January 15, 2011

Who’s Buying All Them State Buildings? Nobody’s Sayin’

<img missing due to burbed’s terrible admin skills. working on restoring>Hidden in emergency budget legislation, 7.3 million square feet of noted state office complexes were put up for sale, including several in San Francisco.That resulted in the oddity of all seven justices recusing themselves from deciding whether the sale could proceed. (Their offices in the Earl Warren building, part of the SF Civic Center, would be included, photo right.)  The deal was halted only 2 days before closing on December 15th, as Arnold’s reign came to an end.  And the more reporters dig to find out who benefits from this sweetheart deal, the more muck they find.

24 buildings on 11 sites, including landmarks such as the Ronald Reagan building in Los Angeles, plus others in San Francisco, Sacramento, Oakland, and Santa Rosa are being sold. The deal is with a mysterious group of investors who don’t wish to be identified, or claim they’ve dropped out when contacted.  The buildings cover 43 percent of all state government office space.

Identities of Investors in State Property Sale Grow Cloudier

Many have dropped out of contested deal, and those that remain are tight-lipped

By ELIZABETH LESLY STEVENS on January 12, 2011 – 3:12 p.m. PST
The Bay Citizen

Most of the members of a shadowy investor group that agreed to finance the sale of tony state office buildings last year appear to have dropped out of the deal, and those that remain are tight-lipped about their involvement in the transaction, which is being challenged in court as an illegal gift of state assets to a group with political pull in Sacramento.

Departing Gov. Arnold Schwarzenegger tried mightily in his waning days in power to close the controversial sale of 11 premier properties.

The deal, now being challenged in a state appellate court, is in limbo. The new administration of Gov. Jerry Brown asked the court for a month to review the matter, and now arguments are scheduled to begin in February. The nonpartisan Legislative Analyst’s Office reported in November that the deal would end up costing California taxpayers $6 billion in the coming decades, but the approximately $1.3 billion net proceeds of the deal are already factored in to the state’s budget for the coming year. If the deal falls apart, the cash-strapped state’s deficit will swell by another $1.3 billion.

The deal had been scheduled to close on Dec. 15. The legal challenge, brought by lawyer Joseph Cotchett and former San Francisco City Attorney Louise Renne, convinced the appellate court to issue a stay just 48 hours before the sale was to have closed.

<img missing due to burbed’s terrible admin skills. working on restoring>Color me surprised.  A bunch of former officeholders finding ways to sell themselves some primo office properties hiding behind lawyers and corporations?  Stalwart building authority members who objected to the deal got sidelined?  Who would have predicted that?

And what a lovely problem it’s left California with: sell our buildings to these crooks, and have to rent what we owned.  (Bonus!  And get evicted in favor higher-paying trophy retailer!)  Or, invalidate the deal and dig up another $1.3 billion for that out-of-whack state budget.  Plus everyone standing to benefit will then sue when they don’t get their cut.  Be sure to read the first link in the article for more background if you haven’t been following this local example of how crony capitalism works.  (Photo above left, State PUC building is part of the 24 building deal.  Adithya Sambamurthy/The Bay Citizen)

But that’s just one secretive sell-off of public assets.  Burbed reader nomadic sends in what could be the answer, but it only raises more concerns.  Matt Taibbi suggests that large chunks of our infrastructure, including “a whole bevy of Californian public infrastructure projects,”are being bought by “sovereign wealth funds.” SWFs are extremely large amounts of cash, in particular from oil-producing nations.  One of the SWFs was offered the entire Pennsylvania Turnpike.  (They demurred, but Taibbi names other public works projects that have been sold off, including the Chicago Skyway and their parking meter revenue.)

Around this time, state and municipal executives began putting their infrastructure assets up to lease — essentially for sale, since the proposed leases in some cases were seventy-five years or longer. And in virtually every case that I’ve been able to find, the local legislature was never informed who the true owners of these leases were. Probably the best example of this is the notorious Chicago parking meter deal, a deal that would have been a hideous betrayal even without the foreign ownership angle. It was a blitzkrieg rip-off that would provide the blueprint for increasingly broke-ass America to carry lots of these prized toasters to the proverbial pawnshop.

Sounds familiar.  Maybe that’s why this California First LLC group is being so secretive?

Comments (7) -- Posted by: madhaus @ 5:05 am

7 Responses to “Who’s Buying All Them State Buildings? Nobody’s Sayin’”

  1. Jus7tme Says:

    WTF? Open bidding or else no sale!! This stinks of corruption of the highest magnitude.

    Any sale or giveaways of public property should, BY LAW, be subjtected top open bidding, and all shareholders or stakeholders or financiers of more than 1% of the monetary OR voting power of any bidding entity should be made public as part of the bid. Also, any hired consultants for the deal should be disclosed.

    And then there is the lack of wisdom of making the public a tenant in their own house. It is a very bad idea.

  2. madhaus Says:

    This is a huge story, and I’m amazed how little it’s being discussed. The Taibbi excerpt mentions the trend of selling off infrastructure for one-time payments to balance budgets. It’s insane, unethical, self-serving, misguided, corrupt, disgusting, and, frankly, evil.

    Use this comment as tip jar for post, and vote up or down as you wish.

  3. The Gilroy Alex Says:

    I have a sneaking suspicion that if the shadowy figures are traced, the line of strawmen will end at the People’s Liberation Army, AKA The Communist Chinese Military.

    I am not joking.

  4. nomadic Says:

    Yeah, I’m amazed this isn’t in the top of every local newscast. And not only because we all know it’s better to own than rent (and therefore the state should continue to own). 😉

    It’s actually worse than I thought – thanks for rounding out the story, madhaus.

    If SEA reads the Taibbi article, the part with the parking meters, I’m sure he’ll be quick to note that the author doesn’t take NPV into account when he’s indignant about the price. One big flaw in an otherwise good report.

  5. The Gilroy Alex Says:

    This is a HUGE scandal, I don’t care who picks this story up, Alex Jones or the WSJ but well, as corny as it sounds, the people have to be warned as to what’s going on!

  6. SEA Says:

    nomadic- Thanks for pointing out the Taibbi article. I didn’t even click on the link initially.

    This reminds me of the “Need cash now” type advertisements. They come in various forms, but essentially they are all the same. If the cash payments are true annuities, then it’s a simple NPV problem. If the discount rate is low enough, it’s always favorable to sell the annuity–if you need the cash bad enough, then you’ll sell out at what I’d consider to be a high discount rate. Apparently the City of Chicago needed cash now.

    I’ve actually pointed the reverse of this out here. I’ve said, “Don’t pay cheap money back early.” This is the case where you are making the annuity payments, instead of receiving them, and you can pay that lump sum today, often the principal balance. If your interest rate is high (i.e. above your discount rate), then eliminate the debt. If you have a loan at zero percent (I’ve assumed a discount rate greater than zero, as usual), then the lump sum today should less than the current principal balance.

    Now the trick is tying interest rates to selling prices. The EMH against trend or fundamental analysis.

    For an EMH view, take a look at these two entries by CR.

    1. “But the current buyer wouldn’t pay much more, because the rational buyer would realize interest rates will probably not be artificially low when they try to sell, and their future buyer would have a higher interest rate and a lower price.”

    Comment: Note how there is an aggregate expectation that interest rates will rise in the future. If we take a group of buyers who think rates are going to stay low forever, then these individual buyers would pay more, but CR seems to disagree with this view.

    2. Addressing the case where individual buyers could get special financing, CR writes, “Imagine just one buyer gets a special interest rate. Would that lucky buyer be willing to pay more than all other buyers for the same property? Nope.”

    This is technically correct, since he only allows us to imagine ONE buyer. CR should, at least in my opinion, suggest that if that one person had a special deal, then that person would be willing to pay a differential higher, but a differential really isn’t anything anyway.

    Now let’s expand that to allow at least TWO buyers. Now a differential is not enough, since the second buyer is willing to go two differentials higher. Allowing added buyers who get a special deal pushes prices higher, given the limited supply, but the use of the EMH is still present in the current price level (initial value=the value that others are willing to pay without the special deal).

    Using the EMH if we experience the sudden rise in interest rates that was not previously expected, then prices should fall based on the cost of financing.

    What happens, however, when a sudden, unexpected rise in interest rates happens? Take a look at back at 2005 for some examples. Also what happens in terms of affordability on a cash flow basis when interest rates rise?

    Remember when so many made the basic assumption that, “Housing price appreciation is always greater than the interest rate charged on loans, which is always greater than inflation.”

    What happens when future personal incomes, as represented by average wages and employment, are under great downward pressure?

  7. sonarrat Says:

    Look up the stock ticker GOV.

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