Spurred by the recent implosion of Page Mill Properties' East Palo Alto portfolio, California's elected officials are considering barring state pension funds from investing in companies that rely on displacing tenants to turn a profit.
The proposed bill by Assemblyman Tom Ammiano would prohibit public pension funds such as the California Public Employees' Retirement System (CalPERS) and the California State Teachers' Retirement System (CalSTRS) from investing in companies that engage in "predatory equity" schemes, which involve forcing tenants out of rent-regulated housing.
CalPERS, the nation's largest pension fund, had committed about $100 million to Page Mill Properties and contributed about $95 million before the Palo Alto-based firm defaulted on a Wells Fargo loan and lost control of all of its properties last fall.
Ammiano's bill, AB 2337, cleared the state Assembly's Committee on Public Employees, Retirement and Social Security last week and is scheduled to be taken up by the entire Assembly in the coming weeks. East Palo Alto tenants and community activists joined Ammiano on April 21 in calling for the committee to approve moving the bill forward, which it eventually did by a 4-2 vote.
"There's no excuse for public funds being used for predatory-equity schemes," Ammiano said. "They are not only unethical but are unsound investments that pose serious financial risks."
"Over $100 million of public funds have been invested in companies in California like Page Mill that have resulted in the harassment and the displacement of tenants and rent control units," he added.
The bill was taken up just two days after the CalPERS board of directors voted to adopt a new policy that prohibits investments in real estate properties that depend on displacements of tenants. The board released a statement touting the new policy as one that will ensure that CalPERS capital won't lead to mass displacements of tenants.
"We took some very tough medicine in real estate but are on the mend and applying extremely useful lessons to greatly improve our systems and controls," CalPERS Chief Investment Officer John Dear said in the statement. "Much of the bad news is behind us, and we're well-positioned for solid performance."
Ammiano's legislation would essentially codify this new policy in state law. Christopher Lund, Page Mill's tenant and member of the East Palo Alto Fair Rent Coalition, told the committee that CalPERS' new policy is a "good first step" but argued that the legislation is needed to make sure predatory-schemes like Page Mill's don't happen in the future.
"Institutional memory is short, and nothing in the proposed policies prevents the boards from rescinding the changes when money once again begins to flow more freely in the real estate market," Lund told the committee. "Legislation remains necessary to ensure that these policies stay in effect under the current and future boards."
Lund said Page Mill's scheme resulted in about 1,500 tenants being displaced through increased rents from their apartments in the city's Woodland Park neighborhood since the company bought the properties in 2007. The company had also filed a flurry of lawsuits against East Palo Alto, challenging its rent-control ordinance and at one point seeking to remove Woodland Park from the city's control.
City officials, tenants and even Page Mill's investors (who have since sued the company) have accused the company of seeking to turn the rent-control apartments into more profitable developments. The company outlined in a private memorandum to its investors its plans to develop condominiums, community-oriented retail and service businesses in East Palo Alto. The memorandum became public once the investors turned against Page Mill.
Dean Preston, president of the tenant-advocacy group Tenants Together, testified at the committee hearing that predatory-equity schemes are "premised on abusing tenants." The situation is particularly unsettling when tenants themselves fund these schemes through their retirement contributions, he said.
"We believe that it is unacceptable for retirement funds of working people to be used to displace working people from their homes," Preston said.
Robert Allen Fisk, an East Palo Alto planning commissioner who formerly chaired the city's Rent Stabilization Board, testified that the city's rent-stabilization program has "become ineffective due to all the lawsuits and the vacancy rates." Fisk, a Page Mill tenant, said the company tried to raise his rent from $900 to $1,700. He also said that his building now has a 50 percent vacancy rate.
But others were more cautious about the proposed legislation. Alex Alanis of the California Bankers Association, said he was concerned about the "broad application" in the proposed bill. Alanis said banks aren't always aware of the practices employed by their clients.
Two committee members, Diane Harkey and Brian Nastande, voted against the bill, A third member, Warren Furutani, voted to support it, but said he was concerned about micromanaging CalPERS.
Danny Brown, chief of government affairs at CalPERS, told the committee that the pension fund has not yet taken a position on the proposed legislation. He said CalPERS agrees with the intent of the legislation but is worried that some of the language in the bill could result in reduced investment in affordable housing.
"We want to make sure this does not create a competitive disadvantage for pension systems," Brown said.
Ammiano agreed to work with CalPERS, the bankers group and CalSTRS to refine the language further before presenting the bill to the full Assembly.