RI Pension Board Attacked Over Real Estate Investment

May 10, 2010 (PLANSPONSOR.com) – West Warwick, Rhode Island, officials have asked the state pension board’s real estate consultant to examine a controversial $3-million real estate investment. 

A Providence Journal news report said the move came after the town’s pension board was hit with a barrage of criticism over the deal’s investment fees and other issues.

Responding to the firestorm, the Journal said, Cole Capital, a Phoenix-based real estate firm, e-mailed the pension board offering to give the fund back its position in the investment. The real estate investment represented 10% of the pension board’s funding.

According to the news report, the Townsend Group, a national real estate consulting firm, also released a report reaffirming repeated concerns raised by the pension board’s former investment consultant, P-Solve Asset Solutions. P-Solve wrote last fall: “We have rarely, if ever, seen a potential investment that is more inappropriate for an institution than this one.”

P-Solve resigned last fall shortly after the pension board ignored its advice and voted unanimously to invest $3 million.

The Townsend Group reported that the investment — in a Cole subsidiary known as Cole Credit Property Trust III — charges a “punitive fee structure,” has many “material conflicts,” and uses “disturbing trends” in its business practices, the newspaper report said.

Overall, Cole’s fees totaled 13%, or almost $400,000. “In my opinion, the negative assessment originally provided by the consultant was appropriate, accurate and should have been heeded,” wrote Anthony D. Frammartino, a principal and partner for Townsend.

Cole executive vice president and general counsel Richard R. defended his company’s practices in a letter to officials, while questioning the performance of the local pension board’s former consultant.

“Sadly, most all of the alleged criticisms of the pension fund’s investment in a Cole non-traded REIT are based on a highly unusual and vociferous attack on the product, by a former investment adviser to the pension board,” Lavin wrote. “While it is our practice not to comment on the services provided by another financial company, we feel we have no choice, under the present circumstances.”

Cole Credit Property Trust III produces investment income by purchasing and managing property for large retail stores such as Staples, Home Depot, and Walgreens. As of the end of March, the company reported owning 160 properties in 36 states, totaling approximately 4.2 million gross rentable square feet of commercial space.