By Jon Peterson
Boston-based Massachusetts Pension Reserves Investment Management Board (Mass PRIM) is considering an investment for an asset in San Jose for the expansion of its direct real estate program, as stated by the pension fund in a board meeting document.
The potential investment would be for $22 million for a land/lease transaction in the San Jose area. The pension fund gave no other details on the potential transaction in its board meeting document.
There is no certainty that this transaction will actually happen at some point in the future, however, the deal is one of 10 potential investments that the pension fund has listed for its investment pipeline that has been reviewed. The other deals the pension fund is looking at are located in Los Angeles, Miami, New York, Boston and Tampa.
Mass PRIM is not a stranger to investing capital in Silicon Valley for its direct investment program. This investment strategy was started about 19 months ago in Santa Clara where the pension fund made a $112.25 million investment for the purchase of 21 acres and a related ground lease in Santa Clara.
The direct investment program is one where Mass PRIM would invest capital on its own with no outside assistance from any real estate manager. This is a fairly unique strategy by a public pension fund in the United States. Most public funds do use separate account managers for making direct acquisitions. One other pension fund with a direct non-manager investment program is State Teachers Retirement System of Ohio. This pension fund does have a regional office in San Francisco located at One California Street.
Mass PRIM has decided to allocate $300 million to its direct investment program in 2018. With around 60 percent leverage, it will have $750 million of total capitalization for the program. The allocation is a preliminary one. The pension fund stated in a board meeting document that the allocation will be reviewed on an annual basis.
One of the main benefits to the investment program will be a fee savings by the pension fund. Mass PRIM projects that the total fee savings will be $11 million on the investment in Santa Clara over a 20-year period.
Mass PRIM’s plans include investing in core and non-core assets for its direct investment program. The core deals would include apartments, warehouses, ground leases and triple-net assets. The targeted returns would be a five percent to six percent unlevered IRR.
The non-core strategy will only be with existing assets and no investing in new development projects. The transactions would include properties that have either leasing issues or need a renovation. The targeted returns would be 200 to 400 basis point above core yields.
