Millot: Legal But Questionable Stategies to Control Charter Boards

Sometimes you can protect yourself from board members that you chose, by getting undated letters of resignation from the start that can be acted on by us at any time.... Probably the most important concept that needs to be grasped by potential and sitting board members for our new schools going forward is that Imagine owns the school, not just the building.

Denis Bakke, President, to Imagine Schools developers, directors and principals (Sep. 4, 2008)

The slippery slope towards a captive charter school board begins with two moves entirely within the law. The first is to recruit and develop boards rather than approach ones that arise independently from their communities. The second involves facility financing.

It should be obvious that a board recruited and developed by an MO employee is a very different negotiating partner than one sparked by a group of committed citizens or a local nonprofit service organization. It certainly reduces the MO's client acquisition costs. It may be noteworthy that Alternative Public Schools (APS), the predecessor of the "Beacon" in Chancellor Beacon Academies - the EMO Bakke bought in 2004 for CMO Imagine - pioneered the practice.

Rather than wait for a charter school to be established--and then go to the governing board to pitch APS's expertise--APS began directly to lobby parent groups to form charter schools (either by establishing a new school or by converting an existing public school to charter status). In 1997, for example, APS shepherded a parents group through the process of converting the Washington, D.C., Richardson Elementary School to a charter school. The company "help[ed] parents get organized," said the Washington Times. "In return, it proposes to manage school finances for a fee if the charter is approved."

Company History for Chancellor Beacon Academies, fundinguniverse.com

Developing your own board may be questionable as a matter of MO ethics, but it's completely legal. As a practical matter, it can be hard to prove who approached who and precisely how a charter school board was formed. As Bakke notes above, even recruited board members may asset independence. Absent evidence like the Bakke memo it can be hard to prove an MO's bad intent. Determining if the initial agreement between the charter board and the MO is the result of an arms length negotiation between equal is no less difficult.  As discussed in my previous post, most charter schools lack every resource required to start a school - their negotiating strength derives sole from the fact that the MO can't hold a charter outright.  

This raises a more subtle means of gaining control over a charter board, also legal on its face,  through the financing of school real estate. Whether the board is independent of the MO or captive, it seeks a high quality school building, yet lacks the sophistication required to hold its own in almost any complex transaction.

Imagine Schools, Inc. operates public charter schools. It provides educational services for students from pre-kindergarten to 12th grade; and offers long-term real estate financing for various school buildings.

Description of Imagine Schools, Inc, Business Week, Private Company Services

Through its financing arm, Schoolhouse Finance,  Imagine Schools has made a speciaity of real estate development for charter schools - in particular through a modestly sophisticated approach called the "sale-leaseback." This form of finance is used by firms that need more or new space - often specialized, but do not want to tie up their cash in a mortgage. To simplify the process, they secure a construction loan. When the building is substantially completed, they sell the building to, say, a real estate trust, and enter into a long term agreement to lease the building back. When the process is completed, the firm not only has the space it requires, but the cash realized from the sale of the building - which may well be in excess of the funds the firm put up to start the process.

Charter schools need high quality facilities, so it is laudable that MOs offer the sale-leaseback finance services to charter boards. But the service can be arranged to control the board. The difference between service and control lies in the combination of two outcomes. Who realizes the proceeds of the sale, and what are the terms of the leaseback? In an arms length bargain between equally sophisticated negotiators, the charter board is bringing a highly reliable stream of government per pupil payments, and control over the use of those revenues held by virtue of the charter. The MO should be bringing a record of success in arranging sales-leaseback packages - that is relationships and credibility with construction lenders, investors who purchase school buildings, and  property managers who maintain the buildings and collect the rent. The outcome of negotiations should vary on the margins and according to broader market circumstances, but the school should come away with the bulk of the profit realized by the sale, and a lease payments in line with  local market rates. 

If the reverse is true, there is reason to wonder if the transaction between the board and the MO was in fact arms-length, or if the MO exploited an overwhelming advantage in knowledge. More important, if the board leaves the transaction without the money realized from the sale that would give it financial maneuvering room, lease payments well-above market rates, and an ironclad long-term commitment to the new owners it has no room to maneuver out of its partnership with the CMO.

You might expect chartering agencies to police the market....

Next: Bad Oversight - Imagine Shows Chartering Agencies Undermanned and Outgunned v. CMOs

Comments

[Indiana]

still waiting on that last installment! When is "Imagine Shows Chartering Agencies Undermanned and Outgunned v. CMOs" coming out?