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May 21, 2004

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Publication Date: Friday, May 21, 2004

Signature's Story Signature's Story (May 21, 2004)

Developer says lawsuits are actions by 'mean-spirited people'

by Jeb Bing

Executives of Signature Properties, badgered in recent months by public criticism and legal actions by the Pleasanton school district, fired back this week after winning their lawsuit against the district over how to pay for the proposed Neal Elementary School in the Vineyard Corridor.

In their first interview since the ruling, they said accusations against them as an uncooperative developer defies facts, pointing to Signature's financial support over the years of school districts in Pleasanton and other communities where they operate.

In the lawsuit, Alameda County Superior Court Judge Ronald Sabraw ruled that Signature has no obligation to pay any of the costs of building Neal Elementary School, as the school district had claimed. The school district has filed notice that it will appeal that decision.

However, Signature's executives, Jim Ghielmetti, President and Chief Executive Officer, and Jim McKeehan, Signature's Executive Vice President, also face fraud and deceit charges that were filed by the school district, a legal action that Sabraw said could continue.

"This is the action by mean-spirited people who aren't appreciative of the good things we've done here," Ghielmetti said. "I've been in business a long time and have worked from the start on behalf of Pleasanton. All we have is our reputation, which is excellent in every community where we operate. You just don't go public in newspapers and the media and say that Jim Ghielmetti and Jim McKeehan are fraudulent. Those are very heavy charges."

Calling the school district's move "frivolous" and "costly to taxpayers," the executives expect the appeal to be turned down. They also plan to ask the court to move expeditiously in hearing the fraud and deceit complaint, which they termed as "outrageous, coming from a school district where Signature has contributed millions of dollars in fees, taxes and personal contributions."

Ghielmetti and McKeehan talked about Signature's involvement in Pleasanton, dating back to the 1980s. The company built its headquarters on Willow Road in Hacienda Business Park and owns a second large office building there. It also built 500 "for sale" housing units in the business park. In 1989, when it acquired unincorporated land that is now Ruby Hill on the eastern edge of Pleasanton, the development was rejected by both Pleasanton and Livermore, which had moved politically toward a no-growth to slow-growth housing policy. After Alameda County indicated it would allow the development independent of the two cities, the Pleasanton City Council agreed to annex Ruby Hill and much of the property on each side of Vineyard Avenue leading to it.

Today, Ruby Hill has about 650 homes, with another 200 housing units already approved. Most have a market value of well over $1 million, with many at twice that value and higher. Ghielmetti said that when Ruby Hill was started, it was estimated that, when fully built out, the development would make up a fifth of the assessed value of Pleasanton, with homes there paying among the highest school fees in the community. Combined with Hacienda Business Park, he said it was estimated that the two properties will represent a significant portion of Pleasanton's total assessed valuation.

Even so, at times it's been a rocky road for Ghielmetti and his company. Signature was criticized in the late 1990s for refusing to cover a possible school district financial shortfall. Ghielmetti argued that there was no shortfall.

Most recently, Signature has been embroiled in arguments over an "Amended Fee Agreement." Responding to a plea by the school district to raise their developer fees, Pleasanton developers agreed in 2001 to raise their "gift fee" payments to $6.54 a square foot. Gift fee is a term used to identify special payments to school districts by developers who pay more than the state's allowable fee, now set at $2.24 a square foot.

When the school district added that it urgently needed to build its 10th elementary school, Neal Elementary, to meet projected grade school enrollment increases in Ruby Hill and the Vineyard Corridor, but lacked the available financing to start the project, Ghielmetti offered to advance funds up to $8.5 million. The loan, based on the projected cost of the school at that time, would be interest-free for two years, with subsequent payments to carry an interest rate of prime-plus-1 percent.

For its part, in accepting the offer, school district lawyers drafted an Amended Fee Agreement allowing Signature to build the school, an agreement that Sabraw ruled was illegal because public works projects like Neal must be advertised for public bidding. At the same time, Signature's developer fee was reduced by $2 a square foot, or to $4.54 a square foot, on new construction, compared to the $6.54 other developers, who were not part of the Neal School loan agreement, were paying.

On its own, Signature also offered to raise the 5,000-square-foot cap on which developer fees could be assessed to 7,000 square feet, a move that increased developer fees from $22,000 for a 5,000-square-foot home to a new maximum of $30,800.

"Neal School had been planned for a long time," Ghielmetti said. "It would benefit the residents in Ruby Hill, which Signature was developing, and I wanted to help get it built,"

Although Ghielmetti offered the district a 10-acre site on Vineyard, where he later built the Ruby Hill Fire Station, the school district determined that location would be too far east to serve students who might be assigned there from the Vintage Hills and Shadow Cliff neighborhoods.

Instead, it paid $2 million in 2001 for a 13-acre site, which since then has seen development problems. Only recently have sewer and water lines reached the site. Overhead power lines had to be removed, with PG&E completing only late last year an underground high voltage transmission line that state school authorities consider safe. Also, construction of Neal had to await the replacement of the existing old Vineyard Avenue with a newly aligned roadway that will open this summer. That street has a loop road circling the Neal School site, although there's no school there.

After signing the 2001 Amended Fee Agreement - a contract school district lawyers drafted and had approved by the school board - Signature hired architects and a consultant who designed and obtained state approval for Neal at a cost of $500,000. Construction was planned to begin in 2002, with the school opening in the fall of 2003.

But when John Casey took over as the district's new superintendent in July 2002, he learned from Signature that the total costs for Neal would be $13.5 million, not $8.5 million, a $5 million difference that Casey said the district could not afford. At the time, with the state facing a multi-billion-dollar budget crisis that was also stripping away state allocations to school districts, Casey was searching for funds to keep schools open and avoid teacher layoffs. Especially helpful was a $600,000 set-aside to pay for Neal School operating costs, an annual reserve that the district has tapped for the last three years to pay other bills.

After meeting with Ghielmetti and McKeehan and saying that the 2001 agreement looked fine, Casey, at the urging of some school board and City Council members, wrote the developers several months later that he had re-read the agreement and determined it committed them to pay all of the costs of building Neal above the $8.5 million they would loan the district. Unless they agreed to cover the additional $5 million in costs, Casey would not authorize construction to start and the school district would sue the developers.

"We were flabbergasted," Ghielmetti said. "We had gone to the school district in good faith to offer our help in getting Neal School off the ground, and this was the thanks we got. It didn't make sense."

"When we signed the agreement," he continued, "we had no idea what the actual costs of the school would be. The $8.5 million was an estimate. All we had before us to evaluate was a piece of dirt out there on Vineyard. We had no design, no engineering, no nothing. Plus this agreement said in at least seven different places that we would advance up to $8.5 million. That was all. To think we would have signed an open-ended agreement was crazy."

By now, with some members of the school board and City Council complaining publicly, both in the media and on CTV30 public television, that Signature was refusing to honor the agreement it had signed, Signature took legal steps to clarify the agreement. It filed a suit May 2, 2003, in Sacramento County Superior Court, a case that was later transferred to Alameda County and Judge Sabraw's courtroom.

The school district filed a counter suit, and then added the fraud and deceit complaint against the two executives personally. That action, filed by the school district's new outside attorney, Louis A. Leone, ratcheted up the months of accusatory letters and public statements to further anger the Signature executives. Although the school board's decision to proceed with the suit had unanimous support, at least two board members have confided that this action has probably ended any hope of sitting down with Signature to work out a new financing agreement for Neal.

"Apparently the district has decided that things aren't going well for them, so they are suing us and our company for fraud and deceit," McKeehan said. "If it weren't so pathetic, it would be kind of humorous. But it's not humorous when you go about making serious charges like these. It's very irritating."

"I have two children attending schools in the district," he added. "I volunteer my services with Amador High's 'We the People' program. My wife and I give lots of money to the school district and individual schools. It's preposterous to accuse me of fraud or deceit."

"To believe these charges, you would have to believe that we signed the agreement, spent half a million dollars processing the plans to get the school designed and approved, and all in an effort to deceive them," he said. "It defies logic."

Although Leone, the school district's attorney, said he doubts that the fraud and deceit complaint will be heard before a resolution on the appeal, McKeehan wants Signature to push for a quick hearing. He expects the appeal to fail and is confident they will prevail on the fraud and deceit claim and is anxious to have the case heard.

Legal analysts said that if the school district loses on both counts, then Signature could ask for restitution of its legal fees, estimated at more than $500,000. It will also be entitled to recover the $500,000 it spent on design work and state permits, which could expire before Neal is built. There's also the possibility of defamation of character suits, although Ghielmetti said he wants the district to publicly apologize and explain its actions.

It wasn't always so contentious for Signature. Ghielmetti was one of the first builders to step to the plate in 1990 at the request of then school Superintendent Bill James and Mayor Ken Mercer to help finance new schools in a rapidly growing city. State developer fees had been capped at $1.50 a square foot, which were not enough to pay for the schools needed.

The school district had analyzed its projected costs, and, in Attachment B that became part of a new developer fee agreement, identified its future needs: 3 elementary schools (Mohr, Hearst and Neal) at projected costs of $8.6 for one and $9.7 million for each of the other two Portable classrooms, $520,000 1 middle school (Hart), $21 million High school expansions, $11.8 million Elementary school expansions, $1.4 million Child care center, $1.6 million

"The total was $64,122,656 million," Ghielmetti said. "The premise for this was that the city would grow at about 650 building permits a year and would have a total number of residences of a little over 31,000 units. The criterion for the grammar schools was 650 students with a potential to go 10 percent higher if needed."

At the time, the school district also pleaded with developers to accelerate the $64 million needed so that school facilities would be ready as more students arrived. Builders agreed to the request, advancing the money spread over the first two-thirds of the housing permits they pulled, with no additional fees due on the remaining third.

The school district also said that its cash flow projections showed a $6 million shortfall in one or two years over the coming five years. Ghielmetti offered to cover any shortfall, but other developers wanted no part of that risk. Instead they agreed to pay $4.50 a square foot in developer fees, $1 more than the $3.50 base which Signature then continued to pay.

Ghielmetti said he also worked with state authorities, "processing, cajoling and using every contact we had" to come up with $25 million in state aid that the school district had never before sought.

But during the mid-1990s, the agreement among developers, the city and the school district started falling apart. As Ghielmetti recalled: The city unilaterally decided to slow growth by limiting building permits to 350 a year, down from 650. This severely impacted school district revenue from developer fees. The city also decided to drop from 31,000 to 29,000 the total number of housing units it would allow, a number that today may reach only 27,500. That affected the buildout numbers on which the school district projections were based. The school board then decided to lower each elementary school's enrollment, from 650 down to 600 and even less. It also added the cost of building a third high school, which was never part of the 1992 agreement.

"Suddenly, you had all new criteria which were never part of the agreement we signed and were never part of the school district's cash flow projections," Ghielmetti said. "When the district declared a cash shortfall to pay for these changes, we said no. You can't change an agreement signed by three parties - the school district, city and developers - without getting the approval of all. That just isn't done."

Ghielmetti said the Superior Court suit and accusatory comments against Signature could be part of a growing realization that Neal Elementary is no longer needed. New demographic data indicates a slowdown in the number of new elementary age students.

"We may have become the scapegoat for those who don't want to see Neal built, but don't have the political strength to say so publicly."

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