Wednesday, September 9, 2009

CalPERS must adopt predatory-free investment criteria

As the New York Times reported today, another predatory equity investment for CalPERS, California's public employee pension fund, has run into serious trouble. This time it's their investment along with Tishman Speyer Properties and Black Rock Realty in Stuyvesant Town and Peter Cooper Village in New York City, a purchase three years ago that amounted to the biggest American real estate deal in history. Now it appears the buyers will be unable to meet their debt obligations.

Just last week we learned from news reports that CalPERS' investment in Page Mill Properties' predatory scheme in East Palo Alto was appearing to go bust.

Housing advocates have coined the term "predatory equity" to refer to overleveraged real estate investments that rely on the the displacement of tenants from regulated rental housing in order to raise rents and turn a profit.

Housing advocates have argued that, not only are predatory equity schemes despicable because they displace tenants as an essential piece of their business plan, but also that these investments are terribly risky financially. The real estate investors at CalPERS are learning this the hard way, though it's been much worse for the numerous tenants who have lost their homes to these schemes of greed.

It is not clear how much staff at CalPERS actually knew about the specific nature of Page Mill Properties' sinister plans in EPA when the pension fund committed $100 million dollars to the project because CalPERS has not been forthcoming. Last year, Tenants Together filed a public records act request to get a copy of Page Mill's investment plan, but CalPERS refused the request on the grounds of confidentiality. If CalPERS knew that they would be displacing low and middle income tenants then this would be a very serious stain on their reputation and they should be roundly denounced for it. If, on the other hand, they were unaware that Page Mill intended to displace tenants, then clearly CalPERS needs a policy procedure that will screen out predatory real estate investments.

Tenants Together has called on CalPERS to adopt "predatory-free" policies that will screen out predatory real estate investments and prevent the pension fund from ever getting involved in such investments in the future. As has been made clear in the last few days, not only are these investments hurting tenants who live in the rental properties purchased in the schemes, but they're also proving to be very poor investments. By investing in predatory equity schemes, CalPERS is failing in both it's ethical and fiduciary responsibilities.

From today's New York Times article, "Buyers of Huge Manhattan Complex Face Default Risk:"

" . . the purchase of Stuyvesant Town and Peter Cooper Village was one of the most publicized and controversial of its deals in recent years. The winning bid presumed the partnership could increase profits by replacing rent-stabilized residents with much higher-paying tenants after renovating and deregulating apartments.

But the existing rents covered less than half of the annual debt service on the loans. And they have been unable to convert apartments to market rates as quickly as they had imagined. "

The fact that the "winning bid presumed the partnership could increase profits by replacing rent-stabilized resident with much higher-paying tenants" shows this was a classic case of predatory equity.

It's high time for CalPERS to apologize to its members and to affected tenants for its involvement in these unethical and financially risky predatory equity schemes and it's time for the pension fund to adopt investment criteria that will prevent it from every happening again.

1 comment:

  1. Dear Andy,

    Agreed. Calpers really needs to disclose documents about how they helped engineer the Page Mill Disaster, and they need to go on the record and take steps in regulating Pension-fund placement agents to make sure these private equity deals are not secretly using public monies counter to public policy. Calpers needs to speak to the Page Mill issue, and they need to talk publicly about their role in Tisch-Speyer. If they don't do it voluntarily, it will be dragged out of them in court, or before Congress.