February 20, 2014
A Hard Lesson For CA Teachers: $44M Lost On 8 Washington Project
A public records request has uncovered that The California State Teachers Retirement System (CalSTRS) invested $45 million and has lost $44 million on the failed waterfront development known as 8 Washington.
From CalSTRS' statement in response to an inquiry from SF Weekly with respect to how their millions were spent on the project which never broke ground: "Disclosure of the requested information prior to the completion of this investment is likely to cause substantial harm to CalSTRS' competitive position."
In addition to the development's defeat at the ballot box, a judge has since ruled that the State Lands Committee improperly exempted the project from additional environmental review. As such, simply lowering the height of the proposed project to meet existing height limits for the parcels won't be enough to move forward with the development.
∙ Planning Approves 8 Washington Street Development As Proposed [SocketSite]
∙ Voters Reject Measures B/C And Designs For 8 Washington Street [SocketSite]
∙ The Fate Of The 8 Washington Street Site: What Happens Now? [SocketSite]
∙ State Teachers' Pension Fund Blew $44 Million on the 8 Washington Project [SFWeekly]
First Published: February 20, 2014 8:00 AM
Comments from "Plugged In" Readers
Why did the CalSTRS invest in this to begin with?
Posted by: why at February 20, 2014 8:33 AM
This is trivial for CalSTRS which has ~$250B invested and had a return of over 13% in their last fiscal year.
Posted by: Jake at February 20, 2014 8:49 AM
Many thanks to all the blockheads who voted "No Wall on the Waterfront".
The short-sightedness of people in this town never ceases to amaze me.
Posted by: Fishchum at February 20, 2014 8:49 AM
Trivial? Losing $44M on a single deal is a catastrophe for any investor, no matter the size of the balance sheet. This is a huge loss for CalSTRS with no end in sight.
Posted by: WH at February 20, 2014 9:15 AM
"This is a huge loss for CalSTRS with no end in sight."
Huh, no end in sight? They invested $45M and have so far lost $44M, I think I can see an end in sight and it is an additional $1M loss. Do you have some information that indicates CalSTRS has some type of ongoing unlimited liability for this project?
Posted by: Rillion at February 20, 2014 9:25 AM
"Why did the [sic] CalSTRS invest in this to begin with?"
Because virtually every major development project in the country involves a developer who puts in a very small amount of equity, an equity investor who puts in the remaining amount necessary to meet a lender's loan-to-value requirement, and then that lender supplies the rest as a construction loan. Your savings accounts, pensions, and life insurance funds are all invested in real estate here and around the world.
So yes, in line with Fishchum's note, I hope that every teacher in S.F. who voted for this (or who failed to go to the polls and vote 'no') woke up this morning gobsmacked at the stupidity of their actions.
Posted by: Sierrajeff at February 20, 2014 10:24 AM
I can never understand why teachers pension funds risk huge money on luxury developments that teachers will never be afford to live in. Why don't they do something like buy redwood forests that will mature over time, and be worth more when teachers actually retire and need the money??
Posted by: 4oceans at February 20, 2014 10:33 AM
Should I be gobsmacked if I drive a more fuel efficient automobile (or, heaven forbid, use public transit) and I own a mutual fund invested in Exxon?
As for the loss of this particular investment, perhaps we should all reread and consider the last paragraph of the post?
Posted by: Mr. E. at February 20, 2014 10:51 AM
Me thinks WH doesn't work in finance.
Posted by: OA at February 20, 2014 10:59 AM
Wasn't this a 160 unit project?
$44M is about $275k per unit.
Was the $44M even the entirety of what was lost or did other investors lose money too?
If it costs over $275k just to plan on building a unit, that shows you why there's an affordability crisis.
Posted by: anon at February 20, 2014 11:03 AM
Re the size of the loss - $ 45 mil is not on the surface a big loss for calsters -- BUT it is certainly within a smaller RE fund where the loss will be more material, and beyond the effect at the entity level to have a complete loser - i.e. a 100% loss on a single investment is a major black-eye especially when some people believe they saw this coming for a long time. I know second guessing is easy now, but this is an embarrassment for calsters and they could and should have known somewhat better.
beyond that it might have a ripple effect on the willingness of institutions to invest in unentitled land development in SF. The folks who manage these funds - i mean within calsters not their outside advisors - have a significant motivation " not to fail" and to just get medium levels returns.
what do you think happens to the cost of capital for the giants project and forest city at pier 70?
Posted by: Louis at February 20, 2014 11:31 AM
I just hope the CSTRS is not also invested in Ca HSR. ( high speed rail) That project, currently forecast at 175 billion could eventually exceed the entire value of the current teachers pension funds.
Posted by: Anon2 at February 20, 2014 11:35 AM
Regardless of the size of this particular investment to the total portfolio, it is a very embarrassing mistake.
As Mr. Buffett advises, the only three rules of investing are "never lose money, never lose money, and never lose money."
Posted by: anon at February 20, 2014 12:34 PM
It is not the job of a fund to engage in a public policy agenda, the funds invest their assets to make sure the pension is fully funded. As to why they invest in luxury projects, or any real estate project for that matter, the answer is simple--they usually make money off such invests. Any investment can end up as a loss, and investing in securities can also result in substantial losses.
This is neither particularly "embarassing" or particular unusual. Some investments work out and some do not, which is why funds are diversified and risks are hedged.
This loss will not change the investing strategy of most funds. It is simply something that happened.
I think the greater loss, and the one that really effects residents of SF is the loss of both the affordable housing fees that this project would have brought, and also the loss of property tax revenue. A tennis court for a chosen few, and an ugly parking lot are not great public amenities, and whatever ones feelings about the particular design of the project, the truth is it would have done very little to interfere with the pedestrian experience off the waterfront. This was not a funky or interesting area--it is a sterile, yuppie area that would not have had its character changed one way or the other by a few more luxury housing units.
Posted by: Chris at February 20, 2014 1:31 PM
To those who think this loss to CALSTRS is trivial because it has so much money under management remember this: cALSTRS is a defined benefit program, which means it has significant obligations and as of June 30,2012 CASTRS independent audited determined that "Actuarial accrued obligations exceeded the actuarial value of it's assets by $70.5 billion"
That might put the loss into perspective.
Posted by: jimmythekid at February 20, 2014 3:36 PM
This sounds like a huge scandal!
...to people who know nothing at all about real estate finance or pension plan investments...
Posted by: anon at February 20, 2014 4:10 PM
"So yes, in line with Fishchum's note, I hope that every teacher in S.F. who voted for this (or who failed to go to the polls and vote 'no') woke up this morning gobsmacked at the stupidity of their actions."
Most teachers not savvy or informed enough to even know about this. Even if they did, most not savvy enough to change their actions.
Posted by: the wolf at February 20, 2014 5:07 PM
Of course losing money is not good and maybe they will make something out of the project yet.
CalSTRS RE portfolio generated enough profit last year that $44M is about equal to the average weekly gain.
FWIW, 8 Washington wasn't their first SF waterfront deal with the developer.
The good news is CalSTRS has recovered from losing more than $40 billion in asset value in the 2008 crash.
That might put any 8 Washington profit or loss into perspective.
Posted by: Jake at February 20, 2014 5:35 PM
NIMBYism is not a victimless crime.
Posted by: formidable doer of the nasty at February 21, 2014 8:13 AM
Jake CALSTRS is a defined benefit program with substantial obligations It's own independent Auditors determined that actuarial accrued obligations exceeded the actuarial value of it's assets by $70.5 billion….There is no good news here!
Posted by: jimmythekid at February 21, 2014 10:25 AM
I still don't get the "scandal" comments, except that yes, they seem to come from people who don't understand anything about how investments are managed.
Would it be a "scandal" if the loss resulted from a bad stock investment? EVERY investment has risks, and if a fund manager is overly conservative on every investment, then they will not generate a big enough return on the assets to fund the pension obligations. It is just as much mismanagement to pursue an overly conservative investment strategy as it is to pursue one that is too aggressive.
More importantly, the proposed real estate project isn't dead yet, so I think it is a bit premature to write it off as a total loss. Something can still be built on the site, and it is likely some revised project will eventually be approved. I assume the investment manager was looking at a long-term horizon with this particular investment.
Also, I am sure the fund is invested in a wide range of investments that help offset the risk of loss on any particular transaction.
As for the pension not being fully funded that is a separate matter from the investment strategy, and unfortunately, it is not an unusual situation for public employee pensions.
Posted by: Chris at February 21, 2014 12:36 PM
jimmy, you may not call it "good" news, but it certainly is "better" news that CalSTRS has recovered from the 2008 losses than if the fund were still another $40 billion or so in the hole.
CalSTRS made 13.8% return in FY2012-13. If they do that well this year and for the next four years, then they will be fully funded. And wouldn't that be good news?
The only way they can make the kind of returns they need is to invest heavily in equities and real estate. Some of those are going to lose money and some are going to more than make up for the losses.
“Every strike brings me closer to the next home run.”
― Babe Ruth
Posted by: Jake at February 21, 2014 12:42 PM
But how do you spend over $45M just planning a project?
Having the issue brought to the ballot surely wastes some money, but a while back someone on SS posted that the anti 8 messure was funded by $75k from a rich couple so that puts a perspective on the costs there.
Posted by: anon at February 21, 2014 12:58 PM
You spend $45 million by spending 10 years in the entitlement process, thusly:
-go thru several years of back and forth negotiating with the Port
-go back to zero when the Port decides to put it out to bid
-prepare the bid
-go thru another couple of years of negotiation with the Port
-have dozens of meetings with neighbors
-design a conforming 85' project all the way thru design development
-have the new District Supervisor on the block call for a 7 week neighborhood planning process that takes 17 months
-have dozens of more meetings
-have the Planning Department and Planning Commission recommend that the project be scaled down in front and up in back - to be more graceful (but now non conforming)
-redesign the whole project to meet what Planning wants
-go thru a multi-year EIR process
-have hearings on the EIR which is passed
-have hearings on the appeal to the EIR
-have hearings on the rezoning at the Planning Commission which passes
-have hearings on the appeal to the rezoning at the Planning Commission
-have hearings on the rezoning at the Board of Supes
-have hearings on the appeal to the rezoning at the Supes
-have hearings with DPW
-have hearings with State Lands
All these hearings involve considerable preparatory work and are attended by the architectural team, lawyers, pr consultants, etc. All the while you are paying lease payments on the land
10 years; $45 m = $4.5m/year.
This is only the developer's cost. It does not include the millions the Port, Planning Department, etc staff time put in (which the hefty permit fees are intended to cover.)
BTW, it is my understanding that Calsters did not fund the ballot measure - the developer did on top of the $45m. And also BTW, the neighbor put in $450k to put the measure on the ballot, not $75k, plus additional $100 or more from Boston Properties (Embarcadero Center) and EOP (Ferry Building). Plus whatever they put in for the actual ballot campaign.
And you wonder why housing is so expensive in SF. The ultimate purchasers of the condos are the ones who pay.
Posted by: Jim at February 21, 2014 3:05 PM
This is really less about an investment , and more about how small minded NIMBY groups , plus Tax and Spend Old School Politicians are again poisoning the city of San Francisco.
Nothing against Art Agnos and his ilk, but restricting the creation of market rate housing, and over building housing for the poor is what got this city in trouble to begin with
Posted by: Joseph A at February 22, 2014 3:23 AM
To put the $44M in perspective, the developer who had tried his hands at a project at that site prior to "8 Washington" had a budget of $39M for the entire project according to the following article:
As I recall, the project was quickly abandoned, possibly in part to local opposition, so I would assume that the developer was able to cut his losses. Enter Simon Snellgrove, who so far, doesn't have all that much to show for the money spent.
As for the notion that housing in SF is unaffordable because of greedy developers trying to build $5M condos for absentee owners in one of the toniest parts of town are met by opposition from rich NIMBYs: Yeah, right, that's probably the reason.
Posted by: anonanon at February 22, 2014 11:09 PM
currently forecast at 175 billion
Where do you get this number from Anon2?
I see $68B as the current estimate.
Posted by: NoeValleyJim at February 24, 2014 1:21 PM