such Client Plan for the prior year.
(f) The total fees paid to RREEF shall constitute no more than
``reasonable compensation'' within the meaning of section 408(b)(2) of
the Act.
(g) The Investment Fee shall be equal to a specified percentage of
the net value of the Client Plan assets allocated to the Account which
shall be payable either:
(1) At the time assets are deposited (or deemed deposited in the
case of reinvestment of assets) in the Account; or
(2) In periodic installments, the amount (as a percentage of the
aggregate Investment Fee) and timing of which have been specified in
advance based on the percentage of the Client Plan's assets invested in
real property as of the payment date; provided that (i) The installment
period is no less than three months, and (ii) if the percentage of the
Client Plan assets which have actually been invested by a payment date
is less than the percentage required for the aggregate Investment Fee
to be paid in full through that date (both determined on a cumulative
basis), the Investment Fee paid on such a date shall be reduced by the
amount necessary to cause the percentage of the aggregate Investment
Fee paid to equal only the percentage of the Client Plan assets
actually invested by that date. The unpaid portion of such Investment
Fee shall be deferred to and payable on a cumulative basis on the next
scheduled payment date (subject to the percentage limitation described
in the preceding sentence).
(h) The Asset Management Fee shall be payable for each quarter from
the net operating income (NOI) of the Account. The amount of the Asset
Management Fee, expressed as a percentage of the NOI of the Account,
shall be established by the Agreement and agreed to by the Independent
Fiduciaries of the Client Plans:
(1) The Asset Management Fee for any Account will be calculated as
follows. The Asset Management Fee for a specific Account real property
will be based solely on items of operating income and expense that are
identified as line items on an operating budget for such property
disclosed to each Client Plan that participates in the Account. The
disclosures have to be made at least 30 days in advance of the fiscal
year to which the budget relates, and approved in the manner described
in (2) below;
(2) Each Client Plan must provide affirmative approval of the
operating budget. Specifically, when the proposed budget (or any
material deviation therefrom) is sent to a Client Plan, it will be
accompanied by a written notice that the Client Plan may object to the
budget or any specific line item therein, for purposes of calculating
the Asset Management Fees for the next fiscal year. The written notice
will contain a statement that affirmative approval of the budget is
required prior to the end of the 30-day period following such
disclosure. In the case of a Multiple Client Account, affirmative
approval by a majority of investors (by interest) will constitute
approval of the proposed budget (or deviation); and
(3) In the event of any subsequent decrease in previously approved
budgeted operating expenses for the fiscal year in excess of the limits
previously described (15% for any line item, 5% overall), then the
resulting increase in NOI (i.e., over and above the allowable
deviation) will not be taken into account in calculating RREEF's
management fee unless affirmative approval for the payment of such fee
is obtained in writing from the Independent Fiduciary for the Client
Plan in the Single Client Account or the Responsible Independent
Fiduciaries for the Multiple Client Account.
(i) In the case of any Multiple Client Account, the Performance Fee
shall be payable after the Client Plan has received distributions from
the Account in excess of an amount equal to 100% of its invested
capital plus a pre-specified annual compounded cumulative rate of
return (the Threshold Amount or Hurdle Rate). However, in the case of
RREEF's removal or resignation, RREEF shall be entitled to receive a
Performance Fee payable either at the time of removal or, in the event
of RREEF's resignation, upon sale of the assets to which the
Performance Fee is allocable or upon termination of the Account as the
case may be, subject to the requirements of paragraph (l) below, as
determined by a deemed distribution of the assets of the Account based
on an assumed sale of such assets at their fair market value (in
accordance with independent appraisals), only to the extent that the
Client Plan would receive distributions from the Account in excess of
an amount equal to the Threshold Amount at the time of RREEF's removal
or resignation. Both the Threshold Amount and the amount of the
Performance Fee, expressed as a percentage of the net proceeds from a
capital event distributed (or deemed distributed) from the Account in
excess of the Threshold Amount, shall be established by the Agreement
and agreed to by the Independent Fiduciaries of the Client Plans.
[[Page 29898]]
(j) In the case of any Single Client Account, the Performance Fee
shall be determined and paid either: (1) In the same manner as in the
case of a Multiple Client Account, as described in paragraph (i) above;
or (2) at the end of any pre-specified period of not less than one
year, provided that such Fee is based upon the sum of all actual
distributions from the Account during such period, plus deemed
distributions of the assets of the Account based on an assumed sale of
all such assets at their fair market value as of the end of such period
(in accordance with independent appraisals performed within 12 months
of the calculation) which are calculated to be in excess of the
Threshold Amount or the Hurdle Rate through the end of such period. For
this purpose, the Performance Fee measuring period shall be established
by the Agreement and agreed to by the Independent Fiduciary of the
Client Plan, provided that such period is not less than one year. In
addition, RREEF shall provide notice to the Client Plan within 60 days
of each Performance Fee calculation for a Single Client Account that
the Independent Fiduciary of the Client Plan has the right to request
updated appraisals of the properties held by the Account if such
Fiduciary determines that the existing independent appraisals
(performed within 12 months of the calculation) are no longer
sufficient.
(k) The Threshold Amount for any Performance Fee shall include at
least a minimum rate of return to the Client Plan, as defined below in
Part IV, paragraph (f).
(l) In the event RREEF resigns as investment manager for an
Account, the Performance Fee shall be calculated at the time of
resignation as described above in paragraph (i) above and allocated
among each property, based on the appraised value of such property in
relationship to the total appraised value of the Account. Each amount
arrived at through this calculation shall be multiplied by a fraction,
the numerator of which will be the actual sales price received by the
Account on subsequent disposition of the property (or in the case of a
property which has not been sold prior to the termination of a Multiple
Client Account, the appraised value of the property as of the
termination date), and the denominator of which will be the appraised
value of the property which was used in connection with determining the
Performance Fee at the time of resignation, provided that this fraction
shall never exceed 1.0. The resulting amount for each property shall be
the Performance Fee payable to RREEF upon the sale of such property or
termination of the Multiple Client Account, as the case may be.
(m) In cases where RREEF does have discretion to reinvest proceeds
from capital events, the reinvested amount shall not be treated as a
new contribution of capital by the Client Plan for purposes of the
Investment Fee, as described above in paragraph (g), or having been
distributed for purposes of the payment of Performance Fee as described
above in paragraphs (i) and (j);
(n) RREEF or its affiliates shall maintain, for a period of six
years, the records necessary to enable the persons described in
paragraph (o) of this Part III to determine whether the conditions of
this exemption have been met, except that:
(1) A prohibited transaction will not be considered to have
occurred if, due to circumstances beyond the control of RREEF or its
affiliates, the records are lost or destroyed prior to the end of the
six year period; and (2) no party in interest, other than RREEF, shall
be subject to the civil penalty that may be assessed under section
502(i) of the Act or the taxes imposed by section 4975(a) and (b) of
the Code if the records are not maintained or are not available for
examination as required by paragraph (o) below.
(o)(1) Except as provided in paragraph (o)(2) and notwithstanding
any provisions of section 504(a)(2) and (b) of the Act, the records
referred to in paragraph (n) of this Part III shall be unconditionally
available at their customary location for examination during normal
business hours by:
(i) Any duly authorized employee or representative of the
Department or the Internal Revenue Service;
(ii) Any fiduciary of a Client Plan or any duly authorized employee
or representative of such fiduciary;
(iii) Any contributing employer to a Client Plan or any duly
authorized employee or representative of such employer; and
(iv) Any participant or beneficiary of a Client Plan or any duly
authorized employee or representative of such participant or
beneficiary;
(2) None of the persons described above in paragraph (o)(1)(ii)-
(iv) shall be authorized to examine the trade secrets of RREEF and its
affiliates or any commercial or financial information which is
privileged or confidential.
(p) RREEF shall provide a copy of the proposed exemption and a copy
of the final exemption to all Client Plans that invest in any Single
Client Account or any Multiple Client Account formed on, or after, the
date the final exemption is published in the Federal Register.
Part IV--Definitions
(a) An ``affiliate'' of a person includes:
(1) Any person directly or indirectly, through one or more
intermediaries, controlling, controlled by, or under common control
with the person;
(2) Any officer, director, employee, relative of, or partner of any
such person; and
(3) Any corporation or partnership of which such person is an
officer, director, partner or employee.
(b) The term ``control'' means the power to exercise a controlling
influence over the management or policies of a person other than an
individual.
(c) The term ``management services'' means:
(1) Development of an investment strategy for the Account and
identification of suitable real estate-related investments;
(2) Directing the investments of the assets of the Account,
including the determination of the structure of each investment, the
negotiation of its terms and conditions and the performance of all
requisite due diligence;
(3) Determination of the timing of, and directing, the disposition
of assets of the Account and directing the liquidation of the Account
upon termination;
(4) Administration of the overall operation of the investments of
the Account, including all applicable leasing, management, financing
and capital improvement decisions;
(5) Establishing and maintaining accounting records of the Account
and distributing reports to Client Plans as described in Part III; and
(6) Selecting and directing all service providers of ancillary
services as defined in this Part IV; provided, however, that some or
all of the foregoing management services may be subject to the final
discretion of the Independent Fiduciary(ies) for the Client Plan(s).
(d) The term ``ancillary services'' means:
(1) Legal services;
(2) Services of architects, designers, engineers, construction
managers, hazardous materials consultants, contractors, leasing agents,
real estate brokers, and others in connection with the acquisition,
construction, improvement, management and disposition of investments in
real property;
(3) Insurance brokerage and consultation services;
(4) Services of independent auditors and accountants in connection
with auditing the books and records of the Accounts and preparing tax
returns;
[[Page 29899]]
(5) Appraisal and mortgage brokerage services; and
(6) Services for the development of income-producing real property.
(e) The term ``Independent Fiduciary'' with respect to any Client
Plan means a fiduciary (including an in-house fiduciary) independent of
RREEF and its affiliates. With respect to a Multiple Client Account,
the terms ``Independent Fiduciary'' or ``Responsible Independent
Fiduciaries'' mean the Independent Fiduciaries of the Client Plans
invested in the Account and other authorized persons acting for
investors in the Account which are not employee benefit plans as
defined under section 3(3) of ERISA (such as governmental plans,
university endowment funds, etc.) that are independent of RREEF and its
affiliates, and that collectively hold more than 50% of the interests
in the Account.
(f) The terms ``Threshold Amount'' or ``Hurdle Rate'' mean, with
respect to any Performance Fee, an amount which equals all of a Client
Plan's capital invested in an Account plus a pre-specified annual
compounded cumulative rate of return that is at least a minimum rate of
return determined as follows:
(1) A ``floating'' or non-fixed rate which is at least equal to the
lesser of seven percent, or the rate of change in the consumer price
index (CPI), during the period from the deposit of the Client Plan's
assets into the Account until the determination date; or
(2) A fixed rate which is at least equal to the lesser of seven
percent or the average rate of change in the CPI over some period of
time specified in the Agreement, which shall not exceed 10 years.
(g) The terms ``Net Operating Income'' or ``NOI'' means all
operating income of the Account (i.e., rents, interest, and other
income from day-to-day investment activities of the Account) less
operating expenses, determined on an accrual basis in accordance with
generally accepted accounting principles, but without regard to
depreciation (or other non-cash) expense and capital expenditures and
without regard to payments of interest and principal with respect to
any acquisition indebtedness relating to the property.
(h) The term ``Net Proceeds of a Capital Event'' means all proceeds
from capital events of an Account (i.e., sales or non-recourse
refinances of real property investments owned by the Account) less
repayment of debt with respect to such property, closing expenses paid,
and reasonable reserves established in connection therewith, whether
such reserves are for repayment of existing or anticipated obligations
or for contingent liabilities.
EFFECTIVE DATE: This proposed exemption, if granted, will be effective
as of (i) May 16, 1994, with respect to the Shell Account, and (ii) the
date the final exemption is published in the Federal Register, with
respect to any Single Client Account and any Multiple Client Account
formed on, or after, such date.
Summary of Facts and Representations
1. RREEF America L.L.C. and its affiliate, RREEF Management
Company, provide investment and property management services to
institutional investors, including employee benefit plans and other
tax-exempt entities, through various separate accounts and commingled
accounts.
On January 27, 1998, RREEF America L.L.C. and its affiliate, RREEF
Corporation (collectively, RREEF), were acquired by RoProperty
Services, B.V. (RoProperty), a major Dutch investment advisory firm. As
a result, the RREEF entities were combined into a newly created
Delaware limited liability company which continues to use the name
``RREEF America L.L.C.'' RREEF operates as an autonomous entity which
continues to provide investment management services, and its affiliate,
RREEF Management Company, continues to provide property management
services.
2. RREEF is generally appointed as an investment manager (the
Manager) as defined in section 3(38) of the Act with respect to each
Client Plan that invests in a Single Client Account or a Multiple
Client Account. Although RREEF has discretion with respect to the day-
to-day operation of each Account and, in many cases, RREEF has full
discretion over Account acquisition and/or disposition decisions, in
certain cases final investment authority may remain with the Client
Plans.
3. A Client Plan may enter into one or more separate account
relationships with RREEF (each, a Single Client Account) pursuant to
one or more individually negotiated investment management agreements
with RREEF, or by investing in a commingled investment fund (Multiple
Client Account, collectively; the Accounts) managed by
RREEF.<SUP>2</SUP> The Accounts to date have been blind investment
relationships established for the purpose of identifying and acquiring
real property investments that meet certain investment criteria.
However, specified-property investment relationships may be established
to invest in pre-identified real property investments. The
responsibilities of RREEF in a typical blind discretionary Account
would include:
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\2\ The applicant represents that in some instances a Client
Plan's investment in a Multiple Client Account that is a common or
collective trust fund maintained by a bank would be exempt from the
restrictions of section 406(a) of the Act by reason of section
408(b)(8). The Department expresses no opinion herein whether all
the conditions of section 408(b)(8) will be satisfied in such
transactions.
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(a) Development of an investment strategy for the Account and
identification of suitable real estate investments.
(b) Directing the investment of the assets of the Account,
including the determination of the structure of each investment, the
negotiation of its terms and conditions, and the performance of
requisite due diligence.
(c) Determining the timing of, and directing, the disposition of
assets of the Account and directing the liquidation of the Account upon
termination.
(d) Administering the overall operation of the investments of the
Account, including all applicable leasing, management, financing, and
capital improvement decisions.
(e) Establishing and maintaining accounting records of the Account,
and distributing reports to Client Plans.
(f) RREEF also has complete discretion in the selection and
direction of the ancillary services (Ancillary Services) defined in
Part IV, paragraph (d) above.<SUP>3</SUP>
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\3\ RREEF or its affiliates may, from time-to-time, provide
certain Ancillary Services to the Accounts, such as in connection
with the development or redevelopment of real property, preparation
of tax returns, environmental consulting, or other services.
Occasionally, RREEF has provided construction management and
development services with respect to non-ERISA governmental plan
accounts. However, upon special request from a client, RREEF may
agree to provide ancillary services, such as construction management
or development services based upon its knowledge of the Client
Plan's investments and its particular expertise. It represented that
the Ancillary Services are provided in accordance with section
408(b)(2) and the regulations thereunder (see 29 CFR 2550.408b-2).
However, the Department expresses no opinion as to whether the
selection of RREEF to provide Ancillary Services or the payment of
fees for such Ancillary Services, as described herein, would meet
the conditions of section 408(b)(2) of the Act.
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RREEF's primary investment objective is to acquire income-producing
real property which will generate current return through cash
distributions and will offer a potential for profit through gain on
resale.
Currently, Multiple Client Accounts consist primarily of tax-exempt
group trusts organized pursuant to IRS Revenue Ruling 81-100 and
limited partnerships. However, other Multiple Client Accounts may be
organized in the
[[Page 29900]]
future, including, but not limited to, title-holding corporations, real
estate investment trusts, or limited liability corporations. In the
case of Multiple Client Accounts that are group trusts, individual
principals and officers of RREEF generally serve as trustees thereof.
Similarly, RREEF principals and officers may serve as directors and/or
officers of other vehicles. RREEF currently does not serve as general
partner with respect to any of its limited partnership accounts that
are subject to ERISA. Typically, the general partner is a corporation
owned by one or more of the limited partners. However, in each case,
the primary investment discretion is delegated to RREEF pursuant to an
investment management agreement between RREEF and the Account (the
Agreement).
4. RREEF proposes to have the Client Plans pay for investment
management services it renders to the Accounts based upon a multi-fee
structure which will be approved in advance by the Independent
Fiduciaries of the Client Plans.<SUP>4</SUP> Each Client Plan in a
Single Client Account shall have total net assets with a value in
excess of $100 million, and each Client Plan that is an investor in a
Multiple Client Account shall have total net assets with a value in
excess of $50 million. In addition, seventy-five percent (75%) or more
of the units of beneficial interests in a Multiple Client Account must
be held by Client Plans or other investors having total assets of at
least $100 million, and 50 percent (50%) or more of the Client Plans
investing in a Multiple Client Account must have assets of at least
$100 million. A group of Client Plans maintained by a single employer
or controlled group of employers, any of which individually has assets
of less than $100 million, will be counted as a single Client Plan if
the decision to invest in the Account (or the decision to make
investments in the Account available as an option for an individually
directed account) is made by a fiduciary other than RREEF, who
exercises such discretion with respect to Client Plan assets in excess
of $100 million. No Client Plan shall invest, in the aggregate, more
than 5% of its total assets in any Account or more than 10% of its
total assets in all Accounts established by RREEF.
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\4\ Section 404 of the Act requires, among other things, that a
plan fiduciary act prudently and solely in the interest of the
plan's participants and beneficiaries. Thus, the Department expects
a plan fiduciary, prior to entering into any performance based
compensation arrangement with an investment manager, to fully
understand the risks and benefits associated with a compensation
formula following disclosure by the investment manager of all
relevant information pertaining to the proposed arrangement. In
addition, a plan fiduciary must be capable of periodically
monitoring the actions taken by the investment manager in the
performance of its duties. The plan fiduciary must consider prior to
entering into any such arrangement, whether it is able to provide
adequate oversight of the investment manager during the course of
the arrangement.
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The relief provided by this proposed exemption for the multi-fee
structures described herein will apply prospectively to any newly
formed Multiple Client Account, if such arrangement is approved in
advance by the appropriate Independent Fiduciaries of the Client Plans
and other investors that invest in the Account. In addition, the relief
provided by this proposed exemption will apply retroactively to the
Shell Pension Trust for its existing Single Client Account (i.e., the
Shell Account), as of May 16, 1994, and prospectively for other Single
Client Accounts if the conditions of the exemption are met. Therefore,
with regard to any Account, the Independent Fiduciary(ies) of the
Client Plan(s) will have final approval as to whether the Agreement
between the Client Plan(s) and RREEF will provide for any Investment
Fees, Asset Management Fees, or Performance Fees. Similarly, in the
case of any Account, the final decision to invest the assets of any
Client Plan in such Account will be made by an Independent Fiduciary.
RREEF will not exercise its discretion with respect to any Single
Client Account to invest those assets in any Multiple Client Account.
With respect to the Shell Account, RREEF represents that this Single
Client Account has complied with all the applicable conditions
contained herein for, among other things, approval by an Independent
Fiduciary for investment in such an Account, the payment of any Fees to
RREEF, the retention of any appraiser (as discussed further below) for
the valuation of properties held in the Account,<SUP>5</SUP> and the
minimum plan asset size required for participation in such
Accounts.<SUP>6</SUP>
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\5\ RREEF's Quarterly Report for the Shell Account, dated
December 31, 1998, describes a portfolio consisting of the following
six properties: (1) the Bellaire Place Apartments, a residential
property located in Redmond, Washington, with a fair market value of
approximately $18.6 million; (2) the San Diego Business Center, an
industrial property located in San Diego, California, with a fair
market value of approximately $17.7 million; (3) the West Sacramento
Industrial Center, an industrial property located in Sacramento,
California, which was sold on December 23, 1998 for $6.4 million;
(4) the Broadway Business Park, an industrial property located in
Phoenix, Arizona, with a fair market value of $26.5 million; (5)
1627 K Street, N.W., an office building located in Washington, D.C.,
with a fair market value of approximately $9.4 million; and (6)
Wendemere at the Ranch Apartments, a residential property located in
Westminster, Colorado, with a fair market value of approximately $16
million. The fair market value of the properties still held in the
Shell Account, as of December 31, 1998, was approximately
$88,268,000.
\6\ The Shell Pension Trust contained approximately $5.7 billion
in total assets, of which approximately 2% were invested in real
estate, as of January, 1999. These real estate assets are managed by
three primary investment managers, one of which is RREEF.
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5. The multi-fee structure will include: (i) The Investment Fee, a
one-time initial fee paid either at the time the Client Plan invests
in, or allocates additional assets to, the Account, or in periodic
installments while such assets are invested by the Account, as
described below; (ii) the Asset Management Fee, an annual fee for asset
management charged as a percentage of the net operating income produced
by properties held in the Account (defined below), which will be
payable to RREEF without regard to the return to the Client Plans of
their invested capital; and (iii) the Performance Fee, a fee charged
upon actual or deemed distributions of capital proceeds from the
Account in excess of a Client Plan's invested capital, plus a
negotiated cumulative, compounded annual hurdle rate of return on such
invested capital (i.e., the Threshold Amount or Hurdle Rate). In a
Single Client Account, an Independent Fiduciary may agree to allow
RREEF to receive a periodic Performance Fee based on the Account's
performance prior to the Client Plan receiving actual distribution of
capital back from the Account in amounts which exceed the prescribed
Threshold Amounts. Such Fees will be based on deemed distributions of
the assets in such Accounts at periodic intervals, with all property
valuations determined by qualified real estate appraisers independent
of RREEF and its affiliates. Any property valuation used in the
calculation of the Performance Fee will be performed within 12 months
of that calculation.
6. RREEF requests an individual exemption for Client Plans that
invest in an Account to pay an Investment Fee, Asset Management Fee,
and a Performance Fee to RREEF under circumstances described below.
RREEF represents that Fee rates and Threshold Amounts will be
negotiated on an Account-by-Account basis.
The Investment Fee will be a one-time fee intended to cover the
expense of organizing the Account, identifying suitable investments,
and completing the initial purchases of real properties for the
Account, based on the assets invested by the Client Plan in the
Account. The Investment Fee may be paid either (i) At the time the
Client
[[Page 29901]]
Plan invests assets in the Account, or (ii) in installments at the end
of pre-specified periods of not less than three months (over a
specified period of years). However, if the pre-specified percentage of
the Account's assets has not been invested by the payment date for the
Investment Fee, the amount of such fee payable on that date will be
reduced to reflect the percentage of assets which have been invested by
that date. In such instances, the remainder of the Investment Fee will
be deferred until the next pre-specified installment date. At that
time, the Investment Fee for the current and past installment dates
will be paid (subject to further deferral if the relevant assets in the
Account have not been invested at that time). The Investment Fees will
generally range from 0% to 2% of the capital committed for investment
by the Client Plans. However, the exact percentage for any Investment
Fee will be negotiated between RREEF and the relevant Client Plans in
the Account.
7. The Asset Management Fee will be paid quarterly throughout the
term of the Account. As with the Investment Fee, the exact terms of the
Asset Management Fee will be negotiated between RREEF and the Client
Plan(s) prior to the initial investment of any Client Plan(s)' assets
in the Account. The Asset Management Fee will be calculated with
respect to the net operating income (NOI) from properties owned by the
Account. In this regard, NOI will not include gains made on properties
from capital events. The Asset Management Fee will be paid without
regard to the return of the Client Plan's invested capital.
The Asset Management Fee will compensate the Investment Manager for
the following services: (i) Selection of properties and other assets
for acquisition or disposition in an Account, (ii) day-to-day
investment and administrative operations of an Account, (iii)
performance of property management and leasing services for the
properties held by the Account, (iv) obtaining and maintaining
insurance for the properties and other assets in the Account, (v)
establishing tax-exempt title-holding corporations under section 501(a)
of the Code for the properties, (vi) obtaining independent MAI
appraisals of the properties every three years, and performing annual
internal valuations of the properties, as necessary; and (vii)
preparing quarterly and annual written reports concerning assets,
receipts, and disbursements of the Account.
As stated above, the Asset Management Fee will be charged as a
percentage of the NOI on the properties held by the Account for each
quarter. The Asset Management Fees are determined by negotiation for
each Account, but generally will be between 5% to 8% of the NOI per
quarterly payment period for properties in the Account. NOI for an
Account will be determined on the basis of recurring operating (non-
capital) income (i.e., rents, interest, and other income from the day-
to-day investments of the Account) less recurring operating expenses
(i.e., utilities, taxes, insurance and maintenance) determined on an
accrual basis in accordance with generally accepted accounting
principles. RREEF states that these recurring revenue items and
operating expenses will be set forth in annual budgets that are
reviewed and approved in advance by the Client Plans and other
investors.
The NOI for an Account will be determined without regard to capital
expenditures and non-cash expenditures for the Account, such as
depreciation on properties held by the Account or amortization of
capital expenditures. In addition, NOI will not be reduced by debt
service. Therefore, capital items, such as debt service and non-cash
expense items, will have no effect on RREEF's Asset Management Fees.
Instead, as discussed more fully below, these items will be reflected
in the Performance Fee because any capital expenditure will increase
the Threshold Amount for purposes of any subsequent Performance Fee
calculation, and any capital distribution will reduce the Threshold
Amount.<SUP>7</SUP>
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\7\ As noted above, the determinations of which items are
``operating'' and which are ``capital'' will be determined by
generally accepted accounting principles. Such determinations are
subject to annual review and confirmation by independent Certified
Public Accountants retained to audit RREEF's annual financial
statements.
---------------------------------------------------------------------------
With respect to each Account, RREEF will prepare annual operating
and capital budgets for each of the Account's properties, which will be
distributed to each Client Plan invested in the Account, within 60 days
prior to the beginning of the fiscal year to which such budgets apply.
At the end of each year, RREEF will also distribute to each Client Plan
an explanation of any material deviation from the budgets previously
provided to the Client Plan for such year.
8. RREEF agrees that in calculating its Asset Management Fee for
any Account, the Fee for any individual real property in the Account
will be determined solely on the basis of those items of operating
income and expense that are identified as line items in the operating
budget for such property, which shall be disclosed to each Client Plan
that participates in the Account. Such disclosures have to be made at
least 30 days in advance of the fiscal year to which the budget
relates, and approved by the Client Plans in the manner described
below.
If, during such year for any previously disclosed line item of
operating expense in the budget for a property, there is any material
deviation between such line item and the actual amount of such expense
for the current year, such deviation will not be taken into account in
calculating the Asset Management Fee unless it is first disclosed to,
and approved by, the Client Plan(s) in the same manner as the original
budgeted line item. For this purpose, a determination of what is
considered a ``material'' deviation will be established by the
investment or property management agreement between RREEF and the
Client Plan(s) for any real property held by the Account. Property
management agreements used by RREEF permit no more than a 15% variance
between any individual line item expense in the operating budget from
year to year. In addition, overall budgeted expenses may vary no more
than 5% from year to year.
If the requisite percentage of investors in an Account fails to
approve the proposed budget or any line item therein, then RREEF will
continue to utilize the prior year's budget figures (generally with a
permitted deviation of 5%). In the event of any subsequent material
deviation from a line item expense in a previously approved budget, or
the addition of a new line item, RREEF would use the expense figures as
budgeted for purposes of its fee calculation, and the variance would
have no effect on its current Asset Management Fee calculation, unless
a revised budget reflecting the deviation (or new line item) is
approved. Any such variance would be reflected only in the subsequent
Performance Fee calculation (by increasing or decreasing the Threshold
Amount).<SUP>8</SUP>
---------------------------------------------------------------------------
\8\ For example, if RREEF were to budget landscaping expenses at
$100 for an Account, but the actual figure turns out to be $80,
unless RREEF obtains the approval of its Client Plans, the amount it
uses for calculating its Asset Management Fee would be limited to
$85 (applying the 15% deviation, as described above). Although the
additional $5 cost savings directly benefits the Client Plans, it
would not be reflected in the Asset Management Fee. Rather, to the
extent that this cost savings increases the amount available for
distribution to the Client Plans, it would be reflected in the
Threshold Amount for purposes of calculating RREEF's future
Performance Fee.
---------------------------------------------------------------------------
The Client Plan approval for these purposes will be by an
affirmative approval in advance by the Independent Fiduciary of a
Single Client Account or
[[Page 29902]]
the Responsible Independent Fiduciaries for a Multiple Client Account
representing at least a majority of the interests in such
Account.<SUP>9</SUP> Specifically, when the proposed budget (or any
material deviation therefrom) is sent to a Client Plan, it will be
accompanied by a written notice that the Client Plan must approve the
budget, and any specific line item therein, for purposes of calculating
the Asset Management Fees for the next fiscal year. The written notice
will contain a statement that affirmative approval of the current
budget is required prior to the end of the 30-day period following such
disclosure. In the case of a Multiple Client Account, affirmative
approval by a majority of investors (by interest) will constitute
approval of the proposed budget (or deviation). In the event of any
subsequent decrease in previously approved budgeted operating expenses
for the fiscal year in excess of the limits previously described (15%
for any line item, 5% overall), then the resulting increase in NOI
(i.e., over and above the allowable deviation) will not be taken into
account in calculating RREEF's management fee unless affirmative
approval for the payment of such fee is obtained in writing from
Independent Fiduciary for the Client Plan in the Single Client Account
or the Responsible Independent Fiduciaries for the Client Plans and
other investors in the Multiple Client Account.
---------------------------------------------------------------------------
\9\ In this regard, the Department notes that an Independent
Fiduciary for a Single Client Account should closely scrutinize
budget estimates for both the NOI of the Account and the Asset
Management Fees payable to RREEF each year based on the actual NOI.
With respect to a Multiple Client Account, the Responsible
Independent Fiduciaries should collectively scrutinize such budgets
and NOI-based Fees, and raise appropriate objections to those Fees
which result from actual operating expenses that materially deviate
from previously approved budgets for such expenses. Thus, the
Department emphasizes that an Independent Fiduciary for a Client
Plan investing in either a Single or Multiple Client Account must
adequately monitor the payment of any Asset Management Fees to RREEF
by closely reviewing how the NOI that results from each property
held by the Account may be affected by any actions taken by RREEF
for such property.
---------------------------------------------------------------------------
With respect to the Shell Account, RREEF represents that annual
budgets have been presented to an Independent Fiduciary for the Shell
Pension Trust for review and approval each year since May 16, 1994. In
this regard, RREEF states that although the annual budget approvals for
properties held in the Shell Account may not have been in writing in
all cases, both parties (i.e., RREEF and the Independent Fiduciary for
the Shell Account) have made contemporaneous written confirmations of
their discussions regarding the annual budgets.
9. The applicant states that in lieu of the Investment Fee and/or
the Asset Management Fee, RREEF and the Client Plans may agree to an
alternative fee arrangement for an Account (the Alternative Fee) which
is based either upon a fixed amount or amounts, or an objective formula
to be negotiated (in either case) between RREEF and the Client Plan
prior to the initial investment of any Client Plan assets in an
Account. RREEF represents that any Alternative Fee will be covered by
section 408(b)(2) and the regulations thereunder (29 CFR 2550.408b-2).
Accordingly, no exemption is being requested by RREEF for any
Alternative Fees.
10. In a Single Client Account, the Performance Fee will be
determined and paid either (i) In the same manner as in the case of a
Multiple Client Account, or (ii) at the end of any pre-specified period
of not less than one-year, provided that the Fee is based upon the sum
of all actual distributions from the Account during such period, plus
deemed distributions of the assets of the Account based on an assumed
sale of all such assets at their fair market value as of the end of
such period (in accordance with independent appraisals performed within
12 months of the calculation) which are calculated to be in excess of
the Threshold Amount through the end of such period.
In the case of a Multiple Client Account, the Performance Fee will
be charged against all distributions of net proceeds from capital
events, as defined in Part IV(h), only after the Client Plans and other
investors have received distributions (from all sources) from the
Account in excess of the Threshold Amount agreed to by the Responsible
Independent Fiduciaries.
Most of RREEF's Single Client Accounts are long-term open-ended
relationships under which the Client Plans may continue to invest new
funds on an ongoing basis. For this reason, RREEF states that certain
Client Plans that invest in Single Client Accounts will negotiate for
the payment of a Performance Fee that would be calculated and payable
periodically, not less frequently than once a year (generally, every
three years, commencing on the third anniversary of the first
acquisitions of properties made by the Account). As noted above, this
periodic Performance Fee would be based on all actual sales of
properties by the Account and distributions made back to the investors
during such period, as well as deemed or constructive sales of all
properties held in the Account at their most recent appraised values,
and the deemed distributions of the net proceeds from such constructive
sales plus earnings which are considered to be at or above the
Threshold Amount.<SUP>10</SUP> In such instances, the periodic
Performance Fee will take into account both realized and unrealized net
gains on properties held in a Single Client Account, and would be
payable to RREEF for deemed distributions of unrealized net gains on
properties held by the Account for a pre-specified period. Therefore,
if agreed to by the Independent Fiduciary for the Client Plan, RREEF
would earn a Performance Fee based on the Single Client Account's
performance which occurs prior to a return to the Client Plan of its
invested capital plus earnings at or above the designated Threshold
Amount or Hurdle Rate.
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\10\ In this regard, RREEF represents that while it anticipates
that most Client Plans establishing a Single Client Account will
elect to pay a periodic Performance Fee based on deemed
distributions, RREEF will not preclude any such Client Plan from
paying a Performance Fee only after the Client Plan has received
actual distributions from an Account equal to its initial invested
capital plus earnings at the Threshold Amount. However, a periodic
Performance Fee arrangement will not be available for Multiple
Client Accounts.
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11. For purposes of the Fees, the fair market value of the
Accounts' real property assets (other than in the case of actual sales)
will be based on appraisals prepared by independent MAI appraisers. In
this regard, every agreement by which an appraiser is retained will
include the appraiser's representation that: (1) Its ultimate client is
the Account and its underlying Plan (and non-Plan) investors, and (2)
it will perform its duties in the interest of such Account (and
investors). The applicant states that in the case of any appraisal that
will serve as the basis for any ``deemed sale'' of such property for
purposes of calculating the periodic Performance Fee payable to RREEF,
then the following procedure shall be utilized:
(a) In the case of any Single Client Account, such MAI appraiser
shall be either (i) Selected by the Independent Fiduciary of the Client
Plan subject to the approval of RREEF, or (ii) selected by RREEF
subject to the affirmative approval by the Independent Fiduciary of the
Client Plan;
(b) In the case of any Multiple Client Account, such MAI appraiser
shall be approved in advance by the Responsible Independent Fiduciaries
(as defined in Part IV(e) above) owning a majority of the interests in
the Account according to the latest valuation of the Account's assets
performed no more than 12 months prior to such appraisal, which
[[Page 29903]]
approval may be by written notice and deemed consent by such
Fiduciaries' failure to object to the appraiser within 30 days of such
notice; and
(c) In either case, the selected MAI appraiser shall acknowledge in
writing that the Client Plan(s) and other investors (in the case of a
Multiple Client Account), rather than RREEF, is (are) its clients, and
that in performing its services for the Account it shall act in the
sole interest of such Client Plan(s) and other investors. In addition,
following the date this proposed exemption is granted, every appraiser
selected shall acknowledge that it owes a professional obligation to
the Client Plans and other investors in the Account in performing its
services as an appraiser for properties in the Account.
If an MAI appraiser selected by RREEF, or an appraisal performed by
a previously approved appraiser, is rejected by the Independent
Fiduciary for a Single Client Account or the Responsible Independent
Fiduciaries for the Client Plans owning the majority of the interests
in the Multiple Client Account according to the latest valuation of the
Account's assets performed no more than 12 months prior to such
appraisal, the fair market value of the assets for any ``deemed sale''
relating to the payment of a Performance Fee will be determined as
follows: (i) The Client Plans shall appoint a second appraiser and, if
the value established for the property does not deviate by more than
10% (or such lesser amount as may be agreed upon between RREEF and the
Client Plan(s)), then the two appraisals shall be averaged; (ii) if the
values differ by more than 10%, then the two appraisers shall select a
third appraiser, that is independent of RREEF and its affiliates, who
will attempt to mediate the difference; (iii) if the third appraiser
can cause the first two to reach an agreement on a value, that figure
shall be used; however, (iv) if no agreement can be reached, the third
appraiser shall determine the value based on procedures set out in the
governing agreements of the Account or, if no such procedures are
established, shall conduct its own appraisal and the two closest of the
three shall be averaged.
In all cases, the Client Plan will retain the right to challenge
any appraiser or appraisal. In the case of a Single Client Account, the
frequency and timing of the required appraisals will be determined by
the Independent Fiduciary of the Client Plan at the time it enters into
an Account relationship with RREEF. However, all Performance Fee
calculations will be based on contemporaneous appraisals of properties
held by the Account, which will be performed within 12 months of the
calculation. Thus, for example, RREEF maintains that a three year
appraisal cycle will correspond to a three year periodic Performance
Fee measuring period for an Account. In addition, RREEF will provide
notice to the Client Plan within 60 days of each Performance Fee
calculation for a Single Client Account that the Independent Fiduciary
of the Client Plan has the right to request updated appraisals of the
properties held by the Account if such Fiduciary determines that the
existing independent appraisals (performed within 12 months of the
calculation) are no longer sufficient.
12. With respect to the calculation of any Threshold Amount for the
payment of a Performance Fee, RREEF states that a bookkeeping account
will be maintained for each Client Plan which will show at all times
the amount that has to be distributed to satisfy the Threshold Amount.
When a certain amount is invested in the Account on a particular date,
this bookkeeping account will initially equal the invested amount and
will thereafter be increased to reflect the hurdle/threshold rate of
return for the Account compounded on an annual basis. Whenever a
distribution (from any source) is made from the Account to the Client
Plan, the amount of this bookkeeping account will be reduced by the
full amount of the distribution. Thereafter, the Threshold Amount will
be calculated with respect to and added to this reduced amount. Only
when the bookkeeping account is reduced to zero will the Threshold
Amount be satisfied. With all Multiple Client Accounts, and those
Single Client Accounts that elect to have a Performance Fee paid only
after actual distributions are paid from the Account, once the
Threshold Amount has been satisfied, the Performance Fee will be
payable to RREEF with respect to all further distributions of net
proceeds from capital events from the Account. With respect to any
Single Client Accounts which elect to pay periodic Performance Fees
based upon deemed distributions of the proceeds from an assumed sale of
the properties by the Account, any such deemed distribution would
reduce the Threshold Amount only for purposes of such Fee payment.
Thus, immediately after such calculation, the Threshold Amount would be
increased by the full amount of the deemed distribution for purposes of
determining any later Performance Fee based on either deemed or actual
distributions to the Client Plans.
13. The applicant submitted hypothetical examples of how the
Performance Fee would work in a Multiple Client Account and a Single
Client Account context.
In the first example, RREEF establishes a Multiple Client Account
to which the Client Plans contribute $100 million (Initial
Contribution) and agree to pay RREEF a Performance Fee equal to 15% of
all amounts distributable from the Account after the investors have
received distributions equal to their initial invested capital plus a
real (CPI-adjusted) annual Threshold Amount of return of 4%. Assuming
that CPI remains constant at 4% annually, the nominal annual Threshold
Amount is 8% (the Threshold Amount). The Multiple Client Account
acquires two real properties at a cost of $90 million (Property I) and
$10 million (Property II, collectively; the Properties). Annual cash
flow from operations is 7% of the Initial Contribution of $100 million,
or 7% million (Annual Cash Flow).
For a Multiple Client Account, the Threshold Amount is calculated
as follows: <SUP>11</SUP>
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\11\ This example has been simplified. In reality, distributions
would be made periodically throughout the year, reducing the amount
on which the hurdle is calculated.
----------------------------------------------------------------------------------------------------------------
Threshold
amount (in
Calculation millions of
$)
----------------------------------------------------------------------------------------------------------------
Year 1................................... 100.00+(.08 x 100.00)-7 = $101.00
Year 2................................... 101.00+(.08 x 101.00)-7 = 102.08
Year 3................................... 102.08+(.08 x 102.08)-7 = 103.25
Year 4................................... 103.25+(.08 x 103.25)-7 = 104.51
Year 5................................... 104.51+(.08 x 104.51)-7 = 105.87
[[Page 29904]]
Year 6................................... 0
----------------------------------------------------------------------------------------------------------------
At the end of year 5, Property I is sold for $110 million, and
there is an actual distribution of $110 million. Accordingly, RREEF
will receive a Performance Fee of 15% times $110 million less $106
million (i.e., the approximate Threshold Amount at year 5), or
$600,000. Numerically, this is as follows: ($110 million-$106 million)
x 15% = $600,000. Because the Threshold Amount has been reduced to $0
at year 6, an additional Performance Fee will be payable with respect
to any subsequent distribution of cash from a capital event, i.e., any
sale or refinancing of the remaining property. Accordingly, if Property
II is sold in year 10 for $15 million, RREEF will receive an additional
Performance Fee of 15% times $15 million, or $2.25 million.
Numerically, as follows: $15 million x 15% = $2.25 million.
Therefore, the total Performance Fee received by RREEF in this example
is $2,850,000.
In the second example, a large Client Plan establishes a Single
Client Account with RREEF to which it contributes $100 million (Initial
Contribution), and agrees to pay RREEF a Performance Fee every five
years equal to 15% of all amounts distributed or deemed distributed
from the Account after the Client Plan has received actual or deemed
distributions equal to its invested capital plus a real (CPI-adjusted)
annual Threshold Amount of return of 4%. If CPI remains constant at 4%
annually, the nominal annual rate is 8% (the Threshold Amount). The
Account acquires two real property assets at a cost of $90 million
(Property I) and $10 million (Property II). Annual cash flow from
operations is 7% of the Initial Contribution of $100 million, or 7%
million (Annual Cash Flow).
For a Single Client Account, the Threshold Amount is calculated as
follows:
----------------------------------------------------------------------------------------------------------------
Threshold
amount (in
Calculation millions of
$)
----------------------------------------------------------------------------------------------------------------
Year 1................................... 100.00+(.08 x 100.00)-7 = $101.00
Year 2................................... 101.00+(.08 x 101.00)-7 = 102.08
Year 3................................... 102.08+(.08 x 102.08)-7 = 103.25
Year 4................................... 103.25+(.08 x 103.25)-7 = 104.51
Year 5................................... 104.51+(.08 x 104.51)-7 = 105.87
Year 6................................... 120.00 <SUP>12</SUP> +(.08 x 120.00)-7 = 122.60
Year 7................................... 122.60+(.08 x 122.60)-7 = 125.41
Year 8................................... 125.41+(.08 x 125.41)-7 = 128.44
Year 9................................... 128.44+(.08 x 128.44)-7 = 131.72
Year 10.................................. 131.72+(.08 x 131.72)-7 = 135.25
----------------------------------------------------------------------------------------------------------------
After five years, the Threshold Amount will increase to
approximately $106 million. At this time, if the two Properties are
appraised for $110 million and $10 million, respectively, the deemed
distributions are $120 million. Accordingly, at this time RREEF will
receive a Performance Fee of: 15% x ($120 million--$106 million) =
$2.1 million.
---------------------------------------------------------------------------
\12\ $120.00 is the amount of deemed distributions.
---------------------------------------------------------------------------
After the first periodic Performance Fee is paid out, the Threshold
Amount is calculated as follows: First, the Threshold Amount is
restored by the full amount of the deemed distribution, i.e., to $120
million, for purposes of the next five-year Performance Fee
calculation. At the end of 10 years, the Threshold Amount will be
approximately $135 million, and no additional Performance Fee will be
payable unless the combined appraised value of the two Properties
exceeds that amount.
14. All proceeds from capital events of an Account (i.e., sales or
refinancings of real property investments owned by the Account) will be
first applied to pay expenses of the Account. These expenses will
include repayment of debt, payment of closing expenses, and
establishment of reasonable reserves in connection with the Account's
assets, whether such reserves are for repayment of existing or
anticipated obligations or for contingent liabilities, other than the
Performance Fee. Such proceeds, net of these expenses and reserves,
generally will be the distributable net proceeds of capital events upon
which the Performance Fee may be payable.
15. With respect to its Single Client Accounts, RREEF generally
does not have discretion to reinvest proceeds from capital events, and
any such reinvestment will occur at the direction of the Client Plan's
Independent Fiduciary. The amount reinvested will be treated as having
been recontributed by the Client Plan for purposes of the Investment
Fee and the Performance Fee. Thus, RREEF represents that where capital
proceeds are reinvested they will be treated as new invested capital
for the purpose of the Threshold Amount and the payment of any future
Performance Fee. RREEF also states that where it does not have
reinvestment discretion, capital proceeds will be distributed to the
Client Plan, unless such Client Plan affirmatively consents to the
reinvestment. In cases where RREEF does have discretion to reinvest
proceeds from capital events, the reinvested amount would not be
treated as a new contribution of capital by the Client Plan for
purposes of the Investment Fee, or having been distributed for purposes
of the payment of Performance Fee. Therefore, such reinvested amounts
will not be considered distributions under the bookkeeping account
maintained for the Client Plan for purposes of calculating whether the
Threshold Amount has been reached.
16. RREEF may be removed as the investment Manager for an Account
at any time (generally upon 30 days notice), without cause, upon
delivery of a notice of removal to RREEF by the Client Plan in the case
of a Single Client
[[Page 29905]]
Account, or by the Client Plans owning at least a majority of the
interests in a Multiple Client Account. In addition, a Multiple Client
Account may terminate upon failure to appoint a replacement investment
manager following the removal or resignation of RREEF. The details and
mechanics of the removal or resignation process will vary from Account
to Account. In the case of an Account procedure for removal for cause
(e.g., breach of contract), removal generally will be immediate. In
most cases, however, removal will result from a desire to appoint a
replacement manager and RREEF may be asked or required to stay on for a
period of time (e.g., up to 120 days) until a replacement is in place.
Similarly, if RREEF resigns, it may be asked to stay on until a
replacement is appointed.
Upon removal of RREEF as investment Manager, RREEF will be entitled
to receive the Performance Fee as if: (a) The assets of an Account had
been sold at a price which is then-agreed to by RREEF and the Client
Plan (or, with respect to a Multiple Client Account, Client Plans and
other investors owning at least a majority of the interests in the
Multiple Client Account); and (b) the deemed proceeds from the deemed
sale were to be distributed from the Account. If RREEF and the Client
Plan(s) cannot agree on a price, then the price shall be determined by
an independent MAI appraiser mutually agreed to by RREEF and the Client
Plan(s). If RREEF and the Client Plan(s) cannot agree on an appraiser,
then the governing documents of the Account will provide for a means of
selecting one or more appraisers or for seeking binding arbitration, as
discussed more fully in paragraph 11 above.
In addition, RREEF may generally resign as investment Manager with
respect to any Account at any time, without cause, by providing written
notice to the Client Plan(s) with an interest in the Account. In this
event, the Performance Fee will be tentatively calculated in the same
manner as if RREEF were removed as investment manager, and allocated
among each real property investment of the Account in proportion to the
respective differences in their appraised values from their original
cost (i.e., deemed unrealized appreciation, if any, for each property).
The amount of the Performance Fee tentatively allocated to each
property will be multiplied by a fraction, the numerator of which will
be the actual sales price of the property received by the Account upon
the disposition/sale of the property, and the denominator of which will
be the appraised value of the property which was used in connection
with determining the Performance Fee at the time of resignation,
provided that this fraction will never exceed 1.0 (that is, the
Performance Fee may be decreased to reflect any subsequent decline in
the value of a property, but not increased to reflect any subsequent
increase in value).<SUP>13</SUP> No Performance Fee will be payable
until distributions (deemed or actual) from the Account exceed the
Threshold Amount.
---------------------------------------------------------------------------
\13\ If a Multiple Client Account is terminated prior to the
sale of all the Account's assets (i.e., each Client Plan is
distributed an undivided interest in each such asset), each
remaining asset in the Account at the time of termination will be
treated as having been sold at its then-appraised value.
---------------------------------------------------------------------------
The Performance Fee will be calculated with respect to each
property held by an Account at the time of resignation. However, the
Performance Fee will not be paid for any property until the earlier of:
(i) The sale of the property from the Account, or (ii) with respect to
a Multiple Client Account, the termination of the Account. The
Performance Fee will be paid only after the Client Plans have received
their initial invested capital plus earnings at the Threshold Amounts.
The replacement investment manager of the Account (unrelated to RREEF)
will have discretion as to when the property is sold or when the
Account is terminated.
17. A Single Client Account generally may be terminated at any time
by the Client Plan upon not more than 30 days written notice to RREEF,
by RREEF's resignation, or by expiration of the period of years
specified in the investment management agreement governing the Account
(unless extended at the request of the Client Plan). In the case of a
Single Client Account termination, the assets of the Account may be
liquidated for cash or distributed in-kind to the Client Plan.
A Multiple Client Account generally may be terminated upon: (a) The
affirmative decision of the Client Plans and other investors owning at
least a majority of the interests in the Multiple Client Account, or
(b) expiration of the period of years specified in the Account's
organizational documents. In addition, a Multiple Client Account may
terminate upon failure to appoint a replacement investment manager
following the removal or resignation of RREEF. Upon termination of a
Multiple Client Account, RREEF is generally obligated to dispose of its
assets and distribute net sales proceeds in an orderly fashion.
In the case of the Multiple Client or Single Client Account
termination, RREEF's Performance Fee would be calculated in the same
manner as discussed above with respect to the removal of RREEF.
18. Each Client Plan will receive throughout the term of the
Account the following information:
(a) Quarterly and annual reports prepared by RREEF relating to the
overall financial position and operating results of the Account (annual
reports are audited by independent certified public accountants as
required by the terms of the Account's governing documents), a
statement regarding the total amount of fees paid by the Account to
RREEF for the period, and, in the case of a Multiple Client Account,
the value of the Client Plan's interest in the Account;
(b) An annual statement of the current fair market value of all
properties owned by the Account based most recent MAI appraisals of
such properties;
(c) In the case of a Multiple Client Account, a list of investors
in the Account and, when applicable, a notice of any change thereto;
and
(d) Operating and capital budgets for the subsequent year, plus
(where applicable) an explanation of any material deviation from the
prior year's budgets.
Any fiduciary for the Client Plan, as well as other authorized
persons described above in paragraph (o)(1) of Part III, will have
access during normal business hours to RREEF's records concerning the
Accounts in which such persons have an interest, subject to the
condition that each such person agree in writing that the information
contained in such records shall be kept confidential except to the
extent disclosure is authorized in writing by RREEF or is necessary to
preserve or protect the assets of an Account or the interests of the
Client Plans. The Department and the Internal Revenue Service will have
access to all RREEF records concerning the Accounts. The Client Plan(s)
having an interest in an Account will also, upon request, be provided
with a report of all compensation paid to RREEF by the Account.
19. In summary, the applicant represents that the transaction
satisfies the statutory criteria of section 408(a) of the Act and
section 4975(c)(2) of the Code because:
(a) The investment of plan assets in a Single or Multiple Client
Account, including the terms and payment of any Investment Fee, Asset
Management Fee and Performance Fee, shall be approved in writing by an
Independent Fiduciary of a Client Plan which is independent of RREEF
and its affiliates.
[[Page 29906]]
(b) At the time any Account is established (or amended) and at the
time of any subsequent investment of assets (including the reinvestment
of assets) in such Account:
(1) Each Client Plan in a Single Client Account shall have total
net assets with a value in excess of $100 million, and each Client Plan
that is an investor in a Multiple Client Account shall have total net
assets with a value in excess of $50 million, subject to certain
additional requirements as stated in paragraph (1) of Part III(c)
above; and
(2) No Client Plan shall invest, in the aggregate, more than 5% of
its total assets in any Account or more than 10% of its total assets in
all Accounts established by RREEF.
(d) Prior to making an investment in any Account (or amending an
existing Account), the Independent Fiduciary of each Client Plan
investing in an Account shall have received offering materials from
RREEF which disclose all material facts concerning the purpose,
structure, and operation of the Account, including any Fee arrangements
(provided that, in the case of an amendment to the Fee arrangements,
such materials need address only the amended fees and any other
material change to the Account's original offering materials).
(e) With respect to its ongoing participation in an Account, each
Client Plan shall receive the following written information from RREEF:
(1) Audited financial statements of the Account prepared by
independent public accountants selected by RREEF no later than 90 days
after the end of the fiscal year of the Account;
(2) Quarterly and annual reports prepared by RREEF relating to the
overall financial position and operating results of the Account and, in
the case of a Multiple Client Account, the value of each Client Plan's
interest in the Account. Each such report shall include a statement
regarding the amount of the Fees paid to RREEF during the period
covered by such report;
(3) Periodic appraisals (as agreed upon with the Client Plans)
indicating the fair market value of the Account's assets as established
by an MAI licensed real estate appraiser independent of RREEF and its
affiliates, under the procedures described herein;
(4) In the case of any Multiple Client Account, a list of all other
investors in the Account;
(5) Annual operating and capital budgets with respect to the
Account, to be distributed to a Client Plan within 60 days prior to the
beginning of the fiscal year to which such budgets relate; and
(6) An explanation of any material deviation from the budgets
previously provided to such Client Plan for the prior year;
(f) The total fees paid to RREEF shall constitute no more than
``reasonable compensation'' within the meaning of section 408(b)(2) of
the Act.
(g) RREEF shall provide a copy of the proposed exemption and a copy
of the final exemption to all Client Plans that invest in any Single
Client Account or any Multiple Client Account formed, on or after, the
date the final exemption is published in the Federal Register.
Notice to Interested Persons
Those persons who may be interested in the pendency of this
exemption include the independent fiduciaries of each Client Plan that
maintains a Single Client Account with RREEF. Thus, RREEF will provide
notice of the proposed exemption to each such affected Client Plan, by
first class mail, within thirty (30) days following the publication of
the proposed exemption in the Federal Register. The notice will include
a copy of the notice of proposed exemption as published in the Federal
Register and as a supplemental statement, as required, pursuant to 29
CFR 2570.43(b)(2). This supplemental statement will inform such
interested persons of their right to comment on the proposed exemption
and/or to request a hearing. All written comments and/or requests for a
hearing are due within sixty (60) days of the publication of this
notice of proposed exemption in the Federal Register.
In addition, RREEF shall provide a copy of the proposed exemption
and a copy of the final exemption to all Client Plans that invest in
any Single Client Account or any Multiple Client Account formed on, or
after, the date the final exemption is published in the Federal
Register.
FOR FURTHER INFORMATION CONTACT: Ekaterina A. Uzlyan of the Department,
telephone (202) 219-8883. (This is not a toll-free number.)
Premier Funding Group, Inc. Employees Profit Sharing Plan (the P/S
Plan) and the Money Purchase Pension Plan for Employees of Premier
Funding Group, Inc. (the M/P Plan, collectively; the Plans),
Located in Arlington, Texas
[Application Nos. D-10669 and D-10670]
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 C.F.R. 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 as of February 1, 1999, to a lease (the Lease) of
certain second-floor space (the Leased Premises) in a building by the
Plans to LM Holdings, Inc., a party in interest with respect to the
Plans; provided that the following conditions are satisfied:
(a) All terms and conditions of the Lease are at least as favorable
to the Plans as those which the Plans could obtain in an arm's-length
transaction with an unrelated party;
(b) The fair market rental amount for the Lease has been determined
by an independent qualified appraiser;
(c) Each Plan's allocable portion of the fair market value of both
the Leased Premises and the building where the Leased Premises are
located (the Building) represents no more than 20 percent (20%) of the
total assets of each Plan throughout the duration of the Lease;
(d) The interests of the Plans under the Lease are represented by
an independent, qualified fiduciary (the Independent Fiduciary);
(e) The fees received by the Independent Fiduciary, combined with
any other fees derived from any related parties, will not exceed 1% of
that person's annual income for each fiscal year that such person
continues to serve in the independent fiduciary capacity with respect
to the Lease;
(f) The Independent Fiduciary evaluated the Lease and deemed it to
be administratively feasible, protective and in the best interest of
the Plans;
(g) The Independent Fiduciary monitors the terms and the conditions
of the exemption (if granted) and the Lease throughout its duration,
and takes whatever action is necessary to protect the Plans' rights;
(h) At the discretion of the Independent Fiduciary, the Lease can
be extended for two additional five-year terms, provided that the
Independent Fiduciary requires independent appraisals of the Leased
Premises to be performed at the time of each extension of the Lease so
as to ensure that LM Holdings continues to pay fair market rent, and
such rent is not less that either the initial base rent or the amount
paid during the most recent annual term; and
(i) Within 90 days of publication in the Federal Register of a
notice granting this proposed exemption, LM Holdings files with the
Internal Revenue Service (IRS) Form 5330 (Return of Initial Excise
[[Page 29907]]
Taxes for Pension and Profit Sharing Plans) and pays all excise taxes
applicable under section 4975(a) of the Code that are due by reason of
the existence of the Lease as a prohibited transaction prior to
February 1, 1999.
EFFECTIVE DATE: This exemption, if granted, will be effective as of
February 1, 1999.
Summary of Facts and Representations
1. The Plans are a profit sharing plan and a money purchase plan
which were established in February, 1994. As of July 15, 1998, the
Plans had two participants, Mr. Michael Leighty and Mr. Patrick McCarty
(Mr. Leighty and Mr. McCarty, respectively). Mr. Leighty and Mr.
McCarty are also the Plans' trustees. As of December 31, 1997, the P/S
Plan and the M/P Plan had $924,350 and $616,234 in total net assets,
respectively. Messrs. Leighty and McCarty are the only participants of
the Plans, the only trustees of the Plans and the sole employees and
shareholders of LM Holdings, Inc. (LM Holdings) and Premier Funding
Group, Inc (Premier Funding).
Premier Funding is the sponsor of the Plans. Premier Funding and LM
Holdings are both incorporated in the State of Texas and are located in
Arlington, Texas. Both corporations are jointly owned on a 50%-50%
basis by Messrs. Leighty and McCarty. Premier Funding and LM Holdings
are in the business of acquiring financial instruments, real estate and
other assets.
2. The Leased Premises and the Building are located at 2400 Garden
Park Court, Arlington, Texas. The Building was owned by Ed Thulin (Mr.
Thulin), an unrelated third party, until December 16, 1997. LM Holdings
had leased approximately 700 square feet in the Building from Mr.
Thulin under the terms and conditions of the subject Lease, as
originally agreed to by the parties.
However, on December 16, 1997, the Plans purchased the Building
from Mr. Thulin, for $210,000. Therefore, as of December 16, 1997, the
Lease was between the Plans and LM Holdings, which made the Lease a
prohibited transaction under the Act.<SUP>14</SUP> In this regard, the
applicant represents that within 90 days of publication in the Federal
Register of a notice granting this proposed exemption, LM Holdings will
file Form 5330 (Return of Initial Excise Taxes for Pension and Profit
Sharing Plans) with the IRS and pay all excise taxes applicable under
section 4975(a) of the Code that are due by reason of the existence of
the Lease prior to February 1, 1999, the effective date of this
exemption.
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\14\ Section 406(a)(1)(A) of the Act prohibits, in pertinent
part, a plan fiduciary from causing a plan to engage in a
transaction which constitutes a leasing of property between the plan
and a party in interest.
---------------------------------------------------------------------------
3. After purchasing the Building, the Plans commissioned an
appraisal (the Appraisal) of the Leased Premises by an independent,
qualified appraiser (see paragraph 5 below). The Appraisal determined
the fair market rental value of the Leased Premises to be approximately
$7 per rentable square foot, or $782.25 monthly. The Lease was amended
on May 5, 1998, whereby the original terms were modified to reflect the
fair market rental amount as determined by the Appraisal.<SUP>15</SUP>
---------------------------------------------------------------------------
\15\ However, under the Lease as amended by the parties pursuant
to the Appraisal, the Landlord and the Tenant have agreed to round
off this number to $785 per month.
---------------------------------------------------------------------------
Furthermore, to comply with the fair market rental amount
determined by the Appraisal, LM Holdings has made an additional rental
payment of $530 to the Plans. The applicant represents that this amount
is equal to the difference between the fair market rental value of the
Leased Premises and the actual rent that was paid for the Leased
Premises by LM Holdings since the beginning of the Lease. This amount
was computed by the applicant's attorney and was based on fair market
rental amount set forth in the Appraisal.
4. The applicant is now requesting an individual exemption,
effective as of February 1, 1999, which is the date that an
independent, qualified fiduciary was appointed to represent the Plans
for purposes of the Lease (as discussed further below). The parties to
the Lease will be the Plans (doing business as PFGI Realty) and LM
Holdings. Under the Lease as it now exists between the parties, the
Leased Premises include approximately 1,341 square feet of the total
rentable 5,196 square feet in the Building.<SUP>16</SUP> LM Holdings
(i.e., the Tenant) will pay $785 per month during the first year of the
Lease. Thereafter, on each annual anniversary of the Lease during the
initial term and any subsequent renewal periods (discussed more fully
below), the rent will be adjusted by the Independent Fiduciary based on
the percent change in the annual Consumer Price Index (CPI) as
published in the Wall Street Journal for the previous year. This annual
adjustment may not fall below the higher of the base rate of $785 per
month or the amount paid on a monthly basis during the most recent
annual term.
---------------------------------------------------------------------------
\16\ There are three other tenants in the Building, who
separately lease the remaining rentable space. Thus, the Leased
Premises represent approximately 25.8% of the Building's rentable
space.
---------------------------------------------------------------------------
Under the terms of the Lease, LM Holdings will be responsible for
electricity, with all other expenses being paid by the owner of the
Building (i.e., the Plans).<SUP>17</SUP> The initial term of the Lease
is scheduled to end on May 5, 2003. At the discretion of the
Independent Fiduciary, the Lease can be extended for two additional
five year terms. The Independent Fiduciary will require independent
appraisals to be performed at the time of each extension of the Lease
so as to ensure that LM Holdings continues to pay fair market rent.
However, the new rents for the Leased Premises set at the time of any
extensions of the Lease will not be less than the rent received by the
Plans during the prior leasing period.
---------------------------------------------------------------------------
\17\ The applicant states that the terms of the Lease are
identical to the other current leases in the Building. Furthermore,
the applicant maintains that the remaining monthly bills for the
Building are gas, water and lawn care. These items are not
separately metered and are paid by the owner of the Building. The
applicant represents that this is consistent with the comparable
buildings analyzed in the Appraisal.
---------------------------------------------------------------------------
Furthermore, the Lease requires that LM Holdings, as the tenant,
provide public liability and property damage insurance for its business
operations on the Leased Premises in the amount of $500,000. This
insurance policy names the Plans as the insured.
5. As stated above, the fair market rent of the Leased Premises was
established by the Appraisal dated April 20, 1998. The Appraisal was
prepared by Thomas S. Haines, MAI and Wayne Burgdorf, MAI of Hanes,
Jorgensen & Burgdorf, Ltd., Diversified Real Estate Services located in
Arlington, Texas. The Appraisal relied on eight comparable rentals in
the surrounding area to determine the fair market rental value of the
Leased Premises. The addendums to the Appraisal (the Addendums), dated
May 12, 1998 and May 22, 1998, respectively, state that the fair market
rent for the Leased Premises is $7.00/square foot fixed, which equates
to $782.25 a month, or $9,387 a year, for a five-year lease.
6. The Lease will be monitored by Gary J. Manny (Mr. Manny), who
will serve as the Independent Fiduciary on behalf of the Plans for
purposes of the Lease. Mr. Manny was appointed as the Independent
Fiduciary on February 1, 1999, and has served in that capacity for the
Plans since that date. Mr. Manny represents that he is an attorney who
has general knowledge of ERISA, and the regulations thereunder. Mr.
Manny also represents that he has acted before in a fiduciary capacity
as a executor,
[[Page 29908]]
guardian and trustee for various clients. Thus, Mr. Manny states that
he has experience in protecting the rights of the parties involved in
such transactions. Mr. Manny states that he understands the duties,
responsibilities and liabilities of acting in a fiduciary capacity for
the Plans.
7. Mr. Manny represents that he is independent of LM Holdings,
Premier Funding, Mr. Leighty and Mr. McCarty (the Related Parties), and
has no interest in any of their business activities. In this regard,
Mr. Manny states that he has done work in the past for the Related
Parties. However, Mr. Manny's fees from the Related Parties represented
less than one percent (1%) of his total annual billings. Mr. Manny
further represents that for each year that he serves as the Independent
Fiduciary for the Plans, his fees for serving in this capacity,
combined with any other fees from the Related Parties, will not exceed
1% of his annual billings.
8. Mr. Manny states that he has reviewed the Lease and the Plans'
investment portfolios. Mr. Manny concludes that the Lease will be
protective of the Plans and consistent with the Plans' investment needs
and objectives. In this regard, Mr. Manny notes that the fair market
value of the Building, and the Leased Premises, represent less than
twenty percent (20%) of each Plan's total assets, and also of the
combined assets of the Plans.<SUP>18</SUP>
---------------------------------------------------------------------------
\18\ The applicant states that the approximate value of the
Building is $210,495, which represents 11.5% of the P/S Plan and
11.5% of the M/P Plan. This is because the ownership of the building
is allocated, as all other assets in the Plans, 60% to the P/S Plan
and 40% to the M/P Plan. The applicants represent that all rents for
office space in the Building are allocated in the same manner.
---------------------------------------------------------------------------
Mr. Manny states that the Lease will be in the best interest of the
Plans and its participants. Mr. Manny believes that the Lease will be
an appropriate investment for the Plans with adequate safeguards and
protections.
9. Mr. Manny will monitor the terms and conditions of the Lease
throughout its initial term and any renewal periods. Mr. Manny
represents that he will have access to the books and records of the
Plans, and will make sure that rental payments under the Lease are paid
on time. Mr. Manny will review the Lease annually to ensure that all
annual automatic adjustments to the rent are made based on the percent
change in the CPI Index from the previous year. Mr. Manny will ensure
that monthly rental payments are adjusted annually, as appropriate. Mr.
Manny will also ensure that the adjusted rental payments never fall
below the amount paid for the Leased Premises during the most recent
annual period. Mr. Manny will monitor the value of the Building to
ensure that each Plan's allocable portion of the Building and the
Leased Premises represent no more than 20% of the total assets of each
Plan throughout duration of the Lease.
Mr. Manny believes that the Lease is administratively feasible, in
the best interest and protective of the Plans. As the Independent
Fiduciary, Mr. Manny will represent the interests of the Plans at all
times. Mr. Manny will monitor compliance by the LM Holdings, as the
tenant, with the terms and conditions of the Lease, and will take
whatever action is necessary to safeguard the interests of the Plans
and its participants.<SUP>19</SUP>
---------------------------------------------------------------------------
\19\ In this regard, the applicant makes a request regarding a
successor independent fiduciary. Specifically, if it becomes
necessary in the future to appoint a successor independent fiduciary
(the Successor) to replace Mr. Manny, the applicant will notify the
Department sixty (60) days in advance of the appointment of the
Successor. Any Successor will have the responsibilities, experience
and independence similar to those of Mr. Manny.
---------------------------------------------------------------------------
10. In summary, the applicant represents that the transaction
satisfies the statutory criteria of section 408(a) of the Act and
section 4975(c)(2) of the Code because:
(a) All terms and conditions of the Lease are at least as favorable
to the Plans as those which the Plans could obtain in an arm's-length
transaction with an unrelated party;
(b) The fair market rental value of the Leased Premises has been
determined by an independent qualified appraiser;
(c) Each Plan's allocable portion of the fair market value of both
the Leased Premises and the Building will represent no more than 20% of
the total assets of each Plan throughout the duration of the Lease;
(d) The interests of the Plans under the Lease are represented by
the Independent Fiduciary;
(e) The fees received by the Independent Fiduciary, combined with
any other fees derived from any related parties, will not exceed 1% of
that person's annual income for each fiscal year that such person
continues to serve in the independent fiduciary capacity with respect
to the Lease;
(f) The Independent Fiduciary evaluated the Lease and deemed it to
be administratively feasible, protective and in the best interest of
the Plans;
(g) The Independent Fiduciary will monitor the terms and the
conditions of the exemption (if granted) and the Lease throughout its
duration, and will take whatever action is necessary to protect the
Plans' rights;
(h) At the discretion of the Independent Fiduciary, the Lease can
be extended for two additional five-year terms, provided that the
Independent Fiduciary requires independent appraisals of the Leased
Premises to be performed at the time of each extension of the Lease so
as to ensure that LM Holdings continues to pay fair market rent, and
such rent will not be less than the current base rate of $785 per
month, or the amount paid on a monthly basis during the most recent
annual term; and
(i) Within 90 days of publication in the Federal Register of a
notice granting this proposed exemption, LM Holdings will file with the
IRS Form 5330 (Return of Initial Excise Taxes for Pension and Profit
Sharing Plans) and pay all excise taxes applicable under section
4975(a) of the Code that are due by reason of the existence of the
Lease as a prohibited transaction prior to February 1, 1999.
Notice to Interested Persons
The applicant represents that, within five (5) business days of the
publication of the notice of proposed exemption (the Notice) in the
Federal Register, all interested persons will receive a copy of the
Notice, and a copy of the supplemental statement, as required by 29 CFR
2570.43(b)(2). Comments and hearing requests on the proposed exemption
are due thirty-five (35) days after the date of publication of the
Notice in the Federal Register.
FOR FURTHER INFORMATION CONTACT: Ekaterina A. Uzlyan of the Department,
telephone (202) 219-8883. (This is not a toll-free number.)
The Unaka Company, Incorporated Employees' Profit Sharing Plan and
Trust (the Plan) Located in Greenville, Tennessee
[Application No. D-10722]
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 C.F.R. part
2570, subpart B (55 FR 32836, 32847, August 10, 1990).
If the exemption is granted the restrictions of sections
406(a)(1)(A) through (D), 406(b)(1), and 406(b)(2) of the Act and the
sanctions resulting from the application of section 4975 of the Code,
by reason of section 4975(c)(1)(A) through (E) of the Code shall not
apply to: <SUP>20</SUP>
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\20\ For purposes of this exemption, references to specific
provisions of Title I of the Act, unless otherwise specified, refer
also to the corresponding provisions of the Code.
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(a) The assignment (the Assignment) by the Plan to the Unaka
Company,
[[Page 29909]]
Incorporated (Unaka), the sponsoring employer and a party in interest
with respect to the Plan, of any and all claims, demands, and/or causes
of action which the Plan may have against certain members of the Plan
Administrative Committee (the PAC) and other involved parties
(collectively, the Responsible Fiduciaries) for breach of fiduciary
duty under the Act, during the period from July 1, 1996 to July 31,
1998;
(b) In exchange for the Assignment, described in paragraph (a),
above, the interest-free, non-recourse loan (the Loan) by Unaka to the
Plan in an amount equal to the difference between $413 and the fair
market value per share for the common stock of Unaka (the Stock) held
by the Plan, in connection with the sale of such Stock by the Plan to
Unaka, pursuant to the statutory exemption, as set forth in section
408(e) of the Act; <SUP>21</SUP>
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\21\ The Department, herein, expresses no opinion as to the
applicability of the statutory exemption provided by section 408(e)
of the Act to the sale by the Plan of its Unaka Stock to Unaka or as
to whether the conditions set forth in such statutory exemption are
satisfied in the execution of such transaction. Further, the
Department, herein, is offering no relief for transactions other
than those proposed.
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(c) The possible repayment of such Loan to Unaka from the cash
proceeds of the recovery, if any, from a judgment or settlement of the
litigation against the Responsible Fiduciaries;
(d) The interest-free, non-recourse extension of credit (the
Extension of Credit) by Unaka to the Plan of certain expenses arising
out of the litigation against the Responsible Fiduciaries, effective as
of, May 1, 1999, the date when expenses incurred by the Plan in
bringing such litigation were first paid by Unaka; and
(e) The possible receipt by Unaka of reimbursement of such
litigation expenses from the cash proceeds of the recovery, if any,
from a judgment or settlement of the litigation against the Responsible
Fiduciaries; provided that the following conditions are satisfied:
(1) The Plan will pay no interest in connection with the Loan or
the Extension of Credit;
(2) None of the assets of the Plan will be pledged to secure either
the amount of the Loan or the amount of the Extension of Credit;
(3) Repayment to Unaka of the amount of the Loan and reimbursement
to Unaka of the amount of the Extension of Credit shall be restricted
solely to the cash proceeds of the recovery, if any, from a judgment or
settlement of the litigation against the Responsible Fiduciaries;
(4) To the extent the amount of the cash proceeds, if any, from any
judgment or settlement of the litigation against the Responsible
Fiduciaries is equal to or less than the amount due to Unaka as
repayment for the Loan and reimbursement of the Extension of Credit,
the Plan shall not be liable to Unaka for any amount;
(5) To the extent the cash proceeds, if any, from any judgment or
settlement of the litigation against the Responsible Fiduciaries
exceeds the total amount of the Loan, plus the amount of the Extension
of Credit, such excess amount will be allocated to the accounts of the
participants of the Plan; with the exception that no such allocation
will be made to the account of Robert Austin, Jr. in the Plan;
(6) The transactions which are the subject of this exemption do not
involve any risk of loss either to the Plan or to any of the
participants and beneficiaries of the Plan;
(7) The Plan will not incur any expenses as a result of the
transactions which are the subject of this exemption;
(8) Notwithstanding the Assignment by the Plan of its rights
against the Responsible Fiduciaries, the Plan does not release any
claims, demands, and/or causes of action which it may have against
Unaka and/or its affiliates;
(9) All of the terms of the transactions are at least as favorable
to the Plan as those which the Plan could obtain in similar
transactions negotiated at arm's-length with unrelated third parties;
(10) The Plan receives no less than the fair market value for the
Assignment, as of the date of the closing on the transfer of the
Assignment;
(11) Prior to the Plan's entering the transactions, an independent,
qualified fiduciary (the I/F), who is acting on behalf of the Plan and
who is independent of Unaka and its affiliates, reviews, negotiates,
and approves the terms and conditions of the Loan, the Assignment, and
the Extension of Credit and determines that such transactions are
prudent, administratively feasible, in the interest of the Plan and its
participants and beneficiaries, and protective of the participants and
beneficiaries of the Plan;
(12) Throughout the duration of the transactions, the I/F monitors
the prosecution of the lawsuit against the Responsible Fiduciaries,
including but not limited to monitoring all costs and fees incurred in
connection with any litigation related to the proposed transactions,
monitors the division of the recovery, if any, from any judgment or
settlement of the litigation against the Responsible Fiduciaries to
ensure that the Plan receives the portion to which it is entitled and
that the Plan's interests are served, and monitors the terms and
conditions of the proposed transactions to ensure that such terms and
conditions are at all times satisfied;
(13) The I/F, acting on behalf of the Plan, shall have final
approval authority over any proposed settlement of any legal
proceedings against the Responsible Fiduciaries brought pursuant to the
terms of the Assignment; and
(14) In the event the I/F resigns, is removed, or for any reason is
unable to serve, including but not limited to the death or disability
of such I/F, or if at any time such I/F does not remain independent of
Unaka and its affiliates, such I/F will be replaced by a successor: (i)
Who is appointed immediately upon the occurrence of such event; (ii)
who is independent of Unaka and its affiliates; (iii) who is qualified
to serve as the I/F; and (iv) who assumes all the duties and
responsibilities of the predecessor
I/F.
Summary of Facts and Representations
1. The Plan, established on February 1, 1967, but amended and
restated on June 29, 1995, is a defined contribution profit sharing
plan which is designed to qualify under section 401(a) of the Code.
Contributions to the Plan are made by Unaka and by the participants in
the Plan. The Plan is an individual account plan which does not provide
for participant-directed investments. All contributions to the Plan are
invested by the trustee of the Plan, pursuant to the funding policy and
method, as determined by Unaka and by the Plan's investment manager.
Employees of Unaka and/or its subsidiaries are participants in the
Plan. As of January 1, 1997, the Plan had approximately 1,142
participants. From January 1, 1997 to February 11, 1999, distributions
of account balances were made to 209 participants, and 104 participants
were added to the Plan. Accordingly, as of March 1, 1999, there were
1,037 participants in the Plan.
As of June 30, 1998, the Plan had approximately $16.8 million in
assets on an unaudited basis, consisting of cash, mutual fund
interests, government and corporate bonds, and shares of stock. It is
represented that each participant's account shares a pro-rata portion
of the overall value of the general assets of the Plan.
In the past, Unaka, as Plan administrator, has delegated to certain
individuals, including, but not limited to certain officers and
employees of Unaka, the responsibilities of administering the Plan. In
this regard, until October 1997, the PAC
[[Page 29910]]
administered the Plan. It is represented that from June 1996 to October
1997, the PAC was comprised of Gordon H. Newman, Jerald K. Jaynes,
Lonnie F. Thompson, and Gary Landes. From May 1995 to June 1996, the
PAC was comprised of Gordon H. Newman, Robert Austin, Jr., and Gordon
Chalmers. Prior to that time the PAC members were Gordon H. Newman,
Terry O'Donovan, Powell Johnson, Dominick Jackson, and Ray Adams.
As discussed more fully below, in an agreement dated July 31, 1998,
as amended March 25, 1999, and April 7, 1999, an independent, qualified
individual was hired to serve as the trustee (the Trustee) of the Plan,
and an institutional investment manager was engaged to manage the
assets of the Plan and to serve as the I/F with respect to the
transactions which are the subject of this proposed exemption.
2. Established in 1950 in Greeneville, Tennessee, Unaka is a
holding corporation for the diverse industries of its wholly-owned
subsidiaries. These subsidiaries consist primarily of the MECO
Corporation, a manufacturer of barbecue grills and folding metal
furniture, SOPAKCO, a warehouse operator and manufacturer of packaged
foods, and Crown Point, an international food supply company
specializing in the buying and selling of food commodities.
Unaka is a privately held corporation whose stock is not traded on
any registered securities exchange. Another holding company, the Rolich
Corporation (Rolich), owns approximately 61 percent (61%) of the 54,000
issued and outstanding shares of the Stock of Unaka which has a $10 par
value. The Plan owns an additional 26 percent (26%) of the issued and
outstanding shares of Stock of Unaka. Members of the Austin family, as
discussed below, and various other individuals own the remaining 13
percent (13%) of the Unaka Stock.
3. In August of 1987, Robert Austin, Sr. purchased, through Rolich,
a controlling interest in Unaka. It is represented that at that time,
Rolich was owned by the members of the immediate family of Robert
Austin, Sr. In connection with Robert Austin, Sr.'s obtaining control
of Unaka, the Plan, on December 27 and 28, 1987, acquired 2,500 and
6,500 shares, respectively, of Unaka Stock directly from Unaka at a
price of $220 per share. Subsequently, on October 1, 1989, the Plan
purchased an additional 5,000 shares of Unaka Stock from Unaka at a
price of $250 per share.<SUP>22</SUP>
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\22\ Unaka represents that the acquisition by the Plan of Unaka
Stock both in December 1987, and October 1989, satisfied the
criteria of section 408(e) of the Act. The Department, herein,
expresses no opinion as to the applicability of the statutory
exemption provided by section 408(e) of the Act to the acquisition
in 1987 and 1989 of the Unaka Stock by the Plan or as to whether the
conditions set forth in such statutory exemption were satisfied in
the execution of such transactions. Further, the Department, herein,
is offering no relief for transactions other than those proposed.
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With the deaths in 1990, of Robert Austin, and his wife, Mary T.
Austin, a struggle for control of Rolich and Unaka ensued among their
three children who are the heirs to their parents' estates. In this
regard, most of the litigation involves the struggle for control of
Unaka and Rolich among, Robert Austin, Jr., Lisa Austin, and Christy
Austin. Additional litigation is associated with the members of Unaka's
former management and with other shareholder derivative and non-
derivative suits. It is anticipated that these various legal disputes
may continue in the foreseeable future. However, it is represented that
as of April 1997, Robert Austin, Jr. obtained majority ownership of
Rolich and is currently serving as Chairman of the Board of Directors
of Unaka.
4. In October of 1996, the Plan entered into an agreement to sell
its Unaka Stock to Nothung, Inc. (Nothung), an entity owned by Robert
Austin, Jr., for a minimum price of $413 per share. It is represented
that certain Responsible Fiduciaries who were members of the PAC did
not complete the sale of the Plan's Unaka Stock, pursuant to the
agreement with Nothung. As a result, the PAC, acting on behalf of the
Plan, failed to sell the Plan's Unaka Stock to Nothung in October of
1996. Subsequently, the offer to purchase the Plan's Unaka Stock,
pursuant to the agreement with Nothung, lapsed on January 27, 1997.
5. With regard to the $413 per share price offered, pursuant to the
agreement with Nothung, it is represented that Mercer Capital
Management, Inc. (Mercer), an independent, qualified appraisal, valued
the Plan's Unaka Stock, as of May 31, 1996, on a marketable, minority
interest basis, at $413 per share. Of the three valuation
methodologies, Mercer employed the income approach and the asset-based
approach, but did not consider the market approach appropriate, because
at the time of the appraisal there had been too few arm's length
transactions in the Unaka Stock. Further, the Mercer appraisal did not
discount the value of the Plan's Unaka Stock for lack of marketability,
because: (1) Mercer believed it reasonable to assume that ongoing
negotiations with Unaka would result in an option for Plan participants
to put the shares to Unaka or to the Plan at the appraised fair market
value; (2) Mercer accepted that the original investment by the Plan in
Unaka Stock was based on assurances of reasonable treatment by the
remaining shareholders; and (3) Mercer accepted representations from
the Plan's legal counsel that there had been an intent and practice not
to consider marketability discounts in the valuation estimates used in
prior years.
6. The Plan currently holds 14,000 shares of Unaka Stock which
Unaka has offered to purchase at a price equal to the fair market value
of such Stock on the date the transaction is closed. It is represented
that the proposed sale by the Plan to Unaka of the Plan's Unaka Stock
will satisfy the criteria of section 408(e) of the Act.<SUP>23</SUP>
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\23\ See, footnote number 22, above.
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In anticipation of the sale of the Plan's Unaka Stock to Unaka and
in anticipation of the transactions which are the subject of this
proposed exemption, it is represented that an appraisal, as of June 30,
1998, of the fair market value of the Unaka Stock was prepared by
Bernstein, Phalon & Conklin (BP&C), an independent, qualified
appraiser, with offices in Dallas, Texas. In determining the value of
the Unaka Stock, BP&C considered all three approaches to value, the
income approach, the asset-based approach, and the market approach. The
results of these valuation techniques applied to a minority interest of
the Plan's Unaka Stock on a closely held basis were as follows:
Income approach
$283 per share
Asset-based approach
$334 per share
Market approach
$292 per share.
After giving slightly greater weight to the income approach, because
that valuation method took into consideration the current and projected
business operations of Unaka, BP&C determined that the fair market
value of the equity of Unaka on a closely held, minority basis was $301
per share, as of June 30, 1998. Based on an appraised value of $301 per
share, approximately $4.2 million of the Plan's assets are currently
invested in Unaka Stock which constitutes approximately 25 percent
(25%) of the total assets held by the Plan.
The applicant has represented that an updated appraisal of the
Unaka Stock
[[Page 29911]]
will be obtain |
