Greg Kraut Submits $2B Proposal for Immediate Sale-Leaseback of Connecticut and Hartford Owned Properties to Balance the Budget and Bailout Hartford

Greg Kraut Submits $2B Proposal for Sale-Leaseback of Connecticut and Hartford Owned Properties to Balance the Budget and Bailout Hartford

Greg Kraut

Greg Kraut, Westport, Connecticut’s Representative Town Meeting, has announced his call to the State’s Governor and Hartford’s Mayor to Demand the Immediate Sale-Leaseback of State-Owned and Occupied Property with more than $2B of proposals from a well-regarded Investment firm.

These proposals call for the immediate sale-leaseback of city and state-owned real estate and will enable both Connecticut and Hartford to immediately recover financially. “This will specifically prevent any further tax on our residents, improve our credit rating, lower our borrowing cost, adequately fund our pensions and position CT for growth,” Kraut says.

“This is a smart measure for desperate times – our Federal Government, Fortune 100 companies and other states have been proactively and frequently completing these transactions for the last 20 years,” Kraut says.

The proceeds from the Hartford sales will allow for a citywide bailout and growth, rather than significant increases in taxes and further debt obligation from the state.

The money gained from the State sale could pay for the Teachers’ Pension Fund’s unfunded liabilities which would go a long way towards reinvigorating our state’s financial well being.

Whether the state or city is going to sell outright or pursue “sale-leasebacks,” the best and most fiscally responsible way to “spend the windfall” of a long-term transaction is to invest it for long-term economic benefit, such as shoring up underfunded public pensions and preventing a bailout from an insolvent city which will raise taxes and decimate its credit.

“We need to be good stewards of our money and not take the easy route through tax increases, but rather think strategically,” says Kraut. “At this stage, it is more important to leverage their resources, pay down its debt and modernize its infrastructure using this mechanism as it is fiscally responsible.”

This is not an idea without precedent as the U.S. Federal Government, through the GSA (General Services Administration) is one of the largest tenants of property in the world, with several hundred million square feet leased. 

Kraut notes that this is happening all over the world. He cites Canada’s government, which in 2007, sold nine federal office properties to a Canadian-owned company. The properties were sold to Larco Investments Ltd. for $1.6 billion and leased back for a total of 25 years. The Minister of Public Works and Government Services said, “We do not need to own it to use it. Most Canadians don’t own their offices. Other public and private sector institutions have undertaken sale-leaseback arrangements, so they can focus on their core priorities.”

“Whether states are going to sell outright or pursue ‘sale-leasebacks,’ the best and most fiscally responsible way to ‘spend the windfall’ of a long-term transaction is to invest it for long-term economic benefit, such as paying down public debt (akin to paying down additional principal on a mortgage), shoring up underfunded public pensions, and investing in long-lived infrastructure.” - Leonard Gilroy, Reason Foundation

Kraut also cites Arizona, which closed a $3.2 billion revenue shortfall through the sale and leaseback of government buildings.

Two of Hartford’s biggest employers and taxpayers, Aetna Inc. and The Hartford Financial Services Group Inc., in past years used sale-leasebacks to manage several of their former office-space assets. Aetna’s former sprawling Middletown office complex and The Hartford’s former Simsbury office building at one time were sold, then leased back from their owners. Both insurers later reclaimed title to their office properties, a typical contractual end in such deals. Aetna has since razed most of the Middletown complex and The Hartford sold its Simsbury campus.

Kraut notes the benefits to governments and taxpayers in engaging in this strategy. It allows governments to leverage their credit rating to monetize their existing assets, freeing up capital to pay down previous obligations or fund ongoing programs. Governments maintain ownership of structures that they have already financed. In addition, governments can continue to control and maintain facilities that are often critical to their identity and function.

“From the perspective of corporations, state and municipal governments alike, one of the most significant advantages of real estate ownership is control,” explains Kraut. “However, there are a variety of lease structures available to corporate and government tenants that can provide them with a high degree of control over their facilities.”

Kraut also notes several disadvantages to the ownership of real property that are specific to state governments versus private individuals or corporations. He explains that there is no appreciation, and that unlike private or corporate-owned, state-owned real estate is primarily a cost rather than an investment. Since states are rarely sellers of properties, taxpayers do not receive the benefit of appreciation of these properties, essentially hindering the taxpayer’s return on these financed assets.

He also noted the increased operating expenses citing that states are often required to hire more expensive union labor for landscape, operation and maintenance of its facilities. Therefore, Kraut explains, taxpayers tend to carry a higher operating expense load than do owners and investors in privately held and operated facilities.

Kraut goes on to explain that states with large real estate portfolios must carry substantial overhead associated with managing, maintaining and making improvements to their assets. Rarely does this ongoing expense translate into better facilities and services for the state’s constituents. Finally, he cites that when states own and operate substantial real estate portfolios, the taxpayer money is invested in fixed depreciating assets rather than mission-critical programs and operations.

“The credit worthiness (bond rating) of these institutions is better leveraged to fund programs that achieve their mission rather than to build or own real estate,” adds Kraut. “While the details of a sale/leaseback may be complex, the basic purpose is straightforward. It’s a way to monetize valuable, non-earnings owned real estate assets and put the sale proceeds to better use.”

In the end, though, even the worst sale-leaseback program is much better than higher taxes or service cuts, which will only dig a deeper hole, Kraut said.

In addition to a sale-leaseback program for the state, Kraut believes a similar program can be a solution in lieu of a state bailout for the near-bankrupt capital city of Hartford.

“It’s crazy to think that an insolvent state can bail out a bankrupt city,” says Kraut.

The current bailout arrangement between Connecticut and Hartford lacks oversight (no emergency manager or state takeover) and it is not consistent compared to other recent Connecticut municipal bailouts. The city of Waterbury had Connecticut guarantee deficit financing bonds issued by Waterbury in 2002 and put in place a control board that could cancel union contracts and renegotiate. Pennsylvania in 2011 passed legislation establishing a state receivership process to address the fiscal woes of its capital Harrisburg. In 2010, Rhode Island’s legislature passed a law that allows the state to appoint a receiver if a locality is undergoing fiscal emergency.

The arrangement also allows Hartford’s debt to be refinanced using the backing of the state’s full faith and credit. This is a step more commonly used by states. The last time this structure was used on behalf of a city was in 1975 in New York and allowed for the creation of a corporation to issue debt on behalf of New York City, which was on the brink of bankruptcy at the time.

“This is a losing proposal for taxpayers and local businesses,” says Kraut. “The only ones that stand to gain from this arrangement are the banks and bond insurers. They must be throwing the most elaborate farewell party for the Governor, since they were all thinking that at best they would get 60 percent of their investment. This is akin to buying a brand-new house and not making the payments. At some point they foreclose, except if you are the capital city of Hartford.”

What are the options?

Kraut believes conventional and practical wisdom is to let city and state face judgment day. Give people equitable settlements on their pensions plans, renegotiate contracts with the unions, and start over. “All we are doing is kicking the can down the road,” says Kraut.

However, Kraut believes the best option is progressive reform utilizing a sale-leaseback strategy to monetize certain city and state-owned assets. Kraut says he has a proposal in hand from a reputable real estate and infrastructure investment firm that can generate upwards of $1 billion in non-taxpayer proceeds to Hartford and the state.

The acceptance of such a proposal would do the following:

  • Provide liquidity to the state and sufficient capital to enable Hartford to repay all its outstanding debt
  • Provide additional cash through converting non-earning real estate assets for reinvestment or reduction of pension deficits
  • Modernize, maintain, and cut operating costs associated with city and state tenanted properties
  • Attract additional, private capital for the revitalization of the city and state by showing a commitment to privatization and modernization

Kraut noted that over the past 12 months, the investment firm has shown a steadfast commitment to Connecticut by submitting multiple proposals to:

1.     Monetize $1 billion in state-owned real estate

2.     Acquire and renovate the XL Center with the intention of attracting an NHL expansion franchise

3.     Refinance all of Hartford’s outstanding debt through a cost-effective sale-leaseback transaction

Furthermore, Kraut says the firm has expressed interest in raising an investment vehicle to invest locally on behalf of city and state pension funds.

“I cannot think of a better use of pension proceeds than local, high-impact investment opportunities that will ultimately help revitalize the state and rejuvenate grossly underperforming pension plans,” says Kraut.

In spite of the clear benefits, Kraut believes these proposals have fallen on deaf ears at both the city and state levels. Kraut indicated he will fight for these proposals until they get the proper consideration and will continue to be an advocate for Connecticut and its capital city trimming their balance sheets and ameliorating their financial futures through strategic asset monetization.

Greg Kraut
Westport RTM
kraut for ct!
D) 203-557-0995

Source: Greg Kraut

Categories: Real Estate Investments, Banking, Finance, Insurance

Tags: BAilout, City bankrupcy, Connecticut budget, Connecticut politics, Dan Malloy, Hartford BAilout, Luke Bronin, state government, state news, Westport

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