CalPERS misjudges the landscape

LA Times ^ | 5/19/08 | Marc Lifsher

[NormsRevenge]

SACRAMENTO -- The California Public Employees' Retirement System, which poured about $1 billion into a troubled real estate deal, is in negotiations to keep a related loan default from turning into a bankruptcy.

CalPERS, the nation's biggest public pension fund, and its partners acquired a controlling interest in 15,000 acres of undeveloped land in the Santa Clarita Valley early last year, before the meltdown in the housing market. The land, once owned by Newhall Land and Farming Co., was appraised at $2.6 billion at the time of the CalPERS investment but has dropped considerably in value since then.

CalPERS chief executive stepping down

Caught in a credit crunch, CalPERS and its partners in LandSource Communities Development are in talks with a loan syndicate headed by Barclays Capital Inc. to restructure $1.24 billion in debt. LandSource received a notice of default on April 22 after missing a payment of an undisclosed amount, and a Standard & Poor's online newsletter, citing anonymous sources, predicted that LandSource would file for bankruptcy this month.

CalPERS President Rob Feckner said he hoped to forestall a bankruptcy but stressed that "if we incur any losses, they will be minor" because the pension fund is "very well diversified, in good shape."

The threat of a loss comes as CalPERS faces a leadership vacuum. Recently, the fund announced the retirement of its chief executive, Fred Buenrostro, and the resignation of its chief investment officer, Russell Read. Officials have said the departures were coincidental and unrelated to current investment strategies and performance.

MW Housing Partners, in which CalPERS is a major investor, acquired 68% of the Newhall property from home builder Lennar Corp. and LNR Property Corp., a unit of Cerberus Capital Management, which each retained a 16% interest.

Feckner said the land along the Interstate 5 corridor, 30 miles north of Los Angeles, was a solid investment. CalPERS officials wouldn't disclose the current assessed value.

"Whether today or somewhere down the line, it still is a good piece of property," Feckner said. "Real estate is going to make a rebound."

But a LandSource investment gone south could do more damage to the $242-billion fund's reputation for financial adroitness than to its bottom line, said Jack Kyser, chief economist for the Los Angeles County Economic Development Corp.

"It would probably be viewed by some people as an embarrassment because any time you make an investment and it goes into default, it's not good news," he said. The deep-pocketed pension fund has made a number of lucrative real estate investments in California and across the country over the last decade, but this year, "real estate has gone bad with a vengeance."

[Oldexpat]

Not to worry. The taxpayers will cover their investment mistakes. What’s a few billion between masters and serfs?

[CharlesWayneCT]

The problem with this type of investment is that the State now has a vested interest in promoting the development of this property. And the State has the power to control development.

The builders were smart. They got money, and they have their 16% interest, and they have to know they are first in line for approval for whatever their plans are, so the State can recoup it’s investment.

I’d be feeling pretty bad if I owned a developable property next door to this one. I know I’m not getting approval for diddly until after this other huge property has paid off for the State.