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Cathie Rowand | Journal Gazette
Fifth-grade teachers prepare new classrooms at Imagine MASTer Academy, a charter school on Wells Street.

Lease adds up at Imagine

Charter school defends selling campus, renting it back

A Fort Wayne charter school is using state tax dollars to pay a for-profit landowner nearly triple in rent what it might have paid to own its campus outright.

Imagine MASTer Academy, on the former Wells Street YWCA campus, spends nearly one of every five dollars of its taxpayer-funded budget on rent to a real estate management company.

Charter school-oversight officials in Indiana say the lease payments are on the high end of what’s recommended but appear acceptable.

Ball State University, which monitors the Fort Wayne charter schools, said it’s closely watching – as it does all charter school budgets – to make sure the leases don’t creep much higher.

Similar real estate deals have come under fire in other states where the national charter school company, Imagine Schools, operates. But a local Imagine executive said such deals are necessary for the charter school company to invest in new properties.

Imagine Schools has emerged, within a short time, as a leading charter school company in the nation. The company’s investment in school buildings went from $19 million in 2005 to nearly $297 million last year, including Imagine on Broadway, its second school in Fort Wayne.

According to its most recent annual report, more than 37,000 students attended 73 Imagine campuses during the last school year.

Charter schools have more instructional flexibility in exchange for greater accountability to one of the three entities in Indiana that can issue charters: the mayor of Indianapolis; a public school district; or a four-year public university.

Ball State is the only university in Indiana that currently issues charters.

The schools are funded by the state in the same way traditional public schools are funded. They may also receive money from federal grants, state tuition support and private foundations, according to the Indiana Department of Education.

In 2002, the first year charter schools were allowed in Indiana, 11 such schools were opened, according to the state Department of Education. At the start of the last school year, 49 were open in the state.

Ownership changes

Imagine MASTer Academy, the charter school company’s first Fort Wayne school, was established in 2006. That spring, local entrepreneur Don Willis told The Journal Gazette he planned to buy the former YWCA campus on Wells Street near State Boulevard through a limited-liability company, intending to develop a charter school there.

According to tax records, Willis never bought the property. In July 2006, it was sold by the YWCA to North Wells Schoolhouse, a for-profit, limited-liability company created by the non-profit Imagine Schools Inc. – a move outlined in the school’s charter.

Early last year, North Wells Schoolhouse LLC transferred ownership of the 26-acre Wells Street campus to Imagine Schools’ for-profit real-estate arm, Schoolhouse Finance LLC. That company sold it for $5.5 million – $2.6 million more than North Wells Schoolhouse paid – to a for-profit real estate investment trust, tax records show.

Now, that investment trust is owned by EPT Schoolhouse, a subsidiary of Entertainment Properties Trust.

Entertainment Properties Trust is a for-profit, publicly traded real estate investment company that trades mostly in movie theaters and also owns restaurants, wineries, vineyards and ski slopes, according to U.S. Securities and Exchange Commission records. It has no connection to Imagine Schools or its affiliated companies.

Imagine MASTer Academy last year earmarked 18 percent of its budget – $740,000 – to lease the buildings it uses on the Wells Street campus, according to a draft of its budget.

Imagine Schools on Broadway this year has budgeted 19 percent for rent, that school’s budget said.

The charter school company bought the Wells Street property for $2.9 million, according to tax records. Had it financed the entire purchase amount over 20 years, a payment at 5 percent interest would be around $19,000 a month, or $229,000 a year. A less preferred rate – say, 7 percent – on $2.9 million over 20 years would be about $269,000 a year.

So even at 7 percent interest, Imagine Schools is paying nearly triple in rent what it could have paid for ownership but is still responsible for all maintenance and liability on the property.

Because the properties bought were rented back to the schools under triple net leases, documents show, the schools – not the property owners – are responsible for costs the owners usually bear. A triple net lease makes the tenant pay all ongoing maintenance costs, including utilities, taxes, insurance and upkeep of the property.

Leases scrutinized

Ball State, which oversees charter schools, says leases are common for young charter schools that don’t have the capital to build or buy property or the history to get a loan.

Some, after surviving four or five years in good standing, have obtained loans to buy or construct new schools, said Peter Tschaepe, finance coordinator in the university’s Office of Charter Schools.

While Ball State doesn’t encourage schools to get tied into long-term leases, the university doesn’t have a preference for schools to lease or own.

“That is a charter school board’s responsibility,” he said. “Our preference is they do the due diligence before they do anything.”

Imagine’s lease will be up for renewal when its five-year charter must be renewed in 2012.

But Imagine’s lease percentage is on the high end of what a charter school should be paying. The recommended national benchmark for rent payments is 15 percent, Tschaepe said. He said he has spoken with Imagine officials about it.

Fort Wayne’s other charter school, the Timothy L. Johnson Academy, leases space from Come As You Are Community Church on South Anthony Boulevard and budgeted about $29,000 for its rent last year. Lower than either Fort Wayne Imagine school’s lease, it represents less than 2 percent of the Johnson Academy’s annual budget.

The Johnson Academy is operated by The Leona Group, a charter school-management company in Lansing, Mich.

Without saying how high is too high, Tschaepe said lease payments greater than 15 percent invite extra scrutiny.

A higher lease sometimes can be justified by location. In the case of MASTer Academy, there was much public enthusiasm for repurposing a beautiful, historic campus, Tschaepe said. Charter administrators look at the overall picture of how well a school performs academically in addition to its fiscal activities, he said.

“The most important factor is the educational outcome,” he said.

Guy Platter, Imagine’s regional director, said capital was a consideration in not holding onto the Fort Wayne properties. Selling the properties allows Imagine Schools to reinvest the capital in new projects, continuing the company’s rapid growth – although not necessarily locally.

In MASTer Academy’s case, the national charter school company has invested less than $7 million of its own money on a campus that will educate more than 800 children this year, Platter said.

He argues that other public schools, which can impose taxes to raise money for building projects, can cost taxpayers more.

South Adams Community Schools recently opened a building – for kindergarten through eighth grade – with room for 925 students for $20 million. Warsaw Community Schools told The Journal Gazette this year it expects two new elementary schools there to cost $25.5 million.

Looked at that way, Platter argues, Imagine’s real estate deals are bargains.

“A 26-acre property like this, to be purchased and renovated (for less than $7 million), it’s like the deal of the century,” he said.

Imagine MASTer Academy initially rented out some of the space on its Wells Street campus but no longer has any functional rentable area. It has continued to grow and has plans to renovate another building on the campus, Platter said.

Scrutiny elsewhere

Imagine’s Fort Wayne charter schools haven’t faced the same criticism as some other Imagine schools. Last month, the Dallas Morning News reported that Imagine has come under fire in Texas and Nevada for spending large chunks of its budgets on rent. An Imagine school in Las Vegas paid 40 percent of its budget on a lease to a real estate investment trust, the newspaper reported. The trust bought the school property from Schoolhouse Finance, Imagine’s real estate arm.

In Indiana, the high lease payments leave less money for Gov. Mitch Daniels’ goal to increase in-classroom education spending.

“Especially when basic academic programs are lacking, it is totally unacceptable that 39 cents of every education dollar is spent outside the classroom,” Daniels said during his State of the State address this year.

Daniels, along with the Obama administration and Secretary of Education Arne Duncan, has supported charter school growth. Daniels, through a spokeswoman, declined to comment for this story, citing a lack of information on the situation.

Dan Stockman of The Journal Gazette contributed to this story.