When you own real estate worth $892 million it’s almost impossible to visit every piece of property on a regular basis. That’s a situation facing trustees of the Hawaii Employees’ Retirement System – with one exception: City Financial Tower in downtown Honolulu.
The ERS has owned the shiny 24-story building at 201 Merchant Street for the past quarter century, one of the last structures designed by renowned World Trade Center architect Minoru Yamasaki before his death in 1986. The pension fund purchased the building, now its headquarters, for $68 million in March 1989, just a few months before it officially opened.
But one thing the ERS didn’t own was the ground underneath the building and its parking garage. That was owned by Citibank Properties, a subsidiary of Central Pacific Financial Corp., the holding company for Central Pacific Bank, which had acquired the real estate through a merger with CB Bancshares, the parent of City Bank. The land under the 360-space parking facility was owned by Kamehameha Schools, an operating unit of the $7 billion Bernice Pauahi Bishop Estate.
City Financial Tower in downtown Honolulu, May 2014.
PF Bentley/Civil Beat
For 20 years, the ERS dutifully made annual ground lease payments to Citibank and Kamehameha Schools. In 2008 negotiations to purchase the land began with Citibank and the haggling continued for several months until the ERS finally acquired the property in 2009 for $7.4 million.
Two years later, in December 2011, the ERS purchased the land underneath the parking garage from Kamehameha Schools for an undisclosed amount. Pension fund Executive Director Wes Machida said details of that transaction can’t be revealed because of a confidentiality agreement. However, real estate records suggest the purchase price was somewhere around $6 million.
City Financial Tower is held by a separate corporation – CFT Land Holdings LLC – which was formed, according to Machida, to shield the pension fund from liability. The building is managed by PM Realty Group and leasing is handled by CB Richard Ellis. Heitman Capital Management is the ERS partner in CFT Land Holdings and also oversees nine other properties scattered across the mainland from Pasadena, California, to Charlotte, North Carolina.
According to heavily redacted minutes of executive sessions of the ERS trustee meetings in 2008 and early 2009 obtained by Civil Beat under a public records request, the pension fund first approached Citibank in early 2007, offering to pay $7 million for the land and was rebuffed by the bank.
However, in September 2008 Citibank contacted Heitman, offering to sell the property for $10 million, something required under the ERS’ right of first refusal to buy the land before it could be offered to somebody else.
It is unknown what changed the bank’s mind, although at the time it offered to sell the land, the country was in the midst of a financial crisis and Central Pacific Financial Corp. was having financial and intermittent regulatory problems of its own. It ultimately received $135 million in federal aid through the government’s Troubled Asset Relief Program on Jan. 9, 2009, money that has been repaid.
The pension fund responded with a counteroffer of $6.5 million which was rejected by the bank. In December 2008 the ERS upped its offer to $7.4 million, a price accepted by the bank upon the condition of a quick closing in January 2009.
“It’s not a home run, but it’s satisfactory.” — Colbert Matsumoto
The redacted ERS executive session minutes do not reveal details of trustee discussions, beyond what appeared to be an attempt to push the ERS into increasing its offer by telling the pension fund another potential purchaser had expressed interest in the property.
Ultimately, on Feb. 6 the bank accepted the ERS offer and the sale was completed on Feb. 27.
One pension trustee shut out of the negotiations was Colbert Matsumoto, who also served as a director of Central Pacific Bank. Supplemental minutes of discussions regarding Central Financial Tower during closed sessions were specifically marked “should be screened from Trustee Matsumoto.”
“I’m on the board at Central Pacific Bank, which at one time was a tenant in City Financial Tower and also owned a part of the (land) underlying (the building). So on all matters related to City Financial Tower, I was recused both at the ERS level and also at the Central Pacific Bank level,” Matsumoto said in an interview.
From an investment-performance standpoint, Matsumoto said City Financial Tower has been OK.
“It’s not a home run, but it’s satisfactory,” he said. “It’s been retained in the portfolio in part because it also happens to be the headquarters for the ERS.”
The ERS occupies some 27,000 square feet of City Financial Tower, with offices on two floors and computers on one. The building is also home to the Hawaii Employer-Union Health Benefits Trust Fund, which is charged with providing other post-employment benefits to public workers, as well as private companies like Hawaiian Dredging.
The building is roughly 95 percent occupied now, Machida said, but has averaged in the upper 80s.
Matsumoto pointed out the building was purchased more than 20 years ago at a time when the trustees were much more actively involved in making investment decisions themselves.
“We’ve totally moved away from that,” he said. “City Financial Tower is kind of a legacy asset from that period.”
More recently, ERS has established an investment management team. The fund has had a chief investment officer, currently Vijoy Chattergy, for years but it wasn’t until the past couple years that its had a few analysts.
That development of that team is a sign of the ERS moving away from hiring outside investment consultants, Matsumoto said.
Although details of the original lease with Citibank were not available, Machida said at the time of the purchase annual lease payments were $300,000. If those payments had remained steady for the full term of the lease, which expired in 2054, the ERS would have paid about $13.5 million to Citibank between 2009 and 2054.
Machida said Heitman estimates City Financial Tower will generate about $4.9 million in revenue for the fiscal year ending June 30 and the parking garage will bring in over $1 million. But that’s before the expenses of operation – which include property taxes.
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