1、 1 Practitioners Corner: An Interesting Time For Real Estate Has there ever been a more interesting time in real estate finance? Happier times, yes, more profitable times, definitely yes .But more interesting? The year leading up to September 2008 saw the creation of real estate finance structures o
2、f breathtaking complexity .since than time in the real estate finance industry have been involved mainly in trying to understand what went wrong, and to determine whether the collapse, was in any material way the result of flaws in these complex real estate finance structures .or was it just a funct
3、ion of external economic pressures and the cyclical nature of real estate .while the jury is still out. The answer seems to be that the structures did not cause the real estate recession, but through their opaque nature they may have made the recession worse, both by delaying the recognition of the
4、underling fragility of the market and by making the problems, once recognized, even more difficult to resolve. One thing is sure: many people, whether legislators, regulators, lawyers, accountants, bankers or those who raise and consume real estate capital are now working very hard to address(1) how
5、 to resolve distressed real estate capital structures, and (2)how to improve the structures and form of delivery of real estate capital to the market in the future. Change being considered now will affect the real estate markets through the next generation. Following are a few examples. RESTORING AM
6、ERICAN FINANCIAL STABILITY ACT As l write this, the US is beginning its final debate of the RESTORING AMERICAN FINANCIAL STABILITY ACT , and appears to be building momentum for adoption in some form, which would then require reconciliation with the equivalent House version. If adopted in anything li
7、ke its current form it will cut a broad swath of change across current business. Practices by providers of real estate capital of all shapes and sizes .it will give the Federal Reserve Bank new powers over financial institutions but in turn impose more congressional over sight of the Fed. 2 Lawyers
8、recognize that often the most compelling litigation cases lead to the worst precedent: judicial over-reaching in the face of egregious facts. Will that be the case with the RAFS and the resulting regulations? Will we spend the next 20 years backing away from the reforms adopted in this atmosphere of
9、 crisis? This will all play out over the coming months and years, we will keep an eye on the process in this column, and as with all subjects covered in this column, we would welcome hearing your perspective on this. CALPERS AND PLACEMENT AGENTS Much of the real estate investment momentum over the y
10、ear 2005 through 2007 was fueled by increased asset allocation within public employee pension founds, attracted by seemingly high returns. One example of this was a $14 billion net increase in commercial real estate investment 9by the California Public Employees Retirement System (CalPERS) as the ma
11、rket boomed in 2005 and 2006.Not only was the net exposure increased, but, as detailed in a Real Estate Program Review, dated April 19,2010,by the Real Estate Unit Of the CalPERS Investment Office, new investment disproportionally made to high risk investments .in a Memorandum accompanying the Progr
12、am Review The Real Estate Consultant to the CalPERS, Board also noted a wide variety of factors that apparently contributed to the 48.2 percent decline in Net Assets at Fair Market Value from June 30,2008 through June 30,2009, in the CalPERS real estate portfolio, as follows: (1) Higher amounts of l
13、everage, which lowered income returns and increased exposure to changes in the asset value； (2) Recourse debt, which exposed CalPERS to risks beyond the specific assets； (3) Looser program guidelines gave investment strategies； (4 Shifting commitments from stabilized core investment to non-stabilize
14、d opportunistic investments, which now comprise more than 40 percent of the current holdings in the portfolio； (5) A dramatic increase in the number of manager relationships and commingled investment vehicles provided less control, poorer governance and hindered staffs ability to resolve problems an
15、d liquidate asset； 3 (6) vintage year concentration with over $27 billion of equity commitments made in 2005 and 2006,in part driven by successful market timing dispositions realized by core partner. Interestingly neither the Real Estate Program Review nor the PCA Memorandum cite the undue influence
16、 of placement agents, generally third party consultants with differing degrees of professional and competence, political or board connections, and compensation arrangements who undoubtedly contributed to the increase in the number of manager relationships, looser program guidelines, and large concen
17、trated investments. However, the California legislature did take note of the potential foe abuse. On October 11,2009,Governor , Schwarzenegger signed into law Assembly Bill No. 1584 regulating the role of placement agents and requiring disclosure of contributions or gifts to state and local retireme
18、nt board members. This now has been followed by Assembly Bill No. 1743, not yet enacted into law, which would define placement agents as lobbyists into accordance with Californias political reform act. This would impose strict controlsover gifts and contributions, and would prohibit compensation con
19、tingent on any investment decision. The latter provision produced initial strong opposition from the Blackstone Group, from which it subsequently backed off. The bill still face significant opposition from trade association, which, not surprisingly, prefer the regulatory approach of complete disclos
20、ure as opposed to outright prohibition . All of this is a story that will continue to unfold, with New York being another state looking closely at the issue, but while the issue of the access is important, the issue of allocation and investment strategy are even more critical. As PCA concludes in it
21、s Memorandum: CalPERS experience during the past 28 years suggests that a real estate strategy focused primarily on direct investment in core-risk type properties has provided a more attractive risk adjusted return than the more aggressive opportunistic strategy. PCA finds significant merit in the overall context of the CalPERS investment program in pursuing a less aggressive strategy. With more controls, than was in place between 2002and 2006.
