Notice2024-16035
Proposed Exemption for Associated General Contractors of America, San Diego Chapter, Inc. Apprenticeship and Training Fund, Located in San Diego, CA
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
July 22, 2024
Issuing agencies
Labor DepartmentEmployee Benefits Security Administration
Abstract
This document provides notice of the pendency before the Department of Labor (the Department) of a proposed individual exemption from certain of the prohibited transaction restrictions of the Employee Retirement Income Security Act of 1974, as amended (ERISA or the Act). This proposed exemption would permit the leasing of certain improved real property located in San Diego, California by the Associated General Contractors of America, San Diego Chapter, Inc. Apprenticeship and Training Fund (the Plan or the Applicant), from the Associated General Contractors of America, San Diego Chapter, Inc. (the Chapter).
Full Text
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<title>Federal Register, Volume 89 Issue 140 (Monday, July 22, 2024)</title>
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[Federal Register Volume 89, Number 140 (Monday, July 22, 2024)]
[Notices]
[Pages 59161-59167]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-16035]
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
[Exemption Application No. L-12006]
Proposed Exemption for Associated General Contractors of America,
San Diego Chapter, Inc. Apprenticeship and Training Fund, Located in
San Diego, CA
AGENCY: Employee Benefits Security Administration, Labor.
ACTION: Notice of proposed exemption.
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SUMMARY: This document provides notice of the pendency before the
Department of Labor (the Department) of a proposed individual exemption
from certain of the prohibited transaction restrictions of the Employee
Retirement Income Security Act of 1974, as amended (ERISA or the Act).
This proposed exemption would permit the leasing of certain improved
real property located in San Diego, California by the Associated
General Contractors of America, San Diego Chapter, Inc. Apprenticeship
and Training Fund (the Plan or the Applicant), from the Associated
General Contractors of America, San Diego Chapter, Inc. (the Chapter).
DATES:
Comments due: Written comments and requests for a public hearing on
the proposed exemption should be submitted to the Department by
September 5, 2024.
Exemption date: If granted, this exemption will be in effect
beginning on October 1, 2020.
ADDRESSES: All written comments and requests for a hearing should be
submitted to the Employee Benefits Security Administration (EBSA),
Office of Exemption Determinations, Attention: Application No. L-12006
via email to <a href="/cdn-cgi/l/email-protection#60054d2f252420040f0c4e070f16"><span class="__cf_email__" data-cfemail="fd98d0b2b8b9bd999291d39a928b">[email protected]</span></a> or online through <a href="https://www.regulations.gov">https://www.regulations.gov</a>. Any such comments or requests should be sent by
the end of the scheduled comment period. The application for exemption
and the comments received will be available for public inspection in
the Public Disclosure Room of the Employee Benefits Security
Administration, U.S. Department of Labor, Room N-1515, 200 Constitution
Avenue NW, Washington, DC 20210. See SUPPLEMENTARY INFORMATION below
for additional information regarding comments.
FOR FURTHER INFORMATION CONTACT: Mr. Frank Gonzalez of the Department
at (202) 693-8553 (this is not a toll-free number).
SUPPLEMENTARY INFORMATION:
Comments
Persons are encouraged to submit all comments electronically and
not to follow with paper copies. Comments should state the nature of
the person's interest in the proposed exemption and how the person
would be adversely affected by the exemption, if granted. Any person
who may be adversely affected by an exemption can request a hearing on
the exemption. A request for a hearing must state: (1) the name,
address, telephone number, and email address of the person making the
request; (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; and (3) a statement of the issues to be addressed and a
general description of the evidence to be presented at the hearing. The
Department will grant a request for a hearing made in accordance with
the requirements above where a hearing is necessary to fully explore
material factual issues identified by the person requesting the
hearing. A hearing notice will be published by the Department in the
Federal Register. The Department may decline to hold a hearing if: (1)
the request for the hearing does not meet the requirements above; (2)
the only issues identified for exploration at the hearing are matters
of law; or (3) the factual issues identified can be fully explored
through the submission of evidence in written (including electronic)
form.
Warning: All comments received will be included in the public
record without change and may be made available online at <a href="https://www.regulations.gov">https://www.regulations.gov</a>, including any personal information provided,
unless the comment includes information claimed to be confidential or
other information whose disclosure is restricted by statute.
If you submit a comment, EBSA recommends that you include your name
and other contact information in the body of your comment, but DO NOT
submit information that you consider to be confidential, or otherwise
protected (such as a Social Security number or an unlisted phone
number) or confidential business information that you do not want
publicly disclosed. However, if EBSA cannot read your comment due to
technical difficulties and cannot contact you for clarification, EBSA
might not be able to consider your comment. Additionally, the <a href="https://www.regulations.gov">https://www.regulations.gov</a> website is an ``anonymous access'' system, which
means EBSA will not know your identity or contact information unless
you provide it in the body of your comment. If you send an email
directly to EBSA without going through <a href="https://www.regulations.gov">https://www.regulations.gov</a>,
your email address will be automatically captured and included as part
of the comment that is placed in the public record and made available
on the internet.
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of ERISA, and in accordance with the
procedures set forth in 29 CFR part 2570, subpart B (76 FR 66637,
66644, October 27, 2011).\1\ If granted, this proposed exemption would
permit, effective October 1, 2020, the leasing of certain improved real
property located in San Diego, California by the Associated General
Contractors of America, San Diego Chapter, Inc. Apprenticeship and
Training Fund (the Plan or the Applicant), from the Associated General
Contractors of America, San Diego Chapter, Inc. (the Chapter), provided
that the conditions described below are met.
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\1\ This proposed exemption would not provide relief from the
requirements of, or specific sections of, any law not noted herein.
Accordingly, the applicant is responsible for ensuring compliance
with any other laws applicable to this transaction.
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Summary of Facts and Representations <SUP>2</SUP>
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\2\ The Summary of Facts and Representations is based on the
Applicant's representations and does not reflect factual findings or
opinions of the Department, unless indicated otherwise. The
Department notes that the availability of this exemption, if
granted, is subject to the express condition that the material facts
and representations contained in application L-12006 (the
Application) are true and complete and accurately describe all
material terms of the transactions covered by the exemption. If
there is any material change in the transaction covered by this
proposed exemption or in a material fact or representation described
in the Application, the exemption will cease to apply as of the date
of the change.
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The Plan
1. The Plan provides apprenticeship training for construction trade
[[Page 59162]]
employees within five Southern California counties. The Plan is funded
by participating employers (contributing approximately 90% of the
Plan's annual funding) and the State of California (contributing
approximately 10% of the Plan's annual funding). Apprentices do not
contribute to the Plan. The Plan's most recent audited financial
statements reflect that the Plan's total assets were $13,725,754 as of
March 31, 2023.
2. The Plan's Board of Trustees (the Board) is comprised of six
individual members (the Trustees) of participating construction trade
employers. The Trustees make all the Plan's administrative and
investment decisions including decisions about the lease that is the
subject of this proposed exemption.
The Plan Sponsor: The Chapter
3. The Plan is sponsored by the Chapter, which is a trade
organization founded in 1927 to promote the interests of employers in
the construction industry located in San Diego, California. A Board of
Directors comprised of construction trade employers manages the
Chapter.
The Plan's Facilities Before October 1, 2020
4. The Applicant represents that before October 1, 2020, the Plan
leased three different properties from unrelated parties comprising
11,293 square feet that were used for administrative, educational, and
training purposes. According to the Applicant, the facilities on these
properties lacked adequate square footage and had outdated training
technology, which resulted in increased costs and wasted resources for
the Plan. In addition, one of the properties was located more than
three miles from the other two properties.
The Chapter's Property
5. On January 18, 2018, the Chapter and the Plan entered into a
Memorandum of Understanding (MOU) documenting their shared interest in
providing a ``world class apprenticeship program'' in a ``modernized
facility.'' Following execution of the MOU, the Chapter acquired
unimproved real property located at 10140 Riverford Road, Lakeside,
California (the Parcel) from Lakeside Land Co., a California limited
liability corporation (the LLC). The LLC is not a member of the
Chapter, there are no common directors between the LLC and the Chapter,
and no LLC directors are Plan Trustees. The LLC has neither contributed
nor participated in the Plan, nor does the LLC participate in the
Plan's apprenticeship training programs.
6. In 2020, the Chapter utilized the Parcel to construct a high-
ceiling training space comprising approximately 43,600 square feet (the
Building). The Chapter's acquisition of the Parcel, and subsequent
construction of the Building, was based on the Plan's intent expressed
in the MOU to sign a 10-year lease to use both the Building once
constructed and an unimproved exterior lot (the Property).
The Lease
7. On April 25, 2019, the Plan Trustees, acting on behalf of the
Plan, caused the Plan to enter into an agreement with the Chapter to
lease both a portion of the Building (once constructed) and an
unimproved exterior lot located in the Parcel (the Lease), subject to
the review and approval of both a qualified independent fiduciary
(described below, the Independent Fiduciary) and the Department.
8. The Lease's term is for 10 years, under which the Plan holds a
leasehold interest to occupy and use 90 percent of the Building's
rentable space (39,115 square feet of the Building's total space of
43,600 square feet) and an unimproved exterior lot along with rights to
use the Property's common areas. The Chapter utilizes the remaining 10
percent, and it has no present plans to change its Building's space
allocation.
9. The Plan's initial base rent under the Lease is $40,000 per
month or approximately $1.02 per square foot (the Base Rent). This
expense during a twelve (12) month period is about 3.5 percent of the
Plan's total assets as reflected in the Plan's audited financial
statements for accounting year ending March 31, 2023. The Base Rent is
subject to annual increases that are discussed further below.
The Independent Appraiser
10. On May 17, 2019, the Plan engaged Cushman & Wakefield Western
Inc. as the Independent Appraiser to determine the Property's fair
market rental value. Trevor G. Chapman, a California licensed Certified
General Real Estate Appraiser, who is an employee of the Independent
Appraiser, performed the appraisal.
11. Mr. Chapman represents that the Independent Appraiser has no
present or prospective interest in the Property that is subject to the
Lease, and no personal interest with respect to the Plan and the
Chapter. In addition, Mr. Chapman represents that the Independent
Appraiser's annual gross revenues derived from parties in interest with
respect to the Plan represented 0.37% of its gross revenues for the
2020 tax year. Furthermore, the Independent Appraiser's agreement with
the Plan does not contain any provisions that provide for the direct or
indirect indemnification or reimbursement of the Independent Appraiser
by the Plan or any other party for any failure to adhere to its
contractual obligations or to state or Federal laws applicable to the
Independent Appraiser's work, or that waive any rights, claims or
remedies of the Plan or its participants and beneficiaries under ERISA,
the Code, or other Federal and state laws against the Independent
Appraiser with respect to the transaction(s) that are the subject of
the exemption.
12. Mr. Chapman inspected the Property on July 1, 2019, to collect
primary and secondary data related to the Property, investigate the
general trends in the regional economy and local area, analyzed rental
data where appropriate, and reviewed (i) the cost estimates based upon
submitted architects' plans, and (ii) the proposed Lease using
generally accepted market-derived appropriate methods and procedures.
In a written report (the Independent Appraisal Report) dated October
23, 2019, Mr. Chapman determined that the Property's fair market rental
rate was $44,443 per month, which represented $1.14 per square foot of
the Plan's rentable space.
13. According to the Independent Appraiser, the Lease is a triple
net lease.\3\ Notwithstanding the types of commercial leases that may
exist in any given marketplace, the Independent Appraiser informed the
Department that the Property subject to the Lease is located in a
market area in which commercial leases are typically written on a
triple-net basis with tenants
[[Page 59163]]
responsible for all operating expenses, including common area
maintenance, taxes, and insurance. Lease terms within the Property's
market are generally between 3 and 7 years for industrial tenants and
contain annual escalations of 3.0 percent.
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\3\ The Independent Appraiser notes that a triple net lease is a
type of commercial lease wherein the lessee is responsible for their
pro rata share of expenses for common area maintenance, taxes, and
insurance. Also, in addition to a base rent, tenants subject to
triple net leases are often required to reimburse the landlord for
certain expenses; recovery clauses for expenses range from
absolutely net (whereby the tenant pays all property expenses) to
fully gross (in which tenant pays no expenses), which provisions can
vary by property type, locale, and can fall anywhere within the net
to gross range.
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The Independent Fiduciary
14. On October 27, 2019, the Plan Trustees retained the services of
Prudent Fiduciary Services, LLC (PFS) of Los Angeles, California, to
serve as the Plan's Independent Fiduciary with respect to the Lease.
Specifically, Mr. Miguel Paredes, a principal with PFS, was appointed
to undertake the duties and responsibilities on behalf of PFS in its
role as the Plan's Independent Fiduciary to ensure that the Lease
arrangement complied with ERISA.
15. The Independent Fiduciary represents that neither Mr. Paredes
nor PFS had a pre-existing relationship with the Plan or the Chapter.
The Independent Fiduciary also represents that Mr. Paredes and PFS
expect to derive approximately 0.55 percent of their combined annual
gross revenues from the Plan and parties in interest with respect to
the Plan. The Independent Fiduciary's agreement with the Plan did not
contain any provisions that violated ERISA Section 410 or the
Department's Regulations codified at Sec. 2509.75-4; \4\ and did not
contain any provision providing for the direct or indirect
indemnification or reimbursement of the Independent Fiduciary by the
Plan or other party for any failure to adhere to its contractual
obligations or to state or Federal laws applicable the Independent
Fiduciary`s work, or waiving any rights, claims, or remedies of the
Plan under ERISA, state, or Federal law against the Independent
Fiduciary with respect to the transaction(s) that are the subject of
the exemption.
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\4\ ERISA section 410 provides, in part, that ``except as
provided in ERISA Sections 405(b)(1) and 405(d), any provision in an
agreement or instrument which purports to relieve a fiduciary from
responsibility or liability for any responsibility, obligation, or
duty under this part [meaning Part 4 of Title I of ERISA] shall be
void as against public policy.''
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16. The Independent Fiduciary examined whether the Lease would be
reasonable, prudent, in the interest of, and protective of the Plan and
of the Plan's participants. To perform this examination, the
Independent Fiduciary: (a) reviewed various documents provided by the
Plan, such as trust agreements, IRS Forms 990, financial statements,
written policies, guidelines, and procedures, lease agreements, and the
Plan Trustees' meeting minutes; (b) interviewed and/or held discussions
with representatives of the Plan; (c) reviewed the Independent
Appraisal Report; (d) conducted an in-person visit of the Property
site; (e) reviewed applicable laws and guidance; and (f) considered the
Plan Trustees' decision-making process with respect to entering into
the Lease.\5\
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\5\ The Independent Fiduciary represents that the Trustees
appeared to have undertaken a reasonable and thorough process before
making this decision. The Independent Fiduciary represents that the
Trustees had explored other alternatives and real estate properties
in the area. Specifically, starting in year 2015 the Trustees began
searching for new facilities. The Trustees evaluated 12 real
properties, comprised of six existing buildings, three parcels of
open land for building, two properties for operating engineer usage,
and the additional annex near the then current facility.
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17. In a report dated October 28, 2019 (the Independent Fiduciary
Report), the Independent Fiduciary noted that the Property allows for
onsite heavy equipment operator training, which was not an option in
the Plan's former location due to space constraints. Plus, the new
location represents an upgrade in size and quality, which should
translate into better training programs. The Independent Fiduciary
stated that having the classrooms and apprenticeship/training offices
in the same location as the Chapter offices potentially improves the
operation and efficiency of the training programs because the Chapter's
oversight and resources are nearby. The Independent Fiduciary also
noted that the Plan and Chapter share an interest in providing high
quality apprenticeship and continuing training education programs
because the Plan would be able to provide excellent benefits to its
participants and the Chapter would be able to use the training programs
to promote Chapter membership.
18. The Independent Fiduciary reviewed the Independent Appraiser's
specific qualifications, including his education, prior experience, and
professional licenses, memberships, and affiliations. Based upon its
review, the Independent Fiduciary determined that the Independent
Appraiser possessed the appropriate training, experience, and
facilities to provide a qualified appraisal report on behalf of the
Trust Fund regarding the subject property.
19. The Independent Fiduciary next examined the Independent
Appraiser's independence. The Independent Fiduciary represents that it
did not find any relationship between Chapman or Cushman, or any
affiliates, to the parties that would be engaging in the transaction
contemplated by the Lease Agreement. The Independent Fiduciary's review
also did not reveal any other information that would call into question
the Independent Appraiser's independence.
20. The Independent Fiduciary next determined whether the payments
from the Plan to the Chapter under the Lease would be reasonable. To do
this, the Independent Fiduciary reviewed the methodology provided by
the Independent Appraiser to calculate the fair market rent, which
included comparing comparable rental properties, having discussions
with local brokers, and testing the Independent Appraiser's conclusions
through a return on cost analysis. The Independent Fiduciary adjusted
the Lease's base rent of $1.02 per square foot upwards by $0.07 per
square foot, to account for the Plan's additional $2,579 monthly
payments to the Reserve Fund, and determined that even with the
adjusted rate, the Lease's adjusted monthly rent of $1.09 per square
foot is less than its appraised fair market value of $1.14 per square
foot. Additionally, the Independent Fiduciary noted in the Independent
Fiduciary Report that leases in the Property's subject market are
typically written on a triple net basis, which is consistent with the
structure of the Lease. The Independent Fiduciary stated that it also
reviewed the properties and key lease information used in the
Independent Appraisal Report analysis of rental activity for comparable
space in similar properties in the Property's subject market and found
that the selected comparable properties were appropriate and reasonably
similar. The Independent Fiduciary noted how other lease terms, such as
rent escalation clauses, duration, and tenant improvement allowances,
contained in the comparable leases that the Independent Appraiser
identified compared to those in the Lease. For the reasons set forth
above, the Independent Fiduciary determined that the arrangements
provided under the Lease are necessary for the operation of the Plan
and that the compensation to be paid by the Plan to the Chapter is
reasonable. It also determined that entering into the Lease was
reasonable, prudent, and in the Plan's interest.
21. On July 28, 2020, the Independent Fiduciary issued an addendum
and supplement to the Independent Fiduciary Report. In the addendum,
the Independent Fiduciary agreed to perform the following additional
duties on behalf of the Plan: (a) monitor the terms of this exemption,
if granted, on an ongoing basis and take all actions that are necessary
and proper to enforce the Plan's rights under the Lease to protect the
Plan's participants and
[[Page 59164]]
beneficiaries; (b) review and approve the material terms and conditions
of the Lease and make any adjustments thereto; (c) engage the
Independent Appraiser and/or other service providers as they reasonably
determine to be necessary; (d) monitor the Lease, including during any
subsequent renewal period; and (e) ensure that all conditions of this
exemption, if granted, are met. The obligations in the addendum have
been subsumed into the Independent Fiduciary's duties below.
22. The proposed exemption requires the Independent Fiduciary to
engage a qualified independent appraiser to perform an independent
appraisal of the Property following the beginning date of the Lease, on
a periodic basis as prudence requires, to ensure the Plan does not pay
more than fair market value under the Lease. The Independent Fiduciary
must regularly evaluate the prudence of the Plan's continued
participation in the Lease and ensure that participation in the Lease
remains in the interest of and protective of the interests of the
Plan's participants. The Plan's ongoing participation in the Lease
requires the ongoing approval and consent of the Independent Fiduciary.
The Independent Fiduciary is responsible for the selection of the
independent appraiser, the frequency of appraisals, and the assessment
of the reliability of the appraisals in determining fair market value.
The Plan may continue to participate in the Lease during any period
only to the extent the Independent Fiduciary has affirmatively
determined that participation in the Lease remains in the interest of
and protective of the Plan and its participants and beneficiaries. The
amounts that the Plan has paid or will continue to pay under the Lease
may not exceed fair market value.
23. In the July 28, 2020, supplement to the Independent Fiduciary
Report, the Independent Fiduciary stated that the Plan needed more
space to comply with social distancing requirements and guidelines in
the COVID-19 environment and to enable the Plan to offer sufficient
classes in a manner compliant with State Division of Apprenticeship
Standards Guidelines. In the supplement, the Independent Fiduciary
confirmed that the Plan's entering into the Lease was reasonable,
prudent, and in the interest of the Plan.
24. On October 1, 2020, the Independent Appraiser conducted another
appraisal of the Property and determined that the Property's fair
market rental value under the Lease was $48,890 per month as of that
date.\6\ The Plan moved into the Building on the same day, stating that
it urgently needed larger space due to the COVID-19 health pandemic. On
January 14, 2022, the Independent Fiduciary represented to the
Department that for the period beginning on October 1, 2020, the terms
of the Lease, including the base monthly rent of $40,000 per month, are
in the interest of, and protective of, the Plan and its participants
and beneficiaries, and reflect a below fair market rent for the subject
premises.
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\6\ This determination is set forth in the Independent
Appraiser's written report, dated December 16, 2021.
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Other Duties of the Independent Fiduciary
25. The Independent Fiduciary must ensure that the Lease is in the
interest and protective of the Plan and its participants and
beneficiaries, including with respect to any amendment or renewal of
the Lease. Further, the Independent Fiduciary must take all necessary
and proper steps to ensure that the Plan and its participants and
beneficiaries are protected in connection with the Lease, including by
approving any amendment or renewal thereof, and beginning on the day
that the notice of exemption is published in the Federal Register, the
Independent Fiduciary must ensure that the Plan's total payments under
the Lease during a twelve (12) month period do not exceed ten (10)
percent of the Plan's total assets as reflected in the most recently
issued report from the independent accounting firm responsible for
auditing the Plan's financial statements.
In order to ensure that the Lease and its terms continue to be in
the interest of participants and beneficiaries of the Plan, this
proposal requires the Independent Fiduciary to give prior written
notice to the Department's Office of Exemption Determinations at least
60 days before the Lease is amended, modified, or extended, unless such
delay would cause imminent harm to the Plan in which case the notice
must be provided immediately. The notification must include a complete
description of the amendment, modification, or extension, including all
material terms.\7\ Additionally, the Independent Fiduciary must notify
the Chapter of the Plan's intention to extend the Lease beyond the
initial 10-year term, and any subsequent renewal must not exceed five-
years.
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\7\ Because the proposed exemption provides retroactive
exemptive relief, within 60 days of the date of publication of the
notice of exemption in the Federal Register (the Publication Date),
the Independent Fiduciary will provide a summary of all amendments,
modifications, or extensions of the Lease made between October 1,
2020, and the Publication Date.
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The Independent Fiduciary, while acting on the Plan's behalf with
respect to the Lease, must not be directly or indirectly controlled by
or through one or more intermediaries, or under common control with
either the Chapter, the Plan, or any related employers' members.
26. The Independent Fiduciary has not entered into and must not
enter into any agreement or instrument that violates either ERISA
Section 410 or the Department's Regulations codified at Sec. 2509.75-
4; \8\ and has not entered and must not enter into any agreement,
arrangement, or understanding that includes any provision that provides
for the direct or indirect indemnification or reimbursement of the
Independent Fiduciary by the Plan or other party for any failure to
adhere to its contractual obligations or to state or Federal laws
applicable the Independent Fiduciary`s work, or that waives any rights,
claims, or remedies of the Plan under ERISA, state, or Federal law
against the Independent Fiduciary with respect to the transaction(s)
that are the subject of the exemption.
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\8\ ERISA section 410 provides, in part, that ``except as
provided in ERISA Sections 405(b)(1) and 405(d), any provision in an
agreement or instrument which purports to relieve a fiduciary from
responsibility or liability for any responsibility, obligation, or
duty under this part [meaning Part 4 of Title I of ERISA] shall be
void as against public policy.''
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Other Lease Terms
27. The Lease defines the formula to be used in determining the
Base Rent annual increases as follows:
``Beginning on the date that is one (1) year after the
Commencement Date [Lease's start date], and on each successive one-
year anniversary thereof (each an `Adjustment Date') throughout the
[t]erm, the Base Rent shall be increased by the amount of increase
in the CPI . . . [s]uch increase shall be calculated by multiplying
the then-current Base Rent by a fraction, the numerator of which
shall be the CPI for the Adjustment Date and the denominator of
which shall be the CPI for the previous Adjustment Date (or the CPI
for the Commencement Date in case of the adjustment for the first
Adjustment Date). If there is no increase in CPI, or a decrease in
CPI, the Base Rent shall remain unchanged.'' \9\
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\9\ CPI means the Consumer Price Index; the Department's Bureau
of Labor Statistics publishes the CPI. The Lease also provides that
``. . . [t]he CPI for any Adjustment Date shall be the CPI for the
most recent month for which it is published before the Adjustment
Date (or before the Commencement Date, as the case may be).'' The
Department understands such Base Rent increase calculation to mean
that the Base Rent may increase annually based on the published CPI
for the applicable period.
[[Page 59165]]
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28. Notwithstanding the Lease's CPI Base Rent annual increases
provision discussed above, and as further described below, the
Independent Fiduciary must ensure that the total amount paid by the
Plan in connection with the Lease does not exceed the fair market
rental value.
29. In addition to the Base Rent, the Lease requires the Plan to
pay certain operating expenses (the Operating Expenses).\10\ The
Operating Expenses are subject to both an annual reconciliation process
(the Annual Reconciliation) and to the Plan's exercise of audit rights,
because of the Building's 90/10 allocation ratio between the Plan and
the Chapter, respectively. The computation of the Operating Expenses
must be made in accordance with fair and reasonable accounting
principles customarily applied by owners of similar properties located
in San Diego, California.\11\
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\10\ The Lease defines Operating Expenses as additional rent for
costs that the Chapter incurs, which include the following: (1)
operation, repair, maintenance, and replacement of the common areas;
(2) trash disposal, janitorial and security services; (3) any
service provided by the Chapter that is an operating expense under
the Lease; (4) the cost of the premiums for the liability and
property insurance policies required to be maintained by the Chapter
under the Lease; (5) the cost of water, sewer, gas, electricity,
solar panels, and other publicly mandated services; (6) labor,
salaries and applicable fringe benefits and costs, materials,
supplies and tools, used in maintaining and/or cleaning the
premises, and accounting and management fees attributable to the
operation of the premises; (7) replacing and/or adding improvements
mandated by any governmental agency and any repairs or removals
necessitated thereby; (8) replacements of equipment or improvements,
as amortized over such equipment or improvements' useful life for
depreciation purposes according to federal income tax guidelines;
(9) reserves set aside for maintenance, repair and/or replacement of
common area improvements and equipment as set forth in the Lease's
Addendum; (10) environmental damages and earthquake coverage to the
extent not recovered by Chapter directly from any tenants; and (11)
all taxes, assessments and charges levied on or with respect to the
facility, or any personal property of the Chapter used in the
operation thereof and payable by the Chapter.
\11\ The Independent Fiduciary's duties include reviewing and
approving the Lease's Operating Expenses provisions.
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30. The Lease requires both the Plan and the Chapter to make
monthly payments into a Capital Replacement Reserve Fund (the Reserve
Fund); both the Plan and the Chapter must pay their pro rata monthly
amount to the Reserve Fund based on their space utilization under the
Lease--the Chapter must pay $136 per month for occupying 4,485 square
feet while the Plan must pay $2,579 per month for occupying 39,115
square feet.\12\ The Reserve Fund's monthly amounts will remain the
same throughout the Lease's duration, including extensions.
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\12\ As noted above, the Independent Fiduciary determined that
these payments had the effect of adjusting the Lease's base rent of
$1.02 per square foot upward by $0.07 per square foot.
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31. The Reserve Fund is intended to segregate payments for future
replacement needs and its calculations are based on reasonable life
expectancy \13\ and anticipated replacement costs of the Reserve Fund
Items; as such, the Reserve Fund is not subject to the Annual
Reconciliation provision.
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\13\ The Lease provides a life cycle costs analysis for the
Reserve Fund Items, which considers all costs of acquiring,
operating, maintaining, and disposing of a building component or
system.
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32. The Reserve Fund may only be used for the replacement of
certain items (such as roofing, doors, frames and hardware, flooring,
asphalt and concrete paving and resealing, fencing and gates, etc.)
that are listed in the Lease's addendum, and the Reserve Fund may not
be used for any other purpose unless agreed to by both the Chapter and
the Plan, subject to the Independent Fiduciary's approval.\14\
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\14\ The Reserve Fund includes the following additional items:
backflow preventers on site utilities; casework and countertops;
sheet metal, caulking, joint sealants; roofing maintenance and re-
roofing; doors, frames, and hardware; operable walls in classroom;
coiling service doors; glass and glazing storefront system; ceramic
tile; flooring carpet replacement and base; paint and coatings;
elevator; plumbing; HVAC equipment; electrical and site lighting;
and fire alarm and security system.
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33. Further, the Lease requires the Chapter to keep the Property,
including interior and exterior walls, roof, and common areas, in good
condition and repair except that the Plan is responsible for day-to-day
maintenance and repairs to the interior of its allocated rented space
to the extent such cost is attributable to causes beyond normal wear
and tear. The Lease requires the Chapter to keep the moneys in the
Reserve Fund in a restricted account that may not be used for any
purpose other than to fund the replacement of the items described
above. Amounts paid by the Plan into the Reserve Fund constitute a
portion of the Plan's overall consideration paid to the landlord, and
once the amounts are paid into the Reserve Fund, the Plan has no legal
right to such amounts beyond what is described in the Lease. The
Lease's termination ends the Plan's right under the Lease.\15\
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\15\ As described in more detail above, the Independent
Fiduciary determined that the aforementioned Lease terms, including
the Reserve Fund provision, were prudent, and in the interest of the
Plan. Moreover, this proposed exemption prohibits the Plan's
participants from paying any Plan operating expenses, including
amounts paid into the Reserve Fund.
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Exemptive Relief Requested and Analysis
34. Absent an administrative exemption, the Lease would violate
ERISA Sections 406(a)(1)(A) and (D) and 406(b)(2). ERISA Section
406(a)(1)(A) prohibits the sale, exchange, or lease, of any property
between a plan and a party in interest. The Chapter is a party in
interest with respect to the Plan under ERISA Section 3(14)(D) because
it is an employee organization whose members are covered by the Plan.
Therefore, the Lease would violate ERISA section 406(a)(1)(A).
35. Additionally, ERISA section 406(a)(1)(D) prohibits the transfer
to or use of any plan assets by or for the benefit of a party in
interest of a plan. Because the Lease requires monthly cash payments
from the Plan's assets to the Chapter, the payments would be considered
a transfer of Plan assets to a party in interest in violation of ERISA
section 406(a)(1)(D).
36. Finally, the Lease would violate ERISA section 406(b)(2), which
prohibits a plan fiduciary acting in their individual capacity or in
any other capacity in a transaction involving the plan on behalf of a
party (or representing a party) whose interests are adverse to the
interests of the plan or its participants or beneficiaries. Because
both the Trustees and the Board are comprised of individuals
representing participating employers who are the Chapter's members,
these individuals are involved on both sides of the Lease in violation
of ERISA Section 406(b)(2).
Conditions for Exemptive Relief <SUP>16</SUP>
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\16\ The Department notes that this is a summary of the
conditions intended for the convenience of a reader; however, the
governing conditions for the Proposed Transaction are those
reflected in section II of the proposed exemption.
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37. In addition to the protections described above, the Plan's
participants must not pay any of the Plan's operating expenses. The
terms and conditions of the Lease must be at least as favorable to the
Plan as those that the Plan could obtain in a comparable lease from an
unrelated party in an arm's-length transaction. If granted, this
exemption will not cover any type of service that is otherwise covered
under an administrative class exemption or a statutory exemption of
ERISA, such as ERISA section 408(b)(2).
38. In the event that the Independent Fiduciary retains an
Independent Appraiser in connection with the Lease, such Independent
Appraiser must not have entered into, and must not enter into, any
agreement, arrangement, or understanding that includes any
[[Page 59166]]
provision that provides for the direct or indirect indemnification or
reimbursement of the Independent Appraiser by the Plan or any other
party for any failure to adhere to its contractual obligations or to
state or Federal laws applicable to the Independent Appraiser's work,
or that waives any rights, claims or remedies of the Plan or its
participants and beneficiaries under ERISA, the Code, or other Federal
and state laws against the Independent Appraiser with respect to the
transaction(s) that are the subject of the exemption.
39. Finally, this proposed exemption would require the Plan to
adhere to the material facts and representations described in the
proposed exemption and set forth in the exemption application,
including the Plan's representations made pursuant to the Department's
Regulations codified in 29 CFR 2570.34-35.
Statutory Findings
40. ERISA Section 408(a) provides, in part, that the Department may
not grant an exemption unless the Department finds that the exemption
is administratively feasible, in the interest of affected plans and of
their participants and beneficiaries, and protective of the rights of
such plan and its participants and beneficiaries, which criteria are
discussed below.
a. The Proposed Exemption Is ``Administratively Feasible.'' The
Department has tentatively determined that the proposed exemption is
administratively feasible because, among other things, the Independent
Fiduciary must represent the Plan for all purposes relating to the
proposed transaction. This representation includes: reviewing and
approving the Lease terms and conditions; and ensuring that the Plan's
entering into the Lease and continuation of the Lease, including any
amendment to or renewal thereof, is reasonable, prudent, and in the
interests of, the Plan and its participants and beneficiaries.
b. The Proposed Exemption Is ``In the Interests of the Plan.'' The
Department has tentatively determined that the proposed exemption is in
the Plan's interest because the Lease permits the Plan to rent a modern
facility located in a central location with updated equipment that can
accommodate a large group of apprentices for an amount not exceeding
fair market value.
c. The Proposed Exemption Is ``Protective of the Plan.'' The
Department has tentatively determined that the proposed exemption is
protective of the rights of the Plan and its participants, and
beneficiaries, because the Independent Fiduciary must represent the
Plan's interests for all purposes with respect to the Lease in
accordance with ERISA's fiduciary duties of prudence and loyalty,
including prudently monitoring the terms of the Lease on an ongoing
basis and ensuring that the protective conditions of the exemption are
fully met.
Notice to Interested Persons
Notice of the proposed exemption will be given to all Interested
Persons within 15 days of the publication of the notice of proposed
exemption in the Federal Register, by first class U.S. mail, to the
last known address of all such individuals. The notice will contain a
copy of the notice of proposed exemption, as published in the Federal
Register, and a supplemental statement, as required pursuant to 29 CFR
2570.43(a)(2). The supplemental statement will inform interested
persons of their right to comment on the pending exemption. Written
comments are due within 45 days of the publication of the notice of
proposed exemption in the Federal Register. All comments will be made
available to the public.
Warning: If you submit a comment, the Department recommends that
you include your name and other contact information in the body of your
comment, but DO NOT submit information that you consider to be
confidential, or otherwise protected (such as a Social Security number
or an unlisted phone number) or confidential business information that
you do not want publicly disclosed. All comments may be posted on the
internet and can be retrieved by most internet search engines.
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 ERISA section 408(a) does not relieve a fiduciary or other party
in interest or disqualified person from certain other provisions of
ERISA and/or the Code, including any prohibited transaction provisions
to which the exemption does not apply and the general fiduciary
responsibility provisions of ERISA section 404, which, among other
things, require a fiduciary to discharge their duties respecting the
plan solely in the interest of the participants and beneficiaries of
the plan and in a prudent fashion in accordance with ERISA section
404(a)(1)(b); nor does it affect the requirement of Code section 401(a)
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 ERISA section 408(a)
and/or Code section 4975(c)(2), 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 exemption, if granted, will be supplemental to,
and not in derogation of, any other provisions of ERISA 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 exemption, if granted, will be subject to the
express condition that the material facts and representations contained
in each application are true and complete at all times, and that each
application accurately describes all material terms of the transaction
which is the subject of the exemption.
Proposed Exemption
Section I. Covered Transaction
If the proposed exemption is granted, the restrictions of ERISA
sections 406(a)(1)(A), (D), and 406(b)(2) shall not apply, effective
October 1, 2020, to the leasing of office, classroom, and training
facilities (the Lease) located on an improved parcel of real property
(the Property) by the Associated General Contractors of America, San
Diego Chapter, Inc. Apprenticeship and Training Fund (the Plan) from
the Associated General Contractors of America, San Diego Chapter, Inc.
(the Chapter), to provide construction trade apprenticeship training to
Plan participants, as long as the conditions set forth in section II
are met.
Section II. General Conditions
(a) The Plan has paid, and will continue to pay, no more than the
fair market rental value in connection with the Lease;
(b) The Plan's participants do not contribute to the Plan;
(c) A qualified independent fiduciary (the Independent Fiduciary)
represents the Plan's interests in all respects to the Lease, including
by approving the Lease and, if warranted, any amendment to or renewal
of the Lease. Additionally, the Independent Fiduciary, acting on the
Plan's behalf with respect to the Lease:
[[Page 59167]]
(1) Must not be directly or indirectly controlled by or through one
or more intermediaries, or under common control with either the
Chapter, the Plan, or any related employers' members;
(2) Reviewed the Lease, including the terms and conditions, and
determined that the Lease was reasonable and in the interest of and
protective of the Plan and its participants and beneficiaries in
accordance with ERISA's fiduciary duties of prudence and loyalty;
(3) Confirmed that the initial base rent did not exceed the current
fair market rental value of the Property by reviewing an appraisal
performed by a qualified independent appraiser (the Independent
Appraiser) both when the Plan entered into the Lease, and when the Plan
began occupying the Property;
(4) Determined in advance of the Plan's entering into the lease for
the Property, that the Lease is reasonable, prudent, in the interest
of, and protective of the Plan and its participants and beneficiaries
in accordance with ERISA's fiduciary duties of prudence and loyalty;
(5) Must engage a qualified independent appraiser to perform an
independent appraisal of the Property following the beginning date of
the Lease, on a periodic basis as prudence requires, to ensure the Plan
does not pay more than fair market value under the Lease. The
Independent Fiduciary is responsible for the selection of the
Independent Appraiser, the frequency of appraisals, and the assessment
of the reliability of the appraisals in determining fair market value;
(6) Must regularly evaluate the prudence of the Plan's continued
participation in the Lease and ensure that participation in the Lease
remains in the interest of and protective of the interests of the
Plan's participants;
(7) Must monitor the parties' compliance with the terms and
conditions of the exemption, if granted, and take all necessary and
proper steps to ensure that the Plan and its participants and
beneficiaries are completely protected throughout the Lease's term and
any related transactions (including any renewal thereof);
(8) Must review and approve the Lease's operating expenses on an
ongoing basis, including but not limited to ensuring that the Plan
undergoes both an annual reconciliation for such accrued expenses and
it exercises its audit rights when prudently needed.
(9) Must give prior written notice to the Chapter of the Plan's
intention to extend the Lease beyond the initial 10-year term;
(10) Has not entered into and must not enter into any agreement or
instrument that violates either ERISA section 410, or the Department's
Regulations codified at 29 CFR 2509.75-4; \17\ and
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\17\ ERISA section 410 provides, in part, that ``except as
provided in ERISA Sections 405(b)(1) and 405(d), any provision in an
agreement or instrument which purports to relieve a fiduciary from
responsibility or liability for any responsibility, obligation, or
duty under this part [meaning Part 4 of ERISA] shall be void as
against public policy.''
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(11) Has not entered into and must not enter into any agreement,
arrangement, or understanding that includes any provision that provides
for the direct or indirect indemnification or reimbursement of the
Independent Fiduciary by the Plan or other party for any failure to
adhere to its contractual obligations or to state or Federal laws
applicable to the Independent Fiduciary's work, or that waives any
rights, claims, or remedies of the Plan under ERISA, state, or Federal
law against the Independent Fiduciary with respect to the
transaction(s) that are the subject of the exemption;
(d) The Plan's ongoing participation in the Lease requires the
continuing approval and consent of the Independent Fiduciary and the
Plan may continue to participate in the Lease during any period only to
the extent the Independent Fiduciary has affirmatively determined that
participation in the Lease remains in the interest of and protective of
the Plan and its participants and beneficiaries;
(e) Any adjustments to the base rent under the Lease must be linked
to the Consumer Price Index for All Urban Consumers for the San Diego,
California area, as published by the Department's Bureau of Labor
Statistics;
(f) Any renewal of the Lease's initial 10-year term must be made
solely at the Plan's discretion subject to approval by the Independent
Fiduciary and if the Lease is renewed, the Lease term must not exceed
five-years;
(g) The Independent Appraiser must not have entered into, and must
not enter into, any agreement, arrangement, or understanding that
includes any provision that provides for the direct or indirect
indemnification or reimbursement of the Independent Appraiser by the
Plan or any other party for any failure to adhere to its contractual
obligations or to state or Federal laws applicable to the Independent
Appraiser's work, or that waives any rights, claims or remedies of the
Plan or its participants and beneficiaries under ERISA, the Code, or
other Federal and state laws against the Independent Appraiser with
respect to the transaction(s) that are the subject of the exemption;
(h) The exemption does not cover any type of service that is
otherwise covered under an administrative class exemption or a
statutory exemption from ERISA's prohibited transaction provisions;
(i) Beginning on the day that the notice of exemption is published
in the Federal Register, the Plan's total payments under the Lease
during any given twelve (12) month period must not exceed ten (10)
percent of the Plan's total assets as reflected in the most recently
issued report from the independent accounting firm that audited the
Plan's financial statements;
(j) The terms and conditions of the Lease are at least as favorable
to the Plan as those which the Plan could obtain in a comparable lease
from an unrelated party in an arm's-length transaction;
(k) All of the material facts and representations set forth in the
Summary of Facts and Representations are true and accurate; and
(l) Within 60 days of the date of publication of the notice of
exemption in the Federal Register (the Publication Date), the
Independent Fiduciary will provide a summary of all amendments,
modifications, or extensions of the Lease made between October 1, 2020,
and the Publication Date. After the Publication Date, on an ongoing
basis, the Independent Fiduciary must inform the Department's Office of
Exemption determinations if the Lease is amended, modified, or extended
at least 60 days before the amendment, modification, or extension
unless such delay would cause imminent harm to the Plan in which case
the notice must be provided immediately. The notification must include
a complete description of the amendment, modification, or extension,
including all material terms thereof.
Exemption Date: The proposed exemption would be effective October
1, 2020.
Signed at Washington, DC, this 16th day of July 2024.
George Christopher Cosby,
Director, Office of Exemption Determinations, Employee Benefits
Security Administration, U.S. Department of Labor.
[FR Doc. 2024-16035 Filed 7-19-24; 8:45 am]
BILLING CODE 4510-29-P
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</html>Indexed from Federal Register on July 22, 2024.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.