The state inquiry into Eric Mahmoud's school enterprises will investigate whether they should repay the state up to $6.1 million after a residential academy built with state money failed on the north Minneapolis campus of SEED Daycare, according to newly released documents.

Those Minnesota Department of Education documents also indicate that a state manager 10 years ago found what she described as "red flags" involving the connected Harvest Preparatory School's finances and "related-party transactions," and urged that the state or legislative auditor be called in to explore the issues.

But that 2002 suggestion wasn't followed until Aug. 3, when the education department asked Legislative Auditor James Nobles to investigate the reimbursement issue.

SEED is run by Eric and Ella Mahmoud and serves as the management company that rents space to Harvest Prep, Best Academy and now Mastery School, which opens this month in partnership with Minneapolis Public Schools.

The Star Tribune reported Friday that despite their academic success, the schools have struggled financially. Eric Mahmoud didn't respond Friday to a request for comment on the latest disclosures.

Several people who were state finance and education officials in 2002, such as then-Education Commissioner Christine Jax, said Friday they couldn't remember what happened to the suggestion that year by manager Audrey Bomstad that the state "be proactive rather than reactive" on issues involving Harvest Prep.

Bomstad's concerns were echoed by school finance chief Tom Melcher, who forwarded her memo with the notation, "I think there are serious issues here."

But current department officials, who became aware of the grant issue this year, said they haven't found evidence that predecessors in previous administrations pursued those issues.

In the 1990s, Gov. Arne Carlson championed the idea of residential academies for at-risk children, and Synergy Academy at SEED was one of two such proposals funded. The operation closed by 2003 after attracting only a few students and losing operating money from Hennepin County.

The 1999 grant to construct and equip the building that housed Synergy required that the state be reimbursed if the facility stopped being used as a residential academy without state consent, or was sold or leased.

Eric Mahmoud served as a SEED representative on the school's board, and was listed as being paid $68,750 in 2000 as a program consultant, the same amount paid to Peter Hayden, president and CEO of Turning Point, a SEED partner in the academy.

The academy's former quarters are part of a larger SEED complex at 1300 Olson Hwy. that is rented to the two charter schools. A memo written in June 2012 by education department official Lisa Needham described information on the transfer of the property from Synergy to SEED "inherently incomplete."

She concluded that unless the Minnesota Office of Management and Budget shows it allowed the school to close, the situation appears to be a "default" and in that case the department should consider reporting it as "evidence of missing funds or public property" to the state auditor. Meanwhile, the department is awaiting the results of a title search for the property.

Bomstad's 2002 memo said SEED and Harvest Prep showed poor documentation of school finances and lacked a financial audit trail. The state was attempting to recover the difference between what it paid to Harvest in state lease aid that charter schools are provided and actual cost.

"What we have seen of the management agreement and accounting records we have received raise real concern over the financial operations of the school," Bomstad wrote. She went on: "I feel more strongly that examination of these enterprises could result in disclosures similar to those involving Success Academy." That charter school, in St. Paul, amassed more than $1.2 million in debt before it closed in 2000.

The state documents, obtained under the Minnesota Government Data Practices Act, do not indicate the state raised any questions about the finances of SEED and the charter schools between 2002 and this year.

Steve Brandt • 612-673-4438