Commonfund Forced to Pay $50-Million in Real Estate Lawsuit

(October 18, 2011) — The Commonfund — with $26.4 billion under management as of June 30 — has been ordered by a Los Angeles jury to pay $50.3 million to its partner in a number of developments, Bloomberg has reported.

One of those developments includes the renovation of the Hollywood Palladium. According to the news service, the Commonfund’s real estate investment unit was in a joint venture with Newport Capital Advisors to build and redevelop office, hotel, and residential space with a projected construction budget of $1 billion.

Newport Capital Advisors maintained it was in a joint venture with Commonfund Realty Investors to renovate the Palladium Theater and build high-rise hotels, office buildings, condo towers, and retail space. The firm claimed the Commonfund pushed it out of four promising developments. “It’s an interesting story for Orange County,” Wayne Gross, an attorney for Newport Capital, told the Orange County Register. “You have a Newport-based company that had a vision for the revitalization of Hollywood, until the joint venture was repudiated.”

Last week, the Los Angeles County Superior Court jury awarded $16.4 million in compensatory damages and $34 million in punitive damages to Newport Capital — the total amount the firm sued for. Meanwhile, the Commonfund’s managing director Keith Luke is considering an appeal. “We assert that there is no basis for either the verdict or the magnitude of the judgment,” Luke said in an email to Bloomberg.  

Last year, the Commonfund ceased direct real estate investments. “We’re not liquidating the fund, we’re just restructuring,” Luke told aiCIO in November 2010. “While our future will be in the manager of manager approach, which is how we oversee most investment programs we do, this particular program will very possibly involve recapitalization,” he said, adding that the firm lacks a timeline for the restructuring phase.

The property unit’s Commonfund Realty Investors fund, which was earlier managed by Timothy Shine, lost a significant portion of its value in the aftermath of Lehman Brothers Holdings’ 2008 collapse. It declined 87% in the fourth quarter of 2009 and first three months of 2010. Before Shine’s departure, co-head of the real estate fund Hugh Scott left in January. After seven years at the job and about 30 years at the firm, Lyn Hutton resigned as chief investment officer in October.