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Building Purchase Probed

D.A.'s fraud division is investigating L.A. Unified's acquisition of headquarters site.

March 20, 2003|Solomon Moore | Times Staff Writer

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.

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