California Sells Off Surplus Land

The State of California has a plan: sell some state-owned properties in order to help pay off the state's $47 billion of general obligation debt. The result is that high-profile sites not yet up for sale, like San Quentin Prison and the Los Angeles Memorial Coliseum and Sports Arena, could be marketed in the future to private real estate developers.

While most states have surplus land sale programs, California's massive real estate portfolio sets it apart. The golden state owns about 5 million acres of land, much of it underutilized — making California's public properties a potential gold mine for private real estate developers.

For decades, California has been selling off chunks of its underutilized real estate. Since 1999, the state has recognized $346 million in revenue from the process. But last year, Governor Arnold Schwarzenegger gave state agencies marching orders to expedite the process in order to increase sales.

The California Performance Review created a list of nearly 50 “high-value urban properties,” including the L.A. Coliseum. The agency valued the 50 properties at $1.6 billion to $4.3 billion.

The California legislature, which designates surplus land, declared just two sites as eligible last year. This year, the state is working on a list of more than 20 eligible properties, says Matt Bender, spokesperson for California's State and Consumer Services Agency, which oversees the state's land. “Initially we're looking at some lower-profile properties,” Bender explains, but he grants high-profile names like the Coliseum could be declared surplus.

Much of the surplus land ends up going to local or other state agencies for redevelopment. But several smaller sales, all priced below $2 million, are currently in the works with private developers, Bender says.

But don't think California has enacted a fire sale on its properties. “There is no giveaway on state lands,” says Claude Gruen, principal economist with Gruen Gruen & Associates, a San Francisco firm that provides real estate economic analysis for the state. “What the state does is carefully study what the economic value of that land is and try to harvest that value.”

The largest surplus land sale to occur recently in California was the $120 million purchase of 470 acres in Chino, Calif., by SunCal Cos. The Irvine, Calif.-based developer of master-planned communities partnered with Lehman Brothers' $1.6 billion real estate fund on the buy. The community, to be called College Park, will eventually feature 2,200 homes and a 7.5-acre retail/commercial center.

While some might envision an imminent boom in surplus land sales to developers, two issues impede the process, according to Gruen. One is that state agencies might have little incentive to identify their buildings as being surplus-eligible since any sale of state land or real estate goes first toward paying off bonds and then back into California's general fund, not to individual agencies.

Another issue, Gruen says, is that cities across the state, through their extensive planning and entitlement processes, effectively control the fate of state land sales.

Gruen has carved out a real niche in this arena. In 1996, the state sold off 136 acres of mostly vacant land in San Jose. Gruen's firm completed a land residual study for the state that concluded the site could harness $103 million, if sold to single-family housing developers.

However, Cisco Systems, a large computer networking company, ended up paying $60 million for the site for its new corporate headquarters, to keep the 13,000 workers it then employed in the city. In the end, state and local officials felt the jobs were more important than the higher dollars.

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