Dallas police-fire pension fund has $400 Million bet on Luxury real estate

Dallas Morning News Feb 16, 2013 (excerpts)

On a hillside in Hawaii sits a lavish home — a six-building estate that looks out over dark lava fields, the Pacific Ocean and a championship golf course. Inside the home, Tibetan rugs cover stone floors. Outside are two infinity-edge swimming pools, a sculpture garden and a large entertainment pavilion.

The Dallas Police and Fire Pension System owns the home, along with five other ultra-luxury houses. It has been on the market for five years while the pension fund has paid its taxes and other expenses. No one has been willing to pay the asking price, which was $22 million in 2008….

…on the company’s board was a developer named K.C. Knudson. He owned Knudson Luxury Housing, and soon after meeting Tettamant and the other pension officials, he flew to Dallas to pitch his company to the pension board.

Knudson was developing several ultra-luxury homes, including the one in Hawaii with the large entertainment pavilion. He proposed a two- to three-year investment.

That summer, in 2006, the board voted unanimously to invest $10 million with Knudson. Before long, Tettamant and other pension officials traveled to Hawaii to check on investments there. In December 2006, the pension board expanded its investment in Knudson houses to $32 million.

Then the bubble burst. By the end of 2007, as housing prices began to fall, the fund’s total real estate investments exceeded $900 million, the equivalent of more than a quarter of its $3.4 billion net worth….

In Hawaii, Knudson was running into similar trouble. As his company sat on luxury homes that had little chance of selling, it was paying several million per year in loan interest alone. To keep the investment solvent, the pension board approved a $30 million infusion….

In quick succession, the pension system bailed out the original developers and took direct control of its luxury real estate projects. In June 2009, the fund took over the Knudson luxury homes in Hawaii, Colorado, Utah and Arizona. In January 2010, it rescued the Napa project just before a scheduled auction on the courthouse steps….

The fund’s rate of investment return in future years depends partly on whether the properties actually sell for what pension officials hope.

The fund has begun renting out its luxury homes — for as much as $15,000 per night — to recoup some of the operating costs. The homes produced about $4.3 million in rental income from mid-2009 through last year. Expenses, including interest, totaled more than $10 million during that time.

In late 2011, the fund found a buyer for one of the Hawaii homes, one adjacent to the one with the entertainment pavilion. The home sold for about $12 million, far less than pension officials had hoped. As a result, the pension system’s accountants marked down the estimated $119 million value of all the Knudson luxury properties by $20 million.

Tettamant said Knudson was a good developer.

“He was very successful at what he did; 2008 just crushed him — and crushed the investment thesis,” he said. “So we had to come up with a new thesis.”

Pension officials have kept Knudson on to oversee the properties. The fund pays him and his staff about $300,000 per year plus percentages of rental income and sales.

“I needed somebody that knew the homes to actually manage those properties,” Tettamant said. “His job is to manage the properties, sell the properties and make sure the properties are in good working order.”

Tettamant said Knudson lives in the various homes.

“I want him to be there at the homes to make sure they’re working right. I don’t know if you’ve ever been in a $25 million house, but it’s got a lot of systems that need to be maintained,” Tettamant said.

A 2007 Robb Report article about the Hawaii home described a Steinway grand piano that was the center of attraction at classical music recitals Knudson and his wife often hosted. Knudson, a piano hobbyist, recounted a time when noted pianist Stanislav Ioudenitch performed on the piano.

“That was a special moment,” Knudson told the article’s author. “It was evening, the tiki torches were lit and we were listening to a world-class pianist play Franz Liszt’s Spanish Rhapsody, looking out over God’s creation in paradise.”

This fall, pension officials moved the home’s grand piano to Dallas. It sits now in the gallery of Museum Tower, a space on the first floor where residents can hold private art shows or concerts. Tettamant said the pension fund owns the piano. “Why not bring it over here?” he said….

Tettamant says that’s a benefit of being a pension fund. If your investment doesn’t do well, you can settle in and hold on for the long term. Someday soon, Tettamant hopes, buyers will come along for the Hawaii homes.

“We do feel that this is trending,” he said of the investment. “It’s going to come back.”

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