In December 2008, about nine months before Page Mill Properties lost control of its 1,800 housing units in East Palo Alto, Warren Otto of Stockbridge Capital Group wrote an e-mail to Page Mill Properties CEO David Taran asking him about a $50 million debt in Page Mills' books.
Otto had recently been hired by CalPERS, the nation's largest retirement fund, to analyze Page Mill's East Palo Alto portfolio, which the Palo Alto-based company began accumulating in 2007. By late 2008, the company had steeply raised rents, displacing many of the residents in the Woodland Park neighborhood and enraging tenant activists. The Palo Alto-based company had also launched a flurry of lawsuits against East Palo Alto, challenging the city's rent-control ordinance.
CalPERS, which stands for California Public Employees' Retirement System and provides retirement and health benefit services to more than 1.6 million members, had invested $100 million in the Page Mill Properties II portfolio in 2006. As time wore on, however, it became concerned about Page Mill's strategy and the fallout its investment has caused in the media and among tenants.
As Otto began to comb through Page Mill's numbers in 2008, the due date for a $50 million loan to Wachovia (which later was acquired by Wells Fargo) caught his attention.
"David, I'd like to talk with you about the status of the debt on the portfolio whenever you have a minute," Otto wrote. "If you have an abstract which summarizes the terms of the debt that would be helpful. If not, I will need a copy of the debt documents. We are concerned about the $50 million of debt which apparently comes due before the term of the loan is over. Thanks."
The e-mail was one of hundreds of documents CalPERS was forced to release this week because of a legal challenge from the nonprofit group First Amendment Coalition. The 1,175 pages include business reports, Page Mill memorandums, complaints from Page Mill tenants and e-mail exchanges between CalPERS officials and Page Mill executives in the frantic months before September 2009, when the company ran out of money and its property managers vacated the apartment buildings, leaving trash cans overflowing and confused residents lined up near empty rental offices, wondering what to do with their rent checks.
The documents, which the First Amendment Coalition posted on its website, indicate that CalPERS sensed trouble with its East Palo Alto investment about two years before Page Mill's collapse but was largely powerless to do anything about it. By late 2008, Page Mill -- which had become East Palo Alto's biggest landlord -- was entangled in litigation and fighting off allegations from displaced tenants and tenant activists, who called its strategy "predatory equity."
According to a private-placement memorandum that Page Mill tried to keep confidential but was made public in a lawsuit from other Page Mill investors earlier this year, the company saw the East Palo Alto neighborhood as an area "poised for growth and gentrification." Its plans included developing condominiums, fixing up the infrastructure and "further developing community-oriented retail and service business."
By late 2008, CalPERS had grown weary of what Taran called its "opportunistic investment" and asked Otto to take a closer look at the company's numbers. The move irked some Page Mill executives. In June 2009, Otto wrote Page Mill a letter saying it "seems a bit counter-intuitive to be incurring thousands of dollars of expenses to evict good long-term tenants when the portfolio is already suffering from high vacancy" and asked for an explanation.
Page Mill's General Counsel James Shore wrote back three days later, essentially asking Otto to trust the company.
"As I explained in our conversation last week, I cannot stress enough how difficult it is to have our business judgment second guessed by CalPERS every time a tenant or a tenant advocate makes an inquiry to CalPERS," Shore wrote. "Warren, during these very challenging economic times, it is more important than ever that the General Partner stays focused on the investments and is not questioned or interfered with whenever some dissident contacts CalPERS."
CalPERS officials also demanded more information about the $50 million payment Page Mill was due to pay Wachovia. Laurie Weir, CalPERS' portfolio manager, had sent a letter to Taran in March 2009 asking about the payment.
"We are concerned about the risks this debt maturity poses for our partnership investments with you," Weir wrote. "Could you please share with us your plans for handling this debt maturity and how this debt maturity could impact our partnership strategy?"
But despite their growing anxiety, CalPERS officials had few options for saving their investment. The pension fund's role as one of several limited partners in the investment gave it little power to do anything about Page Mill's actions, company officials explained in response to tenant pressure.
In October 2008, Tenants Together organizer Andy Blue wrote a letter to CalPERS saying the pension fund's investment poses a "significant risk for CalPERS both financially and reputationally." In March 2009, Priya Mathur, member of the CalPERS Board of Administration, responded by saying the pension fund's role "limits our ability to act."
"Nonetheless, staff continues to work to influence Page Mill," Mathur wrote. "I understand that it feels painfully slow, particularly to the tenants."
Page Mill's fortunes in East Palo Alto crashed in August 2009 when it defaulted on its loan to Wells Fargo, which by then owned Wachovia. Page Mill had held meetings with bank officials in spring of 2009 in hopes of getting the loan's due date extended (in April, Taran wrote that he was "cautiously optimistic that these discussions will be successful"), but the effort ultimately faltered.
On Sept. 4, 2009, CalPERS received an e-mail from state Assemblyman Ira Ruskin's office describing the chaos and confusion in Page Mill's buildings, with tenants not knowing whom to call for maintenance or emergency issues.
A month later, Page Mill was considering bankruptcy and reorganization. Taran wrote CalPERS a letter saying the reorganization would require "fresh equity" of about $25 million to $40 million. CalPERS declined.
"As previously indicated, CalPERS has no interest in providing any additional capital to the Partnership," Weir wrote to Taran. "We trust that the General Partner and its affiliates will manage this process and the property in the best interests of the Partnership and its creditors."
In March of this year, Wells Fargo officially took ownership of East Palo Alto's apartments after a foreclosure auction for the properties brought forth no bids.
Though CalPERS' failed investment in Page Mill attracted major scrutiny from the public and the media, both the pension fund and the company had resisted releasing any documents relating to the investment strategy in East Palo Alto. In January 2008, after CalPERS received multiple requests to publicize Page Mill's private placement memoranda, Taran wrote a letter to Weir urging her not to disclose "any portion of the PPMs or any other trade secret or confidential information of Page Mill."
"As you know, the PPMs are trade secrets, highly confidential, and their disclosure to those other than investors could cause significant harm to Page Mill," he wrote.
CalPERS agreed and responded to one information request by stating that the release of the documents "could negatively affect the return on CalPERS investments" and "jeopardize its relationship with its business partners."
But San Francisco Superior Court Judge Charlotte W. Woolard rejected CalPERS' argument that the documents are subject to confidentiality agreements and ruled on Sept. 14 that the pension fund had to release the documents.
Peter Scheer, president of First Amendment Coalition, said CalPERS is expected to produce more documents, which the pension fund claims are subject to the attorney-client privilege. The court would then determine which of these documents could be publicized.