Tuesday, April 01, 2008

Some Reality Reaches Our 70 Square Miles

by Tom Bozzo

1. Hilldale Phase 2 delayed (again), a little sign of the CRE bust?

Barry Adams's State Journal lede blames the "harsh winter and changes to the design" for a delay in the start of construction at the seven-acre moonscape across from the office until July. This would house a greatly expanded Whole Foods, provide 3 floors of office space, and a 140-room hotel. When last we heard from Jos. Freed & Co., just a month ago, the harsh winter, the phase was supposed to be completed by spring to summer '09; it's now fall '09 to early '10.

I'd figured that Whole Foods would keep the project more-or-less on track, especially seeing as there's reportedly a tenant interested in a full floor of the office building. Oh well.

This project had been an example of the condo bust's losses looking like CRE's gains, at least for a while; the hotel replaced one proposed condo tower, and another mixed-use building (3 floors of office, eight of condos) was scaled back to a 5-story office building, since reduced to 3. Next stop, the soccer fields at Hilldale Phase 2?

2. Big Sh*tpile in Little Madison Revisited, Overture trust balance reaches new lows.

Who could have predicted that 8.25% annual returns aren't risk-free? Well, Mayor Dave Cieslewicz, of course, and the editorial pages of both papers.

The geniuses who manage the trust's investments have managed to turn $109.3M in December '05 to $100.1M as of March 14; they needed to maintain $104 million to make the 2005 refinancing work as advertised, with the trust paying the construction debt and making a contribution to the Overture Center's maintenance.

The problem has been pretty simple all along: too little money required to do too much stuff, so the plan has depended on generating returns sufficiently large that they can't be counted on all the time. As it turns out, you can be too generous and too cheap. The original assumption was a 9% annual return (in 1999, when it was assumed it would be generated from stock market holdings), and the times being what they are, they got 2% through 2005. The refinancing plan shaved off 75 bp, but was especially sensitive to low realized returns in the early years (oops).

Something I wonder is why a nonprofit endowment like this can't buy into a better class of money management. Some of you have surely seen that the peer group for Jane Mendillo, the Wellesley investment manager recently hired to helm the management of Harvard's endowment, turned in a 13.9% 5-year annual average return to the middle of last year. (I'm curious to see what the last nine months have done to the high-flying endowments.) The Overture fund isn't in this size class, but nevertheless I wonder how its management does so poorly? And why can't they just buy into the competent management of larger endowments (i.e., are there tax or regulatory obstacles to doing so)?

The solution, of course, is to raise more capital for the fund — something that was advertised as being facilitated by retaining quasi-private ownership of the facility, but which has yet to materialize except, perhaps, by way of a bailout to prevent a chorus of I-told-you-sos.

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