Frances Veri was walking through the Pennsylvania Academy of Music's headquarters a few weeks ago when she noticed something missing.

A $130,000 Bosendorfer piano.

"My heart stopped. I thought, 'Ohhhh, they took it,' " recalled Veri, who co-founded PAM with her husband, Michael Jamanis.

Veri's concerns proved unfounded — for now. The piano merely had been moved to another room.

Sooner or later, though, her fears probably will come true.

And they'll probably come true exponentially, as part of a second shock wave triggered by PAM's fiscal trauma last fall, when the nonprofit academy defaulted on its loans.

The crisis first pushed PAM into handing over ownership of its dazzling Prince Street headquarters to its mortgage lender, as was widely reported at the time.

But that December transaction was not the full price paid by PAM.

As part of a complex accord that let PAM wipe out its entire $18 million debt without having to file bankruptcy, PAM also agreed to give up an array of other assets, called "nonessential" assets.

Among these are the Bosendorfer and six other pianos, a rare violin, artwork, an empty building next door and the house occupied by Veri and Jamanis for nearly two decades.

They will be sold to let three PAM supporters recoup a sliver of the staggering expense they face for having guaranteed hefty loans that PAM took out to build its headquarters.

The Ferree Foundation, led by philanthropist and former PAM chairman Paul Ware, is faced with spending up to $9.5 million to fulfill its guarantees of loans to PAM.

The charitable James Hale Steinman Foundation is facing a $2 million expense.

Additionally, Lancaster Newspapers Inc. (LNP), publisher of this newspaper, is facing a $1 million expense. The James Hale Steinman family owns LNP.

So honoring the guarantees could cost the foundations and LNP combined as much as $12.5 million.

In return, the foundations and LNP are getting "nonessential" assets that could fetch at most $1 million, if the three organizations "are very lucky," Ferree attorney Dan Blakinger said.

The potential eight-figure setback for the foundations and LNP means less money for the dozens of other charities in the community supported by the three.

"It has to have an effect," said attorney Jim Appel, who represented LNP and Steinman in the matter. "(The money) won't be there to give to somebody else or to keep invested."

•••

Yet for the 325-student academy, the deal was "an excellent outcome," said PAM attorney Larry McMichael, a Philadelphia-based specialist in such cases.

Compared to bankruptcy, the agreement was "a relatively inexpensive solution" to the academy's fiscal predicament, he said.

McMichael, who represents Philadelphia Media Holdings (owner of The Philadelphia Inquirer and Daily News) in its bankruptcy, said bankruptcy would have cost PAM $1 million to $2 million in legal and other fees.

Furthermore, bankruptcy would have tied up PAM in court for six months to a year. Then, to exit bankruptcy, PAM would have had to pay a heavier price than it did in December, he said.

"They would have had to liquidate a lot more than seven pianos and these pieces of real estate if they wanted to come out of a bankruptcy," Blakinger said.

Veri and Jamanis are much less enthusiastic about the deal.

There's a couple reasons for that. For openers, Veri and Jamanis had no role in initiating or negotiating the agreement.

It was the executive committee of PAM's board of trustees that put the deal in motion, hiring McMichael and paying him out of their own pockets.

This was one of several key decisions the committee made on its own, believing bold action was needed to keep PAM open and perceiving Veri and Jamanis would be unsupportive of those steps.

Those moves, which included firing Jamanis as PAM president and hiring an interim replacement, prompted Veri to say the trustees brought in "to help us have somewhat turned against us."

Veri and Jamanis had recruited those trustees in June to lead PAM out of its dire fiscal straits, after Ware resigned in the wake of his own failed attempt to institute cutbacks.

Last month, the committee and all the other outside trustees resigned, as did the interim president and volunteer chief financial officer, saying they too had grown weary of clashing with Veri and Jamanis.

Veri and Jamanis have more issues with the "nonessential" assets deal than their exclusion from the negotiations.

They argue the instruments involved are hardly "nonessential" for a music school. Besides that, most were donated to PAM, which Veri and Jamanis believe means they should stay at PAM.

And the fact that there's no love lost these days between the co-founders and Ware — once PAM's biggest benefactor — makes giving anything to his foundation unpalatable.

Jamanis called Ware "vindictive."

Veri said: "Having these become the possession of another foundation is taking back the gift that someone else has given to the academy. It's not theirs to take.

"And these were given to the academy so it could function. And the function is the education of the students. It goes right down to robbing the students of the ability to reap the benefit of what the academy is for."

Ware declined comment for this story, referring questions to Blakinger, the attorney for Ware's Ferree Foundation.

Blakinger disputed Veri and Jamanis' bleak perspective.

"They have probably 25 pianos, give or take a couple. This gives (the foundations and LNP) seven. Any suggestion that you can't run a music school with 18 pianos is hard to understand."

PAM's new dean, Simon Andrews, struck a middle ground.

He agreed with the cofounders that the "non-essential" instruments were in fact needed. But he emphasized his appreciation of the support of the foundations, LNP and other donors.

"The academy is very grateful to all its past and present supporters. No academy or arts organization can function without that kind of support," said Andrews, who remains head of PAM's music theory and choral departments.

"The Steinman and Ferree foundations have been especially generous, and the academy honors their commitment to the community.

"We are doing everything in our power to ensure that the opportunities supported by their generosity can continue to be offered to present and future students, because that's what it's all about — the students," Andrews said.

•••

Blakinger and McMichael pointed out that the foundations and LNP had the legal right to demand much more from PAM.

That's the way loan guarantees work.

Ferree guaranteed up to $4.5 million of PAM's $11 million in loans from Union National Community Bank and all of PAM's $5 million loan from JPMorgan.

Steinman guaranteed all of a $2 million loan from Fulton Bank; LNP guaranteed all of another $1 million loan from Fulton.

In sum, the guarantees to be paid by Ferree, Steinman and LNP combined will range from $8 million to $12.5 million.

The guarantees helped persuade the lenders to loan the sums to PAM, which needed the money to help cover the skyrocketing cost of its 42 N. Prince St. headquarters.

Initially a $14.5 million project, the budget for the 63,000-square-foot facility ballooned when contractors hit rock, water and contaminated soil, Jamanis said.

The co-founders did not offset that extra expense by cheapening the building's world-class quality. Instead, the budget swelled.

The lavish building opened in June 2008, garnering wide acclaim as a boost for downtown revitalization and the arts.

Its announced price tag — $25 million.

Its actual cost — $32 million, said former trustee Art Mann Sr.

Already burdened with heavy debt, PAM soon found itself undermined by the recession, which caused donors to curtail their giving. PAM stopped making its loan payments in mid-2009.

Ferree, Steinman and LNP will have to pay the full guarantees on the loans from JPMorgan and Fulton.

The amount Ferree pays to Union National remains to be seen. It could range from zero to $4.5 million.

Here's why.

As part of PAM's December restructuring, PAM gave the deed to its headquarters to Union National in lieu of foreclosure. In return, the bank forgave PAM's $11 million in loans, which were in default.

The bank now is trying to sell the building. In round numbers, if the building fetches more than $11 million, Ferree is off the hook. If not, the guarantee kicks in.

Because the foundations and LNP are paying guarantees on behalf of PAM, the foundations and LNP had the legal right to try to recoup those same amounts from PAM.

But the foundations and LNP agreed to waive their right to seek reimbursement from PAM in exchange for the "nonessential" assets, the attorneys said.

The bottom line: The foundations and LNP gave up the right to seek a potential $12.5 million from PAM — in return for getting, at best, $1 million.

"In the commercial world, when you ask somebody to do something, there's something given in return," McMichael said. "We had to give them something."

The foundations and LNP were realistic. They knew they'd never get $12.5 million out of PAM, given its anemic fiscal condition. They also didn't want to do anything to cripple PAM.

On the other hand, they wanted to lessen to some degree the sting of the guarantees.

As Appel, the Steinman and LNP attorney, pointed out, "Even foundations have an obligation to mitigate their losses. It isn't a matter of just walking away from it. They have other constituents."

Their solution was to get the "nonessential" assets. To receive and sell the assets, the foundations and LNP established a corporation, P&T Properties LLC.

The proceeds from the asset sales will be divided among the foundations and LNP. They'll get the same percentage of the proceeds as their percentage of the total guarantees paid.

So, if the guarantees paid by the foundations and LNP total $12.5 million, and Ferree pays $9.5 million of that (or 76 percent), then Ferree will get 76 percent of the proceeds from the assets sale.

The assets to be sold are a mixed lot.

Besides the buildings and the Bosendorfer, there are five Steinway pianos, one Baldwin piano, an 1870 Fabris violin, two chandeliers, four Al Hirschfeld drawings and a bust of composer George Gershwin.

The chandeliers once hung in the American Bank office building, later used by Pinnacle Mortgage, that previously stood on the site of the PAM headquarters.

The bust was purchased by Ware for PAM from Carnegie Hall because Veri and Jamanis are renowned for performing Gershwin's music. Ware also bought the Hirschfeld drawings for PAM.

Blakinger said the fact that Ware donated the bust and drawings was no factor in designating them "nonessential" assets. What mattered, he said, was that they have value and are not critical to PAM's operation.

There's no timetable as yet for removing and selling the pianos and violin, Blakinger said.

Meanwhile, if a PAM supporter wants to buy them from P&T so they can stay at PAM, P&T is willing to listen to an offer, he said.

•••

The loss of the 1109 Marietta Ave. house, occupied by Veri and Jamanis since it was donated to PAM by Nancy Neff Tanger in 1993, rankled the couple for a different reason.

Although PAM officially gave the house to P&T in December, Blakinger said the foundations and LNP offered to let Veri and Jamanis stay there rent-free for six more months.

The house has a fair market value of $509,000, courthouse records show.

But Veri and Jamanis were outraged when two Ferree representatives, acting on behalf of P&T, arrived at the house with a video camera shortly before the property changed hands.

Blakinger said it was merely "prudent" to inspect the house, and make a record of its condition, before taking ownership of it.

Veri and Jamanis felt the Ferree representatives were videotaping their personal possessions and invading their privacy.

"I decided we're not going to stay in that house, no matter what," Veri said.

Within two weeks, they found a vacant house a half-mile to the west — ironically, close to Ware's house on Marietta Avenue — in School Lane Hills and moved there.

"It's a little bit smaller, but at least it's not the academy's," Jamanis said.

The house was purchased in December for the couple by Terry Field, until recently a PAM trustee. She paid $225,000 for it, according to courthouse records.

Field said she bought it as an investment property, then agreed to lease it to Veri and Jamanis when she learned of their hasty exit from the PAM-owned property.

"They're my tenants. They're being charged rent, but probably not what the place would bring (at market rent)," said Field, declining to disclose the amount.

Besides the Marietta Avenue house, P&T Properties in December also took possession of the former Lancaster Interiors building, just south of PAM's Prince Street headquarters.

The empty building, next to the Fulton Opera House, was bought by PAM in 1999 for $250,000. Today, it has a fair market value of $178,000, according to courthouse records.

The Prince Street building is represented by the "P" in P&T Properties; the former Tanger house by the "T."

•••

Veri and Jamanis discussed the "nonessential" assets agreement and the changes at PAM in an interview several weeks ago, at the request of this newspaper, before the outside trustees and administrators resigned.

Asked to identify the causes of the turbulent times at PAM, Veri and Jamanis pointed to the unforeseen cost overruns with the headquarters and the recession-induced plunge in donations.

"No individual has caused this problem," Veri said. "Certainly, Michael and I don't feel we have caused this problem.

"But I also feel that some of the actions a person has taken have exacerbated the problem that was there," she said, referring to Ware.

"And it's exacerbated it to the point that we no longer need Band-Aids. We need major surgery," she said.

Jamanis said, "Foundations are the toys with which the rich can show their colors."

Veri and Jamanis said Ware was pushing to close the academy last June, an allegation Blakinger denied.

"Paul in no way wanted to shut the academy down. He wanted to reorganize it, and make the hard decisions, so it could flourish," Blakinger said.

Ware resigned "in frustration" after his efforts to reorganize PAM, which included hiring a consultant to evaluate the operations, fizzled, Blakinger said.

"If the reorganization had gone forward, he may very well have stayed on the board to help see it through," he said.

Once Ware left, Ferree's donations — $2.2 million from June 2006 through June 2009 — stopped, too.

That sum excludes amounts given personally by Ware, which he declined to disclose, and the loan guarantees by Ferree.

Ferree's donations, plus gifts from many other donors, were used to cover PAM's monthly operating expenses, such as payroll, utilities and interest on the loans, Blakinger said.

Ferree wouldn't be able to resume its donations to PAM in the foreseeable future, even if Ware and the PAM co-founders didn't have their differences, he said.

For a foundation with assets of $14.9 million, the strain of the loan guarantees of up to $9.5 million would rule that out.

"There's no immediate likelihood that they'll give to PAM, or anybody else," Blakinger said. "They're not taking applications for new grants from anyone."

tmekeel@lnpnews.com