Interest in buying state offices in California is building


Efforts to sell 24 state office buildings have drawn lots of interest from potential buyers -- as well as the ire of some former public officials who labored to get them built years ago in the belief that public ownership of the buildings would bring long-term financial benefits to taxpayers.

“This seems to be very shortsighted economics,” said Richard Rowe, a retired executive of the Los Angeles Community Redevelopment Agency, after he heard about plans to sell the Ronald Reagan State Building in downtown Los Angeles and other offices to investors.

State officials last week began accepting 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. Gov. Arnold Schwarzenegger and the Legislature approved the sale in June.

California officials hope to raise $2 billion to pay some of the cash-strapped state’s long-term debt and help plug a deep hole in the state budget by selling the occupied buildings and then leasing space in them for at least 20 years. The plan is to pay off the bonds used to finance the buildings and put the remaining $660 million or so into the state general fund.

State officials say the planned sales are in the taxpayers’ best interests.

“California’s fiscal crisis requires the state to reassess its role in real estate and look for ways to generate immediate revenue and reduce future costs,” said Ron Diedrich, acting director of the state’s Department of General Services.

“This is exactly what Fortune 500 companies are doing around the world when their balance sheets are lacking -- looking internally for savings, shedding risks and cutting future costs,” Diedrich said. “Sale-lease-back agreements are not unusual and can be exceedingly successful in raising needed cash.”

Response from investors has been strong; Hundreds of potential buyers have registered to receive detailed information on the properties, said real estate broker Kevin Shannon of CB Richard Ellis, who is handling the sales for the state.

“The initial reaction to this offering has been overwhelming,” Shannon said. “Interest is coming from all around the world.”

The endeavor dismays some who helped put those buildings on the map.

“Everyone understands there are great cost pressures in Sacramento today,” former state official Dan Rosenfeld said. “However, selling long-term capital assets to cover short-term operating losses is not a sustainable strategy.”

Rosenfeld was the state’s deputy director for real estate and buildings under Gov. Pete Wilson and oversaw the renovation of the Junipero Serra State Building that was completed in 1999. He is now a senior director in charge of economic development for Los Angeles County Supervisor Mark Ridley-Thomas.

The bonds the state plans to pay off are tax exempt with a low 4% interest rate, and it makes fiscal sense to keep them and reap the benefits -- such as not paying rent, Rosenfeld said. “God created tax-exempt financing for government buildings,” he quipped.

Architect William Fain, whose Los Angeles firm Johnson Fain designed some of the buildings for sale, said the state should be wary of letting them go, especially in a down market.

“If they had sold these properties about three or four years ago it might have been a good deal,” he said. “It’s a fire sale at this point.”

Corporate clients of the firm do sale-lease-back transactions sometimes, Fain acknowledged. “If the leases are reasonable and you can get a high price for a facility, it may be a very good business decision.”

But state buildings belong to taxpayers and should probably stay in public hands, he said.

One of the men most responsible for construction of the state’s downtown office buildings, Jerry Epstein, is skeptical about the move to sell them. Epstein, president of a little-known commission called the Los Angeles State Building Authority, has hired an attorney to review the state’s plans.

“I have a fiduciary responsibility to the bondholders,” he said, “to make sure the buildings are well maintained.”