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Charter schools in Utah: Building schools, at what price?

Published January 27, 2008 1:35 am

Some schools pay more than market value to buy buildings
This is an archived article that was published on sltrib.com in 2008, and information in the article may be outdated. It is provided only for personal research purposes and may not be reprinted.

When Larissa Powell first dreamed of starting a new public charter school near her Cedar Hills home, a private company made construction of the school sound like a bargain.

Some parents say it did turn out to be a heck of a deal - for someone else. The current and former Utah legislators who helped finance and build Lincoln Academy were among investors receiving more than $500,000 beyond the appraised market value price when they sold the building back to the school.

"We caved," said Mark Bishop, Lincoln's chief financial officer.

Charter School Properties III, whose investors include current state Rep. Mike Morley, R-Spanish Fork, and former Utah County Republican legislators Jim Ferrin and Glenn Way, never was willing to reveal to Bishop how much it cost to build the three-year-old structure with a roof that has always leaked. Like homeowners everywhere, the parents believed it was better to pay a mortgage, saving money in the long run, rather than watch the lease climb. But buying came with consequences.

"[The company] would have us believe that they loved the ongoing, safe investment of the lease so we had to pay a premium to purchase the building," Bishop wrote in an e-mail. "Very altruistic of them."

Lincoln is not the only charter school signing big checks. Reagan Academy, a charter school in Springville, purchased its building from Charter School Properties #4, which includes the same trio as investors. The school paid $700,000 over appraised market value. Noah Webster Academy in Orem paid $600,000 over its appraisal to Noah Webster Properties owned by Ferrin and Morley.

The private companies developing and financing charter schools in Utah stand to make enormous profit in a booming industry with little oversight and minimal competition. Without legal representation or construction expertise, some starry-eyed school founders may not be in the best position to protect their schools' interests, parents say. They make mistakes that could cost the schools and taxpayers money.

"I wish the state could find a way to not put us at the mercy of the charter developers," said Stephanie Colson, a founder of The Ranches Academy, a charter school in Eagle Mountain.

Each year, charter schools' funding and future are in the Legislature's hands. Ferrin was among lawmakers who championed legislation aiding charter school growth.

When the charter movement began in the 1990s, these schools were conceived as cost-efficient innovators. Schools took root in old buildings rather than the gleaming new facilities typical today. Over time, planning a multimillion-dollar building before the first student enrolled became the norm.

"They want the enrollment, so they can have the multimillion-dollar building and kids will want to come to their facility because it looks good," said Marlies Burns, director of the state charter school office. She was unaware of parents' frustration about the purchase prices.

Despite some parents' frustration, though, many schools see these businesses as saviors willing to take a significant financial risk to make their charter schools a reality.

"Our mistake was we didn't have signed papers saying, before we started . . . how much it's going to cost," Larissa Powell said. "Who would buy a house if the price was constantly going up and you never knew what the final price was going to be?"

For one charter school developer, selling schools for far more than the appraised value is "egregious."

"The reason I feel so strongly about it - it gives us a black eye, too," said Tom Pitcher, president of HighMark School Development, previously known as a related company, Excel. "There are a lot of guys out there doing business the right way."

Charging above-market rates on leases can impact the appraisals, he said. Then schools are charged even more to buy themselves out of their leases.

Other schools can see the logic of a higher-than-appraised price. Reagan had no option to buy in its original lease, but doesn't feel it got trapped, according to board chairman Todd Powell.

"I understand that feeling . . . that it's public money and a school, but I also understand that there are market economics that apply like risk and finance, like cost of land and cost of construction," he said.

Sharon Moss, a founder of Noah Webster Academy, shares a similar view.

"The market conditions drive what the market pays for property," she said. "When we originally secured the [property] we paid a premium price for that because that's what property was going for at the time."

Appraisals are probably trickier for charter schools because there are a small number of schools and "a handful" that have been sold, Ferrin said.

Appraisals are based on past sales, which don't always indicate the current market, according to Jeff Heaton, a commercial real estate specialist at NAI Utah Commercial Real Estate based in Salt Lake City. That could explain why an investor would demand a higher price, he said. Utah's commercial real estate market remains strong.

Lincoln bought its building for less than what a formula in its lease could have yielded, Ferrin said. But the purchase price was more than the appraisal price. Unhappy with the purchase formulas but happy to have a purchase option, the school had agreed to the provisions after weeks of negotiation.

"We were so desperate to have some way to purchase the building," said Bishop, the school's CFO.

But not everyone is paying above appraised market value. American Leadership Academy, a Spanish Fork charter school, bought its school from Charter School Properties V, made up of another group of investors that included Ferrin, Morley and Way, for roughly more than $2 million below appraised market value. Morley's and Way's wives are on the school's board.

"I kind of thought we paid what was appropriate at the time," said Rob Muhlestein, the school's director, noting that the wives recused themselves from the real-estate decisions. "It was more than originally what everyone thought it would be."

Ferrin described the appraisal as "subjective."

"We sell the schools to the schools at a price they can afford," he said.

But he acknowledged his business is designed to make money.

"Our California investor group - I have to be able to show them they ought to be putting money into this charter school rather than into a shopping center," he said.

Once the state approves a new charter school, no public money is automatically provided to build a building. Newly available charter school loans from the state max out at $300,000. Although some federal startup grants can be won, the first operating dollars arrive on the last day of July before the school opens.

That leaves parents scrambling for private financing for properties that may eventually cost as much as $21.5 million and will be bought back with public dollars. Interviews with charter schools reveal those loans can be extremely difficult to arrange, something they would like the state to change.

"It's the mighty dollar," said Colson, a founder of The Ranches. "Whoever has the money is who's going to be able to build the school for you."

Not every school has a nightmare to share and not all development companies or deals are alike. The experience building Summit Academy's junior high through Academica West's affiliate One West Construction was so positive that a board member said he would give the company the builder-of-the-year award. Lakeview Academy in Saratoga Springs locked in a purchase price formula in its lease with Lakeview Project Development, a company related to Excel, and bought its building for more than $1.5 million below appraised market value.

Depending on the arrangement, the development company may arrange the initial financing and construction. A related company may act as landlord and eventually sell the building back to the school. Rather than shopping for contractors, the same builder may be regularly hired, part of the arrangement that some question.

"It does not seem ethical," said Tiffany White, a founder of George Washington Academy, a St. George charter school. "Their hand is in every inch of the pot. They find the land - they pick their own builders. They pick their own architects."

In some cases, the developer is working with parents before the school is approved by the state, helping to develop an application and plan a school that may eventually become a money maker. Contracts that are made before a charter school is officially approved by the state are assumed to be outside competitive bidding rules, according to Carol Lear, the director of school law and legislation for the Utah Office of Education.

Lack of competition is always a concern, said Brigham Young University associate professor of economics Robert Crawford.

"A contractor who comes out and says 'I'll do this for you because I'm such a nice guy' - that's not why they're doing it," he said. "They're interested in the business of providing services and product, and they most likely will try to get as high a price as they can for their services."

If contractors don't have to worry about competitors, they may choose to use poorer quality construction materials, allowing them to make a larger profit, he said.

Even now, as the number of companies increases and the state pushes the importance of following bidding rules, new schools are not always asking for formal bids from companies though investors will eventually receive millions in taxpayer dollars. That appears to have been a larger problem in the past.

State education officials say it's not up to them to ensure the competitive bidding process standard in traditional school districts is taking place. That bidding is designed to ensure that public agencies wisely spend their public funds and businesses have an opportunity to compete.

"They would be responsible kind of like a district for policing themselves," said Burns, the state charter school director. "That doesn't mean we wouldn't need to take a more active role if there ends up being a serious concern in this area."

Some schools are reluctant to talk about their developer. They may be wary of jeopardizing a future sale, further damaging a tenuous relationship or harming charter schools' reputations. They are well aware of the power of these companies.

In an amendment to a purchase agreement, Channing Hall, a Draper charter school involved in a negotiation with Utah School Development, which is related to Excel, essentially agreed to silence certain school employees, preventing them from talking about the company.

"They were concerned we might cause them to lose clients if we talked too negatively," said Deena Pyle, the board's chairwoman.

Students at the Salt Lake City-based Dual Immersion Academy, a charter school, are still eating lunch in a heated tent on the playground because of a contract disagreement between the school and U.S. Charter Development, also owned by Ferrin, Morley and Way. When asked by the company to sign a positive reference letter last year, the school refused.

Because the state now approves charter schools nearly two years before they open - some schools in the past had only a few months - state officials hope schools will have more time to research facility choices. A list is being developed to help schools easily survey their options of experts, developers and others. A checklist has been assembled for schools to follow before contracts are signed. Facility contracts will have to be turned in to the state charter school board for review.

And some of the newest generation of schools are being founded by parents who learned from past mistakes.

As Pitcher with HighMark has traveled the country, he has noticed Utah is far ahead when it comes to charter school facilities.

Though many states have charter schools in old buildings, here the new standard is that when a school is born, a building is, too. Utah is a pioneer.

"The charter community in Utah owes a lot to some of these developers," he said.

jlyon@sltrib.com

Charter schools at a glance

How do you get in?

Charter schools are part of the public education system and must be open to all students, without discrimination, on the same basis as other public schools. If the number of students applying exceeds the capacity of the school, then those to be admitted are chosen at random from among the applicants, subject to certain preferences.

Are charter schools subject to the same laws and regulations as other public schools?

Laws and regulations relating to religion, school fees and tuition, health and safety, civil rights, annual reports, prohibitions against advocacy of unlawful behavior, screening of potential employees or volunteers for competency and fitness, and most other matters are the same for charter schools and other public schools. The state school board, however, may waive any of its rules for a charter school if the school applies for a waiver and the board finds that the waiver would not violate applicable law or cause harm to students or the school.

How is a charter school founded?

Typically, parents propose a new school for their community in an application to the state. Both the state charter school board and the state board of education must approve the application. A charter, which is a contract between the state board and the school, must include items such as school governance, budget, educational goals and projected enrollment. An approved charter school will receive tax dollars to operate. As with all public schools, the Legislature dictates how much funding charter schools receive each year.

Source: Utah Office of Education