Thanks to a provision in the tax law, called the EB-5 program, wealthy foreign investors can buy green cards by investing in charter schools.

Craig Harris, award-winning investigative reporter for the Arizona Republic, took a close look at this provision in the law that allows foreign citizens to buy visas in exchange for funding charter schools.

He visited schools in Arizona and other states.

This story was published in December.

CORNELIUS, N.C. – When Lakeside Charter Academy opened five years ago in this boating community outside Charlotte, it faced the same challenge that confronts many new charter schools.

It had governmental approval to operate and the tax dollars that come with it to pay for teacher salaries, supplies and other expenses. But it had no money to build a school or lease classrooms.

Like most of the 45 states with charter schools — taxpayer-funded campuses operated largely by private businesses — North Carolina provides no money to new operators for start-up or capital costs.

So Lakeside struck a devil’s bargain of sorts. It entered an agreement with an Arizona company to renovate a former church building, funded, in part, by a federal program that allows private companies to raise money by essentially selling green cards to wealthy foreign nationals.

Arizona-based Education Fund of America secured the foreign financing and its business partner, American Charter Development, of Utah, would raise the rest of the cash, build the campus and then lease the space back to Lakeside. Lakeside put no money down.

Peter Mojica, a North Carolina businessman and founding school board member, said Lakeside had few options as parents worked to get the school built around 2012. 

“A charter school has no credit and can’t get the money unless they have a crazy endowment from a rich benefactor,” said Mojica, who still has a son at Lakeside. “So you have Chinese investors buying visas.”

Twenty-seven other campuses in eight states, mostly small charter schools, have struck similar deals with Education Fund of America since 2013, according to its website.

Those deals have put some of the schools in financial jeopardy, according an Arizona Republic investigation.

Two Florida schools closed after one year. Four others, including three Arizona charter schools, are in imminent danger of shutting their doors, records obtained by The Arizona Republic show. More than half of the schools who entered the deals are running budget deficits. And at least 10 have turned to high-interest loans to stay afloat. The majority have average to failing academic scores.

The Republic visited seven states to investigate charter schools and what ongoing shifts in the industry might mean for Arizona, the state with the largest share of charter school students in the nation.

Almost three decades after the first U.S. charter schools opened their doors promising to innovate and compete with traditional public schools, funding remains a daunting barrier for all but the biggest operators. The result, experts say, is small, entrepreneurial operators who were the backbone of the early charter movement are increasingly squeezed out or forced to take big financial risks.

The number of mom-and-pop charter operators is declining. Between 2014 and 2018, 61% of charter schools approved to operate nationwide were affiliated with a nonprofit or for-profit chain, according to the National Association of Charter School Authorizers.

The officials who grant charters to would-be school operators are more inclined to favor big chains with proven track records than independent startups, said Greg Richmond, who until recently was chief executive of the National Association of Charter School Authorizers. 

“The charter school field has become a little more risk-adverse,” he said.

‘MAKING A PROFIT OFF OF OUR CHILDREN’

Lakeside Charter Academy turned to Education Fund of America only after parents struck out trying to get private investors, including hedge funds, Mojica said.

The school has paid escalating rent to American Charter Development for a campus that is far from luxurious, according to interviews and records obtained by The Republic.

Lakeside has no gymnasium or lunch room and only a small playground. At the end of last school year, a parking lot that doubles as a basketball court was rendered unusable by a large sinkhole. Its roughly 300-square-foot library is mostly filled with donated books.

As of July, the school was more than $1.7 million in debt — most of it for unpaid rent — and enrollment had plummeted to 100 students, from a high of 400. The state gave it a “C” academic rating.

“All I wanted was a good school for my sons,” said Alyson Ford, whose boys attended Lakeside until she moved them over disgust with Lakeside’s finances and governing board.

“As taxpayers, we are not happy about this situation,” she said, citing companies “making a profit off of our children.”

She questions Education Fund’s claim that the school was built for $5.1 million, using $3 million in Chinese investment through the federal Employment-Based Fifth Preference Immigrant Investor Program — or EB-5 visa program. County assessor records value the property at $3.3 million….

The nation’s 7,000 charter schools educate more than 3 million children, according to the U.S. Department of Education. The share of public school students attending charter schools nationwide has risen from 1% in 2000 to 6% today.

Despite that growth, starting a charter school remains daunting.

Just seven states and the District of Columbia offer charter school facility grants, and nine have loan programs, according to the Charter School Facilities Center.

The Charter School Facilities Center, a Washington, D.C., group tied to the National Alliance for Public Charter Schools, found in a June research paper that one of the biggest challenges to the expansion of charter schools is state laws that place the burden of funding facilities on school operators who struggle to find affordable facilities.

Arizona Gov. Doug Ducey created a charter school construction lending program in 2016 that was billed as a way to help the “best public schools” expand by providing lower-cost financing with help from the state. It mostly assisted Basis Charter Schools Inc. and Great Hearts Academies — large, successful charter chains with close ties to the governor. After only one charter school received financing through the program in 2018, three Arizona charter schools used it this fall.

The federal government since 1994 has helped fund startup costs for charter schools through competitive grants and credit programs. But only a fraction of the projected $500 million this year is set aside for smaller charter schools, with most going to the large nonprofit companies that dominate the charter school industry.

The U.S. Department of Education last year distributed 32 multi-year grants to individual charter schools. The largest was for $1.25 million, far less than what is needed to build a comprehensive campus. Meanwhile, a single chain, Texas-based IDEA Public Schools, received nearly $117 million.

Operators who succeed in opening a school have a high failure rate, suggesting additional difficulty in finding long-term financing. Since 2000, at least 2,927 U.S. charter schools, or nearly 30%, have closed, federal records show.

The failure rate in Arizona, 41%, is even higher despite the Legislature providing charters with additional per-pupil funding to help with capital costs.

In 2018, The Republic found 1 in 4 Arizona charter schools had significant financial red flags, and that when compared to district schools, charters spend about twice as much or more on administrative costs than in the classroom.

In January 2018, Discovery Creemos, a Goodyear charter school, made headlines when it closed because of financial troubles. The ex-chief executive later admitted to defrauding the state and federal government of at least $2.2 million by inflating enrollment by hundreds of students. 

The Grand Canyon Institute, a private, nonpartisan think tank, found Arizona charter schools primarily fund buildings and classrooms using high-interest “junk bonds” guaranteed by schools’ projected enrollment growth. If the growth doesn’t materialize, mortgage payments will consume a greater share of the schools’ shrinking revenue, leaving less for the classroom.

Bill Honig, a researcher and California educator who runs the Building Better Schools website, found through his research that charter school closures have disrupted the instruction of at least 288,000 school kids since 2000.

Those closures take a largely overlooked toll on students.

Stanford University’s Center for Research on Education Outcomes examined school closures in 26 states over eight years, and found that fewer than 50% of students displaced by a closure ended up at a better school.

A UC Santa Barbara study, considered the definitive look at the subject, found students who changed schools between the eighth and 12th grades for any reason other than being promoted to a higher grade, were twice as likely to drop out…

Wing launched Education Fund eight years ago to help address the lack of charter school start-up funding. 

“Charter schools have a massive financial disadvantage,” he said.

As a U.S. Citizenship and Immigration Services regional center for EB-5 visas, Wing’s Education Fund essentially sells green cards to wealthy foreign nationals in exchange for an investment in U.S. charter schools.

Among its first projects was to provide $2 million in foreign investment for the Learning Foundation and Performing Arts charter school, which opened in Gilbert in 2013.

Education Fund’s website shows smiling students, 28 “EB-5 financed charter schools,” and a breakdown of foreign capital and other investments.

There are about 880 regional centers. But Education Fund, which is approved to operate in 11 states, claims to be the first to raise foreign investment for charter schools.

Its work has gone largely unnoticed, even within the charter school industry. Assistant U.S. Secretary of Education Jim Blew, one of the country’s top charter school advocates, told The Republic he was unaware charter schools have been funded through the EB-5 program.

The foreign investments must create or maintain at least 10 U.S. jobs within two years. When Lakeside Academy signed on with Education Fund, investors could get a visa with a $500,000 investment provided it was for a project in a rural or high-unemployment area.

Wing declined to say how many visas Education Fund’s investors have obtained. Nationwide, about 10,000 such visas are issued annually, but not without controversy and allegations of fraud.

Reports to Congress by U.S. Government Accountability Office in 2015 and 2016 found a lack of federal oversight of the program resulted in fraud.

Sen. Chuck Grassley, R-Iowa and then-chairman of the Senate Judiciary Committee, in 2017 raised questions about an EB-5 scheme that created no jobs while allowing operators to pocket $50 million from Chinese investors.

EB-5-funded projects also have been widely criticized for gerrymandering poorer neighborhoods into regional centers to fund projects in wealthier areas. For example, New York City’s $25 billion Hudson Yards mega project, which has raised luxury towers across a swath of Manhattan, drew on more than $1 billion in EB-5 investment.

USCIS acknowledged it does not keep a “database of specific EB-5 investments” and said each regional center is responsible to “provide adequate and proper oversight, monitoring and management of its projects.”

Former Arizona Sen. Jeff Flake, who as a member of the Senate Judiciary Committee supported Grassley’s efforts to provide more oversight of the EB-5 program, said there have been numerous calls in Congress to fix it because of situations similar to the Hudson Yards project, but “we simply extend the program year after year.”

“Reforms are needed and there is pretty broad agreement on those integrity measures,” Flake said. 

David North, a researcher with Washington, D.C-based Center for Immigration Studies, a think tank that favors reducing immigration, said the “stunning” lack of federal oversight allows the EB-5 program to fester while middlemen and developers enrich themselves.

“It’s a terrific business to be in, but it’s a hell of a waste of public-school monies,” he said. “The EB-5 program is a mess. Charter schools are a mess. When you put them together, it’s a messier mess.”

One of Education Fund’s investors was Erica Zhu, who said she works in foreign-funded enterprises in China.

She learned of the program when her husband saw an article about Education Fund, and invested $500,000 in one of the company’s Florida schools, St. Cloud Preparatory Academy.

Four years passed before the U.S. government approved visas for her and three family members. They plan to relocate to North Carolina. (EB-5 investors do not have to live in the same community as their investment.)

“The EB-5 program is a great program that gives foreigners a chance to immigrate to the United States,” Zhu saidin an email to The Republic.

North disagrees, saying it unfairly rewards wealthy “aliens with a handful of green cards.”…

Education Fund’s cheap foreign money only covered a third of the charter schools’ facility costs. Wing’s business partner, American Charter Development, provided high-interest, U.S. hard money loans. The combined charter school fund totaled $234 million. 

Lakeside Charter Academy’s loans with American Charter Development carry interest rates up to 9.5%. The school began missing rent payments in 2017, records show.

Wing said some Education Fund schools’ financial hardships may be unrelated to their lease arrangement — for example, board infighting or declining enrollment, both of which have occurred at Lakeside.

Wing said Morley has been generous in allowing charter operators to delay rent payments.

Still, a Republic review of Education Fund’s financing of charter schools — including a review of more than 1,000 records and dozens of interviews — found widespread financial problems at the schools:

  • Half of Education Fund’s schools have budget deficits, with one Arizona operator, the Learning Foundation and Performing Arts charter school in Gilbert, nearly $2.8 million in the red. 
  • Education Fund charter operators of at least 10 schools in Arizona, Florida, Georgia and North Carolina have borrowed money from other lenders at interest rates of up to 23%.
  • Independent auditors for three Education Fund charter operators in metro Phoenix have raised doubts to state regulators about whether the schools will remain open. All three, Learning Foundation and Performing Arts, Champion Schools and Painted Desert Montessori Academy, have experienced high and escalating rent payments.
  • Two Florida schools that raised money through Education Fund closed within a year of opening.
  • More than half of Education Fund’s charter schools have average to failing letter grades, with just three receiving an “A….”

Frank Yanez, who has worked in the charter school industry for two decades, wanted to open a Montessori-style school in Buckeye for his grandkids and other children.

He turned to Education Fund, which raised $2.5 million from Chinese investors for the $5.6 million Painted Desert Montessori Academy. Yanez, who has worked as a consultant to Education Fund, put no money down.

Yanez sipped a latte as he greeted students and parents with hugs on the first day of classes in early August.

He wore a smile for the students, but he’s worried about the school’s finances.

The school, which is beginning its fourth school year, has paid nearly $2 million in rent to one of Morley’s companies, he said. That’s about what he receives annually from the state of Arizona to teach 370 kids in the K-8 charter school.

Yanez is $1.4 million in debt, and deferred $436,633 in rent during the 2018-19 school year. Some of the borrowed money was used last year for teacher pay raises.

Things were so dire this past year he leveraged future payments from the state as collateral to borrow operating cash. The loan had interest rates up to 23%. 

This year, he said, he can’t afford to give raises even though the Arizona Legislature and Ducey approved a budget to provide all teachers with a 5% boost in pay.

“With the money on the rent, they are making money,” Yanez said of Wing and Morley. And when he buys the school, instead of paying them rent, “they will make a few million dollars, and that’s a good return on their investment,” he said.

Yanez also is on the board of Champion Charter Schools, a charter chain that financed two campuses through Education Fund in Chandler and San Tan Valley.

Carolyn Sawyer, who runs Champion, said the schools’ rent is so high she had to defer $800,000 in lease payments last year.

The nonprofit company that runs the schools, including a south Phoenix campus built without EB-5 investment, had a $1.9 million deficit last year.

She said using the EB-5 program was her only option. 

Sawyer recalled a woman from Shanghai showing up several years ago when the campus on McQueen Road in Chandler was still under construction. The two put on hard hats and took a tour.

The woman returned several times to check on the school’s progress.

“She decided to invest in American school children,” Sawyer said. “These people have helped us build beautiful schools.”