Briefing Report: Status Update - Sale of the Orange County Fairgrounds

Thursday, July 14, 2011

Introduction

Recently, California's Fourth District Court of Appeals halted the sale of the Orange County Fairgrounds (OC Fairgrounds) to a private company.1 The three-judge panel held that the Department of General Services (DGS), which managed the bid process, did not provide the Legislature with a fair market value comparison for the proposed deal and the bidding process was flawed because of the "total absence" of any bid protest procedures. As a result, the court concluded that this sale could not move forward and "any future sale must begin at square one.2 "

The sale was part of an effort in 2009 by then-Governor Schwarzenegger to close a massive $26 billion budget deficit through the sale of state property, including the OC Fairgrounds.

The winning bidder who was awarded the right to purchase the OC Fairgrounds by DGS, but is now unable to consummate the deal because of the Court's decision, has already filed a petition with the Court asking for a rehearing of its June 7th decision.

Background

In 2009, Governor Schwarzenegger signed into law ABX4 22 (Evans), Chapter 20, Statutes of 2009-10, which directed DGS to conduct the sale of the OC Fairgrounds "pursuant to a public bidding process designed to obtain the highest, most certain return for the state from a responsible bidder" with the final disposition of the proceeds from the sale being the state's general fund.

The sale was part of Governor Schwarzenegger's plan to close the state's gaping $26 billion budget deficit with the sale, lease and refinance of state-owned buildings and facilities. The sale of high-value properties, including the OC Fairgrounds was estimated by the administration to generate between $600 million to $1 billion in revenue for the general fund.

The OC Fairgrounds, officially the 32nd District Agricultural Association (DAA), is located on 150 acres of prime real estate in the City of Costa Mesa, with easy access to major freeways and is just a few miles from the cities of Newport Beach and Huntington Beach. Over the years, the 150-acre site has become more than just the host of the annual fair, it has become an entertainment complex hosting over 150 events each year in its equestrian center, exposition center, and the Pacific Amphitheater.

The Administration estimated that the sale of the OC Fairgrounds could generate as much as $96 to $180 million in revenues for the state and would be completed in two to five years.

In November 2010, more than a year after DGS put out its initial Request for Proposal (RFP) and after a failed bid process and an offer to purchase the fairgrounds by the City of Costa Mesa failed to materialize, DGS accepted the bid of Facilities Management West, a privately held company. The bid was to buy the fairgrounds for $100 million, consisting of $20 million down, with the remaining $80 million to be paid off over the course of 35 years. The opponents of the sale immediately filed suit.

The Court's Decision

On June 7, 2011, California's Fourth District Court of Appeals in Advanced Real Estate Services v. Orange County Superior Court (Department of General Service, et al.,) stopped, at least temporarily, the sale of the OC Fairgrounds to Facilities Management West. At issue was the legality of the sale of the fairgrounds.

This case - a consolidation of two trial court actions - was filed on November 12, 2010, three days before DGS was scheduled to execute the transaction with Facilities Management by a "diverse" group of parties that are opposed to the sale. These opponents include a group of rival losing bidders, Orange County Fairgrounds Preservation Society, a state senator, an assembly member, and a Costa Mesa council member.

The defenders of the sale or the real parties in interest in this case are the buyer Facilities Management West and DGS.

The trial court issued a temporary restraining order on November 17, 2010, precluding any further action by DGS to complete the sale, but subsequently lifted the order on December 21, which allowed the sale to move forward. The opponents of the sale immediately filed a petition for a writ of supersedeas with the appeals court and the appeals court issued a stay of the sale until it could review the issues.3

In its June 7th ruling halting the sale of the fairgrounds, the court cited two specific reasons: The failure of DGS to provide the Legislature with a statutorily-mandated comparison of the fair market value to the proposed sale price and for failure of the Department to provide a bidding process that included bid protest procedures.

First, the court said that DGS neglected to provide the Legislature with an explicit comparison between the fairgrounds' fair market value and any deal which the Department proposed to make as required under Food and Agriculture Code Section 3884.2 subdivisions (d)(2) and (d)(3).4 Further, the court said that, "the Department's claim that the deal it made automatically equaled the fair market value of the property contradicted the position it had taken only a few months earlier in a previous round of bidding. In that round, the Department apparently had a good idea of the fair market value of the property, and decided that none of the bids it had received had come sufficiently close to be accepted."

Second, the court said that the bidding process was flawed by "the total absence of any bid protest procedures." The court reasoned that the Legislature required that the sale of the Fairgrounds be conducted "pursuant to a public bidding process designed to obtain the highest, most certain return for the state from a responsible bidder." DGS, however "implemented a bidding system that contained no safeguards to ensure responsibility, or even that bids be materially responsive to the Department's own request for proposals". Here, the implication of the court being that there cannot be a fair bidding process without bid protest procedures.

In the end, the court found that while it might be possible for DGS to go back and allow for a bid protest, "it is impossible, in any event, to undo the error of not giving the Legislature its statutorily-reserved opportunity to have a comparison between the deal the Department proposed to make, and the property's fair market value so that the Legislature would have the chance to veto the deal. This sale contravened the statute, and therefore cannot be consummated. Any future sale must begin again at square one."

Conclusion

Although the appeals court has stopped the sale of the Fairgrounds, the defenders of the sale still have legal avenues to explore. They can file a petition with the appeals court for a rehearing of the case, which they did on June 21, 2001. And if that fails, they can appeal to the State Supreme Court for review.

Ultimately, however, the sale of the OC Fairgrounds may depend on whether Governor Brown decides to proceed with a new sale.

 

For more information on this report or other Agriculture issues , contact Scott Chavez, Senate Republican Office of Policy at 916/651-1501.

1 This Briefing Report is not intended as a legal analysis or supportive of any one party of interest and should instead be viewed only as a status update.
2 Advanced Real Estate Services Inc. v. Orange County Superior Court (Department of General Services, et al.,),Decided June 7, 2011.
3 Generally, a writ of supersedeas is a petition requesting that the Court of Appeal stay the enforcement of a trial court judgment or order pending a decision on the petition.
4 This section was added by ABX4 22 (Evans) Chapter 20, Statutes of 2009-10 Fourth Extraordinary Session.