“State building ’sale-leaseback’ called ‘poor fiscal policy’

Posted at 08:25 AM on Wednesday, Apr. 28, 2010

California would incur significant long-term lease costs by selling 11 state office properties, the Legislative Analyst’s Office said Tuesday as it assailed the move as “poor fiscal policy.”

But given the array of bad budget-balancing options, the nonpartisan office did not necessarily recommend that the state reject the entire transaction.

Gov. Arnold Schwarzenegger and state lawmakers agreed last year to sell 11 high-profile state office buildings to private investors and then lease them back for at least 20 years. The Republican governor, a proponent of privatizing more state functions, had pushed for the “sale-leaseback” transactions in budget negotiations.

The analysts’ report says the plan represents a “bad budgeting practice.”

Essentially, the state would reap a onetime gain to plug its budget deficit in exchange for decades of lease costs.

The analysts estimated the state would pay an effective interest rate of 7.1 percent to 14.3 percent for that onetime money. The immediate revenue and effective interest rate depend on the sale price.

The most significant costs would come in two to three decades, after the state pays its bond debt on the buildings. Leasing, rather than owning, would initially cost about $30 million a year but could balloon to more than $200 million annually in 20 years, according to the Legislative Analyst’s Office.

Schwarzenegger in January estimated the state would net $593 million from selling the buildings, based on a $1.7 billion sale of the properties and paying off $1.1 billion in debt and transaction costs, the report states.

The Schwarzenegger administration announced last week that it had received more than 300 bids for some or all of the state office building portfolio, which includes the East End complex and attorney general’s office building in downtown Sacramento.

CB Richard Ellis, hired by the state to broker the sale, said that because the state had received multiple bids over $2 billion for the entire portfolio, the state plans to sell all of the properties to one buyer.

The state Department of General Services is not saying how much beyond $2 billion the portfolio bids are. Under the most optimistic assumption, legislative analysts said a $2.5 billion sale would net the state $1.4 billion in onetime money.

The analysts recommended that the Legislature look for other solutions, especially if the sale occurs at the lower end of estimates. It also suggested the Legislature could look at each property sale individually, perhaps selling only those that have high operating costs.

Lawmakers already gave their blessing to the idea in last year’s budget negotiations, but Schwarzenegger must give lawmakers 30 days to review the plan once the governor agrees to proceed with the sale. The Legislature likely would have to pass a new bill to stop the proposal.”

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