SACRAMENTO, Calif. - Boldly going where no other pension fund has gone before - or at least dared to tell - the $89 billion California Public Employees' Retirement System this month allocated $400 million to an in-state residential land acquisition and development program.
The fund is seeking to capitalize on the exodus of savings and loans and commercial banks as the traditional lenders for residential land acquisition and development. The Financial Institutions Reform Recovery Enforcement Act of 1990 curtailed the lending activities of the thrifts and commercial banks.
By filling the vacuum, fund executives hope to generate an after-fee return ranging between 20% and 30%, said Alfonso Fernandez, mortgage investment officer.
In such deals, land already approved by a jurisdiction for the development of single-family homes is acquired, and the infrastructure necessary to build homes - curbs, streets and sewer lines - is installed. The lots then are sold to third-party builders, said Mr. Fernandez.
For the A&D program, California Employees' will continue to work with its partners in its $375 million single-family development program, which it began in 1992. The adviser/partners are Bankers Trust/Alex. Brown Kleinwort Benson, Baltimore; Hearthstone Advisors, San Francisco; Institutional Housing Partners, Irvine, Calif.; Prudential Home Building Investors, Newark, N.J.; and Wells Fargo Housing Advisors Inc., San Francisco.
Each will receive $60 million commitments, said Mr. Fernandez. A determination on the remaining $100 million has not yet been decided, according to Mr. Fernandez.
In a typical single-family home financing, the California fund provides gap equity capital equal to about 35% of the total project cost. The adviser/partner contributes 10%, and the developer contributes 10% of the maximum outstanding on a specific project. Borrowing from a third-party lender is limited to no more than 50% of the cost of a project.
For the A&D program, the percentage contribution of the adviser/partner will be different from the single-family program, and is being negotiated now, according to Mr. Fernandez.
The projected rate of return on the single-family home building program is about 20% after fees, according to Mr. Fernandez.
Two projects developed by Institutional Housing Partners have been completed. A 43-home development called Blairmore in Cupertino generated an after-fee return of 43%, according to Mr. Fernandez. The 57-home Belsomet project in Anaheim generated an 18.6% return, which fell short of the 25% projection after fees.
The lower return is considered satisfactory because of the declining Orange County housing market over the development period, which drove housing prices down, according to a report to trustees.
Other single-family home projects will have between 110 and 220 homes per development, according to Mr. Fernandez.
As of the end of May, the pension fund committed to 66 separate projects with a total of 7,746 units, 100 of which are complete. The program provides 2% to 3% of the total statewide housing activity.
The 66 projects have an approximate cost of $1.25 billion; the partnership commitment is $523 million.
The average home size is 1,636 square feet. The average sale price is $178,199, and the average cost is $148,519. The portfolio is located 50% in Southern California, 20% in the San Francisco Bay area and the balance in other areas, including central California.
As of late May, there were 1,313 closed sales and 1,068 open escrows.
The fund is widely believed to be the first pension fund to invest in residential A&D, but it is not the first tax-exempt institutional investor. Endowments and foundations have made these investments through Acacia Capital Corp., San Francisco.
An Acacia official declined to identify its clients but did say they are among the largest 25 endowments and foundations.