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Sunday, April 17, 2011

Nationwide Charter Schools Shenanigans

From the Journal Gazette

by Karen Francisco

The news about charter schools, their owners, and the money they make goes back to December to the state Supreme Court. In reversing a decision by the Indiana Tax Court, the justices ruled that a property owner doesn’t automatically qualify for a tax exemption even if property is used for a charitable or exempt purpose.

From that one decision, some charter school books are being opened in Fort Wayne. Taxpayers can learn where some of their tax dollars are going, and a lot of them leave the state and end up at a company boasting of attractive profits from a “reliable cash flow.”

A company is summoned. Based on that Supreme Court decision and a January memorandum from the Indiana Department of Local Government Finance, Allen County officials summoned JERIT CS Fund LLC, the real estate investment trust listed as owner of the Wells Street campus of the Imagine schools, to defend its property tax exemption.

The board that will make that decision is the PTABOA (Property Tax Assessment Board of Appeals). It has 180 days, or until late August, to decide. And its decision can be appealed.

Policymakers pushing charter school expansion ask taxpayers to overlook the business side of the equation, using children and school choice as a distraction from deals that benefit investors at the expense of classroom spending. Allen County tax officials have done Indiana taxpayers a favor in prying open the Imagine real estate playbook. Legislators would be wise to slow their rush to pass a charter bill until ensuring there are safeguards to keep Indiana tax dollars in Indiana schools.

The tangle of leases and subleases, for-profit management organizations, charter school boards and real estate investors involved in some of the state’s existing charter schools begs for transparency before more tax dollars start flowing out of state.

Statewide, a lot of money is spent. Taxpayers will spend more than $3.2 million in rent this year on just four Indiana charter schools. Most of the dollars are flowing to a Kansas City, Mo., real estate company that earned $84.7 million in profits last year. And while the Allen County board is scrutinizing the property tax exemption sought for the company’s property on North Wells Street, Entertainment Properties Trust can’t lose: Its triple net lease agreement makes the tenant – Indiana taxpayers – responsible for maintenance costs, utilities, insurance and taxes.

The details about the local deal.

The real estate investment trust recently summoned before the county’s tax assessment board of appeals has been asked to provide the lease agreement between the company and Schoolhouse Finance. Schoolhouse Finance subleases the Imagine MASTer Academy property to the local school board. This year, the board budgeted $790,000 for rent.

The property owner was represented at the hearing by a local attorney and an official with Imagine Schools Inc. They emphasized the 26-acre campus’ use for educational purposes.

PTABOA president Judy Macon, a local Realtor, said she couldn’t comment on the case pending the board’s decision. But at the hearing March 3, board members clearly had in mind the Oaken Bucket case, which is how the Supreme Court ruling is known.

“Is there anything school-related we should know about JERIT?” asked tax appeals board member John M. Thistlethwaite, an appraiser.

“Oaken Bucket states the property has to be used (for charitable purpose),” responded Stephen L. Fink, the Fort Wayne attorney representing the company. “The fact that the owner might make money off it doesn’t make any difference.”

Someone is making money. JERIT (see box on cover) bought the Wells Street campus from Schoolhouse Finance for $5.5 million – $2.6 million more than North Wells Schoolhouse paid the YWCA for the property just two years earlier and about $1 million more than its assessed valuation.

A building permit issued for the address three months before the school board president signed a lease was for $1.2 million in improvements; a lease amendment signed a year later bolstered the base rent from $485,760 to $723,486, citing $771,000 in improvements made on behalf of the tenant. This year, the Imagine school board budgeted $790,704 for rent.

Jason Bryant, regional vice president for Imagine Schools Inc., said that the building was sold at cost. He wrote in an email response that Schoolhouse Finance made improvements to the property and buildings totaling $2.6 million. The cost included design, permitting, roofing and renovating the interior of the main building to create more than 20 classrooms and make the building compliant with the Americans with Disabilities Act.

Bryant said the initial lease amount was a discounted figure.

“Rent has only increased 15 percent, which is the (Consumer Price Index) inflation escalation rate per the lease agreement,” he wrote. “The first-year lease rate of $607,200 was discounted $121,440 in order to help the school get off to a solid start. The balance of the difference in the lease from four years ago until now is due to the middle school expansion.”

Steve Zacher, president of The Zacher Company, a Fort Wayne commercial real estate company, said in an interview that there was no market explanation for the rent increases.

“It seems like someone is making a killing,” he said. “People can get a fair return on their investment, but somebody is getting a way-above-normal return.”

Bryant appeared at the PTABOA hearing alongside Fink. He characterized the complex real estate deals as a means of leveraging investments to acquire more charter school facilities.

Why the court ruling matters. The Indiana Supreme Court decision that prompted the review might well result in the exemption’s being denied. A denial would set up the first test of the ruling. It holds that a property owner – not just the tenant – must demonstrate the property is owned for a tax-exempt purpose.

That could be a tough case for Entertainment Properties Trust (see box on cover) to make. In a video annual report posted on its website, the publicly traded company boasts returns to shareholders of almost 40 percent, citing public charter schools as a promising sector in a portfolio of specialty real estate that also includes megaplex theaters, water parks, ski resorts and vineyards.

But Bryant insists that the property’s use is the key.

“Based on the sole use of the Wells Street campus for an exempt educational purpose, Imagine MASTer should not be treated differently than other public schools,” he said in an email response. “The tax exemption is appropriate and in the best interest of the community. However, if we don’t win the appeal, the school will eventually have to reimburse (Schoolhouse Finance) for the costs.”

A caution for legislators. But even if the Indiana tax officials decide the for-profit company demonstrates a charitable purpose, the appeals board review offers a good opportunity to scrutinize the real estate agreements involving Indiana’s charter schools.

Republican lawmakers are about to make it much easier to open a charter school.

Ohio is a laboratory for Imagine Schools Inc. Imagine Schools Inc. has become the largest charter school operator in the nation, with 73 schools. Policy Matters Ohio, a nonpartisan think tank, examined Imagine Schools’ model in a comprehensive report released last May.

“Schoolhouse Finance spent a combined total of $6 million to buy five Ohio properties that now house four Imagine schools,” according to Piet van Lier, the author of the report.

“Within 22 months of the purchase date for each property, Schoolhouse Finance has sold all five properties to one of three REITs for a combined total of more than $26 million. According to state audits and lease documents obtained through public records requests, the non-profit charter schools run by Imagine continue to operate under long-term leases with Schoolhouse Finance, paying hundreds of thousands of dollars in rent each year to the Imagine subsidiary.”

Interestingly, Ohio is also scrutinizing the tax status of charter schools. The Ohio Supreme Court ruled in October that landlords renting property to charter schools must pay property taxes. In a unanimous vote, the panel reversed a tax court ruling upholding a “schoolhouse exemption” for a Cincinnati charter school.

“In overturning that decision, the court ruled that under case law dating to 1874, the exemption would be valid only if the property is used ‘without any view to profit,’ either on the part of the school or the landlord,” according to the Columbus Dispatch.

The ruling creates a Catch-22 situation in Ohio, where schools are prohibited from using state funds to pay taxes.

What’s next? In Indiana, the four Imagine charter schools have budgeted $4.3 million for rent and operating costs. At the Imagine Life Sciences Academy West in Indianapolis, those expenses amount to more than 22 percent of the school’s total budget. The common guideline recommended for charter school organizers is 15 percent for facility costs.

If no exemption is granted, the lease makes Imagine MASTer Academy – by way of Indiana taxpayers – responsible for the property tax bill. Divided into two parcels, it totals $124,278 for taxes due this year. Because it hits the state’s new constitutionally protected tax cap limit, it qualifies for a circuit-breaker credit of $6,586 – small consolation to taxpayers footing the bill for out-of-state property investors.

For Indiana taxpayers, the real issue is the total cost, although they are justified in asking why. After all, the money doesn’t come from local property taxes but from taxpayers statewide. For Fort Wayne residents, Imagine Schools has preserved and maintained an attractive campus on North Wells Street, and provides for a well-kept neighborhood school on Broadway instead of a vacant church building. The schools in Indianapolis serve similar roles.

But dollars paid to out-of-state investors for rent are dollars not spent on students in the classroom or in salaries to local teachers who will, in turn, pay taxes and support local businesses.

Gov. Mitch Daniels has criticized traditional public schools for spending too much on buildings, while bills he supports targeting teacher seniority are clearly aimed at driving down education salaries. But in his zeal to open more charter schools, he appears to give them a pass on education management agreements and real estate deals that collectively shift millions in tax dollars from classrooms to out-of-state interests.

Karen Francisco has been an Indiana journalist since 1982 and an editorial writer at The Journal Gazette since 2000. She can be reached at 260-461-8206 or by email,

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