Friday, February 26, 2010




The closer it gets, the worse California’s pending sale of state buildings looks, at least for the long-term interests of taxpayers.

Here are the basics of the sale, which aims to produce a modicum of cash to help resolve a budget crisis that seems to grow worse every year:

State officials planned to go into the real estate marketplace in late February with as many as 17 state buildings that are expected to fetch about $2 billion even in today’s depressed climate for sales of commercial buildings. Bids will probably begin arriving in early April.

One reason these buildings will likely draw strong interest is that the state will guarantee continued occupancy for at least 20 years and in some cases as much as 30 years. Not many commercial buildings come with that kind of guaranteed rental income.

Receipts from the sale will be used to pay off about $1.35 billion in bonds issued to finance construction of the buildings. Another $665 million would go toward commissions for the real estate broker managing the deal and to the state’s general fund, where it would be applied toward this year’s expected deficit of about $20 billion.

The commission will likely come to about $16 million for the firm of Coldwell Banker Richard Ellis. CBRE executives have contributed just over $79,000 to various campaign committees controlled by Gov. Arnold Schwarzenegger, a strong advocate of the sale. If the buildings bring the expected amount and the commission is $16 million, or 0.8 percent of the purchase price as spelled out in the CBRE’s bid for the listings, the state budget would benefit by almost exactly $600 million this year, a drop in the deficit bucket.

Meanwhile, future rents California government would be forced to pay would come to at least $5 billion and might reach $6 billion. Yes, retiring the construction bonds would save the state around $120 million in yearly payments. But many of the bonds have less than 10 years to run, so the prospective benefits of paying them off early don’t even approach the costs of future rent payments.

Doug Button, the state Division of Real Estate official supervising the sale, contends savings in ongoing repair and maintenance expenses would also benefit the state. Much of those savings would come from eliminating between 600 and 1,000 state employees who now help operate the buildings. No one knows if those workers would be hired by new owners or draw unemployment and welfare payments, thus reducing any financial benefits of firing them.

Put all the putative savings together and they don’t even approach the rent the state would be committed to pay.

That’s why Bill Leonard, a former Republican state legislator now serving on the tax-collecting state Board of Equalization, says the deal would simply engender “another form of state debt, leaseback contracts instead of bonds.”

Then there’s the question of which buildings are being sold. Rather than try to sell off vacant state properties like a former CalTrans building near San Diego’s Maritime Museum, this sale will offer the Ronald Reagan state office building in downtown Los Angeles, a pink granite tower whose construction bonds were paid off last December. Choice buildings in the San Francisco Civic Center are also on the block.

So instead of the state enjoying free rent in prime locations for many years to come, it will be making rent payments for decades if this sale proceeds.

Then there’s the matter of patrimony. California voters approved the bonds that built all the properties involved in the putative sale. But those same voters have been given no voice in the decision to sell off the buildings they paid for. Does this make sense? How is it different than if the state were to auction off state parks, also bought with voter-approved funds?

But rest easy, say Button and other officials running the sale. “We will only sell if it makes economic sense, and we won’t know about that until the bids come in,” Button said. “We won’t obligate the state unless it makes economic sense.”

But what will seem economically sensible to the bureaucrats and politicians trying to convince Californians that reduced maintenance expenses will somehow make up for paying 20 to 30 years of rent at levels yet to be determined?

It all adds up to a highly questionable deal that offers many years of costs in exchange for a one-time payment that won’t even come close to solving the deficit.

Which is why the closer this deal gets, the worse it looks.

Email Thomas Elias at His book, "The Burzynski Breakthrough," is now available in a soft cover fourth edition. For more Elias columns, visit


  1. I sure would like to see the wording of the part of the budget bill that authorized this. I think it applies to school districts as well. Is the provision retroactive so that property sales income prior to the bill can be used for one time operational expenses?

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