HARRISBURG, Pa. - As layer upon layer of debt was piled on a Los Angeles office building, the $25.3 billion Pennsylvania Public School Employes' Retirement System's lender position sank lower and lower. When the borrower defaulted, the retirement system was left with nothing.
The retirement system holds New York-based Jones Lang Wootton Realty Advisors responsible, and sued the adviser Dec. 30 in Commonwealth Court of Pennsylvania, Harrisburg.
JLW, a non-discretionary real estate manager for the Pennsylvania fund, lent the retirement system's money to a partnership that sought to buy and renovate the office building.
In the 11-count complaint, the Pennsylvania school fund charged Jones Lang Wootton Realty Advisors with breach of fiduciary duty, mismanagement and fraud, among other things. The plaintiff alleges the scope of abuses is so wide "an accounting of all funds caused to be disbursed by defendants is required" before a dollar amount can be placed on the damages sought.
In addition to various JLW subsidiaries, the defendants include Jones Lang Wootton Realty Advisors Managing Directors John Weisz, Stephen J. Furnary, Frank L. Sullivan and Gary Barth. Former Managing Director James Austrian also was named.
Charles Grossman, managing director with Jones Lang Wootton Realty Advisors, said the firm is preparing an answer to the allegations and that the suit is without merit.
"We are surprised (about the filing) since it was a non-discretionary relationship," said Mr. Grossman. In a non-discretionary relationship, the manager is required to first get the investor's permission before making an investment.
Jones Lang Wootton Realty Advisors was an adviser to the pension fund from 1983 to 1992, when the relationship was terminated. During that time, the adviser invested more than $350 million on behalf of the retirement system.
The complaint focuses on several investments, but it is the Los Angeles office building - Jones Lang Wootton's first deal on the retirement system's behalf - that takes up most of the complaint.
According to the plaintiff, Jones Lang Wootton Realty Advisors, acting on behalf of the pension fund, lent Westgroup Inc. $34.5 million in January 1984 to buy and renovate the One Bunker Hill Office Building in Los Angeles.
According to the suit, the Pennsylvania pension fund would receive 9% on its loan in 1984, increasing 1% per year to 12% in 1987 and thereafter.
In addition to the interest, the pension fund was to receive 50% of all cash flow above debt service. Upon sale of the property, the fund would receive the $34.5 million "plus accrued interest plus 50% of the gross over $34.5 million."
Pension fund officials later learned the loan actually was made to One Bunker Hill Associates Ltd., a limited partnership consisting of Patrick R. Colee and Charles R. Lande, principals of Westgroup Inc., according to the court papers.
They also allege J.L.W. Realty Inc., an affiliate of the advisory company, was helping the borrower get financing for the building.
"As a consequence, during the late summer and fall of 1983, J.L.W. Realty Inc. was effectively negotiating terms of the loan/investment from PPSERS on behalf of the borrower... while Jones Lang Wootton Realty Advisors, an entity with direct relationships and affiliations to J.L.W. Realty Inc.... (was) purporting to represent the interests of PPSERS as the lender/investor on the same transaction," the complaint states.
About $25 million of the $34 million was to purchase the building; the balance was for renovations, the complaint states.
In a conference call before the close of the deal, a retirement system finance committee member asked if the $9.5 million for renovations was capped at that amount. The complaint states Mr. Weisz said "That's correct, and then of course more than that, it's their problem. They've got to come up with that money."
But on Dec. 31, 1985, the plaintiff alleges it lent the developer an additional $4.5 million at the recommendation of Jones Lange Wootton Realty Advisors, to cover interest charges and improvements to the building.
The plaintiff alleges the money actually was to prevent the borrower from defaulting on its loan, but Jones Lang Wootton Realty Advisors failed to disclose its use to the pension fund.
As a result, $2.875 million of the second loan was used by One Bunker Hill Associates Ltd. to keep the borrower from defaulting on the first loan, and $425,000 was used to pay Westgroup Inc. fees for its largely unsuccessful leasing effort, the complaint states.
Also: "Weisz, Jones Lang Wootton Realty Advisors and its related and affiliated entities caused a $10,000 brokerage commission to be paid to J.L.W. Realty Inc., for arranging the $4.5 million supplemental loan from PPSERS to One Bunker Hill Associates Ltd."
The payment of the $10,000 brokerage commission from the proceeds of the $4.5 million loan violated the power of attorney the pension fund granted Jones Lang Wootton Realty Advisors when the system agreed to the supplemental loan, the plaintiffs allege.
The Pennsylvania school fund also alleges Jones Lang Wootton Realty Advisors failed to monitor the use of the loan proceeds, and that the borrower used it to pay company debts for which the principals were personally liable.
Affiliates of Jones Lang Wootton Realty Advisors also facilitated the borrowing of additional money from Security Pacific National Bank and the Equitable Life Assurance Society of the United States so the borrower could pay interest on the pension fund's loan, the plaintiff alleges.
As a result, the new lenders received a first priority lien on the office building and the pension fund's position became subordinate, the plaintiff allege.
As the pension fund's loan position sank, the Los Angeles office market tanked. The borrower eventually defaulted. Equitable foreclosed on the building in 1992, and the Pennsylvania school fund lost its entire investment, the complaint states.
In its complaint, the pension fund alleged the building was an unsuitable investment for a first-time real estate investor seeking an inflation hedge.
The Bunker Hill Complex was located "immediately across from and adjacent to ... a skid-row" type hotel and an apartment building in deteriorating condition, both of which provided transient housing.
The building - a 12-story office structure constructed in 1932 - was Class B, and some would say, Class C space, according to the complaint.
"The only foreseeable way the location of the One Bunker Hill Office building would improve was through a renewal program which would attract Class A office facilities to sites immediately adjacent to or in close proximity to the One Bunker Hill Office Building, which would in turn compete with One Bunker Hill Office Building for tenants," the complaint states.
According to the plaintiffs, Mr. Weisz in an Oct. 24, 1983, conference call with members of the fund's finance committee described the building "as an older, historic building" in a very good location that could become an outstanding location in five years because of the development going on in downtown Los Angeles.