Private Equity Firm Dangles $2B Sale-Leaseback Offer In Front Of Connecticut And Hartford

Chicago-based Oak Street Real Estate Capital, a private equity real estate firm, has made the state of Connecticut and the city of Hartford an offer to buy as much as $2B in publicly owned properties and lease them back.

The offer, the details of which were in letters of intent delivered this week, leaves the selection of properties up to the state and city. The deal thus could involve office buildings, healthcare facilities, transit-related properties or an assortment of other assets.

Whichever properties are involved, Oak Street stipulated that it would get a 7.25% initial return, plus annual rent hikes of 1.5%, Bloomberg reports. 

Both Connecticut and Hartford could use the infusion of cash. If the offer were accepted, the state might use the money from sale-leasebacks to reduce its unfunded pension obligations. Hartford, which narrowly avoided bankruptcy last year when it was bailed out by the state, could reduce its debt load.

On the other hand, there are examples of state sale-leaseback deals that have gone sour. In California, the Schwarzenegger administration put in place a $2.3B plan to sell 11 state properties. 

Later, the succeeding Brown administration canceled the deal after independent analysts found that it could cost the state as much as $1.5B. The government ended up paying $24M to investors suing the state over the cancellation.

The Connecticut proposal would certainly be sweet for Oak Street. Cap rates for sale-leaseback office deals in the market are now in the mid-6% range, Real Capital Analytics Senior Vice President Jim Costello told Bloomberg. A guaranteed return of 7.25% would thus represent a premium for investors.

The rate would also be more than Connecticut pays to borrow money. The state sold $800M of debt in January, paying yields of 3.43% on 20-year bonds.