Public pensions invest big in Blackstone's controversial rental properties

Housing rights activists on both sides of the Atlantic rallied this week against the Blackstone Group, a private-equity firm that has become a major landlord in the wake of the foreclosure crisis.

Protesters in Spain as well as U.S. cities such as New York and Atlanta demanded on Wednesday that the firm stop its purchases of foreclosed houses and troubled mortgage loans, which they believe put homeowners and tenants in both countries at risk. Of particular concern are Blackstone’s purchases of tens of thousands of single-family homes, which it now rents out at prices out of reach for low-income tenants, said demonstrators.

“Blackstone is buying up our neighborhoods, kicking us out, raising our rents, excluding people of color and leaving us with less control of our communities than we have ever had,” said Tony Romano, the organizing director at the Right to the City Alliance, a group based in Brooklyn that is leading the U.S. protests.

These purchases are enabled in large part by a particular group of financial backers: U.S. public pension funds. A review of available data shows that public pensions are some of the largest investors in private-equity funds’ controversial acquisitions of foreclosed homes and troubled mortgages, which accelerated as traditional banks backed away from the housing market in the wake of the 2008 crash.

A number of public pension funds have policies prohibiting investments in ventures that jeopardize affordable housing. This raises questions about the role that retirees’ dollars play in bankrolling the growing dominance of Wall Street landlords in an industry that was once the province of mom-and-pop outfits.

The National Home Rental Council, a trade group made up of large single-family rental operators, argues that investors’ foray into rental housing has reduced blight and restored vacant homes to the market. But many housing advocates believe the firms are profiting from the wreckage of the mortgage crisis, taking advantage of a historic low in Americans’ rate of homeownership and that they're planning to cash in on what former Department of Housing and Urban Development Secretary Shaun Donovan called “the worst rental affordability crisis this country has ever known.”

Since 2012, Blackstone has become the largest owner of single-family rental homes in the U.S., purchasing 50,000 properties to rent through a newly created subsidiary, Invitation Homes. These acquisitions were made through a $13 billion private-equity fund the firm launched the same year to focus on distressed real estate assets — ones that entail greater risks but could yield higher returns. The same fund acquired the mortgage loans of about 40,000 Spanish homeowners as well as nonresidential assets such as shopping centers and office buildings.

Blackstone names public pensions as the largest category of investor in the fund, Blackstone Real Estate Partners VII, and data from pensions’ annual reports and the investment research database Prequin show that more than 30 state and local pensions have committed at least $3.2 billion to the fund. Those include the California State Teachers Retirement System (CalSTRS) and the Florida State Board of Administration, which made commitments of $100 million and $300 million, respectively. Three New York City pension funds made a collective commitment of $300 million.

Additional investors in the fund include university endowments and private pension funds, including the Walt Disney Co. retirement plan.

Blackstone’s rental practices have drawn fire from tenant advocates in Atlanta, San Francisco and several other areas where its home purchases are concentrated. In a series of reports, housing groups such as Occupy Our Homes Atlanta have contended that Invitation Homes is a Wall Street slumlord that charges rents well above area medians, fails to return tenant phone calls and neglects its properties, forcing renters to pay for repairs themselves. In some cases, Invitation Homes has done this through leases that appear to violate local rental ordinances, including agreements for some Chicago residents that require them to rent properties as is — a measure that local housing attorneys say shifts risk and expense to the tenant, in contravention of the city’s residential landlord tenant ordinance.

Housing advocates believe the company may be taking these measures in order to meet expected returns to investors and could ramp them up in the future. In fact, Blackstone and other investors have said publicly that they plan to raise rents significantly this year. (Blackstone’s headquarters in London directed questions about Invitation Homes’ practices to a representative in New York, who declined to comment. Blackstone has said previously that average rents per square foot in its single-family homes are approximately 30 percent below comparable multifamily rents.)

As hedge funds and private equity groups buy up foreclosed homes, they are also investing in troubled mortgage loans. Since 2012, such firms have purchased more than 100,000 distressed loans — ones for which borrowers have stopped making payments — at a steep discount from banks and federal housing agencies.

Questions about these firms’ treatment of homeowners are mounting. Last month The New York Times reported on complaints that the firms are quick to foreclose on borrowers and take control of the homes. Critics, including Sen. Elizabeth Warren, D-Mass., held a rally in Washington, D.C., in late September to protest the practices of private equity firm Lone Star Funds, which they say has denied borrowers loan modifications in order to push ahead with sales of their homes. Public pensions contributed at least $900 million to a Lone Star real estate investment fund that has bought more than 22,000 mortgages auctioned off by federal housing agencies. The other major winner of mortgages in these auctions, Bayview Asset Management, is affiliated with the Blackstone Group and has likewise received public-pension money.

Meanwhile, Blackstone’s July 2014 acquisition of thousands of mortgage loans from the Barcelona-based lender Catalunya Banc sparked fears among Spanish housing activists of a wave of impending evictions. The Platform for Mortgage Victims, an anti-eviction group with chapters nationwide, says that some homeowners have since become renters in their own homes.

The Blackstone representative in London said no evictions have taken place from the Spanish properties but declined to comment on Invitation Homes’ practices.

Even if these investments produce positive returns, some housing advocates say that they run counter to the best interests of public pension funds’ members, who often live and work in communities where Blackstone is buying homes. “It’s crazy that a pension fund would make an investment that exacerbates the foreclosure crisis and leads to working people losing their homes,” says longtime labor and community organizer Stephen Lerner.

Moreover, it’s not clear that public pensions funds’ increasing reliance on private-equity funds has paid off for retirees. Desperate to shore up ailing finances, pension managers have flocked in recent years to alternative investments promising higher returns than traditional stocks and bonds. But those gains have often failed to materialize, and more than one private-equity group has been caught bilking investors outright. In early October, for example, Blackstone agreed to a $39 million settlement with the Securities and Exchange Commission over charges that it assessed hidden fees and failed to disclose conflicts of interests to several groups of investors, costing them millions of dollars.

“It’s like a form of assisted suicide,” said Lerner. “Public pension funds are relying on investment strategies that undercut their own financial base.”

This isn’t the first time public pensions have been accused of harming renters through their investments. While institutional investors’ acquisitions of single-family homes are a fairly recent development, they echo an earlier wave of speculative real estate deals that public pensions helped finance.

In the heady years before the housing bubble burst, developers like Vantage Properties and BlackRock Realty bought up some of New York City’s largest apartment buildings, including tens of thousands of units earmarked as affordable housing. A single developer, Page Mill Properties, bought almost half the rent-controlled units in East Palo Alto, a working-class community known as an oasis of affordability in the San Francisco Bay Area. Backed by private-equity cash, the firms bet that they could generate quick returns by replacing low-income tenants with higher-paying ones, a scheme detractors dubbed predatory equity.

Under most local laws, rent-regulated apartments may be converted to market-rate ones once existing residents leave, but the rate of tenant turnover is often slow. In order to meet expected returns and pay off mortgage debt, private equity-backed developers needed to hasten vacancies, and stories soon emerged of their attempting to do so using tactics both aggressive and absurd. Vantage settled a lawsuit with New York state in 2011 over charges that it sent thousands of fake eviction notices in order to drive low-income tenants from properties it bought five years earlier. A group of East Palo Alto renters said in 2008 that Page Mill Properties removed all the trees in front of their building and broke all the laundry machines just before illegally raising the rent. (Page Mill maintained that it was exempt from the city’s rent-control law, which applies to large landlords, because it incorporated each of its properties separately. A number of tenants later won settlements in their favor.)

Even then, most of the developers couldn’t raise rents high enough to make interest payments on their loans. When a number of properties went into foreclosure in 2010, renters weren’t the only losers: Public-pension funds were major investors in the deals and were often the ones left holding the bag as they collapsed. The California Public Employees Retirement System, or CalPERS, lost $600 million after loan defaults by Page Mill and several New York City developers. CalSTRS and the Florida State Board of Administration lost $100 million and $250 million, respectively, according to The New York Times.

Public scrutiny of these episodes — dubbed the pension fund evictions — prompted changes to some of the funds’ investment policies. In 2008 then–New York City Comptroller William Thompson announced that the city’s pensions would take new steps to support affordable housing, including by opting out of investments in particular deals that might adversely affect tenants. He wrote an open letter to other public pension funds, urging them to adopt policies “that both pursue long-term growth of pension assets … and support the housing needs of low- and moderate-income families.” After pressure from advocates and state legislators, CalPERS and CalSTRS adopted policies prohibiting them from investing in deals that hinged on displacing low-income households.

Housing advocates believe pensions funds’ new investments in the single-family rental business via Blackstone and other firms contradict the spirit of these policies.

“Workers’ pensions shouldn’t be invested in schemes that displace working people,” said Dean Preston, the executive director of San Francisco–based Tenants Together, which fought the predatory equity evictions and has followed Blackstone’s scooping up of rental properties in California.

CalSTRS said it does not believe that its $100 million investment in Blackstone Real Estate Partners VII violates its real estate investment policy. Ricardo Duran, a spokesman for CalSTRS, said that as a limited partner in the fund, it has “minimal say” in its management but that its “investment professionals oversee the partnerships very closely and diligently for adherence.”

The New York City comptroller’s office did not comment by press time on whether the $300 million committed by the New York City Employee Retirement System, New York City Fire Department Pension and New York City Police Pension Fund had been reviewed under its real-estate investment policies. A spokesperson pointed to an announcement made Thursday that public pension funds had committed $150 million to a union-administered investment trust aimed at expanding the city’s affordable housing.

The Florida State Board of Administration, which does not have such a policy but lost heavily in a previous real estate deal involving rent-regulated housing, did not respond to a similar request for comment.

Housing advocates say that pension funds can’t afford to turn a blind eye to the consequences of their real estate investments and that, as investors, they are entitled to more disclosure and should be pushing for it.

“[Blackstone] has a vision of how this makes money over the long haul that it should be sharing with investors,” said Preston. “Does it involve mass evictions? Does it involve jacking up rents? Public pensions and other investors are in the best place to get some commitments that the company is not going to leave tenants out in the cold.”

The reporting of this story was supported by the Investigative Fund at the Nation Institute.