State Property Sale Costs Millions

Katy Grimes: Last February I wrote about some highly questionable property sales the state was planning on. In “State selling properties to raise cash,” I wrote “This deal started last year when Gov. Arnold Schwarzenegger directed the Department of General Services to sell the properties in order to raise cash for the state. DGS prepared the property valuations and estimated sale prices, and awarded the contract to commercial real estate company CB Richard Ellis.”

When I questioned the DGS spokesman Eric Lamoureaux and Jeffrey Young, Deputy Director of Public Affairs, both explained that the state was selling the properties with long-term leases, not only because of the immediate need for cash, but because the new owners would take over the maintenance of the properties, alleviating the state of the ongoing maintenance responsibility and cost.

Young had explained that the state was planning to sell the properties for nearly $2 billion; the sales proceeds were expected to be $660 million, after bond debt on the properties was retired.

The entire deal sounded questionable, but every time I questioned anyone at DGS, I got the same answer – “It’s good for the state right now.”

Mike Leury with CBS Channel 13 in Sacramento has found otherwise. Leury writes, “California’s plan to generate $1.2 billion by selling 11 state properties – and then leasing them back – will end up costing taxpayers at least $800 million more than expected, according to a new report from the state’s non-partisan Legislative Analyst’s Office.  The $800 million extra comes from a miscalculation made by the state.”

Leury found that California budget analysts “made a big assumption,” that the state would not have to pay property taxes by selling those buildings. But Leury found otherwise – it turns out that the state was counting on a property tax exemption, but apparently this is not correct.

On the Channel 13 news last evening, Mark Whitaker with the Legislative Analyst’s Office told Leury, “This is a new transaction, something the state has never been involved in before. And I think we made some assumptions in order to provide a timely analysis. As more information on the transaction became clear, it was concluded that the property taxes would likely be assessed on the properties.”

This means that means taxpayers are now responsible for $800 million in higher rents, needed to offset property taxes that the new private owners of the eleven buildings will have to pay. The LAO says selling those 11 properties – then leasing them back – will cost California overall $1.4 billion more, over 35 years, than owning them outright.

However, I had already discovered last February that at the end of the originally discussed 20-year leases, state agencies may have the option to move out of the properties if they no longer need the space, but the state also will not have equity positions in the properties either, after paying $800 million in additional rent.

Each time I spoke with Young, he insisted that the leases would only be for 20 years, and not 30 year leases as I had been informed.  Now DGS says the leases of the eleven properties are for 35 years.

Read all of my stories about the state selling off state properties: Fired official slams state ‘fire sale’, Critics slam state property sale, and DGS Absent At Hearing. Every step of the way, it appears that the Department of General Services had a plan in mind for the property sales, that no one was going to derail.

DGS has continued to defend the questionable sales, insisting that the “significant cash infusion” generated for the current budget year is justification.

Even after refusing to appear before the  Assembly Accountability and Administrative Review committee and provide documentation and information of the sales, it appears that no follow up was ever done with DGS, making many wonder if the hearing was just another exercise in futility.

This is just more of the kick-the-can-down-the-road attitude that is bankrupting our state.

NOV. 11