Audit of Controversial, EB-5 Funded Charter School Foretells Bankruptcy

By David North on December 27, 2019

We have suggested in the past that the combination of the loosely run charter school movement with the loosely managed EB-5 immigrant investor program shows every sign of being a disaster for everyone involved (students, teachers, and taxpayers) — except for the middlemen.

They usually do just fine, thank you.

We have been following, among others, the case of one specific charter school in the suburbs of Charlotte, N.C., where until recently the state government has been, at the very least, more lax than most states in its supervision of charter schools.

This is a school in which six (probably Chinese) aliens have invested $500,000 each in the hopes of getting a family-sized set of green cards through the Homeland Security-managed EB-5 program. It is the Lakeside Preparatory Academy in Cornelius, N.C., sometimes known as the Lakeside Charter Academy, and as Thunderbird Preparatory Academy, Inc.

Financial Background. The struggling school opened a few years ago with four financial handicaps:

  • As we recorded in some detail, the campus had been sold, and resold and resold, apparently never at arms' length, among Utah-based firms, some with the same postal address, so that several middlemen made major profits as its paper value moved up from $1.3 million to $9.5 million — despite a real estate assessment, for tax purposes, of $3.3 million (there was also a couple of million dollars worth of remodeling done during this time);
  • Somewhere along the way, the campus' landlords collected $3 million from the alien investors which helped underwrite the aforementioned profits;
  • There was a falling-out among the middlemen that resulted in the school accepting a $450,000 judgment against it, a sum it had to borrow; and
  • Much of this debt remains, and is subject to a 20 percent interest rate (public school debt rarely exceeds 2 percent or 3 percent).

Bear in mind that the campus is owned by a for-profit entity in Utah, which had the advantage of the EB-5 funding; the school itself, though apparently controlled by the landlord, is a non-profit entity, and receives tax moneys for the education it provides.

In this dismal setting, a recent audit found that the school lost $103,875 in the 2017-2018 school year, and then a loss of $292,463 in the more recent 2018-2019 school year. The most recent loss occurred while the school reported a gross income of $983,091, down from a gross of $1,252,807 the prior year. So the gross was falling and the loss rising. At the end of the last school year, the cumulative loss was $363,471.

The Prospect of Bankruptcy. If one reads the audit carefully — what follows is not stressed anywhere — one finds that during the most recent school year the school paid the Utah landlords only some $23,000 in rent, and that in its current year it is obligated to pay 25 percent of its gross or, if the experience of the most recent year is to continue, $246,522, or about $223,000 more in rent than the previous year, which, if income and expenses remain the same, would suggest a loss in the current year of well over $500,000.

This would mean that the school went from about $100,000 in losses, to about $300,000 in losses the most recent school year, to more than $500,000 in losses for the current year.

Given those prospects, how in the world will the EB-5 investors get their money back?

The True Numbers. What we have reported above reflects the most recent audit by Rives & Associates, a North Carolina CPA firm. Local critics of the audit say that even these grim numbers do not reflect the dire state of the school.

We have a copy of an invoice, for example, that shows that the non-profit school owed the for-profit landlord (Lakeside Charter Holdings LLC) $1,720,503 at the end of the 2018-2019 school year; the date that debt is due is not shown, this debt is about double the school's entire income for that year, and it apparently is not recorded in this audit. What we do see, on p. 14 of the audit is this, perhaps Delphic, statement: "Some liabilities, including bonds payable and accrued interest, are not due and payable in the current period and therefore are not reported in the funds."

So, discounting a bit of auditing sleight of hand, the true debt of the school — with about 100 pupils — is well over $2 million!

It may well be in the interest of the landlord, and of the EB-5 middlemen, to seek to hide the true level of the school's debt.

With all this in mind, EB-5 investors should look carefully at the proposed investments, and they should look at least twice if a charter school is involved.

The EB-5 program calls for 10 new jobs to be created by each $500,000 investment; since charter schools do not create jobs (they just take them away from the public schools), it is hard to agree with the underlying DHS decision to accept any charter school investment as appropriate in the EB-5 program.

One can only hope that the taxpayers will not be forced to bail out this little school.