(Bloomberg)—Desperate times call for desperate measures. But are Connecticut and its capital, Hartford, desperate enough to sell and lease back their properties and guarantee the buyer a hefty return?
A Chicago-based private equity real estate firm is offering as much as $2 billion to purchase office buildings, health-care facilities, transit-related properties and whatever the governments think they can sell, so long as the buyer gets a 7.25 percent initial return, plus annual rent hikes of 1.5 percent. The offer by Oak Street Real Estate Capital LLC, detailed in letters of intent delivered Wednesday, leaves the choice of what properties to include up to the governments.
Connecticut and its distressed capital city surely could use the money. The state’s government has been wrestling with an underfunded pension system and chronic budget deficits, in part because the national economic recovery has passed much of Connecticut by, leaving it with fewer jobs than it had a decade ago. Hartford is even worse: The capital avoided bankruptcy last year only because of a bailout by the state.
“I just want to see our state make a smart decision,” said Gregory Kraut, a managing partner of K Property Group who is also an elected member of Westport’s town government. “And with my real estate and financial background, I have some options for them.”
Kraut, who put together the offer, said he’s acting as a concerned citizen and isn’t taking a commission or a fee from Oak Street. He suggested the state might use the money from real estate sales to reduce its unfunded pension obligations, and Hartford could reduce its debt load.
Terms of the deal as it’s proposed may favor the buyer, according to Jim Costello, a senior vice president for property-research firm Real Capital Analytics Inc. Capitalization rates -- net operating income as a share of the purchase price -- are in the mid-6 percent range now for single-tenant sale-and-leaseback office deals, he said.
“Obviously, the details of every deal are different, but buying in at 7.25 percent, the buyer is getting a better initial yield than the market on average,” Costello said.
Kelly Donnelly, director of communications for Governor Dannel Malloy, said the office is “in receipt of the letter and will take it under advisement.” Vasishth Srivastava, a representative for Hartford Mayor Luke A. Bronin, and Marc Zahr, Oak Street managing partner, declined to comment.
Such a transaction isn’t unheard of. In the aftermath of the last recession, Arizona sold a slew of properties -- including its Capitol building -- to bondholders to help close budget deficits left by the real estate crash. As California governor, Arnold Schwarzenegger proposed taking similar steps, though the plan was scuttled by his successor, Jerry Brown.
And Oak Street is no stranger to Connecticut. Last year, the firm proposed buying Hartford XL Center, where the National Hockey League’s Hartford Whalers played before they moved in 1997, for $50 million. Oak Street also offered to spend as much as $250 million to update the arena to current NHL standards. On Wednesday, the firm reiterated that proposal.
The $2 billion sale-leaseback deal -- as much as $1 billion each for the state and Hartford -- would make Oak Street responsible for property management as well as renovations. The initial lease term would be 25 years, and both governments would have the right of first offer, and first refusal, should they want to buy back the properties.
--With assistance from William Selway.To contact the reporters on this story: David M. Levitt in New York at [email protected]; Danielle Moran in New York at [email protected] To contact the editors responsible for this story: Daniel Taub at [email protected] Christine Maurus
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