CalSTRS joins ban on Stuy Town-style deals

The $138bn pension has joined its neighbour CalPERS in supporting legislation that would prevent the two funds from investing with real estate managers who try to convert rent-controlled apartments. CalSTRS staff will also consider possible penalties for GPs who abuse the ban.

The California State Teachers Retirement System has backed legislation that would ban the pension fund from investing with real estate managers who try to profit from converting rent-regulated apartments by displacing tenants.

The $138 billion pension Thursday agreed to support a draft bill currently making its way through the California state assembly that would prohibit CalSTRS and its neighbour, the California Public Employees’ Retirement System, from investing with managers employing “predatory investment practices” – provided proposed amendments are eventually introduced.

The original legislation could have seen fund managers backed by CalSTRS and CalPERS capital from evicting any tenant, including for the non-payment of rent, and even from moving tenants while improvement works were made to units. It would, CalSTRS said, have cost the pension “millions of dollars in total investment opportunity costs”.

However, director of government relations Berman Obaldia told CalSTRS legislative committee the pension had worked closely with Assembly member Tom Ammiano, who has introduced the bill, to agree various changes that would allow the pensions to continue investments in affordable housing. The discussions had “moved the needle significantly”, he said. “We are close to coming up with some language that is palatable to everyone involved.”

Ammiano introduced the legislation – which would force CalSTRS to sell any investments where “predatory” practices are employed within 18 months of the bill being introduced – after public protests over Page Mill Properties’ East Palo Alto deal and Tishman Speyer/BlackRock Realty’s Stuyvesant Town and Peter Cooper Village transaction.
In both cases, the real estate managers were accused by tenants of aggressively trying to convert rent-stabilised units to market rates. In the case of Page Mill, one CalSTRS investment official told the committee the firm was “a very bad operator and … used aggressive management techniques to incentivise [tenants] to leave”, which resulted in “very bad press” for the pension.

The legislation – known as AB 2337 – would require CalSTRS to sell investments in any deal where “predatory” practices were employed by investment managers and their property managers. CalSTRS legislative board also called on investment staff to draw up policies so fund managers were “constantly” checked as to whether they were complying with the legislation, and fired if found to be flouting the law.

CalSTRS will debate introducing its own policy that “mirrors” AB 2337 at its June board meeting.