ARINC Incorporated Retirement Income Plan (the Plan) Located in
Annapolis, MD
[11/24/2004]
Volume 69, Number 226, Page 68391-68398
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
[Prohibited Transaction Exemption (PTE) 2004-19; Exemption Application
No. D-11220]
ARINC Incorporated Retirement Income Plan (the Plan) Located in
Annapolis, MD
AGENCY: Employee Benefits Security Administration, U.S. Department of
Labor.
ACTION: Grant of individual exemption.
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SUMMARY: This document contains a final exemption issued by the
Department of Labor (the Department) from certain prohibited
transaction restrictions of the Employee Retirement Income Security Act
of 1974 (ERISA or the Act) and from certain taxes imposed by the
Internal Revenue Code of 1986 (the Code). The exemption permits: (1)
The in-kind contribution of the property described as the 27.5 acre
headquarters
[[Page 68392]]
of ARINC Incorporated (ARINC or the Applicant) situated in Annapolis,
MD or the ownership interests of a special purpose entity (SPE) whose
only asset is this property (collectively, the Property) to the Plan by
ARINC, the plan sponsor and a party in interest with respect to the
Plan (the Contribution); (2) the holding of the Property by the Plan;
(3) the leaseback of the Property by the Plan to ARINC (the Lease or
Leaseback); (4) the repurchase of the Property by ARINC (the
Repurchase) pursuant to (a) a right of first offer to ARINC should the
Plan wish to sell the Property to a third party or (b) a voluntary
agreement under which the Plan agrees to sell the Property to ARINC at
any time during the Lease; and (5) any payments to the Plan by ARINC
made pursuant to a make whole obligation as specified below (the Make
Whole Payment or Obligation) (collectively, the Exemption
Transactions). The exemption affects participants and beneficiaries of,
and fiduciaries with respect to, the Plan.
DATES: This exemption is effective on or after November 24, 2004.
FOR FURTHER INFORMATION CONTACT: Wendy M. McColough of the Office of
Exemption Determinations, Employee Benefits Security Administration,
U.S. Department of Labor, telephone (202) 693-8540. (This is not a
toll-free number.)
SUPPLEMENTARY INFORMATION: On September 13, 2004, the Department
published a notice in the Federal Register (69 FR 55179) of a proposed
individual exemption (the Proposed Exemption). The Proposed Exemption
was requested in an application filed on behalf of ARINC pursuant to
section 408(a) of the Act and section 4975(c)(2) of the Code, and in
accordance with the procedures set forth in 29 CFR part 2570, subpart B
(55 FR 32836, August 10, 1990). Effective December 31, 1978, section
102 of Reorganization Plan No. 4 of 1978, 5 U.S.C. App. at 214 (2000
ed.) transferred the authority of the Secretary of the Treasury to
issue exemptions of the type requested to the Secretary of Labor.
Accordingly, this final exemption is issued solely by the Department.
The notice set forth a summary of the facts and representations
contained in ARINC's application for exemptive relief (Application) and
referred interested persons to the Application for a complete statement
of the facts and representations. The Application has been available
for public inspection at the Department in Washington, DC.
The notice also invited interested persons to submit comments on
the Proposed Exemption and/or to request that a public hearing be held.
In response to the solicitation of comments from interested persons,
the Department received: Comments from ARINC; comments from Independent
Fiduciary Services, Inc (IFS), the Independent Fiduciary retained to
represent the Plan in connection with the exemption request; and
comments from two other interested persons. None of the comments
requested that a public hearing be held on the Proposed Exemption. The
ARINC and IFS comments provided further information on the Exemption
Transactions and are discussed below.
One comment was received from the Secretary-Treasurer of Teamsters
Local 986 (Teamsters). The Teamsters represent 70 ARINC employees who
participate in the Plan. The Teamsters' comment supports the Proposed
Exemption, the protective conditions imposed on the Contribution by the
Department, and finalizing the exemption as proposed. The other comment
expressed concern about the rental rate of the Lease described in the
Proposed Exemption. This concern was addressed in a response from ARINC
that is summarized below.
Additionally, the following updated versions of documents discussed
in the Proposed Exemption were submitted to the Department by ARINC and
IFS subsequent to the publication of the Proposed Exemption in the
Federal Register. The final transfer agreement that governs the terms
upon which the Property will be contributed to and held by the Plan and
is between ARINC (the Transferor), Aeronautical Radio, Inc. (ARI), a
wholly-owned subsidiary of ARINC, and the Plan through its agent, IFS,
executed on October 12, 2004 (the Transfer Agreement), was received by
the Department on October 19, 2004. On November 5, 2004, the Department
received the November 4, 2004 second addendum to the December 8, 2004
letter agreement between IFS, ARINC, and the Pension Committee of the
Plan concerning the engagement of IFS as the Independent Fiduciary, as
amended July 30, 2004 (the IF Agreement).
The final lease that governs the terms upon which the Property will
be leased back to ARINC by the Plan (Lease) was received by the
Department on November 15, 2004. In correspondence, dated November 11
and November 15, 2004, ARINC submitted the Lease and stated that the
Lease is consistent with the material terms and conditions of the lease
term sheet, as revised on June 11, 2004 (Lease Term Sheet). By letter
dated November 15, 2004, ARINC provided additional information to the
Department summarizing the provisions in the Lease that supplement the
provisions of the Lease Term Sheet described in the Proposed Exemption.
The Lease is an agreement by and between ARINC as Tenant and 2551
Riva Road, Inc., an SPE. ARINC states that under the Lease, 2551 Riva
Road, Inc., a Delaware corporation, will be the Landlord. This
corporation is initially being established as a subsidiary of ARI,
which currently holds title to the Property. ARI will transfer title to
the Property to 2551 Riva Road, Inc. on or before the date of closing
when the proposed Contribution and Leaseback transactions are
consummated in accordance with the Transfer Agreement (the Closing). On
the date of Closing, ARI will convey all of the stock of 2551 Riva
Road, Inc. to the Plan so that the Landlord will be a wholly owned
subsidiary of the Plan. The Certificate of Incorporation of 2551 Riva
Road, Inc. was filed in the State of Delaware on November 15, 2004. The
initial officers and directors are ARINC employees. ARINC expects that
new officers and directors will be appointed by IFS on behalf of the
Plan the day of or the day after Closing.
ARINC notes that the Department described certain provisions of the
Lease Term Sheet at Paragraph 6 of the Summary of Facts and
Representations in the Proposed Exemption at column 3 of 69 FR 55181.
ARINC represents that these descriptions in the Proposed Exemption
generally remain accurate. However, as applicable, ARINC provides the
following additional information based on modifications to the terms
and conditions of the Lease Term Sheet as agreed to in the Lease.
Bondable/Triple Net Lease Structure
As noted in the ARINC comment below, during the bondable period,
the Lease Term Sheet and the Lease provide for an abatement of rent in
the event of a partial condemnation at article 14.4(b) of the Lease and
the right to terminate the Lease under certain circumstances in the
condemnation and casualty contexts (Lease, arts. 13 and 14).
The Lease Term Sheet provides that there shall be a commercially
reasonable standard for determining whether capital improvements (or
repair or replacement) are required for the Property during the
bondable period. The Lease provides the commercially reasonable
standard by requiring the preparation of a reasonable annual budget to
be approved by Landlord and Tenant for items needing repair,
maintenance or replacement over the coming year (Lease, art. 8.1),
based on an annual inspection by a reputable building inspector and an
agreed
[[Page 68393]]
standard of keeping the buildings in good condition and repair, in a
manner befitting that of comparable buildings in the Annapolis,
Maryland area and in accordance with all applicable laws and the Lease
(Lease, art. 8.2). Disagreements regarding the timing or scope of any
repair, maintenance or replacement, if any, are resolved in accordance
with a neutral third-party arbitration process that is binding on the
parties (Lease, art. 23.4).
Rental Rate
The Lease provides for base rent of $4,290,189 during the first
year of the Lease (Lease, art. 1.5), increased by 2.5% annually (Lease,
art. 4.2), with an increase to $6,488,302 for the first year of the
non-bondable period (Lease, art. 4.1), increased by 2.5% annually
(Lease, art. 4.2). ARINC notes that these figures are consistent with
those described in the Proposed Exemption.
The terms of the Exemption Transactions, however, require an
updated appraisal prior to Closing, and ARINC states that the rental
amounts may be modified based on such updated appraisal. ARINC believes
that a substantial change in the rent is not expected.
The Right of First Offer (ROFO)
ARINC states that article 21 of the Lease provides an additional
right for the Landlord in the event the ROFO is triggered from or after
the 15th anniversary of the Lease commencement date (the date of
Closing under the Transfer Agreement) and a three-appraiser method is
used for the determination of fair market value for the Property. In
this situation, the Landlord has the right, exercisable within 10 days
following the appraisers' determination, to withdraw its notice of
transfer and continue to hold the Property (Lease, art. 21.2).
The Lease includes a provision whereby if the Tenant elects to
purchase under the ROFO, the parties are to enter into a purchase and
sale agreement that incorporates the terms of the right of first offer
but is otherwise in substantially the same form as the Transfer
Agreement for the initial transfer of the Property to Landlord, except
that (i) no additional appraisal is required (inapplicable, since it is
not necessary to set any rent), (ii) only a subset of the
representations and warranties provided to the Landlord upon the
initial transfer shall be required to be provided to the Tenant/
purchaser (Exhibit F of the Lease), and (iii) Tenant/purchaser will not
be entitled to any study period as long as title to the Property has
not changed in any manner other than as previously approved by Tenant
(Lease, art. 21.4).
ARINC provides that in article 21.6 of the Lease, the ROFO terms
have been clarified so that it is not applicable with respect to
easements and the like, as well as to any (i) transfer to an affiliate
of the Landlord, (ii) transfer to Landlord's lender (or a third party)
as a result of a foreclosure or deed in lieu of foreclosure, or (iii)
transfer to a third party in a condemnation proceeding, however, in the
event of a transfer described in clause (i), the ROFO shall apply to
the first transfer by the affiliate of the Landlord, and in the event
of a transfer described in clause (ii), the ROFO shall apply to the
first transfer by the lender/third party. The Tenant loses its rights
altogether in the event of a transfer described in clause (iii).
Article 21 of the Lease adds a provision whereby if the purchase
price of the unsolicited offer that Tenant elects to match is to be
paid by other than cash, the Tenant will be required to pay the fair
market value of the non-cash consideration (Lease, art. 21.7).
Indemnification
ARINC represents that the Tenant's indemnification of the Landlord
during the non-bondable period has been broadened in the Lease to
include violations of environmental laws, the Americans with
Disabilities Act and other health and/or safety laws resulting from
acts or omissions of any invitee, agent, employee, affiliate,
subtenant, assignee, contractor, client, family member, licensee,
customer or guest of Tenant (collectively, Invitees) as opposed solely
to acts or omissions of Tenant or any sublessee or assignee (Lease,
art. 12.2). Additionally, article 12.6 of the Lease provides that the
liability of the Landlord is limited to its interest in the Property
and any sales proceeds, rents, insurance proceeds and condemnation
awards related thereto.
ARINC Default
In the event of a Tenant payment default, the Proposed Exemption
stated that the Lease would contain commercially reasonable provisions
regarding late fees and default interest. To address this, the Lease
provides for a late fee of $1,000 if the Tenant fails to make any
payment within five days after due without regard to any notice and
cure period otherwise provided under the Lease (Lease, art. 15.7) and
default interest on such overdue payment from the date due until
payment at the lesser of (i) one percentage point above the prime rate
or (ii) the highest lawful rate per annum (Lease, arts. 15.6 and 15.7).
Article 15.7 provides that the Landlord waives the late charge and
default interest the first time in any 12-month period that Tenant
fails to make a payment when due, provided the payment is made prior to
the expiration of the five-business day notice and cure period.
By correspondence dated November 11, 2004, ARINC's real estate
counsel provided the following Lease provisions that counsel believes
expanded the protections for the Plan from that contemplated by the
Lease Term Sheet.
Hazardous Materials
Article 6.3 of the Lease provides that ARINC take substantially
increased liability for hazardous materials. The ARINC real estate
counsel asserts that ARINC is taking virtually all liability for
asbestos, tanks and transformers, whether or not caused by ARINC or its
Invitees, and taking expanded liability for other hazardous materials
violations not caused by ARINC.
Insurance
In article 11.1 of the Lease, ARINC has agreed to obtain a
substantially larger amount of liability insurance from that specified
in the Lease Term Sheet. The umbrella liability coverage has been
increased from $5,000,000 to $25,000,000 in the Lease. ARINC's all-risk
property insurance coverage has been increased to include $5,000,000 of
ordinance or law coverage and in addition, ARINC has agreed to purchase
a separate liability policy for the Plan with excess umbrella coverage
of $10,000,000.
Casualty
ARINC's real estate counsel states that ARINC has agreed to a
substantial additional condition to its ability to terminate the Lease
in the event of a casualty during the non-bondable period as provided
in article 13.2 of the Lease. If the Property is totally or partially
damaged or destroyed, the remainder of the Property must be unsuitable
for ARINC's business purposes for ARINC to have the right to terminate
the Lease.
Reporting Requirements
In article 23.3 of the Lease, ARINC has agreed to additional
ongoing reporting requirements by notifying the Landlord regarding
defaults under ARINC loans that could materially adversely affect
ARINC's ability to perform its obligations under the Lease.
Discussion of the Comments
IFS Comment
By letters dated October 19 and November 5, 2004, IFS provided the
[[Page 68394]]
following comments and additional information to the Department.
1. Diversification of the Plan's Assets Condition
IFS observes that subsection (h) of section II of the Proposed
Exemption describes one of the duties of IFS as Independent Fiduciary
as follows:
(h) The Independent Fiduciary determines on an ongoing basis
that the amount of plan assets invested in employer real property
and employer securities, including its interests in the Property,
complies with ERISA;
IFS believes that its specific obligations in regard to the
diversification of plan assets are set forth in the July 20, 2004
amendment and addendum to the IF Agreement, and as described at the
first bullet in the second column at 69 FR 55187 of the Proposed
Exemption, as follows:
In considering whether and on what terms to seek prudently to
sell the Property, IFS shall consider the nature, value and other
relevant aspects of the Property in isolation, as well as the nature
and diversification of the Plan's overall investment portfolio.
Insofar as IFS determines that continued ownership of the Property
poses undue risk to the Plan of over concentration from an
investment perspective, IFS shall determine and take appropriate
action to seek prudently to reduce such risk.
IFS' concern is that section II(h) in the Proposed Exemption
overstates IFS'' authority. IFS notes that while IFS is required to
consider the other assets of the Plan, including any employer real
property and employer securities, in determining whether and to what
extent continued ownership of the Property may adversely affect the
diversification of the Plan's overall portfolio, the IF Agreement does
not give IFS any responsibility for or authority over those other
assets. Section II(h), however, could be read to mean that IFS must
determine on an ongoing basis whether all investments by the Plan in
employer real property and employer securities, not just the Property,
comply with any aspect of ERISA, not just diversification. Under that
reading, IFS would be obligated to take action if, for example, the
Plan has invested in employer securities that are not qualifying
employer securities under ERISA section 407. IFS asserts that this goes
beyond IFS'' role as contemplated by the IF Agreement, as amended.
To clarify that the objective of section II(h) is to require
compliance with the fiduciary responsibility provision of ERISA, IFS
proposes that the phrase ``employer real property and employer
securities, including its interests in'' be deleted and that the phrase
``section 404(a)(1) of'' be inserted in section II(h), so that the
provision would read as follows:
(h) The Independent Fiduciary determines on an ongoing basis
that the amount of Plan assets invested in the Property complies
with section 404(a)(1) of ERISA;
IFS believes that this would be sufficient to make clear that IFS is
obligated to determine on an ongoing basis that the concentration of
Plan assets in the Property is consistent with the ERISA fiduciary duty
of diversification, without requiring IFS to make determinations as to
Plan investments other than the Property.
The Department has determined that it would be appropriate to
modify section II(h) as requested by IFS.
2. Make Whole Payment Condition
IFS notes that subsection (i) of section II of the Proposed
Exemption describes the Make Whole Payment using language that is based
on the IFS report to the Department on June 18, 2004 (the IFS Report).
The two elements of the Make Whole Payment are set forth in section
II(i) as follows:
The actual return component--``the combination of the proceeds
from a sale of the Property (or the change in the value of the
Property if the Plan continues holding it over the full five years)
plus the Plan's net income on the Property under the Lease prior to
the sale (or over the full five years)''
The target return component--``the Property's value as of the
date of the Contribution plus a 5% compounded rate of return on that
value plus the costs of holding and maintaining the Property''
If the target return component exceeds the actual return component
at the time for determining the Make Whole Payment, then ARINC is
obligated to contribute the difference to the Plan.
IFS explains that the description in the IFS Report was based on an
early version of the Make Whole Payment provision of the Lease Term
Sheet, which has since been refined. IFS states that the final version
is contained in article 22 of the Lease and that the language in
section II(i), while less detailed than the final provision in the
Lease, is generally consistent with that provision, except in one
respect: The target return component in the Lease provision does not
include the costs of holding and maintaining the Property. The reason
is that these costs have already been deducted from the actual return
component, as reflected in the use of the term ``net income'' in the
above language. The Lease provision itself refers to the rental income
received by Landlord under this Lease up to the Make-Whole Date, ``less
expenses incurred by Landlord with respect to the Premises and this
Lease.'' To deduct the costs from the actual return, and then add them
to the target return, would be to count them twice.
Accordingly, IFS requests that section II(i) be amended to delete
the phrase ``plus the costs of holding and maintaining the Property''
from subparagraph (ii) in the second paragraph. To the extent the IFS
Report does not accurately reflect this provision, IFS states that it
hereby amends the IFS Report to be consistent with this discussion and
that this change does not affect the conclusions in the IFS Report.
The Department has determined that it would be appropriate to
modify section II(i) as requested by IFS.
3. Status of the Monetization
IFS comments that Paragraph 11 of the Summary of Facts and
Representations in the Proposed Exemption at column 3 of 69 FR 55191,
in describing the IFS Report, states the following regarding the status
of proposals to monetize the lease payment stream:
IFS notes that while they continue to engage financial
institutions in discussions of various proposals, they do not expect
that a monetization transaction will occur.
Since the date of the IFS Report, IFS represents that it has ceased
to engage financial institutions in discussions. IFS remains open to
proposals to monetize the stream of lease payments, but is not actively
pursuing that course at this time. IFS continues to expect that it is
unlikely that a monetization transaction will occur, for the reasons
described in the IFS Report.
4. Status of Due Diligence
IFS notes that, in Paragraph 5 of the Summary of Facts and
Representations in the Proposed Exemption at column 3 of 69 FR 55180,
under the terms of the Transfer Agreement, the Plan will have a 60-day
Review Period after execution of the Transfer Agreement to undertake a
review and examination of all aspects of the Property prior to closing
the transaction, should IFS approve going forward with the transaction.
IFS reports that the Transfer Agreement has now been executed,
effective October 12, 2004, so that the 60-day review period runs until
December 11th. However, prior to the execution date, and consistent
with the intent of the Transfer Agreement, ARINC and ARI made the
requested Property documents available to IFS for review, and IFS'
representatives and consultants were permitted to enter upon the
Property to conduct specific examinations, such as structural
[[Page 68395]]
examinations of buildings and environmental testing. If IFS completes
its due diligence to its satisfaction prior to the expiration of the
60-day Review Period, it may waive any remaining portion of the Review
Period, in order to close the transaction sooner so that the Plan may
begin to benefit from receipt of the rental income.
By letter dated November 5, 2004, IFS informed the Department that
Custer Environmental, Inc. (Custer), retained by IFS to conduct a
``Phase One Environmental Site Assessment'' of the Property, provided a
final environmental report to IFS dated October 25, 2004. On the basis
of its review of the Custer report, IFS states that it is satisfied
that there are no environmental issues that would cause it not to close
on the acquisition of the Property and the lease to ARINC in accordance
with the provisions of the Transfer Agreement and the Lease.
5. Liability Insurance
IFS notes that in addition to the expenses that may be Incurred by
the special purpose entity owned by the Plan (the SPE) as the Landlord
under the terms of the Lease, and by the Plan pursuant to the IF
Agreement, the Plan will be incurring the expense of directors' and
officers' liability insurance in connection with the ongoing operation
of the SPE. This expense is presently estimated to be $18,000 per year,
which may change over time in accordance with market conditions.
ARINC Comment
By letter dated October 19, 2004, the Department received the
following comments from ARINC.
1. Effective Date of the Exemption
ARINC explains that, at the request of ARINC, the Proposed
Exemption provides that, if granted, the final exemption will have an
effective date of September 7, 2004. This effective date was requested
to allow ARINC to make the Contribution prior to the grant of a final
exemption. ARINC considered making the Contribution before September
15, 2004 to, among other considerations, avoid having to make a
variable rate premium payment to the Pension Benefit Guaranty
Corporation in the amount of $910,000. However, ARINC reports that it
has subsequently decided not to Contribute the Property until after the
grant of a final exemption. By doing so, ARINC avoids the possibility
that a final exemption would be granted on terms different than
provided for in the Proposed Exemption, which could expose ARINC to
excise tax penalties under Code section 4975. As a result of ARINC's
decision, the relief necessary under the exemption need be only
prospective since the transaction will not occur until after a final
exemption is granted. ARINC adds that the decision to delay the
transaction, while made by ARINC, is supported by IFS, the Plan's
Independent Fiduciary.
The Department concurs with the ARINC comment and has determined
that the effective date of the exemption will be on or after the date
of publication of this final exemption in the Federal Register.
2. The Lease Terms
ARINC notes that the Proposed Exemption was issued based on a Lease
Term Sheet, which was submitted to the Department while ARINC and IFS
negotiated the more detailed terms of the Lease. However, ARINC
represented that the Lease Term Sheet would accurately reflect the
provisions of the more detailed final Lease.
ARINC submits two clarifications regarding the description of the
Lease in the Proposed Exemption. In Paragraph 6 of the Summary of Facts
and Representations in the Proposed Exemption at column 1 of 69 FR
55182, under the discussion entitled ``Bondable/Triple Net Lease
Structure,'' the Department states ``Under the bondable lease
structure, the rent payable by ARINC to the Plan remains payable under
all circumstances * * *.'' (emphasis added). ARINC states that this is
consistent with the Lease Term Sheet, but ARINC notes that the Lease
Term Sheet also provides for an abatement of rent in the event of
partial condemnation (based on the portion of the property subject to
condemnation) as well as a tenant right to terminate the lease under
certain circumstances, such as in the event of condemnation or
casualty.
Secondly, at column 2 of 69 FR 55183, under the Department's
discussion entitled ``The Right of First Offer,'' ARINC and the IFS
Report described the fair market value determination for the purchase
price as changing for year 15 of the Lease and beyond. ARINC clarifies
that this is not entirely accurate, because the Lease Term Sheet and
the Lease provides for the fair market value determination to change
from and after the 15th anniversary of the Lease commencement date
(which would actually be year 16 and beyond). Accordingly, the two
references in the Proposed Exemption at 69 FR 55183 to ``14'' should
instead refer to ``15,'' and the two references to ``15'' should
instead refer to ``16.''
3. Liability for Hazardous Substances
ARINC states that section II(m) of the Proposed Exemption includes
a condition which provides that ``ARINC indemnifies the Plan with
respect to all liability for hazardous substances released on the
Property prior to the execution and closing of the Contribution of the
Property.'' ARINC requests that the Department confirm ARINC's
understanding that the provisions of the Transfer Agreement satisfy
this condition. In particular, under section 5(a)(12) of the Transfer
Agreement, ARINC has represented that to its knowledge no hazardous
substances have been released on the Property as of the closing date of
the Transfer Agreement. Section 5(f) of the Transfer Agreement provides
an indemnity in the event that ARINC breaches this representation.
ARINC notes that in response to a request by IFS, the Plan's
Independent Fiduciary, ARINC agreed to modify its representation in
section 5(a)(12) of the Transfer Agreement to state that, to ARINC's
knowledge, the construction and condition of certain rooms in buildings
on the Property that were not accessible to Custer Environmental, Inc.
(IFS's environmental consultant), are the same in all material respects
as other rooms in the same buildings that were inspected by Custer, and
that the inaccessible rooms do not have any Hazardous Substances in
violation of Environmental Laws. This change is an improvement from the
Plan's perspective and provides greater assurance to IFS and the Plan
of the condition of the Property. As stated previously, on the basis of
IFS's review of the Custer report, IFS is satisfied that there are no
environmental issues that would cause it not to close on the Exemption
Transactions.
The Department confirms that the provisions of the Transfer
Agreement and the Lease, IFS's due diligence regarding the Property as
stated in the IFS Report, and IFS's approval of the Custer
Environmental Site Assessment (as described above) appears to satisfy
the condition of section II(m) of the Proposed Exemption.
4. The Make Whole Payment Condition
ARINC represents that the Make Whole Payment condition provided
under the Proposed Exemption is consistent with the agreement of ARINC
and IFS in the Lease Term Sheet and the Lease. ARINC notes, however,
that both the Lease Term Sheet and the Lease provide ARINC 180 days
from the date that is the earlier of the date of sale of the Property
by the Plan or five years
[[Page 68396]]
from the closing of the transaction to make the Make Whole Payment.
However, the 180-day period is not specifically reflected in the
language of the Make Whole Payment condition in section II(i) of the
Proposed Exemption. ARINC ask that the Department confirm ARINC's
understanding that, consistent with the Lease Term Sheet, the Lease,
and the Summary of Facts and Representations in the Proposed Exemption
at column 2 of 69 FR 55183, ARINC will have 180 days to make a Make
Whole Payment if any such payment is required.
The Department confirms that the Lease Term Sheet, the Lease, and
the language of the Proposed Exemption provide that ARINC will have 180
days to make the Make Whole Payment.
5. Diversification of the Plan Assets Condition
ARINC states that subsection (h) of section II of the Proposed
Exemption includes a condition that requires that the ``Independent
Fiduciary determines on an ongoing basis that the amount of plan assets
invested in employer real property and employer securities, including
its interest in the Property, complies with ERISA.'' ARINC notes that
ARINC's engagement of IFS grants IFS the discretion to determine
whether the holding of the Property satisfies ERISA's fiduciary
requirements, and the engagement letter requires that IFS evaluate the
nature and diversification of the Plan's overall investment portfolio
in making this judgment. However, IFS has not been appointed
Independent Fiduciary of the Plan to make decisions with respect to
real property or securities other than the Property. As such, ARINC
believes that this condition should be narrowed somewhat. ARINC
understands that IFS concurs with this comment, and has filed its own
letter requesting that this condition be narrowed. ARINC supports their
request.
6. Plan Contributions Update
ARINC confirms that it made $18 million in contributions for the
2003 Plan Year. In addition, ARINC still expects to fully fund the Plan
to the ABO level after all cash contributions and the Property
contribution are made for the 2004 Plan Year (subject to any unexpected
declines in the market value of assets or further declines in interest
rates). To date, ARINC represents that it has already contributed $6
million for the 2004 Plan Year, which exceeds the minimum required
contribution of $2.224 million for the Plan Year.
By letter to the Department, dated November 2, 2004, ARINC further
updated its contribution information and stated that on October 29,
2004, ARINC contributed an additional $2 million to the Plan for a
cumulative total contribution of $8 million thus far for the 2004 plan
year. ARINC noted that these contributions far exceed the minimum
required contribution of $2.24 million for the 2004 Plan Year.
Rental Rate Comment
By letter to the Department, dated October 8, 2004, one commenter
objected to the annual base rent of $12.40 per square foot under the
bondable structure at column 2 of 69 FR 55182.
The commenter stated that the independent appraiser, Deloitte &
Touche LLP (Deloitte), recommended that the initial rate for the
bondable period be set at a higher rate of $13.35 per square foot, and
provided the opinion that ``[t]here is no justification for ARINC to
not pay the full amount recommended by the independent appraiser.''
By letter to the Department, dated November 2, 2004, ARINC
responded to the October 8, 2004 comment. ARINC explained that the
$13.35 initial rent for the bondable period was set forth in the
Deloitte draft report dated May 25, 2004. That appraisal set an overall
property value of the ARINC headquarters Property at $52 million. The
final report by Deloitte, dated June 17, 2004, reduced the overall
Property value to $49 million. The reductions were made in response to
specific concerns raised by IFS that the $52 million valuation was too
high as described in the Proposed Exemption at 69 FR 55189 to 55190.
ARINC states that when Deloitte reduced the Property's appraised value,
it also reduced the rental rate. For the bondable period, the reduction
was from $13.35 per square foot to $12.40 per square foot. ARINC notes
that this change in lease rates is discussed in the Proposed Exemption
in the first column at 69 FR 55190. The summary table that appears on
the same page did not include the changed lease rates. ARINC emphasizes
that the IFS Report concludes that the $49 million property valuation,
and the corresponding $12.40 per square foot rental rate, are
appropriate and the transaction is in the interest of the Plan.
Determination of the Department
Accordingly, based upon the representations made by the Applicant,
the additional documents submitted to the Department, the written
comments received in response to the Proposed Exemption, and the
analysis conducted by the Independent Fiduciary, the Department has
determined to grant the exemption subject to the modifications
discussed above. The Department has, in transactions of this nature,
placed emphasis on the need for an Independent Fiduciary and on such
Independent Fiduciary's considered and objective evaluation of the
transactions. In its deliberations, which included its analysis of all
aspects of the transactions, the Independent Fiduciary has consistently
represented for the record that no transactions concerning the Property
will be accepted on behalf of the Plan unless such transactions are
found by the Independent Fiduciary to be in the interests of the Plan.
Finally, the Department notes that the Independent Fiduciary's
satisfaction of its obligations in connection with the determination of
the fair market value of the Property, the ongoing determination that
the amount of Plan assets invested in the Property complies with
section 404(a)(1) of ERISA as described above, and other obligations as
previously described by the Department in the Summary of Facts and
Representations in the Proposed Exemption is a critical factor in the
Department's decision to grant a final exemption.
The Application pertaining to the exemption, the Proposed
Exemption, the comments submitted to the Department and the responses
to the comments, and all other documents submitted to the Department
concerning this exemption have been included as part of the public
record of the Application. The complete Application file, including all
supplemental submissions received by the Department, is available for
public inspection in the Public Disclosure Room of the Employee
Benefits Security Administration, U.S. Department of Labor, Room N-
1513, 200 Constitution Avenue, NW., Washington, DC 20210.
For a complete statement of the facts and representations
supporting the Department's decision to grant this exemption, refer to
the September 13, 2004 Notice of Proposed Exemption at 69 FR 55179.
General Information
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption
under section 408(a) of the Act and section 4975(c)(2) of the Code does
not relieve a fiduciary or other party in interest or disqualified
person from certain other provisions of the Act and the Code, including
any prohibited transaction provisions to which the exemption does not
apply and the general fiduciary responsibility provisions of section
404 of the Act,
[[Page 68397]]
which require, among other things, that a fiduciary discharge his or
her duties respecting the plan solely in the interest of the
participants and beneficiaries of the plan and in a prudent fashion in
accordance with section 404(a)(1)(B) of the Act; nor does it affect the
requirements of section 401(a) of the Code that the plan operate for
the exclusive benefit of the employees of the employer maintaining the
plan and their beneficiaries;
(2) The exemption will not extend to transactions prohibited under
section 406(b)(3) of the Act and section 4975(c)(1)(F) of the Code;
(3) In accordance with section 408(a) of the Act and section
4975(c)(2) of the Code and the procedures set forth in 29 CFR Part
2570, Subpart B (55 FR 32836, 32847, August 10, 1990) and based upon
the entire record, the Department finds that the exemption is
administratively feasible, in the interests of the plans and their
participants and beneficiaries and protective of the rights of the
participants and beneficiaries of the plans;
(4) This exemption is supplemental to, and not in derogation of,
any other provisions of the Act and/or the Code, including statutory or
administrative exemptions and transitional rules. Furthermore, the fact
that a transaction is subject to an administrative or statutory
exemption is not dispositive of whether the transaction is in fact a
prohibited transaction; and
(5) The availability of this exemption is subject to the express
condition that the material facts and representations contained in the
Application are true and complete and accurately describe all material
terms of the transactions that are the subjects of the exemption.
Exemption
In accordance with section 408(a) of the Act and section 4975(c)(2)
of the Code and the procedures set forth in 29 CFR Part 2570, Subpart B
(55 FR 32836, 32847, August 10, 1990) and based upon the entire record,
the Department finds that the exemption is:
(a) Administratively feasible;
(b) In the interests of the Plan and its participants and
beneficiaries; and
(c) Protective of the rights of the participants and beneficiaries
of the Plan.
Section I. Covered Transactions
The restrictions of sections 406(a), 406(b)(1) and (b)(2), and
407(a) of the Act, and the sanctions resulting from the application of
section 4975(a) and (b) of the Code, by reason of section 4975(c)(1)(A)
through (E) of the Code, shall not apply to:
(a) the transfer of the property described as the 27.5 acre
headquarters of ARINC Incorporated (ARINC) situated in Annapolis, MD or
the ownership interests of a special purpose entity (SPE) whose sole
asset is this property (collectively, the Property) to the Plan through
the in-kind contribution of such Property by ARINC, the plan sponsor
and a party in interest with respect to the Plan (the Contribution);
(b) the holding of the Property by the Plan;
(c) the leaseback of the Property by the Plan to ARINC (the Lease
or Leaseback);
(d) the repurchase of the Property, by ARINC (the Repurchase)
pursuant to (1) a right of first offer as specified in the Lease should
the Plan wish to sell the Property to a third party or (2) a voluntary
agreement under which the Plan agrees to sell the Property to ARINC at
any time during the Lease; and
(e) any payments to the Plan by ARINC made pursuant to the make
whole obligation as specified in the Lease (Make Whole Payment)
(collectively, the Exemption Transactions).
Section II. Conditions
This exemption is conditioned upon adherence to the material facts
and representations described herein and upon satisfaction of the
following requirements:
(a) A qualified independent fiduciary (the Independent Fiduciary)
acting on behalf of the Plan, represents the Plan's interests for all
purposes with respect to the Contribution and determines, prior to
entering into any of the Exemption Transactions described herein, that
each such transaction is in the interests of the Plan;
(b) The Independent Fiduciary negotiates and approves the terms of
any of the transactions between the Plan and ARINC that relate to the
Property;
(c) The Independent Fiduciary manages the holding, leasing, and
disposition of the Property and takes whatever actions it deems
necessary to protect the rights of the Plan with respect to the
Property;
(d) The terms and conditions of any transactions between the Plan
and ARINC concerning the Property are no less favorable to the Plan
than terms negotiated at arm's length under similar circumstances
between unrelated third parties;
(e) The contribution value of the Property is the fair market value
of the Property as determined by the Independent Fiduciary on the date
the Property is contributed to the Plan. In determining the fair market
value of the Property, the Independent Fiduciary obtains an updated
appraisal from a qualified, independent appraiser selected by the
Independent Fiduciary, and ensures that the appraisal is consistent
with sound principles of valuation;
(f) The Lease has an initial term of twenty years, with a three-
year renewal term. The Lease is a bondable lease for the first ten
years of the Lease (or such earlier date specified in the Lease as
agreed to between the Lessor and ARINC). During the bondable period
ARINC, as lessee, pays, in addition to the base rent, all costs
associated with the Property, including capital expenditures. After the
bondable period expires, the Lease shall convert to a traditional
triple net lease under which ARINC, as lessee, pays, in addition to the
base rent, all normal operating expenses of the Property, including
taxes, insurance, maintenance, repairs, and utilities, but does not pay
capital expenditures;
(g) The Independent Fiduciary has sole authority to determine if it
is in the interest of the Plan to enter into a transaction to sell the
stream of lease income on the Property to a third party for cash (the
Monetization);
(h) The Independent Fiduciary determines on an ongoing basis that
the amount of Plan assets invested in the Property complies with
section 404(a)(1) of ERISA;
(i) At the earlier of: (i) The date the Plan sells the Property for
fair market value or (ii) the date five years from the date of the
Contribution, ARINC will transfer to the Plan a Make Whole Payment, as
described below, in order to guarantee the Plan a minimum rate of
return of 5% compounded per annum on the initial contributed value of
the Property; provided that, if a Make Whole Payment is due and if, for
the taxable year of ARINC in which the Make Whole Payment is to be
made, such Make Whole Payment (i) would not be deductible under section
404(a)(1) of the Code or (ii) would result in the imposition of an
excise tax under section 4972 of the Code, such Make Whole Payment
would not be made until the next taxable year of ARINC for which the
Make Whole Payment is deductible under section 404(a)(1) of the Code
and does not result in an excise tax under section 4972 of the Code;
ARINC will guarantee a minimum return of 5% to the Plan by agreeing
that if (i) the combination of the proceeds from a sale of the Property
(or the change in the value of the Property if the Plan continues
holding it over the full five years) plus the Plan's net
[[Page 68398]]
income on the Property under the Lease prior to the sale (or over the
full five years) is less than (ii) the Property's value as of the date
of the Contribution plus a 5% compounded rate of return on that value,
then (iii) ARINC will contribute to the Plan the difference necessary
to provide the 5% return. The calculation of the Make Whole Payment
will take into account the status of any Monetization of the lease
payments as of the time of sale or five-year anniversary of the
Contribution.
(j) If the Plan desires to sell or convey the Property or its
interest therein during the Lease Term, the Plan must first offer ARINC
the right to purchase or otherwise acquire the Property or such
interest therein on such terms and conditions as the Plan proposes to
market the Property or such interest therein for sale (the Right of
First Offer). If ARINC fails to exercise such right to purchase, the
Plan generally is free to sell the Property to a third party. The right
of first offer shall terminate upon the commencement of the exercise by
the Plan of its remedies under the Lease as the result of a monetary
event of default by ARINC as described in the Lease that continues
uncured following notice and the expiration of applicable cure periods
(and a second notice and cure period provided fifteen (15) days before
the loss of such right on account of such default);
(k) The Plan pays no commissions or fees in connection with the
Contribution, the Lease, the Repurchase, or the Monetization of the
Property. This condition does not preclude the Plan from paying the
ongoing costs associated with the holding of the Property that are not
the responsibility of ARINC under the Lease;
(l) Subject to ARINC's Right of First Offer, the Plan retains the
right to sell or assign, in whole or in part, any of its Property
interests to any third party purchaser; and
(m) ARINC indemnifies the Plan with respect to all liability for
hazardous substances released on the Property prior to the execution
and closing of the Contribution of the Property.
Section III. Definitions
(a) The term ``Independent Fiduciary'' means a fiduciary who is:
(1) independent of and unrelated to ARINC or its affiliates, and
(2) appointed to act on behalf of the Plan for all purposes related
to, but not limited to (i) the in-kind contribution of the Property by
ARINC to the Plan, and (ii) other transactions between the Plan and
ARINC related to the Property.
For purposes of this exemption, a fiduciary will not be deemed to
be independent of and unrelated to ARINC if:
(1) such fiduciary directly or indirectly controls, is controlled
by or is under common control with ARINC,
(2) such fiduciary directly or indirectly receives any compensation
or other consideration in connection with any transaction described in
this exemption; except that an Independent Fiduciary may receive
compensation for acting as an Independent Fiduciary from ARINC in
connection with the transactions contemplated herein if the amount or
payment of such compensation is not contingent upon or in any way
affected by the Independent Fiduciary's ultimate decision, and
(3) the annual gross revenue received by such fiduciary, during any
year of its engagement, from ARINC and its affiliates exceeds 5 percent
(5%) of the fiduciary's annual gross revenue from all sources for its
prior tax year.
(b) The term ``affiliate'' means:
(1) Any person directly or indirectly through one or more
intermediaries, controlling, controlled by, or under common control
with the person;
(2) Any officer, director, employee, relative, or partner of any
such person; and
(3) Any corporation or partnership of which such person is an
officer, director, partner, or employee.
(c) The term ``control'' means the power to exercise a controlling
influence over the management or policies of a person other than an
individual.
Signed at Washington, DC, this 19th day of November 2004.
Ivan L. Strasfeld,
Director, Office of Exemption Determinations, Employee Benefits
Security Administration, U.S. Department of Labor.
[FR Doc. 04-26067 Filed 11-23-04; 8:45 am]
BILLING CODE 4510-29-P
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