Published Aug. 10, 2009

When they started their real estate investment company three years ago, Mayor Daley’s nephew Robert Vanecko and his partners made a promise to five city of Chicago pension funds they were seeking as investors:

We’ll put $7 million of our own money into the deal to show we believe in our high-risk strategy of investing city retirees’ pension money in developing inner-city neighborhoods.

That assurance helped the startup venture known as DV Urban Realty Partners quickly land $68 million from the city pension funds.

But now it turns out that Vanecko and his partners — Chicago developer Allison S. Davis and his son Jared Davis — will put in just $3.5 million, half of what they initially promised.

Despite some concerns, the city pension funds quietly agreed to rework the deal with Vanecko and the Davises last August, making changes that financially benefitted the mayor’s nephew and his partners, recently subpoenaed records show.

Vanecko — whose dealings have come under scrutiny by the U.S. attorney’s office in Chicago and the city’s inspector general — personally lobbied city pension officials to rework the deal with his company, records show.

Three of the five pension fund boards voted on and approved the changes — funds representing police, laborers and municipal employees.

Each of those pension fund boards includes high-ranking members of the Daley administration who voted to approve the reworked deal.

The approval of just three of the five pension fund boards was needed. So once those three agreed, the pension funds for Chicago teachers and CTA employees didn’t even vote on the reworked deal with Vanecko’s company.

Which apparently was fine with CTA pension board executive director John Kallianis, who wrote in an Aug. 22, 2008, e-mail to his counterpart at the teachers pension fund: “I was hoping we could sit on the sidelines.’’

Vanecko’s negotiations with the pension fund officials are outlined in e-mails and other documents that a federal grand jury recently subpoenaed. Authorities are

looking into how the pension funds decided to invest with the mayor’s nephew, even though his new company had no track record; acknowledged that, despite potentially big payouts, its investment strategy was high-risk and had been turned down by six other government pension funds.

Two weeks after the grand jury subpoenas were issued, Vanecko announced in June he would leave DV Urban by July 1. Neither the company nor pension officials would say if Vanecko has indeed left the company he started with Allison Davis, a longtime Daley ally in the city’s African-American communities.

Davis formerly headed a small Chicago law firm whose staff once included a then-young attorney named Barack Obama.

“We are continuing our discussions with Mr. Davis regarding Mr. Vanecko. In light of those ongoing discussions, we do not believe it is appropriate at this time to comment,’’ said Michael Fishman, an attorney representing the three city employee pension funds that approved the reworked deal with DV Urban.

Fishman was hired by John Gallagher Jr., executive director of Chicago’s police pension fund, who led the negotiations to redo the deal.

Gallagher cited potential federal tax liabilities that he said the pension funds could face if DV Urban’s real estate deals ended up turning a profit by the time the deal expires in 2014. So far, DV Urban’s investments have fallen in value, which it has blamed largely on the recession.

The new deal gives one key new benefit to the pension funds: They are now guaranteed that they will get back all of their initial investment before DV Urban is paid any incentive fees.

Under the revisions, DV Urban would still be able to collect as much as $8 million in management fees from the pension funds.

It also gets an extra year to invest the pension money, a quicker return on its investment, and the halved requirement for investing its own money, to $3.5 million.

The subpoenaed records show the city pension fund managers had concerns about reducing DV Urban’s initial promise to invest $7 million.

“We want DV to have as much skin in the game as possible,’’ James Mohler, of the municipal employees pension fund, wrote in a July 21, 2008, e-mail to the executive directors of all five pension funds.

Fishman wrote in an email that same day that the reworked agreement is “a much better deal’’ for the pension funds because DV “gets no money until we get paid.”