Charter school companies amass big tax-free real-estate portfolios

By Doug Livingston

Akron Beacon Journal

The Ohio Supreme Court will hear arguments Tuesday in a case that questions whether private companies that run taxpayer-supported charter schools can take ownership of the school assets.

The case involves Akron-based White Hat Management and 10 charter schools. The schools’ boards, after paying White Hat millions to run what turned out to be poorly performing schools, fired the company when they were unable to obtain answers as to how the money was spent.

But after the firing, White Hat argued that it owned most of the assets and it would be the boards that would have to move and start up new schools from scratch. Meanwhile, the buildings that were vacated often became the homes for new charter schools run by the for-profit White Hat.

The case illustrates a larger issue: Ohio charter schools were created more than 15 years ago as independent public agencies. But as so many for-profit companies now own the real estate, furniture and computers, the questions are raised: Are charter schools still public? Are they independent? Or are they now privately run, for-profit businesses?

In the Supreme Court case, White Hat argues that the school boards signed contracts that allowed the company to spend, at its discretion, more than 96 percent of taxpayer funding.

Attorneys for the charter schools have argued that public money should belong to the public schools.

“There will likely be additional action from this,” said Chad Aldis, vice president for Ohio Policy and Advocacy at the Fordham Institute, which oversees 11 charter schools in Ohio. “If White Hat wins this case, the Legislature should look at the independence of charter school boards. And if White Hat loses this case, there’s going to be probably a lot of potential effect on contract law that the Legislature and, or, the courts are going to have to reconcile in future action.”

There is a lot at stake: Ohio’s 377 charter schools receive nearly $1 billion annually, transferred from the local school districts the children would otherwise have attended.

Cashing in on education

Aldis has suggested that the Legislature look at the relationship between charter-school boards and their management companies. An investigation earlier this year by the Beacon Journal and The News Outlet, a journalism lab at Youngstown State University, found board members who said they were recruited by the management companies to serve, and then turned over the school’s money to the company.

In many cases, the management companies are building real-estate empires by forming subsidiaries or affiliates that purchase school buildings then lease them to the school. And because charter-school property is used to educate students, they are exempt from local property taxes.

A Beacon Journal-News Outlet review of hundreds of property records and business filings across Ohio found multiple connections between management companies and property owners.

The investigation found that 40 percent of Ohio public charter schools pay rent to for-profit or out-of-state landlords.

At least six companies have leased property to charter schools that also hired them to run the schools.

One real-estate company charges a rental rate that equals nearly half the property’s market value, according to lease agreements and property records.

The most-active companies are Summit Academy, which owns half its school properties and runs schools in Youngstown and Warren, and White Hat, which has created out-of-state real estate companies to acquire at least 11 of its 29 brick-and-mortar charter schools in Ohio.

Summit Academy, which is controlled by a board of directors mostly elected by its member schools, said the ownership provides financial stability. It supports White Hat in the court case but distinguishes itself as a nonprofit company.

White Hat and others have related companies that manage real-estate portfolios, and while the schools in those portfolios may change names, the education management company doesn’t.

Differences exist

White Hat argues that it owns most assets. Summit Academy also controls property, but all real-estate decisions and purchases above $20,000 must be approved by the board.

And Constellation Schools, a nonprofit company that operates four of only nine Ohio charter schools that meet all academic standards, chooses to stay out of the asset business.

“There is nothing in the contracts between [our] management company and the schools. The schools own all the assets,” said Tom Babb, general manager.

This arrangement offers little confusion about who is in charge.

“The school board owning the assets puts the school board in the driver’s seat of the school. If they’re in a school building, they should own the school building, plain and simple,” Babb said.

That leaves the school boards, which are supposed to answer to taxpayers, in charge, Babb said.

“In theory, we may not be here forever,” he said. “The school board has a right to go get another company to manage the school, if they want to. Now we run a good ship, so thus far that has never happened. But in theory, it could happen. And it would be very difficult for a school to change contracts if they don’t own their own assets.”

Who’s the owner?

The Ohio Department of Education keeps no records on the private management companies hired by public charter schools. The Beacon Journal-News Outlet project interviewed sponsors and reviewed management company websites to determine that 10 private operators educate nearly half of Ohio’s charter school students.

And because the state asks little, determining ownership of assets is complex.

The best opportunity is when schools close. Assets must be dissolved, and how that happens offers a glimpse.

When Brown Street Academy closed, for instance, the Educational Service Center of Lake Erie West — the school’s sponsor, which in Ohio oversees the school instead of the state — said no auction was necessary because White Hat owned everything.

Others object to White Hat’s apparent domination over its schools.

“I’m not buying White Hat’s argument that, because they opened the school, all those assets are theirs,” said Jim Lahoski, superintendent of North Central Ohio Educational Service.

Lahoski’s organization sponsors 15 charter schools that lease property from an array of landlords.

“Some are private businesses. Some are churches. Some are individuals,” he explained.

Lahoski said, under his group’s oversight, only one charter school, Celerity Tenacia Charter School in Columbus, pays rent to an out-of-state company that also operates the school.

However, property records and a lease agreement for Imagine Columbus Primary School, also sponsored by Lahoski’s group, indicate that as much as $700,000 in state funding, more than half what the school is projected to receive, will be paid in rent to Virginia-based Schoolhouse Finance, the real-estate arm of Imagine Schools, which manages the charter school.

The arrangements have drawn the ire of one school-board member in Columbus, who asked her colleagues during a public meeting last week to assemble a committee to possibly renegotiate the lease. During that meeting, an Imagine Schools employee pointed out that the school was built for 500 students and that boosting enrollment and getting more tax dollars would help pay the rent, which is nearly half what the property is worth, according to records.

Gary Miron, a Western Michigan University professor who studies school reform and education policy, said charting how much public money becomes private assets or profits is unclear because the private companies are not required to disclose their finances.

What happens to the money may be unknown, but Miron is convinced that “it doesn’t belong to the charter school board, which represents the public’s interest and the interests of the taxpayers.”

And neither do the assets.

“The public will pay for them but the public won’t own them? That’s just wrong,” Miron said.

Contributing to this report were Matt Hawout, Mary Sweetwood, Karen Bell and John Veauthier of the News Outlet, a journalism lab at Youngstown State University and the University of Akron.