Is it better to rent or to own?
The default answer for a long time — when real estate’s horizon seemed limitless — was to own. Lately some individuals and businesses have decided that maybe owning is not always better, especially when you have other pressing needs for cash, like paying off your creditors.
Now the idea has spread to some states with serious debt problems. In January the state of Arizona concluded a deal to sell to investors ownership stakes worth a total of $735 million in several state-owned office buildings, arenas and other properties — including the buildings housing both chambers of the State Legislature. Arizona will lease back the property from its new landlords, among them the mutual fund giants Fidelity and Vanguard, for 20 years, after which ownership will revert to the state. Arizona is planning another, smaller round of real estate sales in June. For fiscal 2011, which begins in July, the state is estimated to have a deficit of $3 billion.
Although it has been drowned out by hotter issues, like the uproar over the state’s new immigration law, some Arizona politicians have sought to make an issue of the sale-leaseback. Dean Martin, the state’s treasurer and a candidate for the Republican nomination for governor this fall, has derided the sale as a one-time gimmick used to circumvent the state’s debt limit and avoid the hard choices he contends Arizona needs to make about what he calls “unsupportable spending.”
“How many times can you sell the state capital?” he said.
Mr. Martin said he wanted to repackage the state’s debt as bonds and use some of the proceeds to buy back the buildings.
“Who wants to make a long-term investment in a state that is renting its Capitol buildings?” he has been asking on the campaign trail.
Last month California received sale-leaseback bids on a portfolio of 7.3 million square feet of office space in 11 state-owned buildings. The Golden State Portfolio includes buildings in Los Angeles and Sacramento, as well as the San Francisco Civic Center, where the state Supreme Court sits. The deal had been expected to yield about $660 million in revenue for the state, after $1.1 billion in expected proceeds were used to pay off construction bonds. California’s deficit for 2010-11 is about $20 billion.
Kevin Shannon, a vice chairman of the commercial real estate firm CB Richard Ellis, which is managing the auction for the state, said he believed the state would take in more than expected once it analyzed the bids and completed a deal, which is expected to happen by the middle of May. Mr. Shannon said the auction had produced more than 300 bids.
“There’s been a lot of press about this being a fire sale,” he said, “but we’re in a competitive bidding situation.” Mr. Shannon said demand for the properties had been greater than expected.
As with Arizona’s leaseback, the California auction has become a political football. The state Legislature was almost unanimous in approving the plan a year ago. More recently, however, two members of state real estate boards whose approval was necessary for the sale to proceed say they were abruptly dismissed by Gov. Arnold Schwarzenegger because they opposed the deal. They have told reporters they believe it would cost the state more in rent money than it would raise. A state Assembly committee is reviewing the matter.
The view that the deal does not make economic sense has been seconded by others, including the state’s independent Legislative Analyst’s Office, which has called the sale “bad budgeting practice.”
The leaseback continues to enjoy the support of the governor.
“The governor doesn’t believe the state should be in the real estate business,” said Erin Shaw, a spokeswoman for the California Department of General Services, which manages the state’s property holdings. Governor Schwarzenegger said recently that he would not approve a sale if bids were too low. Previously the state shelved a proposed sale of the Orange County fairgrounds when bids came in lower than expected.
Besides Arizona and California, only Connecticut is conducting a sale of state office buildings.
Connecticut, however, is seeking bids for straight-out purchases of buildings it regards as surplus rather than sale-leasebacks. The comparatively modest properties, which include the Litchfield Jail and the Bristol Armory, have attracted little attention.
Gordon F. DuGan, chief executive of W. P. Carey and Company, a real estate investment company that specializes in corporate sale-leaseback deals, said that if the California sale went well other states might follow. Mr. DuGan said, however, that he had not heard of any great interest in such future deals from either prospective buyers or sellers. W. P. Carey has made a bid for some of the California properties, which Mr. DuGan does not expect will be accepted. (The state has said it prefers bidders for the entire package.)
Mr. DuGan said bidding for the California property appeared stronger than he had expected, particularly considering that, unlike other sale-leasebacks, the California deal requires buyers to pick up the cost of services like waste hauling and security. He said that structure made the deal more appealing to bidders that, unlike his company, had big operations units.
The risk of drawing unwanted headlines by selling state property may be one reason the idea has yet to take hold in other states that are short on money. A few years ago a spurt in the sale of state- and city-owned infrastructure, like highways and bridges, ended amid outrage that some of these properties were being sold to foreign investors.
Another reason for the absence of a rush to such deals may be relatively modest proceeds for states. Dan Fasulo, chief of research at Real Capital Analytics, which tracks commercial real estate markets, said in an e-mail message, “There are many states that look at things like this during a crisis, but at the end of the day the amount of money raised from such activities is a laughable amount when viewed from the context of the overall budget shortfalls.”