Santa Ana District Gets Hard Economics Lesson : Schools: Critics raise heat at realization that lot bought for $18.5 million had sold months earlier for $12.6 million.

School planners eye the sprawling industrial lot here, dotted with piles of debris from a razed warehouse, and they see the promise of a brand-new headquarters and another school for a city forced to use hundreds of portable classrooms to teach its children.

For critics who have begun to question the Santa Ana Unified School District’s spending habits with increasing stridence, however, the barren lot has become more than that. For them, it is now another symbol of conventional economics turned upside down at Orange County’s biggest school district.

The reason: The district bought the 18-acre property in 1990 from a private company for a total of $18.5 million. But as several board members only recently learned, the same property changed hands for $12.6 million just a few months before the district’s offer, meaning a 50% markup for the middleman in the deal.

School board members also just learned that the broker who handled both sales, and a general partner of the middleman firm, were both related by marriage to a director of the now-bankrupt corporation that originally sold the property.

“We paid a very high price for that land--and someone made a lot of money off the district,” insists school board Trustee Rosemarie Avila, a frequent critic of district school-building policies who has led the fight against a current school proposal to buy part of a local shopping plaza. “Didn’t we learn a lesson from that?”

The deal closed four years ago on the property at Grand and Chestnut avenues. But Avila and school board ally Tom Chaffee are now pressing the issue anew, demanding more information from the district on the sale because of what they see as parallels to the ongoing controversy over the purchase of space at the local shopping plaza.

In that proposal, the district is planning to spend nearly $22 million in state money to buy 11 acres at the back third of the Bristol Marketplace in Santa Ana and construct a two-story “space-saver” school that would be built above a parking lot there.

The state has already set aside money for the acquisition, but the plan has come under fire in recent weeks--in part over its finances. Realty experts say the property appears to be worth less than half of what the district is planning to pay, and officials have disclosed that the HomeBase store there--which the district would spend millions to relocate under the current plan--had been considering a move from the site anyway because of its poor location.

In light of the fresh controversy over the shopping plaza proposal, the debate over the purchase of what used to be the headquarters of an electronics manufacturer called EECO Inc. has intensified questions from critics about how the district goes about spending state school-building money--and whether the system itself may be partly to blame.

But district officials are quick to defend their handling of both the EECO purchase and the Bristol Marketplace plan, saying that criticism from a minority bloc on the five-member school board is only serving to thwart efforts to solve a classroom-shortage “crisis.”

The system for building new schools, said Michael Vail, the district’s top facilities planner, is designed to ensure fairness and cost-efficiency. It has worked well, he said, allowing Santa Ana to build nine new schools in less than five years.

“I don’t see how all this debate is going to improve a system that’s already manipulation-proof,” Vail said in an interview, frustration evident in his voice. “Apparently, the strategy is to destroy the credibility of the finest school facilities office in the state. That’s the only reason I can think of for the questions being asked.”

Critics on the school board say otherwise.

They maintain that the prospect of a massive overpayment for the Bristol Marketplace site only threatens a repeat of mistakes the district may have made in the EECO purchase.

And Chaffee, elected to the board last year, said he is particularly bothered by what he sees as the repeated reluctance of school district staff members to release basic information on the EECO case--even to elected board members themselves.

“I never really received (the information from district staff members) that I wanted,” Chaffee said. “They’re afraid it might stir up some controversy.”

After requests from Avila and Chaffee, district staff members did distribute to school board members last month a report, prepared at the district’s request by the Santa Ana law firm of Nyman, Johnson, Maguire & Dyer, that summarizes key issues in the EECO purchase.

That Feb. 15 report concluded that the $6-million profit on the EECO sale realized by the middleman in the deal, Burke-Santa Ana Partners, did not necessarily mean that the district paid too much for the site.

Instead, the letter said, EECO Inc. sold the site initially to the Burke company “at something less than market value,” and Burke was then able to turn around and sell the property within a period of months for millions more to the school district.

EECO, a manufacturer of electronic components, had developed the Chestnut Avenue site in Santa Ana beginning in the 1950s, building four structures on the site for production and storage. But by 1988, company debt had mounted--it suffered a net loss of $13.2 million that year--and EECO began to consider selling off the property.

Burke-Santa Ana, a commercial real estate partnership, bought the property for $12.6 million, closing the deal in December, 1988. Just a few weeks later, officials said, the school district made its first contact with a broker over possible interest in the same site.

The school district’s delay in identifying the site as a possible school grounds ultimately cost the state millions in the final acquisition. By the time the district became interested in the property, Burke had moved ahead with plans to market industrial lots there and, under state rules, it had to be compensated for its potential income from that plan.

So why had the district--which had been looking for a site for an intermediate school in that area since the mid-1980s--waited until after the initial sale to look at the EECO property? Essentially, school officials said, they were reluctant to consider any sites that would mean having children west of Grand Avenue walk across that major thoroughfare.

“Everybody knew we were looking for property in that area,” said Anthony Dalessi, a district administrator who oversaw the deal. “If we knew that that property was available before, we obviously ignored it because it was on the wrong side of Grand, so to speak.”

But school officials changed their minds, Dalessi said, and they decided to look more closely at the property. One unforeseen attraction: Its 18-acre expanse would allow the district not only to start a new school, but also to build new administrative offices.

Under state requirements then in effect, the district in mid-1989 got two independent appraisals for the “highest and best use” of the property--one coming in at $16.5 million, the other at $18.2 million.

Both appraisals cited the potential income that Burke could get from the property if it were to build industrial complexes there, as the company had considered. In fact, the Feb. 15 report from the law firm suggested that Burke was so intent on pushing its own project that it was “never interested” in selling and wanted the district to look elsewhere.

But Burke did sell--without the district resorting to condemnation proceedings. Obligated by state guidelines to pay the higher of its two appraisals, the district agreed to pay a total of more than $18.5 million, including reimbursement for money that Burke had already spent to develop the site. The year before, the same property had been assessed by the county at $14.3 million, according to one of the school district’s appraisals.

Even at the time, however, questions were raised about the manner in which the property had changed hands from EECO to Burke and ultimately to the school district, leading to threats of litigation by some EECO shareholders.

A school district appraisal by Michael Frauenthal & Associates in June, 1989, concluded that the EECO-Burke sale “was not an arm’s-length market transaction.”

And in last month’s report from the law firm, attorney Michael P. Maguire also took note of threatened litigation over allegations that the sale “was not for fair consideration and (was) prompted by the buyer obtaining inside information concerning the financial condition of EECO and a motive to create profit for familial members by at least one of the board members.”

Fueling allegations that it was not an arms-length transaction was the fact that both Brian R. Burke, general partner of Burke-Santa Ana, and John Rothwell--the commercial real-estate broker in Orange County who brokered both the land sales--are sons-in-law to an EECO director named Jack Bishop.

The family relationships, together with the $6-million profit made by the middleman, prompted officials of EECO--now defunct after two bankruptcy filings--to consider a lawsuit.

Orange County attorney Steven Bergh, who represented EECO, acknowledged that he “threatened a lawsuit (against Burke), and it was settled” out of court. “There was a settlement, and the other side insisted on a confidentiality clause,” he said, declining to comment further.

Bergh never filed a lawsuit, but he did assert some of his claims in legal filings in EECO’s bankruptcy proceedings in 1991.

He alleged that the EECO sale was “fraudulent” and that the Burke partnership had made a profit of $5.6 million without properly disclosing the family relationship between Brian Burke and Bishop, the EECO director. The Burke firm denied any wrongdoing and asked a judge to declare the claims unfounded. But the request was dismissed without a ruling, and lawyers said the matter was settled confidentially out of court.

Bishop could not be reached for comment. But Rothwell, who brokered both land sales and is married to one of Bishop’s daughters, said in an interview that he found it “absurd” to think that his family ties had helped him profit from either deal.

Rothwell recalled rumblings to that effect at the time the deal was being made. At one point, in fact, he remembered an official involved in the negotiations quipping at one meeting that it seemed like a “family affair.” But Rothwell said his father-in-law never played much of a part in the EECO transaction, and that he was never aware of the district’s possible interest in the site at the time that he brokered the initial purchase for Burke.

Brian Burke, meanwhile, said his company had “absolutely no indication” at the time it bought the EECO property that the school district might be interested in it, and he was more surprised than anyone when the district began putting out feelers a few weeks later.

“We had a hard time believing the school district could come along so quickly after we purchased the property,” he said. “But the fact is that we competed on a fair-market basis with anyone else who wanted to buy that property. . . . We did nothing wrong.”

Still, the questions persist.

School Board President Sal Mendoza said that even while he would now like to see the debate over the EECO purchase laid to rest, the newly emerged details about the deal “bother me.”

He said he wished district staff members had pointed out to him at the time, for instance, that the EECO property had sold for only $12.6 million shortly before the district purchased it.

“I would’ve questioned it. . . . We didn’t find this out until after the fact,” he said. “I, as a board member, learned my lesson from (the purchase of) that site. We’ve got to make sure that we’re not overpaying for a piece of property. I don’t know if we did or not.”

Some suggest, however, that the new details that have emerged in recent weeks about the Santa Ana school district’s purchases show that mistakes are bound to be repeated because of inherent problems in the state system for financing new schools.

Indeed, a 1992 report by the Little Hoover Commission in Sacramento on the state’s “school facilities crisis” found that the state “has created a cumbersome program that micromanages school construction projects” through an array of bureaucratic agencies and that it relies on “an elephantine gestation period” to build a new school.

Glenn E. Noreen, a business manager for the private Fairmont Schools in Anaheim who has followed the debate in the Santa Ana district, says the labyrinth of appraisals, committee approvals and reviews plaguing the state system are largely responsible for the multimillion-dollar cost overruns that are common in school projects.

Noreen said his private school is planning a facility for 400 students at a onetime mansion in Anaheim for a total of $1.5 million--a price so low that he says a public school could never achieve it.

“The system does not work. And the reason for that is that the people who make the decisions (at the local level) are not the ones that pay for it at the state,” Noreen said.

“Clearly,” he said, “it’s not working in Santa Ana.”

As district officials in Santa Ana try to sort out whether or not the process did work there as it was supposed to, Brian Burke says he sometimes regrets having ever heard of the EECO property. Some of his partners say they, too, wish the firm had never become involved in the controversial purchase, because of all the dust that it managed to kick up, he said.

“It’s the deal that won’t go away,” Burke said.