PHILADELPHIA - The $2.2 billion Board of Pensions and Retirement for the City of Philadelphia wants to take property in lieu of cash as a way of getting out of two real estate funds managed by MIG Realty Advisors.
Fund officials cited poor performance by the West Palm Beach, Fla., real estate adviser as the reason.
The pension fund prefers property in lieu of cash because receiving money would require a forced sale of property, which would harm the fund's investors, said Margaret Flynn, pension investment administrator with Phialdelphia.
Ms. Flynn said a letter was sent to one of its co-investors in the funds - the $2 billion Detroit General Retirement System - in late June, suggesting the deal.
The Philadelphia fund, the Detroit General Employees' fund and the $2.1 billion Detroit Police & Fire Retirement System are the biggest investors in Mortgage Investors Fund II and MIG Group Trust III.
The $500 million Oakland County Employees' Retirement System, Pontiac, Mich., is the only other investor in the two MIG funds, said Doug Williams, secretary to the board.
Philadelphia invested $20 million in each fund during the late 1980s.
The pension fund now has $4.9 million in MIF II and $9.2 million in MIG III, said Ben Hayllar, chairman of the board of trustees for the Philadelphia fund.
To date, the total distribution to Philadephia from MIF II has been $2.8 million; for MIG III it is $92,500.
According to Ms. Flynn, the funds were expected to generate an income return of 6% plus appreciation.
Some of the money was lost to depreciation of the assets. Some money also went to pay MIG's fees, which were high but not atypical for real estate fees of that period, said Ms. Flynn.
Some of the equity went to refinance loans on the properties, which were highly leveraged, and some properties in MIG III were foreclosed on, thus wiping out the equity of those investments, said Ms. Flynn.
Philadelphia's investment in the two funds comprises about 30% of the total asset value, Ms. Flynn said.
"There are 11 buildings left in the funds," said Ms. Flynn. "We want one or two. We need to get Detroit and MIG to say we can do this," she said.
Joe Glanton, assistant administrator for the Detroit General Retirement System, acknowledged receipt of the letter.
According to him, a meeting of the general retirement system's trustees was scheduled for July 6 and a meeting of the fire and police fund trustees was scheduled for July 7. No details of the meetings could be learned by presstime.
There are no plans to terminate MIG as a real estate adviser to the Detroit General Retirement System, said Mr. Glanton.
Mr. Williams of the Oakland County fund said he had not received a letter from Philadelphia, but he acknowledged that the performance of MIF II and MIG III had not been good. The Oakland County fund, however, is not looking to exit from the MIG funds.
In total, Oakland County has invested $10 million in five MIG funds, Mr. Williams said.
Larry Wright, president of MIG Realty, declined to comment about the Philadelphia proposal. Mr. Wright blamed the poor performance on the portfolios on the downturn in the economy in the early 1990s.
"From a management standpoint we've done well in terms of keeping things fully occupied," he said.
Philadelphia hired San Francisco-based AMB Institutional Realty Advisors at the end of May to develop a proposal to take property in lieu of cash, according to Ms. Flynn.
Philadelphia's investments with MIG became the center of controversy in 1990 when it was learned that MIG had served as both real estate investment consultant and adviser and recommended its own investment vehicles to the board of trustees.
Philadelphia's investment in MIF II and MIG III were recommendations by MIG, according to Ms. Flynn.
In 1990 the Philadelphia retirement system had more than half of its real estate portfolio - then $70.4 million - in MIG-recommended vehicles.
In the first quarter of this year, MIG resigned from some separate account retail properties it managed on behalf of Philadelphia, said Mr. Wright.
"We had a difference of opinion on how things should be done on the property level." said Mr. Wright.