Friday, April 29, 2011




Like a vampire that seeks to suck the lifeblood from humans and refuses to die until a stake made of wood or silver is driven through its heart, the sale of California’s most prized state buildings refuses to go away.

First conceived by ex-Gov. Arnold Schwarzenegger in late 2009 as a means of raising extra bucks for one-time stopgap relief of the state’s chronic budget woes, the proposed sale of 11 buildings involved choice structures like the San Francisco Civic Center, the red granite Ronald Reagan State Building in Los Angeles, the Attorney General Building in Sacramento and the Rattigan Building in Santa Rosa.

As originally planned, the sale was to bring in about $2 billion at today’s depressed real estate price levels, with about $630 million going toward deficit reduction. The state committed to lease back all the buildings for at least 20 years at whatever the market rates of the future might be.

This plan was obviously rotten from the start. Even the economic analysis of the sale done by Schwarzenegger’s pet economists predicted a net loss to the state of $1.78 billion over 20 years and $2.8 billion if the leasebacks continued for 30 years. So the deal really was like a vampire that threatened to suck California’s fiscal lifeblood for decades to come.

It was a classic case of Schwarzenegger’s short-sighted approach to government, where deficits and other problems were temporarily papered over without even seeking long-term solutions, that task left to those who would come later -- us, now.

The Schwarzenegger approach included $15 billion worth of budget balancing bonds issued in 2004, bonds which will eventually be repaid for about twice the money they brought in – which was spent long ago.

After this column first pointed out the penny-wise, pound-foolish nature of the building sale in February 2010, protests slowly built and a group of former building officials eventually filed suit to stop the transaction.

Schwarzenegger proceeded with the sale process anyway, a firm called California First LLP eventually bidding $2.33 billion for the buildings and the state accepting the bid. But the sale was never consummated despite the signing of a purchase agreement last Nov. 15.

Schwarzenegger intended that paperwork to cement the deal before he left office Jan. 2, but his successor Jerry Brown ordered the sale quashed less than a month after taking office. Even though the deal in its final shape would have produced $300 million more than originally estimated, Brown believed the long-term losses should not be tolerated.

Essentially, Brown claimed the purchase agreement merely began an escrow process, which could be stopped before it was finalized. In fact, California First – whose main partners include the Irvine-based firm ACRE LLC (a wing of an outfit called Antarctica Capital), Hines Inc. of Houston, Texas, plus nine other investment and real estate firms in lesser roles – never took possession of any building.

But the partnership, which loves the idea of billions of dollars in assured profits over at least 20 years, didn’t give up just because Brown ordered the deal ended and moved some other state funds around to make up for the one-time $630 million payment Schwarzenegger had figured would enter state coffers. The partners sued.

“The state negotiated and signed a contract with California First and has no right to back out of the deal,” said the investment group’s Los Angeles lawyer, Stuart Liner. “California First met its obligations every step of the way and we intend to compel the state to live up to their (sic) end of the contract.”

Liner’s challenge indicates the investors have no interest in helping California’s financial future, but simply want to line their own pockets.

The suit, claims Eric Lamoureux, spokesman for the state’s building management agency, the Department of General Services, “is frivolous and wholly without merit. We are confident we will prevail when the facts surrounding…the purchase and sale agreement are brought out in court.”

Lamoureux one year ago was touting alleged benefits of the sale for the state (reductions in maintenance costs, paying off the bonds that built the buildings). Now he says “Escrow never did close because the lawsuit…prevented the state from finalizing the transaction. The lawsuit was still in place this year when Gov. Brown cancelled the sale…”

Brown’s cancellation was no surprise since he promised while campaigning last year to review the sale. That pledge was one reason the purchase agreement was hustled through almost immediately after the bidding process.

As with the overall budget, Brown says he’s seeking long-term solutions and not short-term Band-Aids that merely “kick problems down the road.”

But this bad deal is not dead yet, and with billions of dollars at stake, bet on the California First lawsuit lasting several years at a minimum.

Email Thomas Elias at His book, "The Burzynski Breakthrough: The Most Promising Cancer Treatment and the Government’s Campaign to Squelch It," is now available in a soft cover fourth edition. For more Elias columns, visit

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