PASADENA, Calif. - Trustees of the $17 billion Los Angeles County Employees' Retirement Association want to know if one of its separate account real estate managers is giving investment preference to its private real estate investment trust at the expense of the retirement fund's $250 million account.
The trustees have asked The RREEF Funds, San Francisco, to delay investing the $75 million balance of its account until the pension fund's investment staff can report its findings to the board. RREEF already has invested $175 million on behalf of the pension fund, said Kenneth Shaffer, chief investment officer.
The L.A. fund's other separate account real estate advisers also are being scrutinized to see if they have policies to address how real estate investments are made available to the fund, said Mr. Shaffer.
But the other managers have not been asked to stop making investments, he said. LACERA's other separate account advisers are Lowe Enterprises, Los Angeles; TA Associates, Boston; and INVESCO Realty Advisors, Dallas.
According to fund trustee Bob Hermann, he learned only two weeks ago that RREEF manages a private REIT - RREEF America Inc. - that has a priority position on properties valued at less than $15 million.
Last year, RREEF proposed that in 1995 and 1996 it would buy apartments and industrial properties valued at more than $15 million each for the L.A. fund; the adviser previously bought the smaller properties for the fund, said Mr. Hermann.
He now wonders if RREEF changed the business plan to accommodate its own private REIT.
"Did they do it to benefit us or (to) not have a conflict?" asked Mr. Hermann. "If it's good (the property), I don't care about the size.
"The issue is a fiduciary issue," said Mr. Hermann, a 12-year veteran of the retirement board. "Their business plan has to be set in the best fiduciary interest of the client.
"My issue is when they take our fees they are our fiduciary. You can't be everything to everybody."
Donald King, a RREEF partner, said the retirement board was told that the firm managed a private REIT that would buy properties valued at less than $15 million.
"Webb Snowden (a principal) did it in his capacity because he's the person involved on the account," said Mr. King. "We let it be known to our separate account clients that that's what we were doing.
"Webb tells me it was done and I'm sure it was."
Mr. King described the situation as a misunderstanding; he expects it to be resolved at a subsequent meeting of the board.
"What we will explain to the board will satisfy them," said Mr. King, "We are trying to provide as much information to them as we can.
"It's a difficult situation."
It was by coincidence that Mr. Hermann learned of the private REIT and its priority position over LACERA. The revelation was made in an unrelated report by a retirement system staff member about RREEF's purchase of the Marina Square Shopping Center in San Leandro, Calif., for the pension fund.
The Marin Square report investigated whether LACERA board members were told by RREEF that two other clients of the firm had first been offered and declined to buy the mall. John McClelland, LACERA real estate officer, concluded that the board was told.
But the investigation also revealed the existence of the REIT and its investment philosophy that gives it priority over certain investments, said Mr. McClelland.
"I reported it to them as matter of fact," Mr. McClelland said. "My board was taken aback.
"It's possible that the priority allocation to the REIT was previously disclosed to LACERA (the staff)," said Mr. McClelland, who has only been with the board for 21/2 months. "I believe all the trustees were surprised by this."