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How is CalPERS involved with Page Mill Properties?

CalPERS, the California Public Employees' Retirement System, committed $100 million to Page Mill Properties II, LP, the specific investment vehicle in which all of Page Mill's EPA holdings sit.  The initial investment offering for this fund appears to have raised roughly $120 million through both public and private equity sources.  Page Mill Properties LLC serves as the general partner on this fund, CalPERS as a limited partner.

According to CalPERS' documents, Page Mill Properties II, LP is classified as an "opportunistic” fund.  Again, this is defined as anything that returns > 13% annually.  For the sake of comparison, remember that the annual ROI for the US stock market, when averaged over the past 90 years, is 10%; for the US bond market, 7%.

One additional point on the CalPERS story is worth noting.  In 2005, CalPERS, along with other leading pension and investment groups drafted a document at the United Nations on Principles for Responsible Investment.  CalPERS became a signatory to this document in April, 2006.  As a signatory, CalPERS committed to six guidelines for socially and environmentally responsible investment practices.

In addition to being a signatory, CalPERS also has a representative on the elected board of 11 asset owner signatory organizations.  Members of this board oversee implementation of the compact along with two representatives from the UN.  Rob Feckner, CalPERS President, is quoted on the current UN PRI website saying, “We at CalPERS found that these principles are consistent with our own corporate governance efforts and in accounting for environmental and social factors to enhance our investment returns.”  Moreover, the stated policy of CalPERS California Urban Real Estate investment program implicitly recognizes the value of promoting affordable housing.

In CalPERS real estate investment reports, the inception date for Page Mill Properties II, LP is shown as July 2006.  In April 2006, CalPERS became a signatory to, and began oversight of the UN PRI.  Three months after signing the UN agreement, they committed $100 million to Page Mill's predatory equity scheme in East Palo Alto, $95 million of which has already been invested.  As of June 30, 2009, CalPERS net assets at fair market value for this fund were $57,579,384.  Given current portfolio valuations, all equity is assumed to be lost.

It should also be noted that in July 2008, CalPERS received a letter of concern from New York City Comptroller Bill Thompson regarding the use of public pension fund money in predatory equity schemes.  CalPERS has declined to comment on this letter.

Ironically, the City of East Palo Alto is part of the CalPERS system.  San Mateo County Superior Court judges, who have presided over much of the litigation involving Page Mill Properties, tenants, and the City of East Palo Alto, are also members of the CalPERS system.

CalPERS' decision to invest in a predatory equity scheme is not surprising given the potential ROI and the current structure of compensation packages for its senior investment officers.  The performance plan for Ted Eliopoulos, CalPERS' current senior investment officer for real estate, shows that the majority of his compensation is linked to ROI versus benchmark funds.  There is no mention in this performance plan of the UN PRI or rewards for socially responsible investing.

Mike McCook, the senior investment officer for real estate that was responsible for the majority of CalPERS' investment decisions regarding Page Mill Properties II, left CalPERS in May 2006 to join Kenwood Investments as president and co-owner.  Kenwood's other co-owner, Darius Anderson, and Terry Fancher of Stockbridge Capital, Kenwood's equity partner on several development projects, are both persons of interest in CalPERS' ongoing placement agent scandal.

Has CalPERS been asked to look into its EPA investment?

In short, yes.  Members of the community have been in conversation with CalPERS since August 2008.  These conversations have included several presentations in front of the CalPERS Board in Sacramento.  CalPERS has expressed concern regarding Page Mill's business practices but is limited to some extent in what actions it can take due to fund contractual obligations. 

On June 15, 2009, a delegation from the EPA Fair Rent Coalition presented an open letter to the CalPERS Investment Committee demanding release of the Page Mill Properties II placement memorandum and partnership papers (i.e. business plan).  In their response to this letter, CalPERS refused to release these documents, citing confidentiality and claiming that the public interest served by not disclosing these documents outweighs the public interest served by disclosure.  In an earlier letter, CalPERS denied FRC's February 2009 Public Records Act request for these documents.  FRC renewed its request for these documents in front of the CalPERS Investment Committee on December 14, 2009.  This dialog is ongoing.

Given that Page Mill Properties, LLC may have profited significantly through front end acquisition and fund management fees, this is yet another example of how deregulation has allowed the private sector to privatize profits while socializing downside risk.  With this fee structure, Page Mill Properties had a strong financial incentive to purchase the East Palo Alto properties at prices well above market value.  In fact, data show that Page Mill Properties purchased the East Palo Properties on behalf of investors at gross rent multipliers considered aggressive by industry standards.

Why would CalPERS invest in what was arguably such a high-risk fund?  The promise of outsized returns through highly leveraged deals appears to have trumped proper risk analysis.  Prior to the formation of Page Mill Properties II, LP, Robert Carlson, former CalPERS board member, was quoted as saying, "We believe taking no risk is the biggest risk you can take."  With CalPERS having lost almost a quarter of its assets since July 2008, it may be time for the public to reevaluate this thinking.

If you would like to express your concern regarding the use of public pension fund money in this investment fund, please contact CalPERS at:

Anne Stausboll, CEO
Lincoln Plaza North
400 Q Street
Sacramento, CA 95811
(888) 225-7377

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