County prosecutors have opened a criminal investigation into whether the Los Angeles Unified School District overpaid for a $74.5-million high-rise building downtown to bail out its investors, which included the firm headed by billionaire and city schools activist Eli Broad, according to school officials and sources close to the probe.
Investigators from the district attorney's major fraud division have been questioning school district employees and requesting documentation on the 2001 purchase of the 29-story building at 333 S. Beaudry Ave., just west of the Harbor Freeway. It is intended to become the district's administrative headquarters.
The structure, which has a history of disputes over alleged construction defects, needed repairs of such things as sagging floors and other renovations that could add as much as $80 million to the total cost for the school district.
Included in the purchase price was $15 million paid to investors who held subordinated bonds, similar to second mortgages issued by banks, that were secured by the building. Before the deal, one advisor to the school district said that those second-tier note-holders and some other investors had relatively weak claims on the building's sale and contended that any direct payment to them "appears to be a gift of public funds."
Among those holding subordinated bonds was the SunAmerica financial services company, which received $5.8 million in the school district's purchase. Broad, who sold SunAmerica to American International Group in 1998 but remains SunAmerica's chairman, has been active in supporting candidates for the Los Angeles Board of Education, including several of those who approved the Beaudry deal.
Sources close to the district attorney's investigation say they are looking at, among other things, whether the stake of Broad's company in the building had any influence on the sale price and whether the district was obligated to pay all the bondholders.
School district officials and school board members deny any special deal for Broad or anyone else, saying the Beaudry deal was proper -- and, in fact, beneficial for taxpayers. Without those bond payments, they say, the purchase could have been stalled or canceled by lawsuits and the district could have wound up paying more for office space at a time when it was pushing to convert its old offices into a school.
L.A. Unified General Counsel Hal Kwalwasser said county investigators "were holding their cards very close to the vest" and would not divulge the nature of the investigation to school district officials.
Sandi Gibbons, a spokeswoman for the district attorney's office, declined to discuss details of what she called an "ongoing investigation" into the Beaudry matter.
Broad's office recently referred a request for an interview about the building sale to SunAmerica, and officials there did not return calls.
In December, concerns about the Beaudry investigation prompted L.A. Unified's Jim McConnell, chief facilities executive, to raise the issue in an e-mail he sent to his senior staff listing the district's top 10 real estate priorities.
"Beaudry: D.A. is looking at the deal," McConnell wrote in the memo, a copy of which was obtained by The Times. "Just proves no body ever stays buried. The deal is solid and [L.A. Unified's lawyers are] providing all the closing docs."
In a recent interview, McConnell said that his comment only meant that second-guessing is always part of any deal and that the purchase was legal and advantageous to the district.
The Beaudry building has a history of controversy.
The triangular concrete and glass edifice was completed 23 years ago and soon sold to a limited partnership called Beaudry I Investors for $166 million. A year later, a group of local developers deemed it an "economic and architectural failure" and labeled it a lemon at an annual civic awards ceremony.
In 1987, Beaudry's tenant at the time, Security Pacific National Bank, sued the builders -- C-D Investment Co. -- over alleged construction defects, including roofing problems, electrical code violations, dripping refrigeration units and poor ventilation. The suit eventually was resolved in an undisclosed out-of-court settlement.
Search for Headquarters
In 2001, school district officials were looking around downtown for a new headquarters so they could vacate their old administrative offices at 450 N. Grand Ave. and the district's 3rd Street Annex building to make room for two badly needed schools. They also wanted to limit the leasing of other office facilities. They began to focus on the Beaudry building.
In the fall of 2001, the district's inspector general raised concerns about the building's structural condition, particularly the strength of its floors. Structural engineering consultants were divided on how serious those problems might be.
L.A. Unified officials insist that any remaining construction problems were factored into the price and will be fixed. And district Supt. Roy Romer and other officials said Beaudry was a bargain. Scot Graham, the district's real estate director, said that he knew Beaudry was a "fixer," but added that the price made the deal worth the trouble.
In 2001, appraisers at a real estate firm hired by the district, Cushman & Wakefield, valued the property at $80 million as the district sought to issue certificates of participation to finance the deal. That figure was affirmed by a second real estate broker with CB Richard Ellis, who reviewed the appraisal for the district.
But other downtown development experts warned that renovating the building was not worth the effort.
In an Oct. 8, 2001, letter to Romer, real estate lawyer David Farrar, who was invited by facilities chief McConnell to offer his analysis of the deal, said Beaudry was "shabbily constructed" and warned that the district was "paying a large premium to purchase a grossly overpriced and seriously troubled building."
In his advisory letter, Farrar, who recently became chairman of the board of the city's Community Redevelopment Agency, also told district officials they were paying too many of the investors in the building.
The owners, Beaudry I Investors, were heavily indebted to Allstate Insurance Co., which held bonds secured by the building. Beaudry I also owed money to the subordinated group of bondholders, including SunAmerica and Manufacturers Life Insurance Co.
Farrar contended that the district needed to pay only $39 million to Allstate Insurance Co. for its bonds. Then the district, he said, could have foreclosed on the building's owners. Paying $20 million to the building's owners and $15 million to that second group of bondholders, Farrar said, "appears to be a gift of public funds."
Farrar's opinion on Beaudry was significant, real estate experts say, because he was one of the lawyers involved in the 1986 bond financing of the building, which was arranged by junk bond king Michael Milken. A lease signed by Security Pacific (which was later acquired by Bank of America) helped to back the bonds.
Farrar declined to be interviewed for this article.
District Feared Delays
Graham, the real estate official, maintains that he negotiated the best possible deal at the time. He said Beaudry I could have held title to the property until 2005 despite the owners' extreme indebtedness. Had the district tried to circumvent them, Graham argued, they could have complicated the transaction with a lawsuit and delayed or even quashed the deal.
"They could have tied up the property for years and we didn't have time for all that," Graham said. "We needed to move right away."
Officials at Manufacturers Life did not return calls.
Partners in Beaudry I Investors included venture capital expert Thomas Kane, a founder of the New York-based brokerage firm Printon Kane & Co.
Another major partner was a holding company called Real Vest Realty of California, which is run by Dony Gary of Stamford, Conn. Neither Gary nor Kane could be reached for comment.
In October 2001, the school board moved to issue certificates of participation to finance the Beaudry building. Caprice Young, Mike Lansing, Genethia Hudley-Hayes and Marlene Canter voted for it; David Tokofsky cast the sole no vote. Julie Korenstein and Jose Huizar abstained.
The Beaudry matter is the district attorney's second investigation of a recent major real estate deal by L.A. Unified. The district attorney earlier this month issued a report that found rampant mismanagement but no criminal culpability in the construction of the Belmont Learning Complex, a high school project that cost L.A. Unified $175 million before being stopped because of underground methane and the discovery of an earthquake fault line.
Graham, the director of real estate, said two investigators from the district attorney's office interviewed him about the Beaudry deal twice in November for a total of two hours. He said they wanted to know who Beaudry's previous investors were and who made money in the transaction with the district.
"I just couldn't help them very much," Graham said. "That wasn't really relevant for us."
District officials said that Graham cooperated in the first interview, but that after county investigators barred L.A. Unified lawyers from sitting in on the second session, the school district stopped the meeting. Subsequently, L.A. Unified hired private criminal defense attorney Richard Hirsch to represent it on Beaudry inquiries, and Kwalwasser, the district's general counsel, said he knows of no further interviews of district officials by prosecutors.
Construction of a high school at the district's old headquarters site has been delayed because a new architect was hired. And some repairs at the Beaudry building have taken longer than expected.
District officials, however, are aware that they will need to work fast to justify their purchase of the Beaudry building.
"Remember -- we did all this to create two new schools site[s]," McConnell wrote in his e-mail memo three months ago. "Gotta get those built."