The Public Costs Of Legislating Private Wealth

Hello DC taxpayers: You may have just lost a lot of money!

That is, depending on the fate of a bill (23-0256) to exempt four charter school properties from property taxes (which the DC council on December 3 voted to approve), the loss could be almost $11 million in lost property tax revenue.

First introduced in 2018 by Jack Evans (yes), the bill (then known as 22-1008) had a hearing but died on the vine–only to be revivified in 2019 by Evans again in a new council session.

Three of the four properties are owned by DC and are former DCPS schools being used to house charter schools. Each of the three is leased by a third party that is not a charter school, but is associated in some manner with the nonprofit Charter School Incubator Initiative (CSII).

In an October 22, 2019 fiscal impact statement on the legislation (contained in the council report here), DC’s chief financial officer (CFO) said that “the ownership structure of the properties would likely make them subject to taxation without the bill.”

The idea seems to be that the three entities holding those leases are being favored in property tax exemption over other, non-charter-school leaseholders of buildings where charters are subletting space because these charter schools have some stake in the lease structure of those buildings through CSII.

Despite the (to me) weirdness implicit in that part of the legislation (why those schools, why that sublandlord, etc.), for me the truly weird part of this legislation concerns the fourth property, at 3015 4th St. NE (square 3648, lots 1068 & 1069). It is not owned by DC, but does indeed house two charter schools, which lease it from its owner, a private LLC called St. Paul on Fourth Inc that bought the property in 2016. (The property also housed nonprofits, which will be, or are currently, gone from the property as the schools expand.)

According to the December 11, 2018, tax abatement financial analysis contained in the legislation’s committee report, the sole corporate owner of St. Paul on Fourth is CSII. The CFO in that report notes that audited statements of St. Paul on Fourth indicate that it cannot pay the property taxes on 3015 4th St. NE because it simply doesn’t have the resources to do so; it has been operating there at a loss.

Indeed, the latest tax return the public can view of CSII (2017) shows that it seems a relatively cash-poor entity—despite having $68 million in land and buildings. (In fact, a recent report about the organization stated that CSII (now called Building Pathways) has $96 million in assets as of December 2018. Nice growth!)

CSII was apparently founded to provide new charter schools with facilities below market rates, which it seems to be doing with the charter schools that are leasing 3015 4th St. NE.

That said, property tax records (see here and here) show that until sometime in 2018, someone was paying the property tax bills for this property.

But in 2019, no property taxes were paid, and the office of tax and revenue cited the property for takeover. The CFO noted in his 10/22/19 statement in the committee report that “a one-time allotment of $348,000 was funded in the fiscal year 2020 budget to refund taxes already paid on the St. Paul on Fourth property.”

Even with a private, non-school entity having its property taxes reimbursed after the fact by the city for its private property (nice work if you can get it!), the property tax exemption would seem all water under the bridge but for another entity associated with CSII: Building Hope.

The most recent publicly available tax returns and property tax documents show similarities between Building Hope and CSII: The titles and names of their top leaders are the same. Their office addresses are the same. Their phone numbers are the same. The property tax bills for 3015 4th NE go to Building Hope’s address. And the tax return of CSII shows the same people working for a “related” organization, which appears to be Building Hope. And although the two organizations have filed separate tax returns, the latest publicly available tax form for CSII suggests that compensation is coming from either or both organizations to those same people.

A private foundation for tax purposes, Building Hope appears a very wealthy (and powerful) entity: in Building Hope’s latest publicly available tax return (from 2017), its president, Joseph Bruno, was paid $471,000, while its CEO was paid $370,000.

The tax return for the same year of its associated entity, CSII, showed Mr. Bruno making $474,000.

Assets for Building Hope are listed on its tax return that year as being in excess of $60 million, most notably not in land or buildings (though the attachment describing $48 million of the assets (attachment 6) is missing). Thus, relative to CSII, Building Hope appears to be a cash-rich, land-poor organization.

Regardless, possibly substantial resources may be at play.

For instance, Building Hope and CSII were one and the same entity until sometime in 2011. That same year, CSII (represented by Joseph Bruno) signed a lease for the former DCPS school Birney elementary for $733,000 per year.

But a sublet to DCPS’s Excel school at Birney brings in $904,000 a year to CSII as sublandlord–almost $200,000 in excess of what is needed to fulfill its lease with the city. This school year, CSII is also realizing almost $300,000 more at Birney, with a sublet to Lee Montessori.

Unlike other leases of DC-owned property that house charter schools, the lease with CSII at Birney doesn’t require a certain percentage of sublease money to be given to DC. So it is that with just Birney this school year, CSII could be realizing nearly $500,000 in public money above and beyond what it is paying the city for that same building.

Thus, while St. Paul on Fourth may have no money to pay property taxes on 3015 4th St. NE, it appears different to assume that its affiliated organizations CSII and/or Building Hope don’t have resources.

When I raised all of this with Justin Roberts, director of the council committee on business and economic development (which is handling this legislation), he seemed unconcerned, noting that the CFO’s statements were good evidence of the public benefit of this tax exemption–and that Building Hope does good work for the city, referencing the recent document about its work.

The problem with that analysis is that while both CSII and Building Hope do indeed do work for the city indirectly, in terms of floating money for charter schools to have facilities and/or providing facilities (having received SOAR funding at some point through our office of the state superintendent of education), they are both private entities that appear to have profited in some manner from at least several leases to charter schools at just one former DCPS building.

As it is, there is a provision in DC law that charter schools, given the responsibility of paying property tax as a part of their leases with private landlords, can be reimbursed by DC for that money.

But according to the December 11, 2018 tax abatement financial analysis for the tax exemption legislation, the charter schools at 3015 4th NE need to be “”right sized” and operated at full capacity in order to generate more revenue and operate more sustainably.” With St. Paul on Fourth operating at a loss in sustaining those schools at 3015 4th NE, this tax exemption legislation effectively passes on the enrollment dilemma of those schools to taxpayers–ironically, as a property tax exemption that ultimately (and possibly permanently) benefits a non-charter-school private owner.

So it is that this legislation, apparently for a public benefit, appears to skip over a myriad of complicating factors, including the difficulty in distinguishing St. Paul on Fourth from CSII from Building Hope and the fact that once the legislation exempts 3015 4th NE from property tax on the basis of the owner’s inability to pay it now, it is unclear whether the city would ever revisit the financial status of its owner and/or review on an ongoing basis its ability to pay taxes on that property.

It is further unclear whether Building Hope may have some authority over CSII such that assets of one could be transferred at some point to the other (as apparently happened with their 2011 separation)–and, if so, whether such a transfer would also transfer property tax exemptions as long as the other terms of this legislation were met (i.e., this property would continue being used for charter schools or “by one or more educational or faith-based not-for-profit entities”). The legislation is silent on this.

The outcome of all of this in a city with rising real estate values appears to be pretty lopsided:

That is, as private owners of tax-exempted properties paid for (in some part) by public dollars (via the per pupil facilities fees to charter schools) realize a rising value in those properties, the value of those properties to DC taxpayers actually decreases, because no property tax is being paid on increasingly valuable real estate. To be sure, if the owners are entirely the charter schools themselves, the law recognizes a public benefit–but this legislation is silent on how and when that might happen in the case of 3015 4th NE. It appears to even hold out the possibility that the tax exemption there would apply even if a “faith-based not-for-profit entity” not receiving public money is located there instead of publicly funded charter schools, without any examination of the public benefit thereof.

Interestingly, the LLC that owns 3015 4th St. NE was granted in 2018 $32 million in DC revenue bonds for this property. The legislation that did so mentioned the fact that the property would have 10 housing units, a fact that was trumpeted in 2016 by both news reports and Building Hope itself (see here and here).

But in the 2019 property tax exemption bill, there is no mention of those 10 housing units at 3015 4th NE.

So: where are the housing units? And if they exist, will they, too, be exempted from property tax? And if they don’t exist now, will they do so at some point in the future at this property?

A phone call I made weeks ago about that to the property manager of Building Hope was not returned.

And emails I sent weeks ago about many of these issues (to the chair of the council business and economic development committee, Ward 5 representative Kenyan McDuffie; to council chair Phil Mendelson; and to the CFO) remain unanswered.

Also interestingly, despite being approved by the council on December 3, this legislation has not moved forward. There’s no way for us outsiders to know why.

But several things are happening right now that are related to this topic:

–investigation of Jack Evans by the FBI.

–an audit by the DC inspector general of property tax exemptions.

So, stay tuned.

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