Developer May Try New Plan at Franciscan Site : Mall: Bankrupt firm proposes to scale down the envisioned $110-million retail arcade in a joint venture. L.A. schools may also be interested in the location.

A month after declaring bankruptcy, a company that planned to build a massive shopping center on the site of the former Franciscan Ceramics factory in Atwater Village is considering a joint venture with a Century City developer to build a smaller mall and possibly apartment or office buildings, city officials said.

The new plan represents a scaling down of a proposed $110-million retail arcade. The larger plan was plagued by money problems.

Los Angeles city officials said the proposal, recently introduced to the project’s creditors, is preliminary. It might not be formally considered for several weeks or until bankruptcy proceedings are well under way. Deputy City Atty. Francisco Orozco also said it has not been well-received.

Under the offer, Franciscan Promenade, a subsidiary of Los Angeles-based Schurgin Development Co., would have a 25% interest in a construction project with the Homestead Group, based in Century City, Orozco said.

Homestead would pay Crossland Savings, Franciscan’s main creditor, about $32.5 million for the 45-acre site. This is far less than the about $50 million that the bank has invested in the Franciscan project, Orozco said.

The Community Development Department would lose the $9.5-million loan that it made to the Schurgin subsidiary, possibly jeopardizing the city’s community block-grant program used to insure the federally financed loan, he said.

“It’s a nice low-ball offer,” Orozco said. “To the city, it hasn’t been positively received, because it could wipe us out.”

Schurgin officials refused to comment on the proposal.

“I think that it is absolutely feasible to still build the larger retail facility on the property,” said Rosalind Schurgin, executive vice president of Schurgin Development and Franciscan Promenade. “Whether the site may not only be retail but also another component is still to be determined.”

Meanwhile, the Los Angeles Unified School District continues to eye the site for a new high school. A second possible site is a 47-acre parcel near Broadway and Spring Street that is part of the Southern Pacific Railroad freight yards, Robert Niccum, the district’s director of real estate, said.

The Board of Education is expected to consider environmental reports on both sites and may choose between the two March 18, Niccum said.

City officials have said they would prefer a shopping center, which could generate more than 1,500 jobs and $2 million in sales and property taxes. But residents in neighborhoods near the site are divided over its use.

Atwater Village homeowners generally have favored a shopping center. Los Feliz residents, fearing potential traffic and congestion problems on Los Feliz Boulevard, have pushed for a high school.

The Feb. 5 filing under Chapter 11 of the federal bankruptcy code freezes the project until the Schurgin partnership pays off its loans, finds another buyer for the property or develops a plan that satisfies creditors and federal bankruptcy Judge Barry Russell.

The developer has until June 5 to come up with a plan. A Friday hearing involving Schurgin and its creditors will start the bankruptcy proceedings.

Schurgin, Crossland and city officials predicted that the project would go into bankruptcy after a cleanup of toxic waste at the property, which ended in October, cost millions of dollars more than expected.

The site, at 2901 Los Feliz Blvd., was used for about 80 years for pottery and ceramics manufacturing. It was closed in 1984 and put on the state Superfund list of hazardous-waste sites.

In 1988 Crossland lent $21 million to an Australian developer and Schurgin, a leading developer of major shopping centers in Southern California, to buy the site. Original cleanup costs were estimated at about $6 million. The discovery of asbestos and other toxic materials required Crossland to lend an additional $23 million for the cleanup, said Tom Muller, a Los Angeles attorney for the New York-based bank.

The Community Development Department borrowed $9.5 million in federal Housing and Urban Development funds as a loan to the project. Another $5 million was secured for construction of the shopping center.

Shortly after the cleanup was deemed complete by the state in October, Crossland officials indicated that they were planning to foreclose. Franciscan Promenade filed for financial reorganization in February.

The subsidiary now owes $59.7 million, including about $11,000 in county taxes, according to bankruptcy papers. Schurgin officials said the debt should not overshadow their feat of cleaning up a toxic-waste site with private funds.

“We hope to think of ourselves as the white knight,” John Manavian, vice president of development for Schurgin, said. “When you think of the magnitude of deterioration and blight . . . it could have been very easy for us to walk away from it.”

City officials said they actually were relieved when Franciscan Promenade filed for reorganization.

“If the foreclosure had taken place, the property most likely would have been sold, and the city’s position would have been eliminated,” said Marilyn Lurie, director of the industrial and commercial development division of the Community Development Department.