The Los Angeles County Employees Retirement Association (LACERA) is considering changes to its real estate debt strategy.

The US pension fund’s managers for debt are Cornerstone Real Estate Advisers and Quadrant Real Estate Advisors.

LACERA could allow Cornerstone to write construction loans and Quadrant to make CMBS investments.

At a board meeting last week, the pension fund expressed an interest in learning more about the two opportunities.

Further study and discussions will be conducted that may result in a recommendation to the pension fund’s board of investments.

No timetable has been set for a follow-up meeting.

LACERA hired both managers in 2011 for a core lending strategy as an alternative to core real estate equity investing.

The pension fund stated in a board meeting document that it was aware the new strategies would increase risk within its debt programme.

The plan for Cornerstone would be provide debt in construction loans through first mortgages or mezzanine loans. 

First mortgages have a projected IRR of 9-10%, and mezzanine 11-14%.

Cornerstone manages a current core debt portfolio for LACERA valued at $269m (€242.3m), as of the end of 2015.

Net time-weighted returns on this portfolio are 11.1% for one year and 7.9% for three years.

The possible new strategy for Quadrant would be to originate portfolios of senior commercial mortgages and use the securitisation market to issue CMBS.

The net return is projected at 9.5%.

This compares to net time-weighted returns of 5% for one year and 7.1% for three years on a $23m portfolio Quadrant manages for LACERA.

Should the pension fund move ahead with the new strategy, LACERA could use a portion of the un-invested commitment to Quadrant of around $277m to fund a co-investment allocation to a fund currently being raised by the manager.