Given the precarious financial circumstances of Hartford, Conn. – not to mention the state as a whole – it’s hardly surprising that private investors sense an opportunity to buy up valuable state- and city-owned properties at a good price.
And in the first of what we imagine could be a flood of offers, A Chicago-based private equity firm specializing in real-estate investment has sent letters to the city and to the state of Connecticut offering to spend $2 billion to purchase publicly owned office buildings, health-care facilities and trasit-related properties – and anything else the state and municipal governments might be willing to part with.
However, there’s one catch: The firm is insisting that it secures a 7.25% annual yield on its investment by raising rents and leasing the properties back to their former owners, according to Bloomberg.
For the record, that’s nearly double the 3.43% yield Connecticut pays on 20-year general obligation bonds sold in January. And a recent $550 million state bailout for the beleaguered capital city has inspired Moody’s Investors’ Service to boost its rating on Hartford’s GO bonds to A2 from Caa3 – the same level as the state, according to the Bond Buyer.
Terms of the deal as it’s proposed may favor the buyer, according to Jim Costello, a senior vice president for property-research firm Real Capital Analytics Inc. Capitalization rates — net operating income as a share of the purchase price — are in the mid-6 percent range now for single-tenant sale-and-leaseback office deals, he said.
“Obviously, the details of every deal are different, but buying in at 7.25 percent, the buyer is getting a better initial yield than the market on average,” Costello said.
Still, the firm believes Connecticut might be interested in its offer, considering that the state and city could use the money to help balance out their badly underfunded pensions.
As we’ve pointed out time and time again, the state is in the middle of a taxpayer exodus.
Last year, the state experienced a net adjusted gross income drain of $2.7 billion as wealthy residents fled the state. The average adjusted gross income of those leaving Connecticut last year was $123,377 – the highest in the country.
Oak Street has said it would take any buildings the state would be willing to part with.
Oak Street closed fundraising for its fourth real-estate fund – the Oak Street Capital Real Estate Fund IV – in October, raising $1.25 billion over six months, according to Pensions & Investments. Several state pension funds invested in the Oak Street fund, including the Pennsylvania State Employees’ Retirement System and the Illinois Teachers Retirement System.
The firm’s offer was assembled by a local politician from Westport – a wealthy Fairfield County suburb – who is a mangaing partner at K Property Group, which specializes in identifying properties with “untapped potential.”
“I just want to see our state make a smart decision,” said Gregory Kraut, a managing partner of K Property Group who is also an elected member of Westport’s town government. “And with my real estate and financial background, I have some options for them.”
Kraut, who put together the offer, said he’s acting as a concerned citizen and isn’t taking a commission or a fee from Oak Street. He suggested the state might use the money from real estate sales to reduce its unfunded pension obligations, and Hartford could reduce its debt load.
The state also has the highest net tax supported debt per capita in the US. It also has fewer jobs than it had a decade ago as the post-crisis recovery has largely passed it by. And recently, two of its largest companies – General Electric and Aetna – announced they would soon move their headquarters out of the state.
Still, with the ruling Democrats in danger of losing the governorship after Gov. Dannel Malloy said he wouldn’t seek a third term, reestablishing the party as pro-business and pro-fiscal responsibility could be a major boon during the 2018 election cycle.
Of course, as we’ve pointed out time and time again, while politicians might try and repair pension related shortfalls, the reality is the American pension system is probably already too far gone to salvage. It’s so bad, Congress recently had to step in, quietly forming a committee to use federal funds to bail out as many as 200 “multi-employer” pension plan. They did this because the Pension Benefit Guaranty Corporation (PBGC) – the pension equivalent to the Federal Deposit Insurance Corporation (FDIC) – is completely insolvent.
Think about that: Not only are pension funds heading for insolvency, the backstop meant to bail them out in the event of insolvency is also itself insolvent.
The upshot, is that regardless of whether the state rejects or accepts this offer, if you’re a young teacher or government employee hoping that your state-supported pension fund will be there for you in retirement, think again.