California’s public worker pension system picked Houston-based Hines to take over a beleaguered real-estate project in its hometown of Sacramento.
The move is a dramatic pivot for the $381 billion pension fund known as Calpers. Sacramento officials cheered its decision last year to move forward with a plan by real-estate developer CIM Group for an office-condominium-retail complex that would have been Sacramento’s tallest tower.
But an outside consultant recently expressed concerns about CIM’s performance for the California Public Employees’ Retirement System in a review, said people familiar with the matter. The real-estate developer has failed to deliver as much as $41 million in rebates that were negotiated as part of a nine-year-old agreement.
“Hines is a longtime Calpers partner and has a strong history of successfully developing real-estate projects in Sacramento and the Bay Area,” said
Calpers chief executive officer.
The site, which has sat empty for more than a decade along the road that runs between the California State Capitol building and the city’s iconic Tower Bridge, has been a long-running headache for Calpers. The pension fund picked CIM as the site’s developer after abandoning a plan for the same site in 2007. The vacant parcel illustrates the risks for pensions as they try to navigate the world of real estate, where competing pressures of local politics and investment can collide.
With interest rates low, major public pension plans are under
heightened pressure to seek out investments that will yield enough to cover benefits promised to firefighters, police officers, teachers and other public workers. “We’re committed to fulfilling our fiduciary duty to find the best investment path forward for this very important project,” Ms. Frost said.
Large public plans invest a median 4.45% of their money in real estate, up from 3.09% in 2007, according to Wilshire Trust Universe Comparison Service. Calpers, which serves more than 1.9 million workers and retirees, had aimed to keep 13% of its portfolio in real assets, a category that includes real estate, according to its 2018 financial report. That is up from 10% in 2010, the year the category was created. In 2007, Calpers had a target of 8% of its assets in real estate, the fund’s financial reports show.
Alternative investments can add risk along with the promise of high returns. In 2009, Calpers’ real-estate portfolio lost 48% of its value. Last year, the real-asset category was one of the Calpers’ lowest performers, returning 3.7%. Calpers had at least $1.3 billion invested with CIM as of June 30, 2018, according to its financial reports.
It isn’t clear what factors led the pension fund to cancel its deal with CIM.
RCLCo, a real-estate consultant for Calpers, had outlined problems with CIM Group in a performance review prepared for Calpers, the people said. The memo, which isn’t public, said that CIM’s efforts at developing properties in Calpers’ portfolio were slow.
Separately, a Calpers spokesman said that about $41 million, a previously unreported figure, remains to be paid by CIM Group to Calpers on a total $50 million in fee rebates promised under a 2010 agreement.
The agreement followed an independent review finding that CIM and other money managers had hired consultants, known as “placement agents” to help secure investments from pension funds, contributing to possibly tens of millions of dollars of higher-than-necessary money-management fees.
CIM agreed to reduce the management and other fees it collected on separate accounts it managed for Calpers by as much as $50 million over five years “or as close a period thereafter as required to provide Calpers with that benefit.”
A CIM spokesman said the firm is in compliance with that agreement and that the firm had generated strong returns for Calpers members.
“CIM continues to be an important manager in our real-estate portfolio,” said Calpers Board President
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