Pension fund money proves less than forthcoming.

One deal lags while a second scales back dramatically

Two deals announced early this year to pump pension-fund money into Southland homebuilding are still lagging, and one of them has been scaled way back.

Three months after it announced a pending deal to provide $375 million in construction financing for owner-occupied homes, California Public Employees' Retirement System, one of the largest pension funds in the world, still hasn't cut the final deal with five partners who will administer the funds. All the details should be worked out by the end of June.

The Building Industry Association of California, which announced it was close to finalizing a similar agreement with some large East Coast-based pension funds in late January, still hasn't put the program in place. But one of its key representatives originally projected the fund could raise as much as about $250 million. That estimate has since been reduced.

Mark Held, president of Orange-based Building Industry Capital Realty Advisors, says now the amount of the fund has been revised downward to $75 million and he still hopes to have the agreement finalized sometime in May or June. Because of business closures and the ailing aerospace industry, many investors are reluctant to lend money for housing construction in Southern California.

"We're still in the process of teaching them that there is a strong demand for starter, affordable housing," Held said.

Should CalPERS and the BIA both finalize their plans, they collectively would provide a total of $450 million for construction financing, which has dried up as lenders quit making development loans because property values in Southern California have been falling since 1989. The funds will be made available to developers throughout the state, but analysts think at least half of the money will wind up in Southern California.

Fred Pierce, the director of Price Waterhouse real estate practice in Los Angeles, said he has heard rumors still other construction financing funds are being put together. Should they all get funded, Pierce said the California homebuilding industry would still not have enough construction financing to build all the low- to moderate-priced housing California needs. He estimated half the funds would be supplied to Southern California builders.

"We're still trying to get the (construction financing) program off the ground," said Sacramento-based Al Fernandez, a marketing investment specialist who works for CalPERS. "We still have to set up the individual limited partnership agreements between the five partners and the homebuilders."

Five entities, each taking responsibility for $75 million of the fund, would lend the money to builders throughout the state. The five would be San Francisco-based Wells Fargo Realty Advisors; a partnership of San Francisco-based California Housing Advisory and San Francisco-Based Montgomery Securities; AMB Real Estate Advisors of San Francisco; O'Donnell Group of Orange County; and Alex Brown Kleinworth Benson of Los Angeles.

"Just because three of the partners are located in Northern California doesn't mean Southern California will get short-changed," Fernandez said.

Each limited partnership would be structured differently. In some, the partner investing the CalPERS funds would buy the land the homes would be built on. In others, the CalPERS partners would provide 50 percent to 60 percent of the construction financing. In most cases, the homebuilder would have to put up a minimum of 10 percent of the construction cost.

The CalPERS $375 million pool easily could spur about $1 billion in new-home creation because it would only be lending one-third of the construction costs, with developers and banks providing the balance. The arrangement is attractive to banks because, in the event of loan defaults, they would be first in line to take back the property and be paid with the proceeds from its sale, Fernandez said.

Mike Johnson, vice president and director of client services for San Francisco-based Wells Fargo Bank, said once the fund is finalized, his group will set up various limited partnerships to lend money to homebuilders. For example, a homebuilder needs $5 million to help finance a project. The Wells Fargo group would become a financier and equity partner in that development. Similar arrangements would be made with other developers. Sometimes, Wells Fargo gets principal; and interest payments plus a percentage of the profits.

The Wells Fargo group would provide 30 percent to 40 percent of the funds to buy the land and build the homes. The balance would be financed by a bank. For their contribution, the Wells Fargo group not only would get interest for the money it lends each builder, it would split the profit made on the home with them, Johnson said.

Only experienced homebuilders with group reputations would be able to get financing from the CalPERS fund. Since CalPERS has specified that 60 percent of the funds must be used to build starter homes ($120,000 to $200,000 in the greater Los Angeles area) the fund could finance construction of 10,000 new homes.

If the BIA fund is put together and leveraged similarly, it could conceivably provide construction financing for another 7,500 new homes.