O.C. Agencies’ Building Buy Questioned

SANTA ANA — At a time when prices are at a premium, Orange County tollway officials have spent nearly $5 million for a top-of-the-line administrative office building with an assessed value of $3 million in the Irvine Spectrum area.

The Transportation Corridor Agencies bought the 48,000-square-foot building last month without an outside, independent appraisal and bypassed buildings that sold for less.

Tollway officials, who hailed the purchase as a sound business deal, said the price is comparable to similar two-story, steel-frame buildings in the area. And they view the property as an investment that can be sold at a public profit when the agencies are scheduled to go out of business in about 30 years.

“The property that has been acquired was available a few years back for much less than we paid, but it’s our belief the market is headed up significantly,” said Orange County Supervisor William G. Steiner, a member of the two tollway boards that make up the Transportation Corridor Agencies.

“Although we’re paying more now, we’re actually saving money by buying now rather than later,” said Steiner, who served on the agencies’ building search committee. “The building will continue to appreciate to pre-recession levels.”

*

Others were not as sure.

“I would question whether we’re buying a Ferrari or a Chevy,” said Paula Werner, an Irvine councilwoman and alternate member of the toll road boards. “If we didn’t get an [independent] appraisal, how do we know whether we’re getting a good value? I’m surprised about how they went about buying this building.”

James Kenan, finance director for the Orange County Transportation Authority, which recently called for a study to consider absorbing the tollway agencies, was equally puzzled.

“If it was assessed at $3 million, you have to wonder why they paid $4.8 million for it,” he said.

Several real estate experts said the purchase--completed in July--came at a bad time for a public agency looking for a deal in the Irvine Spectrum area, where sellers can virtually name their price. Just a few years ago, they said, the market was glutted with empty office space that routinely sold for $65 to $85 a square foot.

But the agencies also rejected buildings in the same area now selling for $75 to $80 a square foot to spend nearly $100 a square foot in what is considered among the most sought-after commercial property in the state. In addition, the agencies will spend at least $115,000 to buy out existing leases.

According to the agencies’ own survey of low-rise office space in Orange County, conducted by Grubb & Ellis, its broker, the average sales price this year is about $65 a square foot, down from a high of $135 a square foot in 1990.

“I do a lot of office deals and buyers are finding there’s just not a lot of office space around,” said Milburn A. Matthews, a real estate attorney who represented the limited partnership that sold the building to the tollway agencies. “My understanding was this agency was flush with cash and was able to actually buy a building rather than lease one, and they needed to do so right away.”

Matthews said the principal in the partnership--a San Juan Capistrano businessman who owns a portable storage business in Ontario--has no connection with the toll road agencies.

Property records show that the partnership bought the building in December 1993 for $2.9 million. The assessment for the past two years has held steady at $3.052 million--$1.838 million for the land and $1.214 million for the building and improvements.

*

The Grubb & Ellis broker who handled the recent sale said the limited partnership bought the property in foreclosure from the lender, California Federal Bank.

Tollway officials never sought an outside appraisal and were satisfied that Grubb & Ellis found comparable properties that made the ultimate purchase a good deal, according to Paul Glaab, an agency spokesman.

Real estate brokers contacted by The Times, however, questioned the reliance of a public agency on a broker’s analysis of a property’s value when the broker is benefiting from a sale or lease. They said it is always prudent to get an appraisal from an unbiased and independent source to determine the correct worth.

Typically, lenders require appraisals before granting mortgages on property, but the tollway agency was able to pay $4.8 million in cash for the building following a $1.26-billion bond sale last year. A commission of $240,000--split evenly between the seller’s and buyer’s brokers--was paid by the seller out of the proceeds of the purchase price.

Because the Transportation Corridor Agencies are independent governmental entities entrusted with building three toll roads in east and south Orange County, they do not to follow some of the same guidelines that others, like the county government, must follow when buying property.

*

Unlike the county, the Transportation Corridor Agencies are not funded by taxes and rely almost entirely on fees on new development and tolls to build the roads, allowing them more flexibility in purchasing property.

“We saw a clear business opportunity that would not only meet our needs for the long term, but provide us with an asset that will continue to grow in value and can be applied to the bottom line when sold,” Glaab said. Proceeds from such a sale would be used to retire debt or returned to the county and cities whose members sit on the toll road boards.

When the Orange County Transportation Authority sought a new building in 1991 to consolidate all of its operations and 450 administrative employees, it awarded a four-year contract to an independent real estate consultant to conduct a study. The authority paid from $700,000 to $800,000 to the consultant, which in turn hired a broker and paid the broker’s commission.

“We felt we needed to have an independent assessment,” said Kenan, the OCTA’s finance director. “When you go to your board of directors, there is the credibility of an independent contractor taking a look at this and it carries that much more weight.”

The tollway agencies, by contrast, relied on its own staff and its broker to develop an analysis of whether to lease, build or buy a building.

Chuck West, the county’s director of real estate, said his office is required to conduct an appraisal by its staff or outside consultant before buying property. After choosing a site, the county would have to advertise the purchase in local newspapers and set a public hearing on the matter before the Board of Supervisors approved it, he said.

“We have a different set of rules we have to follow,” West said. “We advertise and have a public hearing so people can have a say as to whether they think it’s a good deal or a bad deal or ask questions.”

The toll road boards unanimously approved the building purchase during an open meeting but were not required to hold a public hearing.

The property purchased in July is at 125 Pacifica, which is now half occupied with existing tenants. The leases on the remaining tenants expire from 1998 to 2000.

Included in the 600-page prospectus used to sell the $1.26 billion in bonds last year was a $5-million budget for a building and $2.352 million for land.

Although the agencies say they spent less than the budgeted amount, the $7.352-million figure was based on the cost of having a contractor build a building and did not take into account how much it would cost to purchase existing office space.

*

After concluding that leasing or constructing a building would be more expensive than buying a building, tollway board members began looking late last year for a building within six miles of a point where fiber-optic lines could easily be connected between the new building and the toll roads. The lines are needed to run a complex, automated toll collection system.

A search subcommittee of the toll road agencies then authorized its broker to survey properties.

Two industrial properties--which would have had to be converted into office space--were selling for $75 to $80 a square foot. A third was available for $154 a square foot and a fourth is now listed at $135 a square foot. A fifth did not list a sales price.

A broader study of properties conducted by the Transportation Corridor Agencies provided a second list of comparable sales of office buildings in South County and around the John Wayne Airport area. Four properties were more expensive, but three were cheaper, including a 41,900-square-foot building in the Irvine Spectrum Office Plaza sold in December for $3.8 million, or $91 a square foot.

Although the new building is paid for and cost about $100 a square foot, the toll road staff is not expected to move out of its current building in Santa Ana until late 1999 or early 2000, when its lease on that property expires and 55 employees move into the new building. Tollway officials said they want to move its toll collection contractor, Lockheed Martin, into the new building as soon as possible.

*

Citing the purchase as an example of their financial prudence, tollway officials said they couldn’t be happier with the deal.

“In these economic times, the cities and the county are looking at being as frugal with their money as possible,” said San Clemente Councilman Scott Diehl, a toll road board chairman and building search committee member. “This simply became a business deal.”

In recent months, the toll road boards have come under scrutiny for what is perceived as excessive spending habits, including salary bonuses and perks to its top executives, who already are richly compensated. Last month, the toll road boards denied pay raises to its three top managers, saying the men had done satisfactory work but did not merit more money.

Irvine Mayor Mike Ward, who sits on both tollway boards, said it would be unfair to criticize the agencies for not buying a building sooner.

“I was smarter than my neighbors when I bought my house 16 years ago,” Ward said. “You can say we should have bought three years ago, but the fact is, this was cheaper than leasing or building a building, and we bought this place as cheaply as we could.”