State Auditor: Charter Schools Paying Higher-Than-Market-Rate Rents

Unlike public schools, Ohio’s charter schools have to find places to hold classes.  Typically, that means renting a building rather than buying one.  A review of charter school leasing practices by outgoing auditor Dave Yost, released before he became Attorney General, found some charter schools are entering lease agreements that are costing them over and above what the private market will bear. 

Complicated leases, with little oversight

"It has to do with the type of leases these schools are signing, and the fact that they're signing leases often times with companies that are affiliated with their for-profit management companies," said Columbus Dispatch statehouse reporter Jim Siegel, who wrote a story about the report. 

Siegel noted that former audtiro Yost found "the school boards of these charter schools are not doing enough to provide strong oversight of these lease agreements.  At the end of the day they're leading to some of these [charter schools] paying $500,000, $700,000, $800,000 more per year than what the market value says they should be paying.  That's taxpayer money that's being paid out to what are essentially for-profit companies."

"Significantly higher" rents

Yost looked at lease agreements with eight schools managed by National Heritage, 13 by Imagine Schools and 17 by Concept Schools.  His analysis found the average per pupil rent for schools ranged from $1,472 for schools managed by Concept to $2,325 for Imagine's schools.  Those rents were far higher than the $848 paid by a random sampling of six other Ohio charter schools not under a management agreement. 

Cleveland's Harvard Avenue Performance Academy 

In Cleveland, Harvard Avenue Performance Academy was paying Schoolhouse Finance, a subsidiary of Imagine.  Siegel said the arrangement was complex.

"Schoolhouse Finance bought a building for Harvard Avenue Performance Academy in 2006, paid $700,000 for it.  They made a couple million in improvements, sold the building to a company called Jerit [Jerit CS Fund I LLC, a subsidiary of a real estate investment trust].  Jerit then leased the building back to Schoolhouse Finance, and then Schoolhouse Finance sublet it to the school.  At the end of the day, in 2015, the school was paying $919,000, which was several hundred thousand dollars above market value.  Then in 2015, the school terminated its agreement with Imagine as the management company.  The school then directly leased the building from Jerit, which owned the building, and immediately the annual rent dropped 26 percent.  And nothing else about the lease changed."

Higher risks, upfront costs

A spokesperson for Schoolhouse Finance, Rhonda Cagle, told Siegel the higher costs were due to the company's assumption of all upfront costs and long-term risk. 

Of the 601 charter schools that opened since 1997, 260 shut down, a 43 percent closure rate.

“We did so at market costs at that time, primarily in the 2006-2008 time frame, and entered into commercially reasonable lease arrangements that reflected the size and quality of each special-purpose school facility, the credit quality of the school tenant and the market conditions at the time each lease was entered into,” Cagle said.

Auditor Yost had a different view. 

"Shortcomings in current Ohio law, laxed oversight, and support programs geared toward community schools have allowed private companies to enter into questionable lease agreements with communitys chools to their advantage at the expense of those schools and the Ohio tax payers who fund their operation," Yost said in the report.  As a result, these factors and deficiences "have afforded private parties an avenue to exploit community schools, diverting public dollars away from students."

A 2015 change found not to apply, due to long-term leases 

Siegel noted that 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 it was passed long after many of these lease agreement were signed, like the one in 2006 between Imagine Schools and the Harvard Avenue charter school.

"Many of them are for fifteen, twenty, thirty years, so that law did not impact them," said Siegel. "Now, going forward, we'll have to see."

Yost sent his report and recommendations for legislative changes, to lawmakers and the Ohio Ethics Commission.  Siegel said it's too soon to tell how the General Assembly, controlled by a Republican Party that has championed charter schools, will respond.

"I don't think they haven't had a lot of time to digest this particular report.  However, the issue isn't new to them, or at least, it shouldn't be.  The Dispatch and the Akron Beacon journal, for example, have been reporting on these leases dating back to 2014.  This is not a new problem."