Restaurant properties as qualifying employer real property

P/OPINION-77-1

407

February 18, 1977

Dear:

This is in reply to your letters of July 16, 1976,
November 15, 1976, and November 24, 1976, in which you
inquire whether certain parcels of property and the
buildings thereon, which ( Name ) ( the Plan ) proposes to
acquire from ( Name ), Inc. (the Employer), constitute
"qualifying employer real property" under Section 407(d)(4)
of the Employee Retirement Income Security Act of 1974 (the
Act), and whether the acquisition by the Plan and subsequent
lease-back of such property to the Employer is a prohibited
transaction under Section 406(a) of the Act.

Your letters state that, among other things, the Employer
is a corporation engaged in the retail sale of fried chicken
through restaurants known as (Name). Currently, the
Employer operates or has under construction 34 (restaurants)
in (two states). Of these 34 restaurants, 29 are leased
from various investors. All 29 restaurants were built by
the Employer, subsequently sold to independent investors
and simultaneously leased back to the Employer. The lease
agreement is normally for a 20-year term with four 5-year
renewal options.

Your letter further represents that the Plan is an eligible
individual account plan, within the meaning of Section
407(d)(3) of the Act, that it currently does not own any
employer real property, and that it wishes to acquire from
the Employer and subsequently lease back to the Employer
three restaurant sites (land and building) . . . There
will be no commissions charged with respect to the proposed
purchase and leaseback transactions.

You represent that each of the three parcels is readily
adaptable to various uses without costly modifications.
These uses include: another fast-food restaurant; garden
or florist shop; craftshop; professional offices; pharmacy;
gasoline station; and others.
Finally, you represent that in the opinion of the Plan
Investment Committee, these three sites are sufficiently
geographically dispersed so that adverse economic conditions
peculiar to one area would not significantly affect the
economic status of the Plan as a whole and that the (three)
sites would be serving and drawing from different fast food
markets.
In order for parcels of "employer real property" (as defined
in Section 407(d)(2) of the Act) to be considered to be
"qualifying employer real property" within the meaning of
Section 407(d)(4) of the Act, the following substantive
requirements must be met: (1) a substantial number of the
parcels must be dispersed geographically; (2) each parcel
of real property and the improvements thereon must be suitable (or adaptable without excessive cost) for more than
one use; and (3) the acquisition and retention of such
property must comply with the provisions of Part 4 of
Title I of the Act (other than Section 404(a)(l)(B) to the
extent it requires diversification, and Sections 404(a)(l)(C),
406 and 407(a)).

Pursuant to Section 5.02(o) of the Advisory Opinion Procedure
(ERISA Procedure 76-1, 41 FR 3628l, August 27, 1976), the
Department of Labor (the Department) ordinarily will not
issue advisory opinions with respect to, among other things,
Section 404(a) of the Act relating to fiduciary duties as
applied to particular conduct. Because the definition of
the term "qualifying employer real property" in Section
407(d)(4)(D) of the Act requires a determination regarding
whether a particular acquisition or retention of employer
real property complies with the requirements of Section
404(a) of the Act, the Department will not issue a ruling
under Section 407(d)(4)(D) with respect to whether particular employer real property is "qualifying employer real
property." The Department will, however, issue rulings in
appropriate cases with respect to the other substantive
conditions of Section 407(d)(4), such as the conditions
requiring geographical dispersion of the parcels of
property, and the suitability of property for more than one
use.

With respect to the geographical dispersion requirement of
Section 407(d)(4)(A) of the Act, your letters state the
location and geographical dispersal of the parcels and
represent, in connection with the question of whether each
parcel is sufficiently geographically dispersed so as to
provide protection for the Plan in the event of adverse
economic conditions in any one area, that (Name) restaurants in these three areas would be serving and drawing from
different fast food markets. If your statements and
representations are correct, the requirements of
Section 407(d)(4)(A) of the Act would be met in the transactions described in your letters.
With respect to the requirement of Section 407(d)(4)(B) of
the Act that each parcel of employer real property and the
improvements thereon must be suitable, or adaptable without
excessive cost, for more than one use, your letters state
that because each restaurant site borders both the residential and business district of a city and because of the
physical characteristics of the sites, they may easily be
used for activities other than fast-food restaurants, such
as those listed above. On the basis of the representations
set forth in your letters with respect to the adaptability
of the parcels in question for numerous uses, it is our
view that each of these parcels meets the requirements of
Section 407(d)(4)(B) of the Act.

With respect to your second inquiry, Section 406(a)(l)(A)
of the Act prohibits a fiduciary with respect to a plan
from causing the plan to engage in a transaction if he
knows or should know that such transaction constitutes a
direct or indirect sale or exchange or leasing of any
property between the plan and a party in interest. Section
3(14)(C) of the Act defines the term "party in interest"
as an employer any of whose employees are covered by such
plan. Thus, the proposed sale and leaseback arrangement
between the Plan and the Employer would constitute a prohibited transaction under Section 406(a)(l)(A) of the Act.
In addition, Section 406(a)(l)(E) and Section 406(a)(2)
prohibit plan fiduciaries from knowingly causing plans to
acquire or hold employer real property in violation of
Section 407(a) of the Act.

However, Section 408(e) of the Act provides an exemption
from the restrictions of Section 406 and 407 for the
acquisition or sale by a plan of qualifying employer
securities or qualifying employer real property if, as
as here relevant, (1) such acquisition is for adequate
consideration, (2) no commission is charged with respect
to the acquisition, and (3) the plan is an eligible
individual account plan. Thus, a prerequisite for the
applicability of Section 408(e) is the acquisition by a
plan of qualifying employer securities or qualifying
employer real property. Because the Department will not
rule on whether the subject employer real property constitutes qualifying employer real property, and because
Section 5.02(a) of the Advisory Opinion Procedure provides
that the Department will not ordinarily issue advisory


opinions relating to whether certain consideration
constitutes "adequate consideration" within the meaning of
Section 3(18) of the Act, we will not rule with respect to
whether the statutory exemption provided in Section 408(e)
of the Act would be available for the proposed transactions.

Sincerely,