NEWARK-Taking a cue from a long-used commercial real estatestrategy, the city is planning to sell municipal buildings to helpclose an $83-million budget shortfall, the Star-Ledger reported Wednesday. Under a plan releasedTuesday, the Essex County Improvement Authority will sell bonds tobuy the properties, including police precincts, firehouses andoffice buildings, then lease them back to Newark. The city hopes toraise $50 million through the sale. Andy Zezas, SIOR partner andGlobeSt.com blogger points out that the state of New Jersey and afew other city governments have looked into this option as well, sothe plan isn’t radical for its originality.

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Sale-leasebacks, as a whole, are a short-term solution. Muchlike a cash advance from a credit card, it may end up costing morein the long-run, as essentially the cost of the property plusinterest is paid back over the lease-term. Zezas notes, if the cityof Newark is doing this strategically and perhaps getting out ofthe building at the end of the term, either through the building’sobsolescence or otherwise, then it might be a smart play. “But ifthis is merely creative structured finance,” he explains out. “Overa longer period of time, they will have jeopardized the financialfuture of Newark. And at some point, the risk is, the city could beworse off.”

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The question is if Newark has a financial future at all shouldthe plan not pass. Driving the sale-leaseback proposal is thecity’s looming budget crisis. If the sale-leaseback scenario or aviable alternative doesn’t come through, Newark may have to raisetaxes by 30%. And even with the approved proposal, the city maystill have to impose a 20% property tax increase and lay off 600employees.

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The plan is expected to cost the city $60 million in the longterm, factoring in capital improvements, fees and services. Thereis no announced timeline as yet, which leaves the final cost anestimation of adding $10 million to the city’s current debt laterfor $50 million now.

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And the plan will require its own short-term solution, needingquick approval at municipal, county and state levels if it’s goingto have its intended effect: the city needs to have the $50 millionin its coffers by mid-November in order to present a balancedbudget and avoid a possible state takeover. So whether or not it’sthe right thing, it might be the only option left.

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“The city of Newark’s contemplation to enter into sale-leasebackstrategies is in keeping with some of the best financial minds inthe state,” Zezas says. “However, in the long-run, leasebacks maynot prove to be the least costly solution for the city.”

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Paul Bubny

Paul Bubny is managing editor of Real Estate Forum and GlobeSt.com. He has been reporting on business since 1988 and on commercial real estate since 2007. He is based at ALM Real Estate Media Group's offices in New York City.