Imagine you are deeply in debt. But you are also less than a year away from paying off the mortgage on a nice home that you want to continue living in. Someone comes in and offers you enough money to pay off a small portion of your outstanding bills if you will sell them your house. As part of the deal, you would have to live in the house for 20 years, paying rent to the new owners that would amount to many times what you were paid for the house. Would you do it? Not likely.
Yet, late last summer, with little study and without public hearings or input from the real estate experts who serve on the relevant state building authorities, Gov. Arnold Schwarzenegger and the Legislature agreed to sell 11 state office building complexes, including the Ronald Reagan and Junipero Serra state buildings in downtown Los Angeles. The decision was made as part of a deal to close the state's $20-billion 2009-10 budget deficit. Today this fire sale is moving forward, common sense notwithstanding, and it's happening at a time when prices for commercial real estate are in a severe slump.
For 30 years, under Democratic and Republican governors, the state has lowered the cost of office space for its courts, employees and agencies by constructing state-owned buildings. Most of the buildings on the "for sale" list are paid off or nearly paid off. By selling off and then leasing back these state office buildings, California is obligating itself to pay market rent for the next 20 years, with no anticipated new revenue to pay for it.
Worse still, even if the state gets the price it's hoping for on the buildings, the estimated net proceeds of about $650 million will be enough to cover only a few years' worth of future rent payments. And getting a good price is a big if. California's recent attempt to sell the Orange County Fairgrounds fell apart last month when the state rejected the highest bid it got -- $56.5 million. The bid was much lower than the state's estimated value of the property, which was between $96 million and $180 million.
I have a personal stake in seeing this foolish plan tabled. Since 1983, the first year of George Deukmejian's two terms as governor, I have served on the Los Angeles State Building Authority, a three-person body established to plan, finance and oversee the construction and management of state office facilities in downtown Los Angeles. Two members of the authority are appointed by the governor; the third is appointed by the Los Angeles Community Redevelopment Agency. There are similar entities in other California cities.
These joint powers authorities were established for many reasons, not the least of which is that the state thought it made good sense to have people with practical experience overseeing the design, financing, construction and management of large state buildings.
For nearly three decades, the authority has carried out its mission, completing two state office buildings. Before construction of the Ronald Reagan and the Junipero Serra buildings, the state was paying more than 75 landlords all across Los Angeles County millions of dollars in rent. The construction of the buildings reduced costs and greatly increased efficiency, since more than 50 state agencies could now be housed just a few blocks apart. The buildings also served as a catalyst for the renaissance of downtown Los Angeles.
To finance construction, the state issued lease revenue bonds, so that once the bonds are paid off, the state will own the buildings free and clear. In May 2011, the bonds that financed the Ronald Reagan State Building are scheduled to be paid off.
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.