TMG Partners Makes the Grade

By Jon PetersonSan Francisco-based TMG Partners has survived a review of investment managers by the California Public Employees’ Retirement System. CalPERS, the largest public pension fund in the country, last year said that it intended to review its relationships with all of its real estate managers. Michael Covarrubias, chairman and chief executive officer of TMG, said he believes his company has passed the test. “We are expecting to be a real estate manager for the pension fund down the road,” Covarrubias said.

The pension fund has said that it hoped to complete its manager review by the end of this year. It has publicly stated that the real estate managers it keeps going forward will be fewer in number but have larger allocations and responsibilities. Thus far, the only real estate manager for CalPERS whose relationship with the huge public pension fund has ended is San Francisco-based MacFarlane Partners. A MacFarlane spokesman issued a one-sentence statement in October saying that the firm had “elected to resign” as manager of California Urban Investment Partners LLC, which The Registry reported in this October 22, 2009 article (LINK). The departure followed a more than $450 million loss in the CUIP fund in the preceding period. San Francisco’s Stockbridge Real Estate Funds assumed management of CUIP. A spokesman for the giant public pension fund, which has been criticized for huge investment losses, many related to commercial real estate, declined to confirm that the CalPERS-TMG relationship would be ongoing. However, Clark McKinley, a CalPERS information officer, did not deny the report, saying only that the fund could not comment on relationships until they are reported publicly to its board.

TMG and CalPERS have had a relationship since 2006 when the pension fund made a $100 million allocation to the Avant Housing Group, a partnership between TMG and San Francisco’s AGI Capital. The strategy was to invest in housing projects in the greater San Francisco Bay Area.

Thus far, the only investment made for the relationship has been a downtown San Francisco office building at 265 5th St. for $10 million. The rest of the capital is still available to TMG for future investments. “The company is looking at a couple of new projects. The market is just now ready for new product to be developed,” Covarrubias says.

The approvals for 265 5th were recently granted by the San Francisco Board of Supervisors to allow development of 179 units. It was presented to the board as part of the 900 Folsom project, a development of 269 housing units.

Eric Tao, a principal with AGI, said they do not expect to start construction any time soon on the project, which he said would likely be built in phases.

“There are factors in the marketplace that need to change,” he said. “One is that the restrictions on debt need to be eased. It used to be that the debt portion on a project would make up 75 percent to 80 percent of the project costs. Now you are lucky if this amount is 60 percent. This makes it harder for a developer and investor to reach return requirements.” Targeted returns are in the mid-teens, he said.

Another brake on starting now is flaccid demand for the end product, which could be either apartments or condominiums based on the entitlements. On the plus side, construction costs have fallen 10 percent to 15 percent since 2007, he and others have said.