CalPERS Terminates Real Estate Partner In Development Plan

CIM is out after nine years of failed efforts to develop a vacant lot in downtown Sacramento into an office tower. What’s next for the site is unclear.

A $550 million plan by the California Public Employees’ Retirement System to build the tallest office building in Sacramento has endured a major setback with an announcement by the pension plan that it has terminated real estate firm, CIM, its development partner.

“We have ended our relationship with CIM on the 301 Capitol Mall project,” said CalPERS spokeswoman Megan White in an emailed statement CIO Tuesday night.

CIM spokesman Bill Mendel said in another mailed statement to CIO that “CalPERS recently informed CIM of its intention to make changes regarding the project. We at CIM believe the project we and CalPERS created is a good solution for the site, albeit not the only solution. We are confident that CalPERS will be successful in identifying a worthy alternative for this important site.”

Sources said the changes referred to by Mendel are specifically for the termination of CIM. It’s unclear if CalPERS still plans to build the office tower.

“We are engaging with a new manager to take over this project to ensure that the project is in the best interests of CalPERS and our members,” CalPERS spokeswoman White said.

The ending of an agreement with developer and real estate manager CIM is the latest difficulty for the retirement system in its more than 12-year saga to develop the downtown Sacramento project.

The vacant lot has been called by locals “the hole in the ground” and has been an embarrassment to city officials, sitting catty corner to a new arena where the NBA’s Sacramento Kings play.

It was back in the mid-2000s that CalPERS first proposed building back then what would have been the tallest buildings west of the Mississippi River. The twin 53-story buildings would house condominiums and a hotel on the site of the old Sacramento Union newspaper.

The expenses for Sacramento condominium towers started at $360,000 and the Intercontinental Hotel chain agreed to operate a luxury lodging facility in the bottom portion of one of the buildings.

The old newspaper building was torn down and a local developer John Saca began construction.

The infrastructure to support the buildings was installed in the form of concrete pilings, but tens of millions of dollars in cost overruns occurred due in part to deficits with the pilings. The pension plan stopped funding in January 2007, losing an estimated $60 million dollars.

CIM was hired the following year to help revive the project, but the great financial crisis put the project under wraps for nine years as the real estate market collapsed and CalPERS suffered billions of dollars of losses in its real estate portfolio.

After the Sacramento Kings arena was built in 2016, renewed interest in downtown Sacramento led the pension plan to announce that it was reviving the downtown development project.  This time, the project was scaled down to a single shorter building that would primarily be an office tower.

Last year, the CalPERS investment committee approved the new $550 million project by a 10-3 vote. Three investment committee members raised concerns about the 34-story building following a negative opinion on the project  from a CalPERS hired real estate consultant.

 The consultant said that local real estate brokers had serious concerns about whether the proposed Class A office building could be fully rented, given an oversaturated Sacramento office market, according to a memo reviewed by CIO.

The memo detailed that the CalPERS investment staff’s plan to rent out  the building with tenants priced out of the expensive San Francisco office market was speculative.

In approving the project, the CalPERS investment committee and investment staff agreed that they would not proceed if the building was not at least 40% pre-leased and CalPERS was guaranteed a return of at least 5.8%.

It’s unclear if any tenants agreed to pre-lease the building.

CIM’s Mendel said in the email that the building, “would have been the first new Class A office building in downtown in more than 10 years, with approximately 800,000 square feet of dynamic office and retail space designed to attract tenants that had not historically targeted Sacramento as their home.”

The email went on to say, “the building would have also housed 100 residential units and 27,000 square feet of public amenity space located on an elevated deck overlooking Capitol Mall.”

It was not immediately clear how much CIM has been paid for its work with CalPERS on the downtown project. The real estate firm continues to manage several real estate funds for the pension plan and was paid approximately $11 million for that work, according to the latest CalPERS comprehensive financial statement for the June 30, 2018 fiscal year. The 2019 fiscal year report does not come out till near the end of this year.

With $377.1 billion in assets under management, CalPERS is the largest U.S. pension plan. Most of it real estate assets exceeds $42 billion.

CalPERS released the statement that it had terminated CIM after a debate Tuesday between investment committee Chairman Henry Jones and J.J. Jelincic, who is attempting to win Jones seat on the investment committee.

Asked about the downtown Sacramento project by an audience member, Jones said he supported the project with modifications, which he did not detail. He also said that CIM had been terminated,

Jones did not return calls to CIO seeking comment.

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