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Selling State Office Buildings Is Real Estate Insanity

Apr 29, 2010

The Legislative Analyst's Office released possibly the most obvious report in its history last week. The LAO said it's a bad idea to spend one-time revenues on ongoing expenses, and it's an even worse idea to generate those revenues by selling things you're going to need for many years.

The LAO concluded that the Schwarzenegger administration's plan to sell 11 state-owned office complexes to help balance the state budget was a "poor fiscal policy." The state would get a pile of money from the sale, but then it would have to spend more piles of money in future years to lease the office space from the new owners.

Yeah, no kidding. The idea is not akin to cleaning out the garage and selling a bunch of junk to pay the light bill. It's more like selling your dishes and flatware to pay for groceries. You'll have food, but you'll still need something with which to eat it.

Of course, the timing of the Schwarzenegger administration's idea couldn't be worse, as the state would be unloading assets near the very bottom of the real estate market. This is what's calling panicking, and savvy investors appear ready to pounce.

The LAO found that the proposed sale of office buildings in Sacramento, Rancho Cordova, Santa Rosa, Oakland, San Francisco and Los Angeles would net the state $600 million to $1.4 billion. However, lease payments would cost the state $34 million per year more than continued ownership, and that's only during the first five years. Within 20 years, the plan would add an extra $200 million annually to state facilities costs.

The office building sales are one portion of a fire sale that could also include state-owned fairgrounds in Costa Mesa and Ventura, at least a portion of the Cow Palace property in Daly City and the Cal Expo fairgrounds in Sacramento. There appears to be far less interest in these properties than in the state office buildings, which would come with a guaranteed tenant for 20 years.

Los Angeles developer Jerry Epstein tried to ask hard questions about the administration's real estate strategy, because it made no fiscal sense to him. A member since 1983 of the Los Angeles State Building Authority the entity that financed and managed construction of state office facilities in downtown L.A., and which continues to oversee facilities management Epstein has more than a little real estate and finance expertise. Instead of answering Epstein's inquiries, the governor fired him from the unpaid position. Schwarzenegger did the same to members of a state building authority in San Francisco.

But the governor can't fire the legislative analyst or members of the Legislature. The governor's plan went nowhere in the Assembly Committee on Accountability and Administrative Review on Wednesday, April 28. A background paper prepared for the committee said, "The sale of state-owned buildings reverses four decades of state facilities planning policy, which favors ownership of buildings over leasing office space. Dating as far back as 1973, state-sponsored cost-benefit analyses of leasing office space versus owning office space have consistently shown that owning office space is better for taxpayers."

I understand that the state and many local government agencies are in dire fiscal straits. The situation is much worse than many people know. Now is the time to bring forward every wacky idea. But, obviously, we need to carefully evaluate those ideas before implementing them; otherwise, we could do more harm than good.

During recent years, Sacramento politicians including Gov. Schwarzenegger have grown fond of saying they refuse to "kick the can down the road." Well, selling a state office building to generate some bucks today and letting someone else worry about how to pay for office space in the future is the definition of kicking the can down the road, or at least past election day.

Paul Shigley

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