Proposed Exemptions; Notice of Proposed Individual Exemption Involving the Plumbers & Pipefitters National Pension Fund (the Fund), 48768-48788 [E6-13623]

Agencies

• Employee Benefits Security Administration
• DEPARTMENT OF LABOR

[Federal Register Volume 71, Number 161 (Monday, August 21, 2006)]
[Notices]
[Pages 48768-48788]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E6-13623]



[[Page 48767]]

-----------------------------------------------------------------------

Part VII





Department of Labor





-----------------------------------------------------------------------



 Employee Benefits Security Administration



-----------------------------------------------------------------------



Employee Benefit Plans--Notice of Proposed Individual Exemption 
Involving the Plumbers & Pipefitters National Pension Fund (the Fund) 
and Grant of Individual Exemption for the Southwest Gas Corporation 
(Southwest Gas); Notices

Federal Register / Vol. 71 , No. 161 / Monday, August 21, 2006 / 
Notices

[[Page 48768]]


-----------------------------------------------------------------------

DEPARTMENT OF LABOR

Employee Benefits Security Administration

[Application No. D-11183, et al.]


Proposed Exemptions; Notice of Proposed Individual Exemption 
Involving the Plumbers & Pipefitters National Pension Fund (the Fund)

AGENCY: Employee Benefits Security Administration, Labor.

ACTION: Notice of proposed exemptions.

-----------------------------------------------------------------------

SUMMARY: This document contains notices of pendency before the 
Department of Labor (the Department) of proposed exemptions from 
certain of the prohibited transaction restrictions of the Employee 
Retirement Income Security Act of 1974 (ERISA or the Act) and/or the 
Internal Revenue Code of 1986 (the Code).

Written Comments and Hearing Requests

    All interested persons are invited to submit written comments or 
requests for a hearing on the pending exemptions, unless otherwise 
stated in the Notice of Proposed Exemption, within 45 days from the 
date of publication of this Federal Register Notice. Comments and 
requests for a hearing should state: (1) The name, address, and 
telephone number of the person making the comment or request, and (2) 
the nature of the person's interest in the exemption and the manner in 
which the person would be adversely affected by the exemption. A 
request for a hearing must also state the issues to be addressed and 
include a general description of the evidence to be presented at the 
hearing.

ADDRESSES: All written comments and requests for a hearing (at least 
three copies) should be sent to the Employee Benefits Security 
Administration (EBSA), Office of Exemption Determinations, Room N-5700, 
U.S. Department of Labor, 200 Constitution Avenue, NW., Washington, DC 
20210. Attention: Application No. ----, stated in each Notice of 
Proposed Exemption. Interested persons are also invited to submit 
comments and/or hearing requests to EBSA via e-mail or FAX. Any such 
comments or requests should be sent either by e-mail to: 
moffitt.betty@dol.gov, or by FAX to (202) 219-0204 by the end of the 
scheduled comment period. The applications for exemption and the 
comments received will be available for public inspection in the Public 
Documents Room of the Employee Benefits Security Administration, U.S. 
Department of Labor, Room N-1513, 200 Constitution Avenue, NW., 
Washington, DC 20210.

Notice to Interested Persons

    Notice of the proposed exemptions will be provided to all 
interested persons in the manner agreed upon by the applicant and the 
Department within 15 days of the date of publication in the Federal 
Register. Such notice shall include a copy of the notice of proposed 
exemption as published in the Federal Register and shall inform 
interested persons of their right to comment and to request a hearing 
(where appropriate).

SUPPLEMENTARY INFORMATION: The proposed exemptions were requested in 
applications filed pursuant to section 408(a) of the Act and/or section 
4975(c)(2) of the Code, and in accordance with procedures set forth in 
29 CFR Part 2570, Subpart B (55 FR 32836, 32847, August 10, 1990). 
Effective December 31, 1978, section 102 of Reorganization Plan No. 4 
of 1978, 5 U.S.C. App. 1 (1996), transferred the authority of the 
Secretary of the Treasury to issue exemptions of the type requested to 
the Secretary of Labor. Therefore, these notices of proposed exemption 
are issued solely by the Department.
    The applications contain representations with regard to the 
proposed exemptions which are summarized below. Interested persons are 
referred to the applications on file with the Department for a complete 
statement of the facts and representations.

DEPARTMENT OF LABOR

Employee Benefits Security Administration

[Application No. D-11183]

Notice of Proposed Individual Exemption Involving the Plumbers & 
Pipefitters National Pension Fund (The Fund) Located in Alexandria, VA

Proposed Exemption

    If the proposed exemption is granted, the restrictions of sections 
406(a)(1)(A) through (D) and 406(b)(1) and (b)(2) of the Act and the 
sanctions resulting from the application of section 4975 of the Code, 
by reason of section 4975(c)(1)(A) through (E) of the Code, shall not 
apply, effective June 5, 2001, to the transactions described below 
involving the receipt by Diplomat Properties, Limited Partnership (DPLP 
or the Partnership) of certain services and products from the hotel 
management company, Westin Management Company East (after January 12, 
2006, Westin Hotel Management, L.P.) (referred to collectively with its 
parent company, Starwood Hotels & Resorts Worldwide, Inc., as Starwood) 
and certain related entities (Related Companies), retained to operate 
the Partnership's principal asset, the Westin Diplomat Resort & Spa and 
the Diplomat Country Club and Spa (collectively, the Resort), provided 
that there is adherence to the material facts and representations 
contained in the Application and satisfaction of the applicable 
requirements described in Parts II and III below.

I. Exemption Transactions

    (a) The provision of Centralized Services or Additional Services 
(collectively, the Proposed Services) to the Resort by Starwood or a 
Related Company;
    (b) The purchase of goods from Starwood or a Related Company in 
connection with the provision of Centralized Services or Additional 
Services (Purchase of Goods); and
    (c) The participation of the Resort in the Associate Room Discount 
Program (ARD Program).

II. General Conditions

    (a) LaSalle, CHM or a successor independent QPAM for the 
Partnership, will represent the interests of the Partnership for all 
purposes with respect to the Proposed Services and the Purchase of 
Goods for the duration of the arrangement. The QPAM, on behalf of the 
Partnership, through negotiation and execution of the Operating 
Agreements and periodic monitoring of the Proposed Services and the 
Purchase of Goods, determines that:
    (1) Starwood's provision of Centralized Services and Additional 
Services to the Resort is in the best interests and protective of the 
participants and beneficiaries of the Plumbers & Pipefitters National 
Pension Fund (the Fund).
    (2) The terms under which the provision of Centralized Services and 
Additional Services are provided by Starwood to the Resort are at least 
as favorable to the Resort as those which the Partnership could obtain 
in arm's length transactions with unrelated parties in the relevant 
market;
    (3) The overall cost of services and products charged by Starwood 
to the Resort on a centralized basis is consistent with the amounts 
charged by other potential branded operators; and
    (4) The Centralized Services and Additional Services made available 
by Starwood and its affiliates are provided at prices and on terms at 
least as favorable to the Partnership as are available in the relevant 
market from

[[Page 48769]]

unrelated parties and reflect the same prices and terms as are offered 
by Starwood and its affiliates to other properties managed by Starwood 
and its affiliates in the ordinary course of business.
    (b) Under the Operating Agreements, at all times that the 
Partnership is using Centralized Services and Additional Services, 
Starwood has acknowledged in writing:
    (1) Starwood's fiduciary status under section 3(21)(A) of the Act, 
with respect to the Resort; and
    (2) Starwood's indemnification of the Partnership with respect to 
any claims, demands, actions, penalties, suits and liabilities arising 
from Starwood's breach of fiduciary duty or violation of the Act.
    (c) On an annual basis, the QPAM, on behalf of the Partnership, 
approves the participation of the Resort in Centralized Services and 
Additional Services as part of its approval of the Resort's Annual 
Operating Plan.
    (d) During any year, subject to exceptions for certain Variable 
Expenses or Uncontrollable Expenses, Starwood does not, without the 
approval of the QPAM, incur any cost or expense or make any expenditure 
with respect to Centralized Services or Additional Services that would: 
(i) Cause the total expenditures for any line item in the Annual 
Operating Plan that includes payment of fees for Centralized Service or 
Additional Services to exceed the budgeted expense for that line item 
by more than 10%; (ii) cause total expenditures for any department of 
the Resort that pays fees for Centralized Service or Additional 
Services to exceed the budgeted expenses for that department by more 
than 5%; or (iii) cause the actual aggregate expenditures for operating 
expenses or capital expenditures to exceed the budget by more than 2%.
    (e) All purchases of products and services by Starwood from (i) 
itself, (ii) any person or entity directly or indirectly controlling, 
or controlled by, or under common control with Starwood, or (iii) any 
entity in which Starwood or its affiliates have any ownership, 
investment or management interest or responsibility are first approved 
by the QPAM (as part of the approval of the Annual Operating Plan or 
otherwise), except in cases of purchases of not more than $50,000 per 
annum where the price paid or charged for each such purchase and the 
terms thereof are lower than those that could be obtained from 
unrelated third parties in the applicable location.
    (f) The QPAM approves (as part of the approval of the Annual 
Operating Plan or otherwise) all contracts for Additional Services 
(and, to the extent applicable, Centralized Services) that provide for 
aggregate annual expenditure or revenue of more than $50,000 or have a 
term of more than one year.
    (g) The fees charged to the Resort for Centralized Services can be 
increased only on a system-wide basis (i.e., not just for the Resort).
    (h) The fees for Centralized Services are not greater than the 
lowest of: (i) the fees initially agreed upon by the parties in the 
Operating Agreement; (ii) Starwood's prevailing fee for the services or 
products as generally charged by Starwood or its affiliates to other 
properties managed by it; (iii) Starwood's cost, with no profit or 
mark-up (although it may include overhead); or (iv) 5% of gross 
revenues (exclusive of certain occupancy-related charges, such as 
third-party reservations fees and frequent guest program charges) of 
the hotel or country club, as applicable.
    (i) Starwood does not, with respect to any Centralized Service or 
Additional Service, solicit bids for the product or service in a manner 
that could result in a ``right of first refusal'' or other bidding 
advantage for the benefit of Starwood or its affiliates.
    (j) The QPAM, on behalf of the Partnership, has the right to opt 
out of any Centralized Services and to elect not to receive any 
Additional Services.
    (k) The QPAM, on behalf of the Partnership, retains the right to 
conduct audits of transactions entered into by Starwood with respect to 
Centralized Services and Additional Services, and, in the event that an 
audit uncovers a discrepancy related to any payment to Starwood or its 
affiliates, it must be corrected within ten days of notice being 
provided.
    (l) As part of its monitoring responsibilities, the QPAM, on behalf 
of the Partnership, has the right to meet with representatives of 
Starwood no less frequently than monthly (and otherwise at the request 
of the Partnership) for the purposes of reviewing each Annual Operating 
Plan, preparing, reviewing and updating rolling three-month forecasts 
for the Resort, and analyzing Starwood's actual performance against the 
Annual Operating Plan and the performance of the Resort relative to an 
applicable competitive set of resorts.
    (m) The QPAM, on behalf of the Partnership, retains the right to 
receive monthly interim and annual accounting reports that include a 
comparison of actual to budgeted expenses, and to have such reports 
audited by an independent accounting firm not more than once in any 
fiscal year.

III. ARD Program Conditions

    (a)(1) Rooms are not made available to employees or associates of 
Starwood or a Related Company pursuant to the Associate Room Discount 
Program if the rooms could otherwise be sold to the public at a higher 
rate; and
    (2) In each case, the discounted rates fully cover the variable 
cost to the Resort for the use of the room and the cost to the Resort 
of the food, beverage and amenities.
    (b) Participation in the Associate Room Discount Program is offered 
by Starwood at all of its owned properties and properties that it 
manages.
    (c) The QPAM, acting on behalf of the Partnership, monitors the 
Resort's participation in the Associate Room Discount Program and 
retains the right to opt out of the Associate Room Discount Program.

IV. Definitions

    (a) The term ``Partnership'' means Diplomat Properties, Limited 
Partnership whose principle asset is the Resort. The Plumbers & 
Pipefitters National Pension Fund (the Fund) is the sole member of 
Diplomat Properties, LLC, the General Partner of the Partnership. The 
QPAM is a non-member manager of the General Partner.
    (b) The term ``QPAM'' means LaSalle Investment Management, Inc. 
(LaSalle), Capital Hotel Management, LLC (CHM) or a successor qualified 
professional asset manager (as defined in section V(a) of Prohibited 
Transaction Class Exemption 84-14 at 49 FR 9494, March 13, 1984), as 
amended at 71 FR 5887 (February 3, 2006) or such other entity that is 
permitted by a U.S. Department of Labor individual exemption to 
function with powers similar to that of a qualified professional asset 
manager, that is exercising discretionary authority on behalf of the 
Fund with respect the activities of the Partnership and the Resort.
    (c) 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.
    (d) The term ``control'' means the power to exercise a controlling 
influence over the management or policies of a person other than an 
individual.
    (e) The term ``Related Company'' means wholly or partially owned

[[Page 48770]]

affiliates of Starwood (including, without limitation, affiliates of 
Starwood that are parties in interest by virtue of section 3(14)(G), 
(H) or (I) of the Act or disqualified persons by virtue of sections 
4975(e)(2)(G), (H), or (I) of the Code) or affiliates or other entities 
in which Starwood has an ownership or other contractual interest.
    (f) The term ``Additional Services'' means any service or product 
other than Centralized Services: (1) Which is provided to the Resort by 
Starwood or a Related Company and is typically provided by Starwood or 
a Related Company on a property by property basis to properties 
operated by Starwood or an affiliate; and (2) for which Starwood or a 
Related Company receives a fee for providing such service or product 
that is based on the level of usage by the Resort.
    (g) The term ``Annual Operating Plan'' means the annual written 
operating plan submitted by Starwood to the Partnership no later than 
90 days before the commencement of each fiscal year, which plan shall 
include monthly estimates and cover the operating budget (including 
departmental revenue and expenses, taxes, insurance and reserves), the 
capital budget, the marketing plan, the advertising program, working 
capital requirements, litigation and any other matter reasonably deemed 
appropriate by the QPAM, on behalf of the Partnership.
    (h) The term ``Associate Room Discount Program'' means the program 
maintained by Starwood with the approval of the QPAM pursuant to which 
discounted room rates and discounted food, beverage and other amenities 
at participating hotels are provided for Starwood associates or 
associates of participating Starwood franchise hotels worldwide and 
their immediate family.
    (i) The term ``Centralized Services'' means any service or product, 
including (without limitation) certain advertising, marketing and 
promotional activities (including frequent guest programs), 
reservations and distribution systems and networks, training and 
similar items, provided that: (i) The service or product is provided to 
the Resort by Starwood or a Related Company and is typically provided 
by Starwood or a Related Company on a central, regional, chain or brand 
basis, rather than specifically at an individual property; and (ii) 
Starwood or a Related Company receives a fee for providing the service 
or product that is based on the level of usage by the Resort.
    (j) The term ``Operating Agreements'' means, collectively, the 
parallel operating agreements, executed on June 5, 2001, between 
LaSalle and Starwood, as amended, to brand and operate the Resort's 
convention hotel as the ``Westin Diplomat Resort and Spa,'' and to 
brand and operate the country club as ``The Diplomat Country Club and 
Spa,'' as part of Starwood's Luxury Collection, and any successor 
operating agreements that may be in effect between the parties or 
successor parties from time to time.
    (k) The term ``Variable Expense,'' as set forth in the Operating 
Agreements, means operating expenses covered by the then-current Annual 
Operating Plan that reasonably fluctuate as a direct result of business 
volumes, including food and beverage expenses, other merchandise 
expenses, operating supply expenses, and energy costs.
    (l) The term ``Uncontrollable Expenses,'' as set forth in the 
Operating Agreements, means certain expenses the amount of which cannot 
be controlled by Starwood, which expenses include, without limitation, 
real estate taxes, utilities, insurance premiums, license and permit 
fees and charges provided in contracts entered into pursuant to the 
Operating Agreement, provided, that Starwood agrees to use commercially 
reasonable efforts to mitigate the expenses under such contracts; and 
the QPAM, on behalf of the Partnership, agrees that Starwood shall have 
the right to pay all Uncontrollable Expenses without reference to the 
amounts provided for in respect thereof in the approved Annual 
Operating Plan.

Summary of Facts and Representations

    1. The Application for this proposed exemption is submitted by 
LaSalle Investment Management, Inc. (LaSalle), as qualified 
professional asset manager (QPAM) for, and on behalf of, the Plumbers & 
Pipefitters National Pension Fund (the Fund). By letter dated April 30, 
2006 (LaSalle Letter), LaSalle informed the Department that as of April 
30, 2006, LaSalle was replaced by Capital Hotel Management, LLC (CHM) 
as the QPAM for the Fund.\1\ The Fund is a Taft-Hartley, multi-
employer, defined benefit pension fund, as defined in section 3(37) of 
ERISA. The Fund is funded solely by employer contributions negotiated 
under collective bargaining agreements with the United Association of 
Journeymen and Apprentices of the Plumbing and Pipe Fitting Industry of 
the United States and Canada, AFL-CIO (the Union). The Fund is 
administered by the Board of Trustees of the Fund (the Board), which 
has six individual members, three of whom are appointed by employers 
who contribute to the Fund, and three of whom are appointed by the 
Union. By letter dated July 14, 2006 from CHM to the Department (CHM 
Letter), CHM stated that as of July 1, 2005, the Fund had 66,513 active 
participants, 17,697 terminated vested participants and 37,062 retirees 
and beneficiaries in pay status. As of July 1, 2006, the Fund had 
approximately $4.295 billion in total assets.
---------------------------------------------------------------------------

    \1\ See below for information on the April 30, 2006 appointment 
of CHM as QPAM for the Fund.
---------------------------------------------------------------------------

    2. The Application states that on August 19, 1997, the Union 
entered into a contract to acquire the Resort and related property from 
an unaffiliated third party (a wholly owned subsidiary of Union Labor 
Life Insurance Company). In late September 1997, the Union caused the 
Partnership and its general partner, Diplomat Properties, Inc. (the 
General Partner), to be organized, with the Union as the initial sole 
limited partner of the Partnership and the sole owner of Diplomat 
Properties, Inc. The Partnership was assigned the right to acquire the 
Resort and arranged to borrow $40 million from a third-party lender to 
fund the acquisition of the Resort and such related property. On 
October 7, 1997, the Union assigned its interests in both the 
Partnership and its General Partner to the Fund, in exchange for the 
Fund's agreement to make a capital contribution to the Partnership of 
$40 million plus certain costs incurred by the Union in connection with 
the acquisition of the Resort and related property. On October 9, 1997, 
the Partnership acquired the Resort from the third party seller for a 
purchase price of approximately $40 million (plus reimbursement of 
certain expenses to the Union); it thereupon repaid the loan from the 
third party lender. As a result, the Fund became the indirect owner of 
the Resort. The LaSalle Letter noted that ``the Fund paid off the $40 
million bank loan. That $40 million paid by the Fund was treated as a 
capital contribution by the Fund to the Partnership.''
    The Fund applied for an exemption from the prohibited transaction 
provisions of ERISA and the Code, on October 3, 1997 for the 
acquisition of the Resort. On November 15, 1999, the Department granted 
PTE 99-46, at 64 FR 61944, which provided conditional relief for the 
Fund's acquisition of the Resort from the Union. Additional 
undertakings agreed to by the Fund, pursuant to an October 13, 1999 
Term Sheet, were incorporated by reference into PTE 99-46. The Fund 
agreed to the appointment of Actuarial Sciences Associates (ASA) as the 
independent named fiduciary of the Fund's account that holds the 
interests in the Partnership, the General Partner and

[[Page 48771]]

other assets of the Fund invested in, or awaiting investment in, the 
Resort (the Diplomat Account). ASA's responsibilities were subsequently 
assumed, with the Department's approval, by its wholly owned 
subsidiary, ASA Fiduciary Counselors, Inc. (ASA Counselors). ASA 
Counselors resigned its appointment, effective as of November 3, 2000.
    On September 12, 2000, the Board and Independent Fiduciary 
Services, Inc. (IFS) entered into an Independent Named Fiduciary 
Agreement (the IFS Agreement), the terms of which were reviewed and 
approved by the Department prior to its execution, pursuant to which 
IFS was appointed, effective as of November 3, 2000, as the successor 
independent named fiduciary of the Fund with respect to the Diplomat 
Account. A more complete description of the general background and 
history of the development of the Resort is set forth in the 
Department's grant of PTE 2001-39 at 66 FR 53439, October 22, 2001 (PTE 
2001-39), providing relief to IFS which is similar to the relief 
provided under Prohibited Transaction Class Exemption 84-14 at 49 FR 
9494, March 13, 1984 (PTE 84-14).
    3. In September 2002, the Department filed a lawsuit entitled Chao 
v. Maddaloni, et al., Case No. 02-61289, in the United States District 
Court for the Southern District of Florida, in which the Partnership 
and the Fund trustees were named as defendants. The relevant facts are 
set forth in the Complaint filed in such action by the Department 
alleging that the trustees failed to prudently manage and invest the 
Fund's assets through their involvement in the Resort project. The suit 
arose from the Fund's acquisition and development of the Resort 
project, beginning in 1997. The Secretary alleged that the trustees 
acted imprudently and without regard to the Fund participants' 
interests in entering into, and continuing the project, specifically by 
failing to obtain, prior to the expenditure of Fund assets, necessary 
analyses for the evaluation of the economic feasibility of the project, 
failing to determine the Fund's rate of return, or risk, on the 
investment, failing to evaluate the qualifications and experience of 
various contractors with whom they entrusted discretionary authority 
with respect to the disposition of Fund assets, and paying excessive 
and unreasonable fees and expenses to the contractors. In August 2004, 
the parties signed a final Consent Order resolving the claims contained 
in this action.\2\ Prior to the Fund's retention of IFS, the Department 
notified the Partnership that it had begun an investigation of the use 
of the Fund's assets in the development of the Resort.\3\
---------------------------------------------------------------------------

    \2\ The Application states that LaSalle has been informed that 
the Fund is the successor to the former Sabine Area Pipefitters 
Local No. 195 Pension Trust Fund, which was involved in the 
correction of a 1988 prohibited transaction that had occurred before 
the former Local 195 Pension Fund merged into the Fund in 1990. IFS 
has further been informed that the correction of the prohibited 
transaction did not involve any assets of the Fund except to the 
extent that the Local 195 Joint Apprenticeship Committee was 
assessed first tier excise taxes under section 4975 of the Code for 
its use of assets of the former Local 195 Pension Fund.
    \3\ Although the Department has requested documents relating to 
various aspects of the Resort's development and operation, LaSalle 
states that it is unaware of any investigation or enforcement action 
that is targeted at the retention of Starwood or its provision of 
services and/or products to the Resort.
---------------------------------------------------------------------------

    4. The Applicant represents that, pursuant to IFS's authority as 
independent named fiduciary, and after an extensive due diligence 
process, which involved issuing a comprehensive request for proposal to 
numerous major real estate investment managers and personal interviews 
with several finalist candidates, IFS appointed LaSalle, effective 
December 14, 2000, pursuant to a comprehensive discretionary investment 
management agreement (the QPAM Agreement), to serve as the QPAM for the 
Diplomat Account, with broad discretionary powers to manage the 
Diplomat Account.
    The Application notes that LaSalle, a member of the Jones Lang 
LaSalle group (JLL), is a leading global real estate investment manager 
with approximately $21.5 billion of public and direct real estate 
assets under management. LaSalle represents many of the world's largest 
and most sophisticated institutional investors, has expertise in the 
management of all major real property types (including hotels) and 
frequently acts as an ERISA fiduciary and QPAM for its clients. Various 
divisions of JLL have assisted (and will continue to assist) LaSalle in 
connection with the Resort, subject to LaSalle's supervisory authority. 
Since its appointment, LaSalle has become integrally involved in all 
aspects of the Diplomat Account, and has made all of the business, 
operational and fiduciary decisions for the Diplomat Account, pursuant 
to the QPAM Agreement (subject to the oversight or approval of IFS, as 
appropriate). The fees of IFS are paid by the Fund; the fees of LaSalle 
are paid by the Partnership.
    In April 2003, Diplomat Properties, Inc. was converted to its 
present form, a limited liability company, and it is now known as 
Diplomat Properties, LLC (DPLLC). The Fund is the sole member of DPLLC, 
and both IFS and LaSalle are non-member managers of DPLLC. DPLLC 
remains the General Partner of the Partnership (DPLP).
    5. The Resort, located in the cities of Hollywood and Hallandale 
Beach, Florida, was initially constructed in the late 1950s and 
consisted of several parcels. The original Diplomat Hotel operated as a 
premier hotel and country club catering to the middle-income convention 
trade, but has been closed since 1992. Since their appointment, IFS and 
LaSalle have overseen the continuing development and initial operation 
of the Resort, including the construction, development and opening of a 
destination resort with multiple operating components, including a 998-
room ocean-front convention hotel with multiple food and beverage 
outlets and recreational facilities, a 217,000 square-foot convention 
center, two marinas, a country club (with 60 guest rooms, approximately 
8,000 square feet of meeting space, and a clubhouse), a 30,000 square-
foot spa, an 18-hole golf course and a tennis center.
    6. The Application states that the process of selecting a third-
party operator for the Resort formally commenced on or about April 1, 
2000, at which time Hotel Investment Partners (HIP), a hotel consulting 
firm selected by ASA, sent a request for proposal to potential 
operators. Upon its retention in December 2000, LaSalle reviewed the 
documentation collected in connection with HIP's initial search for an 
operator. LaSalle determined that it should conduct further analyses 
and reach its own conclusions regarding the appropriate operator for 
the Resort because, among other things, it found, as had IFS, that the 
initial process was not sufficiently organized or documented. During 
the first few months of 2001, IFS and LaSalle spent a significant 
amount of time and effort conducting due diligence and a competitive 
bidding process for the selection of a world-class branded hotel 
operator for the Resort.
    LaSalle performed a comprehensive review of the relevant issues, 
with the assistance of its affiliate, Jones Lang LaSalle Hotels (JLL 
Hotels) (a hotel advisory group staffed by lodging industry 
professionals experienced in hotel operations, hotel asset management 
and hotel transactions, including financing), and in coordination with 
IFS and its consultant, Strategic Hospitality Advisors (a hospitality 
consultant that regularly advises institutional clients on

[[Page 48772]]

the investment characteristics of hotel and resort properties, 
including feasibility, acquisition, planning, design, construction, 
operation and disposition of hotels and resorts) (SHA). Based on such 
review, LaSalle concluded that the retention of a third-party operator 
for the Resort was an important component to securing any necessary 
financing and ensuring that the Fund's investment in the Project will 
be managed in a profitable and professional manner. LaSalle further 
concluded that the Partnership should consider retaining a major 
operating company that has a significant internal infrastructure and 
global marketing resources.
    The Application notes that, in light of these conclusions, LaSalle 
then distributed a second, very detailed request for proposal to ten 
hotel operating companies, which companies then competed for the right 
to manage the Resort. The selected candidates included many of the 
larger international hotel operating companies, including several 
brands. After a detailed analysis of each candidate's written response 
to the request for proposal and a comprehensive analysis of the 
performance of the candidates' comparable properties, LaSalle concluded 
that, given the Resort's size, location and recent history, the 
selected operator should have a strong brand, including a marketing 
program, a group sales network and global distribution and reservations 
systems, in order to maximize revenues throughout the year in an area 
of the country (south Florida) primarily known as a seasonal 
destination.
    This conclusion was based in part on the fact that, while there are 
large-scale independent resort hotels in south Florida that operate 
successfully without the benefit of an operator's brand, those resorts 
are located in the more primary, upscale destinations of Boca Raton, 
Palm Beach and Miami and, in most instances, are established hotels 
that have been operating for many years. In addition, outside the key 
destination markets, such as Orlando, New York, Los Angeles and 
Chicago, there are, according to JLL Hotels, only eight independent 
hotels with over 800 rooms. In fact, LaSalle observed that all recently 
opened hotels over 1,000 rooms have been affiliated with a branded 
``chain.''
    Through a rigorous interview process, coupled with a detailed 
analysis of each candidate's written response to the request for 
proposal and a comprehensive analysis of the performance of the 
candidates' comparable properties, the original field of ten was then 
narrowed to three major operators--Starwood, Marriott International and 
Hyatt. Further interviews and negotiations with each of these three 
operator candidates, including an on-site review of the Resort by each 
company and a review of their comments to a proposed operating 
agreement, resulted in the selection of Starwood and Marriott 
International as finalists for negotiation. Following meetings with 
each of these companies and their counsel to review their comments on 
the proposed operating agreement, LaSalle selected Starwood, through 
its operating subsidiary, Westin Management Company East (effective as 
of January 12, 2006, Westin Management Company East assigned its 
interest in the Operating Agreements (described below) to Westin Hotel 
Management, L.P., a wholly-owned subsidiary of Starwood Hotels & 
Resorts Worldwide, Inc.) (Westin), as the candidate of first choice.
    Starwood is one of the world's preeminent international hotel 
owners and operators (with brands including St. Regis, W Hotels, Westin 
and Sheraton). Among other items considered by LaSalle in selecting 
Starwood was LaSalle's conclusion that the overall cost of services and 
products offered by Starwood on a centralized basis was consistent with 
the amounts charged by other potential operators.
    7. The Application represents that following extensive negotiations 
with Starwood, on June 5, 2001, LaSalle, on behalf of the Partnership 
(Owner), and Starwood (Operator) signed parallel operating agreements 
(collectively, the Operating Agreements) to brand and operate the 
Resort's convention hotel and spa as the ``Westin Diplomat Resort and 
Spa'' and to brand and operate the country club as ``The Diplomat 
Country Club and Spa,'' as part of Starwood's Luxury Collection. In the 
Operating Agreements, Starwood specifically acknowledged, represented 
and warranted that it is a ``fiduciary,'' as defined in section 
3(21)(A) of ERISA, with respect to the Resort and all assets of the 
Fund subject to the Operating Agreements, and that it is not subject to 
any of the disqualifications described in section 411 of ERISA.
    The Applicant asserts that the 15-year term of each of the 
Operating Agreements evidences Starwood's significant, long-term 
business and financial commitment to the Resort. The Operating 
Agreements required Starwood to provide up to $4 million to pay for 
various pre-opening expenses. The Application states that Starwood also 
agreed to provide loans to the Resort (without recourse to the general 
assets of the Fund, other than the Diplomat Account) to fund, among 
other things and subject to certain conditions, up to $11.75 million in 
operating cash flow shortfalls at any given time and up to $50 million 
for debt service shortfalls at any given time.
    8. The Application states that Starwood, like other national or 
international branded hotel operating companies, provides many of its 
services and products through itself or through wholly or partially 
owned affiliates (including, without limitation, the Starwood ERISA 
Affiliates \4\ or other entities in which Starwood has an ownership 
interest (all such affiliates or other entities referred to herein as 
the Related Companies).\5\ Many of these services and products, such as 
certain advertising, marketing and promotional activities (including 
frequent guest programs), reservations and distribution systems and 
networks, training and the like, are typically provided on a central, 
regional, ``chain'' or ``brand'' basis, rather than specifically at a 
property (such services and products referred to herein as Centralized 
Services). Other

[[Page 48773]]

services or products (the Additional Services) are provided by Starwood 
or Related Companies on a property by property basis to properties 
operated by Starwood.\6\ Starwood has informed LaSalle that, where that 
is the case, these Additional Services are offered to properties owned 
and operated by Starwood, as well as to properties operated, but not 
owned, by Starwood (such as the Resort); in each case on the same 
basis.
---------------------------------------------------------------------------

    \4\ The parties in interest are Starwood Hotels & Resorts 
Worldwide, Inc., its wholly owned subsidiary, Westin Management 
Company East, and certain related entities that, because of their 
relationship with Starwood, are parties in interest by virtue of 
sections 3(14) (G), (H) or (I) of ERISA or disqualified persons by 
virtue of sections 4975(e) (2) (G), (H), or (I) of the Code 
(Starwood ERISA Affiliates).
    \5\ The Application notes that Starwood has disclosed to the 
Fund that its corporate and operating structure includes divisions 
or departments within Starwood or its operating subsidiary Westin 
Management Company East and a variety of affiliates that regularly 
deal with Starwood's network or ``chain'' of branded properties to 
provide both ``centralized'' services and products and regular, 
property-specific services and sources of supply. As operator of the 
components of the Resort, Starwood has presented an operating plan 
that will include obtaining certain products and/or services for the 
Resort (including the Centralized Services and Additional Services 
defined below) from Starwood, its affiliates and other Related 
Companies, subject to all the restrictions in the applicable 
Operating Agreement.
    In the LaSalle Letter, LaSalle further explained that the 
Applicant is requesting an exemption in order to permit Starwood to 
contract on behalf of the Applicant with any entity in which 
Starwood has an interest which arguably might affect its independent 
judgment. Because of the many and diverse entities in which Starwood 
from time to time has an economic interest and which are included in 
its operating programs, it is not feasible to break down the various 
types of relationships or to speculate how large an economic 
interest would have to be to create a prohibited transaction. 
Therefore, in order to cover all parties in which Starwood has an 
interest that might arguably affect its judgment, Starwood includes 
all entities in which it has an investment, even if the investment 
is very minor, as ``Related Companies.'' The references to ``ERISA 
Affiliates'' and ``subsidiaries'' are descriptive only and not 
meaningful to the Applicant because they are included in the larger 
group of ``Related Companies'' for which relief is requested.
    \6\ Starwood subsidiaries that may be involved in the provision 
of the Centralized Services and Additional Services to the Resort 
include the following: Galaxy Hotel Systems LLC; Westel Insurance 
Company; Westin Payroll Company; Westin Management Company East; 
Global Connextions, Inc.; and Starwood Reservations Corporation. 
LaSalle notes that, as used in the Application, the term 
``subsidiary'' refers to entities that are majority owned by 
Starwood; however, this distinction is not meaningful because the 
Application covers transactions with all Related Companies, which is 
a broader term that encompasses minority subsidiaries.
---------------------------------------------------------------------------

    The Application provides the following list of entities in which 
Starwood owns a minor equity interest and with which the Resort may 
enter into arrangements for products or services: LastMinute.com--On-
line provider of last-minute travel and entertainment packages.
    Plansoft Corporation--On-line meeting planning company that 
provides meeting planning and technology and services including the 
listing of basic meeting information on Starwood hotels.
    Brightware--Software licensor of e-mail automation and interactive 
one-to-one marketing solutions.
    Worldres--On-line Internet reservation network service provider for 
hotels and other lodging establishments that allows end-users to check 
availability and make real-time reservations.
    Big Vine--On-line business-to-business barter marketplace.
    Site 59.com Inc.--On-line provider of last-minute travel and 
entertainment packages.
    Classwave Wireless Inc.--Canadian company with a global strategy to 
transform the delivery of data to and from mobile devices.
    StarCite Inc.--On-line meeting planning company that provides 
meeting planning and technology and services including the listing of 
basic meeting information on Starwood hotels.
    Hotel Distribution Systems LLC--Joint venture to create a stable, 
low cost, high quality online distribution outlet for the services and 
products of its members currently consisting of Starwood, Hilton Hotels 
Corporation, Marriott International Hotels, Inc. Six Continents Hotels, 
Inc. and Pegasus Solutions, Inc.
    The Application notes that although the foregoing identifies the 
types of arrangements that Starwood currently expects to enter into 
with itself and Related Companies with respect to the Resort, it is 
possible that, due to changing business needs, other arrangements with 
these or other Related Companies will be consummated subject to the 
terms of the Operating Agreements.
    9. The Applicant states that the primary services and products 
provided by Starwood and its affiliates are classified as Centralized 
Services. In some cases, the products provided by Starwood and its 
affiliates (with respect to both Centralized Services and Additional 
Services) are incidental to the services it provides; in others they 
are not. Centralized Services, and the fee structure applicable 
thereto, were set forth in the Operating Agreements negotiated and 
executed by LaSalle for the Resort and were, therefore, approved by a 
QPAM. Changes to services and products or fees are presented to and 
approved, if applicable, by LaSalle in connection with the annual 
budget process (as described below). In addition, the amount of fees 
for Centralized Services is limited as described above to, among other 
limitations, the cost incurred by Starwood and its affiliates with no 
mark-up or profit. The Application provides a description of the 
Additional Services, Centralized Services and fees proposed in 
connection with the Operating Agreements.\7\ The Partnership (through 
LaSalle) has the right to opt out of any Centralized Service.
---------------------------------------------------------------------------

    \7\ The Fund notes that due to the ever changing nature of the 
hospitality business, it is anticipated that services and products 
(whether Centralized Services or Additional Services) may be added, 
discontinued or modified from time to time in the future, subject to 
the limitations and LaSalle's rights to approve any such changes as 
described in the Operating Agreements.
---------------------------------------------------------------------------

    The Applicant provides that Centralized Services for which fees are 
payable to Starwood and affiliates include the following major 
components:
    Reservations Services, for which there are fees based on gross room 
revenue and per room charges, plus additional fees for specialized 
services.
    Frequency Programs, which are the preferred guest programs and 
airline programs used to increase loyalty to the Starwood brands. Fees 
are a percentage of qualified charges \8\ plus usage fees for training, 
program materials, program audits, bonus points and customer service.
---------------------------------------------------------------------------

    \8\ In the LaSalle Letter, LaSalle explained that ``qualified 
charges'' are charges on the guest's room account based on the U.S. 
dollars or equivalent spent on eligible room rate, food and 
beverage, direct dialed telephone, laundry/valet, and in-room movies 
only. Qualified charges also include food and beverage charges of 
US$10 or more in participating Starwood dining outlets, even if the 
guest is not a registered guest. Other charges such as parking, 
business center, retail stores, greens fees, etc., as well as taxes, 
gratuities, service charges and other applicable charges, such as 
energy charges, resort fees, etc, are not qualified charges. Banquet 
or meeting room charges billed back to a member's room are not 
qualified charges. Amounts earned or accrued for charges master-
billed or paid by wholesale rates including WFNR, and all other 
rates from pre-paid channels, such as but not limited to, 
priceline.com, expedia.com, hotels.com, hrn.com, hotwire.com, 
lastminute.com, site59.com, etc. tour or tour operator or other 
vouchers or for certain other discounted rates including, without 
limit, airline vouchers or for certain other discounted rates are 
also not qualified charges. Charges from tour operator rates; 
wholesaler rates; stays longer than 30 days, Free Night Awards, TAED 
rates; room rates billed to master account, crew room rates, and 
employee rates are not qualified charges.
---------------------------------------------------------------------------

    Sales and Marketing Services, for which there is a fee based on 
gross revenues plus certain specified transaction based fees.
    Human Resources, which provides administration of employee benefits 
and payroll for the Resort for a per capita and per check fee 
respectively.
    Information Technology, which includes the Integrated Property 
System, which is the standard and mandated property management system 
for all Starwood hotels and resorts; the Starwood SAP Accounting 
System; Technology Management Services; Revenue Management Services, 
and Network Services. Oracle has been selected as Starwood's database 
for all future systems, including StarwoodONE, the Starwood company 
portal. In order to use StarwoodONE (and any of the following systems: 
Opera PMS, Starwood Customer Relationship Marketing System, Topline 
Prophet, and Rate Shopper), the Resort must participate in the Starwood 
Enterprise Oracle License Program, either through a purchase of the 
right to use the licenses or payment of an annual user fee.
    The Application notes that, in addition, it will become mandatory 
over the next few years for all Starwood hotels to offer high-speed 
Internet services in accordance with Starwood's Broadband Standards. 
Broadband refers to the technology infrastructure that delivers large 
amounts of data, voice and video over a network. There are two 
components to the Broadband Standards--the Guest Portal Standards and 
the Broadband Technology Standards. The Starwood Broadband

[[Page 48774]]

Guest Portal is the customer access point to the Internet and is a 
mandatory Westin standard requiring the payment of fees to Starwood 
based on estimates by Starwood of its costs and expenses. The costs and 
expenses are tracked by Starwood and the fees are adjusted up or down 
as appropriate. The Broadband Technology Standard can be met by the 
property by using the Starwood Broadband Solution or another solution 
that meets required standards.
    Internal Audit Services, with fees based on the size of the hotel.
    Six Sigma, which applies training and other tools to improve 
business processes in order to increase revenue and decrease costs.
    Reimbursable Expenses. The Application states that, on an as needed 
basis, properties pay directly or reimburse Starwood and its 
affiliates, for specified charges and fees, which may include, without 
limitation, rooms programs and services, food and beverage programs and 
services, travel expenses of supervisors, website design and 
consulting, training courses, brand audits, central accounting, 
treasury services, property directories and other brand collateral, and 
payments made to third parties for items such as surveys, employee 
handbooks and similar publications, property photography, internet 
booking services, printing and distribution of manuals and similar 
publications, and the costs incurred by Resort personnel in attending 
management seminars and conferences organized by the corporate 
divisions of Starwood and its affiliates.
    The Application represents that, in some cases, Centralized 
Services are provided in exchange for a fee that cannot be affected by 
Starwood's exercise of discretion. For example, the fee for certain 
Centralized Services is based on the number of rooms at the Resort. 
However, there are other Centralized Services with respect to which 
Starwood or a Related Company receives a fee for providing the service 
or product that is based on the level of usage by the Resort where 
Starwood can, through the exercise of its discretion as operator of the 
Resort, affect the level of usage by the Resort of the product or 
service. For example, one Centralized Service involves SPG Bonus 
Points, pursuant to which Starwood, through the General Manager of a 
particular hotel, can attempt to increase business during slow periods 
by running a promotion that increases the frequent guest award for 
stays at that hotel. The cost of the promotion, which is 1.25 cents for 
each bonus point awarded, is paid to a fund maintained by Starwood and 
used to pay the cost of the program, which includes the overhead cost.
    Another example of this situation involves training courses 
provided by Starwood on a centralized basis. For example, Starwood 
offers at the regional level an ``ABCs of Housekeeping'' training 
course. A fee, based on the cost of the program (including overhead), 
is paid to Starwood and is based on the number of persons who attend. 
Since this course is mandatory for all housekeeping staff, Starwood can 
theoretically affect the level of its fee for this program by hiring 
more housekeeping staff. There are other training courses, such as 
arrival training, that are not mandatory for all of the staff of a 
department. This gives Starwood, through the hotel's General Manager, 
the discretion as to which hotel employees receive arrival training 
and, therefore, the level of fees it receives.
    10. The Applicant represents that in addition to the Centralized 
Services involving Starwood and Related Companies, the Resort may also 
acquire Additional Services (i.e., arrangements for products or 
services) with entities in which Starwood has made an investment, but 
which are not controlled by Starwood. These Additional Services are 
being provided by entities connected to Starwood. One example of the 
Additional Services is insurance. LaSalle has decided to obtain general 
liability, automotive liability, employment practices liability 
insurance, automobile physical damage and umbrella/excess liability 
coverage through the Starwood Risk Management Program. Starwood 
provides this coverage to its owned hotels and makes it available to 
managed hotels on an optional basis for all or only selected coverage. 
(There is an exception for workers' compensation insurance, which must 
be provided through Starwood because Starwood is the employer of the 
employees who operate the Resort.) The Resort will receive first dollar 
protection (with no deductibles) with respect to this coverage with the 
exception of automobile physical damage coverage, which has a small 
deductible, and employment practices liability insurance, which has a 
$100,000 deductible for the Resort vs. a $250,000 deductible for the 
policy purchased by Starwood. To fund this coverage, Starwood purchases 
high deductible insurance and funds projected losses and related 
administrative costs through its subsidiary Westel Insurance Company, 
with premiums to Westel allocated to participating hotels on a cost 
recovery basis. The potential underwriting surplus is retained or the 
potential deficit is absorbed by Westel. LaSalle believes that the cost 
of insurance purchased in this manner is more attractive to the 
Partnership than if it purchased comparable insurance through an 
unrelated party.
    11. The Application notes that another program Starwood typically 
implements at hotels it manages is the Associate Room Discount Program 
(ARD Program) that provides discounted room rates and discounted food, 
beverage and other amenities (to be determined in advance with 
LaSalle's approval) at participating hotels, including the Resort, for 
Starwood associates (including employees of Starwood and their 
immediate families) or associates of participating Starwood franchise 
hotels worldwide and their immediate families. Starwood associates are 
all regular full time and part time employees who have been employed by 
Starwood entities or participating Starwood franchise hotel employers 
for more than 90 days. The ARD Program is offered to all of the 
properties that Starwood owns, manages or has an interest in. All 
hotels owned or managed by Starwood participate in the Associate Room 
Discount Program. Most hotels franchised by Starwood also participate 
in the Program.
    The Applicant states that under the ARD Program, the Resort's 
management would have control over the number of rooms rented at the 
discounted rate on any given night based on occupancy levels at the 
Resort (and where this would not cause higher rate business to be 
displaced). The discounted rates under this program fully cover the 
variable cost to the hotel for the use of the room and the cost to the 
hotel of the food, beverage and amenities. In return for its 
participation in this program and its offering discounted rates, the 
Resort enjoys a substantial benefit in that employees of the Resort are 
entitled to discount rates at other hotels participating in the 
program. The Application asserts that this allows the Resort to provide 
its employees with a valuable employee benefit that is low in cost 
relative to the value it provides (particularly because it is available 
only when rooms could not otherwise be sold at a higher rate). In 
addition, since this arrangement is typically offered by Starwood and 
all other international branded operators, refraining from offering 
this benefit to its employees would place the Resort in a distinct 
hiring disadvantage vis-[agrave]-vis other competing hotels. Further, 
to the extent that an individual taking advantage of the ARD Program 
spends money on food, beverage and incidentals, he or

[[Page 48775]]

she will bring additional revenues to the Resort.
    The LaSalle Letter noted that there is not a specific document 
executed by the Partnership describing the ARD Program that LaSalle, on 
behalf of the Partnership, has agreed to or signed. However, LaSalle 
provided to the Department a March 17, 2004 Starwood Corporate/
Divisional HR Policies and Procedures document on ``Hot Rates,'' 
Starwood's Associate Room Discount policy. LaSalle, on behalf of the 
Partnership, and Starwood entered into the Operating Agreements. In 
these agreements, Starwood has the authority to determine employment 
practices, (including wages, hiring, discipline, and discharge), and 
similarly has the authority to participate in ``Centralized Services,'' 
or those programs that Starwood performs as Operator at all other 
hotels managed by Operator. Although LaSalle did not specifically 
negotiate the terms of the ARD Program, it approved of the 
participation in the ARD Program as part of a more global approval of 
the terms on which Starwood was retained. LaSalle elected not to opt 
out of the ARD Program because it concluded that the program was 
standard industry practice and that the Resort would enjoy a 
substantial benefit from the program. In addition, from time to time, 
LaSalle conducts operational audits, the most recent of which was March 
31, 2005, to ensure that Starwood is complying with its procedures.\9\ 
Although the scope of these operational audits varies from audit to 
audit, a review of Starwood's compliance with the ARD Program has been 
the subject of some prior audits.
---------------------------------------------------------------------------

    \9\ See 13.(c) below for more information on the latest 
operational audit conducted by LaSalle.
---------------------------------------------------------------------------

    In the LaSalle Letter, LaSalle stated that it would be overly 
burdensome to cross-reference the very long list of Fund participants, 
Trustees and contributing employers against the very long list of 
participants in the ARD Program. However, LaSalle confirms that no 
participant, Trustee or contributing employer of the Fund could be a 
participant in the Associate Room Discount Program by virtue of that 
status. Rather, such an individual would only be a participant in the 
Program if he or she were an employee of a Starwood entity or a 
participating franchise hotel (in accordance with the eligibility 
criteria described above).
    12. Section 5.01 of the Operating Agreements requires that: With 
respect to its decisions concerning the operation of the [Resort], the 
Operator shall at all times act in good faith and in the best interests 
of the Owner, using all commercially reasonable efforts to maximize the 
profits from operation of the [Resort] for [the Partnership], subject 
to the terms and conditions of this Agreement.
    The Applicant represents that consistent with this requirement, 
Starwood has indicated that as a major owner of hotels, its primary 
objective in establishing Centralized Services and Additional Services 
is to deliver value to all hotel properties it represents. LaSalle 
believes that it is through the aggregation of these properties, the 
implementation of demonstrated practices and its hospitality industry 
expertise that Starwood is able to provide services and products that 
will result in improved operating performance beyond that which can be 
provided by an operator of a single hotel or smaller group of hotels. 
LaSalle believes that (a) by centralizing this sourcing function, 
Starwood is also able to capture economies of scale designed to reduce 
the cost of the procurement function in the Resort and (b) 
participation in these programs by the Resort should result in 
increased efficiencies and lower operating costs.
    In this regard, LaSalle states that there is objective industry 
data indicating that chain hotels are better performers than 
independent hotels in terms of both average daily rate and occupancy. 
While there is data comparing chain and independent hotels on an 
overall performance basis, there are no specific benchmarks that allow 
for a comparison of specific services. Accordingly, at the time it 
retained Starwood on behalf of the Partnership, LaSalle considered the 
generally accepted principle in the hospitality industry that such 
services can be aggregated and delivered more effectively and 
efficiently on behalf of a chain of hotels rather than individual 
hotels. In so doing, it relied on various sources of industry data 
bearing upon this issue. By way of example, LaSalle provided to the 
Department an example of one data compilation, prepared by Smith Travel 
Research, on which LaSalle relied when it decided to retain a chain 
hotel that provides Centralized Services, rather than an independent 
hotel that does not. In addition, LaSalle notes that there are several 
services provided by a chain such as Starwood that could not be easily 
replicated by an individual property, such as a frequent traveler 
program, reservation center, and similar services. No benchmark would 
exist that compares the services of chain and independent hotels in 
that regard because the independent hotels do not provide the service 
at all.
    LaSalle has concluded that the Centralized Services and Additional 
Services are likely to result in improved operating performance that is 
both monetary and non-monetary. Starwood has represented to LaSalle 
that utilizing these services and products will result in cost savings 
through aggregation of Starwood's purchasing and organizational power, 
and, as more fully described below, the Operating Agreements include 
specific provisions to assure that the Resort will benefit from such 
arrangements. LaSalle also shares Starwood's belief that value will be 
achieved through enhancements in quality and service resulting from the 
economies of scale and joint participation in such arrangements with 
Starwood's branded hotels. In attempting to select the right supplier 
for the hotels it operates, Starwood considers a variety of other 
factors, such as financial, operational (including availability of 
supplies), health and safety issues, and LaSalle ultimately expects 
that Starwood's services and purchasing program will maximize the value 
of the properties.
    13. The Application states that as of January 2003, Starwood's 
portfolio consisted of over 750 properties owned, managed or franchised 
by Starwood in 80 countries. By aggregating certain service and other 
activities described above, Starwood believes that it obtains a 
substantial net cost savings for owners (including itself) of 
properties it manages. Nevertheless, recognizing the Partnership's 
unique status as an ERISA plan asset, the Applicant asserts that 
Starwood has agreed to significant conditions and that the Operating 
Agreements include stringent limitations on Starwood's ability to enter 
into transactions and arrangements concerning the Resort. The 
Application provides the following examples.\10\
---------------------------------------------------------------------------

    \10\ The Partnership and Starwood have entered into two 
Operating Agreements, one covering the country club and spa and one 
covering the hotel and convention center. The Application notes that 
although it references specific terms and conditions related to the 
Resort in general, these terms and conditions are included in each 
of the two Operating Agreements.
---------------------------------------------------------------------------

(a) Limitations on Transactions and Arrangements

    In order to ensure that Starwood treats the Resort at least as well 
as the other properties it manages (and to make it more likely that the 
Resort will be operated in accordance with customary industry 
standards), the Operating Agreements provide that the general operating 
policies applied to the Resort must (in all material respects) be at 
prices and on terms and conditions no less favorable to the Resort (in 
terms of

[[Page 48776]]

increasing gross revenues and decreasing gross operating expenses) than 
the general operating policies applied by Starwood and/or its 
affiliates to the other properties managed by Starwood and/or its 
affiliates. Additionally, Starwood is required by the Operating 
Agreements to act in the best interests of the Partnership and to use 
all commercially reasonable efforts to maximize its profits from the 
Resort.
    There are limitations on Starwood's ability to enter into 
contracts. Specifically, any contracts, leases, licenses and concession 
agreements (other than collective bargaining agreements or terminable 
group sales contracts) providing for an aggregate annual expenditure or 
revenue that exceeds $50,000 for the Resort, or with a term in excess 
of one year for contracts,
    (i) require the Partnership's prior approval (through LaSalle), 
whether as part of the Annual Operating Plan or otherwise; and
    (ii) must be subject to the competitive bidding procedures included 
in the Operating Agreement. Similarly, any single purchase providing 
for the purchase of products and services that requires an expenditure 
that exceeds $50,000 requires