Mather Development Sues State Over Abandoned EdFund Lease

From the Sacramento Business Journal - March 17, 2011

“Mather’s experience should serve as a big red flag for anyone doing business with the state of California,” said Doug Elmets, spokesman for Mather. “Despite our willingness to engage in good-faith negotiations, the state simply bailed on $40 million in rent.”

“The state has apparently decided that its cheapest source of financing is to simply not pay its bills,” Elmets added. “Not only is that a shameful approach, it also should make people think long and hard before entering any business partnerships with California.”

 

 

Mather Development Partners IV, L.P. on Thursday directly named the state of California in an amended suit against the California Student Aid Commission for the value of a lease signed three years ago.

The developers built a modern office campus for EdFund, an auxiliary of the commission, and the lease for that building still has seven years left on it. But EdFund has ceased to exist.

Mather is a partnership led by two major local developers Marc Sussman, president of McCuen Properties, and Mark Friedman, president of Fulcrum Property.

They are suing over a $40 million lease on a pair of buildings commissioned by EdFund, a now-defunct auxiliary of the California Student Aid Commission.

Mather Development filed a lawsuit Jan. 14 in Sacramento County Superior Court against EdFund and the California Student Aid Commission.

Seven years remain on the 10-year lease for the building, custom-built based on EdFund’s ability to pay, according to the suit.

But EdFund was stripped of its federal lending authority and then had its portfolio taken by federal education authorities at the end of last year.

At its peak in 2006, EdFund had 650 employees; now it has none.

“Mather’s experience should serve as a big red flag for anyone doing business with the state of California,” said Doug Elmets, spokesman for Mather. “Despite our willingness to engage in good-faith negotiations, the state simply bailed on $40 million in rent.”

The office of California Attorney General Kamala Harris was not yet aware of the suit and had no comment.

EdFund formerly was one of the largest guarantors of student loans in the country, but it was decimated by changes in the federal program for student lending. That, combined with a revocation of EdFund’s guarantee authority last year, left EdFund a shell with no employees.

For years, EdFund worked with private lenders to make government-guaranteed student loans and to service that loan portfolio. At its peak, EdFund was the second-largest guarantor of student loans in the country, trailing only Sallie Mae. In 2009, EdFund processed more than $10 billion in loans and managed a portfolio of more than $38 billion.

But in mid-2009, the federal government dramatically changed the way student loans were made, creating a big hit for EdFund.

Rather than guaranteeing loans made by private lenders, the feds started lending directly to students. That eliminated the Federal Family Education Loan Program, which EdFund had used to generate most of its loans. The FFEL was eliminated by the Student Aid and Fiscal Responsibility Act of 2009, which went into effect July 1.

U.S. Department of Education shot another hole in EdFund in August when it terminated its guarantee agreement.

Former Gov. Arnold Schwarzenegger tried for several years to sell EdFund, but the U.S. Department of Education ruled that guarantee authority cannot be sold by the state — or anyone. The education department sought to transfer the billions of dollars being serviced by EdFund to another entity, all without compensation to the state.

EdFund’s portfolio is now being managed by Educational Credit Management Corp., a St. Paul, Minn.-based company that is one of the largest guarantors in the country.

“The state has apparently decided that its cheapest source of financing is to simply not pay its bills,” Elmets added. “Not only is that a shameful approach, it also should make people think long and hard before entering any business partnerships with California.”

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