By David Siders
Published: Tuesday, Oct. 12, 2010 – 12:00 am | Page 3A

The recession-battered state said Monday that it will sell 11 office properties for $2.3 billion to a group of private investors based in Texas and Irvine, all but finalizing an agreement between Gov. Arnold Schwarzenegger and lawmakers to raise cash in the budget crisis.

The state would lease the buildings back for at least 20 years. The deal is controversial because of questions about the long-term costs of renting.

“This sale will allow us to bring in desperately needed revenues and free the state from the ongoing costs and risks of owning real estate,” Ron Diedrich, acting director of the Department of General Services, said in a written statement.

He said the sale of the buildings, including the East End complex and attorney general’s headquarters building in Sacramento, would put $1.2 billion into the state’s crippled general fund, a savings assumed in last week’s budget deal.

About $1.1 billion more would be used to pay off bonds on the buildings.

The nonpartisan Legislative Analyst’s Office in April said the sale amounted to “poor fiscal policy,” concerned about long-term lease costs that it said in 20 years could reach $200 million annually.

The Department of General Services’ analysis was rosier.

“We’re going to essentially break even,” department spokesman Eric Lamoureux said. “We’re going to save about $2 million.”

The announcement Monday was the selection of a buyer, California First LLC, a partnership including Houston-based Hines Interests and Irvine-based Antarctica Capital Real Estate LLC.

Rich Mayo, one of the chief investors, said California, despite its financial problems, is a reliable investment. The state is not a tenant prone to “run out on leases or anything,” he said.

“As an investor, it just seems like a good deal,” Mayo said.

The $2.3 billion sale price exceeds Schwarzenegger’s one-time expectation that the buildings might sell for $1.7 billion.

“Far from a fire sale, this was a stiff, multiple-offer competition that generated favorable pricing for the state,” Kevin Shannon, vice chairman of CB Richard Ellis, which is brokering the sale, said in a written statement.

The state fielded more than 300 bids to buy all or some of the buildings it offered. Among the bidders it rejected was Miami-based QueensFort Capital Corp., which said it offered more than $3 billion.

QueensFort spokesman James Lee said Monday that he doubted California First could secure financing to complete the purchase. To Wall Street, Lee said, California “does not necessarily reflect the greatest credit risk at this point.”

Lamoureux said QueensFort’s proposal, unlike California First’s, would have burdened the state with long-term maintenance and repair costs, decreasing its overall savings.

“The highest offer alone was not the only factor we looked at,” he said.

Schwarzenegger and lawmakers authorized the sale in last year’s budget agreement. Paperwork is all that is needed before the transaction is complete, Lamoureux said.

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