CIM Group, which made its mark by redeveloping the Third Street Promenade and other urban main streets, is discovering that for even the most respected developers, raising an equity fund is no picnic.
The Hollywood-based company is trying to take its act to the next major level by raising a $500 million war chest called the CIM California Urban Real Estate Fund LP. The fund, which could be leveraged to facilitate $1 billion worth of real estate acquisitions and developments, would be focused on CIM’s niche street retail and mixed-use projects in California’s under-served urban areas.
So far, CIM has a tentative $125 million commitment from the California State Teachers Retirement System (CalSTRS), along with an equity investment of $20 million or so from CIM itself. But further progress has been blocked by major political headaches.
The CalSTRS contribution is conditional upon other partners coming on board, and CIM has come close to landing a $50 million commitment from the California Public Employees Retirement System (CalPERS). But after 18 months of effort, the CalPERS deal has been stalled by controversy over CIM’s lobbyist, along with general bureaucratic delays. And that is leading to frustration, even for some CalPERS board members.
“I realize that possibly the real estate staff has not been into opportunistic funds for quite some time, and therefore may be cautious,” said CalPERS board member William Rosenberg during a June meeting of the group’s investment committee. “But I keep on seeing over and over again by statements of the staff that they’re finding every possible way to prevent this fund from being successful.”
During a meeting in May, Rosenberg proposed that CalPERS invest $250 million in the CIM fund, but the motion failed.
Rosenberg, an outspoken supporter of CIM, said its targeted annual return of at least 20 percent is supported by its track record. CIM’s $225 million portfolio includes properties on Santa Monica’s Third Street Promenade, in Old Pasadena, downtown Brea, San Diego’s Gas Lamp Quarter and Hollywood.
“I visited all three sites Pasadena, San Diego and Santa Monica and they’re all very viable, active and successful,” Rosenberg said last week.
But senior investment officer Guy Jaquier said CalPERS may be able to negotiate “considerably better terms than are being proposed, especially with a first-time fund for a relatively new entity.”
The wrong lobbyist?
Part of the reluctance by CalPERS to support the fund stems from an apparent lobbying gaffe by CIM. The company hired Alfred Villalobos, a former CalPERS board member and ex-deputy mayor of L.A., as its “placement agent.” But Villalobos has a troubled history. He resigned as deputy mayor in 1993 after media reports revealed that he had been sued over his debts, and had filed for personal bankruptcy. He said they were mostly due to a divorce and gambling problem he had gotten under control.
Then, in the mid-1990s, Villalobos lobbied CalPERS board members to invest in a leveraged buyout fund of Dallas investment manager Hick, Muse, Tate & Furst Inc. CalPERS staff objected strenuously to the deal, but the board met in closed session and approved a $100 million investment anyway. The Legislature responded by passing a new state law requiring more disclosure by CalPERS of its investment activity.
Also involved in the CIM lobbying effort were former state Sen. William Campbell and Kurato Shimada, a former CalPERS board member. Campbell met last year with Sheryl Pressler, then CalPERS’s chief investment officer, who turned down the proposal.
“I believe at the time we were in the middle of a search for the real estate (senior investment officer) and we didn’t have a structured strategy and policy for the urban program. And that’s why the decision (was made) at the time,” said Robert Aguallo, CalPERS’s assistant executive officer.
But board member Charles Valdes disagrees. He contends the CalPERS staff sat on CIM’s proposal for more than a year simply because they resented Villalobos’ involvement.
“My problem is that everything I’ve seen so far suggests that there is an organized effort to go ahead and kill this particular investment project,” Valdes said at the May board meeting. “In my mind, it’s all programmed to come in here with recommendations not to invest in CIM, and the reason is the association (with the project) of Mr. Alfred R. Villalobos.”
CIM took its case directly to the board, meeting with several members this spring in Sacramento. After Rosenberg proposed investing $250 million in the fund in May, several board members, including State Treasurer Philip Angelides, said they needed more information, because there was no staff report at that point.
“Our due diligence is just beginning on CIM,” said Mark Albertson, portfolio manager for real estate with CalPERS.
The staff came back in June recommending that the board initially allocate $50 million to a separate account managed by CIM, or approve a structure under which CalPERS and CalSTRS would each allocate $50 million to a partnership managed by CIM.
Good enough for CalSTRS
CalSTRS approved an investment of $125 million, or 25 percent of the fund, whichever is less, in a closed session in May. CalSTRS Chief Investment Officer Patrick Mitchell said the pension fund considers CIM’s co-mingled fund high risk, because the limited partners have no control over investments. But he said CalSTRS has been impressed with the projects CIM has completed.
“Our primary considerations are rate of return and risk, and with CIM, the staff thought it was favorable,” Mitchell said.
The CalPERS staff report says CIM’s investment returns have been favorable but are “based on a limited track record.” The report also states that CIM’s proposed co-mingled fund provides terms that are not as favorable as CalPERS’s separate-account investments, and the fees would be substantially higher.
(While CalPERS has invested $400 million since January 1999 in various funds devoted to urban infill projects, such as the ones being pursued by CIM, CalPERS has tended to make those investments through individually negotiated, separate accounts, rather than co-mingled funds.)
CalPERS staff also pointed out that CIM has limited experience in institutional investment management, and that continued opportunities in street retail may be limited.
“Therefore, CIM may be pressured to invest in markets in which the underlying economic and demographics are inferior to those of the markets in which CIM has previously developed,” the report says.
Yet Rosenberg said the staff’s conclusions are at odds with the conclusions of the McMahan Group, an outside consultant hired to evaluate CIM and its fund. McMahan’s research report stated that “the investment structure and indicated terms of the fund do not give rise to serious concerns.” The report concluded that CIM’s fund would be a suitable investment for pension funds.
Avi Shemesh, a partner with CIM, counters that there are still plenty of opportunities out there in urban areas.
“The trend of urban renaissance is nationwide. Specifically in California, we see more opportunities than anywhere else,” Shemesh said.
Shemesh declined further comment on the company’s dealings with CalPERS, since the funding proposal is still pending. The organization’s investment committee will again consider the matter on Aug. 14.
“We decided to (raise a fund) because we thought it would be very good for us in the sense of reliable funding, evergreen funding. It doesn’t change because the market is changing. It’s very stable,” Shemesh said.
It’s important for CIM to attract a major California-based investor for the fund, especially if it wants to attract other pension funds that may not be based in the state. “While many out-of-state investors were enthusiastic about the fund, before they committed, they wanted to see one of the major California funds commit,” Shemesh said.
Bloomberg News contributed to this report.
