Who is Paying for the Headlands?

By Chris Dixon

Several months ago, after an interview with the Surfrider Foundation's Chad Nelson and Mark Cousineau on the Dana Point Headlands project, Mark Cousineau brought up an interesting question that seemed worthy of a little research. That question was essentially this: were the retirement funds of California's lifeguards, school administrators, policemen, firemen and other state employees, paying for the controversial real estate development at the Dana Point Headlands?

From this, another question followed: If the California Public Employees Retirement System, or CalPERS, was in fact paying tens of millions to back Headlands development, was there a potential conflict of interest with the Coastal Commission? Coastal Commission employees hold CalPERS pensions. Thus, it would seem that the Commission could have a financial stake in whether CalPERS investments increase in value. If so, would they be at all influenced to vote for a project that could financially impact their retirement fund? The Commission says that legally, the answer is no. Mark Cousineau says, that may be true, but it sure does look questionable.

Then a final question: Even if this did not represent a conflict of interest, would state employees care if their retirement funds were being invested in a project that could lead to a new 2100 foot rock seawall being built along Dana Strands Beach?

After doing a bit of research into this, it seems that CalPERS has indeed been the major financial backer for the Headlands project. Whether there is a conflict of interest perhaps depends on your definition.

For those of you who don't know, The Headlands is a very pretty, very large chunk of undeveloped coastal beach and bluff south of Dana Strands. It runs as far south as Dana Point Harbor. The land, which until a few years ago was owned by the Los Angeles Times' Chandler family, has been the site of a contentious development battle for years. On October 9, at San Diego's Del Coronado Hotel, the California Coastal Commission will take up the request by a group called Headlands LLC to build a 121 acre project that includes 125 single-family homes, a 65 room in, 40,000 square foot shopping site and 62 acres of public parks, trails and open space.

One of the key contentions in the Headlands proposal is the developer's request to build the 2100 foot long seawall or revetment along Strands beach fronting the property. The developer has claimed that the project will not be financially viable if he is unable to construct his seawall and a series of homes behind it, and that there is already an existing seawall there. While the existing seawall is far smaller than the one proposed, and has been largely covered over by rocks and sand, parts of it are certainly still visible along the beach. Yet, other groups including Surfrider and the Sierra Club have argued that this is essentially a new seawall, and that such construction is forbidden by California law under the Coastal Act. "It's flat out illegal," the Sierra Club's Mark Massara said. "There is no way you can justify a new seawall for new construction. That would undo the whole law."

While many of the construction points have been addressed in a previous Surfermag.com interview on the Headlands, the CalPERS issue has not received much, if any, media scrutiny. Cousineau asserts that there is a potential conflict of interest here because the Headlands development has not been funded by Headlands LLC or the City of Dana Point. Rather, the principal investment in the Headlands, likely somewhere between $20 and $50 million, appears to have come from CalPERS. It went from CalPERS to Headlands LLC by way of an Irvine-based group called Institutional Housing Partners, or IHP.

The Headlands Project Plan -- Click this Picture to Blow it up.

With over $140 billion in assets, CalPERS is the largest pension fund in the U.S. and one of the largest in the world. CalPERS' job is to invest in businesses and grow the value of its funds so that it can pay the retirements of state employees. "Typically," says Cousineau, "CalPERS finds a manager for every kind of investment opportunity they have: stocks, bonds or real estate. The managers will put together a fund, CalPERS puts up the money. Let's pretend that I'm CalPERS. I say, 'hey real estate investors, I've got a billion dollars and I want you to invest it'. IHP then comes back to me and says, 'ok, I'll create the fund, I'll manage the fund, I'll handle your tax returns, and all the administration and paperwork'. For that IHP gets one percent. Then for everything over a 20 percent return on CalPERS' money, IHP might get half. Again, this is hypothetical, and I'm not positive of the actual numbers."

"So, CalPERS selects IHP, Joe Blow and Acme. CalPERS gives them say, $300 million each. Then folks like Sanford Edward of Headlands Reserve come to IHP and say, 'hey, I've got a great project I'd like you to invest in. Headlands Reserve needs, $30 million and here's how your money will be spent'. If IHP says 'yes', they strike a deal and then IHP would manage all the details and paperwork and give a periodic report into CalPERS."

According to Cousineau, who deals with developers regularly in his day job as an environmental hazard consultant, this is how the game of real estate is played. "Rarely do developers invest their own money," he says, "Maybe they're investing five or ten percent. They're getting paid to make a profit."

He sees a couple of potential problems to CalPERS' investment.

"One: Should CalPERS be promoting projects that put the Coastal Commission staff in a bind? Two: Say the Commission upholds its own staff recommendation and denies the Headlands project. Should CalPERS take the Commission to court through IHP if it's denied? They're doing this through intermediaries and agents, but it's still CalPERS' money. That's the bottom line."

He continues: "If you lose should you accept the will of the Commission or should you spend taxpayers money to have the state fighting against the state?"

When this issue was first discussed, a lengthy round of emails went from Surfrider's Mike Lewis and Mark Cousineau, myself and a gentleman named Brad Pacheco at CalPERS. The essential question was: how much of CalPERS money actually went to the Headlands? After a series of vague responses, a fax was received from Javier Plasencia, CalPERS Senior Staff Counsel. It said essentially that CalPERS had made money on numerous IHP ventures but that CalPERS generally does not report publicly on project specific investments. He wrote: "Project specific information is proprietary and disclosure of such information to the public or competitors may hurt the ability of the Fund to maximize its returns. With regard to the Fund itself, IHP investment Fund I, at its maximum point had approximately $150 million invested by CalPERS and as of March 31, 2003, had approximately $44.1 million remaining."

Currently, there are four other IHP funds, with nearly $175 million in holdings.

What's next? Barring a Freedom of Information Act request, it's reasonable, according to Cousineau, to expect that as much as $50 million of CalPERS money could be tied up in the failure or success of the Headlands project.

"Say you're a fireman or lifeguard who loves to surf at Strands," Cousineau says, "You hear about a project that's going to destroy your beach. You get angry and then find out that your pension fund is the one that's doing it. "