Why selling state buildings is so dumb

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To stem the massive hemorrhaging in the budget, the state of California has authorized the sale of 24 state-owned office buildings across the state to private investors. The state would then rent back the office space.

It’s a classic case of short-term thinking: In the end, the state will end up paying more money in rent than it will gain from the sales. The nonpartisan Legislative Analyst’s Office reported in April that over the next 30 years, the lease payments will likely cost $5  billion more than if the property had stayed in the state’s possession.

But it would provide an immediate injection of $1.2 billion into the state’s general fund.

But there’s an interesting twist that hasn’t been reported on: The state buildings are currently exempt from local property taxes. Once they’re in private hands, county assessors can put them on the tax rolls.

And the way the deal is structured, the state -- that is, the taxpayers -- will be subsidizing the private owners to cover the local property tax bills. In effect, the deal means that the state will be shifting more money from its general fund to local government -- a good thing for counties, but not a terribly good deal for Sacramento.

According to Eric Lamoureux, spokesperson for the Department of General Services, if the local cities decide to tax the new owners, the rent state agencies pay would increase to make up the difference. The private owners would pay nothing.
“The [cost of the tax] is built into lease terms. Ultimately, the state would be paying that." Lamoureux said.

And while San Francisco City Attorney’s office is still unsure of the exact terms of the sale-lease back agreement, they plan on looking out for the city’s best interests.

 “The city attorney is going to be extremely diligent with the recorder-assessor to collect all the taxes that are owed,” Matt Dorsey, press spokesperson for City Attorney Dennis Herrera, told us. And by collecting property tax, the local city governments would get a nice boost in revenue.

The sale to California First LLC, a partnership between Hines Interests and Antarctica Capital, has already been met with opposition including a lawsuit and an injunction trying to prevent the deal.

Comments

Many private corporations do it too. The only issue is if the numbers stack up. And for that you need to do a proper cashflow analysis, which I notice you didn't do.

While the point about how the rent will cover the property taxes due is a red herring. Rent always covers the property tax, along with all other costs of the building. Any landlord has to build his costs into the rent, else he won't make a profit.

Given that the alternative is firing public sector employees, then selling off non-core assets seems prudent and preferable.

Posted by Tom on Nov. 29, 2010 @ 1:33 pm

The state of California is in a big mess, so this is just one more way to push the problem out. If they can get cash now and then pay for it in another form latter, it seems par for the course.

As for the paying local property taxes, this is added to the contract to limit the down side for investors. Investors will not pay such a high price for the buildings,if the down side is not quantifiable. This sort of in a vague way models the Muni bond market where the state borrows from investors with a tax break for the cheap money.

Don't blame the investors who buy the buildings, blame the state for its poor management. Of course the investors are in it to make money so in the long term the State will pay more back than it received in the sale, I suspect considerably more as the investors want a reward on the time value and the risks of committing such a large sum in a single project.

There is also the question; should the State of California be in the real-estate market?

Posted by Chris Pratt on Nov. 29, 2010 @ 1:37 pm

What about Richard Blum?

You missed a key element of this story. The broker for the sale is C.B. Richard Ellis. Their top dog is Senator Dianne Feinstein's husband. A couple of years back he sold 100 million of SFUSD property for a handsome fee. The Irish are in the streets marching against mortgaging their national treasures on the altars of the International Monetary Fund and the EU.

Why no mention of Dick Blum?

Go Niners!

h.

Posted by Guest h. brown on Nov. 29, 2010 @ 2:07 pm

taxpayer...blah blah blah. Give me a break. The ownership will default and the leases will be restructured. Regarding the taxpayers interests, its the non-recourse loan you should be worried.

Aprapo - classic case of short-term thinking

Posted by Me on Nov. 29, 2010 @ 3:19 pm

Sounds like a tribe of native American indians.

It is "a propos", meaning opportune and appropriate.

If you're going to try and show off with French phrases, at least get them right.

Posted by Tom on Nov. 29, 2010 @ 3:52 pm

Tom. Mis-inform people much? Rental income often doesn't cover the annual property costs. And the rent price is not set by the landlord. The rent price is set by the community based on the income of the local community and local supply and demand factors.

Most SF rental properties sell for far more than their annual *costs,* but real estate investors get tax subsidies (which can offset other taxable income) and hope for long-term real estate appreciation rather than rental income. Thus, in the Bay Area and most metropolitan areas, real estate investors almost always pay more than what the current property rents might otherwise justify.

And comparing corporations to govenments is ludricrous. Private corporations exist to make *monetary* profits; governments ususally exist to bring tangible and intangible benefits to the community, including BUYING new assets like parks, community spaces, affordable housing, etc.

A private business does a sale-leaseback for a variety of reasons that have no relevance to government bodies: to realize a tax gain or tax loss or to improve their balance sheet by dumping an asset and related debt that will improve their stock price. None of these apply to governmental bodies.

People sell the "family jewels" (assets) during tough economic times and always regret the decision later. Families heading to the bottom sell their assets; families rising to the top buy assets.

Selling assets solves none of the major problems of the state: expenses far exceed revenues and the unfunded government pension and healthcare liabilties will continue to erode the annual budget.

People who care about the community don't sell vital assets like courthouses and government office buildings.

Posted by Guest on Nov. 29, 2010 @ 5:38 pm

I am going to take a wild punt here and guess that you are not a landlord?

Guess what? I am. And here is it how it works.

If my mortgage is X, and my property tax is Y, and my other costs are Z, then the rent I have to charge is X+Y+Z+P, where P is this thing called "profit", without which I go out of business, which benefits nobody, not the mortgagor, not the tenant, not the owner, not the taxing authority, nobody. I am not going to rent to you cheaply just because you claim or cry poverty.

Now we have gotten that little Econ 101 out of the way, why don't you ask me what a property owner thinks about the rents being set by the "community"?

While if the rents really didn't cover the costs, then nobody is going to buy these decrepit civic dumps anyway.

But all that is besides the point. There is a fairly simple cashflow formula that any sophomore accounting student can do to project whether an entity is better off renting or owning it's place of business. So if the numbers crunch, we should sell off these assets, especially if the alternative is laying off public sector workers, which it surely is.

Aside from all that, government should focus on it's core skills and competancies, like public safety. Nobody votes for an elected official because they think he knows how to manage a property portfolio, so let's leave that to those who actually know how to do it efficiently.

Posted by Tom on Nov. 29, 2010 @ 6:02 pm

"manage a property portfolio"?

Wasn't that similar to the argument we made to take away the Indians land? I mean, like, they didn't know how to manage it properly?

Just over the last decade or so this single group of SF billionaires have taken over the Zoo and the Library and the Mint and the Art museum in the park. They've taken over most of the soccer fields in town and built a big garage in GG Park on the public dime. They've seized control of the best golf courses after first using the money intended for poor childrens' playgrounds to bring the courses up to "PGA standards". They've evicted a couple of hundred small sail boat owners to build bigger docks for the rich. They're presently bending the City over for a 128 million dollar screw job cause a guy (Larry Ellison) with 35 billion dollars thinks we should give him the best pieces of our waterfront for life and beyond.

They control Treasure Island and the Presidio and the Shipyard and were given 700 acres of Bay View for $1 and that includes the best portions of the best State park in that underserved black neighborhood.

Same thing is happening in Ireland. The investment bankers tie you up in debt whether you're an individual or a nation and then engineer an economic climate that allows them to seize your homes and jobs and public lands and buildings of any value.

These things usually end badly.

(why not comment on the Feinstein connection ... protecting her?)

h.

Posted by Guest h. brown on Nov. 29, 2010 @ 6:48 pm

If there was ever an issue about how the SF Board of Supervisors is supposedly so "progressive," look no further than the 66 year lease that is being negotiated with Mr. Oracle, Larry Ellison. It's not "progressive" to sell off government property or give "master developers" long-term control of government property, especially for a city/county that has a $5-6 billion annual budget.

Even the least competent asset manager could turn the billions of dollars worth of Port property and Redevelopment Agency controlled property into 50 times its currrent worth, while saving much of the land for public use such as parks, community centers, urban gardens and homes for some of the wildlife we've paved over during our last 200 years of occupation.

There is a reason the Port and RDA are separate government entities. Even though they are asset rich, they can plead poverty by creating expenses higher than current revenues. A similar ruse occured in Russia and central Europe during the 1990's - state properties worth billions of dollars were given away for pennies on the dolllar to the wealthiest and most powerful people while the governments said, "these assets are losing money for us." A few people went on to become mega-billionaires and the people got chump change for these valuable assets.

There's the Pelosi connection with Lennar - the developer of TI and Hunter's Point - and a connection with Dick Blum/Diane Fienstein with URS Corp, that exists on billions of dollars of government contracts.

Towns like San Francisco exist primarily to funnel billions in rent and interest payments to the wealthiest people on earth. The fact that there has never been one hearing by the Board of Supervisors during the past 10 years attempting to quantify the amount of rent and interest that is paid annually by San Francisco businesses and residents to the world's wealthiest individuals and corporations tells us that the supervisors are either clueless about basic economics or merely throw around the "progressive" label since it sounds cool to the D9 and D5 hipsters.

The technology industry that surrounds SF is transforming the world economy since most companies can use technology much more profitably than armies of employees. Our local technology workers are very highly paid - which means they can pay high prices for rent and houses - and they tend to be maverick types who don't care too much if that cool TIC in the Mission or the Haight they purchase used to be a rent-controlled apartment. And every year the best and the brightest flock from their colleges afar to make their fortune here, giving the local companies like Oracle, Apple, Google, HP, Intel, Facebook and Yahoo the top talent they need to further cleanse the city, state and country of its middle class when world-wide companies replace workers with technology.

Our local companies are so smart that every couple of years they do an employee purge of the bottom 20% performers to make room for the new brash stars. Their cool looking employee buses are a daily reminder that San Francisco is a mere bedroom community for the technology industry and its super-star workers. Better get out of the way or get crushed by their affluence.

Posted by Guest on Nov. 29, 2010 @ 10:05 pm

You can try to charge whatever rent you want, but it doesn't matter what your costs are and what rent you "need" to get, you can only charge the rent that the community is willing to pay based on its imcome. There are many landlords who would love to change higher rents to cover their costs of a declining real estate asset value, but they can't do it if the community won't pay their asking price.

If rent was based on costs, then we would see super cheap rents for those apartments where the building was inherited from a grandparent, where the property tax is very low (thank you Prop 13!) and where there is no mortgage. Cheaper rents dosn't happen because no landlord sets rents based on costs, just as no buisness person sets a selling price for their product or service based on costs. The price is set at whatever the market will pay.

If someone is making huge profits between the selling price and costs, then other companies will step in and help drive down the selling price based on competition. But this doesn't happen in the real estate market because land is limited and governments have zoning restrictions (and lots of NIMBY's) that prevent easy increases to the housing supply.

Having a third party manage a government asset is one thing - and might make sense in some cases - but selling off government assets like buildings and park facilties and community spaces is a sign of a government in decline, just as it is a sign of a family in decline.

Big landlords, big bondholders and public employee unions with a vested interest in the status quo are the backbone of this city and the Democratic Party in general. It's not surprising they are trying to prevent the city's and state's bankruptcy until all of the key government assets have been sold and they've milked as much out of the system as possible.

Posted by Guest on Nov. 29, 2010 @ 6:58 pm

Guess what?

I still won't rent to you if you won't pay my asking.

Or even if you will but I don't like you.

And the tax breaks on vacant properties are to die for.

So, yeah, the "community" decides what rent I will accept. Yeah, keep believing that. All the way to the poorhouse.

Posted by Tom on Nov. 29, 2010 @ 8:19 pm

How about this as an example. Tom, I'll assume you like to maximize your profit on your apartments. I'll also assume that you're currently asking and getting $3,000 a month for your 2 bedroom, one bath apartments in the Mission.

Tomorrow morning you wake up and lo and behold the government decides it's broke and needs to raise cash fast. Thus, it imposes a 50% tax on gross rents. (Yeah, I know about Props 13, 218 and 26, but humor me here and assume the local government could do this.)

You want the same amount of cash flow from the property, right? So you now have to charge $6,000 for the monthly rent so you can pay the government their 50% tax and you're left with your net $3,000. Do you really think you could raise the rent to $6,000? If so, why wouldn't you do it now? You're a profit maximizer who always wants to charge the highest rent, so if you could get $6,000 a month for the apartment, then that is the rent you would be charging now, irrespective of your costs. But you're currently charging $3,000 a month because that's what the local community will pay for a 2-bedroom apartment in the Mission. You can't change the market no matter how much you might like to impose your will.

Il'l be the first to admit that there will be an impact caused by the 50% tax on rents, but the impact will be that your asset will decrease in value, not that the rent will go higher.

You know and I know that the world doesn't work the way you're describing. Our customers decide what they will pay for our product or service, not us.

And yes, you're right about all of the billion dollar tax breaks given to landlords by the state and federal governments. They end up making housing that much more expensive for everybody, but they help enrich the landlord class and real estate industry even further which is why both the Democratic and Republican Parties are supportive of them.

Posted by Guest on Nov. 29, 2010 @ 10:27 pm

Increases in property tax are generally passed onto tenants. There is even a form at the Rent Board for computing the exact amount.

Now sure, in some case, the market won't bear increases in rent. But I still can't run a rental at a loss long-term - I'd go broke. So in your example, I might sell the property, condo it, rent it to short-term tourists, change it to commercial, or some other option.

Think about it another way. Having sold an office building the State uses, they don't have to continue to work in it. They could move to, say, Fresno, where the RE is much cheaper, where wages are lower, and save us all even more money. Why do those workers even have to be in expensive SF?

Any which way you look at it, the State pays for it's office space, either by paying rent or through the opportunity cost of not selling the asset. Which is better is a cashflow computation and not a political question.

But personally, I want the government out of businesses it knows nothing about, like real estate, so it can be more focused as well as moe solvent.

Posted by Tom on Nov. 30, 2010 @ 10:05 am

Disaster Capitalism is what's going on here, dumping public assets at fire sale prices while the market is down so that when the elites abandon the state, the public is left holding the bag.

By its very nature, state government needs to be geographically dispersed according to population, hence there must be a presence in population centers. Fresno cannot house state workers that must provide services to the wealthier and more expensive coastal counties.

We're entering into a Logan's Run economy, where if you don't make and protect your fortune by the time you're 30, you might as well flame out then and there because all things continuing to be as they are now, its going to get very, very ugly around here.

-marc

Posted by marcos on Nov. 30, 2010 @ 10:32 am

What public services do the wealthy need? As someone who is well off, if not wealthy, the only services I need are fire and police. And they aren't direct State services anyway, but are run by the City.

OK, I also need the driver and vehicle center, although that can mostly be done by mail anyway.

There is no reason to have thousands of highly-paid workers housed in prime SF real estate. Sell it off, move the staff wherever is cheapest, and maybe we can save a few public sector jobs that are otherwise going down the pan for sure.

The government has no business owning and managing real estate.

Posted by Tom on Nov. 30, 2010 @ 2:12 pm

Tom,

So, you don't drive on our streets or walk on our sidewalks or drink our water. Do you process your own excrement too?

Go Niners!

h.

Posted by Guest h. brown on Nov. 30, 2010 @ 7:07 pm

Tom,

So, you don't drive on our streets or walk on our sidewalks or drink our water. Do you process your own excrement too? Or, you just lay it out to dry here?
Go Niners!

h.

Posted by Guest h. brown on Nov. 30, 2010 @ 7:09 pm

Streets and Water is a CITY responsibility, not the State's.

We are discussing why STATE workers need an expensive piece of real estate in an expensive city.

Sell the buildings. All of them.

Posted by Tom on Dec. 01, 2010 @ 7:14 am

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