Charter Facilities in Minnesota: An Overview of Lease Aid and Affiliated Building Corporations

On August 24th, we published a blog post about the challenges Minnesota charter schools face finding appropriate facilities. This piece expands on the topic with a deep dive into the financing of chartered school facilities in Minnesota.

If a Minnesota school district wants to buy or construct a building or make a capital improvement to an existing facility they can pay for it with property tax dollars or sell bonds. Saint Paul Public Schools (SPPS) plans for $870 million in building improvements over the next decade for its 72 buildings. Similarly, Minneapolis Public Schools (MPS) has $107 million in capital improvement projects planned for the 2017 fiscal year alone.

For Minnesota’s chartered schools, however, this is not the case. Even though chartered schools are public schools, they are prohibited from purchasing land or buildings with state funds (MN Stat. 124E.26). Chartered schools may only purchase land or buildings with non-state funds, like donations or foundation grants, though in practice this is incredibly rare. Rather, chartered schools in Minnesota lease their facilities.

Help from the Lease Aid Program

The Lease Aid Program (MN. Stat. 124E.21) was created by the Minnesota Legislature in 1997 to help chartered schools pay for leased spaces. “Lease aid is the state’s way of ensuring charter schools have adequate access to proper facilities,” according to Tom Melcher, director of school finance for the Minnesota Department of Education. Schools must apply for lease aid each year and receive approval from the Commissioner. As of October 19th, for the 2016-17 academic year, 110 Minnesota chartered schools are scheduled to receive, in total, about $70 million in building lease aid. Minnesota is one of 15 states and the District of Columbia that has dedicated state funds for charter school facilities.

While lease aid was a step forward for chartering in Minnesota, it’s important to note that the amount of aid a school is eligible to receive does not cover the entire cost of rent. Under state statute, chartered schools are eligible to receive either 90 percent of the approved rent cost or an amount equal to the number of students multiplied by $1,314, whichever is less (MN Stat. 124.22). For example, during the 2015-16 academic year, Northeast College Prep (NCP) had a total lease cost of $203,334. They received $183,001 (or 90 percent) in building lease aid and had to pay the remaining $20,333 from their general budget—dollars that could have otherwise gone towards student programming.

There are also restrictions on how lease aid dollars can be used. For example, they cannot pay for custodial, maintenance service, utilities or other facilities operating costs.

Enter “Affiliated Building Corporations”

Even though Minnesota chartered schools cannot own their school facilities outright, they can indirectly. In 2009, the Minnesota Legislature passed a statute that formally granted chartered schools the ability to form an “affiliated building corporation” (ABC).

According to Eugene Piccolo, executive director of the Minnesota Association of Charter Schools (MACS), ABCs can receive funding through a variety of sources—including a regular mortgage through a bank, bonds issued through a local unit of government, bonds issued on the open market, or loans from national groups. An ABC may also partner with a group who initially owns and finances the facility, but gives the ABC the option to purchase the facility at some point in the future.

Through these various streams of funding, the ABC is able to purchase and renovate a facility, which is then leased to its associated chartered school. Funding from the lease aid program described above can be used by the school to pay rent to its ABC. Currently over 30 chartered schools in Minnesota have formed an ABC.

Chartered schools are eligible to form an ABC only if they been in operation for six consecutive years and have had a positive net balance in their unreserved general fund for the three preceding fiscal years, among other requirements.

While the law was passed in 2009, chartered schools had been forming what were then called “nonprofit building corporations,” for several years prior. A June 2003 report by the Office of the Legislative Auditor found that 11 chartered schools had formed these corporations in order to purchase facilities. The report called this a “gray area in the states’ policy on building ownership” and recommended that the Legislature clarify the policy. The 2009 law formally defined and provided legal parameters around what are now called ABCs.

Some charter advocates have asked whether it makes sense—under certain circumstances, such as when schools that have a long record of strong governance and financial stability—for chartered schools to be able to purchase facilities outright, without ABCs. MACS included such a recommendation it in their formal policy agenda for 2015.

We’ll be publishing a follow-up blog post about what other states and school districts are currently doing to assist with financing charter facilities later this week. Stay tuned.

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