Money & Politics | Daily Report

Gov. Arnold Schwarzenegger knows real estate – a big portion of his movie fortune has been invested in lucrative properties from Santa Monica to Columbus, Ohio.

East End Complex, Sacramento

But in the state's quest to profit $660 million from the sale of government buildings, Schwarzenegger may be trading short-term gain for long-term financial pain, some real estate experts believe.

The governor's plan, which was approved by the Legislature last year during budget negotiations, calls for the state to sell 17 buildings on 11 sites. The Department of General Services hopes to collect about $2 billion from the sales, along with saving $1.9 billion from no longer paying maintenance costs over the next two decades.

On the block are the Ronald Reagan State Office Building in Los Angeles and the California Public Utilities Commission building in San Francisco. A number of buildings in Sacramento would also be sold to private owners, including the attorney general's office, the Franchise Tax Board building and the sprawling Capitol Area East End Complex.

After paying off the debts from these buildings, the state expects a profit of $660 million for the general fund, a small dent in the current $20.7 billion deficit.

But the Sacramento Business Journal notes that rent on those properties over the next 20 years could wipe out any gains. The Journal reported that the state could end up seeing a $1.3 billion loss after everything pencils out.

One analysis quoted in the Journal had the state paying $2.80 per square foot at the East End project, for example. Adding in an expected 10 percent rent increase every five years on all the buildings, the Journal estimated total rental costs of $5.2 billion over 20 years on properties the state now owns.

The Republican governor is so committed to the sale of these buildings that he recently removed four critics from state boards with influence over the sales. The Associated Press reported that:

The appointees – to building authorities in San Francisco and Los Angeles – were replaced quietly in recent weeks as the state began taking bids on the properties, and their removal likely quashes any dissent or independent financial studies that might have emerged as the property sales move forward.

Two appointees were removed from the San Francisco State Building Authority, and another two were removed from the Los Angeles State Building Authority.

Marina del Ray developer Jerry B. Epstein told the Associated Press that he had asked the Department of General Services for a cost-benefit analysis of the plan. After he was removed from the board, Epstein wrote an op-ed for the Los Angeles Times criticizing the sale, noting that California is experiencing a severe real estate slump. He wrote:

Neither my colleagues on the authority nor I were consulted before this dubious scheme was hatched, though the authority's cooperation is necessary for the execution of the sale of the Reagan and Serra buildings. In late February, at my direction, counsel to the Los Angeles State Building Authority asked the Department of General Services to provide a market study and to clarify the terms proposed by the Schwarzenegger administration. We asked for a comparison of the projected net proceeds from the sale and the projected rental and other costs associated with a 20-year leaseback of these same buildings.

Our letter made it clear that the authority has a fiduciary responsibility to the bondholders as well as to the taxpayers of the state, and that no formal decision by the authority would be made until it could hear testimony about the proposed sale, thereby ensuring that the benefits and costs of the proposed transaction had been fully vetted. 

... I am concerned that we taxpayers may have no refuge from the poor judgment and dysfunction of our state government. Short-term solutions and accounting gimmicks like the proposed sale of state buildings have long-term consequences. The governor and legislators should fix the state's budget problems we face through thoughtful, structural solutions, not carelessly conceived, short-term political fixes that will cost us all more in the long run.

For its part, the Department of General Services plans to perform a detailed cost analysis of the bids, and it warned against making any conclusions about potential profits to the state. Gerald McLaughlin, senior real estate officer with the department, told the Business Journal: "In the final analysis if it doesn't pencil, we're not obligated to sell the property."

One final note: The sale of state property is another taxpayer-provided windfall for a company associated with Richard C. Blum, the husband of U.S. Sen. Dianne Feinstein. He's chairman of CB Richard Ellis, the real estate firm that secured the state contract to sell the buildings. On its Web site, DGS said CB Richard Ellis won the bid because its commission was well below 1 percent, and it scored high in other categories as well, including a history of major sales.