Wednesday, February 13, 2013

The Paterson Collegiate Charter School Application; New Markets Tax Credits, Part III

This is Part III of a four part series about the Paterson Collegiate Charter School Application. Part I was about the current state of the New Jersey Department of Education charter application process, and Part II was about Stephen F. Wilson, the lead founder of the charter and also conveniently the founder and president of Ascend Learning, the proposed Charter Management Organization.

Back in July when I wrote about Benjamin Rayer and the approval of his two hybrid charters I noted that he too was both the lead applicant and CEO of the CMO. Looks like this may be a new trend among the applicants Commissioner Cerf is favoring these days, eh? 

The Paterson Collegiate Charter School Phase One Application is clear that "if selected in the RFP process" Ascend will take a 9% management fee and basically, run the show. (page 28 of 95). Just try to stifle your laughter at the idea that another CMO might come out on top in that Request For Proposal (RFP) process. 

If Ascend is the lucky winner of the contract, they say they will allow no deviation in be responsible for: 
"designing, selecting, acquiring, and implementing the school's educational program, including but not limited to the school's curriculum and pedagogy" and "recruiting, recommending, and training the school director, and assisting the school director with selecting, reviewing, managing, and terminating all other school personel."  
(The terminating bit Rheeally just gives you the warm fuzzies, doesn't it?)

Ascend will also have full control of manage: 
"the school's business administration; payroll; contracts with public or private entities for transportation, custodial, and food services, and all other services procured for the school; facilities and equipment; purchases and leases; and procurement of all other goods, services, or equipment that Ascend Learning deems necessary to attain the school's educational objectives." (Emphasis mine)
All this control work for a mere 9%?  Sounds like a bargain!  But I wonder why they need to manage the facilities and leases...

A look at the budget required as part of the Phase Two application (page 243 of 248) reveals that 17% of the total revenue has been allocated to facilities rent. This line item balloons from $395,503 in the first year of operation to $1,022,338 after four years. The year four amount represents $85,000 a month in rent. 
404 Grand (top) and 297 Getty (bottom)
Two potential facilities are identified in the application; 404 Grand Street and 297 Getty Avenue. Both are industrial warehouses and look like they're going to need a pretty big influx of cash to turn them into schools.

Enter the New Markets tax credits

There is a reason Wilson switched his business model from for-profit (Advantage) to non-profit (Ascend), and it's not because he saw the light and now he's all about helping kids. He figured out where the money is, and you have to be a non-profit to get at it.

The money is in New Markets tax credits, and to get 'em you have to be non-profit, and you have to open charters in low-income urban areas. Juan Gonzalez figured this scam out three years ago.
Wealthy investors and major banks have been making windfall profits by using a little-known federal tax break to finance new charter-school construction.
The program, the New Markets Tax Credit, is so lucrative that a lender who uses it can almost double his money in seven years.
In Albany, which boasts the state's highest percentage of charter school enrollments, a nonprofit called the Brighter Choice Foundation has employed the New Markets Tax Credit to arrange private financing for five of the city's nine charter schools.
But many of those same schools are now straining to pay escalating rents, which are going toward the debt service that Brighter Choice incurred during construction.
The Henry Johnson Charter School, for example, saw the rent for its 31,000-square-foot building skyrocket from $170,000 in 2008 to $560,000 last year.
The Albany Community School's rent jumped from $195,000 to $350,000.
Green Tech High Charter School rents went from $443,000 to $487,000. (emphasis mine)
Well, with that 17% built right into their budget Ascend certainly could accommodate these kinds of jumps in rent, and still have plenty left over. And did you catch the big part?  DOUBLE their money in only seven years.  That's pretty astounding.

Lots of things point to the fact that this is indeed how Wilson and his investors are making their "windfall profits."  We've already uncovered that his two potential facilities are industrial warehouses, so clearly there will be some significant construction happening. 

And remember, the problem with his for-profit was needing to grow to scale fast enough to bring in enough money to cover costs. But if the money is coming in from both management fees and facilities, and you've got investors who are all too happy to get in on the action, there's much less pressure to grow so fast. 

The Ascend website acknowledges that they have figured out the CMO secret sauce, they just don't say exactly what's in it.
The management fees Ascend receives, coupled with the organization’s lean cost structure, have resulted in financial surpluses at each school and the network office from the organization’s second year of operation—a first for a charter management organization. For most CMOs, break-even remains elusive, requiring an ever-increasing number of schools. (emphasis mine)
You don't have to do much digging into the deals behind Ascend facilities in Brooklyn to figure out the secret sauce is indeed the New Markets tax credits used to purchase the facilities.  

Here's the fancy digs the Brownsville Ascend "scholars" call home.
It's gonna take a whole heap of cash to turn the industrial
warehouses above into something that looks like this...
A New York Times article about the project pulls it all together.
Instead of bond financing, the developers are taking advantage of the federal New Markets tax credits program by working with investment funds that specialize in low-income communities. These funds were selected to receive allocations of tax credits by the Treasury Department through a competitive process. 
For the Pitkin project, Poko and its financial partner, Goldman Sachs, joined forces with five such funds: Seedco Financial Services, Nonprofit Finance Fund, Jonathan Rose Companies and its subsidiary Rose Urban Green Fund, and Carver Community Development Corporation. Goldman made its $13 million equity investment through these funds and in return received credits that can be used to offset federal income taxes. Goldman, along with the Nonprofit Finance Fund and Seedco, also provided $23 million in debt.
As Gonzalez revealed, these investors stand to double their money in seven years, and Ascend's budget allocates more than enough money to "facilities rent" to not fall into the same trap as the Albany charters Gonzalez profiled.  

It's certainly telling that Ascend recently hired a Chief Real Estate Officer, responsible for "the development of facilities for schools in the Ascend Learning network, including identifying candidate sites, negotiating leases with developers, securing financing, partnering with Ascend’s architects, and overseeing construction."  There is no doubt that the acquisition and development of real estate is integral to the future success of Ascend.

So while the majority of urban school children in New Jersey's low-income urban areas are forced to attend dilapidated schools because under Governor Christie the School Development Authority has come to a grinding halt, a handful of students in Paterson may get access to a privately financed, newly constructed, state of the art facility.

Ascend can't REALLY just be going where the New Markets tax credits are, can they?

Wilson recently assured nervous parents in Williamsburg that he is not coming for affluent urban white students.
 (An Ascend school will also come to Williamsburg, though Steven Wilson says it will be in a low-income area and he does not anticipate an influx of white students.)
(I feel dirty just cutting and pasting that sentence.) 

I think we can take Wilson at his word that he won't try to enroll "white students" in Williamsburg. But not because he's worried about riling the parents in that community like Eva Moskowitz did with her Success Academy, but rather because the tax credits his plan relies on are only available in low-income areas.  Therefore, Wilson's widgets "scholars" will most likely be low-income minority kids.  

Something else I found remarkable is that the Ascend website gloats that their chain of charters "cost much less to operate than traditional district schools and do not rely on any philanthropy."  The website goes so far as to boast that:
Because Ascend and the schools it manages are self-sustaining (they do not rely on large and continuing grants from foundations), the network’s reach can be expanded without limit.
A charter chain without Walton, Gates, or Broad funding?  Not that my friends IS innovative!

Seems to me that after years of trial and error with the lives of thousands of children, Steven Wilson is quite confident that he has stumbled onto a foolproof plan to turn urban education into a lucrative business. And now, with the help of Commissioner Cerf, odds are he'll be bringing that business to Paterson, just as soon as he can turn one of those warehouses into a gleaming testament of his business acumen charter school.

In the fourth and final part of this series we will look at the educational program Wilson is pitching for Ascend "scholars" should his Paterson application be approved.  There are some tangible reasons the Ascend program "costs much less to operate." Once you learn about Wilson's proposal, you can decide whether you think this is a program that SHOULD be expanded without limit.

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