The collapse of Newark’s Lady Liberty Academy Charter School hurt the nearly 500 inner-city children who attended the privately-run, publicly-funded school–but the debacle also exposed a reckless financing scheme used by former Gov. Chris Christie to help political allies in the charter school movement.
The scheme–known as “conduit bonds”– is so complicated even the spokeswoman for the New Jersey Economic Development Authority (NJEDA), the agency that devised it, conceded she doesn’t understand it.
But the scheme’s fiscally unhinged methods are easy to describe: The Republican Christie administration loaned $10 million to a private real estate estate developer. The developer–BWP School Partners LLC of Metuchen–formed a partnership with a trouble-plagued but politically connected charter school, Lady Liberty Academy, to create a new facility at the site of a closed religious school in the Vailsburg section of Newark.
BWP–a for profit spin-off of a non-profit called Build With Purpose–promised to pay the $10 million from the state back to the state with the funds generated by the annual rent it charged to Lady Liberty. In 2016, the annual rent reached more than $871,000.
That’s $871,000 in public money that would otherwise have gone to Newark’s resource-starved public schools.
The money kept rolling in despite clear indications the school was in academic trouble. A Rutgers report in 2003 warned of “challenges.” The school was twice put on academic probation by the state. Despite the red flags, Christie loaned the money to Lady Liberty and its private real estate developer partner.
Now that the school has been closed by the state under a new political administration, the money for rent is no longer available–not to the school and not to BWP, a company headed by Brian Keenan of Metuchen. And not to the state that loaned it out.
The disaster gets even gets worse: The Christie scheme, explained in a detailed bond offering in 2013, restricts the sort of collateral required to back the loan only to BWP’s ability to collect rents from Lady Liberty. No rents to BWP, no way the state can recoup its money.
“The borrower”–BWP–“has no operations or no assets other than its leasehold interest in the Project Facilities and its sublease agreement. The Borrower’s sole source of revenue to pay obligations under the Loan Agreement will be payments under the sublease agreement.”
Although Keenan calls himself the charter school’s “landlord,” he doesn’t own the property that housed Lady Liberty. Neither does BWP.
Keenan’s company only rents the property–for nearly $200,000 a year–from the Ukrainian Catholic Diocese of Philadelphia which once operated a school in the city’s Vailsburg neighborhood. Keenan’s company only owns a “leasehold interest” in the property.
So, although the church receives rent subsidized by the public loan, it is in no danger of losing the property to foreclosure.
And just in case a sharp lawyer in the current, post-Christie state Attorney General’s office figures out a way to get around these restrictions, the NJEDA has a whopper of another. The NJEDA turned over its rights in the loan–including foreclosure–to a corporate trustee but then limited what the trustee can do in case of default:
The trustee can only find another tenant. It can’t foreclose. The bond offering says:
“The Trustee does not have the right to foreclose on and sell The Project Facilities….Rather its rights are limited to finding a replacement lessee….There is no guaranty that the trustee would be able to find a tenant or tenants to lease the Project Facilities or that any lease payments will be sufficient to pay the principal…or interest in the bonds.”
No money. No property. Nothing backs the loan from the state to Keenan’s company.
How does any of this amount to real collateral for a $10 million mortgage? It looks more like a lien on an illusion–or a now worthless political promise. The property on Sandford Avenue was most recently valued by the City of Newark at less than $1 million. Even if it could be foreclosed on and sold–which it can’t–why would the state loan $10 million against it?
“That’s what makes these conduit deals ludicrous,” explains Bruce Baker, a professor at the Rutgers University Graduate School of Education and an expert on school finance. “The state loans the money out without any real guarantee the money can be paid back.”
In a brief interview last month, Keenan–who has since refused to answer any further questions about Lady Liberty and his involvement in the financing scheme –was asked about selling the property to pay off the mortgage. What was the selling price?
“Well, it’s got a $10 million mortgage,” he said, implying that would be the minimum sale price.
Keenan admits he has all but gotten out of charter school financing. He recently took a position as executive director of the Bayshore Center in Bivalve, an aquatic studies center that owns a sailing ship that can be rented out.
“Not much of a market in charter schools anymore,” Keenan says.
Carlo Caparruva, a real estate agent in charge of handling the Lady Liberty property, explained in an email that BWP might not be interested only in selling its property interest :
“You know the property is for lease as well, right? There is an opportunity for another school to take the location and we are actively marketing the property.”
So, to avoid default, another privately-operated, publicly-funded charter school must be persuaded to take on the $870,000-plus annual rent BWP needs to meet its loan payments to the state and its rent to the Unkrainian Catholic Church.
That means the state has an incentive either to approve a new charter school for the property or to urge an existing school to relocate to an expensive venue. Before its “partnership” deal with BWP, Lady Liberty Charter School was paying $425,000 a year in rent to a Catholic school in Harrison, half what it paid in rent for the Sandford Avenue property.
What happens if BWP can’t make its payments? Homeowners who default on a mortgage lose their homes–tangible property. Who will take the financial fall if the loan based on BWP’s limited assets isn’t paid?
“No one, apparently,” says Baker. “But that may be the point.”
And no one involved disagrees with him.
In its bond offering, the state–through the NJEDA–insists it is not pledging the “full faith and credit” of the state to those who buy the bonds. Yet investors did rely on the state’s issuance of the bonds. The Royal Bank of Canada’s RBC Capital Markets division underwrote the bonds for $10 million. Investors bought the bonds–high interest-bearing because of the risks, no taxes on earnings because they are still state bonds.
A good deal for the rich, if bad for the poor.
Rutgers’ Baker says he believes a disgruntled investor or taxpayer might sue the state some day and the scheme could be declared illegal.
“These schemes–and they’re used in other states–are simply too new to have attracted much attention,” says Baker. “There’s not much law on the books yet.”
And other experts agree state could get into trouble with such risky investments–trouble that could include having the bonds backing the loans declared taxable because they are really private arrangements rather than extensions of state-backed credit.
“The whole thing could come crashing down,” Baker says.
Now, the only real losers are, of course, the children of Newark–both the children who attended Lady Liberty kept alive with public money and the children whose conventional public schools were robbed of funds to meet the financial demands of privatized charter schools and their corporate, profit-making investors.
To meet the bills it still owes–including presumably its rent to BWP–Lady Liberty held an auction last month. Hundreds of computers and furniture were put up for sale. The state, despite a formal request filed under the Open Public Records Act (OPRA), still has not provided the report–required by state regulations– on the assets and liabilities of Lady Liberty.
The assets sold at auction normally should have reverted to the state or the district, but neither the state education department nor the Newark Public Schools sought to reclaim them.
Nicole Broissoie, a spokeswoman for the state education department, would not comment on the appropriateness of privately selling school supplies paid for by the public.
“The auction was held to liquidate Lady Liberty’s property so that it could satisfy its fiscal obligations,” she wrote in an email.
The auction took in $160, 326.58. The auctioneer took a 20 percent cut–$32,065. The education department isn’t saying what happened to that money–or what was sold to amass it.
That might seem like a lot of money to a family in Newark–it’s chump change to the corporate backers of privatized charter schools.