Principal sells defaulted loans to investors
In a January 31, 2013 Houston based real estate publication called Bisnow, the lead article was entitled “Best Friends: TCC and PrinREI”. These acronyms stand for Trammell Crow Company and Principal Real Estate Investors (PREI). In a later article, Mark Allyn, TCC’s senior managing director stated, “Principal and Trammell Crow have had a long relationship spanning 20-plus years…” . Trammell Crow is a Dallas, Texas based commercial real estate developer, and Principal Real Estate Investors are sub-advisers for the Principal U.S. Property Separate account, headquartered in Des Moines, Iowa.
In 2006, TCC and PrinREI announced a new alliance in which Principal would be an majority partner in a multi-billion dollar joint venture development program with Trammell Crow. Principal would provide equity financing, and TCC would build out the projects. In this news article dated June 7, 2006, published in GlobeSt.com, the Dallas/Fort Worth based publication details the plan…
“DALLAS-Principal Real Estate Investors uses equity from the US Property Account to fund a JV program with Trammell Crow Co. One views it as a long-term hold; the other as a merchant build. It’s ready to go with room to grow.”
The article continues… “The big selling point is Principal has this capital ready… no wait time.” and finally… “TCC will build and stabilize–then sell. “We will be selling to the market or selling to them [Principal]…”
In 2006, banks were beginning to tighten the purse strings in their lending practices, demanding more equity to make highly leveraged loans required to finance new construction. A Des Moines, Iowa based Bank of America was located a few blocks from Principal’s corporate office, and provided key financing for Principal’s joint venture projects.
The “US Property Account” referred to above is the Principal U.S. Property Separate Account (PUSPSA), at that time a $6 billion 401(k) investment fund which several hundred thousand retirement investors had relied upon for their future. The account itself is not a legal entity… it owns nothing, holds no equity in investments, and cannot sue or be sued. In effect, it is an Emperor with no clothes. The 401(k) “investor” owns units only in the market value of proprietary investments owned by Principal, and accrues an annual value based solely on the opinion of Principal’s management.
As an investor, imagine an investment where you, the investor, provides all financial resources to purchase and maintain billions of dollars of commercial property, and the service provider keeps all profits generated from the ownership of the plan asset. In addition to not actually owning the plan assets, the market value is based entirely on the judgment of the company for whom you purchased the asset. You own nothing, you have no guarantees, and when you need the money for your retirement, the service provider, in this case Principal Life, can decide when you get paid and how much you should receive. Welcome to the world of real estate investing.
Loan Purchase Agreements as “investments?”
When PREI decided to use the PUSPSA as an multi-billion dollar equity funding source to develop office buildings through a joint venture with TCC, the end result was a security based instrument. Principal supposedly “owned” the equity in the plan assets. But there was one glitch…. the Loan Purchase Agreements (LPA) they signed on behalf of the PUSPSA included three parties to the contract… Principal Life Insurance Company for the Principal U.S. Property Separate Account as guarantor, the borrower TCC, and the lender. TCC signed off on the Deed of Trust. While Principal was not named in the loan documents, they were named in the Sale and Purchase Agreement as joint venture partners. They had a vested interest in the development program with TCC, and they were using investor’s funds to fund that interest. Clearly this was NOT an “arm’s length” activity… Principal was a conflicted party and was engaging in Mortgage Origination Fraud as well, stealing billions of dollars from investors..
Principal was effectively marketing unregistered security instruments on property they owned to investors, a serious breach of Securities and Exchange Commission regulations. Principal’s actions fail the “private placement” test for the sale of unregistered securities under regulation D . In it’s most basic form, the activity was illegal and Principal should be prosecuted for their fraudulent activity. Billions of dollars of investor’s money was used by Principal Real Estate Investor’s to fund their joint ventures with Trammell Crow Company. When the 2008 financial meltdown occurred, no equity was left in the account to cover legitimate withdrawal requests by investors.
To hide their fraudulent activities , Principal issued a “withdrawal restriction,” and for the following two years, few withdrawal requests were honored. The fund had been devalued approximately 50% during that time , and withdrawal payments to investors were devalued as well. Principal and Trammell Crow were making hundreds of millions of dollars by using 401(k) investor’s money to purchase defaulted loans for their joint ventures, all while the investor’s account values were plummeting.
To fully understand the depth of this relationship, one only has to research Trammell Crow management. In 2011, Trammell Crow Co. named Michael S. Duffy their new chief operating officer. Duffy had been at Crow Co. since 2000 and was previously a senior managing director. In his newer position, Duffy is responsible for the asset management function and investment approval process within the Trammell Crow Company. Prior to joining TCC in 2000, Duffy was responsible for establishing Principal Financial Group’s centralized acquisition and disposition functions. Prior to this, he was responsible for all asset management activity of Principal’s $1.5 billion real estate equity portfolio in the Northeast, Mid-Atlantic, and Central regions. After propagating the 2006 development plan successfully, TCC and Principal once again initiated a second development program in 2014, as this article describes.
Forward Commitments under investigation…
The so-called “forward commitments” mentioned in the PUSPSA annual reports involved joint venture investments with Trammell Crow as well as several other joint venture partners. These forward commitments included Loan Purchase Agreements with major lenders, agreed and signed by Principal Life Insurance Company for the PUSPSA. Perhaps the largest loan amount agreed upon involved the construction of a property located in Houston, Texas, called Discovery Tower. Costing over $300 million to build, the Discovery tower was later sold and renamed Hess Tower. Was the Hess Tower construction loan, secured not with the collateral, but rather the PUSPSA, defaulted by TCC and later purchased by the PUSPSA? There would have been no foreclosure on the property since Principal was named as joint venture partner in the sales and Purchase Agreement. If the PUSPSA did pay off the loan, then we have two major companies engaged in money laundering. TCC is owned by CBRE, the nation’s largest real estate broker.
I included the above possibility because in 2010, the PUSPSA Annual Report, implies the account actually “sold” the property to Hess Tower, and not the joint venture partnership of TCC and Principal real estate Investors. There is no indication the account actually ever “owned” Hess tower, only that there was a “forward commitment” on the mortgage. The land on which the office building was to be built was purchased by Principal and TCC in 2007, yet there is no comment in the PUSPSA 2007 Annual Report of such purchase:
“2007 marked the single largest year of acquisition activity in the Account’s 26-year history, closing 29 acquisitions across 22 markets totaling nearly $1 .4 billion. Acquisition activity included the purchase of three portfolio transactions: a retail portfolio in Washington, D.C., a multi-family portfolio with assets located throughout the central and east regions and a three building office portfolio in Denver. Activity also included the Account’s first hotel investment -the joint venture development of a j .W. Marriott located in San Antonio, Texas, developed in conjunction with a partnership that includes Marriott International and the Professional Golfers’ Association of America (PGA). Strategic acquisition themes executed throughout the year included buying high quality assets in infill locations with strong space market fundamentals. The Account accessed transactions through successful local market contacts and increased industrial asset exposure via forward commitment structures. In 2007, 97.5% of the Account’s acquisitions were acquired via an off-market feature including private deals not fully bid to the market, repeat transactions with the seller in which Principal Real Estate Investors has transacted or transactions in which Principal Real Estate investors has previously represented a lender in transacting with the seller. In addition, the Account is enhancing its focus on the sustainable or green nature of both the existing portfolio and acquisition opportunities by assessing the combination of building features and market demand for sustainable projects on economic performance.”
In the 2010 Annual Report, the year prior to selling Hess Tower and Legacy Circle, another TCC/Principal investment, there is no mention of account ownership of either property in the Schedule of Investments, but both are included as Forward Commitments with loans totaling $351.2 million. Based on this fact, in 2010 the account did not yet own either property:
The 2011 annual report does mention the sale of Hess Tower and Legacy Circle in glowing accounts for the benefit of investors:
“Additional transaction activity during the year included the sale of two forward commitments. Both assets were built in partnership with a local developer and sold at stabilization. Additional details are included below:
• Legacy Circle was sold during the first quarter for $53.6 million. The office building, built in 2009 and located in Dallas, TX, was sold to limit exposure to suburban office assets and to capitalize on market pricing that significantly exceeded the cost to build the asset.
• Hess Tower, an office asset built in 2010 and located in downtown Houston, was sold in the fourth quarter. The asset, 100% leased to Hess Corporation, was sold at completion of the property’s business plan for $442.5 million or $524 per square foot, setting a new high price per square foot record for an office building in the city.”
It is impossible to know exactly the number of loans to finance new construction were purchased by the PUSPSA. If a loan defaulted, the account picked up the total costs of paying off the loan including the accrued interest, penalties and other costs associated with the loan. When a property sold, a In many cases, those defaulted loans appear to be never intended to be paid off by the borrower. No payments were made, and the accrued interest and penalties for the loan term was also paid by the account. In some cases, the property was sold to an outside buyer, and I suspect, the loan was purchased by the account with n o foreclosure, hence no return and a substantial loss through mortgage origination fraud practices by Principal.
When the property was scheduled to sell on the open market, Principal would typically grant a “Subordinate Loan” to the seller for approximately 10% of the selling price. Soon thereafter, the Grantor would repay the “loan,” most likely with the same funds which originated from within the PUSPSA a few weeks earlier. The proceeds from the repayment of the loan now becomes “plan assets,” and Principal can keep the laundered money. With TCH Discovery Tower, llc, the “bonus‘ totaled almost $30 million
To fully research these activities, the Department of Justice will need to retain the services of forensic accountants and lawyers. Both Principal’s CEO Dan Houston and Vice President Karen Shaff were closely involved in executive decisions made years ago, as were many board members. Key leaders with Principal Life, Principal Global, and Principal Real Estate Investors may be culpable as well.
Many of Principal’s Board of Directors may have been involved and should be investigated. Fraudulent activities were systemic throughout the organization, and will require transparency to uncover all aspects of collusion. An unwelcome task to say the least, multiple federal agencies should be involved.
History will teach us that under the Obama administration, the Securities and Exchange Commission, the Department of Labor, and the Department of Justice were under the guidance of corrupt individuals, whose only purpose was to shield criminal elements from the public. Today we have a new administration, and while Trump may not be the best choice for President, he has hired capable individuals to run these federal agencies, and to “clean the swamp.”
Millions of investors will once again lose trillions of retirement dollars if the nation experiences another financial meltdown caused by criminal elements within the retirement investment industry. The U.S. Department of Justice must make every effort to investigate Principal’s criminal past and present. The evidence is easily attainable, the wrongdoers easily identifiable, and the public deserves the right to know the truth about corporations they have trusted in the past.
For other institutional investors, Principal needs to be the example of what can go wrong when they decide to defraud the public. The Principal Group of Companies was held in high regard by the retirement investment industry, for all the wrong reasons. It is now a time for change.