Daley nephew’s risky pension business; mayor’s nephew cashing in
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Published Sept. 23, 2007
A nephew of Mayor Daley stands to make millions of dollars from city-connected pension funds.
In winning business from pension funds for city workers, cops, teachers and CTA employees, Robert G. Vanecko said he never told anyone he’s Daley’s nephew.
But officials with those funds knew who he was, interviews and documents show.
Vanecko and his partner, Allison S. Davis, a top mayoral ally, also asked pension funds outside Chicago to invest with DV Urban Realty Partners, a company they formed two years ago. None did.
It’s a risky venture, Vanecko and Davis warned potential investors.
Still, the city-related pensions opened their checkbooks, giving DV Urban $68 million. They did so even as they face growing financial worries, according to a recent state study.
Vanecko and Davis plan to use the pension money in a real estate venture to redevelop some of Chicago’s most-neglected neighborhoods.
Among those could be the area around Washington Park, which is central to Daley’s plans for the 2016 Olympics.
The pension funds represent 180,000 retired and current employees.
So far, they’ve lost money on the deal — $1.5 million since they invested in April 2006.
That’s to be expected, pension officials say, because real estate deals typically make money only when the property is sold.
The biggest reason for those losses is the $1 million in management fees Davis and Vanecko have gotten from the pension funds. They’re guaranteed at least $3 million in management fees and could make as much as $8.4 million before the pension deal ends on Dec. 31, 2014.
Besides those fees, Davis and Vanecko also will share in any profits from the real estate deals. And they can earn a 3 percent fee on property they develop. And their management company is now running the only building they have purchased so far, a high-rise apartment building in the South Loop.
Davis and Vanecko declined to be interviewed by the Sun-Times but offered this statement:
“We are confident that DV Urban will produce good returns for its investors over its long-term investment horizon. Our investors have partnered with us because of our track record and our focus on urban revitalization in Chicago.’’
The Chicago pension funds defended their investments, saying they invested a small portion of their assets with a minority-owned company that aims to build up struggling city neighborhoods.
Davis, who is African-American, owns 51 percent of DV Urban. Vanecko owns 49 percent.
Vanecko said he never told potential investors he’s Daley’s nephew. “As a matter of practice, I don’t disclose this relationship,’’ Vanecko wrote in an e-mail to the Sun-Times. “He is my uncle. I don’t trade on his name.’’
The mayor had nothing to do with his nephew getting city pension business, Daley spokeswoman Jacquelyn Heard said: “He doesn’t do things like that. It’s just not his way.”
One pension official worried that investing with Daley’s nephew could draw criticism. “This relationship may prove troubling in today’s climate where the press is looking to attack any politician but especially Mayor Daley,’’ Kevin Huber, executive director of the Chicago Teachers’ Pension Fund, wrote in a Sept. 26, 2005, e-mail to his board members.
The first grandchild
Bob Vanecko is the first of the late Mayor Richard J. Daley’s 22 grandchildren. He’s the son of Mary Carol Daley and Dr. Robert M. Vanecko, a former physician for a city pension fund that has invested with his son. Vanecko was raised in Chicago’s tony Sauganash neighborhood and lives there with his wife and children.
Vanecko, 42, has a bachelor’s degree in economics from Yale University and a law degree from Northwestern University. He began his career in the early 1990s at Mayer Brown, a Loop law firm where his uncle, William M. Daley, was a senior partner. Vanecko joined Everen Securities in 1998 and became a vice president in real estate banking.
In July 2003, Vanecko joined Davis’ small real estate development company, the Davis Group, according to a corporate biography they gave city planners. Davis
is an attorney-turned-developer who builds low-income housing with tax subsidies from the city, state and federal governments.
Davis, 68, has a long relationship with the Daleys. The mayor appointed Davis to the Chicago Plan Commission in 1991 while Davis was running a small law firm. It’s the law firm where Sen. Barack Obama worked.
Davis gave up his law practice in 1996 to become a developer. He continued to serve on the plan commission until last January, while collecting millions in city subsidies for his developments.
Among his real estate partners was Tony Rezko, the businessman now facing federal charges that he demanded kickbacks from companies seeking state business under Gov. Rod Blagojevich.
Davis often turns to the law firm of Daley & George, run by the mayor’s brother, Michael Daley, to help his projects win approval from City Hall.
Despite his clout, Davis ran into trouble earlier this year, when city inspectors accused him of failing to clean up sewage in his New Evergreen/Sedgwick Apartments near Cabrini-Green. Davis owns the building. His son runs it.
‘Take your chances’
Davis and Vanecko created DV Urban in 2004. They initially were aiming to raise $100 million, primarily from pension funds, to redevelop Chicago neighborhoods, including abandoned industrial sites.
It’s a risky, but potentially rewarding, business, they noted in their sales pitches. “Investors must be prepared to lose all or substantially all of their investment,” Davis and Vanecko said in written pitches to pension funds.
Part of the risky nature of the investment, they noted, was that DV Urban is a startup business with no track record for developing property. But they touted
Davis’ development experience, saying some of his projects provided a 34 percent rate of return.
They approached each of the state’s top government pension plans, except for the Illinois State Board of Investment, because Davis is a member of that board, an appointment made by Blagojevich, on Rezko’s recommendation.
The board invests pension funds for state employees, legislators and all judges.
At least six government pensions — including those representing Chicago firefighters, Cook County employees and downstate teachers — rejected DV Urban’s investment pitch.
“Pay your money, take your chances,” a pension official said of the Davis and Vanecko plan.
Follow the leader
Getting the first investor is critical for a startup company. It took about a year for DV Urban to get its first investor — the Chicago Teachers’ Pension Fund.
On March 17, 2005, the teachers’ pension board voted unanimously to invest $25 million, contingent on Davis and Vanecko meeting their $100 million goal.
When Davis and Vanecko fell short, they convinced the teachers’ pension fund to stick with the $25 million investment, offering a greater share of profits and lower management fees.
“I had not a clue that one of the partners was related to the mayor,” said Connee R. Fitch-Blanks, then-chairman of the fund’s investment committee.
She was among three board members who said they never knew they were investing with the mayor’s nephew. All 12 board members were notified of the relationship six months after they voted to invest with Vanecko’s company. That notification came in an e-mail from Huber, the pension fund’s executive director.
“There is an additional issue that I feel needs to be shared with the trustees concerning this investment,” Huber said in the Sept. 26, 2005, e-mail. “One of the principals of DV Urban, Bob Vanecko, is Mayor Daley’s nephew.”
Huber asked board members if they wanted to reconsider the investment with Vanecko’s company because it carries “potential political risk” in addition to its “significant investment risk.”
They went ahead anyway. And other pension plans followed:
• On May 17, 2005, DV Urban got $10 million from the Laborers’ Annuity and Benefit Fund, which represents about 6 percent of City Hall employees. The fund’s board voted 5-0 to approve the investment.
Those voting for the deal included two members of Daley’s administration — then-city Comptroller Tariq Malhance and then-city Treasurer Judy Rice, both who were originally appointed to their jobs by the mayor. Also voting for the deal was John Briatta, a city Water Department dispatcher who’s a brother-in-law of Cook County Commissioner John Daley, another brother of the mayor. Briatta is now in prison after pleading guilty to passing bribes in the Hired Truck scandal.
• On Feb. 23, 2006, DV Urban got $3 million from the CTA pension fund.
• On April 20, 2006, DV Urban got $15 million from the Municipal Employees’ Annuity and Benefit Fund, which represents about 60 percent of City Hall workers.
The motion to invest came from pension fund board member Steve Lux, who is also the city comptroller, appointed by Daley.
Rice, the city treasurer, seconded the motion. It passed 5-0.
“I acted in the best interests of pension fund participants and beneficiaries, as well as Chicago residents,” Rice, now a Harris Bank official, said in an e-mail.
“In the case of DV Urban, the investment was meant to provide benefit in two ways — first and foremost, we expected a high level of return for pension fund participants over the life of the investment.
Secondly, we saw great benefit in growing pension fund returns while promoting real estate development in underserved areas of the city.”
• On April 25, 2006, DV Urban got its final investment, $15 million from the Chicago Policemen’s Annuity and Benefit Fund. On a motion from fund President Dana
Levenson — who was then the mayor’s chief financial officer — the board voted 7-1 to invest with DV Urban. Among those voting “yes” were Lux and Rice.
Three days later, DV Urban set up a $75 million investment fund — including $68 million from the pension funds and $7 million from
Davis and Vanecko, who originally planned to invest just $2 million of their own money.
If DV Urban’s real estate deals fail, pension officials say Davis and Vanecko could lose $7 million.
They still would get the millions in management fees from the pension funds.
The first deal
So what have Davis and Vanecko done with the money?
They made their first real estate deal last September, with about $9 million in pension funds and a $56 million mortgage to buy a 344-unit apartment building at 1212 S. Michigan. They set up another company to run it.
This building gave Davis and Vanecko control of the only two corners that can be developed at the intersection of Michigan Avenue and Roosevelt Road. In a separate deal not involving pension money, Davis and Vanecko are building a 46-story condo tower at 1160 S. Michigan on land they bought from City Hall.
DV Urban has also put pension money into two other deals:
• A $1 million loan to a company that owns the former Chicago Defender headquarters at 2400 S. Michigan. The owners include Matthew A. O’Malley, a restaurateur who had a baby with a top Chicago Park District official during negotiations to operate the Park Grill restaurant on prime land in Millennium Park.
• A West Loop office building at 217 N. Jefferson. DV Urban declined to reveal the amount of money invested in the project.
DV Urban has other plans involving major City Hall projects, according to documents and emails Davis and Vanecko sent to pension officials.
They’re looking at investing in two Chicago Housing Authority developments that Davis is building as part of Daley’s plan to replace high-rise housing projects.
Davis is a partner in the redevelopment of Stateway Gardens, at 39th and State. “Subsequent phases of this $400 million development may provide financing opportunities for our new fund,” according to a Dec. 16, 2005, e-mail Vanecko sent to pension officials.
Vanecko mentioned another CHA project in an Oct. 2 e-mail to pension officials: “We have been selected . . . as the developer of the remainder of the Lakefront Properties site between 39th and 43rd Streets and Lake Park Ave. This project will create a mixed-income community on a former CHA site and consists of 269 units of housing, including CHA replacement, affordable and market-rate units.”
Davis and Vanecko also told police pension officials that they’re looking at projects in South Side neighborhoods around Washington Park — where Daley plans to build a temporary stadium if Chicago is chosen to host the 2016 Olympics.
Taxpayers on hook for city employee pensions
For every dollar the city of Chicago collects in property taxes, about 47 cents goes toward pensions — for police officers, firefighters, garbage collectors and other city workers.
The amount of money in those funds is growing, but not as fast as the amount needed for current and future pensions.
These pension funds are invested in a variety of ways. How well those investments perform matters to taxpayers, as well as future retirees: If the investments
fare poorly, taxpayers could end up paying more in taxes.
Three of the four city pension funds have invested in a “highrisk/high-return’’ real estate company co-owned by Mayor Daley’s nephew Robert G. Vanecko. The only one that didn’t invest was the Chicago firefighters pension plan.
Vanecko’s company also got investments from the Chicago
Teachers Pension Fund and the CTA Employees Retirement Plan.
In a potential sign of trouble down the road, each of the pension funds — like most public pensions these days — faces a widening gap between its assets and the amount of money it expects to ultimately have to pay retirees.
Their investments are growing, but not as fast as the anticipated future pension payouts.
The CTA fund is in the worst shape of any public pension plan in Illinois, according to a recent state report.