California Selects Hines-Led Team’s $2.3B Bid for 11-Property Office Sale-Leaseback Deal

The state of California just struck a deal that will put a few billion dollars in its empty pockets.

October 12, 2010
By Barbra Murray, Contributing Editor

The state of California just struck a deal that will put a few billion dollars in its empty pockets. California First L.L.C. has emerged victorious in a lengthy and hard-fought competition to acquire an 11-property office portfolio from the state in a behemoth 7.3 million square-foot sale-leaseback deal. The $2.3 billion bid by California First, a consortium of institutional investors headed up by private real estate company Hines and international private equity firm Antarctica Capital Real Estate, won out over more than 300 proposals.

Ron Diedrich, acting director of California’s Department of General Services, noted that the sale will bring in desperately needed revenues and free the state from the ongoing costs and risks of owning real estate. DGS had kicked off the sale-leaseback competition with commercial real estate services firm CB Richard Ellis marketing what was referred to as the Golden State Portfolio in February of this year. Five of the 11 properties involved in the 20-year sale-leaseback 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 (pictured), 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.

The governor of California had originally been the driving force behind the sale-leaseback idea, but the state legislature was initially a bit leery about the notion after having done a little math. The Legislative Analyst’s Office had contended that, based on the assumption by the governor’s office that a sale could yield $1.7 billion, leasing costs would exceed ownership costs by more than $5 billion over a 35-year period. But the legislature eventually got onboard with the governor, and now the Hines team’s proposal has put all fears to rest. “Our purchase price represents fair market value and exceeds the state’s initial anticipation of net proceeds,” Colin Shepherd, senior vice president with Hines, said.

Despite the presently lackluster state of the commercial real estate market, the winning bid cannot exactly be considered a bargain-basement acquisition. “Far from a fire sale, this was a stiff, multiple offer competition that generated favorable pricing for the state,” said CBRE’s Kevin Shannon. “Current historically low interest rates have allowed the state to obtain extraordinary pricing comparable with peak level capitalization rates with leaseback rents well below peak market levels.”

The agreement calls for Hines to serve as manager of the portfolio, adding millions of square feet to the 1 million square feet of state-leased space it already manages in California. And although California is getting a new landlord, it may not be good-bye forever in terms of the state serving as owner of the properties. As per terms of the Hines agreement, the State will have right of first refusal to buy back the office facilities.

“With this solution the State actually improves its finances rather than increasing its debt load,” Rich Mayo, a managing director of ACRE, added. “It is a win-win solution.”