Legislature(1993 - 1994)

02/04/1994 09:09 AM STA

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
txt
 CHAIRMAN LEMAN brings up SB 245 (PERMANENT FUND INVESTMENTS IN REAL           
 ESTATE) as the first order of business before the committee today.            
 The chairman calls representatives of the Alaska Permanent Fund               
 Corporation as the first witnesses.                                           
                                                                               
 Number 023                                                                    
                                                                               
 WILLIAM H. SCOTT, Executive Director, Alaska Permanent Fund                   
 Corporation, introduces Pete Jeans, the Chief Real Estate                     
 Investment Officer for the corporation.                                       
                                                                               
 Number 037                                                                    
                                                                               
 PETE JEANS, Chief Real Estate Investment Officer, Alaska Permanent            
 Fund Corporation, gives the committee some background on the real             
 estate investment experience of the corporation.  Originally, the             
 corporation began by investing in real estate pools.  Since that              
 time, the corporation has become one of the largest institutional             
 real estate holders in the United States.  One of the problems                
 investors in real estate pools have is that there absolutely no               
 control over the assets.  Other than real estate pools, the                   
 corporation also had the option of co-investing in property with              
 other institutional investors.  Six years ago, when the corporation           
 began co-investing, many of the other pension funds and co-                   
 investors were sitting on the sidelines.  This enabled the                    
 corporation to do quite a bit of investing, mostly with small                 
 pension funds.  The larger pension funds weren't willing to co-               
 invest; if they were investing, they were going to invest 100%.               
 The few properties in which the corporation did invest with the               
 larger pension funds, were properties worth 200-250 million                   
 dollars; even the larger funds don't want to hold one property of             
 that size.                                                                    
                                                                               
 Number 102                                                                    
                                                                               
 MR. JEANS says one of the problems with 40% investments, is that              
 the corporation doesn't have any control over the property.  At the           
 time the Alaska Permanent Fund Corporation began co-investing,                
 there wasn't much investing going on, and the corporation was able            
 to negotiate buy-sells and shoot-out clauses which gave the                   
 corporation some control over the deals.  That is no longer the               
 case.  Over the last year, the corporation has lost quite a few               
 deals because the managers weren't willing to do deals with no                
 controls.  The corporation has become the leader in co-investing              
 and has dealt with over 200 funds in the country.  The problem now            
 is that there is more money out there, and when the corporation               
 tries to line up partners on a proposal, if the potential partners            
 like it, they do the whole deal and the corporation doesn't get any           
 of it.  One of the problems the corporation is going to run into              
 with less than 100% investment in properties is finding partners to           
 take a minority position, with no controls in the investment.                 
                                                                               
 Number 140                                                                    
                                                                               
 MR. JEANS states the real estate market is starting to turn around,           
 and the people the corporation co-invested with five years ago are            
 going to be the corporation's major competitors.  Unless the                  
 corporation is allowed to go to 100% investments in real estate, it           
 is going to be extremely difficult for the corporation to get any             
 money out on real estate, especially on the good properties.                  
                                                                               
 Number 149                                                                    
                                                                               
 CHAIRMAN LEMAN thanks Mr. Jeans for his testimony and asks if                 
 anyone has any questions.  The chairman agrees with Mr. Jeans that            
 the corporation should be able to invest 100% in real estate, but             
 is hesitant to make that change.                                              
                                                                               
                                                                               
 Number 183                                                                    
                                                                               
 MR. JEANS says the corporation has been fortunate for the last                
 three years because it has weathered the down-turn in real estate             
 very well.  It worked to the corporation's best interest in                   
 enabling it to find co-investors.  However, that is now changing.             
 Since 1993, the corporation has started losing deals.  The                    
 corporation purchased quite a few apartments over the last two or             
 three years.  It is probably a good time to be putting those                  
 apartments back on the market, but unfortunately the corporation's            
 partners don't want to sell.                                                  
                                                                               
 Number 214                                                                    
                                                                               
 The committee begins discussing some amendments and the proposed              
 State Affairs Committee substitute for SB 245.                                
                                                                               
 SENATOR ELLIS says he thinks the amendments to SB 245 look too                
 restrictive to him, and he is not uncomfortable with the original             
 bill.                                                                         
                                                                               
 Number 221                                                                    
                                                                               
 SENATOR MILLER says he is more comfortable with the committee                 
 substitute for SB 245 than he is with the original bill.  He                  
 believes the board is going to have to be willing to compromise to            
 get a bill passed in the legislature.  Senator Miller is not                  
 comfortable in giving the corporation leeway to invest 100% in any            
 property, of any size.                                                        
                                                                               
 Number 235                                                                    
                                                                               
 SENATOR ELLIS comments on a historical perspective relating to                
 investment requirements for the corporation: he recalls Tom Fink's            
 proposal to only allow the Alaska Permanent Fund Corporation to               
 invest in property within the State of Alaska.  This would have               
 caused an enormous crash; this kind of restriction, in hind sight,            
 would have been really disastrous.  The restriction in the                    
 amendment is much more reasonable than Fink's proposed restriction,           
 but Senator Ellis wanted to warn the committee not to put too many            
 restrictions on the permanent fund corporation.  He reiterates that           
 he leans towards allowing the managers at the corporation more                
 discretion in their investments.  The track record of the                     
 corporation puts Senator Ellis's mind at ease.                                
                                                                               
 Number 254                                                                    
                                                                               
 SENATOR MILLER states he agrees with Senator Ellis, and he did not            
 agree with Mayor Fink's proposal, but he does not think it is wise            
 to put all one's eggs in one basket either.                                   
                                                                               
                                                                               
 Number 260                                                                    
                                                                               
 JIM KELLY states the Alaska Permanent Fund Corporation has a target           
 of having 10% of its' investments in real estate, while the                   
 legislature has a target of 15% investment in real estate for the             
 corporation.  The corporation is not going to be able to reach the            
 legislature's target of 15% if they are not allowed to invest in a            
 higher percentage of a deal.  PERS and TERS already have the option           
 to do 100% deals.  They have no restrictions except the prudent               
 investor rule.  The corporation has the prudent investor rule, plus           
 an authorized list of additional restrictions.  If the corporation            
 didn't have these additional restrictions, it would still follow              
 the prudent investor rule.  In the absence of the additional                  
 restrictions, the corporation is not going to put 380 million                 
 dollars into one deal.  The committee could put in an upper number            
 if it makes the committee feel comfortable, but the board is not              
 going to approve the corporation getting into a 350 million dollar            
 deal anywhere.  The board's main job is to diversify the fund and             
 keep it safe, in addition to making money.  The board is having a             
 hard time keeping the fund safe with the restrictions it has right            
 now.  The corporation is also going to have a harder time making              
 money.                                                                        
                                                                               
 Number 275                                                                    
                                                                               
 MR. JEANS comments it is difficult to set limits for investments,             
 but limits can always be changed.  The corporation would like to be           
 able to handle real estate in the same way it would manage any                
 other asset class.                                                            
                                                                               
 Number 288                                                                    
                                                                               
 CHAIRMAN LEMAN asks if the corporation can sell its' interest in a            
 property even if a partner does not want to sell.  Mr. Scott                  
 replies it is extremely difficult to do without control of the                
 investment.  Mr. Jeans adds, that to sell a minority interest in a            
 property, the corporation would have to discount it to the extent             
 it wouldn't make sense to sell it.                                            
                                                                               
 Number 302                                                                    
                                                                               
 MR. SCOTT comments that the difference between the lesser players             
 in the real estate market and the Alaska Permanent Fund Corporation           
 is that when the lesser players have a property that is performing            
 well, they don't want to sell it, while the corporation thinks that           
 is the best time to sell in order to maximize returns.                        
                                                                               
 Number 312                                                                    
                                                                               
 MR. KELLY asks Mr. Jeans if he would explain the reasoning behind             
 why the corporation invested so much money in Tyson's Corner and              
 the likelihood of the corporation investing that much in any one              
 project again.                                                                
                                                                               
 Number 317                                                                    
                                                                               
 MR. JEANS states Tyson's Corner is a unique property and is                   
 probably one of the top three shopping centers in the country.  The           
 corporation owns 39% of Tyson's Corners, which is a controlling               
 interest.  It is worth it to the corporation to have 145 million              
 dollars invested in Tyson's Corner in order to have the controlling           
 interest; the corporation has veto rights over all the other                  
 partners.  Tyson's Corner is such a well-known asset, that almost             
 any pension fund in the country would buy Tyson's from the                    
 corporation.  The corporation doesn't have close to that amount of            
 money in any other property.  One of the problems the corporation             
 has with its co-investors is that they are mostly small pension               
 funds with perhaps 50-100 million dollars invested in about 5                 
 properties, and if those properties are performing well, those                
 pension funds are afraid to sell.  The only choice the corporation            
 has, if we want to market the properties, is to buy out these co-             
 investors.  The 40% rule, when it came into effect, was to allow              
 the corporation to piggy-back on the major pension funds and                  
 utilize their investment expertise.  The 40% rule is now enabling             
 the smaller pension funds to piggy-back on the corporation, because           
 the larger funds are now doing their own deals and they won't give            
 the corporation a piece of it.                                                
                                                                               
 Number 348                                                                    
                                                                               
 CHAIRMAN LEMAN suggests that on page 1, lines 9 and 10 of the                 
 proposed committee substitute the figure 20,000,000 be changed to             
 50,000,000.  Also add: if the investment exceeds 50,000,000, the              
 corporation shall have no more than 67% ownership in a property.              
 The Chairman asks Mr. Jeans if this language would restrict the               
 corporation too much on its' larger investments.                              
                                                                               
 Number 364                                                                    
                                                                               
 MR. JEANS replies that proposal would be more workable than the               
 limitations with which the corporation currently has to work.                 
                                                                               
 Number 366                                                                    
                                                                               
 CHAIRMAN LEMAN asks if the corporation would lose deals or lose out           
 on opportunities with the changes he has just proposed.                       
                                                                               
 Number 368                                                                    
                                                                               
 MR. JEANS responds the corporation will lose some major retail                
 properties and some major offices.  The difficulty the corporation            
 will have with any restrictions is in finding an investor willing             
 to come in and take a minority share in a property.  If these                 
 restrictions pass, the corporation will probably find itself doing            
 deals up to 50 million, period.                                               
                                                                               
 Number 373                                                                    
                                                                               
 SENATOR ELLIS asks what the administration's position is on SB 245.           
                                                                               
 Number 375                                                                    
                                                                               
 CHAIRMAN LEMAN answers he is not aware of a position from the                 
 administration.                                                               
                                                                               
 Number 377                                                                    
                                                                               
 MR. JEANS and MR. SCOTT responds the administration has no                    
 objection to SB 245.                                                          
                                                                               
 Number 379                                                                    
                                                                               
 SENATOR ELLIS says one could then make the assumption the governor            
 would sign the legislation if it passed.                                      
                                                                               
 Number 380                                                                    
                                                                               
 MR. JEANS and MR. SCOTT answer that it is their understanding the             
 governor would sign the legislation.                                          
                                                                               
 Number 383                                                                    
                                                                               
 CHAIRMAN LEMAN comments that in order to pass SB 245 out of State             
 Affairs Committee today, the members must come to agreement on the            
 bill.  The chairman asks Senator Miller what he would agree to in             
 SB 245.                                                                       
                                                                               
 Number 384                                                                    
                                                                               
 SENATOR MILLER states if the bill changes above and beyond what it            
 is now, he cannot vote for it on the floor.                                   
                                                                               
 Number 388                                                                    
                                                                               
 SENATOR MILLER moves the adoption of CSSB 245 (STA) in lieu of the            
 original bill.                                                                
                                                                               
 Number 389                                                                    
                                                                               
 CHAIRMAN LEMAN, hearing no objection, notes that CSSB 245(STA) has            
 been adopted.                                                                 
                                                                               
 Number 391                                                                    
                                                                               
 CHAIRMAN LEMAN offers an amendment to CSSB 245(STA).  On page 1,              
 lines 9 and 10 change 20,000,000 to 50,000,000.  On page 1, line 12           
 change  40  percent to  33  percent.  On page 2, line 5 change  40            
 percent to  33  percent.   On page 2, line 9 change  60  percent to  6     6  
 percent.                                                                      
                                                                               
 Number 396                                                                    
                                                                               
 CHAIRMAN LEMAN, hearing no objection to the amendment, notes the              
 amendment has been adopted unanimous consent.                                 
                                                                               
 Number 400                                                                    
                                                                               
 SENATOR ELLIS asks that CSSB 245(STA) be moved from committee with            
 individual recommendations.                                                   
                                                                               
 Number 401                                                                    
                                                                               
 CHAIRMAN LEMAN, hearing no objection, orders that CSSB 245(STA) be            
 discharged from the Senate State Affairs Committee with individual            
 recommendations.                                                              

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