Investing in Detroit.

Building trade union pension funds are emerging as a new source of financing for redevelopment projects in downtown Detroit

Hidden somewhere in the byways of downtown Detroit is a long-neglected architectural treasure. You've done your historical homework and come to the conclusion that this building is a prime candidate for renovation or restoration.

You've got a thousand and one exciting plans to restore this structure to its former glory and see it take its place proudly alongside the new stadiums and casinos that are gradually transforming our cityscape.

What you haven't got, though, is the cold, hard cash to take it from blueprint to finished product.

Typically, your next step might be a visit to a bank or other financial institution. But there's a nontraditional source of funding you might never have thought of. In fact, it may be one of the best-kept mini-secrets in real estate circles these days: A number of developers in and around Detroit are pitching their renovation plans to building trade union pension funds.

While most funding for projects in Detroit's Central Business District continues to originate from traditional financial institutions, many building trade unions are using their pension funds to back both new construction and renovation developments. Though this investment opportunity first surfaced sporadically 15 years ago, the city is experiencing this trend now more than ever.

Such is the case with 1001 Woodward Plaza, a landmark building that is one of the key elements of the Campus Martius development. Bloomfield Hills-based Acquest Realty Advisors Inc. recognized the investment opportunity with 1001 Woodward Plaza and contacted Operating Engineers Local 324 to present the offer.

Administrators of the union's pension fund liked what they saw and agreed to purchase, renovate and re-tenant the building. The project, currently in progress, will be 100 percent funded by Local 324, organized as 1001 Woodward Partners LLC. Acquest is both overseeing the renovation and managing the property for Local 324.

"This is a building worth saving. We are turning it into a 21st century building through a $20 million-plus acquisition and renovation plan," says Martin West, senior vice president at Acquest.

While the building is now only 30 percent occupied, West says Local 324 will lease out the rest of the building. In the meantime, workers are demolishing floors, installing a new fire system, updating the heating and air conditioning unit, giving the building Internet accessibility and renovating lobbies and restrooms.

"We are renovating cosmetically and mechanically. Internally, we are offering a modern building at competitive lease rates," West explains.

The process is beneficial for all sides -- the real estate development company, the remodelers and the trade union pension fund. The real estate development company administers the draw process, or funding of money, into the project.

In order to accomplish this, the real estate company must be licensed by the U.S. Securities and Exchange Commission. As compensation for overseeing the business angle of the investment, the company charges a fee. Acquest has no equity ownership in the 1001 Woodward project.

West says the building trade union pension funds average in the range of $200 million to $1.3 billion. A maximum of 15 percent can legally be used by the pension funds as investment in real estate.

"We're investing their money in the city because we think it's a smart thing to do," West says. "Detroit is turning around. This is a good investment -- a good return on your money. And it makes sense from a diversification standpoint."

Local 324 has invested with Acquest in other key properties as well, including University Living in Ann Arbor, Lake Village of Auburn Hills and Lake Village of Fairlane.

Acquest is currently involved in another multimillion-dollar joint venture with the Carpenters' Pension Trust Fund -- Detroit & Vicinity, which is renovating the Professional Plaza Office Buildings at 3800 Woodward, north of Mack, near the Detroit Medical Center.

In the last 10 years, Acquest has received more than $400 million in investment funds from trade union pension funds. The projects are producing a solid return on the pension fund's investment. West says the market-based return ranges from 8 1/2 percent on a debt basis to 20-plus percent on high risk.

Detroit-based Proquest Commercial Property Management handles the leasing side of the building trade union renovation projects. The company searches out tenants after the renovation is complete. Fred Klugman, executive vice president at Proquest, enjoys working with the building trade unions.

"From a leasing perspective, they are good owners to have. They have the funds available to get the renovating done and begin leasing out the space," Klugman notes. "A lot of developers are under-financed, but that does not seem to be a problem with the union pension funds."

Dennis Dickstein, broker/owner at Farmington Hills-based Ralph Manuel Associates Inc., views the pension-fund real estate investment trend in Detroit as an economic issue.

"It is very minor in the suburbs, but I think Detroit has a tougher time financing. So this is something economically that makes sense in the city," Dickstein says.

Although Ralph Manuel Associates is not currently doing any business with trade unions, Dickstein views the investment opportunity as a win-win situation for both the unions and the developers.

"The unions are using union workers for the projects and putting more money back into the system," Dickstein says. "From that standpoint, it is self-preservation for the unions."

Pension funds aren't the only nontraditional source of financing penetrating the real estate market in Detroit. Others include joint-venture equity investments and the Detroit Investment Fund.

Where the pension-fund financing trend is heading remains to be seen, but it's an option worth considering in today's promising redevelopment climate.