California, investors accuse each other of contract breach in $2.3B sale of state properties

SAN FRANCISCO – The State of California and a group of private investors accused each other at a trial Tuesday of breaking an agreement over a $2.3 billion plan to sell 11 state properties and have the state lease them back.

The sale was championed by former Gov. Arnold Schwarzenegger as a way to help the state plug a budget deficit. But Gov. Jerry Brown pulled the plug on the plan in 2011 after independent analysts said it would end up costing the state as much as $1.5 billion.

Brown had no legal basis to stop the sale, Angela Agrusa, an attorney for investment group, California First LP, told San Francisco Superior Court Judge Garrett Wong in her opening statement.

The group has sued the state to force the sale.

Agrusa said California broke the sales contract because of a change in policy and then made up “fiction” to try to validate the decision.

“The governor changed his mind,” she said. “His personal viewpoint, his policy reason is not a legal reason to breach a contract.”

Lawrence Cirelli, an attorney for the state Department of General Services, said the investors failed to make a required $50 million payment on time, terminating the sales agreement they entered into with the state for the properties well before Brown’s announcement. California First didn’t make the payment because it hadn’t secured the necessary funding, Cirelli said.

“They failed to perform because they did not have the money. They were not ready, willing and able to consummate the deal.”

California First — a consortium of investors led by a Texas real estate firm and a private equity firm based in Irvine — would have made $70 million in profit in one year on the sale and lease-back agreement initially. The figure would have climbed to more than $100 million by year 20, the last year of the lease agreement, Agrusa said.

A 2010 analysis by The Associated Press, however, found it would cost the state far more to lease the buildings than to continue owning and maintaining them. The independent Legislative Analyst’s Office subsequently reached the same conclusion.

Brown said in 2011 that the sale amounted to a gigantic loan with interest payments and would be the “ultimate in kicking the can down the road.”

Among the properties in the sales contract are the Ronald Reagan State Building in Los Angeles and the Attorney General Building in Sacramento.

Agrusa said state officials continued to work on the deal after the date they now say it was terminated, giving no indication until Brown’s announcement that it was off.

Cirelli said the state was hoping the contract could be revived, and California First knew the deal was dead.

The trial is expected to last several weeks. An appeal is likely.