How Tax Exempt Are Charter Schools on Land Owned by For-Profit Investors?

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June 30, 2011; Source: Journal Gazette | In Fort Wayne, Ind., the Allen County Property Tax Assessment Board of Appeals has ruled against a property tax exemption for the JERIT CS Fund LLC.  JERIT owns the 26-acre campus of the "Imagine MASTer Academy," a charter school. 

The issues of charter school tax exemption are sometimes contentious due to the charters' sometimes hiring for-profit facility managers and operators.  Apparently, that is part of the problem with the JERIT/Imagine application.  JERIT is owned by Entertainment Properties Trust. The Kansas City-based EPT's business line is leasing properties for charter schools, though its reported $84.7 million profit last year may not be solely due to charter school facility leasing, but also from its investments in water parks, ski resorts, vineyards, and multiplex theaters. 

The story is more complex.  JERIT purchased the site in 2008 for $6.21 million from School House Finance, Inc., which is owned by the Arlington, Va.-based Imagine Schools — operator of 72 charter schools across the nation.  JERIT is leasing the facility to Imagine MASTer Academy for $639,616 annually on a triple net lease with a built in 3 percent escalator clause, apparently not a bad looking deal for the for-profit JERIT.  The deal means that Imagine MASTer pays one out of every five dollars in public funds it receives as rent paid to JERIT. 

So why didn't the county give this property a tax exemption?  According to the newspaper article, the assessment board said that the owner, not just the tenant, has to demonstrate that the property is "owned for a tax-exempt purpose for religious, educational, scientific, or charitable reasons."  The decision was based on a December 2010 case of the Indiana Supreme Court, the "Oaken Bucket case," which said that "a property owner doesn’t automatically qualify for a tax exemption even if property is used for a charitable or exempt purpose."  Allen County said that "evidence was not presented which showed JERIT CS Fund owned the property for an exempt purpose independent of the educational purpose for which the property is being 'occupied and used'" by the charter school and that “there was no evidence that JERIT participated in meeting any of the operational expenses incurred by the school in occupying and using the premises for educational purposes."

JERIT of course will appeal the decision.  One suspects that it is a decision based on the arcane investment structure behind both JERIT and Imagine, with JERIT operating a for-profit business and seeing charter school leasing as a potentially lucrative business line.  As an attorney for the Tax Board noted, “This, I hope, sends a message to people to look more closely at how the charter schools within their communities' are operating and who is behind the property management."  The presence of so many different for-profit interests behind the operations, management, and real estate of charter schools makes this Fort Wayne case one that is likely to be revisited elsewhere in the nation.—Rick Cohen