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Legislative Analyst: State building sale a bad idea

By Josh Richman
Tuesday, April 27th, 2010 at 12:54 pm in Arnold Schwarzenegger.

The nonpartisan Legislative Analyst’s Office today issued a report on a proposal that the state sell some of its office buildings to private interests in order to raise some fast cash and then lease back the same properties to state agencies for 20 years at market rate rents.

The conclusion: It’s a bad idea.

Elihu Harris building in OaklandAmong the state buildings proposed for sale are the Elihu Harris Building, at 1515 Clay St. in Oakland; the Earl Warren/Hiram Johnson complex that houses agencies including the state’s Supreme Court, at 350 McAllister/455 Golden Gate Ave. in San Francisco; and the Public Utilities Commission Building, at 505 Van Ness Ave. in San Francisco.

Here’s the LAO report’s summary (with my emphasis added):

Recent legislation authorized the Department of General Services (DGS) to sell and then lease back 11 state-owned office properties. The sale-leaseback is designed to free up the state’s equity in the buildings to provide one-time revenue for addressing the state’s current budgetary shortfall. We estimate that the sale of buildings would result in one-time revenue to the state of between $600 million and $1.4 billion, but that annual leasing costs would eventually exceed ownership costs by approximately $200 million. Over the lives of these buildings, we estimate the transaction would cost the state between $600 million and $1.5 billion. The Legislature will need to weigh how these costs compare to other alternatives for addressing the state’s budget shortfall. In our view, taking on long-term obligations—like the lease payments on these buildings—in exchange for one-time revenue to pay for current services is bad budgeting practice as it simply shifts costs to future years. Therefore, we encourage the Legislature to strongly consider other budget alternatives.

This gibes with criticisms of the “fire sale” raised in recent weeks by state Controller John Chiang, university economists, land development experts and labor groups; two weeks ago they were touting a report by economic forecasting firm Beacon Economics that foresaw more than $4 billion in hidden costs for taxpayers. State Treasurer Bill Lockyer said the Beacon report “provides a valuable warning about sacrificing the state’s long-term financial health for short-term gain.”

The state already has started accepting bids, but Gov. Schwarzenegger vowed last week that the sales wouldn’t go forward if it didn’t make sound fiscal sense. I’ve asked the governor’s office for a comment today; when I hear back, I’ll update this post.

UPDATE @ 2:10 P.M.: State and Consumer Services Agency Secretary Bill Leonard doesn’t see the LAO report as an obstacle to going through with the sales:

“The LAO’s report correctly concludes that the state is successfully negotiating a potential sale of state buildings, as authorized by the Legislature last summer. The Department of General Services worked with commercial real estate experts to market a world-class portfolio, which drew a world-class number of competitive offers and exceeded expectations. DGS needs to complete its negotiations with buyers and conduct a full analysis of the numbers before any final conclusions can be made. The bottom line is that the state should not be in the business of owning commercial real estate given the inherent cost risks. This transaction – if the numbers add up for the taxpayers – will generate cash that will help the state avoid further public service program cuts.”

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  • flying4vino

    One wonders how many of the bidders have really looked carefully at the package. The small clause in the lease designed to benefit the SEIU, the expense provisions, the maintenance obligations, the staffing obligations, the deferred maintenance, the casualty provisions or what code issues arise when the buildings shift from public to private ownership.

    The foundational assumption that the state can transfer cost risks to the private sector runs contrary to virtually all major tenant , long term leases in office buildings, shopping centers and warehouses. The only way that this can be achieved is to pay a substantially over market yield or to have investors who have dumb lenders.

    Perhaps some insiders have assurances that the lease terms will be rewritten after the other bidders have been eliminated.

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