Land rush

Sacramento’s plan to sell vast tracts of state property to offset its budget deficit has real estate speculators California-dreaming.

Arnold Schwarzenegger has had many incarnations -- bodybuilder, movie star, Kennedy in-law and California governor. He is also reputedly a shrewd real estate investor. His current portfolio includes stakes in a Columbus, Ohio, shopping mall and an office park north of San Diego.

Soon the governor will have a chance to show off his real estate savvy on a grander scale. His administration is preparing to sell a substantial chunk of the Golden State -- some 2,000 state-owned properties, encompassing 2.5 million acres of land and 195 million square feet of buildings. The properties range from wilderness to prime development land in Orange County to whole blocks of downtown San Diego.

“The state’s excess real estate offers investors an unprecedented opportunity,” says Darin Buchalter, a managing director for Ernst & Young Real Estate Advisory Services in San Francisco. “We’re talking about some of the highest-quality property in the state.”

The Schwarzenegger administration is expected to name real estate consultants to advise it on a property auction as soon as this month, and properties could start coming to market this summer or fall.

The decision to unload substantial amounts of “surplus” state land and buildings follows the passage last fall of Proposition 60A -- heavily championed by Schwarzenegger -- in which voters authorized Sacramento to sell excess property to pay down the state’s debt. Specifically, the proposition requires that the proceeds pay off some of the $15 billion in bonds California issued last year under its Economic Recovery Bond Act.

Craig Wilson, deputy secretary for policy and planning at California’s Consumer Services Agency, one of two cabinet-level agencies overseeing the sales, says that in the first round the government hopes to dispose of 28 properties with a combined value of anywhere from $45 million to $147 million.

In May 2004 the governor ordered Wilson’s agency and the Department of General Services to identify all excess state properties. The department’s Web site ( lists real estate deemed surplus by the state government. The Schwarzenegger administration will specify to the legislature which of those properties it would like to sell; only the legislators can formally declare state-owned buildings and land in surplus. So the legislature will add or subtract properties and then pass a law authorizing the sale.

Once, if the state wanted to sell a property it deemed to be surplus, it first had to offer the property to state agencies and, if they weren’t interested, to local governments. “Historically, those properties lingered in the process for years, and if the local government got the real estate, it was usually at nominal value,” says Consumer Services’ Wilson.

But under the special legislation Schwarzenegger has pushed, which authorizes California’s fiscal 2005 budget, a surplus property can be offered directly to local governments. They have 90 days to claim it -- and must pay fair market value if they do so. “That’s a significant change,” notes Wilson.

An example of a parcel that might be sold, as cited in a report commissioned by Schwarzenegger, is 190 acres in the middle of Orange County. The land is now used for a summer agricultural fair. But if it were zoned for housing, says one expert, it could be sold for $27 to $30 a square foot, or about $230 million. Another prime site: two full city blocks of office buildings and parking lots in San Diego.

The Schwarzenegger administration is preparing a second inventory of 11 properties with a potential total value of $210 million.

“The government is going to have to offer packages of large and diverse properties to major institutional investors,” says D.J. Smith, a partner with Smith, Watts & Co., a Sacramento-based lobbying group. “In the package there might be three or four dogs with special problems, but if you can solve those problems, you could make a lot of money.”