PhillyDeals: Office-space speculators make a capital killing

Money's tight for Pennsylvania. But last month, a state agency went to Wall Street and borrowed $107 million to enrich a California hedge fund, a Wall Street bank, and other speculators in a Harrisburg office building.

Result: Investors who bought bonds tied to the city's Forum Place at deep discounts are being paid full price to turn them in, giving them millions in profit.

But state officials say that's still a good deal for taxpayers - because the new arrangement will allow state workers to park their cars at a discount.

Our story opens in 1998, when the Dauphin County General Authority, one of the many local financing agencies that keep politicians and their bankers, lawyers, and advisers busy, raised $86 million - through bonds sold to Merrill Lynch, PaineWebber, First Union mutual funds, and Wilmington Trust - to buy Forum Place.

But in 2001, Forum's main tenant, PennDot, moved out. As rent stopped, cash for bond payments dried up. (The firm that arranged the financing, Dolphin & Bradbury Inc., was fined $800,000 by the Securities and Exchange Commission for not warning investors.)

As the bonds defaulted, investors cut their losses and sold at discounts approaching 50 percent. Most were bought by an arm of Saybrook Fund Advisors L.L.C., Santa Monica, Calif. Citigroup bought bonds with a face value of $12 million.

Saybrook found the building poorly managed. Comanaging partner Jon P. Schotz told me his firm went straight to work "fixing things the way we wanted, as opposed to the way those chuckleheads did."

Soon, Pennsylvania agencies were moving back to Forum Place. The authority's finances slowly mended, Schotz told me. "It would take them 10 years" to replace the lost bond payments, he said. "Maybe 15."

Investors didn't want to wait. They sued to make the authority pay faster. Commonwealth Court said no.

Saybrook kept recruiting tenants. In 2009, the state signed a 25-year lease to fill Forum Place.

A lease that long "happens very rarely," Glenn Blumenfeld, partner at Tactix Real Estate Advisors L.L.C., which represents Sunoco Inc. and other big office tenants, told me. "Generic office space is easily replicated. If you're leasing for 25 years, why don't you just buy it?"

But the Rendell administration tended to sell state office buildings (like the one in Philadelphia, to developer Bart Blatstein, for $25 million, later cut to $21 million), and lease private space instead.