Exemption for Associated General Contractors of America, San Diego Chapter, Inc. Apprenticeship and Training Fund, Located in San Diego, CA, 675-681 [2024-31599]

Agencies

• Employee Benefits Security Administration
• DEPARTMENT OF LABOR

[Federal Register Volume 90, Number 3 (Monday, January 6, 2025)]
[Notices]
[Pages 675-681]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-31599]


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DEPARTMENT OF LABOR

Employee Benefits Security Administration

[Prohibited Transaction Exemption 2024-05; Application No. L-12006]


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, Department of Labor.

ACTION: Notice of exemption.

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SUMMARY: This document gives notice of an individual exemption from 
certain prohibited transaction restrictions of the Employee Retirement 
Income Security Act of 1974, as amended (ERISA or the Act). The 
exemption permits the Associated General Contractors of America, San 
Diego Chapter, Inc. (the Chapter) to lease certain improved real 
property (the Property) located in San Diego, California to the 
Associated General Contractors of America, San Diego Chapter, Inc. 
Apprenticeship and Training Fund (the Plan or the Applicant).

DATES: Exemption date: This final exemption is in effect as of October 
1, 2020.

FOR FURTHER INFORMATION CONTACT: Mr. Frank Gonzalez, Office of 
Exemption Determinations, Employee Benefits Security Administration, 
U.S. Department of Labor, (202) 693-8553 (this is not a toll-free 
number).

SUPPLEMENTARY INFORMATION: The Plan requested an exemption pursuant to 
ERISA section 408(a) and supplemented the request with certain 
additional information (that is collectively, referred to as the 
``Application'').\1\ On July 22, 2024, the Department published a 
notice of proposed exemption in the Federal Register (the Proposed 
Exemption).\2\
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    \1\ The procedures for requesting an exemption are set forth in 
29 CFR part 2570, subpart B (76 FR 66637, 66644, October 27, 2011). 
Effective December 31, 1978, section 102 of the Reorganization Plan 
No. 4 of 1978, 5 U.S.C. app. 1 (1996), transferred the authority of 
the Secretary of the Treasury to issue administrative exemptions 
under the Code section 4975(c)(2) to the Secretary of Labor. 
Accordingly, the Department grants this exemption under its sole 
authority.
    \2\ 89 FR 59161.
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    Based on the Applicant's representations in the Application and the 
administrative record, the Department has determined to grant the 
Proposed Exemption. This exemption provides only the relief specified 
herein and does not provide relief from violations of any law other 
than the prohibited transaction provisions of ERISA.
    Benefits of the Exemption: The Department is granting retroactive 
and prospective relief based in part on the Applicant's representations 
that, among other things, the lease has permitted the Plan to provide 
benefits more efficiently to its participants during the COVID-19 
pandemic and thereafter at a monthly rental rate that saved the Plan 
$4,359 per month in 2020 and $6,311 per month in 2021, respectively, 
based on the Property's appraised monthly fair market rental value of 
$46,938 on October 1, 2020 and $48,890 on October 1, 2021.\3\ The 
Plan's monthly savings will continue to increase if the appraised 
rental value increases subject to escalation terms of the lease that 
are described below. The transaction will be subject to further 
protection, because an independent fiduciary will be responsible for 
ensuring that the Plan does not pay more than fair market value rent 
under the Lease.
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    \3\ This determination is set forth in the Independent 
Appraiser's written report, dated December 16, 2021.
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    As discussed below, the Department makes the requisite findings 
under ERISA section 408(a) based on the Applicant's adherence to all 
the exemption's conditions at all times. Accordingly, affected parties 
should be aware that the Applicant's adherence to all conditions 
incorporated in this exemption is necessary for the Department to grant 
the relief that the Applicant requested. Absent these conditions, the 
Department would not have granted this exemption.

[[Page 676]]

Background

    1. As discussed in the Proposed Exemption, the Plan provides 
apprenticeship training for construction trade 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 $13,681,005 as of March 31, 2024.
    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 of the Plan's administrative and 
investment decisions including decisions about the lease that is the 
subject of this 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 it 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 
to nor participated in the Plan, nor does the LLC participate in the 
Plan's apprenticeship training programs.
    6. In 2020, the Chapter constructed a high-ceiling training space 
on the Parcel 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 of the Building's rentable space and has no present plans to 
change the 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, 2024. 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 Plan to: 
(1) directly or indirectly indemnify or reimburse the Independent 
Appraiser or any other party for any failure to adhere to their 
contractual obligations or to State or Federal laws applicable to the 
Independent Appraiser's work; or (2) 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, which the Independent Appraiser notes is a type of 
commercial lease wherein the lessee is responsible for its pro rata 
share of expenses for common area maintenance, taxes, and insurance.\4\ 
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 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

[[Page 677]]

tenants and contain annual escalations of 3.0 percent.
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    \4\ Also, in addition to a base rent, tenants subject to triple 
net leases are often required to reimburse the landlord for certain 
expenses and recovery provisions for expenses range from absolutely 
net (whereby the tenant pays all property expenses) to fully gross 
(in which tenant pays no expenses). These provisions can vary by 
property type, locale and 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 for year 2019 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.\5\ The Independent Fiduciary's agreement with 
the Plan did not contain any provisions that violate ERISA section 410 
or the Department's Regulations codified at Sec.  2509.75-4; \6\ and 
did not contain any provision requiring the Plan or any other party to 
(1) directly or indirectly indemnify or reimburse the Independent 
Fiduciary for any failure to adhere to its contractual obligations or 
to State or Federal laws applicable the Independent Fiduciary`s work, 
or (2) waive any rights, claims, or remedies 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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    \5\ Furthermore, the Department notes that section II(c)(1) of 
the exemption requires that the Independent Fiduciary 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.
    \6\ 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, and in the interest and protective of the Plan and 
its participants and beneficiaries. To perform this examination, the 
Independent Fiduciary: (a) reviewed various documents, such as the 
Independent Appraisal Report, trust agreements, IRS Forms 990, 
financial statements, written policies, guidelines, and procedures, 
lease agreements, applicable laws and guidance, and the Plan Trustees' 
meeting minutes; (b) interviewed and/or held discussions with 
representatives of the Plan; (c) conducted an in-person site visit to 
the Property; and (e) considered the Plan Trustees' decision-making 
process with respect to entering into the Lease.\7\
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    \7\ 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. The new location 
also represents an upgrade in size and quality compared to the current 
property, 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 better 
able to provide benefits to its participants and beneficiaries and the 
Chapter would be able to use the training programs to promote its 
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 
perform this task, 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 a Capital Replacement Reserve Fund (the 
Reserve Fund), which is described in more detail below, 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 
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 
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 beneficiaries; (b) review and approve the material

[[Page 678]]

terms and conditions of the Lease and make any adjustments thereto; (c) 
engage the Independent Appraiser and/or other service providers as it 
reasonably deems necessary; (d) monitor the Lease, including during any 
subsequent renewal period; and (e) ensure that all conditions of this 
exemption are met. The obligations in the addendum have been added to 
the Independent Fiduciary conditions for the exemption below.
    22. The 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 rent under the Lease. The Independent Fiduciary must 
regularly evaluate the prudence of the Plan's continued participation 
in the Lease and ensure that its participation in the Lease remains in 
the interest and protective of the interests of the Plan's participants 
and beneficiaries. The Plan's ongoing participation in the Lease 
requires the ongoing approval and consent of the Independent Fiduciary. 
The Independent Fiduciary is responsible for selecting the independent 
appraiser, the frequency of appraisals, and the assessment of the 
reliability of the appraisals in determining fair market value rent. 
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 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 rent.
    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 Plan moved into the Building under the 
terms of the Lease stating that it urgently needed larger space due to 
the then COVID-19 health pandemic. Subsequent to the Plan moving into 
the Building, the Independent Appraiser conducted another appraisal of 
the Property and determined that the Property's fair market monthly 
rental value was $46,938 as of October 1, 2020 and $48,890, as of 
October 1, 2021.\8\ Therefore, the Department notes that the Lease's 
monthly payment terms that require the Plan to pay a base rent of 
$40,000 and $2,579 into the Reserve Fund saves the Plan $4,359 and 
$6,311 on a monthly basis for Lease years 2020 and 2021 compared to the 
Property's appraised fair market rental value for those years.\9\ 
Additionally, on January 14, 2022, the Independent Fiduciary 
represented to the Department that for the period beginning on October 
1, 2020, the Lease's terms, including the base monthly rent of $40,000 
per month, were in the interest of and of, the Plan and its 
participants and beneficiaries and reflected a below fair market rent 
for the subject premises.
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    \8\ This determination is set forth in the Independent 
Appraiser's written report, dated December 16, 2021.
    \9\ As described below, the Plan was required to pay, in 
addition to $40,000 per month, an additional $2,579 into a Reserve 
Fund for certain maintenance expenses, which is considered an 
additional component of rent.
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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, which include 
approving any amendment or renewal thereof. 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 Plan and its participants and beneficiaries, this 
exemption requires the Independent Fiduciary to provide 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.\10\ 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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    \10\ Because the 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; 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.

Other Lease Terms

    27. The Lease defines the formula to be used in determining annual 
increases to the Base Rent 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.'' \11\
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    \11\ 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 679]]


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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).\12\ The 
Operating Expenses are subject to both an annual reconciliation process 
(the Annual Reconciliation) and the Plan's exercise of audit rights, 
because of the Building's 90/10 allocation ratio between the Plan and 
the Chapter. 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.\13\
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    \12\ 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.
    \13\ 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 pro 
rata monthly payments to the Reserve Fund based on their space 
utilization. The Lease requires the Chapter to 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.\14\ The Reserve Fund's monthly 
amounts will remain the same throughout the Lease's duration, including 
extensions.
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    \14\ 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 \15\ 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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    \15\ 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. 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.\16\
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    \16\ 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 retain funds held 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. \17\
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    \17\ 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 exemption prohibits the Plan's participants 
from paying any Plan operating expenses, including amounts paid into 
the Reserve Fund.
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Prohibited Transactions

    34. Absent an administrative exemption, the Lease would violate 
ERISA section 406(a)(1)(A), which prohibits a fiduciary from causing a 
plan to enter into transaction involving a 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, the Lease would violate ERISA section 
406(a)(1)(D), which prohibits a fiduciary from causing the plan to 
enter into transaction involving 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 from acting in its 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).
    37. The Department notes that in addition to the protections 
described above, this exemption includes protective conditions that 
allows the Plan to retroactively lease the Property from the Chapter to 
utilize its office space, classroom space, and training facilities to 
continue carrying out the Plan's goal of providing apprenticeship 
training that is related to the construction trade.

Written Comments Received Regarding the Proposed Exemption

    38. In the Proposed Exemption, the Department invited all 
interested persons to submit written comments and/or requests for a 
public hearing with respect to such notice, which comment period ended 
on September 5, 2024. The Department received one comment that was 
immediately

[[Page 680]]

withdrawn and did not receive any hearing requests.
    The complete application file (L-12006) is available for public 
inspection in the Public Disclosure Room of the Employee Benefits 
Security Administration, Room N-1515, U.S. Department of Labor, 200 
Constitution Avenue NW, Washington, DC 20210 reachable by telephone at 
(202) 693-8673. For a more complete statement of the facts and 
representations supporting the Department's decision to grant this 
exemption, please refer to the notice of proposed exemption published 
on July 22, 2024, at 89 FR 59161.

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);
    (2) As required by ERISA section 408(a), the Department hereby 
finds that the exemption is (1) administratively feasible, (2) in the 
interests of the Plan and of its participants and beneficiaries, and 
(3) protective of the rights of the participants and beneficiaries of 
the plan;
    (3) The exemption is supplemental to, and not in derogation of, any 
other ERISA provisions, 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 availability of this exemption is subject to the express 
condition that the material facts and representations contained in the 
Application are true and complete at all times, and that the 
Application accurately describes all material terms of the transaction 
which is the subject of the exemption.
    Accordingly, after considering the entire record developed in 
connection with the Applicant's exemption application, the Department 
has determined to grant the following exemption under the authority of 
ERISA section 408(a) in accordance with the Department's exemption 
procedures regulation.\18\
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    \18\ The procedures for requesting an exemption are set forth in 
29 CFR part 2570, subpart B (76 FR 66637, 66644, October 27, 2011). 
Effective December 31, 1978, section 102 of the Reorganization Plan 
No. 4 of 1978, 5 U.S.C. app. 1 (1996), transferred the authority of 
the Secretary of the Treasury to issue administrative exemptions 
under the Code section 4975(c)(2) to the Secretary of Labor. 
Accordingly, the Department grants this exemption under its sole 
authority.
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Exemption

Section I. Covered Transaction

    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 if the conditions 
set forth in section II are met at all times.

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:
    (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 
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 rent 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 
rent;
    (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 and protective of the interests of the Plan's 
participants and beneficiaries;
    (7) Must monitor the parties' compliance with the terms and 
conditions of the exemption 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 provide prior written notice to the Chapter of the Plan's 
intention to extend the Lease beyond its 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; \19\ and
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    \19\ 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 Plan or other party to: (i) directly or indirectly indemnify or 
reimburse the Independent Fiduciary for any failure to

[[Page 681]]

adhere to its contractual obligations or to State or Federal laws 
applicable to the Independent Fiduciary's work, or (ii) 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 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 provided by the 
Applicant and set forth in the Proposed Exemption are true and 
accurate; and
    (l) Within 60 days after publication date of this 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 and 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 exemption is in effect as of October 1, 2020.

    Signed at Washington, DC.
George Christopher Cosby,
Director, Office of Exemption Determinations, Employee Benefits 
Security Administration, U.S. Department of Labor.
[FR Doc. 2024-31599 Filed 1-3-25; 8:45 am]
BILLING CODE 4510-29-P