Building of Franciscan Mall Called a Long Shot : Development: Because the $23-million toxic cleanup at the site cost more than expected, the builder faces foreclosure and the city faces loss of funds.

Less than two months after a $23-million toxic cleanup readied the former Franciscan Ceramics factory site in Atwater Village for development, key officials in a plan to build a massive shopping center there concede that its construction is now a long shot.

The developer, Franciscan Promenade, a limited partnership and subsidiary of Schurgin Development Co., finished cleaning up the 45-acre site in late September and expected the property to be ready for construction as soon as state health officials labeled it free of cancer-causing asbestos and other heavy metals.

But company, banking and Los Angeles city officials now say that because the cleanup cost almost four times more than originally estimated, Crossland Savings Bank, which financed most of the cleanup, probably will not pay for construction of the proposed $82-million shopping arcade and is likely to foreclose on the loan and take over the site.

They also say it is doubtful that Schurgin will be able to secure construction loans from another lender--and somewhat unlikely that another developer will take over the project.

Meanwhile, the Los Angeles Board of Education may vote as early as mid-December on whether to buy the site for a high school.

But the city, which through foreclosure could lose $9.5 million it borrowed from the federal government to lend to the developer, would rather see a shopping center built on the property at 2901 Los Feliz Blvd.

The proposed development “is something of a long shot, but I’m not sure,” said Marilyn Lurie, director of the industrial commercial development division of the city’s Community Development Department. “The bottom line from the city’s perspective is that we have helped to clean up a major toxic contamination. . . . At minimum, if nothing happens, we don’t feel like our money has been wasted.”

Schurgin officials, acknowledging that foreclosure is likely, said they might respond to such a move by filing for reorganization under Chapter 11 of the federal Bankruptcy Code, thereby freezing the project until they could pay off their loans or find another buyer. They said they have listed the site for sale and have considered scaling down the size of the project.

But, they emphasized, their main objective is to proceed with the development as planned.

“What we’ve said to Crossland is that it would be in everybody’s interest to move forward on the project,” said Bruce J. Lurie, a Los Angeles attorney representing Franciscan Promenade and Schurgin. He is not related to the city official.

“Building a shopping center is a routine activity for Schurgin,” he said. “Cleaning up a toxic site of this size is something they’ve never done before. If they can clean that site, it’s nothing to build a shopping center.”

The property was used for about 80 years as a center for pottery and ceramics manufacturing. It was closed in 1984 and put on the state Superfund list of hazardous-waste sites because of heavy contamination from such items as lead and zinc.

Schurgin, a leading developer of major shopping centers in Southern California, and the Gandell Group, an Australian developer, bought the site in 1988 for about $21 million. Although it was eligible for state and federal cleanup funds, Schurgin pledged to pay for the work privately, Bruce Lurie said.

Originally, cleanup costs were estimated at about $6 million, but the discovery of asbestos and other toxic materials on the property sent the price tag upward. Crossland loaned the developer the money to buy the property, then chipped in another $23 million for the cleanup, said Tom Muller, an attorney for the bank.

Los Angeles officials then borrowed $9.5 million in federal funds to lend to the developer.

The cleanup, which involved the demolition and removal of more than 70 buildings and concrete slabs, ended in late September and was certified Oct. 9 by the state, said Hamid Saebfar, a state Department of Health Services hazardous-materials specialist. Thirty-eight of the buildings contained hazardous materials.

The site will be removed from the Superfund list as soon as the paperwork is completed within a couple of weeks, Marilyn Lurie said.

Ten acres of the property still contain heavy metals, such as lead and zinc, about 20 feet below the surface, but are capped by dirt, synthetic lining and asphalt, and are not considered a threat to ground water, Saebfar said. However, as a safety precaution, no schools, playgrounds, residences or other such facilities can be built in that area, he said.

Franciscan Promenade and Schurgin officials said they are looking for other investors to finance construction of the shopping center. But Crossland probably is not willing to move to second place in the loan repayment process--and thus would have to be repaid in full if another lender is secured, Muller said.

Crossland officials are likely to foreclose because there are no better alternatives, Muller said. That would be risky for the city, which could lose its investment if the bank sold the property and recovered only enough to cover its loans, Marilyn Lurie said.

City officials have predicted that a shopping center would generate more than 1,500 jobs and $2 million a year in sales and property taxes.

“We’re in favor of the property being sold for the highest price it can command because then we stand the highest opportunity of getting our money back,” Marilyn Lurie said. “If we can get a buyer who can go forward with the project, that’s the best of both worlds.”

The leading candidate to acquire the property now, however, appears to be the Los Angeles Unified School District.

The Franciscan property is one of three sites that the district has in mind for a new high school. The other two, both downtown, are the Southern Pacific railroad freight yards, a 47-acre parcel near Broadway and Spring Street, and the former Main Street Dairy, a 17-acre site between Spring and Main streets, said Robert Niccum, the district’s director of real estate.

The Board of Education is expected next month to approve an environmental impact report completed last month on the three sites. It may select a site at that time, Niccum said.

Residents in neighborhoods around the Franciscan site are divided about its use. Atwater Village homeowners have generally favored a shopping center and its projected economic benefits, while Los Feliz residents, fearing potential traffic and congestion problems, have pushed for a high school.

Schurgin officials are expected to report on the project at 7 tonight to the Atwater Village Residents Assn., meeting at Glenfeliz School, 3955 Glenfeliz Blvd.

Most officials involved in the project agree that a decision about the site may not come for months.

“I’d sure love to build a project,” said Ron Bray, project manager for Franciscan Promenade and Schurgin. “But at this point, there are no guarantees whatsoever. This thing has got a heartbeat of its own.”