CalPERS Evaluates Future of CalSmart Investment Program

By Jon Peterson

CalPERS, the country’s largest public employees retirement system, may be abandoning a real estate investment vehicle at the heart of a decade-long thrust to acquire urban real estate across California in pursuit of financial return and gentrification.

The California Public Employees’ Retirement System is looking at what the future will hold for its CalSmart LLC investment program as part of an overview of its relationships with real estate managers, advisors and partners. CalPERS invests through dozens of real estate funds managed by companies with ties to the San Francisco Bay Area.

There has been no timetable established as to when a final decision will be made on CalSmart, which is managed by RREEF LLC. CalPERS and RREEF declined comment.

According to industry sources, it is unlikely that CalPERS will provide additional capital for CalSmart because the investment strategy doesn’t fit the pension fund’s current thinking. CalPERS has publicly stated that it wishes to invest in solid income-producing properties. It wants to get away from investing in more risky strategies, including development, that tie up capital for a decade at a time.

The market value of CalPERS’ net assets fell 25 percent to $181.2 billion in the fiscal year ended June 30, 2009, the largest one-year decline in its history, according to its Comprehensive Annual Financial Report. At year end, real estate accounted for $30.2 billion of total investments, including debt, down $10.8 billion  in value on a year-over-year basis.

On the cover of its 2009 financial report, CalPERS states: “Last year may be remembered as one of the toughest the financial world has ever faced. As we respond to today’s market realities, our focus is on safeguarding the future health and retirement security for California’s public employees.”

CalPERS started the CalSmart investment program in March 2001 as part of a larger development and redevelopment strategy focused on the state’s urban infill properties, the California Urban Real Estate program, or CURE. According to a March 2003 presentation by CalPERS, the pension fund had allocated $175 million to the CalSmart fund as part of a total $1.45 billion allocation to the CURE program overall. Other funds in the CURE program cited in the presentation were Victor MacFarlane Partners’ California Urban Investment Partners, or CUIP.

The pension fund holds a 95 percent ownership position in CalSmart. The other 5 percent is held by the real estate manager for CalSmart, RREEF.

CalPERS placed a value on its investment in CalSmart at $102 million at the end of 2009. This portfolio makes up 1.3 percent of the pension fund’s $8 billion opportunistic real estate portfolio. The recent performance of the CalSmart portfolio on total nominal returns before fees is -59 percent for the fourth quarter of 2009, -73.5 percent for one year, -34.8 percent for three years, -9.4 percent for five years and -1.4 percent since inception.

The pension fund has made the decision in two cases this year to give properties back to the lenders that were in the CalSmart portfolio. One of the properties was an office complex located at 680 Folsom St. in downtown San Francisco. The loan on the property had a face value in the neighborhood of $55 million. The property is a 400,000 square-foot vacant office building. The lender was Wells Fargo.

According to published reports, CalPERS also chose to give back two office buildings in Aliso Viejo in March. These properties total nearly 300,000 square feet. The two buildings are projected to be worth about $50 million total, but the debt is believed to be more than the buildings are worth.

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