Financial Trouble in Imagine City?

by David Safier

NOTE: This is the sixth in a series of recent posts examining Imagine Schools. (Here are 1, 2, 3, 4, and 5.) If you have ideas or information to add, please leave comments at the end of the post or email me at safier@schooltales.net. I keep all email correspondence confidential.

Let's leave aside Imagine Schools' problems in Arizona for a moment and look at the overall financial picture of Imagine's 73 schools across the country. We may be looking at a charter empire in the early stages of financial decay.

The Missouri Board of Education just closed 6 Imagine Schools in St. Louis. That means Imagine Schools has 6 unoccupied buildings on its hands which aren't generating revenue. When they were filled with students, the schools were paying a total of about $6.7 million a year in rent. Unless Imagine can figure out how to rent those school buildings to someone else, that's about $560,000 a month in lost revenue. That's a hell of a lot of money.

But there could be hope Imagine Schools won't take a hit for all those empty buildings, because 5 of the 6 schools are actually owned by another company, Entertainment Properties Trust (EPT), which bought them from SchoolHouse Finance, the real estate arm of Imagine Schools. In most situations, that would mean EPT paid Imagine for the schools, owns them outright and is now left holding the bag for the missing rent. Except it looks like that's not how it works in this case.

Ken Libby has been following the Imagine Schools situation on his blog in a more financially wonky way than I have. He posted about EPT's first quarter report for 2012. Lots of the report dealt with the closed St. Louis Schools. I'm going to try and translate what I read from high-finance-speak into a version of English human beings can understand. I believe I've got it substantially correct.

True, EPT owns those 5 closed St. Louis Imagine School buildings, as well as four Imagine Schools in other cities that are closed or will be closing soon, making a total of 9 empty, non-producing properties. But EPT's risk is minimal, because through some contractual maneuver ("the cross-default nature of the master lease"), Imagine Schools is still responsible for the rent whether the schools are operational or empty. Either Imagine has to keep making monthly payments on the properties to EPT, or it has to exchange the unoccupied schools for occupied schools. Either way, EPT assures its investors, revenue will keep on flowing into its coffers.

Right now, Imagine Schools has 73 schools, and it sounds like 9 of them are empty or soon to be empty. That means about 12% of its schools have crashed and burned. And Imagine's arrangements with EPT sound to my ear closer to long term loans than outright sales, since Imagine has to come up with the payments whether the school generates rent revenues or not, or swap out the unoccupied schools for schools generating rent.

Add to this the fact that many of Imagine's schools operate at a loss, both because of underenrollment and excessively high rents, and the probability is, the "profitable" schools aren't generating much income for the corporation. There's no way to cut education expenses enough to make a large profit. Put all that together, and it looks like Imagine Schools is hemorrhaging money.

As I understand it, CEO Dennis Bakke, a very rich man, has plowed many millions of his own dollars into Imagine Schools, and he can probably afford to kick in more millions to keep it going if need be. But why should he? If Bakke looks at his current balance sheet, then projects out into the future, things don't look good. Chances are, more schools will close over the next few years, just like the 9 that have either shut their doors recently or are planning to soon. Other communities are going to be reluctant to charter new Imagine schools, given the corporation's recent track record. Bakke may find himself bailing out and cutting his losses sometime in the next few years.

If Imagine Schools folds, I doubt many will mourn its loss, even within the charter school community. Even if the corporation were solvent financially, it's been an educational disaster. It's another example, and there have been many preceding it, of some business type thinking he can take a traditional business model and transpose it into the world of education. Generally, that doesn't work out so well.