CalPERS lost tens of millions from failed downtown Sacramento development

CalPERS’ decision to abandon development plans for the tallest office tower in Sacramento will end up costing the pension plan tens of millions of dollars once all the tallies are calculated.

It also draws to a close one of the last failures of the pension plan’s speculative real estate investment program that imploded during the financial crisis in the late 2000’s.

The value of CalPERS real estate assets dropped by nearly 50% in one year alone from approximately $28 billion in 2008 to around $14 billion in 2009.

CalPERS lost close to $1 billion on a single plan to build 21,000 houses north of Los Angeles when the real estate partnership it invested in 2007 went bankrupt the following year. It was just one of countless real estate deals that collapsed.

While most of the failed investments are long gone from CalPERS current $40 billion real estate program, the project at 301 Capitol Mall was still listed as an active project until last week when pension plan CEO Marcie Frost said CalPERS was abandoning development efforts.

Project plans were ambitious in 2006 as well as when a new plan resurfaced in 2018. However, the original plan in 2006 for two of the tallest residential buildings west of the Mississippi River was scaled back to the tallest office tower in Sacramento in the 2018 plan.

Frost said on April 7 that the pension plan was abandoning the project because it couldn’t achieve the financial returns to make the project worth the financial risk. She also emphasized CalPERS changed focus on core real estate income producing assets, a move that started to occur after the financial crisis.

The final losses at 301 Capitol Mall will depend on how much money the pension plan receives for the vacant square-block plot at the entrance of downtown by the Tower Bridge. The land is assessed at $15.8 million.

CalPERS spokesman Joe DeAnda said the pension plan has already written off $50 million of it’s original $71.8 million investment.

DeAnda also said the $71.8 million include CalPERS cost of buying out John Saca, the original developer of the project but not the costs paid to real estate partners helping the pension organization find a new developer after its original plan collapsed in 2007.

CalPERS paid developer Saca $20.2 million in June 2006 for his stake in the real estate partnership after he ran into financial difficulties due to project cost overruns, show Sacramento County assessment records.

Construction originally commenced back in 2006 on two 53-story towers containing condominiums, a hotel and retail shops.

CalPERS ended the project in January 2007 after its own concerns about the project’s financial viability.

‘Aspirational’ plan for downtown

Even in the boom real estate market of 2006, the Capitol Mall project might have been too ambitious for Sacramento. The project included more than 700 high-end condominiums that started at $360,000 a unit.

“I think most people were of the opinion that it was aspirational, that actually accomplishing a project of that scale was problematic,” said Randy Getz, an executive vice-president at commercial real estate firm CBRE’s Sacramento office. “I don’t think a lot of people were surprised when the deal blew up.

Losses quickly mounted for CalPERS. The pension plan lost its initial $25 million investment in the project in addition to buying out Saca for more than $20 million.

A smaller version of the plan to develop what became known as the hole in the ground resurfaced in 2018. CalPERS officials along with its development partner, real-estate developer CIM, proposed a $550 million 550-feet office building.

The problem: a marquee tenant to occupy 40 percent of the building and make the project financially feasible couldn’t be found. CalPERS ended up terminating CIM and entering into a contract with HInes, a new development partner.

CalPERS financial documents show that in the 12-month period ending June 30, 2020, CalPERS paid both CIM and Hines a combined more than $800,000, partly for managing the project.

It’s impossible to know how much went specifically for the 301 Capitol Mall project because the money also included managing CalPERS’ headquarters, several small office buildings, parking lots and a warehouse, in the vicinity of the pension plan’s headquarters.

CIM was paid fees to CalPERS every year between 2007 and 2019, when it was terminated, which included managing the 301 Capitol Mall project.

It was no surprise that the latest version of the project was deemed financially unfeasible by CalPERS.

A 2018 memo by a CalPERS real estate advisor expressed concern that the pension plan could have difficulty in achieving its expected 5.8 percent return. It noted that the rents other office buildings in Sacramento received from tenants weren’t adequate to justify such financial returns.

Despite the report, the majority of the CalPERS board approved going ahead with the project.

CalPERS’ relationship with Sacramento

Why did CalPERS take so long to abandon the project?

CalPERS had a problem with its neighbor, the city of Sacramento. City officials had pressed the pension plan for years to construct a project on the vacant lot after the 2006 project fell through. They considered the vacant land an embarrassing eyesore at a key intersection in Sacramento.

CalPERS spokesman Brad Pacheco noted CalPERS ‘relationship with Sacramento when the pension plan announced the revised project in 2018.

“We want to honor our commitment to the city to create something that is an iconic project,” he said.

Former Sacramento City Councilman Steve Hansen, whose district included the hole in the ground, was constantly pressuring CalPERS during his tenure from 2012 to 2020 to build at the vacant lot as were other city officials.

“I think CalPERS never had the courage to pull the trigger,”Hansen said.

He said investing in Sacramento was part of CalPERS public mission and while it might have been a complicated development, “I thought CalPERS would be willing to invest in difficult projects over the long term.”

For CalPERS, the tide has turned away from real estate speculation .

CalPERS’ current real estate portfolio consists of only five percent of speculative projects, down from more than 50 percent before the great financial crisis.

Whether 301 Capitol Mall ever gets developed will be up to someone else, not CalPERS.

This story was originally published April 14, 2022 at 5:00 AM.