In Lease Agreements, Charter Management Companies Rip Off Their Students and the Public

On January 10, 2019, as one of his final actions as Ohio Auditor of State, Dave Yost released a report about how three Charter Management Companies (CMOs)—National Heritage Academies, Imagine Schools and Concept Schools—have been profiting when their own real estate subsidiaries demand outrageous leasing fees from the charter schools managed by the same National Heritage Academies, Imagine Schools and Concept Schools.

Without any competitive bidding, charter schools being managed by the three CMOs have been forced to pay above market rents for school buildings, when they could have spent the per-pupil dollars allotted to them by the state for paying teachers or otherwise serving their students.

For the Columbus Dispatch, Jim Siegel reports: “In 2015, 77 percent of charter schools leased their buildings. Yost looked at lease agreements with eight schools managed by National Heritage, 13 by Imagine Schools and 17 by Concept Schools.  His office found that the average rent paid per pupil ranged from $1,472 at Concept to $2,325 at Imagine, considerably higher than the $848 paid by a random sampling of six other Ohio charter schools not under a management agreement.”

In the new report, Community School Facility Procurement, Yost blames weak charter school regulation by the Ohio Legislature: “Shortcomings in current Ohio law, lax oversight, and support programs geared toward community schools (Ohio’s name for charter schools) have allowed private companies to enter into questionable lease agreements with community schools to their advantage at the expense of those schools and the Ohio taxpayers who fund their operation.”

In the report, Yost documents a lack of required bidding procedures: “Although traditional school districts are required to follow certain bidding procedures under ORC 3313.46, this law does not apply to community schools.”  Further, “Schools operating under the management of two of the three management companies all had lease rates that exceeded local market rates by upward of 50–150%. This condition is further amplified by lease provisions which caused the majority of schools reviewed to be responsible for property related expenses normally incurred by the landlord in traditional lease agreements… including property taxes, insurance, building maintenance, and structural maintenance.” Yost reports additional violations that produce profits for the three management companies.

While some of the practices Yost identifies are not prohibited by Ohio’s weak charter school laws, at least one practice does violate Ohio law.  Yost documents “related party lease agreements” and “conflicts of interest”: “National Heritage Academies and Imagine Schools, Inc. both had a direct financial interest in the companies their managed schools entered lease agreements with for all schools reviewed under those management companies.  Employees of and persons with interest in New Plan Learning/Breeze, Inc., the parent company that the majority of Concept managed schools entered into lease agreements with, also served on the Board of schools while the schools were leasing from subsidiaries of New Plan Learning… Board members with a vested interest in a company are prohibited from voting on any measures pertaining to that company in accordance with ethics laws.”

Siegel reports that charter school regulatory legislation passed by the Ohio Legislature in 2015 was supposed to have stopped some of these practices, but nonetheless, the practices continue: “A wide-ranging charter school law upgrade that passed in late 2015 included a provision that prohibits an operator from leasing property to its school until an independent real estate professional verifies the lease is ‘commercially reasonable.’ But Yost’s report said a number of problems still need to be addressed by lawmakers.”

One problem, Yost identifies is with the so-called “sweeps” contracts in which some charter school boards grant their CMOs virtually complete control over the schools: “Full-service management companies… will do everything for the school from establishing the school’s curriculum, hiring teachers and principals, handling human resources and marketing, and managing fiscal duties. In some cases, as much as 98 percent of a school’s public funding may be paid to a full-service management company in turn for its services in managing the school. The schools reviewed in this examination operated under management companies that handled the vast majority of the school operations and played a large role in how the schools’ facilities were acquired.”

Reporting on the conclusions of Yost’s new report, Siegel adds, “Clauses in for-profit management contracts of National Heritage and Imagine delegated to them various power in regards to choosing a facility. This can ‘blind the board’ to conflicts of interest. The similar lease terms across National Heritage schools, the report noted, ‘offer evidence that minimal negotiations were performed by the school boards’….”

The auditor’s 30-page report begins: “This study of community-school (charter school) facility leases was prompted by a complaint filed with the Ohio Auditor of State….”  In addition to the formal complaint to which Yost’s report responds, for years the press has been exposing shady lease arrangements in which charter schools pay above-market rent to real estate affiliates of for-profit CMOs.  In October of 2014, the Plain Dealer‘s Jackie Borchardt reported on above-market lease agreements with Schoolhouse Finance, the real estate subsidiary of Imagine Schools, by several Imagine Charter Schools in Cleveland and Akron.

Then last summer, the Columbus Dispatch‘s Catherine Candisky described an outrageous lease arrangement between Great Western Academy, a Columbus Imagine charter school, and School House Finance—the Imagine Schools’ real estate subsidiary: “From the outside, Imagine Schools’ Great Western Academy doesn’t look like much of a school. The sterile building sits at the end of a remodeled strip mall…. But inside the glass doors, the pristine, newly renovated charter school surprises visitors with brightly colored murals, walls of lockers lining freshly painted hallways, and a large gymnasium. Converting the 69,000-square-foot former appliance store into a school for more than 700 kindergarteners through eighth-graders wasn’t cheap. The facility improvements, including structural work in addition to desks, smart boards and other equipment, cost $4.4 million, or about $64 per square foot, according to information provided by school officials.  Under its finance deal, Great Western Academy had to come up with added lease payments totaling $7.7 million over the past decade to cover the renovations—$3.3 million above their actual cost—at times paying nearly $1 million a year in total rent.  According to the Franklin County auditor, the property was valued at $2.4 million in 2017. In other words, the $7.7 million the school paid for renovations was more than three times the building’s value.”

This month, now that Yost has become Ohio Attorney General, let’s hope he prosecutes the companies his own report as State Auditor identifies as having violated the law—the CMOs whose management of charter schools can be proven to have involved actual violations of Ohio law through “related party lease agreements and conflicts of interest.”

I suppose we can also hope for legislative reform.  But with the same powerful Republican officials merely exchanging positions across every one of the state’s major offices and with huge, pro-charter, Republican majorities in both houses of the Legislature, it is hard to believe that charter school regulation will be significantly toughened in Columbus.  It would be nice, however, to save the state millions of dollars for the public education budget—dollars now being scammed by the real estate subsidiaries of CMOs like Imagine Schools, National Heritage Academies, and Concept Schools.


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