Who is Paying for the Headlands?

| posted on July 22, 2010

By Chris

months ago, after an interview with the Surfrider Foundation’s Chad Nelson
and Mark Cousineau on the Dana Point Headlands project, Mark Cousineau
brought up an interesting question that seemed worthy of a little research.
That question was essentially this: were the retirement funds of California’s
lifeguards, school administrators, policemen, firemen and other state
employees, paying for the controversial real estate development at the
Dana Point Headlands?

From this,
another question followed: If the California Public Employees Retirement
System, or CalPERS, was in fact paying tens of millions to back Headlands
development, was there a potential conflict of interest with the Coastal
Commission? Coastal Commission employees hold CalPERS pensions. Thus,
it would seem that the Commission could have a financial stake in whether
CalPERS investments increase in value. If so, would they be at all influenced
to vote for a project that could financially impact their retirement fund?
The Commission says that legally, the answer is no. Mark Cousineau says,
that may be true, but it sure does look questionable.

Then a final
question: Even if this did not represent a conflict of interest, would
state employees care if their retirement funds were being invested in
a project that could lead to a new 2100 foot rock seawall being built
along Dana Strands Beach?

After doing
a bit of research into this, it seems that CalPERS has indeed been the
major financial backer for the Headlands project. Whether there is a conflict
of interest perhaps depends on your definition.

For those
of you who don’t know, The Headlands is a very pretty, very large chunk
of undeveloped coastal beach and bluff south of Dana Strands. It runs
as far south as Dana Point Harbor. The land, which until a few years ago
was owned by the Los Angeles Times’ Chandler family, has been the site
of a contentious development battle for years. On October 9, at San Diego’s
Del Coronado Hotel, the California Coastal Commission will take up the
request by a group called Headlands LLC to build a 121 acre project that
includes 125 single-family homes, a 65 room in, 40,000 square foot shopping
site and 62 acres of public parks, trails and open space.

One of the key contentions in the Headlands proposal is the developer’s
request to build the 2100 foot long seawall or revetment along Strands
beach fronting the property. The developer has claimed that the project
will not be financially viable if he is unable to construct his seawall
and a series of homes behind it, and that there is already an existing
seawall there. While the existing seawall is far smaller than the one
proposed, and has been largely covered over by rocks and sand, parts of
it are certainly still visible along the beach. Yet, other groups including
Surfrider and the Sierra Club have argued that this is essentially a new
seawall, and that such construction is forbidden by California law under
the Coastal Act. “It’s flat out illegal,” the Sierra Club’s Mark Massara
said. “There is no way you can justify a new seawall for new construction.
That would undo the whole law.”

While many
of the construction points have been addressed in a previous
interview on the Headlands, the CalPERS issue has not received much, if
any, media scrutiny. Cousineau asserts that there is a potential conflict
of interest here because the Headlands development has not been funded
by Headlands LLC or the City of Dana Point. Rather, the principal investment
in the Headlands, likely somewhere between $20 and $50 million, appears
to have come from CalPERS. It went from CalPERS to Headlands LLC by way
of an Irvine-based group called Institutional Housing Partners, or IHP.

Headlands Project Plan — Click this Picture to Blow it up.

With over
$140 billion in assets, CalPERS is the largest pension fund in the U.S.
and one of the largest in the world. CalPERS’ job is to invest in businesses
and grow the value of its funds so that it can pay the retirements of
state employees. “Typically,” says Cousineau, “CalPERS finds a manager
for every kind of investment opportunity they have: stocks, bonds or real
estate. The managers will put together a fund, CalPERS puts up the money.
Let’s pretend that I’m CalPERS. I say, ‘hey real estate investors, I’ve
got a billion dollars and I want you to invest it’. IHP then comes back
to me and says, ‘ok, I’ll create the fund, I’ll manage the fund, I’ll
handle your tax returns, and all the administration and paperwork’. For
that IHP gets one percent. Then for everything over a 20 percent return
on CalPERS’ money, IHP might get half. Again, this is hypothetical, and
I’m not positive of the actual numbers.”

“So, CalPERS
selects IHP, Joe Blow and Acme. CalPERS gives them say, $300 million each.
Then folks like Sanford Edward of Headlands Reserve come to IHP and say,
‘hey, I’ve got a great project I’d like you to invest in. Headlands Reserve
needs, $30 million and here’s how your money will be spent’. If IHP says
‘yes’, they strike a deal and then IHP would manage all the details and
paperwork and give a periodic report into CalPERS.”

to Cousineau, who deals with developers regularly in his day job as an
environmental hazard consultant, this is how the game of real estate is
played. “Rarely do developers invest their own money,” he says, “Maybe
they’re investing five or ten percent. They’re getting paid to make a

He sees a
couple of potential problems to CalPERS’ investment.

“One: Should
CalPERS be promoting projects that put the Coastal Commission staff in
a bind? Two: Say the Commission upholds its own staff recommendation and
denies the Headlands project. Should CalPERS take the Commission to court
through IHP if it’s denied? They’re doing this through intermediaries
and agents, but it’s still CalPERS’ money. That’s the bottom line.”

He continues:
“If you lose should you accept the will of the Commission or should you
spend taxpayers money to have the state fighting against the state?”

When this
issue was first discussed, a lengthy round of emails went from Surfrider’s
Mike Lewis and Mark Cousineau, myself and a gentleman named Brad Pacheco
at CalPERS. The essential question was: how much of CalPERS money actually
went to the Headlands? After a series of vague responses, a fax was received
from Javier Plasencia, CalPERS Senior Staff Counsel. It said essentially
that CalPERS had made money on numerous IHP ventures but that CalPERS
generally does not report publicly on project specific investments. He
wrote: “Project specific information is proprietary and disclosure of
such information to the public or competitors may hurt the ability of
the Fund to maximize its returns. With regard to the Fund itself, IHP
investment Fund I, at its maximum point had approximately $150 million
invested by CalPERS and as of March 31, 2003, had approximately $44.1
million remaining.”

there are four other IHP funds, with nearly $175 million in holdings.

What’s next?
Barring a Freedom of Information Act request, it’s reasonable, according
to Cousineau, to expect that as much as $50 million of CalPERS money could
be tied up in the failure or success of the Headlands project.

“Say you’re
a fireman or lifeguard who loves to surf at Strands,” Cousineau says,
“You hear about a project that’s going to destroy your beach. You get
angry and then find out that your pension fund is the one that’s doing
it. ”