Fired official slams state 'fire sale'

APRIL 16, 2010

By KATY GRIMES

A complex administration plan to sell state-owned properties and then lease them back from the new owners is being compared to a short-term money raising gimmick by a recently terminited member of the commission that must sign off on the deal. He views it as a bad deal for the state that has not been sufficiently reviewed.

According to a recent column by the former building authority official, Jerry Epstein, last summer, “with little study and without public hearings or input from the real estate experts who serve on the relevant state building authorities, Gov. Arnold Schwarzenegger and the Legislature agreed to sell 11 state office building complexes,” describing the property sales as a “fire sale” during one of the biggest real estate slumps in California history.

The state of California has the 11 properties up for sale for nearly $2 billion. The sales proceeds are estimated to be $660 million, after bond debt on the properties is retired. (California State Office Portfolio Hits the Market)

The state is selling the properties with long-term leases attached, not only because of the immediate need for cash according to the Department of General Services (DGS), but because the new owners will take over the maintenance of the properties, alleviating the state of the ongoing maintenance responsibility and cost. “This sale will allow California to pay off debt, tap equity and lock in some of the lowest rental rates seen in years,” said DGS Acting Director Ron Diedrich in a DGS statement.

But several real estate industry experts say the leases require 10 percent rent increases every five years, locking in guaranteed increases as well. The building’s state tenants will also be required to pay for parking. While this may initially not sound daunting, each parking stall costs $100 per month according to the leases. In two of the 11 sale properties located in Sacramento, the Capitol Area East End Complex on N Street has 1,399 parking spaces, with a potential parking cost to the state of $130,000 per month, and $1.5 million annually. With another 600 parking spaces at the Attorney General building on I Street, the cost could be approximately $60,000 monthly and $720,000 annually.

DGS acknowledged in February that the state will be obligated to pay $40 million more in rent annually, according to preliminary estimates. In 20 years, the total extra rent cost would be $800 million, and the state will no longer own the buildings. (CalWatchdog February 23, 2010 story, State selling properties to raise cash.)

Adding additional questions about the transparency of the sales deals, on April 8, 2010, the Sacramento Bee reported that the Schwarzenegger administration removed two of the oversight appointees that must sign off on its plan to sell the California state office buildings, replacing the critics of the sales with people who support it.

Epstein, a 30-year appointee of the Los Angeles State Building Authority, wrote in a Los Angeles Times column last week, “Neither my colleagues on the authority nor I were consulted before this dubious scheme was hatched, though the authority’s cooperation is necessary for the execution of the sale of the Reagan and Serra buildings. In late February, at my direction, counsel to the Los Angeles State Building Authority asked the Department of General Services to provide a market study and to clarify the terms proposed by the Schwarzenegger administration. We asked for a comparison of the projected net proceeds from the sale and the projected rental and other costs associated with a 20-year leaseback of these same buildings.”

Three weeks after his objection, Epstein was unceremoniously terminated by the DGS Director Dietrich, in a tersely worded, two-sentence letter. Earlier in the month, two other Building Authority appointees were terminated, who also questioned the administration’s plan to sell the properties.

While researching the state property sales in February, DGS department spokesmen Jeffrey Young and Eric Lamoureaux said that they disagreed with the characterization that the state was making a bad deal. Lamoureaux explained that the state wanted to pull equity out right now in order to retire debt, and cash in on the properties.

But Epstein challenged this DGS theory: “Most of the buildings on the ‘for sale’ list are paid off or nearly paid off. By selling off and then leasing back these state office buildings, California is obligating itself to pay market rent for the next 20 years, with no anticipated new revenue to pay for it.”

Even if the state gets the asking prices for the properties, the $660 million in proceeds would not cover even the $1 billion annual budget of the Department of General Services, nor go far with California’s $24 billion deficit. And, the state might be retiring debt, but most of the bonds on the buildings were already on schedule to be paid within a few years.

“Short-term solutions and accounting gimmicks like the proposed sale of state buildings have long-term consequences. The governor and legislators should fix the state’s budget problems we face through thoughtful, structural solutions, not carelessly conceived, short-term political fixes that will cost us all more in the long run,” wrote Epstein.

Jeffrey Young, DGS public affairs, said that Epstein was terminated because the DGS director felt he wasn’t “in-sync” with the direction of the department any longer. Young said that Director Diedrich is trying to follow the law and go ahead with the sale-leasebacks. “Epstein and the other appointees were not in-sync with the policies,” according to Young. Young reiterated that appointees work at the pleasure of the DGS director, as do all appointees, and “need to be in sync with the director.” In response to the charge of DGS getting rid of critics of the sale-leaseback plan, Young said he knows the department has many critics, but Diedrich “simply felt a change was needed.”

The new building authority appointees have scaled-back roles, mainly overseeing the bonds as they wind down or are paid off early.

Epstein served on the Los Angeles State Building Authority for 30 years, a three-person body established to plan, finance and oversee the construction and management of state office facilities in downtown Los Angeles. Similar building authorities are located in San Francisco and Oakland. These joint powers authorities were established because the state wanted to have people with practical experience overseeing the design, financing, construction and management of large state buildings.

Calls to Epstein have not been returned.