A proposal to convert a condo building in the Bronx to a rental complex could be a sign that the slowing housing market will take its toll on city and state pension funds that invest in real estate, and taxpayers might be stuck shoring up those funds, experts say.
The Arbor, a 127-unit project at 3260 Henry Hudson Parkway in Riverdale, was originally planned as market-rate condos with prices starting at $400,000. The complex, developed by L&M Equity Participants and its affiliate Hudson Arlington Associates, was built on land purchased by the City Investment Fund, a Manhattan-based private equity fund. That fund is financed in part with city and state retirement fund dollars, spokesmen for the pension funds said.
Only about a dozen apartments in the development went into contract, brokers said, and Columbia University offered to buy the entire building as a rental for faculty members, graduate students and their families, the school told The Real Deal in May.
Although the building’s sale has not been finalized, Bronx brokers said a developer would likely make less money from selling the building as a rental than from selling its units as condos. The city has seen a spate of condo developments convert to rentals as the market softens.
Massey Knakal’s director of sales for north Bronx, Karl Brumback, would not comment on the Arbor project specifically, but said a rental conversion usually means less money for the developer.
“No, you are not going to make as much money in a rental building as in a condo building, generally, even with Riverdale rents,” he said.
As the housing market’s problems spread through the city’s outer boroughs and fringe neighborhoods in Manhattan, experts say pension funds must adjust.
John Tepper Marlin, an adjunct professor at the Stern School of Business at New York University, said the city assumes an 8 percent growth rate for its pension funds, and if they fall short, taxpayers have to make up the difference with allocations from the city budget.
“I do not think real estate is growing at 8 percent,” although some real estate investments were not made with large returns in mind, said Marlin, the former chief economist and senior policy advisor with the city’s Comptroller’s Office. “To the extent they fall short of 8 percent, the city taxpayers are being hit.”
L&M Equity Participants and City Investment Fund did not comment.
The decline in property deals has already caused cutbacks in the state, city and Metropolitan Transportation Authority budgets, which rely on real estate transfer taxes. However, the effect on the pension funds will not be known until the state and city comptrollers release their annual reports later in the year.
The New York City Employees’ Retirement System was valued at $42.2 billion in June 2007, and the State’s Common Retirement Fund at $154 billion.
The city pension funds have $140 million and the state has $119 million invested with the City Investment Fund, as of their latest financial statement from 2007. The spokesmen for the state and city comptrollers would not say how much pension money was allocated to the Arbor project, citing policies shared by most pension funds not to disclose information on private investments. About 4 to 5 percent of each pension fund is invested in real estate.
E.J. McMahon, director of the Empire Center for New York State Policy at the Manhattan Institute, a think tank, said that although the Arbor investment amounts to only a small portion of pension funds, determining the value of private equity funds in the pensions remains difficult because many are highly leveraged.
“That is the aspect of private equity that is troubling,” he said. “We don’t know what exposure is there. It is very difficult to measure the extent of the exposure of private equity to the downturn in the real estate market.”