A handful of SC charter schools — finally in new school buildings — are poised to pay out millions in taxpayer dollars to middlemen, developers and foreign investors who want green cards.
The money, paid in the form of high-interest rent payments on the new school facilities, has some critics saying that the state’s taxpayers are getting duped. Money they believe is paying for SC students’ education is instead going to this relatively new network of out-of-state players who are charging high interest rates, as well as wealthy Chinese nationals searching for a quicker path into to the country.
And it’s all happening with federal government approval.
“They were taken for a terrific ride and are paying this high interest rate. It’s remarkable,” said David North, a fellow with the conservative Center for Immigration Studies in Washington D.C. “They could end up paying more in interest than the (cost to construct the school).”
Figuring out just who is getting paid what is complicated and is not readily available in one place. Take, for example, Lowcountry Montessori School in Port Royal, a charter school that serves about 400 students in preschool through the 11th grade.
Through a controversial federal program called EB-5, the school received $1.5 million from three foreign investors to build its school building that opened last school year on Broad River Drive.
Critics have long charged that the program allows rich immigrants to buy their way into the country. And in recent years, cases of fraud and concerns about national security have also plagued the program.
The Port Royal school’s financial arrangement was put together by American Charter Development, a Utah-based company, that secured another $4 million for the new building and constructed the school.
The school is now leasing its $5.5 million building from ACD at a whopping 9 percent annual rate of the school’s construction costs. If the school were to make only the minimum payments over the course of the 20-year lease, $5.6 million of its $10.3 million in lease payments would be interest, according to the school’s most recent audit.
Worked into those lease payments is another key player — Utah-based Education Fund of America, a for-profit company which is receiving a 7.3 percent annual fee on the $1.5 million it secured in EB-5 funding for the school.
And then there are the three unnamed foreign entrepreneurs who actually invested the $1.5 million. The school will pay them back as well, likely including a small return on their investment of around 1 percent, say those familiar with the EB-5 program. The repayment is also included in the lease arrangement.
By comparison, the Beaufort County School District is paying just 1.6 percent interest on its construction bonds for its new May River High School that opened last year.
Leaders of Lowcountry Montessori School and two other charter schools in South Carolina with similar financial arrangements say it’s the only way right now to build their schools given a lack of state funding, and that they intend to get out of the high-interest lease payments as soon as they can.
“We’ve already talked to banks about refinancing,” said Amy Horn, Lowcountry Montessori’s principal.
At least two other SC charter schools are believed to have similar high-interest lease payments, according to a company that helped them secure EB-5 funding and school leaders:
▪ Gray Collegiate Academy near Columbia received $2.4 million from foreign investors through EB-5 funding along with $3.4 million from other sources. It is now paying 10 percent interest to Vertex Nonprofit Organization, a Utah-based company that helps charter schools finance their buildings.
▪ High Point Academy in Spartanburg received $6 million from EB-5 investors along with $15.9 million from other sources to overhaul a former church building into its school facility. A school official was unable to provide the interest rate the school is paying to the developer.
Additional SC charter schools may also have similar high-interest funding arrangements that include EB-5 funding. But the state of South Carolina does not track which projects have made use of the program.
Lowcountry Montessori and the state’s other 70 charter schools are tuition-free public schools, supported by taxpayers and open to any student to attend.
But unlike traditional public schools, they have no way to build new school buildings since banks are unwilling to loan to start-ups that have no credit history and may fail. About 30 SC charter schools have closed since 1996, according to S.C. Department of Education data.
That has created a cottage industry of enterprising for-profit brokers who specialize in finding money and building schools facilities for charter school organizers. Taxpayers’ dollars are used to lease the new school buildings from the developers, who typically tack on hefty interest rates.
Foreign investors are often a small part of the financing mix, providing cheap capital through the EB-5 program. Overseen by the U.S. Department of Homeland Security, EB-5 offers a path to citizenship for wealthy foreign entrepreneurs, mostly Chinese, and their immediate family members who invest $500,000 to $1 million in approved developments that create American jobs.
“There is the question on where we should we be selling green cards or a path to citizenship for money. The answer to that should be no,” North said. “Literally hundreds of millions of people would like to come to the United States if they had a chance. So what we’re saying is (with the EB-5 program), if you are willing to spend half a million dollars, essentially helping an American businessman profit, you can come in.”
While much of EB-5 funding has gone to hotels, condos and other real estate projects in big cities, charter schools are becoming increasingly trendy. Seen as safer and recession-proof because taxpayers are on the hook to repay the loans, EB-5 entrepreneurs who invest in charter schools are typically paid back in roughly five years and may also earn a small return of 1 percent or so, say those familiar with the program.
Horn, Lowcountry Montessori’s principal, said she was skeptical when she first heard about the EB-5 program but looked into it and decided it was a good fit for her school.
“I had a lot of questions at first. But once you see how it functions and how it works, it makes sense,” Horn said. “They’re creating jobs on U.S. soil, and it’s through the federal government.”
Even though Lowcountry Montessori and other charters are taking money from wealthy investors, no requirement exists for the entrepreneurs to move to the areas where those schools are located, nor are their children required to attend those schools.
Rather, it’s the lure of permanent residency in the United States, typically made available in about two years, that is the main draw of the program, said Jennifer Moseley, an Atlanta-based corporate securities attorney who represents businesses seeking EB-5 funding.
A program under fire
Long term, there’s no saying if EB-5 funding will be as readily available to the nation’s charter schools.
Members of Congress on both sides of the aisle saying the program needs to be reformed because of its susceptibility to fraud, among other concerns.
In many of the cases, it’s not the foreign investors but their American middlemen—who help find appropriate U.S. projects and pool investors’ money — who are the culprits, critics say. In one recent case in Seattle, Chinese investors were allegedly scammed out of nearly $10 million that was supposed to be invested in assisted living facilities and coffee shops. Instead, their American partner is accused of misspending the money to buy a yacht and pay personal expenses.
Other cases of fraud, abuse and financial shenanigans have been reported in several states — but not in South Carolina.
Mark Morley, president of Education Fund of America, which helped secured EB-5 funding for Lowcountry Montessori, said he would welcome more EB-5 scrutiny.
“More oversight could mean we don’t have to worry about fraud in the industry,” he told The Island Packet and The Beaufort Gazette.
Pending congressional action isn’t slowing down requests from charter schools for EB-5 money. EFA, for example, has helped secure EB-5 money for more than two dozen charter schools in the Southeast and Midwest, with more in the pipeline, according to Morley.
Investing the money is risky for both “middlemen” companies like EFA and the foreign investors who typically get commercial bank loans to provide the funds to charter schools.
“(The investors and EFA are) taking the risk of underwriting a start-up business and there is no guarantee that it will be successful,” he said.
Few financing options
Horn and other charter school advocates say they have little choice but to pair up with investors, middlemen and private companies like American Charter Development to get school facilities built.
“There was not a choice,” Horn said. “We talked to several different people about getting a facility built. But we’re a smaller school and didn’t have the numbers to get a facility built. So ACD allowed us to do it and hooked us up with EB-5.”
And while the lease agreement could mean the school could pay more to ACD in interest than it cost to build the school, that won’t happen, she said.
The lease agreement allows school leaders to purchase the school after five years, in 2020. It plans to do so by refinancing — with a much lower interest rate — from a bank, Horn said.
“Things are going well at the school. Our enrollment is growing so we will definitely be doing that in Year 5,” she said. “But that’s not an option for charter schools who are just starting. For their first few years, they’re a risky business. So for those first few years for American Charter Development, they want to make a profit.”
It’s a similar case for Gray Collegiate Academy, which focuses on athletics and high-level academics and High Point Academy with a curriculum that stresses science, technology, engineering, arts and math. Leaders from both schools say they plan to refinance as soon as they can.
Gray Collegiate plans to issue bonds —the same type that traditional public schools pay for new facilities — within the next 12 months, while High Point is in the early stages of researching its refinancing options, according to school leaders.
“We’ll save a significant amount of money in interest costs, and we’ll have more control,” said Michael Bobby, director of operations for Florida-based Pinnacle Charter School Management Group, which manages Gray Collegiate.
Russell Jackson, senior vice president of marketing for American Charter Development, said the company encourages charter schools to refinance as soon as possible so they can own their own buildings. Most do so within three to five years of the start of their lease, he said.
And while some critics say ACD’s interest rates are high, “it’s commiserate with perceived risk,” Jackson said.
“It’s not an arbitrary number,” he said. “We take the best rates we can find and pass that along to the schools. That’s why we have multiple sources of funding.”
EB-5 entrepreneurs usually put up just a small percentage of the money needed for a new school, he added. Banks and other big institutions provide the rest.
“(Charter schools) are new entities. They’re unproven, and banks and bonds won’t lend money to them because they don’t know if they’ll exist in two years. So that’s a risk for us, too,” he said.
Horn said she doesn’t blame the private companies. Without them, her students would have no school facility.
Rather, state lawmakers should do more to help charter schools construct school buildings at lower costs, she said.
While the state Legislature created a charter-school facility revolving-loan program several years ago, it never fully funded it.
Facility needs persist as one of charter schools’ biggest challenges, said Elliot Smalley, superintendent of the S.C. Public Charter School District, which oversees many of the state’s charter schools, including the three that have used EB-5 funding.
“The way charters are funded ... they have to use their operating dollars on facilities,” he said, adding that he and other charter school advocates will lobby hard when state lawmakers return in January to find more state dollars for charter school buildings.
Possibilities might include increasing the dollar amount charter schools receive per student, fully funding the state’s revolving-loan program, or creating a credit-enhancement program for schools that perform well so they can find private-sector dollars at lower costs.
“It’s a huge, huge problem for charter schools,” Horn said. “The state should address it.”
Gina Smith: 803-414-1340, @GinaNSmith
▪ EB-5 is a federal immigration program, overseen by the U.S. Department of Homeland Security, that allows foreign entrepreneurs to invest in approved American developments ranging from luxury condos and hotels to nursing homes and charter schools.
▪ Investors, most of whom are from China, must invest $1 million (or $500,000 in rural areas or locations with high unemployment) and create 10 permanent, full-time American jobs.
▪ In exchange, the entrepreneur, spouse and unmarried children under the age of 21 receive EB-5 visas, granting them conditional permanent residence. After two years, they may apply for permanent residence. The entrepreneur is also typically paid back his investment, usually in about five years, and may also receive a small return on his investment. Becuase the return on the investment is usually small, most entrepreneurs participate in the program to gain entry into the country.
Why is the program controversial?
▪ Some critics charge that it’s allowing investors to “buy” their way into the country.
▪ More recently, members of Congress on both sides of the aisle have criticized the program because of its suseptibility to fraud. Others worry that too much of the investments is going to urbanized areas instead of rural ones. A 2016 Government Accountability report was also critical of the program.
▪ Earlier this month, the program was in the spotlight again after Nicole Kushner Meyer, sister of Jared Kushner, President Donald Trump's son-in-law and a top White House adviser, touted the program during a speech to Chinese business owners.
▪ The program, set to expire in September, is likely to be overhauled by Congress.
What’s a charter school?
▪ Charter schools are public schools that any student can attend tuition free. They are nonprofits that can be started by anyone and are chartered either by a local school district or the state’s Public Charter School District.
▪ Unlike traditional public schools, the state’s nearly 70 charter schools are free of certain state regulations in an effort to encourage innovation and increase student success. For example, SC charter schools include ones that focus on the arts, science and drop-out prevention. Others are online-only operations. Others serve students with disabilities.
▪ Because charter schools are funded with taxpayers’ dollars, they are required to meet the same academic and financial standards as traditional public schools. They can be shut down for failure to comply.