California sell-off plan has high cost
Associated Press Writer
SACRAMENTO, Calif. (AP) – Gov. Arnold Schwarzenegger’s plan to sell two dozen state office buildings would cost California taxpayers billions of dollars in rent in the years ahead, far more than the state stands to make from the sale, according to financial documents analyzed by The Associated Press.
If all buildings sell at the asking price, administration officials projected the state would net about $660 million after roughly $1.1 billion in construction bonds are paid off.
The state would then rent space in the buildings from the new owners for 20 years. Over that period, it would pay $5.2 billion in rent, according to documents prepared for potential buyers.
The terms of the proposed leases also say the state would have to pay a monthly fee for nearly 3,500 parking spaces it now controls, adding $138 million to the state’s costs over the next two decades. California taxpayers would even cover increases in property tax assessments once the buildings are sold.
The costs associated with selling off government properties are detailed in investment packets created by the company the state hired to market the buildings, CB Richard Ellis. The Associated Press requested and obtained the documents through the state, then compiled and analyzed the financial information supplied for each building.
The sale prices and projected rents, with 10 percent increases every five years, are what the state expects, but the final contracts with the buyers could set different terms.
The documents also offer the first detailed look at how much the potential buyers stand to gain from the so-called sale-leaseback proposal.
For example, CB Richard Ellis projects net operating income of $9.7 million in 2011 for the investor who buys the state attorney general’s office.
“This is a rare opportunity to acquire an excellent Class A office property that is leased on a long-term basis to a credit tenant, providing investors a stable income stream,” CB Richard Ellis wrote in its offering memorandum.
The plan to sell state office buildings was promoted by Schwarzenegger during last summer’s drawn-out negotiations to close California’s budget deficit. The governor sold the idea as a moneymaker for the state, and lawmakers did not did not request an analysis before voting on it.
The plan was never aired in a legislative committee hearing and no detailed financial plan was ever performed to determine whether it would be a good deal for state taxpayers.
State Assemblyman Jim Silva was one of just three of California’s 120 lawmakers who voted against the proposal. He and other critics questioned whether it was smart to be selling so much state property at a time when commercial real estate prices are in a slump, then saddle taxpayers with rent costs for decades to come.
Most of the buildings on the sell-off list will be paid off within 10 years. The Reagan office building, which houses an array of state agencies in downtown Los Angeles, is scheduled to be paid off next year.
“California has to make sure that the taxpayers are treated fairly, and selling our buildings and leasing them back would not be in the best interest of our taxpayers,” Silva, a Republican from Huntington Beach, told the AP this week.
Other properties up for sale include the San Francisco Civic Center, which houses the state Supreme Court, the Public Utilities Commission building in San Francisco and several buildings in downtown Sacramento, including those that house the attorney general’s office and state Department of Education.
Estimates for the first year after the proposed sales are completed illustrate the cost to the state.
The Schwarzenegger administration projected the state will spend $192 million in bond payments, maintenance and repairs for its buildings in the fiscal year that begins in July. By comparison, CB Richard Ellis estimated the state would pay $238 million in rent and utilities alone during its first year as a renter – a $46 million increase in costs to state taxpayers.
State officials say hundreds of investors have inquired about the sale. Bids from potential buyers were due Wednesday, and the administration is expected to report to the Legislature in June.
Last week, the AP reported that the administration had removed critics from two oversight boards who questioned the plan’s long-term feasibility.
Jerry Epstein, who was removed as president of the Los Angeles State Building Authority, reviewed the financial documents prepared for the Reagan office building and concluded that taxpayers will be paying more under Schwarzenegger’s sell-off plan.
The state has been paying about 4 percent interest on the building’s bonds, which are set to be paid off next year. The new owners would make a 7 percent return while taxpayers would carry the burden for at least 20 years, Epstein said. After that time, the state could repurchase the buildings at market rate or continue paying rent.
“That was the whole reason the authority was created, so the state would own the buildings free-and-clear,” Epstein said. “It is so stupid. Something is not right. It really has a stench to it.”
The three-member building authorities in Los Angeles and San Francisco were established three decades ago after the state determined it was more financially sound to own its government buildings than to rent the space. The authorities oversee the bond payments and have to approve the sale of those buildings.
Several of the members are gubernatorial appointees.
Earlier this year, Epstein directed the authority’s lawyers to ask the Department of General Services, which is leading the sale on behalf of the state, for a cost-benefit analysis of Schwarzenegger’s plan. A few weeks later, the department replied with a letter saying he was being replaced and his services were no longer needed.
The head of the Department of General Services is appointed by Schwarzenegger.
Jeffery Young, a department spokesman, said the governor feels strongly that California should not be in the business of managing properties.
“This is an unprecedented situation,” he said, referring to California’s budget deficit. “You’ve got to do everything you can to raise cash. Where is it written that we should be in the real estate business?”
The $660 million in one-time profit the state hopes to receive from the sale amounts to 3.3 percent of the state’s budget deficit, estimated at $20 billion.
By selling its government buildings, California will be relieved of the financial burden of maintaining them. But Young said there is no way to project how much the state will save in maintenance costs over the next 20 years.
“We’re not going to know how good or bad this is until 10 years down the road,” Young said.
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