SAN FRANCISCO — A judge here ruled Friday California can proceed with a $2.3 billion sale and leaseback of 11 government-owned office buildings.
Superior Court Judge Charlotte Woolard denied a request for a preliminary injunction to block the sale that is set for next Wednesday.
“I think the court’s ruling is sound,” Woolard told the courtroom, affirming a tentative ruling after hearing arguments from around half a dozen lawyers Friday morning.
She said the plaintiffs — two former members of the Los Angeles State Building Authority — lacked sufficient standing to obtain a preliminary injunction. In her ruling, the judge said the sale did not demonstrate waste, violate a separation of powers, or appear to be an illegal gift.
Immediately following the decision, opponents of the sale said they would appeal.
“This was an unconstitutional stealing of taxpayer money,” Joseph Cotchett, a lawyer for the plaintiffs, said outside the courtroom. “This is an outrage that these magnificent buildings are being sold for this amount of money. ”
The buildings up for sale include the San Francisco home to the California Supreme Court, the First District Court of Appeal and the Ronald Reagan State building in Los Angeles.
“Our focus right now is to close the escrow process,” Eric Lamoureux, a spokesman for the Department of General Services, which was named in the suit, told reporters outside the courtroom. “It is important with the current budget situation to be able to generate this revenue to help support the sagging state budget.”
During the hearing, Cotchett alleged the sale is being pushed forward in order to make it happen before the new administration takes office next year.
California First LLC, a consortium led by privately owned real estate firm Hines and private-equity firm Antarctica Capital Real Estate, will buy the 11 buildings for $2.33 billion. The state will lease them back for at least 20 years.
The deal announced in October was driven by the budget gap. California’s deficit-ridden general fund will contain one-time revenue of $1.2 billion after retiring the lease-revenue bonds backed by the real estate.
The 11 properties include centrally located buildings in Los Angeles, San Francisco, and Oakland, and a mix of central and suburban Sacramento locations. Their high-profile tenants include the California Public Utilities Commission and the Sacramento headquarters of the attorney general.
Gov. Arnold Schwarzenegger first proposed the sale and leaseback in May 2009. The Legislature authorized the process to go forward that July.
Some lawmakers subsequently criticized the proposal, but the plan was affirmed again when legislators adopted the fiscal 2011 budget.
According to an analysis prepared by the Legislative Analyst’s Office in April, eight of the buildings are encumbered by lease-revenue bond debt.
The biggest share is from the Capital East End Complex, five buildings just east of the state capitol that opened between 2002 and 2003. The complex had $381.1 million in bond principal outstanding as of July 1.
Those bonds, sold in December 2002 by the California State Public Works Board, are not callable until December 2012, according to their official statement.
When the Schwarzenegger administration first proposed the sale and leaseback, it projected California would net $600 million and $675 million from the deal after paying off the bonds. The state did a lot better.
There were more than 300 bids, including 30 for the entire portfolio of 11 buildings, according to Kevin Shannon of CB Richard Ellis, who handled the sale for the state.
California First has nine equity investors other than the two headline firms, according to the Department of General Services’ formal report on the sale.
The consortium will fund the deal with 40% equity and the balance from a JPMorgan loan, the report said.
Among the losing bidders was a proposal to finance the transaction with municipal bond debt. That proposal was prepared by the California Municipal Finance Authority, an independent conduit issuing agency, broker-dealers Stone & Youngberg LLC, and AEW Capital Management, according to CMFA meeting minutes.
