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Arnold Schwarzenegger’s Real Estate Deal Haunts California:

When producers named a post-apocalyptic television series “The Walking Dead,” they probably had no idea that title also would come to describe one of the worst moves Arnold Schwarzenegger made in his seven years as California’s most amateurish governor ever.

That was his deal to sell 11 choice state office buildings to private investors for about $2.3 billion ($600 million in immediate cash), which he planned to use as a stopgap to throw into California’s then-chronic budget gap. Never mind that even his own pet economists predicted a net loss of $2.8 billion over 30 years from this deal.

Jerry Brown thought he cancelled this big mistake almost immediately after taking over in 2011 for his third term as governor. But somehow the deal threatens to survive; at the very least, it still haunts the state.

The sale of buildings in Sacramento, San Francisco, Los Angeles and San Diego is not exactly a ghost, largely because a San Francisco judge decided about a year ago that the potential buyers’ claim their deal was done before Brown could quash it deserves a full court trial. That trial will probably open within the next month.

The essential claim of the buyers, a partnership called California First that’s headed by the Irvine-based ACRE LLC and Hines Inc. of Houston, Texas, is that a contract is a contract. California First won an auction staged under Schwarzenegger, but has yet to take possession of any building.

The fact these companies are still pursuing the deal four years after Brown tried to end it is pretty good evidence they had figured to reap healthy profits from the steady stream of rents Schwarzenegger committed the state to pay for at least 30 years after the deal was done. They also planned to fire most union maintenance workers now employed in the buildings.

Schwarzenegger tried hard to sign as many papers on the deal as possible before leaving office, since Brown had expressed great skepticism about the sale while campaigning in 2010.

Brown knew the deal stunk, and tried to exploit a contractual loophole to keep the buildings in state hands. His claim then remains the contention of the state Department of General Services today: Because a ruling in a lawsuit that aimed to stop the sale forced the buyers to miss a deadline, the deal was never really done.

A department spokesman told a reporter this fall that “The lawsuit is a misguided attempt to resurrect a long-defunct contract.” But California First maintains it had at least an implied contract that still should apply. And it’s for sure that Schwarzenegger wanted to sell.

This deal, of course, was as short-sighted as the $15 billion in budget-balancing bonds Schwarzenegger pushed through 10 years ago, bonds which the state may pay off next year with a final $1.6 billion installment.

So no one now can be sure who will ultimately own the red granite Ronald Reagan State Building in Los Angeles, the Public Utilities Commission and state Supreme Court buildings in San Francisco and the Department of Justice building in Sacramento, to name a few landmarks involved.

Rooting hard for the deal to be consummated is the firm of Coldwell Banker Richard Ellis, whose executives contributed more than $79,000 over the years to various Schwarzenegger campaign committees. CBRE stands to get $16 million in commissions if this happens, a pretty nice return on its political investment.

The sale drew little attention until this column in February 2010 exposed its short-sighted nature. Protests built after that.

But California First never gave up even after Brown acted. One partnership lawyer called Brown’s cancellation “a politically motivated decision that left our client with a broken contract.”

Brown explained his move differently, saying he sought long-term budget 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. But it may yet be revived.

Which means that almost four years after the consistently inept Schwarzenegger left office, one of his mistakes threatens to burden the state he still professes to love for many decades into the future.

in Opinion
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