By Alan Singer
Obscure laws can have a very big impact on social policy, including obscure changes in the United States federal tax code. The 2001 Consolidated Appropriations Act, passed by Congress and signed into law by President Clinton, included provisions from the Community Renewal Tax Relief Act of 2000. The law provided tax incentives for seven years to businesses that locate and hire residents in economically depressed urban and rural areas. The tax credits were reauthorized for 2008-2009, 2010-2011, and 2012-2013.
As a result of this change to the tax code, banks and equity funds that invest in charter schools in underserved areas can take advantage of a very generous tax credit. They are permitted to combine this tax credit with other tax breaks while they also collect interest on any money they lend out. According to one analyst, the credit allows them to double the money they invested in seven years. Another interesting side note is that foreign investors who put a minimum of $500,000 in charter school companies are eligible to purchase immigration visas for themselves and family members under a federal program called EB-5.
The tax credit may also explain why Facebook CEO Mark Zuckerberg partnered with the former mayor of Newark, New Jersey, to promote charter schools; donated a half a million dollars worth of stock to organizations that distribute charter school funding; and opened his own foundation, Startup: Education, to build new charter schools.
“Our investment portfolio of nearly $3 billion includes megaplex movie theatres and adjacent retail, public charter schools, and other destination recreational and specialty investments. This portfolio includes over 160 locations spread across 34 states with over 200 tenants.”
The Charter management group Charter Schools USA recommends that rental costs should not exceed 20 percent of a school’s budget. However the Miami Herald reported that in 2011, 19 charter schools in Miami-Dade and Broward exceeded this figure and one in Miami Gardens paid 43 percent. The Herald called south Florida charter schools a “$400-million-a-year powerhouse backed by real-estate developers and promoted by politicians, but with little oversight.” Its report found charters paying exorbitant fees to management companies and that many of the highest rents were paid to landlords with ties to the management companies running the schools.
Tax benefits and real estate investment may also explain why Wall Street is so hot on raising money for charter schools. On Monday night, April 28, 2014, hundreds of Wall Streeters gathered at Cipriani in Midtown Manhattan to raise funds for Success Academy Charter Schools. Former Florida governor and possible 2016 GOP presidential candidate Jeb Bush gave the keynote address. The dinner was chaired by hedge fund manager Daniel Loeb. Loeb is the founder of Third Point LLC and chairman of the board for Success Academy. The gala raised at least $7.75 million for Success Academy. Also attending were Kyle Bass of Hayman Capital Management, Joel Greenblatt of Gotham Asset Management, Boaz Weinstein of Saba Capital, John Paulson of Paulson & Co. and Erik Prince, the founder of Blackwater USA.
According to The New York Times, the 10 highest-paid hedge fund operators with close ties to charter schools also includes David Tepper (No. 1 at $3.5 billion in 2013), founder of founder of Appaloosa Management and New Jersey based “Better Education for Kids”; Steven A. Cohen (No. 2 at $2.4 billion) of SAC Capital Advisors, which was forced to pay a $1.2 billion dollar penalty for insider trading, who has given over $10 million to the Achievement First charter school network; and Paul Tudor Jones II (tied for tenth at $600 million), founder of the Tudor Investment Corporation who has supported charter schools through his Robin Hood Foundation.
(Correction: Fixing first sentence, to swap room for reform)