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Judge refuses to stop sale of California buildings

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SAN FRANCISCO -- A judge on Friday refused to stop the sale of 11 state properties to a group of private investors, handing Gov. Arnold Schwarzenegger a legal victory as he seeks to close the deal before leaving office.

Superior Court Judge Charlotte Woolard denied a request for an injunction to halt the sale, saying she did not think there was enough support to bring the case forward and show that taxpayer funds are being wasted. Opponents vowed to appeal.

The state is selling the buildings -- including the Ronald Reagan building in Los Angeles and the San Francisco Civic Center -- for $2.3 billion to California First LLC, a consortium of investors led by a Texas real estate firm and a private equity firm based in Irvine.

The state Department of General Services is trying to close the deal by Dec. 15. After construction loans are paid off, the state expects to generate more than $1.2 billion to help fill the state's general fund. The state will continue to use the space by entering into a 20-year lease with the new owners.

"We're very satisfied with the judge's ruling today," said DGS spokesman Eric Lamoureux. "It confirms what we've always known, that the sale-leaseback transaction is valid. We will be moving forward to close the escrow process and complete the sale at this point."

The lawsuit was brought by two former state building authority members, Jerry Epstein and A. Redmond Doms, who were ousted by Schwarzenegger after they asked the state to perform a cost-benefit analysis and questioned the long-term consequences for taxpayers.

In affirming a tentative ruling she made earlier in the day, Woolard said Epstein and Doms lacked sufficient standing to bring the case.

Their attorney, Joseph Cotchett, said he would file an immediate appeal.

Cotchett said an injunction was sought to stop the sale so it could be considered on its merits. "One understands that this was just a stop along the way; the case goes on," he said.

Opponents of the sale contend the deal should not continue without the consent of the Judicial Council, which has authority over buildings housing the state's appellate courts. They also claimed the proposal constitutes a waste of taxpayer money and an illegal gift of public assets to a private party.

"If President Obama and the Congress decided to sell the United States Supreme Court (building) to investors foreign and domestic, you can well imagine the uproar," said Louise Renne, an attorney representing former building authority member Don Casper, who also objected to the sale. "Well, we have the same thing going on right here in the state of California."

The 11 office complexes contain 24 separate buildings and were sold to help close the state's budget deficit in the current fiscal year. Even with the sale, the state faces a $6.1 billion deficit this year.

An analysis by the nonpartisan Legislative Analyst's Office found the deal will end up costing taxpayers at least $1.4 billion over 35 years. The state will pay an effective interest rate of 10.2 percent to rent back the buildings it now owns, about double what the state pays on existing bonds used to build its offices.

Opponents also questioned the bidding process. During a deposition of state Treasurer Bill Lockyer, they found that investors had sought to arrange to give a $500,000 "finder's fee" to Santa Ana Mayor Miguel Pulido if the sale goes through.

Until the lawsuit was filed last month, the state refused to release information about the losing bids.

"This bidding process was a sham," Cotchett said. "It's a situation where they're running something up the flag pole at the last moment, giving the taxpayers no transparency whatsoever."

Mary Maloney Roberts, who represented the Judicial Council's administrative office, argued the council should have a say over two of the buildings, which house a variety of court offices, including the California Supreme Court and two courts of appeal.

"Council has not spoken, it has not had the opportunity to speak at all," Roberts said.

Cotchett noted at the hearing that the state is not facing an immediate cash shortage and questioned the Republican administration's intent to close the deal this month when the state fiscal year doesn't end until June 30.

"Why the rush here to close this transaction?" Cotchett said. "This audience knows why we're in court. We're in court because they want this matter to close before there's a new administration."

Gov.-elect Jerry Brown, a Democrat, will be sworn in Jan. 3.

Andrew Stroud, an attorney for the state, called Cotchett's arguments about the loss of the iconic buildings "rhetorical flourishes." He suggested politics was in play, noting that Lockyer and state Controller John Chiang are both Democrats. Each provided statements opposing the sale.

"Whether a mistake is being made or not, whether this is in the best interest of the state of California or not, is not the legal issue presented here," Stroud said. "The legal issue presented here is: Does this transaction comply with the law? It does, your honor."

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