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Dallas Police and Fire sues Townsend for RE losses

The $2.1bn pension system alleges the real estate consultant’s actions caused it to lose $580m.

Dallas Police and Fire Pension System is suing Cleveland-based advisory and investment firm Townsend Group, its previous real estate consultant, for multiple breaches of contract, breaches of fiduciary duties and negligence.

In a lawsuit filed on August 31 in the district court of Dallas County, the pension system alleges that Townsend, which consulted for DPFP from October 2001 to February 2016, caused the pension system to lose $580 million from its real estate investments, largely in development projects that were not completed. DPFP is also suing its previous lawyer, Gary Lawson, and two Townsend principals: Richard Brown, who joined the firm in 1999, and Martin Rosenberg, who started at Townsend in 2005.

Townsend earned over $2.5 million in fees during its 15-year contract, which DPFP is seeking to recover along with damages and legal fees, according to the filing.

DPFP advice from Townsend ceased after the pension terminated the contract.

Townsend has 50 days from August 31 to respond to the lawsuit.

A spokeswoman for Townsend and its current owner, real estate investment trust Colony NorthStar, declined to comment. Greg Taylor, the lawyer for the pension system, also declined to comment on behalf of Houston-based law firm Diamond McCarthy, and DPFP did not respond.

On Monday, Colony NorthStar announced it is selling Townsend to consultancy Aon Group for $475 million. Aon could not be reached for comment about the lawsuit.

The pension system alleges that Townsend “failed to act as a prudent investment consultant would under similar circumstances,” and did not diversify DPFP’s portfolio to minimize the risk of large losses, among other charges.

“DPFP made most of its real estate investments through real estate investment managers, who were obligated to monitor, recommend and actively supervise each real estate investment under their purview. As investment consultant, Townsend oversaw both the investments in the real estate portfolio and the IMs who supervised them,” the pension system wrote in the suit. “For years, Townsend allowed investment managers under its oversight to run amok, plowing DPFP funds into wildly inappropriate investments, disclaiming their statutorily-mandated fiduciary duties and over-allocating funds toward investments in real estate.”

In the lawsuit, DPFP noted four specific investment managers that caused $400 million in investment write-downs: CDK Realty Advisors, which in 2014 managed 60 percent of DPFP’s real estate portfolio; now-bankrupt Land Baron Investments; luxury housing developer Knudson; and Criswell Radovan, which filed for bankruptcy last year.

DPFP maintains Townsend failed to advise the pension system to diversify its investments by manager, property type and location, citing, in one example, three separate development projects around Boise, Idaho, one of which remains undeveloped and two of which were sold for a loss of $52 million. One of those exited investments, called Nampa, was projected to have a 132-580 percent one-year return on equity, according to a board presentation cited in the lawsuit. When Nampa’s manager went bankrupt, Townsend did not tell the DPFP board, DPFP claims.

The pension system also alleges that Townsend did not disclose material information.

The court filing also mentions former DPFP staffer Richard Tettamant, noting: “Townsend feared former DPFP Administrator Richard Tettamant,” who the filing says was dismissed by the DPFP board in 2014. “Because of this dynamic, Townsend repeatedly lost sight of who its client really was – the DPFP Board of Trustees. Instead, Townsend repeatedly failed to advise its client, for fear of speaking out and of jeopardizing its lucrative contract.”

Tettamant has been a senior advisor for Ethika Investments, a Los Angeles-based private equity real estate firm, since 2014, according to his LinkedIn profile. He could not be reached for comment.

DPFP also claims Townsend did not advise the board that its overallocation to real estate was “problematic.” Today, DPFP continues to be overallocated to the asset class, with 24.1 percent, or $510 million, of its $2.1 billion portfolio invested in real estate, compared with a target allocation of 12 percent as of March 31, according to its most recent investment report.

In the five years ending March 31, DPFP’s real estate returned -7.6 percent, below its 10.7 percent benchmark, and 4.7 percent in the year ending March 31, under its 7.3 percent benchmark. The overall portfolio returned 1.1 percent over five years and 5.7 percent in one year.

After DPFP voted to terminate Townsend’s contract in February 2016, the pension system expanded the mandate for its general investment consultant, NEPC, to include real estate.