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State of California Offloading Buildings To Fill Budget Shortfalls – What A Disaster

December 11, 2009

As economic pressures mount, the The State of California has retained CB Richard Ellis to sell off 17 of our buildings. The portfolio represents around 8 million square feet. The buildings include the Elihu M Harris building in Oakland, the Earl Warren building in San Francisco, and the PUC building in San Francisco. I’m sure the five other companies competing for the contract to sell the buildings felt this was going to be a pony show since Diane Feinstein’s husband is the chairman of CBRE. Feinstein also received a lot of flack over CBRE being given the FDIC contract as well.

The government expects to reap some 2 billion dollars from the sale. 11 of the buildings are already being marketed by CBRE. Attachment below.

Though selling real estate is not mutually exclusive of raising additional funds through bond sales, the sale is a worrisome signal. Who knows what this portfolio will trade at, but for argument’s sake lets say 6% capitalization rate, with escalations thrown in there as well. The fact that the state is opting to sell off real estate as opposed to issue bonds which would likely yield much less than 6% is pretty darn interesting to say the least. Given that the state needs these buildings to function, and a default of its obligations could conceivably put even that at risk, it seems that the government should just opt to issue more paper rather than sell off the taxpayer’s property in these dire times.

This is clearly good for CBRE, but terrible for the taxpayer. If you agree, contact your representatives.


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Categories: Commercial Finance and Lending | Commercial Real Estate Investing | Notable Deals
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Joshua December 11, 2009


the only problem i have with this is that these are properties they need to lease back. if they just sold off a bunch of the shit they hold for some random reason id be fine with it. californias bond rating is at Baa1 (thats at moodys, i believe fitch has us at bbb [the lowest IG rating]), which is three downgrades from junk. Im going to go out on a limb and say that come june 2010 the ratings agencys are issuing downgrade warnings on us again. anyway, GO bonds are yielding ~5.25% but trading at about a 20% discount on the secondary market (buyers wanting yields around 6.66%). it probably would be in their interest to just issue the debt, but people are pretty wary of it at the current time and a large issue may cause the yields to bump up. hey, were screwed, how about we default and teach our politicians and the citizens that you cant just vote to spend money without actually paying the money to the state to dole out.

Joshua December 13, 2009


oh, interesting, commission is "substantially less than one-half of one percent". how lovely. cbre has been chop chop chopping their fees into the ground over the last couple years so they can hoard deals. i mean, how do you pay an Asst Real Estate Manager $55K a year to run 3 properties with a asset mgmt contract at 1%. eh, anyway, it is not surprising that they are doing the deal for free.

Square Feet December 13, 2009


Hey, a quarter of a point on a $2B deal is still $5M in fees, which to investment brokers these days is the next best thing to winning the lotto. We all know it doesn't cost nearly that much to pedal these buildings. Spend $500K on advertising and preparing offering packages, website, etc. and the whole world will know about it, set a call for offers day, and you're off. Heck the sheer size and unique nature of the portfolio alone does most of the marketing itself.

But the real story is the fact that CBRE has about $3B in debt, and a market debt that has just recently increased to $3.5B. Their current and d/e ratios are not very interesting to look at either. But then again so is JLL's, whose current ratio as of the last reported quarter was less than 1, their debt to equity ratio if you exclude Goodwill of $1.4B (thanks Staubach!) was also below 1.

These guys are looking for anything that moves right now.

Jeff December 13, 2009


Good luck with the six percent capitalization rate – especially if they start to pay their rent in warrants…

Square Feet December 13, 2009


I agree, was just using that number for argument's sake. The rents are above market as well, and the residual value of some of these buildings are pretty dismal, so the number will likely be significantly higher.

Joshua December 14, 2009


agreed. i dont so much have an issue with the fee on this deal in particular. but they are whoring themselves on fee. less than 1% of gross asset mgmt fees and brokerages commissions significantly lower than "usual". so, on this deal, i dont really care. but your comments on their debt ratios is spot on. they are doing anything and everything, and cutting their fees to the lowest rate possible, cause they need to be involved in every single deal they can get their hands on. i worked for jll when cbre decided to buy the world to take over the global #1 rank. they just buy, buy, buy and theyre very lucky their CFO worked out that debt deal about 12 months ago, or theyd be bad shape right now.

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