It was one of the smartest and also one of the most obvious decisions Gov. Jerry Brown made after his latest term began in early 2011 – canceling the planned sale of 11 choice state office buildings to private investors.
The only problem was that contracts had been signed and commitments made while muscleman actor Arnold Schwarzenegger was still governor, so this classic example of penny-wise, pound-foolish fiscal policy just won’t go away, even though it’s always been an awful deal for the state.
Not surprisingly, lawyers for the private investors who would profit by billions of dollars over 30 years if the deal goes through insist that a contract is a contract, even if it was signed by a governor who has now left office. Schwarzenegger made sure he signed as many papers on the deal as possible before Brown took over, since Brown had expressed great skepticism over the deal while campaigning in 2010.
Now a judge in San Francisco has overruled state attempts to have the investor claims dismissed, so there will likely be years of litigation before the ultimate ownership of the red granite Ronald Reagan State Building in Los Angeles and several choice buildings in San Diego, Sacramento and the San Francisco Civic Center is determined.
This lousy deal originated in late 2009, with Schwarzenegger desperately casting about for stopgap ways to raise some bucks to relieve the state’s chronic budget woes. When the package of buildings went out for bidding in early 2010, at the very bottom of the Great Recession’s real estate crash, even Schwarzenegger’s pet economists predicted a net loss for the state of $2.8 billion over 30 years.
Yes, the sale would have produced about $600 million in immediate money – and if it eventually goes through, it would now generate almost $1 billion because some bonds that would have been paid off by proceeds from the sale have been paid down considerably in the meantime. But long-term losses would be far higher as the state pays rent on the buildings for decades.
The deal also would bring about $16 million in commissions to the firm of Coldwell Banker Richard Ellis, whose executives contributed more than $79,000 over the years to various Schwarzenegger campaign committees.
The sale drew little attention until this column in February 2010 exposed its short-sighted nature. Protests built after that, with a group of former state building officials eventually filing suit to stop the sale.
Their action became moot when Brown nixed the deal shortly after moving back into the governor’s office, unwilling to tolerate the long-term losses. His contention was that Schwarzenegger’s purchase agreement merely began an escrow process, which could be stopped before it was finalized.
The California First partnership that had won the 2010 bidding (its main partners include Irvine-based ACRE LLC and Hines Inc. of Houston, Texas) has never taken possession of any building.
But the partnership won’t give up. “The state negotiated and signed a contract with California First and has no right to back out of the deal,” said one partnership lawyer. “Brown wanted to distance himself from the sale,” said another. “It was a politically motivated decision that left our client with a broken contract.”
Brown explained his canceling the deal differently, saying he sought long-term solutions and not short-term Band-Aids that merely “kick problems down the road.”
The bottom line is that this was one of the worst real estate deals ever negotiated by California officials, who could instead have sold off vacant state properties like a former CalTrans building near San Diego’s Maritime Museum. But that wouldn’t have a provided large enough short-term fix to satisfy Schwarzenegger.
And so, almost 10 years to the day after he won office in the recall election that ousted Gray Davis from the governor’s office, the ghost of his deal lives on, and no one knows if or when it will ever go away.