DALEY PENSION DEBACLE: WHERE DID $54M GO?
MAYOR’S NEPHEW, BACKER GOT $9M IN FEES, MOST OF THAT FOR MANAGING DEALS THAT TANKED
If there ever was any hope that five Chicago city workers pension funds would make any money by investing $68 million with then-Mayor Richard M. Daley’s nephew and one of his key political supporters, it didn’t last long. Only months after the deals were made a dozen years ago, problems began to emerge.
The nephew, Robert G. Vanecko, and his business partner Allison S. Davis, a developer who gave campaign money to Daley and was appointed by the mayor to head the Chicago Plan Commission, started investing in a series of property deals that, by the time the last of them are unwound by the end of December, will have cost the city workers pension funds 80 percent of the $68 million they put in — $54 million in all.
Vanecko and Davis set up a company, DV Urban Realty Partners, and bought an apartment building that was riddled with code violations.
They invested in a vacant building that once housed the Chicago Defender, even as City Hall inspectors threatened to tear it down unless repairs were made.
They put city employees’ pension money into an old warehouse that sat on land so poisoned with arsenic and lead that the pension funds had to help pay $2.6 million for cleanup just to be able to unload it at a huge loss.
They lent millions of dollars to developers who personally guaranteed to repay the money but never did, costing the pension funds more than $5.6 million.
DV Urban broke a contract to buy a building in the South Loop, a decision that cost the pension funds another $4 million.
And somehow they even lost money — more than $11 million on the deal that built a busy Mariano’s supermarket in the North Side neighborhood of East Lake View, a location that has 90,000 people living within a one-mile radius.
As the investments made with Vanecko and Davis plummeted in value, the pension funds still had to live up their commitments to keep putting in the money they promised to DV Urban — which listed Davis, a developer who is African-American, as the 51 percent majority owner. That provided the pension funds with some cover for doing business with the mayor’s family, allowing them to say they had hired a minorityowned company, which historically they seldom had done.
Vanecko pulled out of DV in June 2009, as federal investigators were nosing around, issuing subpoenas regarding the pension boondoggle first exposed by the Chicago Sun-Times in September 2007. But that wasn’t until after he had played a key role in setting up all of the deals that cost the pension funds most of the money they invested, even as they guaranteed DV Urban a steady flow of management fees no matter how well or poorly the investments fared.
And Vanecko wasn’t the only Daley family member involved. Daley & George, the law firm headed by the mayor’s brother Michael Daley, worked on some of the projects. So did another mayoral nephew, Patrick Daley Thompson, a lawyer who is now alderman representing the family’s longtime power base, the 11th Ward.
After the first Sun-Times report appeared, headlined “Mayor’s nephew cashes in,” Daley’s press secretary said he had nothing to do with giving the city business to his nephew, saying, “He doesn’t do things like that. It’s just not his way.”
But three top city officials in Daley’s administration had a role in handing the millions of dollars in city employees’ retirement money to Vanecko and Davis. They had seats on four of the pension fund boards that agreed to invest with DV Urban.
Even now, years after the pension debacle was set in motion, representatives of the pension funds are reluctant to discuss what happened and whether they might still be able to recover any of the lost money.
One pension official is afraid the funds could be sued for breaching their fiduciary duty to their members — hundreds of thousands of retired and current Chicago teachers, police officers, garbage collectors, bus drivers and other city workers.
Some of those involved have laid blame for the financial losses on a factor they say was outside anyone’s control: the drastic downturn in the economy and the real estate market that hit as Vanecko and Davis started their business.
But insiders say there were other problems.
“This was a combination of bad deals and bad timing and not great management,” one says. “A basic thing you do when you manage a fund is you have audited financial statements, you have tax returns that you file with the investors. They didn’t file two or three years of tax returns or financial statements.”
That’s one reason it’s difficult to unravel the real estate deals Vanecko and Davis made and pinpoint how these five drastically underfunded city pension funds lost so much money.
There’s no question about what happened to $9 million of it: It went to Davis and Vanecko in fees, primarily for managing the pension funds’ money that they largely lost.
For more than a decade, the Sun-Times has been reporting on what an early story called “Daley nephew’s risky pension business.”
Now, based on thousands of pages of financial reports, property records, bankruptcy case files, lawsuits and other public records, here is a detailed look at the nine real estate deals Davis and Vanecko made with the pension funds’ money and, as much as it’s possible to determine, where the money went.
1212 S. MICHIGAN AVE. A 344-unit apartment building with stunning views of Lake Michigan
Daley’s brother-in-law, Dr. Robert M. Vanecko, a former chief of staff at Northwestern Memorial Hospital, introduced his son to Davis, according to a deposition the younger Vanecko gave in a lawsuit filed over a pension fund deal.
The son, now 53, had been a lawyer with the firm Mayer Brown and an investment banker. Davis, now 79, ran a small law firm where future President Barack Obama got his first job after Harvard Law School and later became a developer of subsidized housing.
After securing investments of $68 million from five city pension funds — the Chicago Teachers’ Pension Fund, Chicago Policemen’s Annuity & Benefit Fund, Chicago Municipal Employees’ Annuity and Benefit Fund, Chicago Laborers’ Annuity and Benefit Fund and the Retirement Plan for CTA Employees — Davis and Vanecko made their first deal.
It was to buy a high-rise apartment building that had been sold less than two years earlier for $43.6 million.
Davis and Vanecko paid $65.2 million in
September 2006 to buy the building. In addition to using $9.9 million of pension money, they got a $56 million loan from General Electric Capital.
Over the next five years, DV Urban reported, it sank $16 million in pension money into the property, hiring a company owned by Davis’ son, Cullen Davis, to manage it.
In November 2011, DV Urban sold the building for $65.5 million — slightly more than it paid five years earlier.
According to a knowledgeable source, DV Urban turned a $6 million profit on the deal.
But the pension funds didn’t get a dime, losing at least $9.9 million on the building.
Five months ago, the building again was sold — for $92.5 million.
2400 S. MICHIGAN AVE. The former headquarters of the Chicago Defender in the historic Motor Row District
This vacant building ended up in DV Urban’s portfolio after a pair of unusual transactions that inflated the price of the property by $413,000 in a single day.
It started with the estate of Lev Stratievsky, a Russian mobster who died while awaiting trial on charges that he was involved in money laundering for Ukrainian drug deals. The estate sold the property for $3,720,000 on June 8, 2007, to a business owned by Jeffrey Duerwachter, then 39, of Wilmette.
Duerwachter immediately flipped the property for $4,133,000 to a company owned by Matthew O’Malley, a friend of the Daley family who had been given sweetheart deals from City Hall to operate the Park Grill and Chicago Firehouse restaurants, and his partner, Brian J. O’Connell, a developer from La Grange.
O’Malley and O’Connell bought the building with a $3.3 million loan from First Chicago Bank & Trust, a $500,000 loan from Joseph Peterchak and Jeanne Picerene and $1 million in pension money from Davis and Vanecko. DV Urban guaranteed to repay the bank loan, while O’Malley and O’Connell personally guaranteed to repay DV for the $1 million loan as well as a second loan of $1,590,850 they got in May 2009 to repay Peterchak and Picerene.
Those two loans had an interest rate of 18 percent and have been in default since April 2011, with a total of $2,848,149 unpaid, according to yearly audits for the pension funds. There doesn’t appear to have been any attempt to collect on the personal guarantees made by O’Malley and O’Connell and recover money for the pension plans.
Three months after O’Malley and O’Connell defaulted on the pension fund loans, First Chicago foreclosed on the bank’s loan, resulting in a years-long court fight that ended when O’Malley and O’Connell sold the property in February 2014 for $4.26 million to repay the delinquent mortgage.
The sale came as City Hall filed another lawsuit against the property, demanding that the building be torn down if “the dangerous and unsafe conditions” weren’t corrected.
The five Chicago pension funds got $475,000 from the sale — about 18 percent of the pension money DV Urban put into the deal.
It’s unclear what O’Malley and O’Connell did with the money they borrowed from DV Urban. They never made any improvements to the former Defender headquarters, now known as Revel Motor Row and hosts private events.
217 N. JEFFERSON ST. A six-story office building in the West Loop
When the Uhlich Children’s Advantage Network moved out, Davis and Vanecko invested $2,650,000 of pension money in the property in July 2007, teaming with Terrapin Properties, an investment group that already owned half the building.
“They put up enough that we made them our co-general partner,” says Jake Geleerd, who headed Terrapin with Michael Ezgur. “They were a co-general partner with us for the whole building.”
DV Urban ended up investing $4,495,555 in the building, and the partnership obtained several mortgages from a Highland Park bank, including one for $11.7 million in 2009.
Things got complicated in 2012, when the
pension funds ousted Davis, leading to a court battle that continued until this summer.
The pension funds brought in Newport Capital Partners to take over DV Urban, with instructions to liquidate all of the real estate investments Davis and Vanecko made.
When Newport put the property up for sale, it discovered that Bank of America had a $2.7 million loan that needed to be repaid.
Eventually, the building was sold in March 2015 for $14.5 million. The pension funds got $4.5 million.
The money the pension funds got included $796,000 to cancel $2,730,094 in loans DV Urban had made to Terrapin, whose investors personally guaranteed to repay the money but didn’t.
Davis and Vanecko let the loans go into default in May 2008. They remained in default through 2017, according to an audit.
7100 S. SOUTH SHORE DR. A 162-unit apartment building
This vintage apartment building had a history of housing code violations when Davis and Vanecko bought it for $11.5 million in July 2007, including $6.5 million in pension money.
The code violations continued after they bought it, records show, with City Hall suing, seeking fines of $8,000 a day until repairs were made.
The building was managed by DV Property Management, run by another Davis son, Jared Davis.
By the time the pension funds dumped DV Urban in 2012, their investment in the property topped $9 million. Newport Capital sold the building in March 2015 to a New York company for $6,750,000.
The five pension funds lost all of their original investment — plus $173,082 more to pay off a loan from Private Bank.
3508 S. STATE ST. Storefronts in a Chicago Housing Authority development
After Daley tore down the Stateway Gardens housing project, his CHA board and its management firm, The Habitat Company, hired Allison Davis in 2001 to redevelop the property with townhomes and stores. The taxpayer-funded deal was to pay Davis — Daley’s plan commission chairman — and his company $2 million in development fees.
Davis and Vanecko bought the storefronts in August 2007 for $4.2 million in a deal that included $3.5 million from the pension funds.
DV Urban rented out the storefronts, which included a Starbucks and Jimmy John’s, but had difficulty keeping some of the stores leased. And Starbucks had concerns about violence in the area, a block from Chicago police headquarters, but eventually renewed its lease.
Newport Capital sold the stores for $2.4 million in December 2016. After repaying a bank loan, the pension funds got $1.1 million, a fraction of their original investment.
1411 S. MICHIGAN AVE. Former headquarters of the National Association of Letter Carriers
Hoping to cash in on booming development in the South Loop, the union decided to move, building a new home in Bronzeville that would largely be financed by selling the two-story building and surrounding parking on Michigan Avenue just south of O’Malley’s Chicago Firehouse, a restaurant close to Daley’s home.
On the union’s behalf, Ernest Sawyer, former Mayor Eugene Sawyer’s brother, reached out to see whether Davis was interested.
He was. Davis and Vanecko submitted the highest bid, a deal negotiated by two attorneys from the Daley & George law firm: Allan Kelly Ryan IV, husband of Vanecko’s cousin Anne Daley, whose father runs the law firm, and Dennis Aukstik, former brother-in-law of William Daley.
The Daley firm also worked on several other pension fund deals for DV Urban, according to Vanecko’s deposition.
Under the contract Davis and Vanecko signed in August 2007, DV Urban agreed to pay the postal workers union $8.5 million for the property, including nearly $4.7 million from the pension funds.
DV Urban gave the union a “predevelopment” loan of $400,000, earnest money of $850,000 and a $2.9 million line of credit — money the union needed to build its new headquarters and move.
Under the deal, DV Urban could back out if the newly elected alderman of the Second Ward, Robert Fioretti, didn’t OK their unspecified plans, which they said might include a hotel, condos or apartments.
In a deposition, Davis said he spent months trying without success to reach Fioretti before the alderman said he wasn’t prepared to sign off on their project.
The deal was still up in the air in June 2009 when Vanecko pulled out of the DV Urban partnership because the pension fund deals were causing strife in the mayor’s family.
A few weeks later, Jared Davis asked the postal workers to renegotiate. But the union refused, prompting him to send a letter canceling the deal and asking it to return the pension funds’ money.
The union refused. It sued DV Urban for breach of contract, a lawsuit that dragged on for years while the pension funds wrested control of DV Urban from Davis, turning the real estate fund over to Newport.
While DV Urban and the postal workers were fighting in court, the union sold its now-vacant headquarters for $3.1 million in October 2012 to a developer, who resold it in the spring of 2015 for $5.6 million.
Today, a 199-unit apartment building is going up on the property, which includes 40,000 square feet of commercial space that Rush University Medical Center has leased for $12 million in a 10-year deal.
After five years of litigation, the union’s lawsuit against DV Urban ended in September 2014 when the union and Newport Capital reached an out-of-court settlement. The deal returned just $41,844 to the pension funds.
“That’s what happens when you breach a contract,” says Elvin Charity, an attorney for the union. “DV wanted to renegotiate the price. They didn’t try to get the zoning. They didn’t know what they wanted to do. They tried to use the zoning issue to get out of the deal. I can’t speculate as to why they did it.”
3348 S. PULASKI RD. A decrepit warehouse on land that was tainted by arsenic and lead
A week after the Sun-Times reported that Daley’s nephew and his partners had been paid nearly $500,000 in rent by City Hall for the Pulaski Road property, Vanecko announced in June 2009 he would walk away from DV Urban, leaving the company to be run by Allison Davis and Jared Davis.
Vanecko said he was turning over his 49 percent stake to the Davis family. None of those involved ever disclosed how much money, if anything, Vanecko got for that.
Vanecko’s decision came amid reports of tension in the Daley family.
At one point, the mayor publicly rebuked his sister’s son: “While many of you have speculated that somehow I knew about Bob’s business relationship, I did not. When I found out, I made it very clear it was not a good decision, and he should end the business relationship immediately. But as an adult, Bob made a different decision, which leads to a very painful string of news stories that have indeed caused tension in my family.”
DV Urban’s investment in the Pulaski Road warehouse grew to $5.2 million in the fall of September 2011, a few months before the five pension funds ousted the Davises.
Newport got three bids for the property, including a $5.4 million offer from a joint venture of the California teachers pension fund and Panattoni Development in California. Panattoni hired Vanecko’s cousin, Patrick Daley Thompson, an attorney who then served on the Metropolitan Water Reclamation District of Greater Chicago, to lobby City Hall for a property tax break to develop the land.
After Ald. Rick Munoz (22nd) agreed to support the tax break, Newport sold the warehouse and surrounding land to PanCal in July 2014 for $5.4 million.
Newport settled an outstanding mortgage on the property while $2.6 million went into a fund to help PanCal to clean it up.
The pension funds reported they received $1.7 million.
PanCal agreed to pay Thompson and his law firm $100,000, according to city records, for obtaining the 10-year tax break, which could cut the property tax bill by $4.1 million.
PanCal tore down the warehouse, removed 70 tons of poisoned soil and built a new, 316,000-square-foot warehouse on the site that it sold to an arm of Prudential Insurance in December 2015 for $29.7 million.
3030 N. BROADWAY AND 3000 BLOCK OF NORTH WATERLOO COURT Site of a Mariano’s grocery store, a Starbucks, a health club and a bank
It could have been Davis and Vanecko’s biggest deal, one that would make millions for the pension funds and offset losses from their bad investments.
Instead, it turned out to be DV Urban’s biggest flop, losing money building an upscale grocery store in one of Chicago’s richest neighborhoods, just blocks from Lake Michigan.
What’s now a Mariano’s once was the site of a Dominick’s that burned down in June 2005. Jon Zitzman of JFJ Development Co. and Michael O’Connor of Dionysus Development bought the land for $16 million, with plans to build 55 condos and a store that Dominick’s agreed to lease.
In January 2007, Zitzman and O’Connor got a $15 million loan from Vail Capital LLC, headed by Sheldon “Red” Mandell, chairman of National Wrecking Company, according to documents filed with the Cook County recorder of deeds.
But Mandell says he was never involved in any deal on this property and denies making any loans on the deal.
The Vail Capital loan was modified in February 2008 when Davis and Vanecko entered the deal, records filed with the county show. Using $3 million from the pension funds, Davis and Vanecko bought the Waterloo Court portion of the property that was part of the collateral on the loan Zitzman and O’Connor got from Vail.