California bill banning Stuy Town-style deals fails

Legislation that would have prohibited two of the US’ largest public pension plans from investing with real estate managers employing “predatory investment practices” failed to pass a crucial California Senate committee this week.

California State Assembly member Tom Ammiano had introduced a bill – known as AB 2337 – that would have banned California State Teachers Retirement System and its neighbour, the California Public Employees’ Retirement System, from investing in deals or with fund managers who try to convert rent-controlled apartments into market rate apartments. The legislation was intended to prevent CalSTRS and CalPERS from repeating their investments in Tishman Speyer and BlackRock Realty’s Stuyvesant Town and Peter Cooper Village as well as in Page Mill Properties’ East Palo Alto residential deal.

The legislation had passed through California’s state assembly and had been widely expected to pass through the Senate. However on Tuesday, the Senate Public Employment and Retirement Committee rejected the measure by a vote of 3-1.

Both CalSTRS and CalPERS have already adopted policies in recent months to prevent “predatory” equity investments by managers, in an effort to comply with the “intent” of the upcoming legislation. However, Dean Preston, executive director of California's statewide organisation for renters' rights, Tenants Together, said: “With the bill dying it now falls to the pension funds themselves to implement these policies and enforce them. We’ll obviously have to be paying close attention to who they’re funding and whether they’re violating those policies.”

In both the Stuy Town and East Palo Alto deals, Tishman, BlackRock and Page Mill were accused by tenants of aggressively trying to convert rent-stabilised units to market rates. In relation to Page Mill, one CalSTRS investment official told a pension fund committee in May that 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.

Preston warned there was still major issues at stake “in terms of pension fund money and in terms of the tenants who get evicted. Tenant advocates are going to have to keep a lot closer eye on the pension funds investments to make sure that predatory equity investments don’t occur again, which is difficult to do because some of this occurs behind closed doors, and we tend to see it once it’s played out and tenants are starting to be displaced.”

Quintin Mecke, communication director for Assemblyman Ammiano, said part of the opposition to the bill centred on the issues of rent control of apartment properties. “Rent control here in California, as in New York, is the law of the land,” he said. “I’m not sure why opposition to rent control played itself out into the decision-making, when the bill didn’t deal with that. The bill dealt with the behaviour of CalPERS and CalSTRS using public money [for investments in rent conversion strategies].”