California to put Reagan office building up for sale
Two dozen state office buildings across California officially go on sale Friday as the cash-strapped state seeks to raise more than $2 billion to pay off some of its long-term debt.
The state plans to sell the buildings, which include the Ronald Reagan State Building in downtown Los Angeles, and then lease back the office space for state use for at least 20 years. Gov. Arnold Schwarzenegger and the Legislature approved the sale last June.
Under the proposal, for example, the twin-towered Reagan state office building at 3rd and Spring streets would be purchased by an investor who would in turn lease it to the state. The state would pay the new owner an estimated $12.2 million a year in rent, according to the plan.
State officials will now accept bids on 24 office buildings on 11 sites in Los Angeles, Sacramento, San Francisco, Oakland and Santa Rosa. Investors may buy the properties en masse or individually.
The planned sale comes during one of the worst real estate markets since the Great Depression. Commercial property values have fallen as much as 40% from their 2007 peak, according to industry analysts. Although the depressed market may hold sales prices down, it may also help the state as it negotiates how much to pay in rent after it leases back the buildings.
The recession drove up vacancy rates in many privately owned office buildings as white-collar companies contracted through layoffs or closed their doors. Landlords in most of the country’s major office markets have been forced to reduce rents to attract or keep tenants.
The sales would add an additional 7.3 million square feet of rented office space to the 20 million square feet the state already leases from the private sector, according to the Department of General Services. Acting Director Ron Diedrich said he approved of the plan to sell the offices.
“Most businesses aren’t in the business of investing in real estate portfolios, and I don’t think the state should be either,” Diedrich said. “By doing this we are freeing up hundreds of millions of dollars to help the citizens of California by retiring billions of debt. That’s a good thing for California now and in the foreseeable future.”
The state sold bonds to raise money to build office buildings. By paying off the bonds it would avoid future interest payments. The cost of retiring the bonds would be about $1.35 billion, leaving about $660 million to add to the state’s general fund if the properties sell for the projected $2 billion.
Large commercial property sales have been rare since the credit crunch and recession hit in 2008. Potential buyers had difficulty arranging financing to make purchases while many owners tried to hang on and avoid selling at the low end of the market.
Sensing a bottom in the real estate market, several investment groups have announced in recent months that they have raised hundreds of millions of dollars to buy commercial real estate. With lenders reluctant to take back commercial properties through foreclosure, buyers have been challenged to find properties for sale at prices they want to pay.
“This is the largest office deal [available] in the country right now,” said real estate broker Kevin Shannon of CB Richard Ellis, who is handling the sale for the state. “There is not a shortage of money, there is a shortage of property.”
Potential buyers include foreign investors, wealthy individuals, real estate investment trusts, pension funds and institutions such as insurance companies, Shannon said.
The buildings for sale represent about 50% of the offices owned by the state’s General Services Administration, said Doug Button, the state’s project manager for the sale and lease of the buildings. The oldest among them is the 10-story former Broadway department store flagship in downtown Los Angeles that was built in 1914. It was renovated by the state in the 1990s and renamed the Junipero Serra State Building.
Rents the state would pay as tenants would vary from market to market, but its sales proposal calls for paying in the low- to mid-$2 per square foot per month, Button said.
The state would have the right to extend its leases beyond 20 years and the right to purchase the properties if their owners decided to sell them.