KOCE-TV Foundation, District's Deal Done Dirt Cheap

I have been traveling a lot this week, but I finally got a chance to analyze the latest information about Coast Community College District's supposed sale of the public TV station KOCE to the KOCE-TV Foundation. I say "supposed" because once you talk to all of the players (and I have), and you read all the documents, it is clear KOCE was not sold to the foundation but was given to them in a no-money-down deal.

To understand how this was done, let's go back to 2004. The college district was in a contentious exchange of what should happen to KOCE. Some faculty thought the money used to subsidize the station should be spent in the classroom (in other words, to get them higher salaries). Others understood the station paid for itself with the Tele-Courses and should be left as is. The state was paying close to $2 million a year for students to take the courses, and the actual courses cost 15% of that.S

ome college district trustees, like Board President Jerry Patterson, said they would be just fine with giving the station to the foundation. Others thought it should be sold to the highest bidder and the money put back into the colleges. The trustees who wanted to get the most money for the TV station won out, or so they thought, and a bidding process was set up with an outside media brokerage firm to obtain the highest bids in a closed-bid process.

This is where opinions diverge on what happened next. But here is what we do know: Among several bidders, Daystar Television Network bid $25.1 million. The KOCE Foundation made a winning $32-million bid of cash and terms. Once the bidding was closed, Daystar upped its bid to $40 million. The trustees still chose the foundation as the highest "responsible bidder" and started the process of negotiating the actual terms of the sale. This is where they gave away the station behind closed doors.

Negotiating the final terms for the sale on the district's side of the table was Patterson.

First off, they lowered the price by $4 million. The foundation had 12 million reasons why the price was too high and as Patterson told me, "We negotiated it down $4 million" and lowered the price by the same. Forget the fact that the foundation thought the station was worth $32 million when it made the bid.

Foundation officials agreed on an $8 million cash down-payment and a note of $20 million. Problem was, the foundation did not have the $8 million. Though district officials were supposed to pick a "responsible bidder" they knew the foundation did not have the money and would have to raise it. What the public does not know is the college district's trustees allowed the KOCE-TV foundation to borrow $10 million from a bank, secured against the assets of the TV station and all of its equipment. I have never seen a situation where a government entity sells an asset and allows the buyer to not only borrow the down-payment, but also take an additional $2 million to put in their pocket. In addition, the district loaned its $20 million subordinate to the banks.

In layman's terms: If the foundation defaults on its bank loan, the bank takes the TV station and wipes out the district's $20 million note. So much for a "responsible bidder."

So how do you make sure the foundation does not default on the bank loan? You loan the district's money at 0% interest for 30 years with no payments for five. Try getting those terms at Bank of America. So how does the foundation make the payments to the district in five years? That is where the Tele-Courses come back into the picture. The district signs a seven-year agreement to pay the foundation $357,142.85 per year to run the courses in the early morning and evening. But remember, there are no payments for five years. It just so happens that if you multiply $357,142.85 by seven years you get $2,499,999.95. Let's lower the note to the district (a.k.a. taxpayers) by $2.5 million and now the foundation only owes $17.5 million. In fact, by the time the deal closed, the sale price was not $28 million, as the district's news release stated, but the lower price of $25.5 million.

Now I could go on with other terms which would make your head spin. But suffice it to say the note to the district in my opinion was written by the foundation, for the foundation, by the foundation's attorneys.

So let's go over it again. The foundation bought the TV station with no money down, put $2 million in its pocket and sold airtime back to the district to make its payments to the district.

I've been making business deals for about 30 years and I believe in my bones this deal was agreed to in principle with a wink and a nod by the foundation members and some college trustees prior to any bidding for the station.

No one would bid $32 million they didn't have unless they knew they would never have to pay it. Anyone got the D.A.'s number?