Brown Revokes Sale of Calif. Buildings

The Golden State's governor announced that he will cancel the proposed $1.2 billion transaction, claiming that now is not the optimal time to sell real estate.

February 9, 2011
By Allison Landa, News Editor and Barbra Murray, Contributing Editor

California Gov. Jerry Brown announced at a press conference that he will cancel the proposed $1.2 billion sale of a government building portfolio, claiming that now is not the optimal time to sell real estate.

In October, the state struck a deal with California First L.L.C., which emerged victorious in a lengthy and hard-fought competition to acquire the 11-property portfolio from the state in a huge 7.3 million-square-foot sale-leaseback deal. A consortium of institutional investors headed by private real estate firm Hines and international private equity company Antarctica Capital Real estate, the group won out over more than 300 proposals.

The sale was expected to bring in desperately needed revenues and free the state from the ongoing costs and risks of owning real estate. However, Brown said at the press conference that the sale basically reflected a huge loan with significant yearly interest.

Five of the 11 properties that were involved in the proposed 20-year agreement are located in the state capital, Sacramento, and account for an aggregate 4.1 million square feet, including the 1.8 million-square-foot Franchise Tax Board Complex and the 1.5 million-square-foot Capitol East End Complex, which constitute the two largest office facilities in the entire portfolio. Four properties sit in the San Francisco Bay Area and total 2 million square feet, while the remaining two assets are located in the Los Angeles Area and together encompass 1.2 million square feet of office space.

While Brown was originally the driving force behind the sale-leaseback, the state legislature had expressed concern about the deal. In October, Hines senior vice president Colin Shepherd told CPE that the purchase price represented fair market value and exceeded the state’s initial anticipation of net proceeds. However, it appears that Brown is no longer swayed by that argument.

Hines would have served as manager of the portfolio, adding millions of square feet to the 1 million square feet of state-leased space it already manages in the Golden State.