BILL ANALYSIS
Bill No: AB
2605
SENATE COMMITTEE ON GOVERNMENTAL ORGANIZATION
Senator Roderick D. Wright, Chair
2009-2010 Regular Session
Staff Analysis
AB 2605 Author: Committee on Accountability
As Amended: June 15, 2010
Hearing Date: June 22, 2010
Consultant: Art Terzakis
SUBJECT
State Property: sales
DESCRIPTION
AB 2605 is an urgency measure that requires the Department
of General Services (DGS) to submit a cost-benefit analysis
to the Legislature at least 30 days prior to executing a
sale or lease transaction of eleven specified state-owned
buildings and prohibits the sale or lease transaction
unless the Legislature provides statutory authorization.
Specifically, this measure:
1.Requires the Director of DGS, at least 30 days prior to
executing a transaction for the sale or lease of
specified state-owned buildings, to submit to the chairs
of the fiscal committees of the Legislature an analysis
of the transaction comparing the costs and benefits to
the state of a sale or lease of the building to the
continued ownership over a 50-year period.
2.Prohibits the buildings from being sold or leased until
the Legislature determines that the transaction is in the
best interests of the state, makes a finding to this
effect, and explicitly authorizes the sale by statute.
EXISTING LAW
AB 2605 (Committee on Accountability) continued
Page 2
Existing law (ABX4 22 - Evans, Chapter 20, Statutes of
2009) grants DGS the authority to sell, at fair market
value, 11 state-owned buildings and enter into long-term
leases of those buildings, including entering into an
option to repurchase the buildings.
Existing law stipulates that the 11 state-owned buildings
are not "surplus' to the State's needs thus proceeds from
any sale or lease do not need to be used to retire the
principal and interest on the Economic Recovery Bond Act of
2004 and shall instead be deposited in the General Fund.
Existing law requires DGS, 30-days prior to executing a
sale or lease transaction for any of these buildings to
report to the chairs of the fiscal committees of the
Legislature the terms and conditions of any transaction.
Existing law also requires DGS to report to the
Legislature, on or before June 30th each year, on the
status of any completed or pending sale.
Existing law provides for a California Environmental
Quality Act (CEQA) exemption for the 11 state-owned
buildings, applicable only to the "sale transaction," that
is identical to an ongoing CEQA exemption for properties
declared surplus.
Existing law also provides that proceeds from the sale of
these 11 state-owned office buildings must be used to
retire any bonds related to the properties and to reimburse
DGS for any related costs.
The above-referenced 11 state-owned office buildings are as
follows:
Attorney General Building - 1300 I Street, in the
City of Sacramento;
California Emergency Management Agency Headquarters
- 3650 Schriever Avenue, in the City of Rancho
Cordova;
Capitol Area East End Complex - in the City of
Sacramento;
Elihu Harris Building - 1515 Clay Street, in the
City of Oakland;
Franchise Tax Board Complex - 9645Butterfield Way,
in the City of Sacramento;
AB 2605 (Committee on Accountability) continued
Page 3
Earl Warren/Hiram Johnson Buildings (Civic Center)
- 350 McAllister Street and 455 Golden Gate Avenue, in
the City of San Francisco;
Junipero Serra Building - 320 W. 4th Street, in the
City of Los Angeles;
Department of Justice Building - 4949 Broadway
Street, in the City of Sacramento;
Public Utilities Commission Building - 505 Van Ness
Avenue, in the City of San Francisco;
Judge Rattigan Building - 50 D Street, in the City
of Santa Rosa; and,
Ronald Reagan Building - 300 South Spring Street,
in the City of Los Angeles.
BACKGROUND
Sale/Leaseback of State-Owned Office Buildings: ABX4 22
(Evans) of 2009 was a Schwarzenegger Administration
sponsored measure intended to free up equity tied up in
certain state-owned office buildings. The Administration
argued that the state owns all of its major office
buildings and should have the option to enter into
sale-leaseback agreements where there is potential for
revenue. The Administration contended that such agreements
typically involve a very large building, a purchaser with
strong financial credibility and a sophisticated ability to
take advantage of tax and financial possibilities, and a
seller-tenant who can guarantee long-term occupancy. The
Administration emphasized that the proceeds from these
sales would be used to pay off the bonds on the buildings
with the state receiving the difference as cash deposited
into the General Fund. The Administration believed that a
sale-leaseback option could free up over $660 million in
equity for the various large office buildings referenced in
ABX4 22. The Administration also recognized that such a
proposal could potentially result in future rent increases
to the state.
Purpose of AB 2605: According to the Chairman's office,
the Assembly Committee on Accountability and Administrative
Review held a hearing on April 28, 2010 regarding ABX4 22,
which included testimony from the Legislative Analyst's
Office (LAO) on the cost-benefit analysis it conducted
comparing the costs of owning and maintaining the buildings
versus selling them and leasing them back from private
owners. The LAO concluded that even if the state sells the
AB 2605 (Committee on Accountability) continued
Page 4
buildings for a total of $2.5 billion, which it considers
optimistic, the cost of selling and leasing back the
buildings will be more than $5 billion more than owning the
buildings over a 35-year period. The LAO concluded that
selling the buildings for a short-term revenue boost that
would ultimately add to state costs is poor fiscal policy,
and that the Legislature should strongly consider other
alternatives to solving the state budget deficit.
In a report dated April 27, 2010, the LAO made the
following recommendations relative to the sale-leaseback
addressed in this measure:
The state originally invested in these buildings
because it was determined that owning state office
space would save money compared to leasing. Based on
our analysis of the proposed sale-leaseback, this
continues to be true;
Paying for the state's annual costs of running its
programs with a one-time sale of critical state assets
is poor fiscal policy;
We recommend that the Legislature reject the
sale-leaseback if the sales revenue is at the lower
end of the range - near the Governor's revenue
estimate - as the effective interest rate would be too
high and make other options preferable.
The Assembly Committee contends that an investigation of
this issue found other concerns with selling the state
buildings, including that there was little economic
analysis done before this proposal was adopted. Public
discussion of this proposal was minimal, and selling
buildings the state currently uses and will likely need in
the future goes against 40 years of state facilities
policy.
Staff Comments: DGS could decide to stop the
sale-leaseback without seeking the Legislature's input,
similar to DGS' actions for the sale of the Orange County
Fairgrounds (which was also a component of ABX4 22). If
DGS decides to move forward with the sale, it is required
to provide details to the Legislature 30 days before
completing the transaction. The 30-day reporting
requirement was included to ensure the Legislature had an
AB 2605 (Committee on Accountability) continued
Page 5
opportunity to examine the terms of the sale-leaseback and
consider the matter again once all the information is
available.
In April of 2010, DGS announced that it had received more
than 300 offers to purchase and lease back the 11 state
office properties referenced above. Multiple bids were
received for the entire portfolio that totaled in excess of
$2 billion. The bids were received after CB Richard Ellis
placed the properties on the market in late February, which
generated worldwide interest from numerous buyers eager for
stable, leased investment properties.
Speaking on behalf of the Administration, DGS Acting
Director Ron Diedrich stated, "We are more than pleased
with the competitive offers that have been submitted. I'm
looking forward to proceeding with the next step of
negotiations." Diedrich also said "This transaction will
generate a significant amount of capital for the state to
retire debt and help contribute to the General Fund."
DGS has scheduled two public hearings on June 28, 2010 (one
in San Francisco beginning at 10:00 a.m. and the other in
Oakland beginning at 3:00 p.m.) to report on the status of
the Civic Center Complex and the Public Utilities
Commission Building in San Francisco and the Elihu Harris
Building in Oakland.
This measure doesn't necessarily stop the sales process
that has begun; it does however give the Legislature more
authority to make an informed decision about whether to
sell the buildings, based on information submitted by DGS.
PRIOR/RELATED LEGISLATION
AB 151 (Jones) 2009-10 Session. Would grant DGS the
authority to investigate the potential terms of a sale,
exchange, or lease of the Board of Equalization building
located in downtown Sacramento, at 450 N Street. (Pending
in this Committee)
SB 1167 (Cogdill) 2009-10 Session. Would authorize DGS to
dispose of all or any portion of two parcels of real
property (the Veterinary Laboratory for the Department of
Food and Agriculture located in Fresno and the Department
of Motor Vehicles field office located in Roseville, Placer
AB 2605 (Committee on Accountability) continued
Page 6
County). (Pending in Assembly Policy Committee)
AB 22xxxx (Evans) Chapter 20, Statutes of 2009-10 Fourth
Extraordinary Session. Authorized DGS to: (1) sell the
Orange County Fairgrounds; (2) sell specified state-owned
office buildings and to enter into long-term leases for
those buildings with the option to buy back any of the
buildings; (3) enter into and approve "long-term" leases of
the state's real properties and determine terms and
conditions of such leases. Also, imposed additional
reporting requirements upon state agencies relative to
information that must be submitted to DGS pertaining to the
state's real property holdings and authorized a loan of not
more than $10 million from the General Fund to support the
management of the state's real property assets and any
extra workload.
SUPPORT: As of June 18, 2010:
Howard Jarvis Taxpayers Association
Service Employees International Union (SEIU)
OPPOSE: None on file as of June 18, 2010.
FISCAL COMMITTEE: Senate Appropriations Committee
**********