The Iowa Public Employees' Retirement System (IPERS) plans to come to the aid of commercial real estate borrowers by investing in funds that will fill the gap between conventional financing and borrower equity.
"We see this as an opportunity that was brought by the crash in the real estate market and the need by borrowers to refinance all of their mortgages," said Karl Koch, IPERS' chief investment officer.
IPERS will commit $150 million to Blackstone Real Estate Strategies II and another $50 million to Principal Real Estate Debt Fund,managed by Principal Real Estate Investors.
Both are high-yield real estate debt funds that Koch believes will offer a handsome return. Similar to mezzanine financing, the funds will provide high-interest loans to fill the lending-to-equity void left by institutional lenders, which provide long-term, lower-interest loans that are secured by a first lien.
Koch said those loans typically are made at 65 percent of value and are based on appraisals that often run 25 percent lower than those made during the real estate boom that came to crash with the financial crisis of 2008 and 2009.
IPERS' involvement in the Principal fund depends on efforts to collect $250 million in total commitments for the fund by June 30, according to a report in Pensions & Investments.
Koch said the retirement fund has invested in the conventional commercial market -- apartment complexes, retail and office centers, for example -- for 30 years and views the debt funds as a relatively short-lived opportunity to cash in by filling a need in the market.
"We expect the life of the fund to be seven to 10 years," he said. "We doubt that we're going to commit to another fund after that."
Gap financers typically have little opportunity to recoup their investments if a project fails. As a result, the funds charge significantly higher interest rates that provide quick rewards.
"We recognize that there is a risk, but we believe we are going to be rewarded for taking this risk," Koch said.
As of June 30, IPERS had 328,975 members who were working or retired. Its retirement fund for current and retired workers in Iowa's schools, state agencies, cities, counties and other local governments is supported by taxpayers and investments.