San Francisco Superior Court to Hear Challenge to State Buildings Sale

By Sharon Simonson

A lawsuit opposing the $2.3 billion sale of 11 state buildings to a Hines company partnership has its first hearing at 11 a.m. Nov. 22 in San Francisco Superior Court.

Based on a petition filed Nov. 16, the state court has agreed to take up a request for a temporary restraining order to stop the properties’ sale, said plaintiffs’ attorney Anne Marie Murphy of Burlingame law firm Cotchett, Pitre & McCarthy.

The transaction is slated to close before the end of the year.

The state proposes to sell more than 7.3 million square feet of office buildings in Sacramento, Los Angeles and the San Francisco Bay Area. It then would immediately lease all 11 of the buildings for the next 20 years. The lease provisions would give California the ability to extend their terms for another 30 years.

Murphy represents Jerry B. Epstein and A. Redmond Doms, who are challenging the sale based on their standing as California taxpayers and as former members of the Los Angeles State Building Authority. The authority oversees the construction and management of state office facilities in downtown LA. The two men allege they were dismissed from the authority earlier this year after they questioned the proposed sale, as were members of the San Francisco and Oakland building authorities.

The suit alleges the building sales are illegal because they were not authorized by the Judicial Council, the governing body of the California Court System, or the Los Angeles, San Francisco and Oakland regional building authorities. Many of the buildings proposed for sale house state courts and judicial offices. The suit also alleges the sale represents an unconstitutional transfer of public wealth to private hands.

On the block in the Bay Area are the San Francisco Civic Center, which includes the Hiram Johnson Building and the Earl Warren Building, a 1922 structure on the National Register of Historic Places that houses facilities for the California Supreme Court and the Courts of Appeal, according to the petition. Also being sold are Oakland’s Elihu Harris Building at 1515 Clay St., which has more than 700,000 square feet, and the San Francisco Public Utilities Commission building with 271,000 square feet at 505 Van Ness Avenue.

The matter is set to be heard by Judge Charlotte Walter Woolard, according to Murphy and the Superior Court Web site.

The lawsuit relies heavily on the findings of the Legislative Analyst’s Office in two reports that preceded the sale. In the second report, dated Nov. 5, the LAO concludes that based on a 35-year lease term, the state would spend $1.4 billion more in present-value dollars than it otherwise would if it continued to own the properties. According to the LAO report, that is the same finding of the California Department of General Services, a defendant in the lawsuit.

The LAO said the proposed sale and lease-back of the properties by the state was “poor fiscal policy,” embraced only to have an additional $1 billion to fill the current year’s budget deficit. The LAO acknowledges that alternatives may have been less palatable still.

Houston-based Hines, which owns some of San Francisco’s signature buildings, is managing partner of California First LLC, which was selected by the state to own and operate the buildings. California First’s general partner is Antarctica Capital Real Estate LLC, an international private equity fund with offices in the United States and India, according to the Department of General Services. Debt to finance the transaction is coming from JP Morgan.

Under the deal, the state will use the $2.3 billion to repay more than $1 billion in debt against the buildings, leaving $1.23 billion in net cash proceeds.

West Coast Commercial Real Estate News