by David Safier
NOTE: Since Imagine School at Superstition made news by firing 11 of its 14 teachers, I've been writing about it, reading up on Imagine Schools and talking to people who know more than I do. This is the fifth in a series of posts trying to make sense of the nation's largest charter school corporation which has drawn more controversy for its practices and low student achievement scores than any other (Here are the first, second, third and fourth posts). What I write may be incomplete or incorrect in places. If you have information to add, please leave comments or email me at firstname.lastname@example.org. I keep all email correspondence confidential.
I've been trying to wrap my mind around the way money moves through the Imagine Schools organization, from schools to the for profit Imagine Schools corporation and from schools to Imagine's real estate arm, Schoolhouse Finance. It's a complex, convoluted money shuffle whose machinations are far beyond my minimal business and financial knowledge. But one thing I'm certain of: something about the money shuffle doesn't smell right.
This morning I read an article in the NY Times about how Bain Capital worked during Romney's years with the corporation, and a light went off in my head. The cycle of acquisition, indebtedness and failure built into the Bain model is similar to what Dennis Bakke, Imagine's founder, created at his energy corporation AES (Applied Energy Services), and he's carried the same model over to the way he runs Imagine Schools.
The short version of the Bain story is, when Bain acquired a company, it loaded it up with loans and used the money to make more acquisitions. Meanwhile, Bain also charged the company management fees, which meant money kept rolling into Bain's coffers regardless of the fortunes of the company. If the company collapsed under the weight of its debt, which happened frequently, Bain shrugged, walked away with its winnings and moved on. If the company thrived despite the debt, so much the better. That meant even more money.
When Bakke ran his energy company AES, he created mountains of long term debt which he used to expand at breakneck speed, acquiring power plants around the world -- using, in a sense, the same model for his own company Bain used for the companies it acquired. AES nearly went bust under the weight of its loan obligations, but Bakke walked away with a fortune, bought a failing charter school company and started Imagine Schools.
In four years, Imagine grew from its original 25 schools to 73 schools, almost tripling in size and making it the largest charter school organization in the country. That kind of rapid school expansion isn't smart educationally, and for most companies it would be impossible financially, especially the way Imagine did it. When Imagine started a new charter school, it acquired a piece of property and either built a school on it or remodeled an existing structure to make it work as a school. That takes an estimated $5-10 million real estate investment per school.
Where did all that money come from to build the new schools? That's where things start to get interesting, and complicated.
Bakke apparently invested a great deal of his own money to start Imagine Schools, but the buying of property and building of schools are done through the corporation's real estate arm, Schoolhouse Finance. Schoolhouse Finance puts forward the money to build the school, then collects rent from the schools, which it can use to build more schools. It also sells some of its schools to real estate investment corporations, which means it recoups its investments in those schools quickly and has funds freed up to build new ones.
For Imagine to keep expanding, Schoolhouse Finance has to keep generating enough funds to build new schools. It does that, by all indications, by charging ridiculously high rent to the individual charter schools. Imagine Prep at Superstion, to use the school I've been focusing on in recent posts, pays about a million dollars in rent every year. My back-of-the-envelope estimate of the total cost to Schoolhouse Finance for buying the property and building the school (It bought Compass Bible Church for $2.1 million, remodeled the existing building and constructed a second) is $6-7 million. That means Schoolhouse Finance recoups its entire investment in the school in 6 to 7 years, and from that point on, the million-dollar-a-year rent is gravy.
Exorbitant rents like this are the rule, not the exception for Imagine Schools. I've found similar rental costs at other Imagine schools in Arizona, and journalists across the country have uncovered the same kind of arrangement. A New York Times article mentions a Las Vegas Imagine school, 100 Academy of Excellence, which spent 40% of its $3.6 million revenue on rent. That's $1,440,000 per year.
No school can spend that kind of money on rent and have enough left to educate its students well. So what often happens is, Imagine lends the schools money which it expects will be paid back sometime in the future.
Think of the right pocket of Dennis Bakke's pants as Imagine Schools and the left pocket as Schoolhouse Finance. The exorbitant rents paid to Schoolhouse Finance go into that left pocket while Bakke bails out the schools, which can't afford the rents, with loans from his right pocket. In a sense, Bakke is shifting money from the right pocket to the left, where the funds can be used to buy new schools. Meanwhile, Bakke expects the schools to eventually make up the shortfall in his right pocket by paying back the loans.
There's one more piece to this puzzle. Like Bain Capital, Imagine Schools charges management fees to its schools, though they're called basic services fees, according to the NY Times article. The typical fee is 12% of the school's revenue. Add that to 40% paid for rent, and some schools have 52% of their state revenues sucked up before they have hired a single teacher or bought a single desk or textbook. Sometimes Imagine adds another fee to guarantee that a school can get a loan if it goes over budget.
What does all this mean? I'm not sure. I just know this is no way to run schools, and from a business angle, it sounds like financial sleight of hand. I'm hoping to learn more, both from people who know the inside workings of Imagine Schools better than I do and from people who can make more sense of the tangled business dealings than I can. Readers can either leave comments on the post or email me at email@example.com. I keep all email correspondence confidential.