State Board of Education Considers Renting to Charters

State Board of Education Considers Renting to Charters

by Brian Thevenot
June 24, 2010

Hoping to tackle the long-standing challenge of financing charter school facilities, the State Board of Education is considering taking on a novel and controversial role for an elected body: landlord.

The proposal, spearheaded by member David Bradley, R-Beaumont, would draw about $100 million from the state’s $23 billion Permanent School Fund to purchase buildings that would be leased back to charter schools. Bradley and Commissioner of Education Robert Scott, both vocal charter advocates, call the arrangement a “win-win,” saying the fund could make money on the investment while at the same time saving charter schools money. The board will take up the matter on July 21, Bradley says.

Some observers, however, seem baffled at what looks like a too-good-to-be-true scheme. The logic simply doesn’t work, they say: Laws governing the Permanent School Fund require the board to invest the money to its best-possible advantage — so how can that standard be met while giving charter operators terms more favorable rates than they can get in the private market?

“Why would charters do this," asks state Rep. Scott Hochberg, D-Houston, the vice chair of the House Public Education Committee, unless the board gave them a rent break? “How does this help anybody?”

It’s complicated, Bradley concedes. But such an arrangement, he says, could take charters out of the business of facilities management and ownership — which they never wanted to enter in the first place — and realize cost savings. That’s because charter organizations often run into problems getting reasonably priced credit to buy buildings, he says. Unlike traditional school districts, charters have no taxing power, are politically controversial and operate on five- or 10-year contracts with the state, all factors the private lending market doesn’t particularly like. In addition, the schools that rent space pay hidden property taxes as part of their leases, which are not tax-exempt for their landlords because charters, though financed by tax dollars, are actually private entities.

Both situations could be avoided, Bradley said, with the SBOE taking a tiny percentage of the fund to purchase buildings and then lease them back, at market rates, to charters. The YES Prep charter school network in Houston just embarked on an ambitious building campaign that will seek to raise $100 million — roughly half in debt and half in donations, says Anne McClellan, the network's chief growth officer. But if there were an opportunity to pay a “reasonable” lease, YES Prep might just jump at the chance, she says. “We’re not in the business of having to build schools because we want to be,” she says. “If we didn’t have to do fundraising to build $9 million buildings, we could spend more money on students in the classroom.”

Facilities issues have long been the thorn in the side of the charter movement, because the Legislature has never given the schools extra money for buildings. Instead, they must finance facilities out of their regular operating budgets — meaning they can spend less in the classroom than comparable campuses run by traditional school districts, which have broad taxing and borrowing power. But the question of whether the SBOE could offer the schools “reasonable” rent hinges entirely on what rate of return the board needs to meet the “prudent person standard” it must follow for all Permanent School Fund investments. In other words: Would a prudent person choose investing in the charter school facilities business — or, more accurately, directly running that business — over all other real estate investments available on the open market?

Some remained unconvinced, including Board Chair Gail Lowe, R-Lampasas, usually an ally of Bradley’s in the board’s bloc of social conservatives. “I like the traditional asset allocation pathway we’ve taken,” Lowe says. “If [investments] help charters as a side effect, that’s nice. But that’s not the main goal. I think you have to prove that charter facilities are a better investment than anything else, and I haven’t seen anything to substantiate that claim.”

Potential conflicts

It’s unclear whether Bradley can muster the political support to secure board approval — particularly amid shifting politics on the SBOE. Newly elected board member Thomas Ratliff, R-Mount Pleasant, who will take over from former chair Don McLeroy, R-Bryan, in January, said the board has no business going into the rental business.

“If they want to do it, they better do it quick, because I don’t think the votes will be there on the board in January,” he says. “Charter school facilities are a legitimate issue. But it’s a problem for the state Legislature to solve. … If a charter school has a good business model, than it should be no problem getting a loan in the commercial space. And if not, why would we want to invest?”

Charter advocates have concerns, as well, about how much value the proposition would offer individual schools. David Dunn, executive director of the Texas Charter School Association, says the group prefers an alternate proposal being floated by some legislators that would have the state guarantee loans to charter operators, thereby allowing them to borrow money at favorable rates. “We would of course support anything that made lease payments lower for charter schools,” he says. “But I’m not sure the state would be able to write a lease that’s really favorable to the charter schools.”

Whatever money schools renting from the state might save through a property tax exemption might well be eaten up by whatever profits a “prudent” SBOE would need to make on its investment, Dunn says. The state could, however, provide a potential advantage in simple stability, he says. “Right now, charters are going in and out of shopping centers with private landlords. Presumably, the state would be a more stable landlord, hopefully under favorable leases. But there’s something to be said for stability alone.”

Legislative support?

Bradley remains confident he can pull together support for his proposal. “This proposal is going to get buy-in from everybody,” he says. “I’ve had nothing but positive feedback at the Capitol.”

He noted the support of state Sen. Florence Shapiro, R-Plano, chair of the Senate Education Committee. Shapiro confirmed interest in the idea but says it has “pros and cons.” Specifically, she says, it’s not clear if the Permanent School Fund can legally be used to aid charter schools, as opposed to traditional school districts. And she had the same concern raised by others about the ultimate value of Bradley’s plan for charters.

But she says such complex ideas stem directly from the Legislature’s failure to do the obvious thing: give charter schools enough money to pay for their facilities in cash, whether they choose to rent or own. Shapiro, like some other lawmakers, has tried and failed in the past to introduce measures to finance charter facilities. “I’m looking to try and give them incentive money, to reward good charter schools with money for facilities, but I haven’t been able to pass that,” she says. “What Bradley is doing is looking at alternatives.”

On the House side, Hochberg says the alternative stretches the SBOE far out of the bounds of its authority over the public school fund. Common sense dictates that the best-possible investment mix to maximize Permanent School Fund revenues will change constantly, as the market changes. Real estate in general might be a great investment today and a terrible one a month from now. A board decision to lock itself into specific properties for the specific purpose of renting only to charters can’t possibly be the best business decision for all market environments — if it makes sense at all, Hochberg says.

“Let’s say you decide to invest a certain amount in real estate, and you buy a building and rent it to Wal-Mart — and then the market changes, so you decide to change investments and sell it. You can do that. But what if a charter school is in there?” Hochberg asks. “They’re not supposed to be in a specific business — they’re supposed to be investing in the long-term interest of the children of the state of Texas.”