Chinese Investors Help Fuel Charlotte's Charter School Boom

Jul 5, 2016

CharlotteObserver.com

Chinese investors provided $3 million in startup money for Thunderbird Preparatory Academy, a Cornelius charter school that’s fighting for survival.

That’s one of the insights that emerged from last week’s state review of the school’s finances, governance and facilities.

Thunderbird’s network of investors and lenders left Charter School Advisory Board members shaking their heads and palming their faces. “A spider web,” one member dubbed it. “Exceedingly messy and complex,” said board Chair Alex Quigley.

But as North Carolina has opened itself to rapid charter school expansion, a growing number of startup schools are turning to charter-school finance companies to pay for facilities. Some also tap a network of companies and consultants to help them run the schools. That means tax money from North Carolina is flowing across the country and around the globe to repay debts and cover outsourced services.

Lee Teague, executive director of the N.C. Charter Schools Association, said he had never heard of the Chinese investment in charter schools. But because charter schools don’t get public money for facilities – and because schools must begin paying bills before the first state check arrives – it’s common to see new schools taking out loans, he said.

Thunderbird, which opened in 2014, got its $3 million through the EB-5 program, which provides green cards to foreign investors who create U.S. jobs. Although charter school salaries are paid with public money, an Arizona-based company called Education Fund of America offers the opportunity to invest in charter schools, claim the job-creation visa benefit and rely on government support of such schools to secure the investment.

[Read more about the EB-5 program in Charlotte]

The Education Fund’s site, which touts Thunderbird as a success story, lists 13 projects funded through EB-5 investment. Seven are in North Carolina and South Carolina, including A.C.E. Academy, a charter school in Harrisburg ($1.5 million); Charlotte Choice Charter ($1.5 million); and Kidz Rock Preparatory Academy, a Christian child-care center in Charlotte ($2.5 million).

The advisory board and state charter school staff focused more on other loan sources within the United States, especially one with an extremely high short-term interest rate.

Thunderbird board Chairman Peter Mojica said Friday that the EB-5 loan and his other financial arrangements are “all standard products that are used by charter schools.” A software executive and self-described serial entrepreneur, Mojica said the state’s questions, spurred partly by parent complaints, created a “sense that we’re either taking money and going to Bermuda or we don’t know what we’re doing.”

In the coming year, when state officials will subject Thunderbird to intensive financial scrutiny, “I will unravel the finances to make them digestible in plain English to the layperson,” he said.

Thunderbird gets almost $4 million a year in state and local money. At last week’s special meeting of the Charter School Advisory Board, Mojica and other Thunderbird leaders persuaded the board to withdraw its recommendation to stop public funding immediately. However, the board requested copies of all loan documents and said the state will keep close tabs on Thunderbird for another year.

[Read more: Panel recommends closing Thunderbird Prep]

[Read more: Thunderbird gets a second chance on a short leash]

Among the unresolved questions: After covering its debts and paying other bills, will the school have enough money to provide an education for about 500 K-6 students?

In the account that emerged at that meeting, Thunderbird’s financial problems began the year the school opened, when the board terminated a contract with local advisers who had helped launch Lake Norman Charter, widely viewed as one of the area’s most successful charter schools.

Startups are tricky

In theory, the plan for charter schools sounds simple: People who want to start a school form a nonprofit board and submit a charter application. If the state approves it, the school gets state and local money based on enrollment.

But those boards don’t get extra money for buildings. That means a charter board must line up financing to build, rent or renovate a school, with the payments coming from the public operating money.

Those volunteer boards may also seek guidance on running a school. Some are affiliated with national chains such as Charter Schools USA and National Heritage Academies, which are for-profit companies, or KIPP, which is nonprofit. Others are independent but contract for help.

When the Thunderbird board got approval to open in 2014, it signed a contract with Banyan Strategics, a Mecklenburg firm that provides support for charter and private schools. The founders were involved in starting Lake Norman Charter in the late 1990s.

Mojica said Banyan lined up the $3 million in Chinese investment through the Education Fund of America. That money went toward early operating costs, he said.

American Charter Development, a Utah-based company that usually builds schools and leases them to charter boards, financed the purchase of a former Montessori school on Old Statesville Road in Cornelius. Thunderbird worked with Banyan to renovate it, Mojica said.

Big changes, big debt

During the first school year, the relationship between Thunderbird and Banyan fell apart. Mojica declined to discuss details, saying the separation agreement prohibits it, and Banyan couldn’t be reached for comment. But the Thunderbird board ended up borrowing $450,000 to pay a penalty for breaking that contract.

It also switched landlords, with Vertex Nonprofit Organization, another Utah-based company that specializes in charter school finance, buying the Thunderbird building from American Charter Development. Vertex leases buildings to charter schools with an option for the school to eventually buy.

The Vertex website says the company charges lease payments that exceed the cost of capital, then returns the excess to the school based on faculty suggestions, “with a focus on maximizing the benefit to students.”

Vertex gave Thunderbird a short-term, no-interest loan of $150,000 to help pay the Banyan penalty, according to reports presented last week. American Charter Development, the former landlord, loaned another $150,000 at 9.5 percent interest.

The rest came from ALK Angel Holdings of Virginia, which gave Thunderbird a $250,000 line of credit, with interest-only payments of $4,167 a month, or $50,000 a year. That’s the one that really raised eyebrows among state officials.

“That just seems like a bad loan,” said Steven Walker, an advisory board member who is also general counsel to Lt. Gov. Dan Forest. Walker pressed Mojica for details about Angel Holdings, including whether any Thunderbird board members did business with general partner Alex Karakozoff.

Mojica said Karakozoff is a venture capitalist with whom he had done business in the past.

All three of the short-term loans were due June 30, the day the advisory board met to reconsider Thunderbird’s fate. Mojica brought letters from all three lenders saying the loans have been extended through June 2018. The Angel Holdings letter says Thunderbird owes $200,000 in principal as of June.

Paying the rent

In addition to paying off the Chinese investors and the three loans, Thunderbird pays rent to Vertex – under an agreement that also makes the school responsible for all maintenance and repairs.

Some of the classrooms flood during heavy rains, which means the school is paying to install a new drainage system and get rid of mold, which sparked parent complaints about health and safety. Families also complained to the Health Department about rats in the school; Thunderbird is hiring a pest control company.

Mojica says rent on the building is capped at 20 percent of the per-pupil allotment Thunderbird gets from taxpayers to run the school.

“We are within the norms. We might be on the high side of the norms,” he said. “It may not be the cheapest rent around.”

In 2014-15, the first year Thunderbird was open, expenses outstripped the money it took in. The 2015-16 audit isn’t due until October, but the school provided the state panel an informal report showing it had ended the year in the black.

But Alexis Schauss, the state Department of Public Instruction’s director of school business, said those numbers don’t seem to match what she has seen on monthly reports. “I don’t feel comfortable with the data I have,” she told the advisory board.

Righting the ship

The turmoil at Thunderbird isn’t limited to management and finance. The 2015-16 school year saw bitter rifts open during the search for a principal/managing director, with parents bombarding state officials with complaints and four of seven board members resigning.

The Thunderbird board hired human resources consultants to screen candidates for the school’s volunteer board and the top job. The March decision to hire Emmanuel Vincent, an educator who had most recently worked at a Georgia charter school, over Andrea McKinney, a longtime local educator who had been hired as interim director, infuriated some families, who petitioned for Mojica to resign.

State charter board members said they want to see improvements on all fronts: relations with parents, healthy classrooms, board governance and financial reporting.

Mojica says that’s in the works – with more outside help. Even before last week’s meeting, Thunderbird had signed on two school leadership consultants to advise the board on academics and governing. A financial consultant will “audit the audit,” Mojica told the board, and Thunderbird is taking bids for a bookkeeping firm.

The board recently added two members and will continue working with the HR consultant to add two more, Mojica said.

Meanwhile, the school is recruiting teachers and students for the coming year. Publicity about the problems has hurt enrollment, Mojica said, and lower enrollment shrinks the budget.

Walker, the board member who asked the most aggressive questions about Thunderbird’s loans and the Chinese investments, said he’s not alarmed by the EB-5 involvement. “I don’t have any reason to think there is anything fishy going on,” he said.

But he made the motion to request loan documents, just to make sure.

Quigley, the board chair, scolded Mojica several times and warned him that the charter can still be revoked if Thunderbird doesn’t resolve its issues.

“I think you have a very short period of time to right this ship,” Quigley said.