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Art Institute campuses to be sold to foundation

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A philanthropic foundation in Los Angeles is buying the vast majority of career colleges owned by Education Management Corp., including 31 Art Institute campuses, Argosy University and South University, in a deal announced Friday that underscores the instability of the for-profit education industry.

Education Management (EDMC) was once one of the largest for-profit college chains in the country, with more than 150,000 students studying such fields as culinary arts, health sciences and education at 106 locations in 32 states and Canada. Tepid demand in recent years sank enrollment to 65,000 as of October. By then, the company had announced the closure of 23 of its 26 Brown Mackie College campuses and 19 of its 51 Art Institutes locations.

“We feel the Art Institutes have a good history, despite the last few years, and we’ll be able to turn that back around,” said Randall Barton, managing director of the Dream Center Foundation, the outfit acquiring EDMC’s schools.

The foundation funds programs through the Dream Center Los Angeles that provide job training and free preparation classes for the California high school equivalency exam, as well as a host of services for the homeless, veterans and impoverished children. Barton said acquiring EDMC aligns with the foundation’s desire to use education as a means of transforming lives.

EDMC will retain ownership of 43 Brown Mackie and Art Institute locations where it has stopped enrolling new students and is in the process of “teaching out” those left on campus. The company previously sold three Brown Mackie locations and one Art Institute campus in Vancouver. In the latest deal, the parties gave conflicting accounts of the sale price, pegging it somewhere in the ballpark of $60 million.

Mark McEachen, president and chief executive of EDMC, said the company entertained other suitors, but many wanted to cut costs in a way that would have undermined the classroom experience. The company, he said, was won over by the mission of the Dream Center.

“The passion and commitment that these folks have…only means reinvestment in the classroom, which only means a more motivated faculty and staff, which ultimately leads to what we want–a good student experience,” he said.

In hindsight, McEachen said revamping programs might have helped stave off some of the enrollment decline. The schools the company chose to close, he said, were losing money for years and were never going to be profitable again as enrollment continued to slide. McEachen said he managed to stabilize EDMC after shrinking its footprint, but selling the campuses to a nonprofit foundation that could raise money for scholarships and to improve operations was in the best interests of the students.

The new owner has tapped Brent Richardson, the former chairman of Grand Canyon Education, as chief executive of Dream Center Education Holdings, which will manage university operations. Richardson led the transformation of Grand Canyon University into a for-profit school with a robust online presence, but resigned from his post in January, two years after shareholders made an unsuccessful bid to oust him for not attending enough board meetings.

The rise of the covert for-profit college

Now Richardson will lead the transformation of the three EDMC schools into nonprofit universities, a conversion that is sure to draw scrutiny from higher education experts who have decried such moves as end-runs around regulations aimed at for-profit colleges.

Nonprofit universities are not subject to what’s known as the 90/10 rule, which bars for-profit colleges from getting more than 90 percent of their operating revenue from federal student aid. And few nonprofits have to adhere to rules that measure whether graduates of career-training programs obtain “gainful employment” to repay student loans.

For-profit conversions have been met with skepticism by the Education Department, which along with the Interval Revenue Service must approve such changes. In August, the department denied a request from the Center for Excellence in Higher Education, a Utah-based chain of career colleges, accusing the company of trying to skirt regulations.

Education Department stops for-profit college from sidestepping federal rules

The Center for Excellence applied for nonprofit status shortly after purchasing Stevens-Henager College and College America from Carl Barney for $636 million in 2012. Education officials said they were unease with Barney retaining primary control of the colleges and collecting rent on some of the campuses when becoming a nonprofit school is supposed to mean placing control in the hands of trustees who operate with no financial benefit.

“This transaction is nothing like that transaction,” Barton, who will serve as executive chairman of Dream Center Education, said of the EDMC deal. “There was a contractual change and a legal change, but it was more form over substance. This is a total change. None of the executives, none of the owners, none of the creditors will have any involvement after we acquire.”

What’s more, Barton said none of the three universities are close to getting 90 percent of their operating revenue from federal student aid funding. He said the new company will review the course offerings at all three schools and consider adding academic programs with a technology focus at the Art Institutes.

Dream Center Education plans to invest a percentage of revenue from the schools in scholarships for students and charitable programs administered by the foundation. The principal financing for the deal is being provided by an affiliate of the investment firm Najafi Companies, with additional funding from the Richardson Family Trust.

The sale, which is anticipated to close this summer, must receive the blessing of the Education Department and college accreditors. All of the people employed at the universities being sold to the foundation will retain their jobs, McEachen said.

This is not the first time EDMC has revamped its business. The company went private in 2006 and used new capital to grow its online operations. The move, however, was not enough to shield the school from a downturn in business, so it reverted to a publicly-traded firm in 2009. Five years later, the company delisted its stock from Nasdaq and stopped filing financial reports with the Securities and Exchange Commission, saying the costs of being publicly traded outweighed the benefits.

Second largest for-profit chain to pay $95 million to settle fraud charges

Things took a turn for the worse the following year when EDMC reached a $95 million settlement with the Justice Department and several state attorneys general. The deal resolved allegations that the company paid employees based on student enrollment in violation of a federal ban on incentive compensation at schools in the federal financial aid programs. McEachen said the settlement had a negative impact on enrollment.

“There is some reputational damage that we’ll have to work through, and that was part of the purchase price quite frankly,” Barton said.

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