State retirement money went to predatory landlords
In the wake of some big money-losing real estate deals, the California Public Employee's Retirement System, the largest public pension fund in the nation, is reviewing its investment policies. But it's too late to help working-class people displaced by two major CalPERS investments.
In 2006, at the height of the real estate bubble, CalPERS put $600 million into real estate deals in New York City and East Palo Alto that, critics say, have led to rent hikes, displacements, and harassment of moderate-income tenants.
The pension fund invested $100 million in Page Mill Properties II, which used the money, along with a sizable bank loan from Wachovia, in a 2006 building-purchase frenzy. The outfit wound up with more than 100 buildings in East Palo Alto some 1,800 housing units. Another $500 million went to Tishman Speyer Properties and BlackRock Realty, cash that was used in the $5.4 billion deal to snag the Manhattan apartment complexes Stuyvesant Town and Peter Cooper Village.
Those investments are currently teetering on financial ruin. The San Jose Mercury News reported Sept. 9 that Page Mill Properties missed a $50 million dollar balloon payment on its $243 million loan. Now the properties owned by Page Mill are in receivership, placing the landlord's future and CalPERS' investment in peril. (Our calls to Page Mill haven't been returned.)
A Sept. 9 New York Times article quoted real estate analysts predicting that Tishman Speyer and BlackRock would exhaust their funds by December and face loan defaults. A recent New York state court ruling may hold the companies responsible for an estimated $200 million in improper rent overcharges.
Rent overcharges in violation of rent-control laws is one piece of what some have labeled "predatory equity" schemes. A May 9, 2008 Times article described the idea: buy rental housing with a lot of middle-income tenants, remove those tenants from rent-controlled units, and re-rent the places to richer people at higher rent. The outcome was supposed to be a quick, profitable return on high-risk investments.
The Page Mill properties in East Palo Alto border the more affluent neighborhoods of Palo Alto and Menlo Park on the west side of Highway 101. The neighborhood is home to service workers and public employees, many of them people of color. "It's choice real estate, no question about it. I don't think Page Mill's plan was to serve the low-income tenants," Andy Blue of the advocacy group Tenants Together told us.
But local officials haven't been thrilled with the results. "We are under siege by Page Mill Properties," East Palo Alto Mayor Ruben Abrica told the Mercury News last month. The city is locked in several court battles with the real estate outfit, including two over the city's rent stabilization ordinance.
A resolution passed by the City Council last year stated that Page Mill had imposed rent increases beyond the 3 percent allowed by the ordinance, and urged CalPERS to intervene.
In an document e-mailed to CalPERS and obtained by Tenants Together, Page Mill claims its rent increases averaged 9 percent. But a class-action suit filed by several Page Mill tenants reported increases of more than 30 percent. A 2008 injunction filed by the city against Page Mill cited increases ranging from 5 percent to 40 percent.
According to the Fair Rent Coalition's Web site, nearly half the people affected were cost-burdened as defined by government standards meaning that more than 30 percent of their income already went to rent. The result of the rent increases, according to the city's resolution, was the displacement of low-income tenants from their homes.
In fact, vacancy rates in East Palo Alto spiked after Page Mill came on the scene. According to numbers crunched by the Fair Rent Coalition and based on 2007 census data, the vacancy rate reached 24 percent in 2008. Before Page Mill started buying up property, vacancy rates were as low as 2 percent. Further, there were 182 evictions between 2007 and 2009 according to the San Mateo County Sheriff's Office.
The Tishman Speyer deal has gotten a lot of press on the East Coast much of it highly critical. The two massive housing complexes were built for middle-income renters and were one of the few moderate-income communities remaining in Manhattan.
David Jones, president of the Community Service Society of New York, wrote in a Sept. 17 Huffington Post piece that it was the intention of Tishman Speyer to shove aside moderate income to make room for more affluent renters who can afford the higher rents. He called it a "classic example of 'predator equity.'"
Dina Levy, who works with the New York advocacy group Urban Homesteading, agrees with that assessment. She told us in a phone interview that it was obvious what plans the real estate firms had in mind for the properties.
She said that CalPERS, as a public agency, should have been more careful about getting involved in this sort of investment. She told us that other bankers she talked to thought the deal was toxic and stayed away. "Why would CalPERS put money into a deal that's predicated on displacing families?" Levy asked.
The Wall Street Journal reported Oct. 23 that CalPERS is extensively reviewing its relationship with Apollo Global Management, which handled a majority of its real estate equity. The fund also issued a new policy on its dealings with placement agents.
But so far, there has been no public investigation of the East Palo Alto and New York investments. Tenancy advocacy groups and East Palo Alto have asked CalPERS to take an active role in the management of Page Mill's property.
"It doesn't appear that the human impact of their investments were considered at all as part of this," Tenants Together executive director Dean Preston told us.
Preston's group is trying to get CalPERS to adopt predator-free investment guidelines a policy that already has been instituted by New York's pension fund.
In a February letter to Tenants Together, CalPERS called itself a "limited partner in the partnership" and expressed concern over the situation in East Palo Alto, stating that it is reviewing the allegations.
But tenant advocates say the giant fund has been missing in action. "There hasn't been anything that they've told us they've been doing or that we've seen them do," Preston said.
That hands-off approach appears to violate CalPERS' stated policies. Two months before allocating funds to Page Mill, CalPERS coauthored and signed the United Nations Principles for Responsible Investment (UNPRI). No. 2 of the six principals states: "We will be active owners and incorporate ESG [environmental, social, and corporate governance] issues into our ownership policies and practices."
CalPERS has been eyeing real estate windfalls since 2002. According to memos and letters given to us by the Fair Rent Coalition, agency staffers that year were discussing an "opportunistic real estate fund." The result of those discussions: discretionary authority given to the senior investment officer for investments up to $100 million, with anything beyond that requiring approval from the chief investment officer.
Paradoxically, the compensation package that rates the senior investment officer's performance has no provision for the social responsibilities. This coming year's compensation package now includes a "Best Practices" measure on ethics and risk management. But there's still no provision for social responsibility.
The California Assembly Committee on Public Employees, Retirement, and Social Security monitors the pension fund, but CalPERS has autonomous authority over its investments. Chief consultant Karon Green told us that the committee is "going to watch to see what the board does and gauge our response based on that."
CalPERS has yet to respond to our inquiries, and hasn't responded to our public records request for documents pertaining to what Page Mill and its CEO David Taran proposed for the East Palo Alto properties.
Similar requests were made by Tenants Together and the Fair Rent Coalition. CalPERS responded that those documents were confidential, although some e-mails were handed over to the advocacy groups the day before they were to meet with the CalPERS board in December 2008.
Although it calls itself a "limited partner," the e-mails illustrate a closer relationship between CalPERS and Page Mill. In an e-mail to CalPERS, Taran asked for a copy of the public records request made by a San Jose journalist so "we can review them and get back to you regarding what should not be produced and is confidential."
Preston points to the larger policy issue. "If there were a few bad real estate managers who were investing in this, then they should lose their jobs," he said. "But the idea that they just sweep under the rug their $100 million loss in East Palo Alto and their $500 million loss in New York, and whatever other schemes they're involved in, is just unacceptable."
Christopher Lund, a Page Mill tenant and communications director for the Fair Rent Coalition, agrees. "They've gotten burned on some of these high-risk investments over the past year or two. But institutional memory is short and in 10 years when the real estate market is booming, if there's no transparency and no oversight, this is going to happen somewhere else."