(Reuters) - It’s been a turbulent period for charter schools in the United States, with financial analysts raising concerns about their stability and regulators in several states shutting down schools for poor performance.
The volatility has made it tough for startup schools to get financing.
But an unlikely source of new capital has emerged to fill the gap: foreign investors.
Wealthy individuals from as far away as China, Nigeria, Russia and Australia are spending tens of millions of dollars to build classrooms, libraries, basketball courts and science labs for American charter schools.
In Buffalo, New York, foreign funds paid for the Health Sciences Charter School to renovate a 19th-century orphanage into modern classrooms and computer labs. In Florence, Arizona, overseas investment is expected to finance a sixth campus for the booming chain of American Leadership Academy charter schools.
And in Florida, state business development officials say foreign investment in charter schools is poised to triple next year, to $90 million.
The reason? Under a federal program known as EB-5, wealthy foreigners can in effect buy U.S. immigration visas for themselves and their families by investing at least $500,000 in certain development projects. In the past two decades, much of the investment has gone into commercial real-estate projects, like luxury hotels, ski resorts and even gas stations.
Lately, however, enterprising brokers have seen a golden opportunity to match cash-starved charter schools with cash-flush foreigners in investment deals that benefit both.
“The demand is massive - massive - on the school side,” said Greg Wing, an investment advisor. “On the investor side, it’s massive, too.”
Two years ago, Wing set up a venture called the Education Fund of America specifically to connect international investors with charter schools. He is currently arranging EB-5 funding for 11 schools across North Carolina, Utah and Arizona and says he has four more deals in the works.
And that’s just the start, Wing says: “It’s going to be explosive.”
The charter school movement is somewhat controversial. Critics - led by teachers’ unions - contend they divert much-needed funds from traditional public schools. Still, they have proved quite popular and now educate more than 2 million children in the United States.
Charter schools are publicly funded but privately run, sometimes by for-profit companies. They receive taxpayer dollars to educate each child who enrolls. Yet in most states, they get little or no public money to build classrooms, libraries and other facilities.
Well-established and successful chains of charter schools, such as KIPP, Green Dot or Achievement First, receive hefty support from philanthropic foundations and private donors. The chains can also tap into financing provided by an array of for-profit and non-profit investment funds created for that purpose.
But the charter school movement also includes hundreds of small, one-of-a-kind schools, often started by parents seeking a different educational environment for their children. Those mom-and-pop startups have always had a hard time securing funding to build their schools. Many have had to make do with makeshift classrooms in strip malls or church basements.
And lately, experts say, the credit crunch has worsened.
“It’s a hard go,” said Eric Hall, an attorney in Colorado Springs who advises charter school boards.
Last month, Fitch Ratings warned it was likely to downgrade bonds backed by charter schools because the sector is volatile and the schools are highly leveraged. Such risks mean charter-school debt is typically considered speculative, rather than investment grade, said Eric Kim, a director at Fitch Ratings.
Meanwhile, the IRS has signaled it plans closer scrutiny of charter schools’ tax-exempt status if they rely on for-profit management companies to provide their classroom space and run their academic programs, Hall said. He sent his clients a long memo this summer warning that the stepped-up IRS oversight could put some at “significant risk.”
If that weren’t enough to make investors wary, several well-known charter schools have run into significant legal and fiscal hurdles in recent months.
Missouri regulators shut down six campuses run by Imagine Schools, one of the nation’s largest for-profit charter chains, because of poor academic performance. A judge in California ruled that Aspire Public Schools, a large non-profit chain, hadn’t secured the proper approval for six of its schools and would have to get permission from local boards of education to continue running them. Local officials yanked the charter of a high-achieving middle school in Georgia over concerns about mismanagement.
All told, about 15 percent of the 6,700 charter schools that have been launched in the United States in the past two decades have since closed, primarily because of financial troubles, according to the Center for Education Reform, which supports charter schools.
This fall alone, more than 150 established charter schools didn’t open their doors to students.
Such volatility “will spook people, no doubt about it,” said David Brain, chief executive officer of Entertainment Properties Trust, which has historically owned movie theaters but branched out to invest in charter schools, including the six that were shuttered in St. Louis.
Brain said the closures did not affect his company’s bottom line and he remains convinced charter schools are a profitable sector. But even he’s not ready to start backing untested startup schools.
Charter school administrators say they know that wariness all too well.
“Until you get that charter renewal that says you’re doing good things” - typically after five years in operation - “banks won’t even talk to you,” said Hank Stopinski, principal of the Health Sciences Charter School in Buffalo. Without foreign investment, he said, “we would not have been able to do this project.”
The EB-5 program has drawn sharp criticism in the past. Some immigrant investors have lost both their money and their shot at U.S. citizenship when their American partners proved inept or corrupt. In the United States, critics have questioned the value of trading visas for scattershot investment. (link.reuters.com/cem33t)
Yet interest is surging. In the first nine months of this year, the government approved 3,000 petitions from foreigners seeking to participate in the program - nearly twice as many as were approved all last year, according to the Department of Homeland Security.
Charter schools have become particularly trendy because they are pitched as recession-proof.
An investor forum in China last spring, for instance, touted U.S. charter schools as a nearly fool-proof investment because they can count on a steady stream of government funding to stay afloat, according to a transcript posted on a Chinese website.
Arizona educator Holly Johnson, who runs three charter schools and plans to open a fourth next year, said she couldn’t believe how easy it was to secure $4.5 million in funding from abroad.
“We didn’t have to do anything at all,” she said, other than open her schools to potential investors. They didn’t ask many questions, she said. Their concern was more basic: “They wanted to come over and make sure it was real.”
Eager to join the rush, Ali Faisal devoted a day this week to touring charter schools in Arizona.
Faisal, 37, is a Pakistani citizen who now lives in Calgary, Canada. He runs a technology consulting business that works with oil and gas companies and says he is eager to expand to the United States. He figures the best way to do that is to get a green card.
And the best way to do that, he said, is the EB-5 program.
Participants can get a temporary visa by investing $500,000 to $1 million in a federally approved business. If the business creates or preserves at least 10 jobs in two years, the investor and his immediate family are eligible for permanent residency in the United States.
“It’s a much easier path,” Faisal said.
He decided to put his money in a charter school, he said, because that way he felt he’d be serving society as well as helping himself. The schools he saw impressed him with their rigorous science curriculum and he said he hoped his investment would help nurture a new generation of American entrepreneurs.
“Investing in some type of hotel,” Faisal said, “will not give me that inner satisfaction.”
Reporting by Stephanie Simon in Denver; Additional reporting by Elizabeth Dilts in New York and Melanie Lee in Beijing; Editing by Jonathan Weber and Claudia Parsons