Opponents Vow Appeal to San Francisco Judge’s Ruling to Allow $2.3 Billion State Building Sale

By Sharon Simonson

The state of California is free to proceed with the $2.33 billion sale of 11 office buildings under an order that was to be signed by state Superior Court Judge Charlotte Woolard by the end of the day Dec. 10.

But opponents of the sale are vowing to continue their fight, promising to file an appeal of the court’s ruling as early as Monday, Dec. 13. The transaction is scheduled to close Wednesday, Dec. 15.

The Bay Area properties slated to be sold include San Francisco’s Public Utilities Commission building on Van Ness Avenue, the Civic Center at McAllister and Golden Gate avenues and the Elihu Harris building on Clay Street in Oakland.

Houston-based Hines, a real estate company with assets worldwide including significant holdings in the Bay Area, is managing partner for the winning bidder, California First LLC. Hines already owns some of San Francisco’s signature buildings including 101 California, a 48-story tower with 1.2 million square feet, and 101 Second St., a 26-story building completed in 2000.

California First beat no less than 63 other entities making 391 separate offers for the 7.3 million square-foot state portfolio. Among those it trumped was a partnership that included AEW Capital Management LP, a global asset manager that oversees $43 billion in real estate assets and securities.

The two contenders’ offering prices were nearly identical, according to public records, but California First offered the state all cash. The Golden State Asset Acquisition Group, which included AEW, sought to sell municipal bonds instead. Its offer included the possibility of the state continuing to own the land beneath the buildings, according to an Aug. 10 letter distributed by the plaintiffs at the hearing.

Hines also bested San Francisco-based Stockbridge Capital Group LLC., which partnered with J.P. Morgan in a $2.012 billion cash offer. Stockbridge was among the finalists who competed in a third round of bidding.

Plaintiffs Jerry B. Epstein and A. Redmond Doms, in their capacity as California taxpayers and as former members of the Los Angeles State Building Authority, sued the state Nov. 16 to halt the state properties’ sale. The building authority plans, finances and oversees the construction and management of state-owned office buildings in downtown Los Angeles. Similar bodies manage state assets in San Francisco and Oakland.

Epstein and Doms allege they were removed form the Los Angeles Building Authority and replaced with other appointees after they raised objections to the proposed sale.

In total, the state seeks to sell just more than 7.3 million square feet. At the proposed sale price, the buyers are paying more than $310 a square foot for the assets, which include historic buildings as well as the home of the California Supreme Court. The state has agreed to lease back the buildings for a term of no less than 20 years though the state may extend the terms for another 30 years under the agreements.

The transaction would constitute an outright sale of the assets.

The plaintiffs allege the process that preceded the buildings’ sale did not comply with state law, that the sale constitutes a waste of public funds and that it represents an unconstitutional gift of public goods. They sought, among other things, preliminary and permanent injunctions to prevent the buildings’ sale under the current agreement and to force the governor and the state Department of General Services, which managed the sale process, to seek approval from additional state bodies.

But Judge Woolard was unswayed by the arguments, telling those gathered within minutes of the hearing’s start that she had reached a tentative ruling denying the plaintiffs’ requests.

She agreed with attorneys representing the state that Epstein and Doms lacked “standing,” or a sufficient personal stake in the outcome of the case, to allow them to halt the buildings’ sale. She said the legislature had not illegally delegated its authority to sell the buildings to the state’s Department of General Services nor did she believe the sale would affect the “core functions” of the courts, undermining any allegations that a sale without the express consent of the judiciary violated the separation of powers theory that is the basis of all American government.

The hearing in San Francisco Superior Court drew a full house, with nearly a dozen attorneys representing the plaintiffs, the state and various intervening parties. The attorneys and multiple news reporters and other observers filled the relatively small courtroom.

The state’s sale includes three Bay Area buildings with not quite two million square feet in aggregate, two large Los Angeles office buildings and five more in Sacramento and the surrounding area.

Judge Woolard told attorneys at the hearing’s close a few minutes past noon that she wanted a final order reflecting her comments before the end of the day Friday so that an appeal could be filed right away.