RI’s Pension Fund Haunted by 27-Year-Old Real Estate Investment and Legacy of Failure
Wednesday, June 15, 2016
The development known as the “American Express” building in Providence still haunts the Rhode Island pension fund 27 years later, as a State Representative just introduced a resolution to pay back a $1.7 million outstanding obligation to the fund long after the developer's bankruptcy.
And it is just the tip of the iceberg of economic losses tied to real estate investments for the state's pension fund.
GET THE LATEST BREAKING NEWS HERE -- SIGN UP FOR GOLOCAL FREE DAILY EBLASTDecades after the state invested in the failed project, the pension fund has not been made whole -- but the Boston-based developer behind it is bigger than ever. Now, State Representative Michael Marcello has submitted a resolution to obligate the state to make a partial payment back to the Rhode Island pension fund.
Over the past few decades, the performance of Rhode Island’s pension fund real estate portfolio has been the tale of two stories -- and both may fall under the genre of "horror."
The RI State Investment Commission (SIC) has been investing in real estate since at least 1989, and according to Ted Siedle, a columnist for Forbes and former SEC lawyer, the investments have been dismal and the failure of the real estate investments have been missed opportunities that has costs the fund hundreds of millions in returns over the decades.
“The pension fund has been underperforming against its own benchmarks in the real estate sector. The RI real estate portfolio may be the poorest performing in the United States,” said Siedle. “For the first 17 years (the real estate portfolio) made no money. In the past few years the return has been insignificant."
“To our knowledge, the SIC has not made direct investments in real estate other than the well-documented Gateway 8 investment in 1989, in which the State Investment Commission invested in bonds issued by the Rhode Island Industrial Facilities Corporation. The property developer went into bankruptcy in December of 2004.” said David Ortiz, a spokesman for now-General Treasurer Seth Magaziner, in an email to Siedle provided to GoLocal.
American Express Still Haunts RI
Just this month, Marcello introduced legislation to repay the retirement fund for the loss due to the bankruptcy of the Gateway 8 project -- shortly after Siedle began pressing the issue with Magaziner's office.
The developer of the project, Dean F. Stratouly, now heads Congress Group in Boston, a major real estate development firm. Stratouly has developed some of the most expensive projects in Boston including the $100 million Park Square project. He is described on the firm’s website as “co-founded Congress Group nearly 35 years ago, building it into one of the area’s leading commercial real estate investment and development firms…spearheads the company’s investment strategy, deal generation, institutional relationships and long-term strategic planning. He actively oversees every company transaction with hands-on energy and focus."
As a GoLocal investigation reported in 2013, “Rhode Island Industrial Facilities Corporation, a legal arm of the EDC, financed the construction of the four-story office building next to the train station with $23 million in bonds it issued. The bonds were bought by the state pension system, according to new archives accessed through the LexisNexis database.
A decade later, the development suffered a setback when the original tenant for whom the building was named, American Express, relocated.
The Boston-based developer, Gateway Eight, had to refinance the mortgage with the pension fund. The EDC sweetened the deal by making a $3 million guaranty. If the pension fund foreclosed the building and wasn’t able to recover all of the money it had invested from selling it, the guaranty would make up the difference, according to news reports from the mid-2000s.
Effort to Fix the Pension Hole
Representative Marcello’s resolution is intended to make a repayment of the initial investment, but makes no reparation for the lost interest to the pension fund pursuant to the state guaranty.
The resolution states, “There is hereby appropriated out of any money in the treasury not otherwise appropriated for the fiscal year 2016-2017 the sum of one million seven hundred thousand dollars ($1,700,000) to the employees' retirement system of Rhode Island ("ERSRI") … as repayment of a loan extended by ERSRI to the Gateway Eight Limited Partnership, in anticipation of development and renovation of the American Express Building or AmEx Building, so-called, also known as the Gateway Center.”
Marcello told GoLocal that he submitted the legislation at the request of a constituent.
Real Estate Pension Fund Advisor
From 2004 to 2012, the State Pension Commission was advised by Townsend Group who was terminated in January of that year and the Commission tapped PCA as the new advisor.
“The Gateway 8 investment was written off in FY2007 after the building was sold at a loss of $1.3 million, and is therefore factored into the current 10-year investment performance number,” said Ortiz to Forbes Columnist in an email last week. Siedle says Ortiz’s characterization of the loss underestimates the real adverse impact of the loss.
"All public records pertaining to ERSRI’s real estate investments have been provided to you and are publicly accessible on the website. The FY expense summary on the website includes a comprehensive accounting of all performance fees, management fees and fund expenses for the real estate managers," said Ortiz.
Siedle said that the state shouldn't have take the loss.
"The state did have a guarantee that's never been honored. There's no doubt there was a guarantee," said Siedle. "The pension fund has been taking the loss when it shouldn't have."
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