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Own a school? Or rent? For charters, it’s complicated

The state reimburses charters for leasing costs, but not for construction or renovation. Many schools work around this.

This article was originally published in The Notebook. In August 2020, The Notebook became Chalkbeat Philadelphia.

Pennsylvania’s charter law makes no provision for the reimbursement of construction and renovation costs, leaving the schools to come up with other ways to pay for buildings.

School districts, on the other hand, are repaid by the state for a portion of their costs for educational buildings. Payments are made over the life of the building. The annual statewide payout is about $300 million.

Charters do get state reimbursements for leasing costs: $160 per pupil for elementary schools and $220 per pupil for secondary schools, multiplied by their aid ratio, meaning that those in wealthier districts get less than charters in poorer ones. More than 90 charters applied for lease reimbursement, totaling about $9.5 million, in 2014-15.

When schools rent, however, the landlord retains ownership and payments can be increased or leases terminated. To avoid such unexpected disruptions, many charters buy their buildings. According to a 2015 report, by the end of 2014, charters or associated groups statewide had floated 31 public bond issues worth about $578 million to buy properties. More buildings were purchased through private lending.

Many charters have devised an ingenious method of controlling their buildings while still collecting lease subsidies. They form associated nonprofit “friends” organizations, whose mission is the support of the charter. The “friends” group then buys the buildings that the charters occupied and rent them back to the charter. Many charters do this and continue to collect state lease reimbursement payments.

Charter schools defend the practice, saying that it gives them needed funds because they are not reimbursed for construction costs. Purchasing the building through the “friends” group, they say, creates stability and lowers costs in the long run.

But critics say this arrangement creates the potential for conflicts of interest between the charter and related nonprofits.

One issue arises when charter buildings are owned by a parent organization that could favor the interest of that organization over the charter by charging rent that could be considered too high. In a recent audit of ASPIRA and Universal Companies, City Controller Alan Butkovitz questioned this practice.

In other cases, the charter-associated “friends” groups may set a rental fee that is lower than the fair market rate for the property could demand because its purpose is to help the charter. However, nonprofit board members are required by law to avoid “self-dealing” – taking actions that are not in the best interest of their organization.

Some officials, including State Auditor General Eugene DePasquale, contend that this practice disqualifies charters from collecting lease reimbursements because the “friends’” group is so closely related to the charter. He concluded that the charter, in essence, owns the building.

A 2013 state audit report on Delaware County’s Chester Community Charter School, the state’s largest brick-and-mortar charter, reported that the school’s buildings had been owned until 2010 by Vahan Gureghian, the CEO of the for-profit charter management company that ran the school. In 2010, a newly formed nonprofit group, “Friends of Chester Community Charter School,” bought the buildings from Gureghian for $50.7 million, using county industrial development authority bonds. The friends group then signed a lease with the charter school, which continued to collect state lease reimbursements.

In Philadelphia, at least a dozen charters have purchased school buildings through public bond issues or are renting buildings owned by nonprofits that they are associated with and yet continue to get state lease reimbursements.

DePasquale has audited numerous charters with these “circular lease arrangements” and called on them to return the reimbursements. He has called on the Pennsylvania Department of Education to disallow these reimbursements.

In an emailed response to questions about the Education Department’s lease reimbursement policy for buildings owned by associated groups and rented to charters, Deputy Communications Director Casey Smith said only that the department “receives documentation from charter schools identifying the owner of the property and a signed verification that the charter school does not own the property and that it is used for educational purposes.”

String Theory Charter School’s imposing eight-story building at 16th and Vine Streets, which houses its Philadelphia Performing Arts school, was bought in 2013 for $55.5 million by a nonprofit associated with the charter.

Because the nonprofit owns the building and leases it to String Theory, according to a 2015 article, the charter continues to collect $188,000 a year through the state’s Charter School Lease Reimbursement Program.

The article said that String Theory spends nearly one-third — $5.5 million — of its $16 million annual charter budget on the new building and on two smaller buildings for its older school in South Philadelphia. That figure, the article said, is more than String Theory spends on teachers’ wages — $5.3 million. String Theory announced academic and transportation cutbacks at its schools in February 2015, the article said.

Other charters get private funding. KIPP Philadelphia Charter Schools financed renovation and construction work at its Elementary Academy campus in North Philadelphia with funding from the for-profit Turner-Agassi Charter School Facilities Fund, bankrolled in part by tennis great Andre Agassi, according to a recent Inquirer article. The article said that the fund made a nearly $1 million profit, or a 9.1 percent return on its investment.

Jonathan Cetel, who leads the school-choice advocacy group PennCAN, which works for high-quality education options in Pennsylvania, said that many charter construction controversies stem from inadequate state funding for the schools. He said he would like to see charters get construction funding on the same basis as public schools, including state backing for construction bonds. The lack of construction reimbursements, he said, means that “a lot of charters are in trailers or weird commercial spaces that aren’t conducive to education. That’s not good for anybody.”

But Donna Cooper, executive director of Public Citizens for Children & Youth, said that “the financial mismanagement in the charter sector has made [state backing for charter bonds] a high-risk proposition for the state. … The last thing I would want to see is the commonwealth putting its full faith and credit behind a temporary institution.”

One 2005 Philadelphia charter school bond of $10.7 million is now in default. The Walter D. Palmer Leadership Learning Partners Charter School, beset by academic and financial problems, closed its doors in 2014. The building, near Northern Liberties, was sold in January for $6 million, the Inquirer reported.

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