Proposed Exemptions; Pennsylvania Institute of Neurological
Disorders, Inc. Profit Sharing Plan (the Plan)
[12/28/2005]
Volume 70, Number 248, Page 76870-76886
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
[Application No. D-11306, et al.]
Proposed Exemptions; Pennsylvania Institute of Neurological
Disorders, Inc. Profit Sharing Plan (the Plan)
AGENCY: Employee Benefits Security Administration, Labor.
ACTION: Notice of Proposed Exemptions.
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SUMMARY: This document contains notices of pendency before the
Department of Labor (the Department) of proposed exemptions from
certain of the prohibited transaction restrictions of the Employee
Retirement Income Security Act of 1974 (the Act) and/or the Internal
Revenue Code of 1986 (the Code).
Written Comments and Hearing Requests
All interested persons are invited to submit written comments or
requests for a hearing on the pending exemptions, unless otherwise
stated in the Notice of Proposed Exemption, within 45 days from the
date of publication of this Federal Register Notice. Comments and
requests for a hearing should state: (1) The name, address, and
telephone number of the person making the comment or request, and (2)
the nature of the person's interest in the exemption and the manner in
which the person would be adversely affected by the exemption. A
request for a hearing must also state the issues to be addressed and
include a general description of the evidence to be presented at the
hearing.
ADDRESSES: All written comments and requests for a hearing (at least
three copies) should be sent to the Employee Benefits Security
Administration (EBSA), Office of Exemption Determinations, Room N-5649,
U.S. Department of Labor, 200 Constitution Avenue, NW., Washington, DC
20210. Attention: Application No. ----, stated in each Notice of
Proposed Exemption. Interested persons are also invited to submit
comments and/or hearing requests to EBSA via e-mail or FAX. Any such
comments or requests should be sent either by e-mail to:
``moffitt.betty@dol.gov'', or by FAX to (202) 219-0204 by the end of
the scheduled comment period. The applications for exemption and the
comments received will be available for public inspection in the Public
Documents Room of the Employee Benefits Security Administration, U.S.
Department of Labor, Room N-1513, 200 Constitution Avenue, NW.,
Washington, DC 20210.
Notice to Interested Persons
Notice of the proposed exemptions will be provided to all
interested persons in the manner agreed upon by the applicant and the
Department within 15 days of the date of publication in the Federal
Register. Such notice shall include a copy of the notice of proposed
exemption as published in the Federal Register and shall inform
interested persons of their right to comment and to request a hearing
(where appropriate).
SUPPLEMENTARY INFORMATION: The proposed exemptions were requested in
applications filed pursuant to section 408(a) of the Act and/or section
4975(c)(2) of the Code, and in accordance with procedures set forth in
29 CFR part 2570, subpart B (55 FR 32836, 32847, August 10, 1990).
Effective December 31, 1978, section 102 of Reorganization Plan No. 4
of 1978, 5 U.S.C. App. 1 (1996), transferred the authority of the
Secretary of the Treasury to issue exemptions of the type requested to
the Secretary of Labor. Therefore, these notices of proposed exemption
are issued solely by the Department.
The applications contain representations with regard to the
proposed exemptions which are summarized below. Interested persons are
referred to the applications on file with the Department for a complete
statement of the facts and representations.
Pennsylvania Institute of Neurological Disorders, Inc. Profit Sharing
Plan (the Plan) Located in Sunbury, PA
[Application No. D-11306]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the procedures set forth in 29 CFR part
2570, subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption
is granted, the restrictions of sections 406(a), 406(b)(1) and (b)(2)
of the Act and the sanctions resulting from the application of section
4975 of the Code, by reason of section 4975(c)(1)(A) through (E) of the
Code, shall not apply to the proposed sale (the Sale) by the Plan of a
parcel of unimproved real property known as Lot 20, Section ``F'',
Monroe Manor, Inc., (Lot 20 Kingswood Drive, Selinsgrove, PA
17870) (the Property) to Mahmood Nasir, M.D. (Dr. Nasir), a party in
interest with respect to the Plan, provided that the following
conditions are satisfied:
[[Page 76871]]
(a) All terms and conditions of the Sale are at least as favorable
to the Plan as those that the Plan could obtain in an arm's-length
transaction with an unrelated party;
(b) The Sales price is the greater of $81,000 or the fair market
value of the Property as of the date of the Sale;
(c) The fair market value of the Property has been determined by a
qualified independent appraiser;
(d) The Sale is a one-time transaction for cash;
(e) The Plan does not pay any commissions, costs, or other expenses
in connection with the Sale; and
(f) The Plan fiduciaries will determine, among other things,
whether it is in the interest of the Plan to go forward with the Sale
of the Property, will review and approve the methodology used in the
appraisal that is being relied upon, and will ensure that such
methodology is applied by a qualified independent appraiser in
determining the fair market value of the Property as of the date of the
Sale.
Summary of Facts and Representations
1. The Pennsylvania Institute of Neurological Disorders, Inc. (the
Employer) is the sponsor of the Plan. Dr. Nasir is the sole owner and
shareholder of the Employer. Dr. Nasir is also the President of the
Employer. The Employer is located in Sunbury, Pennsylvania.
The Plan is a defined contribution profit sharing plan which was
effective as of September 1, 1993. As of December 31, 2004, the Plan
had seven participants, who are as follows: Dr. Nasir, Denise Bebenek,
Teresa Gelnett, Julie Rebuck, Judy S. Smink, Hollie Vankirk, and Cassie
J. Wolfe. The Trustees of the Plan are Dr. Nasir and Rubina Nasir. As
of December 31, 2004, the Plan had total assets of $403,241.99.
2. In July 1995, the Plan purchased the Property from John A. Bolig
and Christabelle M. Bolig, unrelated third parties, for $49,000.\1\ The
Property is a 22,500 square foot parcel of unimproved real property
located at Lot 20 Kingswood Drive, Selinsgrove, Pennsylvania
17870. The Property is adjacent to property owned and resided on by Dr.
Nasir. The applicant represents that the Property has not been leased
to, or used by, any party in interest with respect to the Plan since
the date of acquisition by the Plan. The value of the Property
represents approximately 16.57% of the Plan's total assets as of
December 31, 2004. The applicant represents that the only Plan
expenditure with respect to the Property is $511.72 in annual real
estate taxes from 1995 (i.e., the year of original acquisition) until
the present. Therefore, the total cost to the Plan for the Property was
$54,628.92 as of the present date ($5,628.92 + $49,000 = $54,628.92).
Since the date of the purchase, the Property has remained vacant and no
income has been generated.
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\1\ The Department expresses no opinion herein as to whether the
acquisition and holding of the Property by the Plan violated any of
the provisions of part 4 of Title I of the Act.
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3. The Property was appraised (the Appraisal) on June 21, 2005, by
Mary Beth Rodriguez (the Appraiser), of the Bowen Agency in
Selinsgrove, Pennsylvania. The Appraiser is certified by the
Commonwealth of Pennsylvania as a General Appraiser. The Appraiser has
certified that she is independent of the Employer, the Trustees, and
any other parties in interest.
The Property was valued using the sales approach. The Appraiser
compared the Property to three other similar properties sold within a
one-half mile of the Property since March 2004. She adjusted the sale
price of the comparable properties based upon date of the sale,
location, and site/view. The Appraiser determined that the fair market
value of the Property was $81,000 as of June 21, 2005.
The Appraiser did not attribute any special benefit to the value of
the Property from the ownership of Dr. Nasir of the adjacent property
due to a number of factors. First, there is a driveway dividing the two
parcels. Second, the ownership of the Property by Dr. Nasir does not
affect Dr. Nasir's interest in the adjacent lot. Finally, the value of
the sum of the separate values for the Property and the adjacent parcel
already owned by Dr. Nasir is greater than the value if the Property
and the adjacent lot were sold as one combined lot. Therefore, the
Appraisal does not include any premium for assemblage value.\2\
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\2\ ``Assemblage'' value reflects the willingness of a purchaser
to pay above market value for a parcel of property in order to
preserve such purchaser's interest in their present holdings of
other parcels which are adjacent to such property.
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4. The applicant represents that the proposed transaction is in the
interest of the Plan because a gain will be realized when the parcel of
land is sold to Dr. Nasir and the proceeds can be reinvested in other
investments with a higher rate of return without incurring carrying
costs such as real estate taxes. The Property is the only real property
owned by the Plan. The transaction will be a one-time cash sale and
will enable the Plan to diversify its investment portfolio.
Furthermore, the applicant represents that the proposed transaction
is in the best interest and protective of the Plan because the Sale
will be for an amount equal to the greater of: (i) $81,000 which
represents the fair market value of the Property as of June 21, 2005,
or (ii) the current fair market value of the Property, as established
by a qualified independent appraiser on the date of the Sale. This
amount exceeds the original acquisition cost of the Property, plus
expenses and real estate taxes incurred by the Plan from the date of
the acquisition until the date of the proposed Sale. The Plan will not
pay any commissions, costs, or other expenses in connection with the
Sale. The applicant states that the Appraisal will be updated as of the
date of the transaction.\3\
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\3\ For this purpose, the updated appraisal must take into
account any new data on recent sales of similar property in the
local real estate market, which may affect the valuation conclusion.
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5. The Plan fiduciaries will determine, among other things, whether
it is in the interest of the Plan to go forward with the Sale of the
Property, will review and approve the methodology used in the appraisal
that is being relied upon, and will ensure that such methodology is
applied by a qualified independent appraiser in determining the fair
market value of the Property as of the date of the Sale.
6. The proposed transaction will occur within 30 days of the
publication of the grant of the prohibited transaction exemption.
7. In summary, the applicant represents that the subject
transaction satisfies the statutory criteria contained in section
408(a) of the Act and section 4975(c)(2) of the Code for the following
reasons:
(a) All terms and conditions of the Sale will be at least as
favorable to the Plan as those that the Plan could obtain in an arms-
length transaction with an unrelated party;
(b) The fair market value for Property has been determined by a
qualified independent appraiser;
(c) The Sale will be a one-time transaction for cash;
(d) The Plan will not pay any commissions, costs, or other expenses
in connection with the Sale; and
(e) The Plan will receive an amount equal to the greater of: (i)
$81,000; or (ii) the current fair market value of the Property as of
the date of the Sale.
Notice to Interested Persons
Notice of the proposed exemption shall be given to all interested
persons in the manner agreed upon by the
[[Page 76872]]
applicant and Department within 15 days of the date of publication in
the Federal Register. Comments and requests for a hearing are due
forty-five (45) days after publication of the notice in the Federal
Register.
FOR FURTHER INFORMATION CONTACT: Ms. Blessed Chuksorji of the
Department, telephone (202) 693-8567 (this is not a toll-free number).
The Zieger Health Care Corporation Retirement Fund (the Plan) Located
in Farmington, Michigan
[Exemption Application No. D-11313]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Employee Retirement Income Security
Act (the Act) and section 4975(c)(2) of the Internal Revenue Code of
1986 (the Code), and in accordance with the procedures set forth in 29
CFR part 2570, subpart B, 55 FR 32836, 32847 (August 10, 1990).\4\
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\4\ 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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I. Transactions
If the exemption is granted, the restrictions of sections 406(a),
406(b)(1), 406(b)(2), and 407(a) of the Act and the sanctions resulting
from the application of section 4975, by reason of sections
4975(c)(1)(A) through (E) of the Code, shall not apply to:
(a) The in-kind contribution and transfer to the Plan (the In-Kind
Contribution) by Zieger Health Care Corporation (ZHCC), acting through
its wholly-owned subsidiary, Botsford General Hospital (the Hospital),
both of which are parties in interest with respect to the Plan, of the
Hospital's right, title, and interest in five (5) limited liability
corporations, (collectively, the LLCs or individually, an LLC) where
the sole asset of each such LLC is one of five (5) parcels of improved
real property situated in southeastern Michigan (individually, an
Underlying Property, collectively, the Properties).
(b) The holding by the Plan of ownership interests in the LLCs that
own the Properties.
(c) The leaseback by the Plan to the Hospital of the Underlying
Property held by each of the LLCs, (individually, a Lease or
collectively, the Leases).
(d) The sale of an Underlying Property (or ownership interest in an
LLC, as the case may be) by the Plan to ZHCC or its affiliates,
pursuant to a right of first offer (the RFO), as described in each
Lease, at any time during the term of such Lease.
(e) Any payment or payments to the Plan by the Hospital, pursuant
to contingent rent payments(s) (the Contingent Rent Payment(s)), as
described in each Lease, during the term of such Lease.\5\
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\5\ The transactions described in section I (a)-(e), above,
collectively, are referred to herein as the Transactions.
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II. Conditions
The exemption is conditioned upon adherence to the material facts
and representations described herein and upon satisfaction of the
following requirements:
(a) ZHCC contributes to the Plan no less than:
(1) Cash in the amount of $3.3 million in the year 2005;
(2) Cash in the amount of $2 million in each of the years 2006,
2007, and 2008; and
(3) Cash in the amount of $3 million in the year 2009.
(b) A qualified, independent fiduciary, as defined in section
III(c), below, (the Independent Fiduciary), acting on behalf of the
Plan, determines in accordance with the fiduciary provisions of the
Act, whether and on what terms to enter into each of the Transactions.
(c) The Independent Fiduciary represents the Plan's interests for
all purposes with respect to each of the Transactions and determines,
prior to entering into any of the Transactions, that each such
transaction is feasible, in the interest of the Plan, and protective of
the Plan and its participants and beneficiaries.
(d) The Independent Fiduciary reviews, negotiates, and approves the
specific terms of each of the Transactions.
(e) The Independent Fiduciary monitors compliance by ZHCC and its
affiliates, as defined in section III(a), below, with the terms of each
of the Transactions and with the conditions of this proposed exemption
to ensure that such terms and conditions are at all times satisfied.
(f) The Independent Fiduciary manages the acquisition, holding,
leasing, and disposition of the Plan's ownership interests in the LLCs
that own the Properties and takes whatever actions are necessary to
protect the rights of the Plan with respect the Plan's ownership
interests in such LLCs.
(g) The terms and conditions of each of the Transactions are no
less favorable to the Plan than terms negotiated at arm's length under
similar circumstances between unrelated third parties.
(h) The Independent Fiduciary determines the fair market value of
the In-Kind Contribution, as of the date such contribution is made. In
determining the fair market value of the In-Kind Contribution, the
Independent Fiduciary obtains an updated appraisal from an independent,
qualified appraiser selected by the Independent Fiduciary and ensures
that the appraisal is consistent with sound principles of valuation.
(i) Each Lease has a term of years, commencing on the closing date
of the In-Kind Contribution and ending ten (10) years thereafter. Each
Lease is a triple net ``bondable'' lease in which the Hospital's
obligation to pay rent to the Plan is absolute and unconditional. The
rental payment under each Lease is no less than the fair market rental
value of the leased premises, as determined by the Independent
Fiduciary, and is net of all costs related to the leased premises,
including costs of capital improvements and all other costs to operate,
maintain, repair and replace in good condition, and repair the systems
and structural and non-structural components of the buildings on the
leased premises, including without limitation, the roof, foundation,
landscaping, storm water management, utilities, and all other capital
and non-capital repairs and replacements, all in a manner befitting
office buildings comparable to the buildings on the leased premises and
in accordance with all applicable laws. Each Lease contains a
commercially reasonable standard for determining whether repair or
replacement is necessitated. All such maintenance, repair, and
replacement work is the responsibility of the Hospital. As discussed in
representation number 6 in the Summary of Facts and Representations,
below, and except as otherwise provided in each Lease, the Hospital is
required to restore the leased premises in the event of casualty or
condemnation, regardless of any lack or insufficiency of insurance
proceeds or condemnation awards therefore (but subject to all
applicable laws);
(j) ZHCC and the Hospital agree to make one or more Contingent Rent
Payment(s) to the Plan, if the Plan does not earn an annual return on
each of the Properties equal to a fixed interest rate of 8 percent (8%)
in any year (the Minimum Funding Rate). Each Contingent Rent Payment is
due on the earliest of: (1) The end of the ten (10) year term of the
Leases, (2) the termination of any of the Leases (including a
termination due to default,
[[Page 76873]]
destruction, or condemnation), or (3) the sale by the Plan of any
parcel included in the Properties (or the sale by the Plan of the
entity that owns any parcel) (each a Minimum Return Date). If the
actual return to the Plan (the Actual Return), as defined in section
III (d), below, is less than the sum of the contribution value of the
Properties, plus a return on such contribution value equal to the
Minimum Funding Rate (the Minimum Return), then ZHCC and the Hospital
shall pay to the Plan a Contingent Rental Payment equal to the amount
of any such difference. ZHCC and the Hospital shall pay each Contingent
Rent Payment to the Plan in cash within 180 days after each Minimum
Return Date.
(k) If the Plan desires to sell or convey any of the Properties (or
any of the LLCs, as the case may be), during the term of a Lease, the
Plan shall first offer the Hospital the right to purchase or otherwise
acquire such property or LLC, pursuant to a right of first offer (the
RFO): (1) On such terms and conditions as the Plan proposes to market
such property or such LLC for sale (Soliciting Offer), which terms and
conditions shall reflect the Plan's good faith determination of market
conditions and the fair market value for such property or LLC, or (2)
on such terms and conditions as are contained within an unsolicited
bona fide offer from an unaffiliated third party that the Plan desires
to accept (Unsolicited Offer). The parties shall negotiate in good
faith the terms and conditions of any purchase based on a Soliciting
Offer for a period of thirty (30) days following the Plan's notice to
the Hospital. In all events, the Hospital shall exercise such right to
purchase, if at all, upon notice to the Plan within the thirty (30) day
period described above with respect to a Soliciting Offer or within
thirty (30) days after notice to the Hospital of an Unsolicited Offer.
If the Hospital fails to exercise such right to purchase, the Plan is
free to sell such property or LLC (i.e., close on the transfer) to a
third party on such terms for the next 360 days. However, the Plan
shall not have the right to sell to a third party at a lower effective
purchase price or on any other materially more favorable term than the
effective purchase price and terms proposed by the Plan to the Hospital
without first re-offering such property or LLC to the Hospital at such
lower effective purchase price or other more favorable term, nor to
sell on any terms following the expiration of such 360-day period,
without in either event first re-offering such property or LLC to the
Hospital. The RFO shall terminate upon the commencement of the exercise
by the Plan of its remedies under the Leases as the result of a
monetary event of default by the Hospital that continues uncured
following notice and the expiration of applicable cure periods (and a
second notice and cure period provided fifteen (15) days before the
loss of such right on account of such default).
(l) Subject to the Hospital's RFO, the Plan retains the right to
sell or assign, in whole or in part, any of its interests in the
Properties (or any of its interests in the LLCs, as the case may be) to
any third party purchaser.
(m) ZHCC indemnifies the Plan with respect to any liability for
hazardous materials released on the Properties, whether such release
occurs prior to or after the execution of the Leases or the In-Kind
Contribution;
(n) The In-Kind Contribution is conditioned on the Independent
Fiduciary's receipt of favorable engineering and environmental reports
prior to closing.
(o) The Plan incurs no fees, commissions, or other charges or
expenses as a result of its participation in any of the Transactions.
III. Definitions
(a) The term, ``affiliate,'' means:
(1) Any person directly or indirectly through one or more
intermediaries, controlling, controlled by, or under common control
with the person;
(2) Any officer, director, employee, relative, or partner of any
such person; and
(3) Any corporation or partnership of which such person is an
officer, director, partner, or employee.
(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, ``Independent Fiduciary,'' means a fiduciary that:
(1) Has a minimum of five (5) years of experience acting on behalf
of employee benefit plans covered by the Act and/or the Code;
(2) Can demonstrate, through experience and/or education,
proficiency in matters involving the acquisition, management, leasing,
and disposition of real property;
(3) Is an expert with respect to the valuation of real property or
has the ability to access (itself or through persons engaged by it)
appropriate data regarding the purchase, sale, and leasing of real
property located in the relevant market;
(4) Has not engaged in any criminal activity involving fraud,
fiduciary standards, or securities law violations;
(5) Is appointed to act on behalf of the Plan for all purposes
related to, but not limited to (i) the In-Kind Contribution, (ii) the
Leases, (iii) the RFO, (iv) the Contingent Rent Payment(s), and (v) any
other transactions between the Plan and ZHCC and its affiliates related
to the LLCs and Properties; and
(6) Is independent of and unrelated to ZHCC or its affiliates. For
purposes of this exemption, a fiduciary will not be deemed to be
independent of and unrelated to ZHCC and its affiliates if:
(i) Such fiduciary directly or indirectly controls, is controlled
by, or is under common control with ZHCC,
(ii) Such fiduciary directly or indirectly receives any
compensation or other consideration in connection with any Transactions
described in this exemption; except that an Independent Fiduciary may
receive compensation from ZHCC for acting as an Independent Fiduciary
in connection with the Transactions contemplated herein if the amount
or payment of such compensation is not contingent upon or in any way
affected by the Independent Fiduciary's ultimate decisions, and
(iii) The annual gross revenue received by such fiduciary, during
any year of its engagement, from ZHCC and its affiliates exceeds five
percent (5%) of the fiduciary's annual gross revenue from all sources
for its prior tax year.
(d) The definition of Actual Return to be used in calculating the
amount of each Contingent Rent Payment is the sum of: (1) The sales
price of any parcel sold, net of selling costs, (2) any net insurance
proceeds or net condemnation awards received by the Plan (if any Lease
is terminated due to destruction or condemnation), (3) the fair market
value of any parcel(s) that the Plan continues to hold, as determined
by a three appraiser method (if the parties are unable to otherwise
agree), plus (4) the rental income received by the Plan under the
Leases prior to the Minimum Return Date, less expenses incurred by the
Plan with respect to the Properties and the Leases up to the Minimum
Return Date. The liabilities and obligations of the Hospital and ZHCC
survive the expiration date of a Lease, or a termination of a Lease,
and continue until such liabilities and obligations have been fully
paid and fulfilled.
Temporary Nature of Exemption
The exemption, if granted, is temporary and will become effective
on the date of publication of the grant of the final exemption in the
Federal Register. The exemption will expire on the date which is ten
(10) years from the date of the grant of the exemption. If the
[[Page 76874]]
Hospital wishes to renew the Leases on the Properties between the
Hospital and the LLCs (or between the Hospital and the Plan, as the
case may be), the Department would encourage the applicant to submit
another application prior to the expiration of this exemption, provided
that the Independent Fiduciary determines that the conditions of the
renewal are feasible, in the interest and protective of the Plan and
the Hospital can demonstrate that it can satisfy the terms of such
renewal.
Summary of Facts and Representations
1. ZHCC is a not-for-profit Michigan corporation established in
1968 to provide a centralized governance and management structure for
its subsidiaries. ZHCC's business operations include the following
wholly-owned subsidiaries: (a) The Hospital, (b) Community Emergency
Medical Services (CEMS), and (c) Botsford Continuing Care Corporation
(BCCC).
The Hospital is a community osteopathic hospital that operates a
full service hospital, providing an array of ambulatory and inpatient
services for the benefit of the residents living in southeastern
Michigan. CEMS provides emergency and non-emergency medical
transportation to the general public and health care providers in
approximately twenty (20) communities in southeastern Michigan. BCCC
owns and operates a 179-bed skilled nursing facility in Farmington,
Michigan, a 64 unit assisted living facility, and a 51 unit independent
living apartment building. BCCC also provides services to an
independent living condominium development that consists of 86
separately owned units located within its campus.
2. The Plan was established January 1, 1968, and restated effective
January 1, 2000. The Plan is a non-contributory, single employer,
defined benefit pension plan. The Plan covers all employees of the
Hospital, CEMS, and BCCC. It is represented that the Hospital, CEMS,
and BCCC are the only entities in the controlled group that have
employees. As of December 31, 2003, the Plan had approximately 3,344
participants and beneficiaries. As of February 11, 2005, the date the
application for exemption was filed, the Plan had approximately 3,300
participants and beneficiaries.
On November 26, 2002, the Board of Directors of ZHCC approved a
resolution to freeze benefit accruals under the Plan, effective
December 31, 2002. All participants, as of December 31, 2002, are
deemed 100 percent (100%) vested. After December 31, 2002, employees
could not become participants in the Plan.
As of September 30, 2004, the Plan was approximately 71 percent
(71%) funded with assets of $71.2 million and liabilities of $101
million measured on an accumulated benefit obligation basis using a 6
percent (6%) discount rate, under Financial Accounting Standard (FAS)
No. 87, Employers' Accounting for Pensions. Of the total assets of the
Plan after the execution of the In-Kind Contribution, approximately ten
percent (10%) will be involved in the Transactions that are the subject
of this exemption.
ZHCC is the sponsor of the Plan, the administrator of the Plan, and
the named fiduciary for the Plan. As such, ZHCC is a party in interest
with respect to the Plan, pursuant to section 3(14)(A) and 3(14)(C) of
the Act. The Hospital, CEMS, and BCCC, as corporations 50% or more
owned by ZHCC, are also parties in interest with respect to the Plan,
pursuant to 3(14)(G) of the Act.
The general administration of the Plan and the responsibility for
carrying out the provisions of the Plan are vested in a Retirement
Committee (the Committee) consisting of designated members of the Board
of Directors of ZHCC and two (2) members of management. The Board of
Directors of ZHCC appoints the members of the Committee. The function
of the Committee is to administer the Plan exclusive of those functions
assigned to the trustee of the Plan (the Trustee). The Committee is a
party in interest with respect to the Plan, pursuant to section
3(14)(A) of the Act.
Under the terms of the Zieger Health Care Corporation Retirement
Plan Trust (the Trust), the Trustee of the Plan is Standard Federal
Corporate and Institutional Trust (formerly, Standard Federal Bank).
The Trustee is a division of LaSalle Bank, a national banking
association. The Trustee has discretion with respect to the investment
of the assets of the Plan. Pursuant to its authority under the Trust,
ZHCC has appointed investment managers to manage the Plan's assets.
ZHCC has the power to appoint and remove the Trustee. The Trustee is a
party in interest with respect to the Plan, pursuant to section
3(14)(A) of the Act.
The Plan has invested $3,272,836 and $2,691,285, as of December 31,
2003, and December 31, 2002, respectively, in shares of funds managed
by the Trustee or its subsidiaries. The applicant represents that these
transactions are exempt under Prohibited Transaction Class Exemption
77-4 (PTCE 77-4).\6\
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\6\ The Department is offering no view, herein, as to the
applicant's reliance on PTCE 77-4 with respect to the purchases by
the Plan of interests in funds managed by the Trustee or its
subsidiaries, nor has the Department made a determination that the
applicant has satisfied all of the requirements of PTCE 77-4.
Further, the Department is not providing any relief, herein, with
respect to such purchases.
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3. The Properties that are the subject of this proposed exemption
are described below:
(a) Botsford Center for Rehabilitation and Health Improvement (the
Rehab Center) is located at 26905 Grand River Avenue in Redford,
Michigan, on a rectangular, level site containing 27,443 square feet or
0.63 gross acres with frontage along Grand River Avenue and Denby
Street. All of the typical utilities are available to the site.
The Rehab Center is a one-story building totaling 5,288 square feet
of gross building area. The construction of the improvements is
represented to be Class C, with average quality of construction. The
condition of the building is average.
The Rehab Center was built in 1963, originally as offices of Junior
Achievement, with renovations in 1985 and 2001. The Rehab Center is
currently 100 percent (100%) owner occupied by the Hospital.
(b) Botsford Kidney Center (the Kidney Center) is located at 28425
West Eight Mile Road in Livonia, Michigan, on a slightly irregular
level site containing 209,959 square feet or 4.82 gross acres frontage
along West Eight Mile Road. All of the typical utilities are available
to the site.
The Kidney Center is a one-story building totaling 16,217 square
feet of gross building area. The building has 13,947 square feet of net
rentable area, which does not include the common areas of the building.
The construction of the improvements is represented to be Class C, with
average quality of construction. The condition of the Kidney Center is
average.
The Kidney Center was built in 1976 as offices for an architect and
was renovated in 1991 and 1995. A tenant owned by the Hospital occupies
28 percent (28%) of the building. The remaining 72 percent (72%) of the
building is occupied on a month to month basis with only an expired
lease in place by Botsford Kidney Center, Inc. (BKCI). BKCI is a
Michigan business corporation owned 80 percent (80%) by individual
physicians and 20 percent (20%) by the Hospital.
(c) Brentwood Medical Center (the Medical Center) is located at
28711
[[Page 76875]]
West Eight Mile Road in Livonia, Michigan, on a slightly irregular,
level site containing 84,158 square feet or 1.93 gross acres with
frontage along Brentwood Avenue and West Eight Mile Road. All of the
typical utilities are available to the site.
The Medical Center is a one-story building with 9,895 square feet
of gross building area. The building has 8,542 square feet of net
rentable area, which does not include the common areas of the building.
The construction of the improvements is represented to be Class C, with
average quality of construction. The condition of the building is
average.
The Medical Center was built in 1977, and has had several minor
renovations since 1997. The Medical Center is currently 63 percent
(63%) occupied by the Hospital, the owner, and 37 percent (37%)
occupied by Tri-County Urologists, an unrelated third party.
(d) The Planning and Development Building (the P&D Building) is
located at 29134 Grand River Avenue in Farmington Hills, Michigan, on a
slightly irregular, level site containing 22,744 square feet or 0.52
gross acres. The site is comprised of two parcels, one that has
frontage on Grand River Avenue, and one that has frontage on Jefferson
Avenue. The only access to the property is via Jefferson Avenue. All
typical utilities are available to the site.
The P&D Building is a one-story building totaling 4,063 square feet
of gross building area and net rentable area. The construction of the
improvements is represented to be Class C, with average quality of
construction. The condition of the building is good.
The P&D Building was built in 1987. A department of the Hospital
currently occupies 100 percent (100%) of the building.
(e) The South Professional Office Building (the SPO Building)
located at 28100 Grand River Avenue in Farmington Hills, Michigan, on
an irregular, level site containing 80,150 square feet or 1.84 gross
acres. The site does not have any frontage on Grand River Avenue but is
located on the campus of the Hospital. The only access to the property
is via the access drive to the Hospital. All typical utilities are
available to the site.
The SPO Building is a three-story building totaling 43,200 square
feet of gross building area. The building has 35,470 square feet of net
rentable area, which is comprised of fourteen tenant suites that are
located on all three floors. The construction of the improvements is
represented to be Class C, with average quality of construction. The
condition of the building is average.
The SPO Building was built in 1987. The SPO Building is currently
87.3 percent (87.3%) occupied by multiple tenants, including Hospital
departments and unrelated third party tenants.
The SPO Building is currently held in the Botsford Professional
Office Building Limited Partnership, LLP (BPOB). BPOB is 90 percent
(90%) owned by the Hospital and 10 percent (10%) owned by Botsford Real
Estate Services Corporation (BRESC), a wholly owned subsidiary of ZHCC.
It is represented that prior to the In-Kind Contribution, BRESC will be
merged into the Hospital, thereby dissolving BPOB and resulting in the
SPO Building being 100 percent (100%) owned by the Hospital.
The SPO Building is subject to a $1.9 million mortgage. It is
represented that the Hospital will pay-off the SPO Building mortgage
debt before executing the In-Kind Contribution.
4. ZHCC, the applicant, seeks an individual administrative
exemption: (a) For the immediate, voluntary In-Kind Contribution to the
Plan of interests in five (5) LLCs each of which will hold one of the
Properties, described in paragraph 3, above, and (b) for the continued
holding by the Plan of ownership interests in such LLCs and Properties.
It is anticipated that the Hospital will transfer its fee simple
interest in each Underlying Property to a separate Michigan LLC of
which the Hospital will own a 100 percent (100%) interest. The Hospital
then intends to transfer its entire interest in each LLC to the Plan.
Because the LLCs will be formed immediately before the In-Kind
Contribution, it is represented that the LLCs will have no outstanding
obligations or liabilities other than those generated by the
transaction.
5. ZHCC believes that the In-Kind Contribution of the Properties
does not satisfy the requirements of section 408(e) of the Act relating
to the acquisition, lease, or sale of ``qualifying employer real
property,'' as defined in section 407(d)(4) of the Act. In this regard,
among the provisions in the definition of ``qualifying employer real
property,'' set forth in section 407(d)(4) of the Act, is the
requirement that parcels of property must be dispersed geographically.
ZHCC believes that the In-Kind Contribution of the Properties would
violate sections 406 and 407(a) because the Properties are all located
within five (5) miles of each other; and therefore, arguably would not
be geographically dispersed.
Likewise, as it is anticipated that each of the Properties is to be
transferred into an LLC and the interests in the LLCs transferred to
the Plan, ZHCC believes that the interests in the LLCs would fail to
meet the requirements of 408(e) of the Act applicable to the
acquisition or sale of ``qualifying employer securities,'' set forth in
section 407(d)(5) of the Act, as interests in the LLCs would fail to
meet the requirements of section 407(f)(1) of the Act. Accordingly,
ZHCC has requested relief from sections 406(a), 406(b)(1), 406(b)(2)
and 407(a) of the Act for the In-Kind Contribution and for the
continued holding of ownership interests in the LLCs and the
Properties.
6. In addition to the In-Kind Contribution, ZHCC requests an
administrative exemption from section 406(a) and 406(b)(1) and
406(b)(2) of the Act for the Leases of the Properties between the
Hospital and the LLCs. It is represented that execution of the Leases
between the Hospital and the LLCs is a condition to acceptance by the
Plan of the In-Kind Contribution. Under the terms of the Leases, the
Plan, acting by and through the Independent Fiduciary who manages the
LLCs, will lease each Underlying Property to the Hospital under a
separate lease agreement. Each of the Leases will be identical as to
material terms. For the purpose of each Lease, the Plan will maintain
each of the Properties in its respective LLC in which: (1) the Plan
will be the sole member and the Independent Fiduciary will be the LLC
manager, and (2) the LLC will own such Underlying Property and be the
lessor under the Lease.
Each of the Leases has a term of ten (10) years. Each Lease is an
absolute net lease (i.e., all costs are paid by the lessee, the
Hospital) throughout the term of such Lease. The Leases are
``bondable'' leases in which the Hospital's obligation to pay rent to
the LLC is absolute and unconditional. The rental payments are
exclusive of all costs related to the leased premises, including real
estate taxes, utilities, and insurance, which the Hospital must pay.
The Hospital also bears the costs of capital improvements to the
Properties. Under the provisions of the Leases, the Independent
Fiduciary must approve any capital alterations made to the Properties.
The Hospital will also bear all costs to operate, maintain, repair
and replace in good condition the systems and structural and
nonstructural components of the buildings on the Properties, in a
manner befitting comparable office buildings in the area and in
accordance with all applicable laws. In this regard, it is represented
that the Independent Fiduciary has retained and will retain annually an
engineering firm to conduct a property condition assessment and make
[[Page 76876]]
recommendations for maintenance, repair, and replacements. In this
regard, the Independent Fiduciary represents that it has received a
Property Condition Assessment Report that has identified a number of
repairs and replacements that should be made on the Properties. Based
on the recommendations of the inspector, the Independent Fiduciary and
the Hospital are working to develop a timetable to complete these
repairs and replacements and will annually develop a budget for
maintenance, repair, and replacement. All such maintenance, repair, and
replacement work is the responsibility of the Hospital.
The Leases will contain a commercially reasonable standard for
determining whether repair or replacement is necessary. Any disputes
between the Independent Fiduciary and the Hospital concerning the
Properties will be resolved through mediation. If mediation is
unsuccessful, either party may bring suit.
The Leases contain certain casualty provisions that are described,
in part, in this and the following paragraphs. In this regard, the
Hospital, as lessee, is required at its sole expense to restore,
repair, rebuild, or remove and replace all or any part of the leased
premises damaged or destroyed in the event of any casualty, regardless
of any lack or insufficiency of insurance proceeds. In this regard, the
Hospital shall commence such activity after the occurrence of any such
casualty within the time period, as set forth in the Lease, unless
prevented by circumstances beyond the Hospital's control, and shall
pursue such activity to completion. All casualty insurance proceeds are
deposited with the LLC or the Plan, as the lessor, and disbursed to the
Hospital, as needed in accordance with the capital alteration
provisions of the Lease.
Failure by the Hospital to commence or substantially complete the
restoration, repair, rebuilding, or removal and reconstruction, within
certain timeframes as set forth in the Lease, shall be deemed an event
of default under the Lease. Any insurance proceeds paid to the Hospital
but not applied to the restoration, repair, rebuilding, or removal and
reconstruction of the leased premises are due and payable, as
additional rent by the Hospital, immediately prior to the termination
of the Lease. All insurance proceeds not yet paid to the Hospital
become the property of the LLC or the Plan, as lessor, upon such an
event of default.
In the event that all or part of the leased premises are damaged or
destroyed at any time during the last three (3) years of the term of
the Lease, and either (a) the cost to repair or replace exceeds 50
percent (50%) of the full replacement cost, or (b) repair or
replacement cannot reasonably be completed within 360 days of the date
of the damage or destruction, the Hospital may elect to terminate the
Lease; provided all insurance proceeds are paid to the LLC or the Plan,
as lessor. If the estimated cost to reconstruct or repair the leased
premises exceeds the amount of the insurance proceeds payable as a
result of the damage or destruction, the Hospital shall be obligated to
contribute any excess amounts needed to fully restore the leased
premises. Any such excess amounts shall be paid to the LLC or the Plan,
as lessor together with the insurance proceeds.
The Lease contains certain condemnation provisions that are
described, in part, in this and the following paragraphs. If at any
time during the term of a Lease, there shall be a taking of
substantially all of the leased premises, the Lease shall terminate, as
of the date of such taking, and the base rent and additional rent shall
be apportioned and paid by the Hospital to the date of such taking. If
the Lease terminates because of such taking, as of such date, the LLC
or the Plan, as the lessor, shall be entitled to the entire
condemnation award, except that the Hospital shall be entitled to any
portion explicitly attributable to the Hospital's personal property and
relocation costs.
In the event of a partial taking, the Lease shall continue and
remain unaffected, except that the Hospital shall promptly after such
partial taking, at its expense, take commercially reasonable efforts to
restore or demolish and reconstruct any improvements altered or damaged
by such partial taking. In this regard, the Hospital is entitled to
reimbursement from the condemnation award for the aggregate of the
funds expended and all other reasonable and customary costs directly
related to such restoration or demolition and reconstruction. The
balance of the award shall be paid to the LLC or the Plan, as lessor.
Following any partial taking, the base rent shall be re-determined by
the independent fiduciary based on an independent determination of fair
market value by a qualified, independent appraiser.
Failure by the Hospital to commence and substantially complete
restoration or reconstruction of the leased premises, within the time
periods set in the Lease, unless such failure is due to circumstances
beyond the Hospital's control, shall be deemed an event of default
under the Lease, whereupon LLC or the Plan, as lessor, shall be
entitled to the entire award, or so much thereof as has not been
disbursed and used in such reconstruction or restoration.
In the event of a taking of all or part of the leased premises for
temporary use, the Lease shall continue without change. There shall be
no re-determination of base rent. Any periodic payments of the
condemnation award made for such temporary use will be made to the
Hospital until the expiration or termination of the Lease and to the
LLC or the Plan, as lessor thereafter. In the event of a lump sum
payment of the condemnation award, the Hospital shall be entitled to an
amount equal to a maximum of three (3) months rent with the balance of
such condemnation award deposited with the LLC or the Plan, as lessor.
In addition, the Hospital is entitled to file any claim against the
condemnor for damages for negligent use, waste or injury to the leased
premises throughout the balance of the term of the Lease. The amount
recovered for such damages shall be first applied by the Hospital to
any necessary repair or restoration of the leased premises.
The Hospital in the event of any taking shall not be entitled to
any payment based upon the value of the unexpired term of the Lease,
other than the unearned portion of prepaid base rent or amounts
attributable to the Hospital's personal property and any reasonable
removal and relocation costs.
The Hospital, as the sole lessee under each of the Leases, will be
solely responsible for all payments of rent to the LLC or the Plan, as
lessor. The rental payments under the Leases are set at fair market
rates. Subject to final due diligence and the approval of the
Independent Fiduciary, the annual base rent for each of the Properties
will be the current fair market rental value identified in appraisals
prepared by an independent, qualified appraiser. It is estimated that
the Leases will generate in the aggregate an average of $1 million in
annual rental income for the Plan over the ten (10) year term of the
Leases.
Under the terms of each Lease, the rental rate increases at 2.5
percent per year, compounded. The Independent Fiduciary represents that
this provision is intended to protect the Plan against inflation. In
this regard, the Independent Fiduciary represents that over the past
ten (10) years, the average annual increase in the Consumer Price Index
(CPI) has been 2.45 percent (2.45%). The Independent Fiduciary
maintains that using a fixed percentage, rather than pegging the rent
to a variable
[[Page 76877]]
index, such as the CPI, provides certainty for the Plan as owner of the
Properties. Further, it is represented that: (a) In recent years,
negotiated base rental rates have increased by less than 2.5 percent
(2.5%); and (b) the Congressional Budget Office estimates that the
average annual increase in the CPI over the next ten (10) years will be
2.2 percent (2.2%).
The Leases provide that the Hospital will indemnify and hold the
Plan harmless from all liabilities, obligations, damages, penalties,
claims, costs, charges, and expenses, including reasonable architects'
and attorneys' fees (excluding consequential damages and indirect
losses) \7\ during the term of a Lease, related to (i) any work done in
or about the leased premises or any part of the leased premises by the
Hospital or any party claiming by or through or at the request of the
Hospital; (ii) any use, non-use, possession, occupation, condition,
operation, maintenance, or management of the leased premises by the
Hospital or any party acting on behalf of the Hospital; (iii) any
negligence on the part of the Hospital or any of its agents,
contractors, employees, subtenants, licensees, or invitees; (iv) any
failure on the part of the Hospital to perform or comply with any of
the covenants, agreements, terms, provisions, conditions, or
limitations in the Leases; (v) any violation of any environmental law,
the ADA, and other applicable laws; and (vi) any liability for
hazardous materials released on the leased premises, whether such
release occurred prior to or after (a) the execution of the Leases, or
(b) the In-Kind Contribution.
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\7\ The applicant has represented that the exclusion for
consequential damages and indirect losses referred to in this
sentence, would prevent the Plan from making a claim for damages
that do not flow directly and immediately from the Hospital's
activities, but only from some indirect result of those activities.
For example, if the Hospital's negligence leads to a loss of rental
income, this loss would be part of the Plan's direct damages. But if
the loss of rental income causes the Plan to default on an
obligation to a third party, this default would result in
consequential damages that do not flow directly from the Hospital's
activities.
---------------------------------------------------------------------------
It is represented that the Independent Fiduciary has retained
Atwell-Hicks Development Consultants (Atwell) to conduct a Phase I
Environmental Site investigation. In this regard, it is represented
that Atwell did not identify any environmental concerns associated with
the Properties or surrounding adjacent properties that could impact
business environmental risk. No further investigations or actions were
recommended at this time.
The Hospital will have the authority to sublease all or a portion
of any of the Properties to a third party. Currently, portions of the
Kidney Center, the SPO Building and the Medical Center are leased to
unrelated third parties. Any leases currently in existence between the
Hospital and unrelated third parties with regard to any of the
Properties will be treated as subleases upon consummation of the Leases
between the Hospital and the LLCs.
The provisions of all of the subleases are similar. The term of
each of the subleases is generally for a period of five (5) years. It
is represented that the initial rental rates due from the Hospital
under the Leases of the Properties are higher than the aggregate rents
to be paid under the subleases. In this regard, for calendar year 2005,
the annual sublease income, including a proportionate share of expenses
related to the SPO Building, the Kidney Center, and the Medical Center
was $783,221. Taking into account the expenses that the Hospital bears
with respect to the subleasing of the Properties, the applicant
maintains that there are no current or anticipated profits to share
with the Plan. In this regard, the Independent Fiduciary represents
that since the tenant in an absolute net lease bears all of the costs
of a property (as does the Hospital under the provisions of the
Leases), such leases do not normally provide for profit sharing.
The Independent Fiduciary has negotiated an arrangement designed to
ensure that any economic benefit derived from the subleases flows
through to the Plan. In this regard, rents paid by subtenants will be
sent to a postal lockbox and deposited directly into a cash account
that can be used only to pay the rent and other obligations of the
Hospital, as lessee under the Leases. Neither ZHCC nor the Hospital
will have the right to withdraw funds from this cash account. The
Independent Fiduciary will direct withdrawal of funds from this
account. In this regard, on a monthly basis, the Independent Fiduciary
will notify the Hospital of the amount of funds applied toward its
rental obligations during the previous month, and the Hospital will
have the right to deduct such amount from the next installment of rent
due under the Leases. If any rentals are set aside, recovered,
rescinded, or required to be returned for any reason, including the
bankruptcy, insolvency, or reorganization of any subtenant, then the
rental obligations of the Hospital to which the subtenant's rentals
were applied will remain in existence, and the Leases will be
enforceable as to such rentals. The Hospital will pay all fees and
expenses related to the lockbox, the cash account, and any related
postal or banking services.
The subleases will survive the expiration of the Leases, if entered
into on commercially reasonable terms and for fair market rent. Any new
subleases will include a provision stating that in the event of default
by the Hospital under the Leases, the subtenant will pay all rents to
the Plan or as directed by the Plan.
The applicant maintains that the Independent Fiduciary did not
require a security deposit. In this regard, it is represented that
security deposits are not customarily required under medical office
leases because of the favorable risk profile of medical office tenants.
It is further represented by the applicant that the subtenants, like
the Hospital, are reliable tenants who have fulfilled their rental
obligations on a timely basis.
7. The applicant has also requested an administrative exemption
from section 406(a) and 406(b)(1) and 406(b)(2) for the sale of any of
the Properties (or ownership interest in any of the LLCs, as the case
may be), pursuant to the RFO, specified in the provisions of the Leases
of the Properties as negotiated by the Independent Fiduciary. In this
regard, the Properties (or LLCs, as the case may be) are to be offered
to the Hospital, in accordance with a Soliciting Offer the terms of
which are set by the Plan, or in accordance with an Unsolicited Offer
made to the Plan by an unrelated third party.
The Independent Fiduciary will be responsible for any negotiations
if the Hospital elects to purchase any of the Properties under terms of
the RFO. The Hospital has a period of thirty (30) days to decide
whether to accept such offer on its terms and, if the Hospital fails to
do so, the Plan may sell to a third party on the offered terms or
better. It is represented that the RFO does not ``run with the land'',
so that the Hospital has no rights once the Plan sells to a third
party. The Hospital cannot avail itself of the RFO, if there is an
uncured monetary default under any Lease.
8. Further, an administrative exemption from sections 406(a) and
406(b)(1) and 406(b)(2) of the Act is needed for any Contingent Rent
Payment(s) made to the Plan by ZHCC and/or the Hospital under the terms
of the Leases on the Properties. In this regard, ZHCC and the Hospital
have agreed to make one or more Contingent Rent Payment(s) that will
provide a return to the Plan on each of the Properties equal to the
Minimum Funding Rate. As of a Minimum Return Date, if the Actual Return
(as defined in section III(d), of the exemption) to the
[[Page 76878]]
Plan is less than the sum of the fair market value of such property
when contributed plus a return equal to the Minimum Funding Rate, then
ZHCC and/or the Hospital within 180 days, will pay to the Plan a
Contingent Rent Payment equal to the difference. Under the terms of
each of Leases of the Properties, the liabilities and obligations of
ZHCC and the Hospital survive the expiration date or termination of a
Lease and continue until such liabilities and obligation have been
fully paid and fulfilled.
9. The applicant maintains that the requested exemption is
administratively feasible in that the subject Transactions are similar
to those granted by the Department in Prohibited Transactions Exemption
2004-19 \8\ and include similar terms which protect the interests of
the Plan and its participants and beneficiaries.
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\8\ ARINC Incorporated Retirement Income Plan granted 69 FR
68391 (November 24, 2004) and proposed 69 FR 55179 (September 13,
2004).
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10. The applicant maintains that the exemption is in the interest
of the Plan in that the proposed contributions, both those to be made
in-kind and in cash are entirely in excess of the minimum funding
obligations of ZHCC under section 302 of the Act and section 412 of the
Code. As a result of the In-Kind Contribution, including the additional
contributions of cash, and the income from the Leases, the Plan will be
more than 110 percent (110%) funded for the actuarial present value of
the accumulated Plan benefits liability under FAS 35. The Independent
Fiduciary represents that the proposed exemption would place the Plan
in a better actuarial and financial position over a five (5) year
period from 2005-2009, with a higher funding percentage and a large
funding standard account credit balance, with lower cash contributions
from ZHCC. It is represented that the Plan will be less reliant on the
ZHCC's ability to generate cash for payments to the Plan. Further, as
the Properties are marketable and have a value independent of the
Hospital, as the lessee, the Plan's reliance on the Hospital's
creditworthiness would be reduced.
In addition to improving the Plan's funded status, it is
represented that the overall diversification of the Plan's portfolio
will improve as a result of the In-Kind Contribution. In this regard,
the Plan's investment policy statement currently permits investments in
equities (domestic and international), fixed income, real estate,
immediate participation guarantee contracts issued by insurers, and
cash equivalents. Currently, the Plan holds no real estate assets and
owns no employer securities. If the exemption is granted and the
Properties become assets of the Plan, the contributed real estate would
replace a portion of the Plan's fixed income allocation. It is
represented that adding real estate assets like the Properties to a
portfolio of publicly-traded securities should enhance the overall
portfolio diversification, given the low correlation of returns between
real estate and other asset classes, and can be expected to improve the
Plan's risk adjusted returns. It is further represented that the In-
Kind Contribution and the Leases would not cause the Plan to fail to
satisfy the diversification requirement as set forth in section 404 of
the Act, notwithstanding the fact that approximately 10 percent (10%)
of the Plan's assets would be invested in real estate in a single
metropolitan area.
11. The applicant maintains that there are sufficient safeguards in
place with regard to the subject Transactions that are designed to
protect the interests of the Plan and its participants and
beneficiaries. In this regard, pursuant to a letter agreement (the
Agreement) between Fiduciary Counselors Inc. (FCI) and the Committee,
FCI has been appointed to act as the qualified Independent Fiduciary on
behalf of the Plan and investment manager with authority and discretion
to acquire, hold, lease, and dispose of the Properties and acquire,
hold, and dispose of the LLCs, as the case may be. FCI represents that
it understands and acknowledges its duties and responsibilities, and
obligations to act as a fiduciary under the Agreement and in accordance
with the applicable fiduciary responsibility provisions of the Act.
If any party terminates the Agreement or if FCI decides to assign
its obligations to perform services, the parties to the Agreement shall
notify the Department within 15 days of any decision regarding the
resignation, termination, or change in control of the Independent
Fiduciary. Any replacement or successor Independent Fiduciary must be
independent and qualified and must assume responsibility prior to the
effective date of the removal of the predecessor Independent Fiduciary.
It is represented that FCI is qualified to serve as the Independent
Fiduciary and investment manager for the Plan. In this regard, FCI is
an investment adviser registered under the Investment Advisers Act of
1940 and a ``qualified professional assets manager'' as that term is
defined in Prohibited Transaction Exemption 84-14. Since its inception
in 1999, FCI has been involved in a variety of transactions requiring
an independent fiduciary, such as prohibited transaction exemptions,
conversions of common and collective mutual funds, mergers of mutual
funds and ESOP transactions, and other transactions involving plan
assets totaling more than $5 billion.
With regard to its independence, neither FCI nor its affiliates are
affiliates of ZHCC or its affiliates within the meaning of 29 CFR
2570.31(a) of the Department's regulations. FCI represents that the
fees it will receive in the current year from ZHCC will not exceed five
percent (5%) of its annual gross income for the prior fiscal year. It
is represented that while ZHCC is paying FCI's fees, the contract with
FCI specifically provides, and ZHCC has acknowledged, that FCI's duties
and obligations are solely for the benefit of the Plan and its
participants and beneficiaries.
Nell Hennessy (Ms. Hennessy), President of FCI, will lead the
project on behalf of FCI with respect to the Transactions that are the
subject of this proposed exemption.
FCI is responsible for deciding whether and on what terms to agree
on behalf of the Plan to the In-Kind Contribution and the Leases of the
Properties. FCI will negotiate the specific terms of and the closing of
the In-Kind Contribution and the Leases and will determine on behalf of
the Plan the value of the assets to be obtained by the Plan by virtue
of the consummation of such transactions. In making such decision, FCI
will review the Plan's financial and actuarial condition, asset
allocation, investment portfolio, investment policy statement, and
other material relevant to making a determination as to the suitability
of engaging in these transactions within the context of the Plan's
overall assets.
In addition to its responsibilities with regard to the In-Kind
Contribution and the Leases, FCI will be responsible for the following
ongoing functions: (a) Monitor and enforce the Plan's rights and
interests with respect to the Properties that are the subject of this
exemption and any Leases or other agreements with ZHCC regarding the
use of such Properties; (b) propose, negotiate, and decide whether to
enter into any agreement to amend the Leases; (c) evaluate and decide
whether to grant requests for forbearance of the terms of the Leases;
(d) arrange for such appraisals of the Properties as may be necessary
to satisfy the Plan's responsibilities under the Act and the subject
exemption to establish and report the value of such Properties; (e)
[[Page 76879]]
report annually to the Committee concerning the physical and financial
condition of the Properties; (f) determine whether continued ownership
of the Properties is in the interest of the participants and
beneficiaries of the Plan and whether, when, and on what terms to seek
prudently to sell any of the Properties in accordance with the
provisions of any contract between the Plan and ZHCC; and (g) in the
event FCI determines to sell or otherwise dispose of any of the
Properties, negotiating the terms and conditions of, and consummating
the sale or disposition.
To carry out its responsibilities, FCI retained an experienced
legal counsel in the law firm of Warner, Norcross & Judd LLP (Warner
Norcross) to advise with respect to legal issues raised by the
Transactions. In addition, FCI retained a qualified, independent
appraiser, as discussed more fully, in paragraph 12 below, to determine
the fair market value of the Properties and the fair market rent for
the Leases. In this regard, it is represented that Ms. Hennessy
physically inspected the Properties with the appraiser and a real
estate partner from Warner Norcross.
FCI represents that it has retained and, if the Transactions are
consummated, periodically will retain engineering and environmental
experts to assess the physical condition of the Properties and make an
environmental site assessment. It is represented that an engineering
firm has conducted and will conduct its assessment in general
conformance with the American Society of Testing and Materials
guidelines for property condition assessments. It is further
represented that an environmental firm has produced and periodically
will produce Phase I environmental reports. FCI represents that any
defects identified by the engineering and environmental experts will
either be corrected or taken into account in determining whether to
accept the Properties and the fair market value at which the Properties
will be contributed.
FCI has represented that it will also retain an expert in insurance
issues to evaluate the adequacy of the insurance coverage that ZHCC
currently maintains and will maintain on the Properties. FCI further
represents that, if appropriate, it will recommend changes in or
additions to such coverage. Further, it is represented that FCI and its
advisors will continue to analyze the condition of the Properties and
the safeguards available to protect the Plan if the Transactions are
consummated.
12. It is represented that FCI retained Stout Resius Ross Inc.
(SRR), a qualified independent appraiser, to determine the fair market
value of the Properties for purposes of the In-Kind Contribution and
the fair market rental value of the Properties for purposes of the
Leases. It is represented that the FCI solicited proposals from a
number of appraisal firms, interviewed two firms and selected SRR based
on their experience and references.
It is represented that SRR is qualified in that it has 19
professionals focusing on real estate valuation and consulting,
including two professionals that are designated members of the
Appraisal Institute with the MAI designation. SRR professionals hold
general certified appraiser licenses in a number of states, including
Michigan. It is represented that the real estate valuation group at SRR
completes valuations of over 500 commercial properties per year. SRR
has experience in the valuation of different property types, including
hospital office buildings.
As requested by FCI, the scope of SRR's assignment for each of the
Properties included the following: (a) Inspection of each of the
Properties and surrounding area; (b) collection of current assessment
and zoning data; (c) estimation of the highest and best use of each of
the Properties; (d) research and analysis of sales and rentals of
similar properties; (e) an estimate of the value of the Properties; (f)
an estimate of the fair market rent for a ten-year absolute net lease;
(g) an estimate of the fair market rent for a standard term lease; (h)
consideration of the rent escalation factor contained in the Leases;
(i) consideration of the RFO contained in the Leases; and (j)
consideration of the adaptability of the Properties for alternative
uses.
As requested by FCI, SRR determined the fair market value of the
Rehab Center, the Medical Center, the Kidney Center, and the P&D
Building based on: (a) The fee simple \9\ ``as is,'' because these
properties were not leased to third parties or were only subject to
short-term leases; and (b) the leased fee estates \10\ under the Leases
with the Hospital. For the SPO Building, SRR determined the fair market
value based on: (a) The leased fee estate ``as is,'' because a portion
of the SPO Building is currently leased to third parties at below
market rental rates, and (b) the leased fee estate under the Lease with
the Hospital.
---------------------------------------------------------------------------
\9\ SRR defines a ``fee simple'' as absolute ownership
unencumbered by any other interest or estate, subject only to the
limitations imposed by governmental powers of taxation, eminent
domain, police power, and escheat.
\10\ SRR defines a ``leased fee estate'' as an ownership
interest held by a landlord with the rights of use and occupancy
conveyed by lease to others. The rights of the lessor (the leased
fee owner) and the leased fee are specified by contract terms
contained within the lease.
---------------------------------------------------------------------------
In making its determinations of the fair market value of each of
the Properties ``as is'', SRR used the ``sales comparison'' \11\ and
the ``income capitalization'' \12\ approaches, but did not use the cost
approach,\13\ due to the age of the improvements and the difficulty in
accurately estimating physical depreciation.
---------------------------------------------------------------------------
\11\ The ``sales comparison approach'' estimates the market
value based on sales and listing of similar properties.
\12\ The ``income capitalization approach'' estimates value by
capitalizing the net income a property is capable of generating at
market rates.
\13\ The ``cost approach'' estimates the market value of the
land as if vacant and the cost to replace the improvements less
depreciation to their current conditions.
---------------------------------------------------------------------------
In making its determination of the fair market value of the leased
fee estate under the Leases with the Hospital, SRR incorporated a lease
structure that would have the Hospital as a tenant for a ten (10) year
term of the Lease, on an absolute net \14\ basis. According to SRR, the
ten (10) year term of the Lease, reduces rollover risk for the landlord
under the Leases. The following factors influenced the estimation of a
fair market rental rate and influenced an overall capitalization rate
of 9.25 percent (9.25%): (a) The terms of the Leases, (b) the market
rental rates applicable to each of the Properties to be included in the
Leases, and (c) an estimation of management fees and replacement
reserves. Additionally, SRR determined that the rental rate for each of
the Properties is calculated by deducting $0.75 per square foot from
the applicable market rental rate. This was calculated by accounting
for the additional reimbursement of management fees and replacement
reserves.
---------------------------------------------------------------------------
\14\ SRR defines an ``absolute net lease'' as a lease in which
tenant pays its pro-rata share of all operating expenses, including
management fees and capital expenditures.
---------------------------------------------------------------------------
SRR examined the Leases under three (3) separate scenarios, one
utilizing a direct capitalization approach and the other two utilizing
a discounted cash flow analysis (DCF). The first DCF analysis examined
the result if the Hospital were to vacate the premises after the
expiration of the ten-year term of the Leases.
The second DCF analysis examined the result if the Hospital were to
renew the Leases after the expiration of the ten-year term of the
Leases.
It is represented that SRR concluded that the final reconciled
value should be the fair value based on the actual terms of the Leases,
including the actual
[[Page 76880]]
distribution of responsibility and cost for capital maintenance, and
not on a more generalized market value based on market standard lease
terms. FCI concurs with SRR in this view. As of March 22, 2005, the
fair market values of the Properties and fair market rental value of
the Properties were as follows:
------------------------------------------------------------------------
Fair market
rental value Fair market
per square value of
Name of property foot absolute ``Leased fee''
net under estate under
Leases with Leases with
Hospital Hospital
------------------------------------------------------------------------
Rehab Center.......................... $12.25 $630,000
Kidney Center......................... 12.25 1.7 million
Medical Center........................ 12.25 1 million
P&D Building.......................... 12.75 510,000
SPO Building.......................... 14.75 5.1 million
------------------------------------------------------------------------
It is represented that FCI will continue to do due diligence before
accepting the Properties for the Plan and that SRR's final valuation
will be adjusted to reflect any subsequent information or developments
so that the value of the Properties and the LLCs will reflect fair
market value when contributed.
In determining whether the In-Kind Contribution will be in the
interest of the Plan and its participants and beneficiaries, FCI
considered not only the abstract value of the Properties, as determined
in SRR's appraisals but a realistic assessment of the marketability of
the Properties to parties other than ZHCC in the event the Leases are
terminated and the Hospital no longer occupies the Properties, either
by choice at the end of the Leases or due to a default under the
Leases. The Properties are currently occupied almost exclusively by the
Hospital or by medical practices that are associated with the Hospital.
However, it is represented that the Properties are suitable for use by
other occupants so the value of the Properties can be realized even if
the Hospital were to default on the Leases. Based on the appraisals
prepared by SRR, FCI believes that the Plan could recoup 87 percent
(87%) of the leased value if the Properties were sold to independent
third parties. In this regard, it is represented that with the
exception of the SPO Building, the Properties are not on the campus of
the Hospital; and therefore, could be sold separately.
All of the Properties are on or near major thoroughfares, in
commercial areas. Thus, there should be multiple opportunities for sale
or rental of the Properties to one or more unrelated users.
Under the terms of each of the Leases, ZHCC will have a RFO to
purchase the leased premises, if the Plan chooses to sell any of the
Properties prior to the end of the term of the Lease. FCI considered
whether the RFO would materially impair the Plan's ability to sell the
Properties for fair value during the term of the Leases. In this
regard, FCI represented that, as structured, the RFO will not bar the
Plan from marketing the Properties for sale at fair market value, since
ZHCC can only purchase the Properties at fair market value. It is the
opinion of FCI that any purchaser will not be burdened by the RFO, and
therefore, the RFO should not affect the price that a purchaser is
willing to pay for any of the Properties.
As the Properties are currently used for professional medical
offices and facilities, FCI requested that SRR analyze the fitness of
each of the Properties for alternative uses within the overall area and
market in which they are located. This analysis is presented in the
Highest and Best Use section of SRR's report. Factors affecting this
include the strength and growth patterns of the region and the physical
structure as well as the permitted uses of the Properties.
In the opinion of SRR, the most probable use of the Rehab Center,
the Kidney Center, and the Medical Center is as a medical office space
given the medical design of the examination rooms. However, it is
represented that each of these buildings could be converted to a
general office use for a tenant other than the Hospital by utilizing
the tenant improvement allowances to reconfigure the interior of the
buildings.
SRR represented that the most probable use of the P&D Building
based on the design of the building is general office use. However, by
utilizing tenant improvement allowances, it is the opinion of SRR that
the P&D Building could likely be reconfigured for commercial/retail
use.
SRR represented that medical office use is the most probable use
for the SPO Building. In the opinion of SRR, significant renovations
would be required to convert the SPO Building to general office use.
Furthermore, SRR represented that general office use for the SPO
Building would not be a likely alternative given the location of the
SPO Building on the campus of the Hospital.
FCI has addressed whether the SPO Building would continue as a
medical office building if the Hospital were to fail. In this regard,
although the SPO Building could be reconfigured for other professional
offices if necessary, FCI anticipates that the SPO Building would
continue to be leased to doctors and other medical specialists. It is
represented that vacancy rates for medical offices within a 7-mile
radius of the site are significantly lower than general office space (8
percent (8%) compared to 18 percent (18%)) and this difference has been
consistent over the last three (3) years. In the opinion of FCI, since
this space has already been configured for medical offices, which
generally command a higher rent because of the build outs needed for
medical practices, it is likely that the space in the SPO Building
would remain leased to doctors and other medical professionals.
13. FCI has determined that the In-Kind Contribution and the Leases
are appropriate and in the interest of the Plan's participants and
beneficiaries. FCI believes that the terms of the In-Kind Contribution
and the Leases when taken as a whole are consistent with an arm's
length negotiation between unrelated parties. In this regard, the In-
Kind Contribution and the Leases include the following important
features to protect the interests of the Plan and its participants and
beneficiaries:
(a) The bondable nature of the absolute net Leases for the entire
term of such Leases means that the Hospital, not the Plan, will bear
not only the ordinary maintenance, tax and insurance expenses
associated with a triple net lease but also all capital expenses
associated with the Properties.
[[Page 76881]]
In addition, the Hospital will not have a tenant's typical right to
rent abatement in the event any of the Properties suffer damages and
cannot be occupied.
(b) The Plan has the unencumbered right to sell the Properties and
to lease them to any party when the Leases expire.
(c) ZHCC has accepted a RFO. The RFO is subject to forfeiture in
the event of ZHCC's unsecured monetary default. The RFO will not run
with the land but will be extinguished, if the Hospital declines to
exercise the right with respect to any of the Properties and the Plan
sells that property to a third party.
(d) ZHCC and the Hospital have agreed to provide the Plan a minimum
rate of return on each of the Properties as of the 10th anniversary of
the In-Kind Contribution or on the earlier sale of any of the
Properties or termination of a Lease or related lease on such property
(including a termination due to default, destruction, or condemnation).
This will take the form of one or more Contingent Rent Payment(s) to
the Plan so that the Plan's actual return on the property (including
rental payments) will not be less than the Minimum Funding Rate. This
provision will protect the Plan if the value of any of the Properties
were to decline.
(e) The Properties are discreet parcels of real estate with office
buildings suitable for other tenants. FCI has insisted that each of the
Properties be owned by a separate LLC, because that will facilitate
separate sales in the future if FCI determines that such sales would be
in the best interests of the Plan and its participants and
beneficiaries. The LLCs are special purpose entities that will be
single member LLCs, owned and managed entirely by the Plan. This LLC
structure protects the remaining assets of the Plan from any liability
arising from the Properties and facilitates future sales without
transfer taxes, and without changing the underlying economic benefits
for the Plan. For tax purposes, the LLCs will be treated as
partnerships so the attributes of the Properties will be passed through
to the Plan. This is the structure typically used by plans that acquire
real estate.
FCI requested SRR to consider the potential impact on the value if
each of the Properties is owned by a separate LLC. In this regard, SRR
represented that if the LLC is 100% owned by the Plan, and the owner
has control over the operation of the entity as well as the assets
within the entity, then there would not be any discount to the value of
the entity. The LLC would be valued based on the opening balance sheet
of the entity, reflecting the market value of the assets less any
applicable liabilities (e.g. mortgages), if they exist.
14. It is represented that ZHCC's cash position is the key to its
ability to make the payments required by the proposed Transactions. In
the opinion of FCI, the proposed Transactions would not appear to place
a financial burden on ZHCC that would jeopardize its ability to satisfy
its obligations to the Plan and its other creditors. It is represented
that at the end of 2004, ZHCC had $79.7 million in cash and marketable
securities (which could easily be converted to cash) of which $50.3
million (63%) was unrestricted. The annual rent under the Leases,
$915,254, represents less than five percent (5%) of ZHCC's anticipated
net cash for operations for 2005. FCI represents that it will continue
to review ZHCC's financial situation prior to entering into the
proposed Transactions and will take ZHCC's financial situation into
consideration both in deciding whether it is prudent to enter into the
proposed Transactions and what should be the final value assigned to
the contributed Properties.
Further, FCI examined the Hospital's most recent financial
information. In this regard, the Hospital's financial results for the
first half of 2005 indicate that the Hospital's revenue was up 4
percent (4%) and expenses were down 3 percent (3%) for the six-month
period ending June 30, 2005, compared to the same period last year.
FCI did not require financial projections for the full ten (10)
years of the Leases. FCI states that projections beyond five (5) years
were not available and would be highly speculative. FCI did review the
Hospital's financial projections through 2010. In this regard, FCI
represents that the Hospital provided five-year projections, even
though it normally prepares one-year projections for its lenders. Based
on five-year projections, it is the opinion of FCI that the Hospital
should have sufficient cash flow to make the payments under the Leases,
the Contingent Rent Payment, and the additional contributions to the
Plan as required under the conditions of this exemption.
15. FCI provided a written report to the Department of its
conclusions and summarized the analysis and consideration it took into
account in reaching such conclusions. In the opinion of FCI, the In-
Kind Contribution and the Leases will immediately improve the Plan's
funding, improve the Plan's overall portfolio of assets in terms of
anticipated risk-adjusted return, and reduce the Plan's reliance on
future cash contributions from ZHCC. The Plan will receive a portfolio
of marketable real estate, fully leased to a single tenant obligated to
pay rent at fair market value with regular annual increases. The terms
of the Leases relieve the Plan of any exposure to the costs, including
capital improvements, for the first ten (10) years after the Properties
are contributed to the Plan. Further, in the view of FCI, the In-Kind
Contribution and the Leases satisfy the criteria set forth in sections
404 and 408(a) of the Act. Accordingly, for the reasons set forth
above, FCI concluded, as the Independent Fiduciary for the Plan, that
the In-Kind Contribution and the Leases are prudent and in the interest
of the Plan's participants and beneficiaries.
16. The Department notes that the appointment of an independent
fiduciary to represent the interests of the Plan with respect to the
transactions that are the subject of the exemption request is a
material factor in its determination to propose exemptive relief. The
Department believes that it would be helpful to provide its views on
the responsibilities of an independent fiduciary in connection with the
in-kind contribution, directly or indirectly, of property to an
employee benefit plan.
As noted in the Department's Interpretive Bulletin, 29 CFR 2509.94-
3(d),\15\ apart from consideration of the prohibited transaction
provisions, plan fiduciaries must determine that acceptance of an in-
kind contribution is consistent with the general standards of fiduciary
conduct as set forth in the Act. It is the view of the Department that
acceptance of an in-kind contribution is a fiduciary act subject to
section 404 of the Act. In this regard, section 404(a)(1)(A) and (B) of
the Act requires that fiduciaries discharge their duties to a plan
solely in the interests of the participants and beneficiaries, for the
exclusive purpose of providing benefits to participants and
beneficiaries and defraying reasonable administrative expenses, and
with the care, skill, prudence, and diligence under the circumstances
then prevailing that a prudent person acting in a like capacity and
familiar with such matters would use in the conduct of an enterprise of
a like character and with like aims.
---------------------------------------------------------------------------
\15\ 59 FR 66736, December 28, 1994.
---------------------------------------------------------------------------
In addition, section 404(a)(1)(C) of the Act requires that
fiduciaries diversify plan investments so as to minimize the risk of
large losses, unless under the circumstances it is clearly prudent not
to do so. Accordingly, the fiduciaries of a plan must act
``prudently,'' ``solely in the interest'' of the plan's participants
and beneficiaries, and with a view to the need to diversify plan assets
when
[[Page 76882]]
deciding whether to accept an in-kind contribution. If accepting an in-
kind contribution is not ``prudent,'' not ``solely in the interest'' of
the participants and beneficiaries of the plan, or would result in an
improper lack of diversification of plan assets, the responsible
fiduciaries of the plan would be liable for any losses resulting from
such a breach of fiduciary responsibility, even if a contribution in-
kind does not constitute a prohibited transaction under section 406 of
the Act.
The selection of an independent qualified appraiser to determine
the value of an in-kind contribution and the acceptance of the
resulting valuation are fiduciary decisions governed by the provisions
of part 4 of Title I of the Act. In discharging its obligations under
section 404(a)(1) of the Act, the independent fiduciary must take steps
calculated to obtain the most accurate valuation available. In
addition, the fiduciary obligation to act prudently requires, at a
minimum, that the independent fiduciary conduct an objective, thorough,
and analytical critique of the valuation. In conducting such
verification, the independent fiduciary must evaluate a number of
factors relating to the accuracy and methodology of the valuation and
the expertise of the independent qualified appraiser. Reliance solely
on the valuation provided by the appraiser would not be sufficient to
meet this prudence requirement.
17. In summary, the applicant represents that the subject
Transactions meet the statutory criteria of section 408(a) of the Act
and 4975(c)(2) of the Code because:
(a) The Leases are expected to generate approximately $1 million in
income for the Plan annually for a period of ten (10) years; (b)
subject to the Hospital's RFO, the Plan retains the right to sell or
assign, in whole or in part, any of its interests in the Properties (or
any of its interests in the LLCs, as the case may be) to any third
party purchaser; (c) FCI has established the fair market value of the
Properties and the fair market rental value of the Properties with the
assistance of a independent, qualified appraiser; (d) the Plan will be
in a stronger financial position as a result of the In-Kind
Contribution; (e) the Plan will acquire a valuable investment in that
the Properties are likely to appreciate in value and are adaptable for
other uses; (f) the In-Kind Contribution of real property will
diversify the Plan holdings; (g) FCI has determined that the In-Kind
Contribution and the Leases are appropriate and in the interest of the
Plan's participants and beneficiaries; (h) FCI is responsible for
reviewing, negotiating, and approving the specific terms of each of the
Transactions, and has determined that the terms of the In-Kind
Contribution and the Leases are consistent with an arm's length
negotiation between unrelated parties; (i) the In-Kind Contribution is
conditioned on receipt of favorable engineering and environmental
reports prior to closing; (j) the Plan will incur no fees, commissions,
or other charges or expenses as a result of its participation in any of
the Transactions; (k) ZHCC will indemnify the Plan with respect to any
liability for hazardous materials released on the Properties, whether
such release occurs prior to or after the execution of the Leases or
the In-Kind Contribution; (l) if the Actual Return to the Plan is less
than the sum of the contribution value of the Properties plus a return
on such contribution value equal to the Minimum Funding Rate, then ZHCC
and the Hospital will make Contingent Rent Payments to the Plan equal
to the amount of any such difference; (m) each Lease is a triple net
``bondable'' lease in which the Hospital's obligation to pay rent to
the Plan is absolute and unconditional; (n) FCI will manage the
acquisition, holding, leasing, and disposition of each of the
Properties and the acquisition, holding, and disposition of the
interests in each of the LLCs and will take whatever actions are
necessary to protect the rights of the Plan with respect the Plan's
ownership of such Properties and LLCs; (o) FCI will represent the
Plan's interests for all purposes with respect to each of the
Transactions and determine, prior to entering into any of the
Transactions, that each is feasible, in the interest of the Plan, and
protective of the Plan and its participants and beneficiaries; (p) FCI
will monitor compliance by ZHCC and its affiliates with the terms of
each of the Transactions and with the terms of this exemption; (q) the
In-Kind Contribution plus the additional voluntary cash contributions
will exceed the minimum funding requirement for the year 2005; and (r)
FCI has determined that the Hospital should have sufficient cash flow
to make the Lease payments, the Contingent Rent Payment(s), and the
additional cash contributions to the Plan.
Notice to Interested Persons
Those persons who may be interested in the pendency of the
requested exemption include participants and beneficiaries of the Plan,
trustees, unions, vested terminates, retirees, and all other interested
persons or parties involved in the Transactions. It is represented that
these various classes of interested persons will be notified as
follows.
All interested persons will be provided with a copy of the notice
of this proposed exemption (the Notice), plus a copy of the
supplemental statement (the Supplemental Statement), as required,
pursuant to 29 CFR 2570.43(b)(2), which will advise such interested
persons of the right to comment and to request a hearing. The Notice
and the Supplemental Statement will be provided to all interested
persons within seven (7) days of the publication of the Notice in the
Federal Register. The Notice and the Supplemental Statement will be
sent by first class mail to all interested persons. It is represented
that for the purpose of sending the Notice and Supplemental Statement
by mail, the last known addresses of such interested persons will be
used.
The Department must receive written comments and requests for a
hearing no later than thirty-seven (37) days from the date of the
publication of the Notice in the Federal Register.
FOR FURTHER INFORMATION CONTACT: Angelena C. Le Blanc of the
Department, telephone (202) 693-8540. (This is not a toll-free number.)
The Donlar Corporation Profit Sharing Plan (the Plan) Located in
Roseville, MN
[Exemption Application No. D-11325]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Employee Retirement Income Security
Act (the Act) and section 4975(c)(2) of the Internal Revenue Code of
1986 (the Code), and in accordance with the procedures set forth in 29
CFR part 2570, subpart B, 55 FR 32836, 32847 (August 10, 1990).\16\ 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, by reason of section
4975(c)(1)(A) through (E) of the Code, shall not apply, in connection
with the termination of the Plan, to the cash sale of a parcel of
improved real property (the Property) owned by the Plan to Mr. Donald
A. Kainz (Mr. Kainz), a party in interest with respect to the Plan;
provided that:
---------------------------------------------------------------------------
\16\ 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.
---------------------------------------------------------------------------
[[Page 76883]]
(a) The Plan receives a price for the sale of the Property to Mr.
Kainz equal to the greater of:
(1) $418,000; or
(2) The fair market value of the Property, plus the ``assemblage
value'' to Mr. Kainz, as determined by an independent, qualified
appraiser, as of the date of such sale; or
(3) The cost to the Plan to acquire and hold the Property;
(b) The Plan incurs no fees, commissions, or other charges or
expenses as a result of its participation in the sale of the Property
to Mr. Kainz;
(c) Prior to entering into the subject transaction:
(1) With respect to the past use and/or leasing of the Property by
the Donlar Corporation (the Employer), the Employer files a Form 5330
with the Internal Revenue Service (IRS);
(2) With respect to the entire period of such use and/or leasing,
the Employer pays all appropriate excise taxes, plus interest on such
taxes to the IRS; and
(3) With respect to the past use and/or leasing of the Property by
the Employer, the Employer pays to the Plan the present value of the
fair market rent, including interest, due to the Plan from the Employer
in the form of a lump sum total rent payment in arrears with respect to
the past use and/or leasing of the Property by the Employer, as
determined by Mike Amo (Mr. Amo) an independent, qualified, appraiser,
for the entire period of such use and/or leasing of the Property by the
Employer;
(d) The termination of the Plan and the distribution of its assets
is in accordance with the provisions of the Plan and all applicable
statutes and regulations, including section 4044 of the Act, relating
to the allocation of assets; and
(e) Upon termination of the Plan, each participant in the Plan
receives 100 percent (100%) of the balance of his or her account in the
Plan in cash, including each participant's pro rata share of the value
of the Property, as of the date of the sale of the Property to Mr.
Kainz.
Summary of Facts and Representations
1. The Employer, a corporation located in Roseville, Minnesota,
engages in the construction business. As an employer any of whose
employees are covered by the Plan, the Employer is a party in interest
with respect to the Plan, pursuant to section 3(14)(C) of the Act.
Mr. Kainz is a shareholder and director of the Employer. As such,
Mr. Kainz is a party in interest with respect to the Plan, pursuant to
sections 3(14)(E) and 3(14)(H) of the Act.
2. The Plan is a defined contribution pension plan with individual
participant accounts. The Employer adopted the Plan, effective July 1,
1973, as amended and restated July 1, 1997. As of July 7, 2005, the
date of the application for exemption, there were sixteen (16)
participants in the Plan. Mr. Kainz is a participant in the Plan.
Mr. Kainz and Lawrence S. Dotte (Mr. Dotte) serve as trustees of
the Plan (the Trustees). As Trustees, Mr. Kainz and Mr. Dotte are
fiduciaries and parties in interest with respect to the Plan, pursuant
to section 3(21) and 3(14)(A) of the Act.
The financial statement for the Plan prepared by Larson Allen, CPA,
indicates that, as of June 30, 2004, the aggregate fair market value of
the total assets in the Plan was $5,481,798. As of June 30, 2004,
approximately 60.9 percent (60.9%) of the assets of the Plan consisted
of real property valued at $3,342,500.\17\
---------------------------------------------------------------------------
\17\ It would appear that a substantial percentage of the assets
of the Plan involve real property. In this regard, the Department
notes that the general standards of fiduciary conduct under section
404 of the Act would apply to investments by the Plan. Section
404(a)(1)(C) of the Act requires, among other things, that a
fiduciary diversify the investments of a plan so as to minimize the
risk of large losses, unless under the circumstances it is clearly
prudent not to do so. It is the responsibility of the fiduciary of
the Plan to determine whether the diversification requirements of
section 404(a)(1)(C) of the Act have been satisfied. It is the
Department's position that both section 408(a) of the Act and the
regulations promulgated thereunder make clear that a fiduciary of a
plan that has received an administrative exemption is not insulated
from responsibility and/or potential liability under section 404 of
the Act.
---------------------------------------------------------------------------
Effective December 31, 2004, the Board of Directors of the Employer
resolved to terminate the Plan and to cease contributions. As of the
same date, participation in the Plan ceased, as did crediting service,
vesting, and benefit accrual under the Plan. On April 1, 2005, the
Employer submitted to the IRS Form 5310, Application for determination
for Terminating Plan, with respect to the Plan. In connection with the
termination of the Plan, it is represented that all participants became
100 percent (100%) vested. A favorable determination letter from the
IRS is expected upon termination of the Plan. It is represented that
the Plan's trust will be liquidated after the IRS issues a favorable
determination letter.
3. On June 1, 1984, the Plan purchased the Property that is the
subject of this exemption for a purchase price of $73,000 from Gordon
R. and Shirley Hove and Robert A. and Hazel G. Lindborg. It is
represented that none of the previous owners were parties in interest
with respect to the Plan.
It is represented that the Trustees made the decision to purchase
the Property as a long term growth investment for the Plan. Since the
acquisition of the Property in June 1984, until November 30, 2004, the
Plan has paid $13,426 in real estate taxes, $45,126 in financing costs,
and $5,447 in utility costs. Accordingly, the total cost to the Plan to
acquire and hold the Property, as of November 30, 2004, was
approximately $136,999.
At the time the Plan acquired the Property approximately 18.37% of
the Plan's total assets were invested in the Property. As of December
31, 2003, and June 30, 2004, respectively, the value of the Property
represented approximately 6.60 percent (6.60%), and 7 percent (7%) of
the Plan's total assets.\18\
---------------------------------------------------------------------------
\18\ The Department, herein, is providing no relief from section
404 of the Act for the acquisition and holding of the Property by
the Plan.
---------------------------------------------------------------------------
4. The Employer and the Trustees (collectively, the Applicants)
have requested a prospective administrative exemption that would permit
the sale of the Property to Mr. Kainz for cash; provided that, among
other conditions the Plan receives a price equal to the greater of: (1)
$418,000; or (2) the fair market value of the Property, plus the
``assemblage value'' to Mr. Kainz, as determined by an independent,
qualified appraiser, as of the date of such sale; or (3) the cost to
the Plan to acquire and hold the Property. In addition, the Plan will
not incur fees, commissions, or other charges or expenses as a result
of its participation in the sale of the Property to Mr. Kainz.
5. The Property is described as a rectangular 51 acre tract of
cropland and woods located adjacent to and south of 100th Street
Northeast, within the eastern half of Section 11 of Watab Township,
Benton County, Minnesota.
It is represented that the northern half of the Property is level
but slopes gradually down to Sucker Creek and back up again south of
the creek. The highest and best use of the Property is described as
rural residential development. It is represented that access for the
purpose of developing areas south of Sucker Creek would require the
acquisition of an easement for a road from the south.
The Property is improved by a one-story, steel and wood storage
garage (the Garage) situated on a concrete slab.
Overhead electric and underground telephone lines are available to
the site. Water and sewer would be via private drilled well and sewer
disposal systems. There are two wells on the site.
[[Page 76884]]
5. It is represented that Rita Kainz, the wife of Mr. Kainz, the
proposed purchaser of the Property, owns a parcel of real estate (the
Kainz Land) contiguous to the Property owned by the Plan. In this
regard, the Kainz Land is situated within the eastern half of Section
11 (14.2 acres) and western half of Section 12 (14 acres) of Watab
Township, Benton County, Minnesota. It is represented that the Kainz
Land was purchased in 1979, five (5 years) prior to the Plan's
acquisition of the Property in 1984 and was purchased from unrelated
individuals that were different than the sellers of the Property to the
Plan.
The Kainz Land is described as an irregular-shaped 28.20 acre tract
consisting of approximately 19 acres of cropland and 9 acres of woods.
The Kainz Land is predominately south of Sucker Creek, but a portion of
the Kainz Land lies north of Sucker Creek.
Overhead electric and underground telephone lines are available to
the Kainz Land. Water and sewer for the Kainz Land would be via private
drilled well and sewer disposal systems or a cluster system or future
area sewer district.
Accessibility to the Kainz Land is adequate for residential and
agricultural uses. Most of the Kainz Land is nearly level and
developable for residential use.
6. The applicant maintains that the requested exemption is
administratively feasible in that Mr. Kainz is a willing buyer of the
Property, for a purchase price that includes ``the assemblage value''
of the Property.
The applicant further maintains that the exemption is feasible in
that it involves a one-time sale by the Plan of the Property to Mr.
Kainz for cash. The applicant also points out that if the exemption
were not to be granted, the Plan would incur additional costs, fees,
commissions or other charges or expenses associated with the sale of
the Property to an unrelated third party.
7. The applicant maintains that safeguards will be in place at the
time the transaction is entered that are designed to protect the
interests of the Plan and its participants and beneficiaries. In this
regard, the application file contains two (2) appraisals reports of the
fair market value of the Property, dated June 30, 2004, and December 6,
2004, respectively.
These appraisals were prepared by Mr. Amo, an Associate Appraiser
with St. Cloud Appraisal, Inc. in St. Cloud, Minnesota.
In these appraisals, Mr. Amo estimated the value of the Property
using only the Sales Comparison Approach. In this regard, Mr. Amo
indicates that vacant land is typically valued using the Sales
Comparison Approach. Even though there are improvements on the
Property, the Cost Approach was not applied, as Mr. Amo believes the
Garage situated on the Property, does not contribute to the value of
the Property in its projected highest and best use as residential
development land. Further, Mr. Amo did not consider the Income
Capitalization Approach to be valid in this case. It is represented
that Mr. Amo is qualified to appraise the Property in that he is a
member of the Appraisal Institute, a Certified Assessment Evaluator, a
Certified General Appraiser, and a Certified Appraiser Assessor. Mr.
Amo represents that he has had twenty (20) years of experience with St.
Cloud Appraisal, Inc. Mr. Amo has also served as county assessor of
Morrison County and city assessor of St. Cloud. In addition, Mr. Amo
has experience as a lecturer and instructor in appraisal courses for
the University of Minnesota.
Mr. Amo is independent in that he has no present or prospective
interest in the Property and has no personal or professional interest
with respect to the parties involved. It is represented that Mr. Amo's
engagement and compensation were not contingent upon the development or
reporting of predetermined results.
To measure the ``assemblage value'' of the Property to Mr. Kainz by
virtue of the fact that the Kainz Land is contiguous to the Property,
Mr. Amo prepared the December 6, 2004, appraisal report. In this
regard, Mr. Amo appraised: (1) The value of the Property at $398,000
($7,804 per acre); (2) the value of the Kainz Land at $259,000 ($9,184
per acre); and (3) the value of the Property and the Kainz Land under
one ownership (the Combined Site) (79.20 acres) at $677,000 ($8,548 per
acre). In the opinion of Mr. Amo, the Combined Site: (1) Benefits from
the amenity of Sucker Creek, and (2) is fully able to be developed from
both the north and the south access points. According to Mr. Amo, the
``assemblage value'' of the Combined Site is $20,000 ($253 per acre),
as of December 6, 2004, as calculated by subtracting the value of the
Combined Site from the sum of the values of the subject Property and
the Kainz Land. ($677,000 minus ($398,000 + $259,000) = $20,000)
Accordingly, the fair market value of the Property, as of December 6,
2004, plus an ``assemblage value'' is $418,000. ($398,000 + $20,000 =
$418,000)
8. The applicant maintains that the subject transaction is in the
interest of the Plan, because the Plan has been terminated and the sale
of the Property to Mr. Kainz is the most effective means of liquidating
the Plan's assets in preparation for making cash distributions to
participants. In this regard, it is represented that the termination of
the Plan and the distribution of its assets will be in accordance with
the provisions of the Plan and all applicable statutes and regulations,
including section 4044 of the Act, relating to the allocation of
assets. Further, upon termination of the Plan, each participant in the
Plan will receive 100 percent (100%) of the balance of his/her account
in the Plan in cash, including each participant's pro rata share of the
value of the Property, as of the date of the sale of the Property to
Mr. Kainz.
9. It is represented that, in the past, a portion of the Property
was used and/or leased by the Employer as a staging site for
construction equipment, materials, and supplies. In this regard, the
Employer confirms that it has used, since 1990, a portion of land area
of the Property and since 1994, the Garage on the Property to store
equipment and building materials. It is represented that the Employer's
use of the Property ceased on June 29, 2005.
The Employer has represented that on July 7, 2005, it filed a Form
5330 with the IRS and attached a check made payable to the United
States Treasury in the amount of $11,582.11 which the Employer has
represented reflects the excise tax due from the Employer for engaging
in a use of plan assets by a disqualified person from July 1, 1990
through June 29, 2005.
The application file contains an appraisal report, prepared by Mr.
Amo, dated May 31, 2005, of the present value of the fair market rent,
including interest, due to the Plan from the Employer for the
Employer's prior use of all or part of the Garage and a portion of land
area of the Property for the period from June 30, 1990, through June
30, 2005.
The scope of Mr. Amo's assignment was to estimate the nature and
extent of the Employer's occupancy of the Property, including the term
and intensity of such occupancy. To assist him in this task, Mr. Amo
represents that he reviewed the appraisals of the Property which he
prepared during the past decade. Further, Mr. Amo represents that those
reviews were supplemented by statements from representatives of the
Plan. In this regard, Mr. Kainz, as one of the Trustees, assisted Mr.
Amo with the development of an occupancy schedule for the dates
preceding the time period
[[Page 76885]]
covered by Mr. Amo's appraisals and inspections of the Property. In
this regard, Mr. Amo has estimated that the Employer utilized one-half
acre of the land area of the Property during 1990, 1991, 1992, and
1993. For the period from 1994 through June 30, 2005, Mr. Amo concluded
that the Employer utilized one acre of the land area of the Property in
addition to all or part of the Garage located on the Property.
The scope of Mr. Amo's assignment also included estimating the
market rent for rural industrial land, as well as for rural garage
storage space, during the term of the Employer's occupancy of the
Property, and calculating the present value of the fair market rent,
including interest, due to the Plan from the Employer in the form of a
lump sum total rent payment in arrears.
In reaching his conclusion on the present value of the fair market
rent, including interest, due to the Plan, Mr. Amo used the following
assumptions: (a) A 4.5 percent (4.5%) effective rate of interest, as
being a representative average during the relevant time period; (b) an
annual frequency of conversion; (c) the land rent calculated using the
market value estimate for the site utilized times a capitalization rate
of 8 percent (8%); (d) occupancy of the land of the Property commencing
on June 30, 1990, and occupancy of the Garage commencing after June 30,
1994, and (e) Garage market rent based on comparisons with unheated,
basic storage unit rents in residential garages with additional
consideration for the remote and un-secure location of this structure.
In addition, in a letter dated September 28, 2005, Mr. Amo
clarified that in completing his analysis of the present value of the
fair market rent, including interest, due to the Plan he considered the
access roadway to the Property. In this regard, Mr. Amo indicated that
in the market where the Property is located, rents paid for land and
building occupancy include the rights to ingress and egress.
Mr. Amo's final conclusion, as of June 30, 2005, of the present
value of the fair market rent, including interest, due to the Plan from
the Employer in the form of a lump sum total rent payment in arrears,
was $19,595.11. In this regard, the Employer represents that on June
30, 2005, it paid $19,595.11 to the Plan for the use and/or leasing of
the Property for the period from July 1, 1990 through June 30, 2005,
and that such amount represented the fair market rental value of the
Property due to the Plan.\19\
---------------------------------------------------------------------------
\19\ The Department, herein, is providing no retroactive relief
from the prohibitions as set forth in section 406 of the Act for the
past use and/or leasing of the Property by the Employer.
---------------------------------------------------------------------------
10. In summary, the applicant represents that the subject
transaction meets the statutory criteria of section 408(a) of the Act
and 4975(c)(2) of the Code because:
(a) The Plan will receive a price for the sale of the Property to
Mr. Kainz equal to the greater of:
(1) $418,000; or
(2) The fair market value of the Property, plus the ``assemblage
value'' to Mr. Kainz, as determined by an independent, qualified
appraiser, as of the date of such sale; or
(3) The cost to the Plan to acquire and hold the Property;
(b) The Plan will incur no fees, commissions, or other charges or
expenses as a result of its participation in the sale of the Property
to Mr. Kainz;
(c) Prior to entering into the subject transaction:
(1) With respect to the past use and/or leasing of the Property by
the Employer, the Employer filed a Form 5330 with the IRS and with
respect to the entire period of such use and/or leasing, the Employer
paid all appropriate excise taxes, plus interest on such taxes to the
IRS; and
(2) With respect to the past use and/or leasing of the Property by
the Employer, the Employer paid to the Plan the present value of the
fair market rent, including interest, due to the Plan from the Employer
in the form of a lump sum total rent payment in arrears, as determined
by an independent, qualified, appraiser, for the entire period of such
past use and/or leasing of the Property by the Employer;
(d) The termination of the Plan and the distribution of its assets
will be in accordance with the provisions of the Plan and all
applicable statutes and regulations, including section 4044 of the Act,
relating to the allocation of assets;
(e) Upon termination of the Plan, each participant in the Plan
receives 100 percent (100%) of the balance of his or her account in the
Plan in cash, including each participant's pro rata share of the value
of the Property, as of the date of the sale of the Property to Mr.
Kainz;
(f) The subject transaction is a one-time sale by the Plan of the
Property for cash; and
(g) Mr. Amo, an independent, qualified appraiser determined the
present value of the fair market rent, including interest, due to the
Plan from the Employer in the form of a lump sum total rent payment in
arrears with respect to the past use and/or leasing of the Property by
the Employer and will determine the fair market value of the Property
including ``assemblage value,'' as of the date of the sale of the
Property to the Employer.
FOR FURTHER INFORMATION CONTACT: Angelena C. Le Blanc of the
Department, telephone (202) 693-8540. (This is not a toll-free number.)
General Information
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption
under section 408(a) of the Act and/or section 4975(c)(2) of the Code
does not relieve a fiduciary or other party in interest or disqualified
person from certain other provisions of the Act and/or the Code,
including any prohibited transaction provisions to which the exemption
does not apply and the general fiduciary responsibility provisions of
section 404 of the Act, which, among other things, require a fiduciary
to discharge his duties respecting the plan solely in the interest of
the participants and beneficiaries of the plan and in a prudent fashion
in accordance with section 404(a)(1)(b) of the Act; nor does it affect
the requirement of section 401(a) of the Code that the plan must
operate for the exclusive benefit of the employees of the employer
maintaining the plan and their beneficiaries;
(2) Before an exemption may be granted under section 408(a) of the
Act and/or section 4975(c)(2) of the Code, the Department must find
that the exemption is administratively feasible, in the interests of
the plan and of its participants and beneficiaries, and protective of
the rights of participants and beneficiaries of the plan;
(3) The proposed exemptions, if granted, will be supplemental to,
and not in derogation of, any other provisions of the Act and/or the
Code, including statutory or administrative exemptions and transitional
rules. Furthermore, the fact that a transaction is subject to an
administrative or statutory exemption is not dispositive of whether the
transaction is in fact a prohibited transaction; and
(4) The proposed exemptions, if granted, will be subject to the
express condition that the material facts and representations contained
in each application are true and complete, and that each application
accurately describes all material terms of the transaction which is the
subject of the exemption.
[[Page 76886]]
Signed at Washington, DC, this 21st day of December 2005.
Ivan Strasfeld,
Director of Exemption Determinations, Employee Benefits Security
Administration, U.S. Department of Labor.
[FR Doc. 05-24493 Filed 12-27-05; 8:45 am]
BILLING CODE 4510-29-P
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